PrefBlog

The Toronto-Dominion Bank has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series Y (the “Series Y Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series Z (the “Series Z Shares”).

With respect to any Series Y Shares that remain outstanding after October 31, 2013, holders of the Series Y Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including October 31, 2013 to but excluding October 31, 2018 will be 3.5595%, being equal to the 5-Year Government of Canada bond yield determined as at October 1, 2013 plus 1.68%, as determined in accordance with the terms of the Series Y Shares.

With respect to any Series Z Shares that may be issued on October 31, 2013, holders of the Series Z Shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including October 31, 2013 to but excluding January 31, 2014 will be 2.666%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of October 1, 2013 plus 1.68%, as determined in accordance with the terms of the Series Z Shares.

Beneficial owners of Series Y 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 October 16, 2013.

The new rate of 3.5595%, is $0.889875 p.a. This represents a steep decline from the original rate of 5.10% (or $1.275 p.a.), so my mailbox will be filling up shortly with outraged queries from casual investors.

We can examine the comparables with the help of the Pairs Equivalency Calculator:

The closing bid for TD.PR.Y yesterday was 25.06; assuming this holds after the conversion privilege is no longer available then the average implied three-month bill rate of 2.36% calculated above in turn implies a bid on the new issue of 25.58.

So, as of right now, it looks like conversion is recommended. Naturally, investors will want to wait until the last moment before making a decision.

Additionally, it will be noted that although the deadline for notifying the company is October 16, intermediary brokers will almost always have earlier internal deadlines. Also, it is normal that trades must be settled before notice can be given … so for most brokers, I suggest that the last day for trading the issue in the hopes of reaping enormous profits on conversion will be Wednesday October 9 (remember there is a skip-day for Thanksgiving). This strategy didn’t work very well for the BMO.PR.M / BMO.PR.R conversion, when the price of BMO.PR.M was supported by the conversion privilege and promptly sank after the last trading day to settle prior to the notification date.

On the other hand, the current bid of 25.06 for TD.PR.Y gives a current yield of 3.55% (calculated from the new 3.5595% coupon rate), compared to an average Current Yield of 3.42% for the FixedResets noted above. On that basis – without looking at anything else – TD.PR.Y looks cheap.

On the other hand, the FloatingReset resulting from TD.PR.Y conversion will pay three-month bills +168. BMO.PR.R pays +165 and is bid at 25.11; TD.PR.S pays +160 and is bid at 25.38; both are above today’s bid on TD.PR.Y, but certainly nothing to run around mortgaging the farm for.

So … some might wish to speculate, on the basis that TD.PR.Y should be priced higher than it is and the FloatingReset issue that results from conversion should be higher still. Just remember it’s a speculation!

This entry was posted on Tuesday, October 1st, 2013 at 11:09 pm 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.