PrefBlog

Market Action

August 16, 2017

The WSJ has a nice piece titled The Wage Paradox Explained:

So why haven’t wages risen faster amid an increase in hiring and unfilled jobs? One answer is that wages have actually been growing at a faster clip—around 4% to 5%—at least for full-time workers with steady jobs. But new full-time workers who are generally paid less than the retirees they replace are dragging down the average wage increase.

Researchers at the San Francisco Fed this week updated their 2016 paper that disaggregated the wages of full-time workers with steady employment from recent entrants—that is, new workers or those returning to full-time work. Their earlier analysis showed that average wage growth had slowed less than expected during the recession while staying relatively flat during the recovery.

That’s because workers who lost jobs during the recession were generally lower skilled and lower paid, so average weekly wages didn’t fall significantly. However, many of those workers have since been rehired at below-average wages, which has depressed the aggregate.

In prior expansions, wage growth has been driven mostly by continuously full-time employed workers, and the researchers find that’s still the case. Wage growth for these workers is now close to the pre-recession 2007 peak. But there are now many more workers who have been on the labor-force sidelines who are moving to full-time employment, thus creating a drag on wages.

Unfortunately, the San Francisco Fed’s website seems to have collywobbles at the moment so I can’t access the paper.

PerpetualDiscounts now yield 5.34%, equivalent to 6.94% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, the same as reported on August 9.

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	0.4718 %	2,380.5
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.4718 %	4,368.1
Floater	3.64 %	3.67 %	117,797	18.10	3	0.4718 %	2,517.4
OpRet	0.00 %	0.00 %	0	0.00	0	-0.2038 %	3,053.7
SplitShare	4.71 %	4.61 %	53,013	3.73	5	-0.2038 %	3,646.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.2038 %	2,845.3
Perpetual-Premium	5.41 %	4.86 %	63,679	6.10	17	0.0722 %	2,774.8
Perpetual-Discount	5.33 %	5.34 %	67,208	14.85	20	0.2272 %	2,916.2
FixedReset	4.40 %	4.43 %	154,936	6.33	98	-0.0345 %	2,366.5
Deemed-Retractible	5.07 %	5.49 %	114,669	6.06	30	0.2318 %	2,862.8
FloatingReset	2.63 %	3.12 %	42,320	4.22	9	0.0664 %	2,613.8

Performance Highlights
Issue	Index	Change	Notes
ELF.PR.G	Perpetual-Discount	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 22.07 Evaluated at bid price : 22.30 Bid-YTW : 5.38 %
MFC.PR.K	FixedReset	-1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.21 Bid-YTW : 6.42 %
PVS.PR.E	SplitShare	-1.10 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-10-31 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 4.79 %
SLF.PR.G	FixedReset	1.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.29 Bid-YTW : 8.33 %
BAM.PR.C	Floater	1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 14.21 Evaluated at bid price : 14.21 Bid-YTW : 3.67 %
MFC.PR.B	Deemed-Retractible	1.17 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.51 Bid-YTW : 6.52 %
TRP.PR.E	FixedReset	1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 21.48 Evaluated at bid price : 21.84 Bid-YTW : 4.43 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PR.Z	FloatingReset	109,700	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.44 Bid-YTW : 2.82 %
TD.PF.H	FixedReset	56,410	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-10-31 Maturity Price : 25.00 Evaluated at bid price : 26.08 Bid-YTW : 3.80 %
TD.PR.T	FloatingReset	54,718	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.47 Bid-YTW : 2.72 %
BAM.PR.M	Perpetual-Discount	51,700	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 21.37 Evaluated at bid price : 21.64 Bid-YTW : 5.56 %
NA.PR.C	FixedReset	45,161	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-11-15 Maturity Price : 25.00 Evaluated at bid price : 25.07 Bid-YTW : 4.58 %
RY.PR.L	FixedReset	41,700	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 25.18 Bid-YTW : 3.72 %
There were 7 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
ELF.PR.G	Perpetual-Discount	Quote: 22.30 – 22.95 Spot Rate : 0.6500 Average : 0.4301 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 22.07 Evaluated at bid price : 22.30 Bid-YTW : 5.38 %
MFC.PR.J	FixedReset	Quote: 23.40 – 23.81 Spot Rate : 0.4100 Average : 0.2470 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.40 Bid-YTW : 5.24 %
CU.PR.C	FixedReset	Quote: 21.36 – 21.79 Spot Rate : 0.4300 Average : 0.2848 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 21.36 Evaluated at bid price : 21.36 Bid-YTW : 4.53 %
BAM.PR.R	FixedReset	Quote: 19.43 – 19.90 Spot Rate : 0.4700 Average : 0.3724 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-16 Maturity Price : 19.43 Evaluated at bid price : 19.43 Bid-YTW : 4.70 %
NA.PR.X	FixedReset	Quote: 26.45 – 26.68 Spot Rate : 0.2300 Average : 0.1385 YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-15 Maturity Price : 25.00 Evaluated at bid price : 26.45 Bid-YTW : 3.94 %
TRP.PR.K	FixedReset	Quote: 25.75 – 25.99 Spot Rate : 0.2400 Average : 0.1543 YTW SCENARIO Maturity Type : Call Maturity Date : 2022-05-31 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 4.18 %

