RY.PR.M Hammered On Low Volume

Royal Bank of Canada has announced:

it has closed its domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BF. Royal Bank of Canada issued 12 million Preferred Shares Series BF at a price of $25 per share to raise gross proceeds of $300 million.

The offering was underwritten by a syndicate led by RBC Capital Markets. The Preferred Shares Series BF will commence trading on the Toronto Stock Exchange today under the ticker symbol RY.PR.M.

The Preferred Shares Series BF were issued under a prospectus supplement dated March 9, 2015 to the bank’s short form base shelf prospectus dated December 20, 2013.

RY.PR.M is a FixedReset, 3.60%+262, NVCC-compliant, announced March 5. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 223,152 shares today (consolidated exchanges) in a range of 23.75-67 (which would be rather breathtaking even if the issuer was not a major bank or Canada’s largest company) before closing at 24.25-49 (which is an equally breathtaking spread). Vital statistics are:

Maturity Type : Limit Maturity
Maturity Date : 2045-03-13
Maturity Price : 22.85
Evaluated at bid price : 24.25
Bid-YTW : 3.51 %

The Implied Volatility calculation is not particularly informative:

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According to the calculation, the two NVCC non-compliant issues, RY.PR.I and RY.PR.L, resetting at +193 and +267, respectively, are quite expensive: this is as it should be, due to the greater certainty that these issues have of being called at the next opportunity.

However, it seems clear that the NVCC-compliant issues, RY.PR.Z, RY.PR.H, RY.PR.J and RY.PR.M are reasonably well aligned with an implied volatility of greater than 40%, which shows continued market confidence that anything issued by a bank will always be worth somewhere close to par value.

Update, 2015-3-19: They had to have an inventory blow-out sale:

Yet RBC’s most recent $300-million deal struggled to find buyers, according to people familiar with the offering, prompting the bank to re-price it. Preferred shares are always sold for $25 each, but RBC’s deal had to be ‘cleaned up,’ or re-priced, at $24.35.

Investors apparently balked because of the coupon RBC tried to offer them. A week before the offering was announced, Toronto-Dominion Bank launched its own preferred share sale, and promised to pay a 3.6 per cent annual coupon. RBC told investors it would pay the same rate – the problem is that underlying bond yields moved between the dates when the deals were offered.

Preferred shares are priced off the five-year Government of Canada bond yield, and this yield climbed roughly 15 basis points higher between the RBC and TD deals. Instead of boosting its preferred share coupon by the same amount, RBC apparently hoped investors wouldn’t notice the shift.

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