July 25, 2008

PerpetualDiscounts had a good strong day on light volume: up 0.41% to finish just short of the July 10 level. They are now down a mere 4.24% on the month; yield 6.37% or 8.92% interest-equivalent at the standard 1.4x equivalency factor; long corporates continue to yield 6.2%, so the spread is now 272bp.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.39% 67,557 16.33 6 +0.1243% 1,085.5
Floater 4.19% 4.22% 58,149 16.97 3 -1.3008% 880.0
Op. Retract 4.99% 4.47% 134,727 3.26 17 +0.1054% 1,041.7
Split-Share 5.37% 6.13% 61,157 4.50 14 +0.0991% 1,029.5
Interest Bearing 6.13% 5.90% 41,382 3.69 3 +0.2026% 1,122.6
Perpetual-Premium 6.14% 6.15% 70,640 10.67 4 +0.5314% 981.9
Perpetual-Discount 6.32% 6.37% 228,563 13.39 67 +0.4139% 840.0
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -2.1164%  
CM.PR.E PerpetualDiscount -2.0319% Now with a pre-tax bid-YTW of 6.97% based on a bid of 20.25 and a limitMaturity.
BAM.PR.K Floater -2.0313%  
SLF.PR.E PerpetualDiscount -1.9337% Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.75 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.5285% Now with a pre-tax bid-YTW of 6.77% based on a bid of 16.75 and a limitMaturity.
NA.PR.M PerpetualDiscount -1.2097% Now with a pre-tax bid-YTW of 6.13% based on a bid of 24.50 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.0107% Now with a pre-tax bid-YTW of 6.33% based on a bid of 17.99 and a limitMaturity.
BNS.PR.N PerpetualDiscount +1.0214% Now with a pre-tax bid-YTW of 6.07% based on a bid of 21.76 and a limitMaturity.
RY.PR.C PerpetualDiscount +1.0799% Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.72 and a limitMaturity.
TCA.PR.X PerpetualDiscount +1.0870% Now with a pre-tax bid-YTW of 6.01% based on a bid of 46.50 and a limitMaturity.
BNS.PR.J PerpetualDiscount +1.1284% Now with a pre-tax bid-YTW of 6.14% based on a bid of 21.51 and a limitMaturity.
BNA.PR.C SplitShare +1.1284% Asset coverage of 3.2+:1 as of June 30 according to the company. Now with a pre-tax bid-YTW of 8.73% based on a bid of 17.81 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.19% to 2010-9-30) and BNA.PR.B (8.52% to 2016-3-25).
ENB.PR.A PerpetualDiscount +1.3187% Now with a pre-tax bid-YTW of 6.06% based on a bid of 23.05 and a limitMaturity. Trading through Royal Bank. Right.
PWF.PR.H PerpetualDiscount +1.3636% Now with a pre-tax bid-YTW of 6.74% based on a bid of 22.30 and a limitMaturity.
CU.PR.B PerpetualDiscount +1.6598% Now with a pre-tax bid-YTW of 6.22% based on a bid of 24.50 and a limitMaturity.
W.PR.J PerpetualDiscount +1.7908% Now with a pre-tax bid-YTW of 6.53% based on a bid of 21.60 and a limitMaturity.
GWO.PR.F PerpetualDiscount +1.7952% Now with a pre-tax bid-YTW of 5.97% based on a bid of 24.95 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.8216% Now with a pre-tax bid-YTW of 6.47% based on a bid of 21.80 and a limitMaturity.
PWF.PR.F PerpetualDiscount +2.3278% Now with a pre-tax bid-YTW of 6.26% based on a bid of 21.10 and a limitMaturity.
MFC.PR.C PerpetualDiscount +2.6158% Now with a pre-tax bid-YTW of 6.06% based on a bid of 18.83 and a limitMaturity.
POW.PR.D PerpetualDiscount +3.0384% Now with a pre-tax bid-YTW of 6.53% based on a bid of 19.33 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 316,750 Nesbitt crossed 300,000 at 17.75. Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.75 and a limitMaturity.
RY.PR.B PerpetualDiscount 46,195 Royal crossed 25,000 at 19.10. Now with a pre-tax bid-YTW of 6.24% based on a bid of 18.87 and a limitMaturity.
TD.PR.R PerpetualDiscount 33,900 CIBC crossed 25,000 at 23.95. Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.91 and a limitMaturity.
BAM.PR.N PerpetualDiscount 31,735 Nesbitt crossed 18,000 at 16.20. See BAM.PR.M, below. Now with a pre-tax bid-YTW of 7.38% based on a bid of 16.33 and a limitMaturity.
BAM.PR.M PerpetualDiscount 27,985 Nesbitt crossed 18,000 at 16.50. See BAM.PR.N, above. This really looks like a tax-loss crystallization, but why the different prices? Is one fund being favoured over another? Now with a pre-tax bid-YTW of 7.35% based on a bid of 16.40 and a limitMaturity.