New Issues

New Issue: KML FixedReset 5.25%+365M525

Kinder Morgan Canada Limited has announced (although not yet on their website):

that it has entered into an agreement with a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities (together, the “Underwriters”) pursuant to which the Underwriters have agreed to purchase from the Company, 8,000,000 cumulative redeemable minimum rate reset preferred shares, Series 1 (the “Series 1 Preferred Shares”) at a price of $25.00 per share for distribution to the public.

The Company has granted to the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2,000,000 Series 1 Preferred Shares at a price of $25.00 per share.

The Company intends to use the proceeds from the offering to indirectly subscribe for preferred units in Kinder Morgan Canada Limited Partnership, which intends to subsequently use such proceeds to, directly or indirectly, finance the development, construction and completion of the Trans Mountain Expansion Project and Base Line Terminal project as well as potential future growth opportunities, to repay indebtedness and for general corporate purposes.

The holders of Series 1 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.3125 per share, payable quarterly on the 15th day of February, May, August and November, as and when declared by the Board of Directors of the Company, yielding 5.25 per cent per annum at the issue price, for the initial fixed rate period to but excluding November 15, 2022 (the “Initial Fixed Rate Period”). The first quarterly dividend payment date is scheduled for November 15, 2017. The dividend rate will reset on November 15, 2022 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield plus 3.65 per cent, provided that, in any event, such rate shall not be less than 5.25 percent per annum. The Series 1 Preferred Shares are redeemable by the Company, at its option, on November 15, 2022 and on November 15 of every fifth year thereafter at a price of $25.00 per share plus accrued and unpaid dividends.

The holders of Series 1 Preferred Shares will have the right to convert their shares into cumulative redeemable floating rate preferred shares, Series 2 (the “Series 2 Preferred Shares”), subject to certain conditions, on November 15, 2022 and on November 15 of every fifth year thereafter. The holders of Series 2 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of the Company, at a rate equal to the sum of the then 90-day Government of Canada treasury bill rate plus 3.65 percent.

Closing of the offering is expected on August 15, 2017, subject to customary closing conditions.

The offering is being made under a prospectus supplement to the base shelf prospectus of the Company dated July 28, 2017 (together, the “Prospectus”). Copies of the Prospectus may be obtained from The Bank of Nova Scotia, Scotia Plaza, 44 King Street West, Toronto, Ontario M5H 1H1, Telephone: (416) 866-3672, Canadian Imperial Bank of Commerce, Commerce Court, Toronto, Ontario M5L 1A2, Telephone (416) 980-3096, Royal Bank of Canada, 200 Bay Street, 4th Floor, North Tower, Toronto, Ontario, M5J 2W7, Telephone (416) 955-7803 and The Toronto-Dominion Bank, Toronto-Dominion Centre, Toronto, Ontario M5K 1A2, Telephone: (416) 308-6963. Investors should read the Prospectus, and the documents incorporated therein by reference, before making an investment decision.

They later announced:

that as a result of strong investor demand for its previously announced offering of cumulative redeemable minimum rate reset preferred shares, Series 1 (the “Series 1 Preferred Shares”), the size of the offering has been increased to 12,000,000 shares. The offering no longer includes the previously granted underwriters’ option. The aggregate gross proceeds of the offering will now be $300 million. The syndicate of underwriters is led by Scotiabank, CIBC Capital Markets, RBC Capital Markets, and TD Securities.

Nice to see a new issuer … too bad it’s junk! S&P calls it P-3(high):

S&P Global Ratings said today it assigned its ‘BB+’ (P-3 (High) Canadian National Scale Preferred Share Rating) issue-level rating to Kinder Morgan Canada Ltd.’s (KML) cumulative redeemable minimum rate reset preferred shares, series 1.

Update, 2017-08-08: Pfd-3(high) [Provisional] from DBRS:

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-3 (high) with a Stable trend to Kinder Morgan Canada Limited’s (KML or the Company) proposed issuance of Cumulative Redeemable Minimum Rate Reset Preferred Shares, Series 1 (Series 1 Preferred Shares).

DBRS has not assigned an Issuer Rating to KML; however, the Series 1 Preferred Shares rating is based on the credit profile of Kinder Morgan Cochin ULC (KMU; rated BBB (high) with a Stable trend). KMU is KML’s operating subsidiary, which operates the Company’s Canadian energy infrastructure assets, including the existing Trans Mountain Pipeline, the $7.4 billion Trans Mountain Expansion Project (TMEP), the Puget Sound pipeline, the Canadian portion of Cochin pipeline as well as various terminal, rail and storage facilities.

