Whoosh! Market Adjustment Affects Fair Value of New Issues

Readers will remember that when the recent new issues were announced, I liked both of them: the BNS 5.25% was worth $25.93 according to the prior day’s closing prices, although by the time the BMO 5.25% was announced both issues were worth more like $25.33.

Which was still good enough to buy!

Following the debacle of Friday September 28, in which the market just kept on falling, both issues are now fairly valued below their issue price: fair value is about 24.88 to 24.90.

Something like this leads me to suspect that there just isn’t too much opportunistic money on the sidelines; that while the new issues were recognized as attractive, all the money required to buy them has come out of other preferred issues, rather than from other asset classes.

This is a funny market. 5.25% dividends, multiplied by an equivalency factor of 1.4 implies that interest of 7.35% must be received to provide the same after-tax income. There are unique risks in the preferred share market, of course. Investors must be aware of these risks and ensure they’re not overly exposed to any of them (or to any other single risk!) … but 7.35%? From a major bank? We haven’t seen that kind of interest rate lately.

Update, 2007-10-2: As of the close today, fair value for both issues is within a few pennies of $24.85.

Update, 2007-10-4: As of the close today, fair value is $24.72 for the BMO issue, $24.74 for BNS.

8 Responses to “Whoosh! Market Adjustment Affects Fair Value of New Issues”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « Whoosh! Market Adjustment Affects Fair Value of New Issues […]

  2. […] The decline in perpetuals, which I attribute to the influence of new issues, caused a lot of changes this month. […]

  3. […] Whoosh! Market Adjustment Affects Fair Value of New Issues […]

  4. […] This new issue, announced on September 27 initially looked pretty good … but market yields kept increasing and it looked less and less like a good thing as time went on. […]

  5. […] Well, TD responded to my plea for TD Perps, but I suppose I should have specified that I want a decent coupon! Come on, guys! 5.25% was a great coupon, back in the old days of late September when comparables were trading to yield 5%, but it doesn’t cut the mustard today. This issue, which joins the 5.25% BNS Perps and the 5.25% BMO Perps is expensive compared to comparables and cannot be recommended at the issue price, given the recent increase in market yields. […]

  6. […] Update: Looks very good, with a curvePrice of $26.08 based on the yield curve as calculated for Ontario high marginal rates as of the close Jan. 16.However, the curve shifting to reflect the new issue, rather than vice versa. […]

  7. […] The FloatingRate index bounced back (just a little bit!) from its disastrous performance in December. The tepid returns for the two perpetual sub-indices mask a great deal of excitement – at its peak on January 16 the PerpetualDiscount index was up 1.85% on the month, while at its trough on January 21 it was down 1.23%. The downdraft was caused by a new issue: BNS.PR.O, announced January 17. There was extreme fear that this could presage another hit to the market as happened in September, but by the time TD.PR.Q was announced January 22 the worst was over. […]

  8. […] Issuance in the first three quarters of 2007 totalled $4.2-billion, compared with $28.5-billion common, $6.4-billion Income Trusts, $1.6-billion Limited Partnerships and $0.3-billion Capital Trusts. Presumably, the two new issues announced in September for October settlement will be incorporated into the 4Q07 figures. […]

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