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Update, 2008-7-28: Newly Assiduous Reader newtoprefs comments that he she has been advised to sell BAM.PR.O short. I have uploaded the HIMIPref™ OpRet Index for 7/25. It is unclear to me why, if you were going to shortsell anything in this index (a big if, in my opinion, but what do I know?) AND you were going to shortsell one of the BAM issues … why wouldn’t you shortsell BAM.PR.I? The yield is 30bp lower than that of BAM.PR.O.

14 Responses to “July 25, 2008”

  1. davejphys says:

    I was wondering if I could tap your experience again. I am wondering what happens when a bank with 2/3 of it equity in preferred shares is taken over by another bank. The bank in question is a Puerto Rican bank holding company. The prospectus on the preferred shares says that a merger or buyout does not count as a liquidating event so the acquiring bank probably would not need to pay off the preferred shareholders at par. The bank has stopped paying all dividends several months ago and is now either going to be bought out or seized by regulators. Does the acquiring bank need to pay these preferred dividends if it is going to keep paying its own common dividend? I don’t see anything in the prospectus which deals with this situation.

    These preferreds are trading on the pinksheets at 10% of par value so could be an excellent if illiquid purchase for a distressed debt investor. I am sure that most funds are dumping them at any price given the dire situation of the bank.

    Do you know of any such situations like this that have occurred?

  2. jiHymas says:

    Well, this kind of situation is not fixed income investing – in fact, it’s not even equity investing – it’s Special Situation investing, which not only calls for a whole different set of skills, but also calls for legal advice.

    I don’t know the law – I don’t even know the company! Take all my comments with a big grain of salt and remember the wild ride the BCE acquisition has had through the courts!

    The issuer certainly sounds as if it’s pretty sick and I wouldn’t count on an acquirer giving any gifts to the current preferred stockholders. One possibility I can think of is that the acquirer will keep the target as a wholly owned – or majority owned – subsidiary. In such a case, it could continue paying dividends on its own common even though the subsidiary’s preferreds aren’t getting anything. We’ve had this situation in Canada with, for instance BCE/Teleglobe and Quebecor/Quebecor World.

    You might also wish to review the Thornburg Mortgage Tender of Preferred Stock; in which preferred shareholders are being told, in effect: accept our generous offer of 20% of par value, or get nothing.

  3. newtoprefs says:

    hi, I’m pretty new to this (like my handle?) I’ve been reading your blog and I like your analysis. I’ve been buying some prefs from my broker when new issues come out, but most are trading at losses now.

    I’ve read some other blogs, and people there are less into it than you. namely, a blog by accrued interest tells me this isn’t that good of a place to be:


    Even worse is one from Preftrader, talking about a new issue thats being sold below cost?


    Can you explain why these comments are so negative? and why you love this stuff so much? I’m not sure any more.

  4. jiHymas says:

    I reviewed the Accrued Interest post on July 21.

    I hadn’t been aware of the “Preftrader” post and don’t really consider it worthy of much comment. The particular post linked refers to a Brookfield new issue on Friday – but there wasn’t one. There was a new issue announced June 16 which closed on June 25 and has been recently quoted at 23.50-73 and the description meets his criteria … except that it was launched a month ago. So, until the subject of his post is clarified, I couldn’t really comment much even if I wanted to.

