I don’t normally talk about junk paper in this blog, but Prefblog’s Prettiest Assiduous Reader writes in and points out that there’s some really strange behaviour going on.
NTL.PR.F closed today at 11.40-59, 10×7
NTL.PR.G closed today at 10.00-48, 15×10
These two issues constitute a “weak pair”, as defined in my article about Preferred Pairs. They’re “ratchet rate” floaters, currently paying 100% of prime on their par value of $25.00 – which comes to $1.3125 at today’s prime of 5.25%. In other words, an interest rate of over 11% on investment … although, mind you, you can only call it 11% if you actually get paid the money. DBRS rates the Nortel Preferreds at Pfd-5(low), which is their lowest ranking short of default, and Nortel’s senior unsecured debt at B(low), which isn’t exactly investment grade either.
But regardless of where the level should be for these issues, why is there a difference?
NTL.PR.F had a conversion option to fixed rate in 2006. NTL.PR.G has been mentioned on PrefBlog in a post about distressed preferreds.
I watch both and own none. The F series is cumulative, while the G one is not. Considering the real (?) possibility of some dividends being skipped, F should trade at some premium to G. Mind you, in the past year there have been quite a few days when it was the other way around, and that made no sense to me.
You’re right about the cumulative nature of the dividends, adrian2, I had forgotten that part – although this is noted on PrefInfo.
The Series 5/6 (“F”) prospectus and the Series 7/8 (“G”) prospectus are both published on the Nortel Website.
Mind you, I’ll contend that a full year’s worth of dividend difference sounds awfully extreme for the “cumulative” provision.
Other than the Nortels discussed above and the BAM.PR.M / BAM.PR.N pair, are there other virtually identical “weak pairs” trading with unexplainable significant variances. I would like to test my theory that the market mistakenly believes that the alphabetically former series have precedence over the latter series (i.e. the “F” over the “G” in the Nortel case; the “M” over the “N” in the Brookfield’s case). Am I under estimating the intelligence level of the market? I initially thought that such irregularity could only be temporary but the BAM.PR.N I purchased with the proceeds of my former BAM.PR.M, about a year ago, remain (almost) consistently less valued than its virtual twin sister.
are there other virtually identical “weak pairs” trading with unexplainable significant variances
For now, I’ll leave that as an exercise for the student, although it does sound like an interesting topic!
BAM.PR.N is often discussed on PrefBlog; it is my belief that the effects of a difficult underwriting are still lingering and the issue’s holders are much more “hot money” than “real money” oriented. Sometimes this will lead to a divergence in price and the behaviour will continue until the proportions of holders are more similar.
I think.
Although an amateur, I probably have more appetite for “junk” than you, James. By luck or skill (?), I’ve traded successfully among the Bombardier prefs (still own a bit, in positive territory) and the IQW ones (lucky again, got out with gains before the default announcement).
FWIW, I’ve never owned Nortel prefs (too junky for me, at this price at least).
Is a year’s worth of dividends too much for the cumulative provision? I don’t know, but it’s not out of the question, IMO. Maybe the market, in its cumulative (sic!) vision, believes that there is a chance of a year of dividends being skipped before the eventual bankruptcy, redemption or otherwise closing the position. Maybe they’re right, maybe not. In any case, it seems to be a recent development, the pair traded pretty much in tandem not so long ago. Maybe it’s a day or two aberration – I don’t know.
Prof. Hymas wrote: “it is my belief that the effects of a difficult underwriting are still lingering and the issue’s holders are much more “hot money” than “real money” oriented. Sometimes this will lead to a divergence in price and the behaviour will continue until the proportions of holders are more similar”.
I can understand that the underwriters who got “stuck” with the “N” are more willing to sell than the holders of the “M”. However, a full year has elapsed now. Why was there (last trading day again) so many “intelligent” bidders queueing up to buy the “M” at $19.98; 19.87; 19.86; 19.85, 19.80 etc. while they could purchase the same thing (the “N”) for less than $19.40 per share??? Prior to December 26th, I thought it might be for tax reason that holders of the “M” were waiting the new fiscal year to cash in their capital gain but the new year hasn’t changed anything to the situation.
Addendum to my above post (I was a bit too quick pressing the “submit comment” button): cashing in a capital loss was more likely in that case…
Why was there (last trading day again) so many “intelligent” bidders queueing up to buy the “M” at $19.98; 19.87; 19.86; 19.85, 19.80 etc. while they could purchase the same thing (the “N”) for less than $19.40 per share???
I don’t know.
I just don’t know.
It’s right up there with “Why are women so … so … well, you know?” as far as eternal mysteries of life are concerned.
Players might be more willing to short BAM.PR.M / long N after the dividend goes ex, thereby bringing it more into line … I don’t know. I just don’t know.
You can drive yourself crazy wondering. It’s more profitable just to be sensible yourself, and maybe swap between them whenever the price differentials more than $X in your favour.
If I understood why things like this occur, maybe I really would deserve the honourific “Prof.”!
[…] issues were last mentioned on PrefBlog on March 10 in connection with their price differential: NTL.PR.F closed today at 11.40-59, […]