Archive for June, 2017

BAM.PR.X : Convert or Hold?

Friday, June 9th, 2017

It will be recalled that BAM.PR.X will reset to 2.727% (paid on par) effective July 1.

Holders of BAM.PR.X have the option to convert to FloatingResets, which will pay 3-month bills plus 180bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Toronto time) on June 15, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be BAM.PR.Y.

BAM.PR.X is a FixedReset, FixedReset, 4.60%+180, that commenced trading 2011-2-8 after being announced 2011-1-19. Thus, the new rate represents a dividend reduction of 41%. Ouch!

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BAM.PR.X and the FloatingReset BAM.PR.Y that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_170609
Click for Big

The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3-month bill rate and the averages for investment-grade and junk issues are both well below current market rates, at -0.04% and -0.16%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BAM.PR.X FixedReset, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart BAM.PR.Y given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for BAM.PR.X) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread +0.50% 0.00% -0.50%
BAM.PR.X 15.95 180bp 15.51 14.99 14.47

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BAM.PR.X continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

June 8, 2017

Friday, June 9th, 2017

A Spanish bank went bust, so obviously the sky is falling:

The collapse of Banco Popular Espanol SA and a subsequent wipeout of its junior debt serves as a reminder for Canadian investors lapping up similar bonds why these securities offer a higher yield than others.

The 1-euro rescue takeover of what was Spain’s sixth-largest bank by rival Banco Santander SA left holders of its stock and contingent convertible bonds with losses of 3.3 billion euros ($3.7 billion). Senior debt was protected as authorities averted a run on the bank and saved taxpayers from bearing costs.

The move comes as investors across the ocean have been buying non-viability contingent capital bonds, securities which convert to equity when certain crisis triggers are hit. While no major Canadian lender is anywhere near the trouble Banco Popular was in, the Bank of Canada warned on Thursday of increased financial system vulnerabilities associated with household debt.

So a Canadian NVCC bond was highlighted in the story:

The spread on the 2.982 percent NVCC bonds of Toronto-Dominion Bank, Canada’s largest bank by assets, with a call date in September 2020 has fallen 160 basis points from its peak in February 2016, while that on the lender’s 2.045 percent deposit notes maturing in March 2021 has shrunk 54 basis points over roughly the same period, according to Bloomberg data.

“It should be a bit of a wake-up call for Canadian investors,” said Bill Girard, who manages corporate bond portfolios at Bank of Nova Scotia’s 1832 Asset Management, arguing that Canadian investors have been buying higher-yielding NVCC bonds without fully realizing the risk. “Banco Popular investors might have thought the same. You’re safe right until the point you aren’t.”

It should be a bit of a wake-up call, but it won’t be. The reason it should be a wake-up call is because … well, first off, let’s take a look at the financial statements for PHILLIPS, HAGER & NORTH SHORT TERM BOND & MORTGAGE FUND (I don’t want to pick on Royal Bank’s subsidiary – it was just the first one I found).

On page four of the document, we find that this fund holds just over $17-million of these things.

WHAT THE #$$%**@$ IS AN NVCC ISSUE DOING IN A SHORT TERM BOND & MORTGAGE FUND?

I have noted in the past that OSFI wanted this stuff incorporated into bond indices, even though they’re not actually bonds as the term is generally understood. OSFI’s desire for this was publicly reported and was consistent with other sleaze-bag regulatory rip-offs of unsophisticated retail bond index investors globally. So, naturally, the bank-owned TSX happily incorporated them in their bond indices. This was a problem for quite some time, but I am pleased to report that May, 2017, revision of the FTSE TMX Canada Universe and Maple Bond Indexes contains section 3.1.4:

Exclusions

The indexes do not include floating-rate notes, convertible bonds (which convert to equity at the option of the holder), Non Viable Contingent Capital bonds (NVCC which convert to equity if the regulator determines a firm is “Non Viable”), residential and commercial mortgage-backed securities (CMBS and MBS), other monthly-pay securities, other prepayable securities, inflation-indexed securities, or securities specifically targeted to the retail market. It also excludes securities that are not priced, which would typically be securities that are closely held and do not trade.

It doesn’t happen very often, but sometimes things do get better!

