There are now about 1.66-million shares of AZP.PR.C outstanding following a 42% conversion from AZP.PR.B – which are going to be a nightmare for novices to trace, since this was issued as EPP.PR.B, then changed to CZP.PR.B, then changed to AZP.PR.B and finally converted to AZP.PR.C.
AZP.PR.C is a FloatingReset, paying the three-month bill rate +418bp, reset quarterly. It is convertible back to AZP.PR.B on 2019-12-31 at the option of the holder.
This issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.
The Toronto Stock Exchange reports no volume on its debut.
Vital statistics are:
| AZP.PR.C | FloatingReset | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 12.50 Evaluated at bid price : 12.50 Bid-YTW : 10.22 % |
The Pair Equivalency of AZP.PR.C to its FixedReset sibling AZP.PR.B shows it to be very cheaply bid at 12.50, compared to the 13.30 bid on the latter issue; but given that there was no volume at all and that the quote was 12.50-14.00, no real conclusions can be drawn. At the bid prices, three-month bills need only average 0.42% over the next five years to achieve equivalent total returns.
Click for Big
James,
“There are now about 1.66-million shares of AZP.PR.C outstanding following a 42% conversion from AZP.PR.B – which are going to be a nightmare for novices to trace, since this was issued as EPP.PR.B, then changed to CZP.PR.B, then changed to AZP.PR.B and finally converted to AZP.PR.C.”
I am wondering if prefinfo could add this one (even though there are credit concerns) under the goal of helping “novices”. AZP.PR.A and AZP.PR.B are already there anyway…
Done!
James – one year later, AZP.PR.C continues to be one of the most extreme examples of your observation of the “distaste” in the market for floating product. At close yesterday, the discount to AZP.PR.C was 16%.
This seems very difficult to explain away, especially given that conversion is only three years away. In fact, when I look at a wide swath of strong pairs, I find it difficult to determine a rationale for the wide variation in discounting of the floater in the market.
Do you have a comment on AZP.PR.C in particular or on the seemingly nonsensical variation in discounting across strong pairs in the market?
Yes, AZP.PR.C is the most extreme example of unloved FloatingResets.
I can’t explain it!
I will observe that both issues are quite illiquid, AZP.PR.C more so than AZP.PR.B. I will also point out that the differential has built up since the end of May; I believe there was some institutional buying of AZP.PR.B through the period. It may be that the PM doing this either didn’t know or didn’t care about the next Exchange Date.
My software checks hourly, and, since May of this year, AZP.PR.B has never available to short from Interactive Brokers. I guess the price stays high since no one is selling (holders or short sellers).
I think you nailed it @hrseymour – people forget the cost of short financing when doing arb calc. As retail, it is hard to borrow most prefs. Even non-retail, most Canadian prefs are not cheap to borrow when you can locate them. Aside from the most liquid, largest issues, you tend to pay 2.5 – 6% to borrow. Thinner names (like AZP.PR.B) can cost even more. @ 5% borrow rate plus 0.5% spread on margin financing, a 16% discount in AZP.PR.C is essentially arb neutral over 3 years.
Its also too thin for someone large enough to matter to be able to put the arb on if they had cheap financing, and anyone who tried would be at constant danger of a buy in (with massive short squeeze potential).
It is certainly true that preferreds are difficult to short (see Shorting Prefs and Shorting Prefs: Part 2) but that doesn’t provide a full explanation.
Why are people bidding for AZP.PR.B, when they can buy AZP.PR.C and achieve an equivalent position much more cheaply?
I agree James, the availability of AZP.PR.B to short should be of zero interest to investors with cash who are keen to bid AZP.PR.C to something closer to a price reflecting general anxieties about the floating component of any strong pair (under 10% for sure).
I’d like to put this down to the idea that the Bs are over-bid, but at a 8.5% current yield that doesn’t seem too likely given peer-level credit in the market. It seems like plain-ole mis-pricing of the Cs to me.