PrefBlog

6 Responses to “August 12, 2011”

1. prefhound says:

   August 13, 2011 at 10:40 pm

   OK, we haven’t heard anything about Yellow Prefs for at least a couple of days! I have a hard time understanding the relative pricing of YLO.PR.A ($15.60) vs PR.B ($9.55) when YLO itself is under $2.00 ($0.94).

   Both these prefs have a firm retraction date (Dec 31, 2012 for PR.A and Jun 30, 2017 for Pr.B), but the company has the option to pay out in common shares based on a minimum of $2.00 per share (at a 5% discount to market).

   Clearly, if YLO is $0.94 at retraction, the company option would generate only $25/95%/2.00 = 13.16 common shares worth $12.37 at the time. With a dividend of $1.0625, YLO.PR.A has an 18-month yield of -8.9% to retraction at $12.37 and should trade today at about $11.30 to yield 15.9% like the common.

   YLO.PR.B has a dividend of $1.25 for a six-year yield of 16.1% to retraction at $12.37 — which is about the same yield as the common. This pricing makes sense because these prefs are basically common equivalents with a slightly higher chance of retaining their dividend (though no ability to increase it), and no further upside beyond $25.

   Following this logic, we could say that YLO.PR.B is fairly priced while YLO.PR.A is about $4.30 rich. The difference seems too great to be due to optionality — as a common equivalent, both prefs are a long call on stock and short put while common is well under $2. Even as short $2.00 puts, annual stock volatility would have to be 70% (with Risk Free Rate – Yield = 0) to rationalize this difference. While this is not completely ridiculous, it fails to explain why PR.A would have a NEGATIVE yield to retraction (which should be considered YTW when YLO < $2).

   This pair has always been difficult to understand. What are your thoughts these days?

2. jiHymas says:

   August 14, 2011 at 1:45 am

   Thank you for this- it is very helpful. I have addressed these issues in the August edition of PrefLetter – and I know you’re a subscriber!

3. newbiepref says:

   August 14, 2011 at 11:15 pm

   Prefhound, can the difference be explained by the fact that management said at their last quaterly results meeting that they want to redeem A’s for cash next year. The question is: can they be trusted?!

4. adrian2 says:

   August 15, 2011 at 8:30 am

   annual stock volatility would have to be 70% (with Risk Free Rate – Yield = 0) to rationalize this difference. While this is not completely ridiculous

   Without going through the math, I’d guess this understates the volatility of YLO.

   it fails to explain why PR.A would have a NEGATIVE yield to retraction (which should be considered YTW when YLO < $2)

   Maybe there’s decent chance YLO will not stay this low for the next 16 months? BTW, the “A” yield flips to positive way before the common surpasses $2.

5. prefhound says:

   August 15, 2011 at 7:07 pm

   Newbiepref: That quote from management was in James PrefLetter and was news to me — positive for PR.A. However, this is the same management that once said the onset of Trust taxation/corporate conversion would leave the distribution unchanged at $1.18. Time will tell. Obviously the market puts a probability >50% on redemption at $25.

   adrian2: 70% understates the recent 4-month volatility, but over 18 months should be an overstatement. As to the “decent chance YLO will not stay this low”, I am a strong believer that Yield to Worst should assume the current market price of YLO. If you think YLO will increase above $2, don’t buy the pref, buy the common!

6. jiHymas says:

   August 18, 2011 at 1:39 am

   I have problems with all this “70% volatility” stuff – essentially the same problems I have with believing 40%+ volatility with DeemedRetractibles and definitions of risk that look at the standard deviation of monthly returns and stop there.

   I may be wrong, but I suspect to derive that number you’re taking the standard deviation of closing prices for the last 80-odd trading days. But to do that, you’re claiming that the mean price over this period is $3.50 (or whatever it is) and that all variation from this price are entirely random, uncorrelated happenstance.

   I claim that’s hooey. I claim that there is a clear trend in the data and that the existence of a trend negates a basic assumption of Black-Scholes. I claim that if you want to use Black Scholes, you’ve got to do something to de-trend the data: maybe take the daily deviation from a moving average of some kind, maybe do all your calculations with daily returns rather than daily prices … something. I’m not up enough on option theory to know if anybody’s done any work on this.