Archive for February, 2015

MAPF Portfolio Composition: February 2015

Saturday, February 28th, 2015

Turnover continued to be above average in February, at about 16%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

  • Unaffected Straight Perpetuals
  • DeemedRetractibles explicitly subject to the rules (banks)
  • DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped was the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) in early 2013 – many of the PerpetualPremiums had negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! While market weakness since the peak of the PerpetualDiscount subindex in May, 2013, has mitigated the situation somewhat, the population of PerpetualDiscounts is still exceeded by that of PerpetualPremiums – most of which are trading at a negative Yield-to-Worst.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to other Straights, I also have to check its peer group. This cuts down on the potential for trading.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues were either trading near par when the change was made or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past nine months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Due to further footdragging by OSFI, I will be extending the DeemedMaturity date for insurance issues by another two years in the near future.

Sectoral distribution of the MAPF portfolio on February 27 was as follows:

MAPF Sectoral Analysis 2015-2-27
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 10.6% (+0.1) 4.63% 5.90
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 1.8% (+1.1) 4.92% 15.60
Fixed-Reset 36.9% (-6.0) 5.38% 9.45
Deemed-Retractible 32.6% (-1.8) 4.98% 7.95
FloatingReset 6.5% (+5.6) 3.20% 19.27
Scraps (Various) 10.5% (+0.3) 5.44% 10.16
Cash 1.1% (+0.7) 0.00% 0.00
Total 100% 4.97% 9.30
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from January month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

The big shift during the month was from FixedResets into FloatingResets, as the January swaps of TRP.PR.F into TRP.PR.A were reversed.

Credit distribution is:

MAPF Credit Analysis 2015-2-27
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 21.6% (-1.0)
Pfd-2(high) 41.5% (+2.9)
Pfd-2 0%
Pfd-2(low) 25.0% (-3.2)
Pfd-3(high) 1.6% (-0.1)
Pfd-3 4.9% (+0.9)
Pfd-3(low) 3.0% (-0.3)
Pfd-4(high) 0.7% (0)
Pfd-4 0%
Pfd-4(low) 0% (0)
Pfd-5(high) 0% (0)
Pfd-5 0.5% (0)
Cash +1.1% (+0.7)
Totals will not add precisely due to rounding. Bracketted figures represent change from January month-end.
The fund holds a position in AZP.PR.C, which is rated P-5 by S&P and is unrated by DBRS
A position held in NPI.PR.A is not rated by DBRS, but has been included as “Pfd-3(high)” in the above table on the basis of its S&P rating of P-3(high).

Liquidity Distribution is:

MAPF Liquidity Analysis 2015-2-27
Average Daily Trading Weighting
<$50,000 11.5% (-0.6)
$50,000 – $100,000 3.0% (+1.0)
$100,000 – $200,000 37.8% (-5.2)
$200,000 – $300,000 28.9% (-3.7)
>$300,000 17.7% (+7.9)
Cash 1.1% (+0.7)
Totals will not add precisely due to rounding. Bracketted figures represent change from January month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) or those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

  • MAPF credit quality is better
  • MAPF liquidity is a bit lower
  • MAPF Yield is higher
  • Weightings
    • MAPF is much more exposed to DeemedRetractibles
    • MAPF is much less exposed to Operating Retractibles
    • MAPF is much more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF weighting in FixedResets is much lower

February 27, 2015

Saturday, February 28th, 2015

European deflation is significant:

Spanish consumer prices plunged for a second month in February, encapsulating the threat facing Mario Draghi as the European Central Bank prepares to unleash quantitative easing.

Prices fell 1.2 percent from a year earlier after a 1.5 percent decline in January, which was the biggest since 1997. The inflation rate was probably also negative in Italy and Germany, economists said before data due later on Friday.

Plunging oil costs have damped inflation across the globe, including in the U.S., where consumer prices posted their first annual decline in more than five years last month. In a positive sign, Spain’s February decline was less than economists had forecast and, with oil rising from its recent low, may indicate the worst of the inflation slump is passing.

However, some some parts of some economies are doing well:

Shares of South Korea’s leading condom maker soared for a second day after the country’s Constitutional Court decriminalized adultery in a ruling that ended a decades-old anti-cheating law.

Unidus Corp. was up 11 percent to 3,475 won at 12:55 p.m. Friday in Seoul. The stock rose 15 percent yesterday, leaving it up almost 30 percent since the ruling. Hyundai Pharmaceutical Co., a maker of morning-after pills, rose 10 percent yesterday to the highest in more than five years. The shares slid 7 percent Friday.

It has been a while since I complained about the ridiculous and economically counter-productive cost of education in the States (especially), so why don’t I complain about the ridiculous and economically counter-productive cost of education in the States (especially)?

Switching one of their dead-tree texts out for an open-source one—a book available for free online or to print at a minimal cost—saves students an average of $128 per course every semester, said the Student Public Interest Research Groups in a report (pdf) published Tuesday.