KML intends to use the proceeds from the offering to indirectly subscribe for preferred units in Kinder Morgan Canada Limited Partnership (KMLP; 100% owner of KMU) through Kinder Morgan Canada GP Inc. (KMCGP; 100% owned by KML). KMLP in turn intends to use such proceeds to finance the development, construction and completion of TMEP and the Base Line Terminal project as well as potential future growth opportunities, to repay indebtedness and for general corporate purposes. KMLP receives all dividends paid by KMU. KMLP’s preferred units mirror the terms and conditions of the Series 1 Preferred Shares issued by KML. The dividends due on the Series 1 Preferred Shares are matched by the dividends paid on the preferred units of KMLP to which KML subscribes. Dividends on KMLP’s preferred units have priority over dividends paid on KMLP’s common units and are distributed through KMCGP to KML for further distribution to holders of KML’s Series 1 Preferred Shares. KMLP and KMCGP have no debt. The rating on KML’s Series 1 Preferred Shares is therefore linked to KMU’s rating and any change in KMU’s rating could affect the rating of the Series 1 Preferred Shares.

Market Action

August 3, 2017

Remember the Teachers / BCE deal? Bloomberg has a look back, ten years later:

Another is what happened to BCE after the deal imploded. It flourished—with what Jim Leech, head of Ontario Teachers’ Pension Plan’s private capital arm at the time, says is much of the board and management team his bidding group would have put in charge.

Today the company’s shares are up more than 150 percent from the day the deal collapsed.

“It would have been a home run,” Mark Wiseman, then head of private investment at the competing bidder Canada Pension Plan Investment Board, says. “It didn’t beat what we projected—it crushed what we projected.”
…
Wiseman:Hindsight is 20-20. As it turns out, the company could have easily supported the debt, given its outperformance. What’s missed in the middle of this is that [KPMG’s] Susan Glass helped save Citibank. If she had gone the other way on her going-concern opinion, Citi would have been on the hook for at least C$20 billion in the middle of the financial crisis. Could you imagine the loss they would have taken in trying to place that debt?

Joel Wagner of the BoC has published a Staff Paper, Downward Nominal Wage Rigidity in Canada: Evidence Against a “Greasing Effect”:

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long-run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re-examine these issues in a model that accounts for precautionary motives in wage-setting behaviour. We confirm that DNWR generates a long-run negative relation between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with inflation, offsetting the beneficial effects of a higher inflation target. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns to pre-crisis levels during recessions is relatively unaffected by variations in the inflation target.

Global bonds were strong today:

•The yield on 10-year Treasuries held at 2.22 percent after declining five basis points on Thursday.
•Ten-year yield on Australian government notes fell five basis points to 2.62 percent

Canada was not immune, with the five-year Canada yield falling to 1.51%, from 1.65% at month-end.

Americans are doing better with their retirement plans:

A string of record 401(k) and IRA account totals now stretches across three consecutive quarters, according to second-quarter data from Fidelity Investments. The data covers 22,155 companies and 15.1 million 401(k) plan participants, as well as 8.8 million IRA accounts. The performance reflects the impressive display of endurance training by a stock market that just keeps on running, as well as increased employee and employer contributions to retirement accounts.

The average 401(k) account balance stands at $97,700 as of June 30. That’s a 9.6 percent gain from the $89,100 average of a year ago, and a big leap from the $73,300 average of five years ago. Average IRA totals, meanwhile, rose to $100,200 from $89,600 a year ago and $73,100 in 2012. For the 12 months ending June 30, market gains accounted for 72 percent of the rise in retirement account balances at Fidelity. Over that same period, the Standard & Poor’s 500 had a total return of 17.9 percent.
…
Employees put a record average of $5,850 into their 401(k)s over the past 12 months, a 4 percent increase from a year ago. Ninety-five percent of active employees contribute to their 401(k)s, and many defer enough of their pre-tax salary to get the average company match, which is 4.5 percent. But about 21 percent of employees can’t, or aren’t, contributing enough to get the full match. Many are likely to have been auto-enrolled into their 401(k) at a salary deferral rate of 3 percent, and left it there.

The bit of good news is that many savers don’t have that far to go before getting the full match—53 percent are 1 or 2 percentage points away. Competing financial priorities may mean saving another 1 or 2 percent of salary isn’t feasible until a raise or bonus comes into play. But if extra cash flow exists, a relatively small increase in savings rates can make a big difference over a long career.