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 0.8707 % 2,115.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.8707 % 3,881.3
Floater 3.71 % 3.75 % 78,070 17.88 3 0.8707 % 2,236.8
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1022 % 3,046.9
SplitShare 4.72 % 4.42 % 70,925 3.92 5 -0.1022 % 3,638.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1022 % 2,839.1
Perpetual-Premium 5.28 % 1.33 % 70,381 0.09 25 0.0875 % 2,795.2
Perpetual-Discount 5.08 % 5.09 % 99,995 15.27 12 0.0849 % 3,003.9
FixedReset 4.54 % 4.11 % 198,436 6.53 95 0.5465 % 2,282.8
Deemed-Retractible 4.98 % 4.99 % 123,822 6.26 30 0.0449 % 2,902.5
FloatingReset 2.52 % 3.12 % 49,051 4.39 10 0.0657 % 2,520.7
Performance Highlights
Issue Index Change Notes
SLF.PR.J FloatingReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.12
Bid-YTW : 9.25 %
BAM.PF.F FixedReset 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 22.02
Evaluated at bid price : 22.27
Bid-YTW : 4.41 %
MFC.PR.O FixedReset 1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.98
Bid-YTW : 3.46 %
MFC.PR.N FixedReset 1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.96
Bid-YTW : 6.91 %
BAM.PF.A FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 21.45
Evaluated at bid price : 21.79
Bid-YTW : 4.50 %
SLF.PR.G FixedReset 1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.03
Bid-YTW : 8.87 %
MFC.PR.J FixedReset 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.31
Bid-YTW : 6.03 %
MFC.PR.K FixedReset 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.45
Bid-YTW : 7.08 %
HSE.PR.A FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 15.22
Evaluated at bid price : 15.22
Bid-YTW : 4.29 %
TRP.PR.C FixedReset 1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 15.23
Evaluated at bid price : 15.23
Bid-YTW : 4.04 %
MFC.PR.G FixedReset 1.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 5.36 %
CU.PR.I FixedReset 1.31 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-12-01
Maturity Price : 25.00
Evaluated at bid price : 26.22
Bid-YTW : 3.05 %
BAM.PR.X FixedReset 1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 15.78
Evaluated at bid price : 15.78
Bid-YTW : 4.41 %
IFC.PR.A FixedReset 1.87 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.87
Bid-YTW : 8.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 331,425 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 23.14
Evaluated at bid price : 24.95
Bid-YTW : 4.25 %
MFC.PR.O FixedReset 106,705 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.98
Bid-YTW : 3.46 %
SLF.PR.H FixedReset 102,685 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.61
Bid-YTW : 7.37 %
SLF.PR.I FixedReset 80,295 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.21
Bid-YTW : 5.55 %
TRP.PR.D FixedReset 60,950 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 4.24 %
BMO.PR.S FixedReset 30,741 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 21.04
Evaluated at bid price : 21.04
Bid-YTW : 3.99 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
SLF.PR.J FloatingReset Quote: 15.12 – 15.38
Spot Rate : 0.2600
Average : 0.1958

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.12
Bid-YTW : 9.25 %

BMO.PR.Q FixedReset Quote: 21.18 – 21.40
Spot Rate : 0.2200
Average : 0.1591

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.18
Bid-YTW : 5.64 %

GWO.PR.R Deemed-Retractible Quote: 23.92 – 24.14
Spot Rate : 0.2200
Average : 0.1626

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.92
Bid-YTW : 5.48 %

BAM.PF.H FixedReset Quote: 26.27 – 26.56
Spot Rate : 0.2900
Average : 0.2344

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 3.77 %

CCS.PR.C Deemed-Retractible Quote: 24.15 – 24.37
Spot Rate : 0.2200
Average : 0.1653

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 5.54 %

PWF.PR.P FixedReset Quote: 15.46 – 15.65
Spot Rate : 0.1900
Average : 0.1387

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-08
Maturity Price : 15.46
Evaluated at bid price : 15.46
Bid-YTW : 4.06 %

June 7, 2017

Wednesday, June 7th, 2017

PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard conversion factor of 1.3x. Long corporates now yield about 3.60%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a slight (and perhaps spurious) widening from the 295bp reported May 31.

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 0.5839 % 2,097.0
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.5839 % 3,847.8
Floater 3.74 % 3.78 % 81,177 17.81 3 0.5839 % 2,217.5
OpRet 0.00 % 0.00 % 0 0.00 0 0.0393 % 3,050.1
SplitShare 4.72 % 4.22 % 73,642 1.53 5 0.0393 % 3,642.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0393 % 2,842.0
Perpetual-Premium 5.28 % 3.77 % 69,539 0.09 25 0.0281 % 2,792.8
Perpetual-Discount 5.09 % 5.08 % 99,799 15.28 12 -0.1271 % 3,001.3
FixedReset 4.56 % 4.17 % 198,449 6.52 95 -0.0885 % 2,270.4
Deemed-Retractible 4.98 % 4.99 % 124,444 6.27 30 -0.0789 % 2,901.2
FloatingReset 2.52 % 3.16 % 48,809 4.39 10 0.1080 % 2,519.0
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset -2.93 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.56
Bid-YTW : 9.25 %
IFC.PR.C FixedReset -1.44 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.60
Bid-YTW : 6.53 %
BAM.PR.X FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-07
Maturity Price : 15.51
Evaluated at bid price : 15.51
Bid-YTW : 4.48 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 241,253 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-07
Maturity Price : 23.13
Evaluated at bid price : 24.94
Bid-YTW : 4.25 %
IFC.PR.E Deemed-Retractible 135,585 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 5.26 %
BNS.PR.G FixedReset 130,030 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-07-25
Maturity Price : 25.00
Evaluated at bid price : 26.97
Bid-YTW : 3.62 %
TD.PF.H FixedReset 122,924 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-10-31
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 3.96 %
TRP.PR.E FixedReset 72,610 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-07
Maturity Price : 20.36
Evaluated at bid price : 20.36
Bid-YTW : 4.23 %
TRP.PR.K FixedReset 58,234 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.94
Bid-YTW : 4.10 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.A FixedReset Quote: 16.56 – 17.01
Spot Rate : 0.4500
Average : 0.3105