The Student PIRGs, a group of state student advocacy organizations, crunched data from five colleges that have introduced open textbook programs to estimate how much students save by using open books. With more than 11 million full-time undergraduates in the U.S., and upwards of 160 open textbooks on the market, the group says students would save $1 billion a year if they all replaced a single book with its open-source alternative.

The report, titled OPEN TEXTBOOKS: THE BILLION-DOLLAR SOLUTION, makes an interesting point:

With oft-exceeding $200 price tags, the cost of textbooks has become a serious barrier to college access and a negative impact on student success. A 2014 Student PIRGs studyiv found that 65% of students had skipped buying or renting a textbook because it was too expensive, and 94% of those students felt that doing so would hurt their grade in a course. Additionally, nearly half of students said the cost of textbooks impacted how many courses they were able to take.

textbookCost_150227
Click for Big

Now, I think the analysis regarding potential savings is optimistic to the point of being simplistic. The proposed replacement is ‘Open Textbooks’, which are described as:

Open textbooks are faculty-written, peer-reviewed textbooks that are published under an open license – meaning that they are available free online, they are free to download, and print copies are available at $10-40, or approximately the cost of printing.

So they’re not including any allowance for paying the authors or the reviewers or the editors; there’s also no accounting made for kickbacks to administrators, professors or the institution for choosing and approving the book; there’s no accounting for elegant dinner parties with hot saleschicks from the publisher; and there’s no accounting for the creation and maintenance of the very popular ‘test-banks’, whereby questions and answers for tests are maintained by the publisher so that lazy instructors don’t have to do any work. All these things are vital to the education of young minds, who represent our hope for the future, and regrettably these things require significant investment if they’re going to be done right. So it’s an optimistic analysis, but I find it very difficult to believe that more than a fraction of the charted increase in price since my day is due to quality improvements in second-year organic chemistry or first year calculus texts!

Pembina Pipelines, proud issuer of PPL.PR.A, PPL.PR.C, PPL.PR.E and PPL.PR.G, was confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes of Pembina Pipeline Corporation (Pembina or the Company) at BBB, and the Preferred Shares at Pfd-3. The trends remain Stable. The confirmation largely reflects DBRS’s view that the Company’s exposure to fractionation (frac) spreads and seasonal pricing differentials has lowered since the closing of the Provident acquisition (the Acquisition) in 2012 and has been maintained at a manageable level. The confirmation also reflects DBRS’s expectation that Pembina will continue to prudently manage its project expansion risk and to finance its expansion with appropriate debt and equity to maintain its debt-to-capital ratio at around 40% and cash flow-to-debt ratio at or above 25%. However, the rating trends could be changed to Positive if the Company successfully and substantially completes its current major expansion projects (backed by long-term take-or-pay or fee for service (FFS) contracts) while maintaining its credit metrics at or near the current level.

Allbanc Split Corp. II, proud issuer of ALB.PR.B, was confirmed at Pfd-2 by DBRS:

Since the last rating action in February 2014, the performance of the Company has been volatile. The trend seen in the net asset value, however, is in line with the movement seen in the volatile share prices of Canadian banks. Downside protection increased steadily to 64.1% on February 12, 2015, from 60.9% on February 13, 2014, while increases in dividend distributions from underlying banks helped boost the dividend coverage ratio.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 25bp, FixedResets gaining 5bp and DeemedRetractibles up 6bp. The Performance Highlights table was quite lengthy with the credit-dubious ENB issues prominent on the winning side. Volume was very high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150227A
Click for Big

The new issue has caused a large change in the curve-fitting for the TRP series of FixedResets, which is discussed at greater length on the post announcing the new issue. TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.07 to be $1.18 rich, while the new issue, resetting 2020-11-30 at +296, is $1.02 cheap at its issue price of 25.00.

impVol_MFC_150227
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.55 to be $0.43 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.73 to be $0.47 cheap.

impVol_BAM_150227
Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 25.05 to be $0.52 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.44 and appears to be $0.95 rich.

impVol_FTS_150227
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.64, looks $1.09 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.50 and is $0.97 rich.

pairs_FR_150227A
Click for Big

The investment grade break-even rates average close to zero.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

pairs_FF_150227
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

One way or another, that’s it for another month!