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	-0.0457 %	2,443.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.0457 %	4,484.0
Floater	3.54 %	3.56 %	128,595	18.36	3	-0.0457 %	2,584.1
OpRet	0.00 %	0.00 %	0	0.00	0	-0.1332 %	3,058.2
SplitShare	4.71 %	4.39 %	55,285	1.38	5	-0.1332 %	3,652.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1332 %	2,849.6
Perpetual-Premium	5.39 %	4.61 %	61,671	5.96	17	0.0232 %	2,785.4
Perpetual-Discount	5.30 %	5.29 %	69,270	14.90	20	-0.3245 %	2,923.6
FixedReset	4.33 %	4.43 %	168,840	6.33	98	-0.1546 %	2,409.1
Deemed-Retractible	5.06 %	5.38 %	110,816	6.10	30	0.0055 %	2,866.1
FloatingReset	2.60 %	2.96 %	41,804	4.25	9	-0.0809 %	2,638.2

Performance Highlights
Issue	Index	Change	Notes
VNR.PR.A	FixedReset	-1.57 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.56 Evaluated at bid price : 21.90 Bid-YTW : 5.12 %
IFC.PR.C	FixedReset	-1.21 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.13 Bid-YTW : 5.72 %
MFC.PR.J	FixedReset	-1.20 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.81 Bid-YTW : 5.12 %
BAM.PF.G	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 22.99 Evaluated at bid price : 24.00 Bid-YTW : 4.67 %
BAM.PF.D	Perpetual-Discount	-1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 22.14 Evaluated at bid price : 22.40 Bid-YTW : 5.53 %
NA.PR.W	FixedReset	-1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 4.49 %
BAM.PR.N	Perpetual-Discount	-1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.51 Evaluated at bid price : 21.51 Bid-YTW : 5.59 %
BAM.PF.C	Perpetual-Discount	-1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.67 Evaluated at bid price : 22.02 Bid-YTW : 5.56 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.J	FixedReset	152,492	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-31 Maturity Price : 25.00 Evaluated at bid price : 26.94 Bid-YTW : 3.60 %
MFC.PR.R	FixedReset	66,124	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.89 Bid-YTW : 4.16 %
RY.PR.Q	FixedReset	56,500	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 26.65 Bid-YTW : 3.56 %
TRP.PR.D	FixedReset	39,480	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 22.30 Evaluated at bid price : 22.64 Bid-YTW : 4.45 %
RY.PR.J	FixedReset	29,009	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 22.92 Evaluated at bid price : 23.82 Bid-YTW : 4.43 %
CM.PR.R	FixedReset	28,534	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 4.51 %
There were 12 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
VNR.PR.A	FixedReset	Quote: 21.90 – 22.45 Spot Rate : 0.5500 Average : 0.3714 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.56 Evaluated at bid price : 21.90 Bid-YTW : 5.12 %
IFC.PR.C	FixedReset	Quote: 22.13 – 22.69 Spot Rate : 0.5600 Average : 0.4010 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.13 Bid-YTW : 5.72 %
GWO.PR.I	Deemed-Retractible	Quote: 21.91 – 22.28 Spot Rate : 0.3700 Average : 0.2422 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 6.74 %
NA.PR.W	FixedReset	Quote: 21.70 – 22.05 Spot Rate : 0.3500 Average : 0.2268 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 21.38 Evaluated at bid price : 21.70 Bid-YTW : 4.49 %
BAM.PF.G	FixedReset	Quote: 24.00 – 24.29 Spot Rate : 0.2900 Average : 0.1825 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 22.99 Evaluated at bid price : 24.00 Bid-YTW : 4.67 %
PWF.PR.F	Perpetual-Discount	Quote: 24.63 – 24.88 Spot Rate : 0.2500 Average : 0.1560 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-03 Maturity Price : 24.32 Evaluated at bid price : 24.63 Bid-YTW : 5.35 %

Issue Comments

ENB.PF.U To Reset at 4.959% (USD)

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series L (Series L Shares) (TSX: ENB.PF.U) on September 1, 2017. As a result, subject to certain conditions, the holders of the Series L Shares have the right to convert all or part of their Series L Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series M of Enbridge (Series M Shares) on September 1, 2017. Holders who do not to exercise their right to convert their Series L Shares into Series M Shares will retain their Series L Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series L Shares outstanding after September 1, 2017, then all remaining Series L Shares will automatically be converted into Series M Shares on a one-for-one basis on September 1, 2017; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series M Shares outstanding after September 1, 2017, no Series L Shares will be converted into Series M Shares. There are currently 16,000,000 Series L Shares outstanding.

With respect to any Series L Shares that remain outstanding after September 1, 2017, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series L Shares for the five-year period commencing on September 1, 2017 to, but excluding, September 1, 2022 will be 4.959 percent, being equal to the five-year United States Government treasury bond yield of 1.809 percent determined as of today plus 3.15 percent in accordance with the terms of the Series L Shares.

With respect to any Series M Shares that may be issued on September 1, 2017, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series M Shares for the three-month floating rate period commencing on September 1, 2017 to, but excluding, December 1, 2017 will be 1.055 percent, based on the annual rate on three-month United States Government treasury bills for the most recent treasury bills auction of 1.08 percent plus 3.15 percent in accordance with the terms of the Series M Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series L Shares who wish to exercise their right of conversion during the conversion period, which runs from August 2, 2017 until 5:00 p.m. (EST) on August 17, 2017, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps. Any notices received after this deadline will not be valid.

