PrefBlog

NA.PR.Q, the FixedReset 3.80%+243 announced October 30 settled today.

The prospectus, dated October 31 and available on SEDAR, is noteworthy for its hopeless misunderstanding of the NVCC rules:

Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The First Preferred Shares Series 28 and, if and when issued, the First Preferred Shares Series 29 as a result will not qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the First Preferred Shares Series 28 and the First Preferred Shares Series 29 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the First Preferred Shares Series 28 and the First Preferred Shares Series 29, if any, in accordance with their respective terms.

In fact, the cap for inclusion of non-NVCC Tier 1 will be set according to the amount outstanding at the end of this year. 100 percent of this total may be included in Tier 1 in 2013; 90% in 2014; and so on. The decline is by total non-NVCC, not by issue, so some banks may have entire issues included in Tier 1 by the time we get to the end of the schedule, as long as those issues are less than 10% of what they have outstanding at year-end.

However, such details did not hurt sales – TMX Money advises that there are 8-million shares outstanding, so we may conclude that the greenshoe option for a million shares was exercised in full.

In accordance with my policy with respect to non-NVCC issues of regulated financial institutions, I have added a maturity entry to the option schedule used for analytical purposes by my software, HIMIPref™; this instrument is analyzed with a call option at par on 2017-11-15 (as stated in the prospectus) and a maturity 2022-1-31 (a totally synthetic entry designed to reflect the likelihood of a call). I am all too well aware that the instrument will not, in fact, mature on 2022-1-31: for this and other instruments I will simply cross my fingers and hope that the situation clarifies in the next five years (it could be called; shareholders could vote to change the terms); if not then I will decide what to do when I change the terms of the issue in 2017 to reflect the reset dividend rate.

Also in accordance with my standard practice, this issue is being assigned to the FixedResets index, lumped together with all the non-financial issues for which NVCC is not applicable; I have not (yet) considered that the differences are significant enough for FixedResets to warrant the creation of a new index, as I did with DeemedRetractibles.

I really hate this mess. Thank you OSFI!

NA.PR.Q traded 1,663,080 shares today in a range of 25.27-42 before closing at 25.39-42, 100×6. Vital statistics are:

This entry was posted on Thursday, November 8th, 2012 at 1:08 am and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.