PrefBlog

DBRS has announced that it:

changed the trend on all ratings of National Bank of Canada (National or the Bank) and its related entities to Positive from Stable, as well as confirmed all ratings, including the Bank’s Long-Term Issuer Rating at AA (low) and Short-Term Issuer Rating at R-1 (middle). National’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2, reflecting the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch uplift to the Long-Term Issuer Rating. Under the Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would provide an adequate buffer for non-bail-inable obligations and is expected to offset the removal of systemic support.

KEY RATING CONSIDERATIONS
The Positive trend and confirmation of the ratings recognize National’s dominance in its home province, the Province of Québec (Québec; rated A (high) with a Positive trend by DBRS), which continues to experience strong economic growth, in addition to the successful expansion of the Bank’s footprint in targeted markets across the rest of Canada, especially in Wealth Management (WM) and Financial Markets (FM). Furthermore, the Bank benefits from strong earnings, to which Personal and Commercial (P&C) and WM are now larger contributors, while transformation efforts in its P&C business and growth of its WM business have driven growth in client deposit capture.

The ratings also consider the longevity of the current credit cycle and the potential negative impacts on the Québec economy that might arise due to escalations in trade disputes between Canada, the United States and China. Lastly, DBRS notes that National’s FM business segment is an important contributor to the Bank’s franchise. Although the majority of transactions are client driven, which DBRS views positively, the segment’s activities do expose the Bank to increased capital markets risk from significant market downturns or other adverse events.

Affected issues are: NA.PR.A, NA.PR.C, NA.PR.E, NA.PR.G, NA.PR.S, NA.PR.W and NA.PR.X.

Bank of Montreal has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (the “Preferred Shares Series 29”) and Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 (the “Preferred Shares Series 30”).

With respect to any Preferred Shares Series 29 that remain outstanding after August 25, 2019, commencing as of such date, holders thereof will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the five-year period commencing on August 25, 2019, and ending on August 24, 2024, will be 3.624 per cent, being equal to the sum of the five-year Government of Canada bond yield as at July 26, 2019, plus 2.24 per cent, as determined in accordance with the terms of the Preferred Shares Series 29.

With respect to any Preferred Shares Series 30 that may be issued on August 26, 2019, being the first business day following the conversion date of August 25, 2019, identified in the Preferred Shares Series 29 prospectus, which falls on a Sunday, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, calculated on the basis of the actual number of days elapsed in each quarterly floating rate period divided by 365, as and when declared by the Board of Directors of the Bank and subject to the provisions of the Bank Act (Canada). The dividend rate for the three-month period commencing on August 25, 2019, and ending on November 24, 2019, will be 3.885 per cent, being equal to the sum of the three-month Government of Canada Treasury bill yield as at July 26, 2019, plus 2.24 per cent, as determined in accordance with the terms of the Preferred Shares Series 30.

Beneficial owners of Preferred Shares Series 29 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (EDT) on August 12, 2019.

They previously announced (on 2019-6-27):

that it does not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 of the Bank (the “Preferred Shares Series 29”) on August 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 29 have the right, at their option, to convert all or part of their Preferred Shares Series 29 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 30 of the Bank (the “Preferred Shares Series 30”) on August 26, 2019. This date is the first business day following the conversion date of August 25, 2019, identified in the Preferred Shares Series 29 prospectus, which falls on a Sunday. Holders who do not exercise their right to convert their Preferred Shares Series 29 into Preferred Shares Series 30 on such date will retain their Preferred Shares Series 29, unless automatically converted in accordance with the conditions below.

The foregoing conversions are subject to the conditions that: (i) if, after August 12, 2019, the Bank determines that there would be less than 1,000,000 Preferred Shares Series 29 outstanding on August 25, 2019, then all remaining Preferred Shares Series 29 will automatically be converted into an equal number of Preferred Shares Series 30 on August 25, 2019; and (ii) alternatively, if the Bank determines that there would be less than 1,000,000 Preferred Shares Series 30 outstanding on August 25, 2019, no Preferred Shares Series 29 will be converted into Preferred Shares Series 30. In either case, the Bank will give written notice to that effect to any registered holders of Preferred Shares Series 29 affected by the preceding minimums on or before August 16, 2019.

The dividend rate applicable to the Preferred Shares Series 29 for the 5-year period commencing on August 25, 2019, and ending on August 24, 2024, and the dividend rate applicable to the Preferred Shares Series 30 for the 3-month period commencing on August 25, 2019, and ending on November 24, 2019, will be determined and announced by way of a news release on July 26, 2019. The Bank will also give written notice of these dividend rates to the registered holders of Preferred Shares Series 29.

Beneficial owners of Preferred Shares Series 29 who, on or after July 26, 2019, wish to exercise their right of conversion should instruct their broker or other nominee to exercise such right before 5:00 p.m. (EDT) on August 12, 2019.

Conversion inquiries should be directed to BMO’s Registrar and Transfer Agent, Computershare Trust Company of Canada, at 1-800-340-5021.

BMO.PR.T is a FixedReset, 3.90%+224, NVCC-compliant issue that commenced trading 2014-6-6 after being announced 2019-05-28. It is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.

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., RY.PR.H 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

Click for Big

The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.11% and +1.09%, 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 BMO.PR.T FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, BMO.PR.T. Therefore, it seems likely that I will recommend that holders of BMO.PR.T continue to hold the issue and not to convert, but I will wait until it’s closer to the August 12 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BB (the “Series BB shares”) and NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BC (the “Series BC shares”).

With respect to any Series BB shares that remain outstanding after August 24, 2019, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including August 24, 2019 to, but excluding, August 24, 2024 will be 3.65% for Series BB shares, being equal to the 5-Year Government of Canada bond yield determined as of July 25, 2019 plus 2.26%, as determined in accordance with the terms of the Series BB shares.

With respect to any Series BC shares that may be issued on August 24, 2019, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including August 24, 2019 to, but excluding, November 24, 2019 will be 3.91%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of July 25, 2019 plus 2.26%, as determined in accordance with the terms of the Series BC shares.

Beneficial owners of Series BB shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on August 9, 2019.

RY.PR.H is a FixedReset, 3.90%+226, NVCC-Compliant issue that commenced trading 2014-6-3 after being announced 2014-5-23. The bank gave notice of extension on 2019-7-22. The issue is tracked by HIMIPref™ and has been assigned to the FixedReset-Discount subindex.

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., RY.PR.H 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). Inspection of the graph and the overall average break-even rates for extant pairs will provide a guide for estimating the break-even rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.

Click for Big

The market has lost enthusiasm for floating rate product; the implied rates until the next interconversion are generally well below the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.06% and +0.68%, 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 RY.PR.H FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade below the price of their FixedReset counterparts, RY.PR.H. Therefore, it seems likely that I will recommend that holders of RY.PR.H continue to hold the issue and not to convert, but I will wait until it’s closer to the August 9 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – 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.