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3781 % 2,302.6
FixedFloater 4.39 % 3.53 % 18,581 18.35 1 -0.3683 % 4,026.1
Floater 3.13 % 3.27 % 63,901 19.01 4 0.3781 % 2,447.9
OpRet 4.08 % 1.80 % 110,194 0.31 1 -0.1193 % 2,757.1
SplitShare 4.41 % 4.29 % 28,777 3.55 6 -0.2581 % 3,211.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1193 % 2,521.1
Perpetual-Premium 5.32 % -2.66 % 56,585 0.08 24 0.0359 % 2,516.2
Perpetual-Discount 4.94 % 4.87 % 106,451 15.13 10 0.2546 % 2,802.9
FixedReset 4.45 % 3.44 % 219,731 16.91 78 0.0453 % 2,402.9
Deemed-Retractible 4.93 % 0.18 % 104,873 0.16 39 0.0567 % 2,651.5
FloatingReset 2.43 % 2.85 % 96,501 6.38 7 0.0062 % 2,326.8
Performance Highlights
Issue Index Change Notes
SLF.PR.H FixedReset -4.90 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 4.21 %
TRP.PR.B FixedReset -2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 14.11
Evaluated at bid price : 14.11
Bid-YTW : 3.43 %
CGI.PR.D SplitShare -1.52 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 3.57 %
FTS.PR.H FixedReset -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 16.64
Evaluated at bid price : 16.64
Bid-YTW : 3.18 %
MFC.PR.M FixedReset -1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.95
Bid-YTW : 3.98 %
PWF.PR.T FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.15
Evaluated at bid price : 24.70
Bid-YTW : 3.17 %
SLF.PR.G FixedReset -1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.30
Bid-YTW : 6.28 %
VNR.PR.A FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.23
Evaluated at bid price : 24.44
Bid-YTW : 3.61 %
BAM.PF.B FixedReset 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 22.95
Evaluated at bid price : 24.24
Bid-YTW : 3.52 %
ENB.PR.T FixedReset 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 20.20
Evaluated at bid price : 20.20
Bid-YTW : 4.15 %
BAM.PR.R FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 21.43
Evaluated at bid price : 21.76
Bid-YTW : 3.60 %
FTS.PR.G FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 22.69
Evaluated at bid price : 23.55
Bid-YTW : 3.08 %
BAM.PR.T FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 21.70
Evaluated at bid price : 22.16
Bid-YTW : 3.53 %
ENB.PR.B FixedReset 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 18.92
Evaluated at bid price : 18.92
Bid-YTW : 4.20 %
ENB.PR.P FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 20.26
Evaluated at bid price : 20.26
Bid-YTW : 4.12 %
ENB.PR.D FixedReset 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 4.18 %
ENB.PR.N FixedReset 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 20.62
Evaluated at bid price : 20.62
Bid-YTW : 4.19 %
MFC.PR.C Deemed-Retractible 1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.94
Bid-YTW : 5.04 %
ENB.PF.G FixedReset 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 22.11
Evaluated at bid price : 22.75
Bid-YTW : 3.95 %
ENB.PR.Y FixedReset 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 19.57
Evaluated at bid price : 19.57
Bid-YTW : 4.18 %
ENB.PR.F FixedReset 2.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 19.81
Evaluated at bid price : 19.81
Bid-YTW : 4.19 %
TRP.PR.C FixedReset 2.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 3.44 %
ENB.PF.E FixedReset 2.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 22.03
Evaluated at bid price : 22.60
Bid-YTW : 3.95 %
BAM.PR.X FixedReset 4.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 17.99
Evaluated at bid price : 17.99
Bid-YTW : 3.82 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.S FixedReset 110,811 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 2.75 %
ENB.PR.N FixedReset 86,411 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 20.62
Evaluated at bid price : 20.62
Bid-YTW : 4.19 %
RY.PR.J FixedReset 83,900 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.13
Evaluated at bid price : 24.95
Bid-YTW : 3.33 %
TD.PF.A FixedReset 64,674 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.04
Evaluated at bid price : 24.59
Bid-YTW : 3.05 %
BMO.PR.S FixedReset 58,669 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.17
Evaluated at bid price : 24.85
Bid-YTW : 3.07 %
NA.PR.W FixedReset 57,425 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 23.06
Evaluated at bid price : 24.70
Bid-YTW : 3.04 %
There were 51 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
SLF.PR.H FixedReset Quote: 22.50 – 23.24
Spot Rate : 0.7400
Average : 0.4519

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 4.21 %

TRP.PR.E FixedReset Quote: 24.07 – 24.50
Spot Rate : 0.4300
Average : 0.2757

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 22.83
Evaluated at bid price : 24.07
Bid-YTW : 3.33 %

TRP.PR.F FloatingReset Quote: 18.60 – 19.25
Spot Rate : 0.6500
Average : 0.5039

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 18.60
Evaluated at bid price : 18.60
Bid-YTW : 3.20 %

BNS.PR.C FloatingReset Quote: 23.83 – 24.14
Spot Rate : 0.3100
Average : 0.1960

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.83
Bid-YTW : 3.07 %

HSE.PR.A FixedReset Quote: 17.56 – 17.99
Spot Rate : 0.4300
Average : 0.3274

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 17.56
Evaluated at bid price : 17.56
Bid-YTW : 3.60 %

ENB.PF.A FixedReset Quote: 22.25 – 22.59
Spot Rate : 0.3400
Average : 0.2452

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-27
Maturity Price : 21.82
Evaluated at bid price : 22.25
Bid-YTW : 4.00 %

AZP.PR.A, AZP.PR.B and AZP.PR.C Removed From Watch-Negative By S&P

Saturday, February 28th, 2015

Standard & Poor’s has announced:

  • •We are affirming our ‘B’ corporate credit ratings on U.S. power generator Atlantic Power Corp. (APC) and affiliate Atlantic Power Limited Partnership, and are removing them from CreditWatch with negative implications.
  • •At the same time, we are revising our recovery ratings on APC’s senior unsecured debt to ‘2’ from ‘4’.
  • •The outlook on all ratings is stable.