The four ENB USD-denominated issues have a very narrow range of spreads, limiting the utility of Implied Volatility Analysis for FixedResets, but for what it’s worth:

Click for Big

As I do not track USD issues, there will be no recommendation regarding whether holders should convert or hold their ENB.PR.U shares.

Market Action

August 2, 2017

PerpetualDiscounts now yield 5.25%, equivalent to 6.82% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 280bp, a sharp narrowing from the 295bp reported July 26.

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	1.0862 %	2,444.8
FixedFloater	0.00 %	0.00 %	0	0.00	0	1.0862 %	4,486.0
Floater	3.54 %	3.56 %	130,013	18.36	3	1.0862 %	2,585.3
OpRet	0.00 %	0.00 %	0	0.00	0	0.1333 %	3,062.3
SplitShare	4.70 %	4.37 %	54,379	1.38	5	0.1333 %	3,657.0
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1333 %	2,853.4
Perpetual-Premium	5.39 %	4.59 %	60,190	2.49	17	0.1206 %	2,784.8
Perpetual-Discount	5.29 %	5.25 %	69,476	14.95	20	0.1444 %	2,933.1
FixedReset	4.32 %	4.42 %	171,191	6.34	98	0.0952 %	2,412.8
Deemed-Retractible	5.06 %	5.40 %	111,710	6.11	30	0.1122 %	2,865.9
FloatingReset	2.60 %	2.95 %	41,946	4.26	9	-0.0657 %	2,640.4

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.C	Floater	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-02 Maturity Price : 14.60 Evaluated at bid price : 14.60 Bid-YTW : 3.56 %
TD.PF.D	FixedReset	1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-02 Maturity Price : 23.02 Evaluated at bid price : 24.10 Bid-YTW : 4.42 %
NA.PR.A	FixedReset	1.11 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.41 Bid-YTW : 3.85 %
BAM.PR.B	Floater	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-02 Maturity Price : 14.54 Evaluated at bid price : 14.54 Bid-YTW : 3.58 %

Volume Highlights
Issue	Index	Shares Traded	Notes
MFC.PR.O	FixedReset	202,776	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-06-19 Maturity Price : 25.00 Evaluated at bid price : 27.13 Bid-YTW : 3.45 %
RY.PR.L	FixedReset	163,108	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 25.18 Bid-YTW : 3.63 %
CM.PR.R	FixedReset	161,237	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.08 Bid-YTW : 4.53 %
SLF.PR.D	Deemed-Retractible	129,325	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.38 Bid-YTW : 7.08 %
RY.PR.Q	FixedReset	102,017	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-24 Maturity Price : 25.00 Evaluated at bid price : 26.64 Bid-YTW : 3.57 %
TRP.PR.J	FixedReset	98,373	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-31 Maturity Price : 25.00 Evaluated at bid price : 27.05 Bid-YTW : 3.48 %
There were 18 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.O	Perpetual-Premium	Quote: 25.55 – 26.25 Spot Rate : 0.7000 Average : 0.5520 YTW SCENARIO Maturity Type : Call Maturity Date : 2017-10-31 Maturity Price : 25.25 Evaluated at bid price : 25.55 Bid-YTW : 1.04 %
TRP.PR.J	FixedReset	Quote: 27.05 – 27.35 Spot Rate : 0.3000 Average : 0.1733 YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-31 Maturity Price : 25.00 Evaluated at bid price : 27.05 Bid-YTW : 3.48 %
BNS.PR.H	FixedReset	Quote: 26.11 – 26.40 Spot Rate : 0.2900 Average : 0.1981 YTW SCENARIO Maturity Type : Call Maturity Date : 2022-01-26 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 3.80 %
TD.PR.S	FixedReset	Quote: 24.76 – 24.98 Spot Rate : 0.2200 Average : 0.1388 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.76 Bid-YTW : 3.53 %
IFC.PR.A	FixedReset	Quote: 19.83 – 20.27 Spot Rate : 0.4400 Average : 0.3589 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.83 Bid-YTW : 7.14 %
PWF.PR.S	Perpetual-Discount	Quote: 23.03 – 23.28 Spot Rate : 0.2500 Average : 0.1689 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-02 Maturity Price : 22.67 Evaluated at bid price : 23.03 Bid-YTW : 5.22 %

