EPP.PR.A and WN.PR.E : Coupled? Decoupled?

Assiduous Reader madequota asked about EPP.PR.A in the comments to February 5 … since he is an Assiduous Writer as well … let’s indulge him, shall we? It has been a long time since I last looked at this issue.

EPP.PR.A was issued last spring and received an extremely hostile reception from the market, as by the time it commenced trading the market was way down. It is my understanding that the underwriters had a really hard time selling it and took a bath. Problems with such issues can persist for a long, long time, especially in the preferred market: many preferred share investors buy an issue when issued and never look at it again. Those issues that have trouble finding such a “real money” home at issue time find themselves perpetually in the hands of hot money.

Anyway … this is another split-rated issue, as is the CCS.PR.C examined yesterday; it’s rated Pfd-3(high) by DBRS and P-2(low) by S&P.

I’m not going to say much one way or the other. Issues with this kind of credit carry a larger proportion than usual of specific risk – and my firm avoids this for the most part. I don’t want to analyze companies! I analyze the yield curve! This means I concentrate on high quality instruments in which specific risk is minimized.

However, I’ve prepared some graphs that may provide some context for those who want to analyze the company’s financials and, at least to some extent, take a view on the credit:

Readers will note the precipituous decline in averageTradingValue for EPP.PR.A after its issue … recall that it starts with a pre-set $2.5-million presumed value and declines exponentially to a long-term average of actual trading volumes.

Also note that the Quality Spread graphed is between Pfd-2 and Pfd-3: no allowance is made in this graph for “high” and “low” modifiers.

4 Responses to “EPP.PR.A and WN.PR.E : Coupled? Decoupled?”

  1. madequota says:

    Good morning, Mr. Hymas . . . many thanks for the comments, and the research items pertaining to EPP.PR.A.

    I appreciate your focus on analyzing the yield curve, as opposed to spending analysis on the underlying company. For me, trading trends tend to be a priority over corporate items [and I hope that neither of us gets severely hurt by setting these as priorities!]

    In any case, EPP.PR.A hit an all time low of $17.11 in early December, and then proceeded to spend the next month rising consistently to the $19 level. In early to mid January, the market seemed to lose interest, and the stock came back to the high $17’s where it is now. There is currently a disproportionately large number of bids from $17 to the current high bid of $17.83, and very little offered at all.

    I suspect that since there doesn’t seem to be any “material” changes with this company, that the upward trending could resume at any time; hence it’s probably a smart time to take more of a position with this one. Beyond that, I mentioned in a previous post that my “gut” feeling suggests the possibility of a takeover of Epcor, which could result in a redemption of this issue.

    There’s just something odd about the way the market’s poo-pooed this one ever since issue. I don’t know.

    thanks again for the thoughts,


  2. J says:

    Thanks for the blog. 1000 shares of EP.PR.A was recommended to me by my broker when it came out at $25. I just don’t get it. Why is the market punishing this stock? And why did my broker recommend it so strongly?

  3. jiHymas says:

    I don’t think the market is punishing this particular stock so much … it’s more that the issue has characteristics that are being given a rough ride regardless of the particular name.

    As I mentioned after announcement but before closing of the issue, the timing of the issue was unfortunate. It came in towards the end of early 2007’s rush of issuance – so many investors were full up on preferreds – and the market, in general, started getting hit almost simultaneously with the pricing of the issue. For a review of all the bad things that happened to preferreds in 2007, see my review.

    A cynic might suggest that your broker was strongly recommending it solely because of the 3% new issue commission. A more generous interpretation might be that he favours this issue because it’s not a financial – there are a lot of brokers who, for good reasons and bad, adore non-financial issues, particularly in the wake of recent multi-billion dollar write-offs. There will be as many rationales as there are brokers. I can only suggest you ask him.

    There’s nothing particularly wrong with this issue, other than its relatively poor credit. Its non-financial nature persists and there are some, such as Assiduous Reader madequota, above, who will give it an extra point or two due to a perception that the company might get taken over by a firm with a better credit.

    The high dividend yield at current prices will make this issue attractive to many, even those who do not wish to play the Credit Anticipation game and those who are not particularly concerned about a sectoral concentration in financials. You should be warned, though, about two special factors: first, issues with difficult underwritings tend to behave in an odd manner for years afterward, as secondary trading of preferreds is not very efficient; secondly, issues with this credit profile (split-rating, with DBRS having it as Pfd-3(high) tend to respond more strongly to company-specific news and therefore, necessarily, less strongly to overall market conditions.

    As my speciality is analysis of cash flows that respond predictably (well … relatively predictably!) to overall market conditions, I do not spend a lot of time analyzing this issue, but that does not mean that it is necessarily a poor investment. Should you choose to jump in, I will suggest that you cap your exposure to this name at 5% of your preferred share exposure, and exposure to such lower-rated issues in aggregate to 10%.

  4. […] quoted at 15.21-64 to yield 8.11% at the bid. It was last mentioned on PrefBlog in the post EPP.PR.A and WN.PR.E: Coupled? Decoupled?. Those keeping track of such things will note that WN.PR.E now yields 7.24% … way, way, way, […]

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