The CreditWatch placement followed the departure of the company’s CEO and a significant cut in distributions by the company that had triggered our review of the company’s financial plan. In September 2014, APC had lowered its dividend by 70% (C$0.12 annually from C$0.40), a second distribution cut in 18 months, following a 65% reduction in February 2013. The company had also revised its distribution payments to a quarterly schedule from monthly payouts. The company had cited a reevaluation of its medium-term plan, including debt maturities and recontracting risk from 2017 onward that had caused the change in its payout policy.

The challenge management faces at this point is the relatively high leverage as it deals with recontracting risk in 2017 and 2018. Atlantic is considering selling assets (the company has made statements that its wind assets could be candidates for sale) and using proceeds for deleveraging.

We are affirming the ratings based on our expectations that:

  • •The sale of the wind portfolio would appear to be a likely divestment by the company. APC is not restricted by its capital structure on use of proceeds and wind assets appear to be attractive assets in the current market.
  • •Even if a sale does not close successfully, ratios are incrementally weaker but the level of financial performance on a quality of cash flow (QCF) score of ‘6’ is adequate for the rating.
  • •There are no debt acceleration covenants in the documents. If Atlantic cannot meet its EBITDA to interest covenant it will have restrictions on dividend payments over a specified amount, but the covenant breach is not an event of default.
  • •We expect the company to be in compliance with its covenants in first-half 2015 (APC’s bond fixed-charge ratio was not in compliance at year-end 2014 because of make-whole charges incurred in February 2014).
  • •Management changes have concluded and a new CEO has taken charge.

“The stable outlook reflects our expectation that the company will maintain POCF to mandatory debt service levels above 1.9x and POCF to debt above 13%,” said Standard & Poor’s credit analyst Aneesh Prabhu.

We also expect POCF to interest levels to be above 2x. Selling the wind assets will not change these levels materially, but we expect a potential sale (and proceeds used for debt reduction) to move consolidated debt leverages, as reflected in consolidated debt to EBITDA by 50 basis points to below 6x by year-end 2015, which supports ratings.

The now concluded ‘Watch-Negative’ was reported on PrefBlog 2014-9-17.

TD.PR.R To Be Redeemed, Some Day

Saturday, February 28th, 2015

For those of you who missed it in the post announcing the new TD FixedReset issue, Toronto-Dominion Bank has announced:

It is the intention of the Bank to exercise its right to redeem all of its outstanding 10 million Non-cumulative Redeemable Class A First Preferred Shares, Series R (the “Series R Shares”). The foregoing statement of intention does not constitute formal notice of redemption. Should the Bank exercise its right to redeem the Series R Shares, formal notice of redemption will be issued by the Bank in due course.

TD.PR.R is a DeemedRetractible, 5.60%, which commenced trading March 12, 2008 after being announced March 3, 2008.

It is currently redeemable at 25.75; the redemption price declines by $0.25 on 2015-4-30. There can be no great surprise about the redemption intention announcement, given that the redemption of the very similar TD.PR.P and TD.PR.Q issues was announced in late January.

New Issue: TD FixedReset, 3.60%+279, NVCC

Saturday, February 28th, 2015

Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 7 (the “Series 7 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 7 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 7 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 7 Shares will yield 3.60% annually, payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending July 31, 2020. Thereafter, the dividend rate will reset every five years at a level of 2.79% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on July 31, 2020 and on July 31 every 5 years thereafter, TD may redeem the Series 7 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption, holders of the Series 7 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares, Series 8 (the “Series 8 Shares”), subject to certain conditions, on July 31, 2020, and on July 31 every five years thereafter. Holders of the Series 8 Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury bill yield plus 2.79%.

The expected closing date is March 10, 2015. TD will make an application to list the Series 7 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

The Bank, as previously announced, will redeem its outstanding Non-cumulative Redeemable Class A First Preferred Shares, Series P and Series Q on March 2, 2015. It is the intention of the Bank to exercise its right to redeem all of its outstanding 10 million Non-cumulative Redeemable Class A First Preferred Shares, Series R (the “Series R Shares”). The foregoing statement of intention does not constitute formal notice of redemption. Should the Bank exercise its right to redeem the Series R Shares, formal notice of redemption will be issued by the Bank in due course.