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.56
Bid-YTW : 9.25 %

VNR.PR.A FixedReset Quote: 20.48 – 20.79
Spot Rate : 0.3100
Average : 0.2319

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-07
Maturity Price : 20.48
Evaluated at bid price : 20.48
Bid-YTW : 4.65 %

MFC.PR.O FixedReset Quote: 26.70 – 26.94
Spot Rate : 0.2400
Average : 0.1680

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.70
Bid-YTW : 3.75 %

POW.PR.D Perpetual-Discount Quote: 24.91 – 25.09
Spot Rate : 0.1800
Average : 0.1118

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-07
Maturity Price : 24.65
Evaluated at bid price : 24.91
Bid-YTW : 5.08 %

BAM.PF.H FixedReset Quote: 26.20 – 26.44
Spot Rate : 0.2400
Average : 0.1734

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.85 %

IAG.PR.A Deemed-Retractible Quote: 22.90 – 23.14
Spot Rate : 0.2400
Average : 0.1829

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.90
Bid-YTW : 5.97 %

June 6, 2017

Tuesday, June 6th, 2017
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 -0.4754 % 2,084.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4754 % 3,825.5
Floater 3.76 % 3.80 % 82,415 17.77 3 -0.4754 % 2,204.7
OpRet 0.00 % 0.00 % 0 0.00 0 0.2682 % 3,048.9
SplitShare 4.72 % 4.16 % 74,092 1.53 5 0.2682 % 3,641.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2682 % 2,840.8
Perpetual-Premium 5.28 % 3.11 % 70,221 0.09 25 -0.0812 % 2,792.0
Perpetual-Discount 5.08 % 5.09 % 101,019 15.27 12 -0.0917 % 3,005.2
FixedReset 4.56 % 4.17 % 193,857 6.52 95 -0.4770 % 2,272.4
Deemed-Retractible 4.98 % 4.96 % 125,078 6.27 30 -0.1454 % 2,903.5
FloatingReset 2.52 % 3.18 % 46,702 4.39 10 -0.0563 % 2,516.3
Performance Highlights
Issue Index Change Notes
MFC.PR.N FixedReset -1.93 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.85
Bid-YTW : 6.99 %
MFC.PR.M FixedReset -1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.95
Bid-YTW : 6.97 %
TRP.PR.B FixedReset -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 13.85
Evaluated at bid price : 13.85
Bid-YTW : 3.98 %
TRP.PR.E FixedReset -1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.26
Evaluated at bid price : 20.26
Bid-YTW : 4.25 %
IFC.PR.A FixedReset -1.39 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.06
Bid-YTW : 8.68 %
TD.PF.A FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.61
Evaluated at bid price : 20.61
Bid-YTW : 4.01 %
BMO.PR.W FixedReset -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.30
Evaluated at bid price : 20.30
Bid-YTW : 4.01 %
MFC.PR.J FixedReset -1.31 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.15
Bid-YTW : 6.14 %
IFC.PR.C FixedReset -1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.90
Bid-YTW : 6.29 %
IAG.PR.G FixedReset -1.25 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.28
Bid-YTW : 6.25 %
RY.PR.H FixedReset -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.67
Evaluated at bid price : 20.67
Bid-YTW : 3.98 %
MFC.PR.K FixedReset -1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.24
Bid-YTW : 7.25 %
TD.PF.C FixedReset -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.32
Evaluated at bid price : 20.32
Bid-YTW : 4.06 %
BMO.PR.Q FixedReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.00
Bid-YTW : 5.83 %
RY.PR.J FixedReset -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 21.77
Evaluated at bid price : 22.02
Bid-YTW : 4.17 %
TD.PF.B FixedReset -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.46
Evaluated at bid price : 20.46
Bid-YTW : 4.05 %
BAM.PR.T FixedReset -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 18.43
Evaluated at bid price : 18.43
Bid-YTW : 4.56 %
MFC.PR.G FixedReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.54
Bid-YTW : 5.46 %
SLF.PR.G FixedReset -1.00 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.84
Bid-YTW : 9.05 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 189,067 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 23.13
Evaluated at bid price : 24.93
Bid-YTW : 4.25 %
IAG.PR.G FixedReset 184,300 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.28
Bid-YTW : 6.25 %
TD.PF.H FixedReset 67,430 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-10-31
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.98 %
TD.PF.A FixedReset 50,372 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.61
Evaluated at bid price : 20.61
Bid-YTW : 4.01 %
MFC.PR.N FixedReset 36,449 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.85
Bid-YTW : 6.99 %
TRP.PR.D FixedReset 33,000 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 4.26 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.K Floater Quote: 12.52 – 12.77
Spot Rate : 0.2500
Average : 0.1759

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 12.52
Evaluated at bid price : 12.52
Bid-YTW : 3.82 %

CU.PR.I FixedReset Quote: 26.00 – 26.29
Spot Rate : 0.2900
Average : 0.2322

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-12-01
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.31 %

