It is not my usual practice to announce excitedly that issues have not been called for redemption, but this is something of a special case…
Earlier today I reported that RY.PR.N, RY.PR.P and RY.PR.R have been called for redemption, but Royal Bank has five, count ’em, five issues callable on 2014-2-24 and the announcement covered only three. The two not announced were RY.PR.I and RY.PR.L.
RY.PR.I is a FixedReset, 5.00%+193, announced 2008-9-9 and closed 2008-9-16.
RY.PR.L is a FixedReset, 5.60%+267, announced 2008-10-23 and closed 2008-11-3.
These Issue Reset Spreads may be compared with those of the called issues, 350bp, 419bp and 450bp, respectively.
Given that the five year GOC yield is now about 1.82%, and assuming that there is no change from this number at the time of calculation of the dividend reset, RY.PR.I will reset at 3.75%, a decline of 25% from the initial dividend rate, while RY.PR.L will reset at 4.49%, a decline of 20%. My mailbox will shortly fill up with angry queries from preferred shareholders.
This difference in treatment is a wonderful illustration of the point I have been making from the time the structure was developed:
A call at par only five years hence is not a good thing; the bank will exercise the option only if redemption is in its own best interest
…
It must never be forgotten that buying a perpetual issue, even one that is “almost certain” to be called, or one that will adjust its dividends to account for changing market conditions, represents exposure to the chance that the issuer will get into trouble and that with perpetuals there is no opportunity to simply let the dubious debt mature.
Assiduous Readers might also wish to admire my PrefBlog posts Fixed-Resets : Critchley Likes, Ruggins Doesn’t and Critchley of Financial Post: Fixed-Resets Good!.
Well, in this case it was not the issuer getting into trouble, but rather a change in market conditions that has led to the (presumed) extension, but that’s just a quibble. Its a wonderful illustration anyway, and I will cite it until all my Assiduous Readers beg for relief. Who would have thought that a pair of issues with issue dates bracketting the Lehman bankruptcy would be left outstanding five years later?
Mind you, it will be noted that the presumed extension cannot yet be deemed a fact. According to the prospectus for RY.PR.I and the prospectus for RY.PR.L:
We will give notice of any redemption to registered holders not more than 60 days and not less than 30 days prior to the redemption date.
… so they’ve still got lots of time to change their minds one way or another if the market goes blahooey.
My rules of thumb continue to work (until they’ll stop working):
– under 200 bps spread, no redemption by the issuer,
– over 300 bps spread, likely redeem at the five year mark,
– over 400 bps spread, definitely redeem if still investment grade,
– between 200 and 300 bps, roll the dice.
An entirely reasonable rule of thumb for investment-grade FixedResets, although I prefer to toss a coin.