They later announced:

that, in connection with its recently announced public offering of 12,000,000 3.60% Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 7 (the “Series 7 Shares”), the underwriters have exercised their option (the “Underwriters’ Option”) to purchase an additional 2,000,000 Series 7 Shares at a price of $25.00 per share. TD will receive additional gross proceeds of $50,000,000 from the exercise of the Underwriters’ Option, increasing the total size of the offering to $350,000,000. Closing of the Underwriters’ Option is expected to occur concurrent with the closing of the public offering on March 10, 2015.

The Implied Volatility calculation has some points of interest:

impVol_TD_150227
Click for Big

Firstly, the market does not appear to be differentiated between the NVCC compliant and non-compliant issues, as the latter appear to be plotted on a line more or less defined by the former. Additionally, the Implied Volatility is very high – ridiculously high, for NVCC-compliant issues – so I would expect the new issue to outperform the three non-compliant issues (TD.PF.A, TD.PF.B and TD.PF.C) as the market comes to realize what the word “perpetual” means.

AIM.PR.A To Be Extended

Friday, February 27th, 2015

Aimia has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 6,900,000 Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Shares”) on March 31, 2015. As a result and subject to certain conditions set out in the prospectus supplement dated January 13, 2010 relating to the issuance of the Series 1 Shares, the holders of the Series 1 Shares have the right to convert all or part of their Series 1 Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series 2 (the “Series 2 Shares”) of Aimia on March 31, 2015. Holders who do not exercise their right to convert their Series 1 Shares into Series 2 Shares on such date will continue to hold their Series 1 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Aimia determines that there would be less than 1,000,000 Series 2 Shares outstanding after March 31, 2015, then holders of Series 1 Shares will not be entitled to convert their shares into Series 2 Shares, and (ii) alternatively, if Aimia determines that there would remain outstanding less than 1,000,000 Series 1 Shares after March 31, 2015, then all remaining Series 1 Shares will automatically be converted into Series 2 Shares on a one-for-one basis on March 31, 2015. In either case, Aimia will give written notice to that effect to registered holders of Series 1 Shares no later than March 24, 2015.

The dividend rate applicable to the Series 1 Shares for the 5-year period from and including March 31, 2015 to but excluding March 31, 2020, and the dividend rate applicable to the Series 2 Shares for the 3-month period from and including March 31, 2015 to but excluding June 30, 2015, will be announced by way of a press release on March 2, 2015.

Beneficial owners of Series 1 Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Montreal time) on March 17, 2015.

Inquiries should be directed to Aimia’s Registrar and Transfer Agent, CST Trust Company, at 1-800-387-0825 (toll free in Canada and the United States).

No surprises here, since the issue resets at GOC5 + 375bp and was quoted at 22.38-50 on February 27 to yield 4.97%-93 to perpetuity.

AIM.PR.A changed its ticker from AER.PR.A in October, 2011. AER.PR.A commenced trading 2010-1-20 after being announced 2010-1-12.

February 26, 2015

Friday, February 27th, 2015

Assiduous Reader DW brings to my attention a piece titled BXF no longer a strip tease, which points out:

When First Asset created Canada’s first strip bond ETF in 2013, they claimed that the ETF was expected to be more tax-efficient than other short term bond products currently available in the marketplace.

With a full tax year behind us, and armed with a new methodology for calculating the after-tax returns of ETFs, we can put First Asset’s claim to the test. Spoiler alert: the results are not only impressive, but they make you wonder why other firms haven’t followed suit by offering their own brand of strip bond ETFs.

The results above should not be considered a fluke – as long as the other bond ETFs continue to have an average coupon that is significantly higher than their yield-to-maturity, BXF will be expected to outperform these plain-vanilla ETFs on an after-tax basis (for more information on this concept, please read Why Use a Strip Bond ETF? by Dan Bortolotti).

This has previously been an issue in the preferred share world – see the article Beware the tax trap of these tempting preferreds and the post Tax Impact on FixedResetPremium Yields. Remember the good old days, when FixedResets traded at a premium?

Strips are generally too expensive to hold in any account, let alone a taxable one, but the fact that they are treated as par bonds as of the purchase date is a very useful wrinkle. Regrettably, most strips are governments and to a large extent the tax savings will be offset by the liquidity premium – which retail shouldn’t pay for, because the ability to transact $50-million in one ‘phone call without moving the market isn’t exactly an attribute that should be of much interest to retail.

I have advised many clients in the past to open accounts at full-service brokers with the sole objective of gaining access to current coupon corporate new issues. This has worked out OK for them – the biggest problem is putting the fear of God into the broker so he never calls unless he’s got a new issue that meets pre-defined standards!

US brokers are attempting to whip up some fear-inspired trading in bonds:

While the Federal Reserve considers raising overnight borrowing costs from about zero, where they’ve been since 2008, central banks in Europe are dropping deposit rates into negative territory.