    The only other post in that blog is rather puerile. Ah, the wonderful Internet and its wonderful anonymity!

    Prefs have experience a violent bear market for the past 16-months. I wrote an article on the 2007 bear and have lightly commented on the current downdraft – mainly in Party like it’s 1999!, but all the recent posts in the Spreads to Bonds category are applicable.

    Particularly with spreads so high in historical terms, preferreds will be of interest to investors with a taxable fixed income portfolio.

    I neither love preferreds, nor hate them. I analyze them and make this analysis available in various forms for a fee.

  5. newtoprefs says:

    thank you for your answer. my broker called me on Friday suggesting I shortsell this new issue. He called it Brookfield Asset management 5.0% Cumulative class a series 21, being issued at $23.75 but with a par value of $25, closing on July 31. This is why preftrader’s comment seemed to be pretty up to date. maybe you just didn’t hear about it.

    I didn’t know you could short sell IPOs, and I thought it odd that my broker who was part of the selling syndicate would give me this advice.

    anyway, I said I’d think about it, but I’m so confused about how to invest in prefs now, I just don’t know. I thought that buying a $25 issue for $23.75 would be a good idea.

    thanks again

  6. jiHymas says:

    Series 21 is BAM.PR.O; it has been trading for over a month.

    The underwriters may be repricing it at 23.75 to clear their inventory, but it is not a new issue and far from being an IPO.

    Your broker may be anticipating a very poor reception for this clear-out sale and further price weakness. He could possibly be right on market-tone grounds, but I see no fundamental reason not to like this issue at 23.75. At Friday’s closing bid of 23.51, it yields 6.58% as a dividend/deferred capital gain, which for a taxable account will be somewhere in excess of 9.2% interest-equivalent for five-year paper. Note that the normal interest-equivalency factor of 1.4x isn’t strictly applicable here, because the tax on the capital gain is deferred five years.

    I suggest that you ask your broker for a copy of his long-term track record, presented as a set of composites compliant to CFA Institute standards. When he says he doesn’t have one (virtually a certainty) decide for yourself how much credence to give an advisor without a track record.

    See the “Update” in the main post above for some comparables.

  7. jiHymas says:

    More generally, newtoprefs, I would recommend against taking any position (long or short) in any security in an asset class without feeling more confident than you now appear in your understanding of the potential risks and returns.

    Without wishing to toot my own horn (too much!) I feel that my articles in Canadian Moneysaver represent a good, thorough introduction to the asset class. Click on the green boxes on the right-hand panel of this blog to get PDFs of past articles.

  8. newtoprefs says:

    thank you so much for looking in to this for me. I think I do need a bit more research for sure. as for my broker, I’ve already come to the conclusion that she’s not doing me any favors. I’ll continue to spend time at this, and some other blogs. btw ‘newly assiduous reader newtoprefs comments that he has been advised…’ should read ” that she has been . . .”

    thanks once again

  9. […] Now with a pre-tax bid-YTW of 6.73% based on a bid of 23.78 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.49% to 2012-3-30), BAM.PR.J (7.00% to 2018-3-30) and BAM.PR.O (6.60% TO 2013-6-30) … and consider the rather odd report in the comments to July 25! […]

  10. davejphys says:

    Thanks. I will look at those sources.

    The bank holding company in question is R&G Financial RGFC.PK. The preferred shares (one series anyway) are RGFCN.PK. This one last traded at $2.50. Par value is $25.

    The former CEO and Chairman Victor Galan owns about half of the common shares and is trying to sell the bank to one of the other Puerto Rican banks.
    There is a story here.

    They just paid a class action lawsuit settlement and are on the edge of being well capitalized.

    According to these rumors, the bank has offers but Galan is holding out for more. But is sounds like the common shares will be getting something which usually would indicate that the preferred will get paid off at par. But I worry that this guy will find some way for the common shares to get paid without paying the preferred shares.

