BMO.PR.Y Weak On Middling Volume

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 33 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 33”). The offering was underwritten on a bought deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 8 million Preferred Shares Series 33 at a price of $25 per share to raise gross proceeds of $200 million.

The Preferred Shares Series 33 were issued under a prospectus supplement dated May 29, 2015, to the Bank’s short form base shelf prospectus dated March 13, 2014. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.Y.

BMO.PR.Y is a FixedReset, 3.80%+271, announced May 27. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 651,560 shares today (consolidated exchanges) in a range of 24.46-65 before closing at 24.65-73. Vital statistics are:

Maturity Type : Limit Maturity
Maturity Date : 2045-06-05
Maturity Price : 23.02
Evaluated at bid price : 24.65
Bid-YTW : 3.61 %

This issue looks reasonably good according to Implied Volatility theory:

Click for Big

Note that the very high level of Implied Volatility is also calculated when only the NVCC-compliant issues are considered – for these issues alone, I get a spread of 99bp and Implied Volatility of 40%. This level of Implied Volatility is silly and will generally arise when the issues concerned are trading with an expectation of directionality in prices; I suggest that there are a lot of investors who figure that anything with the BMO brand name on it will trade somewhere near par forever.

This has the effect of making the lower spread issues vulnerable to a decline in credit quality and/or an increase in spreads; in other words, the higher-spread issues (such as this new issue) are getting a boatload of downside protection for free (when compared to other BMO issues ONLY!).

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