This backdrop has pushed a measure of expected Treasury price swings to levels that are about 40 percent higher this year than in the same period in 2014, according to Bank of America Merrill Lynch’s Option Volatility Estimate MOVE index.

“The risk in bonds has gone up,” Francesco Garzarelli, London-based co-head of macro and markets research at Goldman Sachs Group Inc., said in a Bloomberg Television interview Thursday. “The sensitivity to small changes in yield expectations from here will command very sizable price swings, and I just think that makes fixed income a very dangerous asset class.”

While the biggest banks have cut back on their positions in risky, speculative-grade debt, it’s steadily migrated to large institutions, insurance companies and mutual funds. Such firms have boosted their holdings of corporate and foreign bonds to $5.1 trillion, a 65 percent increase since the end of 2008, according to data compiled by UBS.

This has more than offset the $800 billion decline in holdings at banks and securities firms in the period, a regulator-prompted retrenchment that was intended to reinforce the financial system, UBS analysts Matthew Mish and Stephen Caprio wrote in a Feb. 26 report.

What we’re left with instead — ballooning bond funds that own more and more risky debt — may be a less bad option, but one that still threatens to wreak havoc in credit markets.

Rob Carrick highlights a TD publication in his piece What if interest rates never return to ‘normal’?:

I’m on record as having warned many times about rising rates, but I’m now in adjustment mode. What has me reconsidering is the kind of thinking found in a new report by TD Economics titled The New Normal: Low Rates in Advanced Economies for the Long Run. It argues that rates are low today because of weak global economic growth, and that they will move higher as the economy improves. However, rates will not return to levels we used to consider “neutral.” The reason: Aging, and in some cases, shrinking populations across the industrial world. They’ll keep a lid on growth in economic productivity and thereby reduce the need to crank rates higher.

The TD report THE NEW NORMAL: LOW RATES IN ADVANCED ECONOMIES FOR THE LONG RUN forecasts modest rates for years to come:

  • • Trend economic growth is likely to remain slower than it has been historically throughout advanced economies. The two key determinants, labor force and labor productivity growth, have been slowing nearly everywhere.
  • • Record low interest rates in many advanced economies is a result of both cyclical and structural factors. However, even once they begin to normalize, lower potential GDP growth will keep the long-term equilibrium level of interest rates lower than in the past. By extension, bond yields are also slated to be lower across the maturity spectrum.
  • • The equilibrium level of interest rates in the UK is set to be relatively similar to Canada’s and slightly below that of the US. In the euro area, the equilibrium level will be a notch below the UK’s, while it will be substantially lower in Japan.
  • • In the near term, it is perfectly clear that interest rates are set to remain far lower than their expected neutral level. Nonetheless, for long-term investors, such as pension funds, investing over multiple business cycles, lower neutral rates will make for a particular challenge.


In a recent paper, TD Economics estimated the long-run neutral level of the federal funds rate to be 3.25%, relative to a 1992-2007 average of 4.10%, and the long-run neutral Bank of Canada overnight rate to be 3.00%, compared to an average of 4.20% over the same time frame. This decline reflects slower labor force growth and modest productivity growth. A central question is whether this is a global phenomenon? In this paper, we explore the long-run neutral level of interest rates for the UK, euro area and Japan. Our conclusion is that across the advanced world, the long-term equilibrium level of interest rates will be lower than in the past.

And the paper referenced in the quoted paragraph is DIVERGENT VIEWS ON NEUTRAL INTEREST RATES

  • • With the Fed signaling an end to QE in October, financial markets are now debating both the timing of future rate hikes and, more importantly, the level to which interest rates will ultimately rise. The latter requires an understanding of the neutral level of interest rates.
  • • Disagreement over how high rates will rise in the future seems to be embedded in different timeframes under discussion. The view of a ‘new neutral’ real fed funds rate of close to zero (2.00% in nominal terms) is usually grounded in a shorter timeframe that is not consistent with the long-run level of rates of an economy in equilibrium – growing at a trend pace with stable inflation.
  • • TD Economics believes that the long-run neutral level of the fed funds rate is around 3.25% (1.25% real) and the neutral level of 10-year Treasury yields is close to 4.00% (2.00% real). However, the Fed is expected to reach those points slowly, over the course of more than three years, assuming the economic recovery remains on track. The result is that our real fed funds rate averages -0.5% from 2015 to 2017.


For some time, TD Economics has viewed the future long-run neutral level of rates as lower than the pre-recession experience. We forecast a neutral level of interest rates in a range of 3.00% to 3.50% (equal to 1.00%-1.50% real), and we use the middle of that range (3.25%) to anchor our long term interest rate projection.