    So you are saying that it is possible that an acquirer merges the bank and pays the common shareholders with shares in the acquirer and keeps the bank as a subsidiary with the preferreds getting nothing? That would be cruel indeed.

    I will probably stay away since I don’t have enough info.

  11. jiHymas says:

    So you are saying that it is possible that an acquirer merges the bank and pays the common shareholders with shares in the acquirer and keeps the bank as a subsidiary with the preferreds getting nothing?

    Well … it’s possible. I’m not prepared to take a view on how likely. That particular outcome – assuming that the acquisition is made with an actual view towards making a profit – would depend on the corporate structure and the health of the various subsidiaries.

    At WIND-UP the preferred shareholders would get more, but lots of stuff can happen in between “trouble” and “windup”.

    I think that Thornburg provides a more likely – in general – template: the preferred shareholders get more than the common, but that doesn’t necessarily mean they’re happy.

    I will probably stay away since I don’t have enough info.

    That would certainly be my reaction! This sort of situation can be immensely profitable if you have a team of lawyers and accountants constantly checking over a list of distressed companies – and particularly if you have enough capital to make you a player – but without some special information or bargaining position it’s just a toss of the coin.

  12. davejphys says:

    I don’t try to compete against the professionals in special situation investing. However I think a lot of these situations are too small and fly under the radar of the professionals. No one is going to employ a lawyer and accountant team to make a measly 100K but that is a big gain for me. Thanks again.

  13. […] … giving new meaning to the term “new issue concession”. It would seem that prior half-measures for the underwriters to blow this puppy out of inventory haven’t […]

  14. jiHymas says:

    RG Premier Bank of Puerto Rico has failed and Scotiabank is taking over.

    The company reported trading of its preferreds in the $0.10-0.20 range on Friday.

    A corporate filing in 2009 stated:

    Effective December 16, 2009, Victor L. Galán, Jr. tendered his resignation from the Board of Directors of R&G Financial Corporation (the “Company”), R-G Premier Bank of Puerto Rico, the Company’s wholly-owned banking subsidiary (the “Bank”), and R-G Mortgage Corp., another wholly-owned subsidiary of the Company (“R-G Mortgage”).

    Mr. Galán’s resignation letter states that the reason for his resignation is that he is establishing a mortgage banking business and desires to avoid a conflict of interest. Mr. Galán has not indicated to the Company that his resignation was due to any disagreement with the Company or its management. The Company notes, however, that Mr. Galán’s position as an officer of the Bank was eliminated in November 2009 and his employment was terminated at that time. Shortly following the termination of his employment with the Bank in November 2009, Mr. Galán filed an action in the Court of First Instance of Puerto Rico alleging unjust termination and is seeking damages and legal fees. The Company believes that such lawsuit is without merit and intends to vigorously defend such action.

    Mr. Galán had served as a director of the Company since 1996, as a director of the Bank since 1995 and as a director of R-G Mortgage since 1996. Mr. Galán also served as an executive officer at R-G Mortgage until its mortgage origination functions were moved into the Bank in early 2009. Mr. Galán is the son of current Director and former Chairman of the Board, Victor J. Galán.

    Slightly earlier in 2009, the company’s operating subsidiary (the Bank) agreed to very tight constraints on its capital with the FDIC:

    While the Amended Orders are in effect, the Bank cannot declare or pay dividends or any other form of payment representing a reduction in capital without the prior written permission of the FDIC and the Commissioner. The Bank must also refrain from making any distributions of interest, principal or other sums on its subordinated debentures without the prior written permission of the FDIC and the Commissioner. The Bank has historically paid dividends to the Company in order for the Company to fund its dividend obligations on its common stock and preferred stock as well as its trust preferred securities. As previously disclosed on March 31, 2006, the Board of Directors of the Company suspended the payment of dividends on it common stock and on April 25, 2008, the Company suspended dividends on the Company’s preferred stock and deferred interest payments on its subordinated debentures issued to the Company’s trusts which funded outstanding trust preferred securities.

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