IAG.PR.G FixedReset Quote: 21.28 – 21.59
Spot Rate : 0.3100
Average : 0.2586

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.28
Bid-YTW : 6.25 %

PWF.PR.T FixedReset Quote: 22.41 – 22.65
Spot Rate : 0.2400
Average : 0.1891

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 21.87
Evaluated at bid price : 22.41
Bid-YTW : 3.77 %

ELF.PR.F Perpetual-Premium Quote: 25.21 – 25.45
Spot Rate : 0.2400
Average : 0.1896

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-07-06
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 3.90 %

HSE.PR.A FixedReset Quote: 15.20 – 15.40
Spot Rate : 0.2000
Average : 0.1526

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-06
Maturity Price : 15.20
Evaluated at bid price : 15.20
Bid-YTW : 4.35 %

June 5, 2017

Monday, June 5th, 2017
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 0.1852 % 2,094.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1852 % 3,843.8
Floater 3.74 % 3.78 % 83,168 17.81 3 0.1852 % 2,215.2
OpRet 0.00 % 0.00 % 0 0.00 0 -0.0237 % 3,040.7
SplitShare 4.73 % 4.49 % 72,172 3.93 5 -0.0237 % 3,631.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0237 % 2,833.2
Perpetual-Premium 5.28 % 0.32 % 71,000 0.09 25 0.0766 % 2,794.3
Perpetual-Discount 5.08 % 5.08 % 102,442 15.28 12 -0.1655 % 3,007.9
FixedReset 4.54 % 4.14 % 194,769 6.54 95 -0.2077 % 2,283.3
Deemed-Retractible 4.97 % 4.96 % 125,080 6.27 30 0.0231 % 2,907.7
FloatingReset 2.52 % 3.10 % 47,304 4.40 10 -0.3834 % 2,517.7
Performance Highlights
Issue Index Change Notes
TRP.PR.A FixedReset -2.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 17.85
Evaluated at bid price : 17.85
Bid-YTW : 4.08 %
BAM.PR.X FixedReset -2.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 15.70
Evaluated at bid price : 15.70
Bid-YTW : 4.43 %
SLF.PR.J FloatingReset -2.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.10
Bid-YTW : 9.25 %
BMO.PR.S FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 3.94 %
IAG.PR.G FixedReset -1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.55
Bid-YTW : 6.05 %
MFC.PR.L FixedReset -1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.44
Bid-YTW : 7.16 %
BNS.PR.D FloatingReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.58
Bid-YTW : 4.89 %
TD.PF.F Perpetual-Premium 1.02 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2024-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 4.51 %
IAG.PR.A Deemed-Retractible 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.10
Bid-YTW : 5.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 255,851 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 23.14
Evaluated at bid price : 24.97
Bid-YTW : 4.24 %
BMO.PR.C FixedReset 51,398 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 23.30
Evaluated at bid price : 25.43
Bid-YTW : 4.19 %
NA.PR.W FixedReset 31,767 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 20.41
Evaluated at bid price : 20.41
Bid-YTW : 4.05 %
BMO.PR.B FixedReset 28,352 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 3.92 %
BNS.PR.D FloatingReset 27,200 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.58
Bid-YTW : 4.89 %
HSE.PR.C FixedReset 26,281 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 22.17
Evaluated at bid price : 22.52
Bid-YTW : 4.64 %
There were 11 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.A FixedReset Quote: 17.85 – 18.27
Spot Rate : 0.4200
Average : 0.2922

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-05
Maturity Price : 17.85
Evaluated at bid price : 17.85
Bid-YTW : 4.08 %

PVS.PR.E SplitShare Quote: 25.91 – 26.48
Spot Rate : 0.5700
Average : 0.4439

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 4.75 %

SLF.PR.J FloatingReset Quote: 15.10 – 15.40
Spot Rate : 0.3000
Average : 0.1843

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 15.10
Bid-YTW : 9.25 %

BNS.PR.C FloatingReset Quote: 24.06 – 24.35
Spot Rate : 0.2900
Average : 0.1854

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.06
Bid-YTW : 3.35 %

IFC.PR.A FixedReset Quote: 17.30 – 17.72
Spot Rate : 0.4200
Average : 0.3194

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.30
Bid-YTW : 8.46 %

SLF.PR.A Deemed-Retractible Quote: 23.93 – 24.19
Spot Rate : 0.2600
Average : 0.1804

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.93
Bid-YTW : 5.42 %

MAPF Performance : May, 2017

Sunday, June 4th, 2017

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close May 31, 2017, was $9.1975.

