TD.PR.S To Remain Outstanding

The Toronto-Dominion Bank has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding 10 million Non-Cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”) of TD on July 31, 2013. As a result and subject to certain conditions set out in the prospectus dated May 30, 2008 relating to the issuance of the Series S Shares, the holders of the Series S Shares have the right to convert all or part of their Series S Shares, on a one-for-one basis, into Non-Cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”) of TD on July 31, 2013. Holders who do not exercise their right to convert their Series S Shares into Series T Shares on such date will continue to hold their Series S Shares.

The foregoing conversion right is subject to the conditions that: (i) if TD determines that there would be less than 750,000 Series T Shares outstanding after July 31, 2013, then holders of Series S Shares will not be entitled to convert their shares into Series T Shares, and (ii) alternatively, if TD determines that there would remain outstanding less than 750,000 Series S Shares after July 31, 2013, then all remaining Series S Shares will automatically be converted into Series T Shares on a one-for-one basis on July 31, 2013. In either case, TD will give written notice to that effect to holders of Series S Shares no later than July 24, 2013.

The dividend rate applicable to the Series S Shares for the 5-year period from and including July 31, 2013 to but excluding July 31, 2018, and the dividend rate applicable to the Series T Shares for the 3-month period from and including July 31, 2013 to but excluding October 31, 2013, will be determined and announced by way of a press release on July 2, 2013.

Beneficial owners of Series S Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on July 16, 2013.

The default recommendation is to retain the five-year fixed rate; as of June 26, according to the Bank of Canada, the GOC-5 rate is 1.84% while Three Month CTBs are at 1.03%. This spread, although very generous by post-Crunch standards, is pretty skinny by longer term standards.

From a practical standpoint, however, it will be recalled that BNS.PR.P (FixedReset, +205bp) was partially converted into the Floating Reset BNS.PR.A on its Exchange Date in April. Given the GOC-5 rate at the time, BNS.PR.P reset to 3.35% while BNS.PR.A pays 3-month CTB+205.

Given the Canada yields mentioned above, TD.PR.S will reset to a shade higher than BNS.PR.P: 1.84%+160 = about 3.45%, while the new FloatingReset will pay 3-Month CTB+160, significantly less than BNS.PR.A. We are thus left with the rather odd situation that the FixedReset should trade higher and the FloatingReset should trade lower than the BNS comparable.

As always with this type of decision, we can look and see what kind of increase is required in the CTB rate to provide a break-even: given the Canada rates quoted above, a ballpark figure is a steady increase over the next five years to a CTB rate of about 265bp … i.e., if it pays 81bp less today, then an increase to 81bp more in five years will approximately break even (ignoring the time value of money: 81bp less today does quite offset 81bp more in five years. But considering the uncertainty of the prediction itself, that’s close enough for government work).

2.65% is certainly not an unreasonable prediction for three-month bills in five years time. However, there is another consideration: the market loves floating rating instruments. LOVES them. BNS.PR.A (FloatingReset +205) closed last night at 25.91-00, well above its current 25.50 call price, while BNS.PR.P (FixedReset, 3.35%+205) closed last night at 25.25-30.

While a decision should be put off until the new FixedReset rate has been announced (July 2, according to TD), it seems to me that a reasonable plan is to convert to the FloatingReset with the intent of selling them immediately.

2 Responses to “TD.PR.S To Remain Outstanding”

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  2. […] as discussed in the post TD.PR.S To Remain Outstanding, the market seems to have some kind of love affair going on with the only FloatingReset issue […]

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