3 Responses to “CM.PR.P Soft on Good Volume”

1. prefQC says:

   January 8, 2015 at 4:59 pm

   Hi James,
   I can currently purchase (via Scotia iTrade discount brokers) CIBC Capital Trust bonds (10.25% coupon, earliest call 30-Jun-2039, maturity 30-Jun-2108!) for $135.34 per $100 par value, for a yield of 6.5%. (I’m not sure if it is calculated to maturity or to the first call, but that shouldn’t make a big difference.) Similarly priced Capital Trust bonds for other banks are also available.

   Presumably, these Capital Trust bonds would be of equivalent or, more likely, of better credit quality than NVCC-compliant prefs such as CM.PR.P. Nothwithstanding that the payout is taxable interest and that there is no reset provision with these bonds, it nevertheless seems that the difference in yield is very significant.

   Would you please enlighten me as to why this difference is so pronounced? Stated more provocatively, why doesn’t everyone just buy the Capital Trust bonds and forget about the NVCC-compliant prefs?

2. jiHymas says:

   January 8, 2015 at 7:33 pm

   From the prospectus:

   On or after June 30, 2014, the Trust may, at its option, with the prior approval of the Superintendent on giving not more than 60 nor less than 30 days’ notice to the holders of the applicable series of CIBC Tier 1 Notes, redeem the CIBC Tier 1 Notes of the applicable series, in whole or in part. The redemption price per $1,000 principal amount of CIBC Tier 1 Notes redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price (as defined herein), and the redemption price per $1,000 principal amount of CIBC Tier 1 Notes redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding tax. The redemption price payable by the Trust will be paid in cash. See “Description of the Trust Securities — CIBC Tier 1 Notes — Trust Redemption Right”.

   Upon the occurrence of a Regulatory Event (as defined herein) or a Tax Event (as defined herein), the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the applicable series of CIBC Tier 1 Notes, redeem all (but not less than all) of the applicable series of
   CIBC Tier 1 Notes at a redemption price per $1,000 principal amount of such series of CIBC Tier 1 Notes equal to par, together with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding tax. The redemption price payable by the Trust will be paid in cash. See “Description of the Trust Securities — CIBC Tier 1 Notes — Redemption on Tax or Regulatory Event”.

   A “Series B Interest Reset Date” means June 30, 2039, and every five years thereafter, so you’re OK on that one.

   But a “Regulatory Event”?

   Regulatory Event in respect of a series of CIBC Tier 1 Notes means the receipt by CIBC of a notice or advice from the Superintendent that the CIBC Tier 1 Notes of such series no longer qualify as eligible Tier 1 capital or are no longer eligible to be included as risked based Total Capital on a consolidated basis, in either case under the capital guidelines

   And guess what? These issues are not NVCC compliant so CIBC expects to exercise the clause in 2022, as I discussed in my 2011 post Regulatory Event Clause To See Minimal Use. I complained about the effects of this on the so-called bond indices ha ha in my article Shaken and stirred: How the OSFI wants to manipulate bond investors

   So I don’t know the yield of 6.5% was calculated, but a capital loss of $35 over the next seven years is $5 p.a., deducted from interest of $10.25, and paid on initial investment of $135 … the yield ain’t 6.5%, I’ll tell you that much. Did you take advice from a bank?

3. prefQC says:

   January 8, 2015 at 10:09 pm

   Thanks James for the clear response. It’s very disappointing that iTrade only indicates the possible 2039 early call and not the probable non-NVCC regulatory call. For most “retail” investors (like myself) it is very difficult to understand these subtleties from the prospectuses.