Returns to May 31, 2017
Period MAPF BMO-CM “50” Preferred Share Index TXPR*
Total Return
CPD – according to Blackrock
One Month -1.14% -2.11% -1.67% N/A
Three Months +1.06% -0.54% +0.11% N/A
One Year +22.27% +17.61% +15.77% +15.33%
Two Years (annualized) +1.58% +2.20% +0.98% N/A
Three Years (annualized) +0.48% +0.32% -0.40% -0.80%
Four Years (annualized) +1.00% +0.34% -0.36% N/A
Five Years (annualized) +2.71% +1.28% +0.81% +0.35%
Six Years (annualized) +2.17% +1.71% +1.22%  
Seven Years (annualized) +5.40% +3.83% +2.99%  
Eight Years (annualized) +7.13% +4.74% +3.65%  
Nine Years (annualized) +9.17% +3.59% +2.60%  
Ten Years (annualized) +8.50% +3.03%   +1.45%
Eleven Years (annualized) +8.19% +2.84%    
Twelve Years (annualized) +7.95% +2.86%    
Thirteen Years (annualized) +8.12% +3.16%    
Fourteen Years (annualized) +9.01% +3.23%    
Fifteen Years (annualized) +8.84% +3.53%    
Sixteen Years (annualized) +9.30% +3.43%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
The full name of the BMO-CM “50” index is the BMO Capital Markets “50” Preferred Share Index. It is calculated without accounting for fees.
“TXPR” is the S&P/TSX Preferred Share Index. It is calculated without accounting for fees.
CPD Returns are for the NAV and are after all fees and expenses.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are -1.17%, +0.73% and +14.37%, respectively, according to Morningstar after all fees & expenses. Three year performance is +0.91%; five year is +1.79%
Figures for Manulife Preferred Income Class Adv [into which was merged Manulife Preferred Income Fund (formerly AIC Preferred Income Fund)] (which are after all fees and expenses) for 1-, 3- and 12-months are -2.80%, -0.90% & +18.52%, respectively.

It will be noted that AIC Preferred Income Fund was in existence prior to August, 2009, but long term performance figures have been suppressed.

Figures for Horizons Active Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are -1.78%, +0.15% & +16.91%, respectively. Three year performance is +1.30%, five-year is +2.12%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are -1.95%, -0.15% and +16.50% for one-, three- and twelve months, respectively. Three year performance is +0.30%.

According to the fund’s fact sheet as of June 30, 2016, the fund’s inception date was October 30, 2015. I do not know how they justify this nonsensical statement, but will assume that prior performance is being suppressed in some perfectly legal manner that somebody at National considers ethical.

The figures for the NAV of BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR) is +18.52% for the past twelve months. Two year performance is -0.76%, three year is -2.61%.
Figures for NexGen Canadian Preferred Share Tax Managed Fund (Dividend Tax Credit Class, the best performing) are -%, +% and -% for one-, three- and twelve-months, respectively.
Figures for BMO Preferred Share Fund are -0.75% and +12.96% for the past three- and twelve-months, respectively. Three year performance is -1.00%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are +19.38% for the past twelve months. The three-year figure is +0.67%; five years is +0.76%
Figures for the First Asset Preferred Share Investment Trust (PSF.UN) are no longer available since the fund has merged with First Asset Preferred Share ETF (FPR)

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

Obviously, the last twelve months have been superb for both preferred shares in general and the fund in particular, but I think that there is still room for outsized gains. The Seniority Spread (the interest-equivalent yield on reasonably liquid, investment-grade PerpetualDiscounts less the yield on long term corporate bonds) is still quite elevated (chart end-date 2017-5-12):

pl_170512_body_chart_1
Click for Big

… and the relationship between five-year Canada yields and yields on investment-grade FixedResets is also well within what I consider ‘decoupled panic’ territory (chart end-date 2017-4-13):

pl_170512_body_chart_5
Click for Big

In addition, I feel that the yield on five-year Canadas is unsustainably low (it should be the inflation rate plus an increment of … 1%? 1.5%? 2.0%?),and a return to sustainable levels is likely over the medium term.

The performance gap between FixedResets and PerpetualDiscounts, remarked on last month, widened in May:

himi_indexperf_170531
Click for Big

Of course, it’s one thing to say that ‘spreads are unsustainable and so are government yields’ and it’s quite another to forecast just how and when a more economically sustainable environment will take effect. It could be years. There could be a reversal, particularly if Trump’s international trade policies cause a severe recession or even a depression. And, of course, I could be just plain wrong about the sustainability of the current environment. The drop in FixedReset relative performance could be related to uninspiring economic news:

In the first official growth estimates of Trump’s presidency, federal economists reported gross domestic product, a broad measure of economic growth, grew at an annualized rate of just 0.7 percent in the year’s first quarter, down from 2.1 percent growth in the fourth quarter of 2016.

I think that a broad, sustainable rally in FixedResets will require higher five-year Canada yields (or a widespread expectation of them) … and although I’m sure this will happen eventually, it would be foolish to speculate on just when it will happen!

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
September 10.4601 5.28% 0.997 5.296% 1.0000 $0.5540
December, 2014 10.5701 4.83% 1.009 4.787% 1.0000 $0.5060
March, 2015 9.9573 4.99% 1.001 4.985% 1.0000 $0.4964
June, 2015 9.4181 5.55% 1.002 5.539% 1.0000 $0.5217
September, 2015 7.8140 6.98% 0.999 6.987% 1.0000 $0.5460
December, 2015 8.1379 6.85% 0.997 6.871% 1.0000 $0.5592
March, 2016 7.4416 7.79% 0.998 7.805% 1.0000 $0.5808
June 7.6704 7.67% 1.011 7.587% 1.0000 $0.5819
September 8.0590 7.35% 0.993 7.402% 1.0000 $0.5965
December, 2016 8.5844 7.24% 0.990 7.313% 1.0000 $0.6278
March, 2017 9.3984 6.26% 0.994 6.298% 1.0000 $0.5919
May, 2017 9.1975 6.55% 0.995 6.583% 1.0000 $0.6055
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
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 (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (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: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.