MAPF

MAPF Performance: July 2017

Returns to July 31, 2017
Period	MAPF	BMO-CM “50” Preferred Share Index	TXPR* Total Return	CPD – according to Blackrock
One Month	+2.04%	+1.71%	+1.11%	N/A
Three Months	+5.52%	+2.99%	+2.24%	N/A
One Year	+27.83%	+20.11%	+16.92%	+16.70%
Two Years (annualized)	+9.45%	+8.39%	+6.82%	N/A
Three Years (annualized)	+2.29%	+1.50%	+0.34%	+0.01%
Four Years (annualized)	+4.02%	+2.10%	+1.43%	N/A
Five Years (annualized)	+3.60%	+2.03%	+1.23%	+0.83%
Six Years (annualized)	+3.47%	+2.43%	+1.73%	N/A
Seven Years (annualized)	+5.15%	+3.89%	+2.93%	N/A
Eight Years (annualized)	+6.39%	+4.62%	+3.55%	N/A
Nine Years (annualized)	+11.05%	+4.83%	+3.80%	N/A
Ten Years (annualized)	+9.09%	+3.52%	+2.53%	+2.01%
Eleven Years (annualized)	+8.77%	+3.26%
Twelve Years (annualized)	+8.41%	+3.24%
Thirteen Years (annualized)	+8.33%	+3.38%
Fourteen Years (annualized)	+9.07%	+3.57%
Fifteen Years (annualized)	+9.35%	+3.75%
Sixteen Years (annualized)	+9.48%	+3.76%
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 +0.91%, +2.24% and +15.61%, respectively, according to Morningstar after all fees & expenses. Three year performance is +1.60%; five year is +2.23%
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 +1.63%, +2.04% & +21.05%, 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 (HPR) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.58%, +2.84% & +19.39%, respectively. Three year performance is +2.34%, five-year is +2.74%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +1.40%, +2.50% and +18.85% for one-, three- and twelve months, respectively. Three year performance is +1.31%. 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 +22.07% for the past twelve months. Two year performance is +6.73%, three year is -2.05%.
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 +1.08% and +13.11% for the past three- and twelve-months, respectively. Three year performance is -0.40%.
Figures for PowerShares Canadian Preferred Share Index Class, Series F are +21.67% for the past twelve months. The three-year figure is +1.73%; five years is +1.36%
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 2017-7-14):

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 2017-7-14):

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 second-quarter outperformance of PerpetualDiscounts over FixedResets sharply reversed itself in July with a sharp decline in PerpetualDiscount prices in the first half of the month met by opposite movement by FixedResets:

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. However, the increasingly hawkish tilt among global central banks has been widely remarked:

Two weeks of rhetoric from policy makers in Europe and North America has rewritten the outlook for markets, with the Bank of England and the Bank of Canada now seen as more likely than not to join the Federal Reserve in raising rates before the year is out, based on overnight index swap rates. Even the possibility of a European Central Bank hike, once seen as all but impossible, is slowly growing.

The prospect of four of the world’s five largest central banks moving to tighten policy at the same time is shocking traders after years of easing, with the dislocations in money markets also rippling through global bonds.

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
June	9.5313	6.41%	0.998	6.423%	1.0000	$0.6122
July, 2017	9.7255	6.37%	0.994	6.408%	1.0000	$0.6232
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%
June	1.35%	0.69%
July, 2017	1.65%	0.70%

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

MAPF Portfolio Composition: July, 2017

Turnover eased from June’s high level to about 11% in July.

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 July 31 was as follows:

MAPF Sectoral Analysis 2017-7-31
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	2.8%	4.43%	5.63
Interest Rearing	0%	N/A	N/A
PerpetualPremium	0%	N/A	N/A
PerpetualDiscount	6.0%	5.33%	14.86
Fixed-Reset	71.2%	6.43%	7.18
Deemed-Retractible	1.1%	6.91%	6.17
FloatingReset	8.8%	7.87%	6.66
Scraps (Various)	9.6%	6.13%	12.78
Cash	+0.6%	0.00%	0.00
Total	100%	6.37%	8.03
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 1.65% and a constant 3-Month Bill rate of 0.70%

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 2017-7-31
DBRS Rating	Weighting
Pfd-1	0
Pfd-1(low)	0
Pfd-2(high)	50.5%
Pfd-2	33.8%
Pfd-2(low)	5.6%
Pfd-3(high)	1.9%
Pfd-3	4.6%
Pfd-3(low)	2.3%
Pfd-4(high)	0%
Pfd-4	0%
Pfd-4(low)	0%
Pfd-5(high)	0.7%
Pfd-5	0.0%
Cash	+0.6%
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.

Liquidity Distribution is:

MAPF Liquidity Analysis 2017-7-31
Average Daily Trading	Weighting
<$50,000	26.1%
$50,000 – $100,000	26.6%
$100,000 – $200,000	40.8%
$200,000 – $300,000	5.9%
>$300,000	0%
Cash	+0.6%
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

Market Action

August 1, 2017

There’s some good news from S&P:

S&P said Monday that it would no longer consider companies with multiple share classes for its main U.S. stock indexes. The one that matters is the S&P 500, which is tracked by about $2.2 trillion worth of assets and which serves as a benchmark for more than $7.8 trillion of investments. The share structures S&P is targeting usually grant insiders control of the company by giving their shares far more votes than shares held by outside investors.
…
The shift mainly targets Silicon Valley, where companies from Facebook to Google and, most recently, Snap , have sold shares while giving investors virtually no say in how the companies are run. Snap, now down more than 20% from its IPO price, was seen as the tipping point because it gave investors no say at all. Companies already in the index will be allowed to stay.

