We had a look at POW.PR.A yesterday, as an example of an issue in the PerpetualPremium index with a negative YTW; now let’s look at RY.PR.K (previously commented upon on August 22). This is particularly interesting in light of the RY.PR.O redemption recently announced. RY.PR.O was also at an intermediate stage of its call schedule and also had a call price declining by $0.25 p.a. The important differences between these issues are:

  • the “K” is retractable and is therefore included as debt on the balance sheet. RY.PR.O is perpetual and therefore may be included in Tier 1 Capital.
  • the “K” has an annual dividend of $1.175; the “O” pays $1.375.

This issue was quoted at the close of business, 2006-10-19, at $25.66-62 and has the embedded option schedule:

  • Redemption      2003-08-24      2004-08-23  26.000000
  • Redemption      2004-08-24      2005-08-23  25.750000
  • Redemption      2005-08-24      2006-08-23  25.500000
  • Redemption      2006-08-24      2007-08-23  25.250000
  • Redemption      2007-08-24   INFINITE DATE  25.000000
  • Retraction      2008-08-24   INFINITE DATE  25.000000

So it is currently redeemable at $25.25 and, while one can never be absolutely certain of anything in this world, the idea that it will be redeemed prior to becoming retractible in 2008 is a safer bet than most.

These options, run through the HIMIPref™ software, give rise to the following optionCalculationList:

  • Call  2006-11-18 YTM: -6.24 % [Restricted: -0.51 %] (Prob: 31.99 %)
  • Call  2007-09-23 YTM: 2.61 % [Restricted: 2.42 %] (Prob: 1.14 %)
  • Soft Maturity  2008-08-23 YTM: 3.64 % [Restricted: 3.64 %] (Prob: 66.87 %)

So HIMIPref™ is accounting for the possibility of an immediate call (one maturityNoticePeriod hence) at $25.25, which will result in a realized yield of -6.24%. This is a very odd issue, quite frankly! I noticed it when I was working on my article about Yield-to-Worst as a predictor of future returns (A Call, too, Harms) … at one of the year-ends studied it was among the issues with the lowest YTW but was not called, making my point a little less emphatic, but returning poorly over the ensuing year anyway. I drew attention at that point to the issue:

The other retractable in the low yield-to-worst lists for 2000-2002 that was not called was RY.PR.K. Although it managed to avoid the worst case scenario (a call nine months subsequent to its appearance in the list), it underperformed the index by a cumulative total of about 6% in the following three years. Clearly, dodging the redemption bullet was not, in and of itself, a great cause for celebration!

The continuing oddness can be illustrated over the past year by looking at a graph of the bid price over the past year. The high prices for this issue lead to YTWs that have been negative more often than not.

I don’t understand! Fortunately, however, I don’t need to understand. Knowing where to find the “Sell” button is good enough for me!

4 Responses to “RY.PR.K”

  1. […] extant Innovative Tier 1 Capital does not have any interesting dates coming up. RY.PR.K has its soft-retraction coming up in August … but these are currently in Tier 1 capital in the “preferred” […]

  2. […] RY.PR.K has been a member of the HIMIPref™ Operating Retractible Index continuously since it was issued 1998-4-27. It’s habit of trading with a low or negative Yield-to-Worst has been an annoyance for quite some time! […]

  3. Kaitas21 says:

    Hi Hymas,

    I wonder if you could shed some light on the RY.PR.K or even the recent Brookfield Asset Management 5.00% Cumulative, Convertible Class A Preference Shares, Series 21. Both issues have the conversion privilege to convert the prefs into their underlying common shares at the discretion of the issuer AND the holder. But if the holder exercises his/her conversion rights, the issuer can decide not to give the shares and redeem them into cash. So it seems that this type of prefs are linked to the common shares. How does this affect the price of the pref ? RY.PR.K is trading above par and it’s IPO coupon is 4.72%.

    thanks again!


  4. […] an old thread regarding RY.PR.K, Assiduous Reader Kaitas21 asked: Hi […]

Leave a Reply

You must be logged in to post a comment.