The same reasoning is also applied to FixedResets from these issuers, other than explicitly defined NVCC from banks.

Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

These calculations were performed assuming constant contemporary GOC-5 and 3-Month Bill rates, as follows:

Canada Yields Assumed in Calculations
Month-end GOC-5 3-Month Bill
September, 2015 0.78% 0.40%
December, 2015 0.71% 0.46%
March, 2016 0.70% 0.44%
June 0.57% 0.47%
September 0.58% 0.53%
December, 2016 1.16% 0.47%
March, 2017 1.08% 0.55%
May, 2017 0.95% 0.54%

Significant positions were held in NVCC non-compliant regulated FixedReset issues on March 31, 2017; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares) This presents another complication in the calculation of sustainable yield, which also assumes that redemption proceeds will be reinvested at the same rate. It will also be noted that my analysis of likely insurance industry regulation as recently updated is not given much weight by the market.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas to estimate dividends after reset for FixedResets. The assumption regarding the five-year Canada rate has become more important as the proportion of low-spread FixedResets in the portfolio has increased.
iii) Making the assumption that deeply discounted NVCC non-compliant issues from both banks and insurers, both Straight and FixedResets will be redeemed at par on their DeemedMaturity date as discussed above.

MAPF Portfolio Composition : May, 2017

Sunday, June 4th, 2017

Turnover picked up in May, to about 12%.

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.

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.

And, of course, the same segmentation has the same effect on trading opportunities between FixedReset issues.

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. While the framework has been updated, the modifications focus on the amount of capital required, not the required characteristics of that capital. However, OSFI has recently indicated that it would support a mechanism similar to the NVCC rule for banks, so we may see some developments as the IAIS deliberations regarding insurance capital continue.

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

Sectoral distribution of the MAPF portfolio on May 31 was as follows:

MAPF Sectoral Analysis 2017-5-31
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 2.2% 4.44% 5.79
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 6.3% 5.00% 15.51
Fixed-Reset 72.1% 6.60% 9.00
Deemed-Retractible 1.0% 6.04% 6.39
FloatingReset 8.3% 8.86% 6.82
Scraps (Various) 9.6% 6.08% 14.31
Cash +0.5% 0.00% 0.00
Total 100% 6.55% 9.59
Totals and changes will not add precisely due to rounding. 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.

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.

Calculations of resettable instruments are performed assuming a constant GOC-5 rate of 0.95% and a constant 3-Month Bill rate of 0.54%

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.

Credit distribution is:

MAPF Credit Analysis 2017-5-31
DBRS Rating Weighting
Pfd-1 0
Pfd-1(low) 0
Pfd-2(high) 39.4%
Pfd-2 33.6%
Pfd-2(low) 17.0%
Pfd-3(high) 0.8%
Pfd-3 4.6%
Pfd-3(low) 3.4%
Pfd-4(high) 0%
Pfd-4 0%
Pfd-4(low) 0%
Pfd-5(high) 0.7%
Pfd-5 0.0%
Cash +0.5%
Totals will not add precisely due to rounding.
The fund holds a position in AZP.PR.C, which is rated P-5(high) by S&P and is unrated by DBRS; it is included in the Pfd-5(high) total.
A position held in INE.PR.A is not rated by DBRS, but has been included as “Pfd-3” in the above table on the basis of its S&P rating of P-3.
A position held in BIP.PR.A is not rated by DBRS, but has been included as “Pfd-2(low)” in the above table on the basis of its S&P rating of P-2(low).

Liquidity Distribution is:

MAPF Liquidity Analysis 2017-5-31
Average Daily Trading Weighting
<$50,000 9.2%
$50,000 – $100,000 27.7%
$100,000 – $200,000 44.7%
$200,000 – $300,000 9.7%
>$300,000 8.2%
Cash +0.5%
Totals will not add precisely due to rounding.

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). 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 less exposed to Straight Perpetuals (including DeemedRetractibles)
    • MAPF is less exposed to Operating Retractibles
    • MAPF is usually, but not currently, more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF is overweighted in FixedResets

June 2, 2017

Friday, June 2nd, 2017

Jobs, jobs, jobs!

Nonfarm payrolls rose by a seasonally adjusted 138,000 in May from the prior month, the Labor Department said Friday, and job gains in the prior two months were revised down. The unemployment rate fell to 4.3%, the lowest reading since May 2001. Economists surveyed by The Wall Street Journal had expected 184,000 new jobs to be added in May and a jobless rate of 4.4%.

The drop in unemployment suggests that the labor market is at or very near full employment, or the point when virtually all workers who are seeking a job have found one. Federal Reserve officials projected in March the jobless rate will average 4.7% to 5% over the long run.

Average hourly earnings for private-sector workers increased by 4 cents to $26.22 an hour in May. From a year earlier, wages rose 2.5%. Annual wage gains have stayed near the 2.5% pace since late 2015, despite a steady decrease in the unemployment rate.