Meanwhile, preferred share investors are contemplating inspirational public art:

scaffold
Click for Big

It was a rough day for the Canadian preferred share markets, with PerpetualDiscounts down 18bp, FixedResets losing 40bp and DeemedRetractibles off 10bp. MFC issues of all types are notable on the bad side of a lengthy Performance Highlights table, while ENB issues made an appearance on the good side. Volume was high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150226
Click for Big

The new issue has caused a large change in the curve-fitting for the TRP series of FixedResets, which is discussed at greater length on the post announcing the new issue. TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.07 to be $1.24 rich, while the new issue, resetting 2020-11-30 at +296, is $0.87 cheap at its issue price of 25.00.

impVol_MFC_150226
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.18 to be $0.38 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.80 to be $0.46 cheap.

impVol_BAM_150226
Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 17.24 to be $0.84 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.39 and appears to be $1.03 rich.

impVol_FTS_150226
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.86, looks $0.83 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.51 and is $0.94 rich.

pairs_FR_150226
Click for Big

Most of the investment grade break-even rates are close to zero.

On the other hand, the market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

pairs_FF_150226
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1262 % 2,294.0
FixedFloater 4.37 % 3.52 % 18,699 18.38 1 1.0233 % 4,041.0
Floater 3.14 % 3.29 % 64,663 18.94 4 0.1262 % 2,438.6
OpRet 4.08 % 1.39 % 110,236 0.31 1 0.0000 % 2,760.4
SplitShare 4.40 % 4.28 % 28,352 3.55 6 0.2370 % 3,220.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,524.1
Perpetual-Premium 5.33 % -0.17 % 55,716 0.08 24 0.0049 % 2,515.3
Perpetual-Discount 4.95 % 4.92 % 106,817 15.65 10 -0.1791 % 2,795.8
FixedReset 4.45 % 3.41 % 213,018 16.83 78 -0.3973 % 2,401.8
Deemed-Retractible 4.92 % 0.11 % 100,920 0.17 39 -0.0989 % 2,650.0
FloatingReset 2.43 % 2.85 % 94,896 6.38 7 0.1022 % 2,326.6
Performance Highlights
Issue Index Change Notes
MFC.PR.C Deemed-Retractible -2.64 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.61
Bid-YTW : 5.22 %
MFC.PR.L FixedReset -2.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.42
Bid-YTW : 4.09 %
PWF.PR.P FixedReset -2.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 3.23 %
SLF.PR.H FixedReset -2.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.66
Bid-YTW : 3.61 %
ENB.PR.F FixedReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.28 %
TRP.PR.C FixedReset -1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 16.31
Evaluated at bid price : 16.31
Bid-YTW : 3.52 %
BAM.PR.X FixedReset -1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 17.24
Evaluated at bid price : 17.24
Bid-YTW : 4.00 %
BAM.PF.G FixedReset -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.14
Evaluated at bid price : 25.00
Bid-YTW : 3.67 %
CU.PR.G Perpetual-Discount -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.29
Evaluated at bid price : 23.62
Bid-YTW : 4.77 %
TRP.PR.E FixedReset -1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 22.83
Evaluated at bid price : 24.07
Bid-YTW : 3.33 %
PWF.PR.A Floater -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 17.76
Evaluated at bid price : 17.76
Bid-YTW : 2.82 %
MFC.PR.N FixedReset -1.31 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.18
Bid-YTW : 3.80 %
VNR.PR.A FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.33
Evaluated at bid price : 24.70
Bid-YTW : 3.55 %
MFC.PR.M FixedReset -1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.26
Bid-YTW : 3.82 %
MFC.PR.B Deemed-Retractible -1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.30
Bid-YTW : 5.00 %
TRP.PR.D FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 22.63
Evaluated at bid price : 23.56
Bid-YTW : 3.37 %
MFC.PR.I FixedReset -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.63
Bid-YTW : 3.28 %
BAM.PR.G FixedFloater 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 21.90
Evaluated at bid price : 21.72
Bid-YTW : 3.52 %
TRP.PR.B FixedReset 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 14.42
Evaluated at bid price : 14.42
Bid-YTW : 3.35 %
ENB.PF.A FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 21.77
Evaluated at bid price : 22.17
Bid-YTW : 4.01 %
BAM.PR.K Floater 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 15.20
Evaluated at bid price : 15.20
Bid-YTW : 3.31 %
ENB.PF.G FixedReset 1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 21.89
Evaluated at bid price : 22.40
Bid-YTW : 4.02 %
ENB.PF.C FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 21.81
Evaluated at bid price : 22.25
Bid-YTW : 3.99 %
CGI.PR.D SplitShare 1.58 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.35 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.J FixedReset 144,700 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.15
Evaluated at bid price : 25.02
Bid-YTW : 3.32 %
OSP.PR.A SplitShare 110,207 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2020-03-31
Maturity Price : 10.00
Evaluated at bid price : 10.12
Bid-YTW : 4.77 %
CM.PR.O FixedReset 73,930 TD crossed 50,000 at 24.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.09
Evaluated at bid price : 24.67
Bid-YTW : 3.11 %
ENB.PR.F FixedReset 65,111 RBC bought 10,100 from Scotia at 19.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.28 %
ENB.PR.N FixedReset 63,458 Scotia crossed 14,000 at 20.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 20.34
Evaluated at bid price : 20.34
Bid-YTW : 4.24 %
BMO.PR.S FixedReset 49,288 Scotia crossed blocks of 17,600 and 25,000, both at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.20
Evaluated at bid price : 24.93
Bid-YTW : 3.05 %
There were 41 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.C Deemed-Retractible Quote: 23.61 – 24.34
Spot Rate : 0.7300
Average : 0.4221

