New Issue: National Bank Fixed-Reset, 5.375%+205

And thick and fast they came at last, and more and more and more! National Bank has announced:

a public offering of 7 million, non-cumulative 5-year rate reset first preferred shares Series 21 (the “Preferred Shares Series 21”) at a price of $25.00 per share, for an aggregate amount of $175 million.

Holders of Preferred Shares Series 21 will be entitled to receive a non-cumulative quarterly fixed dividend for the initial period ending August 15, 2013 of 5.375% per annum, as and when declared by the Board of Directors of National Bank. Thereafter, the dividend rate will reset every five years at a level of 205 basis points over the 5-year Government of Canada bond yield. Holders will, subject to certain conditions, have the option to convert all or any part of their Preferred Shares Series 21 to non-cumulative floating rate first preferred shares Series 22 (the “Preferred Shares Series 22”) of National Bank on August 16, 2013 and on August 16, every five years thereafter. Holders of the Preferred Shares Series 22 will be entitled to receive a non-cumulative quarterly floating dividend equal to the 90-day Canadian Treasury Bill rate plus 205 basis points, as and when declared by the Board of Directors of National Bank.

National Bank has agreed to sell the Preferred Shares Series 21 to a syndicate of underwriters led by National Bank Financial Inc. on a bought deal basis. National Bank has granted to the underwriters an option to purchase up to an additional $26.25 million of the Preferred Shares Series 21 at any time up to 30 days after closing.

Issue: National Bank of Canada Non-Cumulative 5-Year Rate Reset Preferred Shares Series 21

Amount: 7-million shares @ $25.00 = $175-million

Greenshoe: 1,050,000 shares @ $25 = $26,250,000 up to thirty days after closing.

Initial Dividend: 5.375%, changes every Exchange Date

Subsequent Dividend: 5-Year Canadas + 205bp, determined 30 days prior to Exchange Dates

Exchangeable: To Series 22 Floaters, pay 90-day Canada T-Bills + 205, determined quarterly

Exchange Dates: August 15, 2013 and every five years thereafter

Redemption: Series 21 Resets redeemable every exchange date at $25.00. Series 22 Floaters at $25.00 on every exchange date and at $25.50 at all other times.

Rank: On parity with all other First Preferred Shares, senior to common, junior to everything else.

Ratings: S&P: P-2(High); DBRS: Pfd-1(low); Moody’s: A1

Don’t like ’em! The Big Black Mark against this structure is that it can be called in only five years. I’ve published my thoughts on the matter … but some people like ’em and they certainly seem to be selling well.

Update, 2013-8-14: This issue, NA.PR.N, was called for redemption on the first Exchange Date

5 Responses to “New Issue: National Bank Fixed-Reset, 5.375%+205”

  1. […] And … just to make sure nobody missed it … there was yet another new issue with this structure today (number five in a continuing series): National Bank 5.375%+205. […]

  2. mpisni says:

    For the life of me I don’t understand why ANYONE would like this new issue when the previous issue pays 6% and is still close to the issue price and it dropped today !!

    Can someone explain the rationale here

  3. jiHymas says:

    Those who prefer this issue to the NA.PR.M 6% Perpetual are deathly afraid of generalized interest-rate increases; the potential for credit downgrades and adverse spread changes are relatively discounted in their minds.

    The market yields today are:
    GOC 5-Year: 3.31%
    NA.PR.M: 6.00%
    NA Fixed-Reset Spread: 205bp (approx)
    NA Fixed-Reset Rate: 5.375%

    NA.PR.M pays a dividend of $1.50 compared to $1.34375 for each of the next five years for the new issue. The difference is $0.15625 p.a., for a total of $0.78125 for the next five years.

    To a first approximation, we can therefore say that if NA.PR.M is priced at more than $24.21875 in five years’ time, its total return will have exceeded the new issue. If the price is less, it will have under-performed.

    A price of $24.22 on an issue paying $1.50 implies a yield of 6.19%. Thus, purchasers of the new issue are protected against a PARALLEL SHIFT of 19bp in the yield curves – that is, the break-even point is:

    GOC 5-year: 3.50
    NA.PR.M: 6.19%
    NA Fixed Reset Spread: 205bp
    NA Fixed Reset Rate: 5.55%

    If that’s what things look like in 5 years, then the fixed-resets will have stayed equal to the straights.

    You can play with potential spreads that will exist 5-years hence to your heart’s content. Note that a sharp increase in market spreads (due to NA getting itself into trouble) will make holders of both issues unhappy; but NA.PR.M will continue to have a higher coupon until 5-year GOC yields exceed 3.95% – which could very easily happen.

    However, should everything stay the same as it is now, the NA.PR.M will continue to grind out 62.5bp p.a. more than the new issue, which I consider significant.

    You always have to remember that, with both issues trading at par, any capital gains you might make are subject to being called away. The issuer’s redemption privileges are very valuable!

    Note that if there was a longer no-call period on the new structure, I would prefer the new structure as well.

  4. […] The market drifted downwards, perhaps due to the National Bank Fixed Reset, 5.375%+205 new issue. […]

  5. […] I detect a move in the right direction with this issue. The most recent fixed-reset was from National Bank, 5.375%+205 and the penultimate was TD, 5.00% +160; the Canada 5-year is now at 3.52%, up 6bp from yesterday. […]

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