Typically, economists would expect falling unemployment to coincide with better wage gains. When the unemployment rate was 4.4% in May 2007, wages for nonsupervisory workers were growing better than 4% annually. In May 2001, those wages were up 4% from a year earlier. Nonsupervisory wages rose 2.4% last month, from a year earlier.

Maybe people have lost the habit of paying more:

Robert Barbera, co-director for the Center for Financial Economics at Johns Hopkins University, suggests it is important to not just look at the unemployment rate’s level, but how long it took to get there

It took a long seven years for the unemployment rate to get to 4.3% from the peak of 10% in October 2009. Because of the sluggish growth, businesses never had to scramble, and pay more, to add workers. And at no point did workers feel they were awash in opportunity.

This slow growth doesn’t give people confidence to ask for higher wages. And plenty of workers have never experienced that kind of environment: The 2000s were a bit of a dud outside of housing. Only workers in their 40s and older remember the 1990s boom. Maybe the U.S. labor market is turning a bit like Japan’s, where the unemployment has fallen to its lowest level in nearly a quarter-century, but after so many years of disappointment, workers are hesitant to demand higher wages, and employers are hesitant to give them.

Meanwhile Illinois is in big trouble!

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state, as the long-running political stalemate over the budget shows no signs of ending.

S&P warned that Illinois will likely lose its investment-grade status, an unprecedented step for a state, around July 1 if leaders haven’t agreed on a budget that chips away at the government’s chronic deficits. Moody’s followed S&P’s downgrade Thursday, citing Illinois’s underfunded pensions and the record backlog of bills that are equivalent to about 40 percent of its operating budget.

“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance,” Ted Hampton, Moody’s analyst, said in a statement. “During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached.”

“The rating actions largely reflect the severe deterioration of Illinois’ fiscal condition, a byproduct of its stalemated budget negotiations,” S&P analyst Gabriel Petek said in a statement. “The unrelenting political brinkmanship now poses a threat to the timely payment of the state’s core priority payments.”

Meanwhile, Picton Mahoney has gotten some ink for investing in ‘Deemed Retractible bonds’

Phil Mesman and his colleagues at Picton Mahoney Asset Management have been scooping up subordinated debt issued by the likes of JPMorgan Chase & Co., Barclays Plc, and Credit Agricole SA in the 1980s and 1990s that is trading at a discount to face value. The goal is to get repaid early at a premium to the current price. This strategy, which began almost two years ago with a spreadsheet plotting the rather tiny universe of the asset class, has handed the firm’s funds returns of more than 20 percent, Mesman said.

These legacy hybrid capital notes were originally issued to convert to equity in the event of a bank failure. They trade at a discount primarily because of the low coupon, which is based on a spread over the London interbank offered rate, and uncertainty around whether or not they will be repaid early, Mesman said.

The bonds, which also have a liquidity discount, have a maturity of 25 years or longer in most cases, and some are perpetual bonds, he said. The bond covenants and structures are good for investors, because they make it difficult for a bank to convert the bonds to equity in the event it needs to shore up capital levels. Regulators have said that banks need to take out the bonds before Jan. 1, 2022, Mesman said, putting a deadline on opportunities in the trade.

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 -0.8136 % 2,090.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.8136 % 3,836.7
Floater 3.75 % 3.79 % 84,386 17.80 3 -0.8136 % 2,211.1
OpRet 0.00 % 0.00 % 0 0.00 0 0.0158 % 3,041.4
SplitShare 4.73 % 4.30 % 69,297 1.55 5 0.0158 % 3,632.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0158 % 2,833.9
Perpetual-Premium 5.28 % -0.69 % 71,623 0.09 25 0.1314 % 2,792.1
Perpetual-Discount 5.07 % 5.06 % 103,880 15.33 12 0.1058 % 3,012.9
FixedReset 4.53 % 4.15 % 194,604 6.55 95 -0.3398 % 2,288.1
Deemed-Retractible 4.97 % 4.94 % 125,317 6.28 30 0.1115 % 2,907.1
FloatingReset 2.52 % 3.15 % 47,391 4.40 10 -0.1214 % 2,527.4
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset -2.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 15.19
Evaluated at bid price : 15.19
Bid-YTW : 4.07 %
TRP.PR.B FixedReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 14.06
Evaluated at bid price : 14.06
Bid-YTW : 3.95 %
PWF.PR.P FixedReset -1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 15.50
Evaluated at bid price : 15.50
Bid-YTW : 4.08 %
TRP.PR.A FixedReset -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 18.30
Evaluated at bid price : 18.30
Bid-YTW : 4.00 %
MFC.PR.J FixedReset -1.43 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.44
Bid-YTW : 5.94 %
TRP.PR.H FloatingReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 13.22
Evaluated at bid price : 13.22
Bid-YTW : 3.43 %
BMO.PR.Q FixedReset -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.32
Bid-YTW : 5.47 %
IFC.PR.A FixedReset -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.37
Bid-YTW : 8.41 %
BAM.PF.B FixedReset -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 20.81
Evaluated at bid price : 20.81
Bid-YTW : 4.45 %
BAM.PR.C Floater -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 12.56
Evaluated at bid price : 12.56
Bid-YTW : 3.80 %
CM.PR.Q FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 22.07
Evaluated at bid price : 22.46
Bid-YTW : 4.15 %
BAM.PR.X FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 16.08
Evaluated at bid price : 16.08
Bid-YTW : 4.35 %
RY.PR.H FixedReset -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 20.90
Evaluated at bid price : 20.90
Bid-YTW : 3.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.R FixedReset 2,454,817 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 23.14
Evaluated at bid price : 24.98
Bid-YTW : 4.25 %
PWF.PR.Z Perpetual-Premium 171,302 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 24.67
Evaluated at bid price : 25.07
Bid-YTW : 5.15 %
MFC.PR.N FixedReset 101,200 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.35
Bid-YTW : 6.60 %
TRP.PR.K FixedReset 91,577 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 25.86
Bid-YTW : 4.16 %
MFC.PR.R FixedReset 86,691 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 4.26 %
TRP.PR.J FixedReset 68,103 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-31
Maturity Price : 25.00
Evaluated at bid price : 26.68
Bid-YTW : 3.70 %
There were 42 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.A Deemed-Retractible Quote: 22.85 – 23.25
Spot Rate : 0.4000
Average : 0.2807