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.61
Bid-YTW : 5.22 %

MFC.PR.L FixedReset Quote: 23.42 – 24.25
Spot Rate : 0.8300
Average : 0.6360

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.42
Bid-YTW : 4.09 %

RY.PR.F Deemed-Retractible Quote: 25.50 – 25.91
Spot Rate : 0.4100
Average : 0.2356

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-05-24
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : 0.35 %

BAM.PF.G FixedReset Quote: 25.00 – 25.39
Spot Rate : 0.3900
Average : 0.2405

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 23.14
Evaluated at bid price : 25.00
Bid-YTW : 3.67 %

BAM.PR.N Perpetual-Discount Quote: 23.28 – 23.65
Spot Rate : 0.3700
Average : 0.2318

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 22.86
Evaluated at bid price : 23.28
Bid-YTW : 5.16 %

ENB.PR.F FixedReset Quote: 19.40 – 19.85
Spot Rate : 0.4500
Average : 0.3197

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-02-26
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 4.28 %

New Issue: CM FixedReset, 3.60%+279

Thursday, February 26th, 2015

The Canadian Imperial Bank of Commerce has announced:

that it had entered into an agreement with a group of underwriters led by CIBC World Markets Inc. for an issue of 10 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares, Series 43 (the “Series 43 Shares”) priced at $25.00 per Series 43 Share to raise gross proceeds of $250 million.

CIBC has granted the underwriters an option to purchase up to an additional two million Series 43 Shares at the same offering price, exercisable at any time up to two days prior to closing. Should the underwriters’ option be fully exercised, the total gross proceeds of the financing will be $300 million.

The Series 43 Shares will yield 3.60% per annum, payable quarterly, as and when declared by the Board of Directors of CIBC, for an initial period ending July 31, 2020. On July 31, 2020, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.79%.

Subject to regulatory approval and certain provisions of the Series 43 Shares, on July 31, 2020 and on July 31 every five years thereafter, CIBC may, at its option, redeem all or any part of the then outstanding Series 43 Shares at par.

Subject to the right of redemption, holders of the Series 43 Shares will have the right to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares, Series 44 (the “Series 44 Shares”), subject to certain conditions, on July 31, 2020 and on July 31 every five years thereafter. Holders of the Series 44 Shares will be entitled to receive a quarterly floating rate dividend, as and when declared by the Board of Directors of CIBC, equal to the three-month Government of Canada Treasury Bill yield plus 2.79%.

Holders of the Series 44 Shares may convert their Series 44 Shares into Series 43 Shares, subject to certain conditions, on July 31, 2025 and on July 31 every five years thereafter.

The expected closing date is March 11, 2015. CIBC will make an application to list the Series 43 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of this offering will be used for general purposes of CIBC.

CIBC has two other series of FixedResets outstanding, CM.PR.O and CM.PR.P – sadly, insufficient to perform an Implied Volatility analysis.

I find it interesting that the issue won’t close until March 11 – two weeks is a relatively long marketing period for a major bank. The sluggishness of sales of current issues has been remarked upon both in comments on PrefBlog and elsewhere.

Rush to liquidity leads to junk sell-off

Thursday, February 26th, 2015

Andrew Allentuck was kind enough to quote me in his January, 2015, piece Rush to liquidity leads to junk sell-off:

Given the higher level of risk caused by increased duration and the reduced liquidity caused by a bank’s need to cut holdings of dicey bonds, spreads between corporate bond prices and, especially, subinvestment-grade bonds are going to increase, says James Hymas, president of Hymas Investment Management Inc. in Toronto: “It is liquidity, not default risk, that is moving prices and yields in the junk debt market.”

Bonds can improve portfolio stability

Thursday, February 26th, 2015

Andrew Allentuck was kind enough to quote me in his November, 2014, piece Bonds can improve portfolio stability:

Still, care should be taken not to err too far on the side of safety. “When you compare a 10-year – and longer – Government of Canada bond with a high, investment-grade corporate bond of similar term, you can see a spread of 150 bps,” says James Hymas, president of Hymas Investment Management Inc. in Toronto. “The spread on yield is not all compensation for risk. Only 20 bps to 30 bps covers the credit risk. The rest is liquidity, and most retail investors give up too much yield to get the liquidity.”