With billions flowing into index funds every month, blocking these companies will likely reduce their potential valuation.
…
The rise of index funds, and companies such as Vanguard, BlackRock and State Street that dominate the business, has concentrated power in the hands of investors in a way never seen before. The three companies have long said they believe in one share, one vote. And they pay a lot of money to index providers like S&P to use their products. The fund managers, of course, are paid by investors.

It is regrettable that the dominant Canadian index firm is the Toronto Stock Exchange, which is owned by the banks, who also own fool service brokerage houses while running many index-linked ETFs and closet-indexing mutual funds; so don’t hold your breath waiting for participating debentures masquerading as equity to be out of our indices any time soon. Fortunately, we know that the oligopoly is wonderful and works in our favour, because many of the oligopoly’s future employees currently at the Canadian Securities Administrators say so.

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	-0.0462 %	2,418.5
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.0462 %	4,437.8
Floater	3.58 %	3.60 %	125,438	18.28	3	-0.0462 %	2,557.5
OpRet	0.00 %	0.00 %	0	0.00	0	-0.0549 %	3,058.2
SplitShare	4.71 %	4.38 %	54,934	3.77	5	-0.0549 %	3,652.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0549 %	2,849.6
Perpetual-Premium	5.40 %	4.65 %	60,918	2.49	17	0.0813 %	2,781.4
Perpetual-Discount	5.29 %	5.31 %	70,581	14.93	20	0.2043 %	2,928.8
FixedReset	4.32 %	4.43 %	176,747	6.34	98	-0.0573 %	2,410.5
Deemed-Retractible	5.07 %	5.38 %	113,895	6.11	30	0.0735 %	2,862.7
FloatingReset	2.60 %	3.01 %	41,186	4.26	9	-0.1009 %	2,642.1

Performance Highlights
Issue	Index	Change	Notes
IFC.PR.A	FixedReset	-1.92 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.97 Bid-YTW : 7.02 %
NA.PR.A	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.12 Bid-YTW : 4.16 %
PWF.PR.L	Perpetual-Discount	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 24.06 Evaluated at bid price : 24.32 Bid-YTW : 5.26 %
TRP.PR.B	FixedReset	1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 15.80 Evaluated at bid price : 15.80 Bid-YTW : 4.49 %

Volume Highlights
Issue	Index	Shares Traded	Notes
NA.PR.S	FixedReset	438,700	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 22.36 Evaluated at bid price : 22.70 Bid-YTW : 4.46 %
NA.PR.X	FixedReset	286,861	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-05-15 Maturity Price : 25.00 Evaluated at bid price : 26.67 Bid-YTW : 3.65 %
TRP.PR.D	FixedReset	197,100	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 22.42 Evaluated at bid price : 22.77 Bid-YTW : 4.42 %
BAM.PF.I	FixedReset	116,080	YTW SCENARIO Maturity Type : Call Maturity Date : 2022-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.83 Bid-YTW : 4.14 %
W.PR.K	FixedReset	100,523	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-01-15 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.10 %
TRP.PR.E	FixedReset	91,500	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 22.80 Evaluated at bid price : 23.10 Bid-YTW : 4.36 %
There were 20 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.O	Perpetual-Premium	Quote: 25.55 – 26.20 Spot Rate : 0.6500 Average : 0.3897 YTW SCENARIO Maturity Type : Call Maturity Date : 2017-10-31 Maturity Price : 25.25 Evaluated at bid price : 25.55 Bid-YTW : 1.03 %
HSE.PR.E	FixedReset	Quote: 24.23 – 24.72 Spot Rate : 0.4900 Average : 0.3199 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 23.13 Evaluated at bid price : 24.23 Bid-YTW : 5.26 %
POW.PR.D	Perpetual-Discount	Quote: 24.03 – 24.49 Spot Rate : 0.4600 Average : 0.3215 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 23.72 Evaluated at bid price : 24.03 Bid-YTW : 5.23 %
BMO.PR.Y	FixedReset	Quote: 23.90 – 24.35 Spot Rate : 0.4500 Average : 0.3227 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2047-08-01 Maturity Price : 22.92 Evaluated at bid price : 23.90 Bid-YTW : 4.41 %
NA.PR.A	FixedReset	Quote: 26.12 – 26.54 Spot Rate : 0.4200 Average : 0.2976 YTW SCENARIO Maturity Type : Call Maturity Date : 2021-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.12 Bid-YTW : 4.16 %
MFC.PR.M	FixedReset	Quote: 22.61 – 23.00 Spot Rate : 0.3900 Average : 0.2734 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.61 Bid-YTW : 5.66 %

Issue Comments

DBRS Improves TD Senior Debt Trend to Stable

DBRS has announced that it:

has today confirmed the ratings of The Toronto-Dominion Bank (TD or the Bank) and its related entities, including TD’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). TD’s Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) 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. The trends on TD’s short-term ratings, as well as the Long-Term Issuer Rating, Long-Term Senior Debt, Long-Term Deposits and older-style subordinated debt, have been revised to Stable from Negative, while other capital instruments whose ratings are notched down from the Bank’s IA remain Stable.