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.85
Bid-YTW : 5.99 %

TRP.PR.B FixedReset Quote: 14.06 – 14.39
Spot Rate : 0.3300
Average : 0.2449

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 14.06
Evaluated at bid price : 14.06
Bid-YTW : 3.95 %

MFC.PR.J FixedReset Quote: 21.44 – 21.67
Spot Rate : 0.2300
Average : 0.1550

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.44
Bid-YTW : 5.94 %

CM.PR.Q FixedReset Quote: 22.46 – 22.67
Spot Rate : 0.2100
Average : 0.1424

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 22.07
Evaluated at bid price : 22.46
Bid-YTW : 4.15 %

CU.PR.D Perpetual-Discount Quote: 24.64 – 24.85
Spot Rate : 0.2100
Average : 0.1517

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 24.35
Evaluated at bid price : 24.64
Bid-YTW : 4.99 %

SLF.PR.D Deemed-Retractible Quote: 22.38 – 22.61
Spot Rate : 0.2300
Average : 0.1754

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.38
Bid-YTW : 6.16 %

CM.PR.R Firm On Excellent Volume

Friday, June 2nd, 2017

The Canadian Imperial Bank of Commerce has announced:

that it has completed the offering of 32 million Basel III-compliant Non-cumulative Rate Reset Class A Preferred Shares Series 45 (Non-Viability Contingent Capital (NVCC)) (the “Series 45 Shares”) priced at $25.00 per share to raise gross proceeds of $800 million.

The offering was made through a syndicate of underwriters led by CIBC World Markets Inc. The Series 45 Shares commence trading on the Toronto Stock Exchange today under the ticker symbol CM.PR.R.

The Series 45 Shares were issued under a prospectus supplement dated May 26, 2017, to CIBC’s short form base shelf prospectus dated March 16, 2016.

CM.PR.R is a FixedReset, 4.40%+338, NVCC Compliant issue announced 2017-05-25. It will be tracked by HIMIPref™ and has been added to the FixedResets subindex.

The issue traded 2,454,817 shares today in a range of 24.96-07 before closing at 24.98-00. This volume places it eighteenth on the all-time (well, back until 1993-12-31, anyway) list, just behind TD.PR.H on 2004-4-6 and just ahead of BCE.PR.P on 2002-6-13. Vital statistics are:

CM.PR.R FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 23.14
Evaluated at bid price : 24.98
Bid-YTW : 4.25 %

Implied Volatility analysis for FixedResets continues to suggest the issue may be a little expensive:

impvol_cm_170602
Click for Big

The theoretical price implied by the above calculation is 24.77.

ENB.PR.C Debuts With No Trading

Friday, June 2nd, 2017

Assiduous Readers will remember that there was an 8% Conversion from the FixedReset ENB.PR.B to the FloatingReset ENB.PR.C, which the company treated as top secret information. I advised readers not to convert, but to continue holding the ENB.PR.B, which have reset to 3.415%.

ENB.PR.C will pay dividends at a rate of 3-Month Canada Treasury Bills plus 240bp, reset quarterly.

The issue was listed yesterday, but didn’t trade – this is largely due to the banks’ hegemony over the Canadian financial system (approved by both securities regulators and the Competition-haha Board) and their total lack of interest in providing competent service to stinking investor scum such as yourselves. These exchanges do not hit client accounts until the day after the company gives effect to them – however, investors can complain to the bank-owned CDS and the (mostly) bank-owned brokerages about this lackadaisical attitude toward client assets and see how far it gets them.

The issue also did not trade today, but at least the spread on the quote narrowed considerably from yesterday’s value.

Vital Statistics are:

ENB.PR.C FloatingReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2047-06-02
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 4.36 %

The most logical way to analyze the relative value of ENB.PR.C vs ENB.PR.B through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., IAG.PR.G and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_170602
Click for Big

The break-even T-Bill yield for the ENB.PR.B / ENB.PR.C pair is now 0.46% (given bid prices of 17.56 and 17.00, respectively), well above the junk-pair average of -0.16%, but slightly below the current actual bill rate of 0.54%.