The revision of the trends to Stable reflects DBRS’s view that TD’s long-tenured track record of improving fundamentals points to an improving IA, which may offset the anticipated regulatory reform support-related downward pressure on the rating. Therefore, the expectation of a ratings downgrade following the removal of support is less likely.
…
DBRS continues to view that changes in Canadian banking legislation and regulation point to a declining potential for timely support for Canada’s systemically important banks. Eventually, this decline is expected to result in a change in DBRS’s SA to SA3 from SA2. Currently, for these banks, the SA2 results in an uplift of one notch above their IAs. This regime primarily affects the six big Canadian banks that have been designated as domestic systemically important banks (D-SIBs). While this bail-in regime is expected to come into force in H1 2018, the proposed new bail-inable debt will only begin to be issued by D-SIBs at that time and no existing debt will be subject to bail-in retroactively. Thus, DBRS considers that there would not be sufficient bail-inable debt initially to reduce the likelihood of systemic support from its current level in Canada. DBRS expects to maintain the current notch of support until the D-SIBs build up sufficient new bail-inable senior debt such that the likelihood of systemic support has declined to a level at which this uplift is no longer warranted. The timing of such action depends on the finalization of the bail-in regime and the extent to which the D-SIBs build up their bail-inable senior debt. Two factors pressuring the D-SIBs to issue new bail-inable senior debt are the maturing of their existing senior debt and their need to meet the newly established requirements for total loss absorbing capacity (TLAC) by November 1, 2021. DBRS continues to evaluate the impact of the proposed regulations and will comment further as the proposals are finalized. For more detail, please see “DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged” published July 11, 2017, on dbrs.com.

The paper DBRS Comments on Proposed Implementation of Bail-in Regime in Canada; Bank Negative Trends Unchanged states in part:

Under the CDIC Act, if a bank is determined to have ceased or is about to cease to be viable, the CDIC would be authorized to take temporary control or ownership to the bank and conduct the bail-in process. Existing CDIC resolution tools include liquidation, forced sale and creation of a bridge bank. Adding to these powers, the proposed Bail-in Regime permits the conversion of bail-inable liabilities into common shares to recapitalize the distressed bank. CDIC would establish the terms and conditions of the bail-in with the intent under this Act to recapitalize the bank, while respecting the relative hierarchy of the bank’s obligations. Under this approach, more senior obligations are treated better than more junior obligations, as compared to an absolute hierarchy whereby more junior obligations would be written off completely. Thus, senior bail-inable debt would receive more common shares than NVCC securities and all securities in the same class would receive the same treatment.

In its TLAC guideline, OSFI specified its proposed minimum requirements for TLAC for D-SIBs. Initially, there will be a minimum of at least 21.5% for the Risk-based TLAC ratio (TLAC Measure / Risk Weighted Assets). Focusing on the risks faced by a bank, this ratio is considered the primary basis for assessing a D-SIB’s TLAC. There is also a minimum of 6.75% for the TLAC Leverage ratio (TLAC Measure / Exposure Measure), with the framework for determining this exposure being provided in OSFI’s Leverage Requirements guideline. This ratio is considered an overall measure of a D-SIB’s TLAC. Subject to certain adjustments and exclusions, TLAC comprises common equity Tier 1, additional Tier 1 capital, Tier 2 capital, and other TLAC instruments, principally bail-inable senior unsecured debt. OSFI considers that these minimums are consistent with the Financial Stability Board’s (FSB) requirements for G-SIBs, thereby ensuring that Canada’s six D-SIBs are in a comparable position to G-SIBs globally and prepared if there is a change in the designation of one or more of these banks. The intent of the TLAC requirements is to require D-SIBs to have enough resources to be restored to viability after experiencing significant losses in a very stressed environment. D-SIBs will be expected to maintain buffers over the minimum requirements.

The original trend change was reported on PrefBlog in 2015 in the post DBRS: Bank Senior Debt On Trend-Negative Due to Government Support Uncertainty

Preferred shares were not affected by the trend opinion, but I considered the information to be material.

TD’s currently outstanding preferreds are: TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PF.E, TD.PF.F, TD.PF.G, TD.PF.H, TD.PF.I, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z.

Of Interest