TD.PF.F, a 4.90% NVCC-compliant Straight Perpetual announced July 9 has settled.
The issue traded 464,790 shares today (consolidated exchanges) in a range of 24.57-74 before closing at 24.66-69. Note that the HIMIPref™ PerpetualDiscounts subindex is down up about 1.25% (about $0.30 for a $25 issue) between July 9 and July 21, so the issue is not actually as poorly received as one might think from the raw numbers did not benefit from the rising market.
Sorry about the mix-up in direction … I inverted the numerator and denominator! JH 15-07-22
TD.PF.F will be tracked by HIMIPref™ and has been assigned to the PerpetualDiscounts subindex. Vital statistics are:
| TD.PF.F | Perpetual-Discount | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-21 Maturity Price : 24.29 Evaluated at bid price : 24.66 Bid-YTW : 4.98 % |
Hello again. I got your PrefLetter, and am working through it, trying to understand the vast amount of concepts in this area. I thought I understood a number of things, but what happened to this pref (TD.PF.F) after release confuses me. The yield is great, considering the drop in the Canadian interest rates. So, why would the price drop after it hit the market?
They’re still expensive at 24.68-70, says me.
Look at the Canadian Utilities issues CU.PR.D, CU.PR.E, CU.PR.F and CU.PR.G, just to take an easy example.
They yield more AND they’re a better credit AND they’re at a greater discount to par AND they’re non-financial AND they are not subject to the whims of OSFI should the going get tough. What’s not to like?
The recent RY.PR.O http://prefblog.com/?p=29883 also gives a good comparison in my opinion…
So, is it best not to get the IPO, and just buy on the open market?
There have been very few new issues over the past fifteen years that I’ve actually liked. Always check what’s out there on the secondary market relative to the new issue your friendly salesman is exhorting you to buy.
Makes sense. Then why do people buy them?
One more question,
“… they’re non-financial AND they are not subject to the whims of OSFI should the going get tough.”
What do you mean? Thought financials were good risks.
I wonder why people would buy them if they are not competitive.
“… they’re non-financial AND they are not subject to the whims of OSFI should the going get tough.”
I don’t understand. I thought financials were good risks. Could you please expand?
Then why do people buy them?
Because their salesman tells them to.
Thought financials were good risks.
They weren’t during the last market crash, although I can’t tell you for sure what’s going to be the epicentre of the next one. While I think that NVCC-compliant preferreds will perform rationally during the early stages of credit deterioration, I think that they’ll perform worse during the late stages, due to uncertainty over what OSFI will do.
It’s good to diversify; it’s hard to do in the financials dominated world of preferred shares, but one should do what one can.
“While I think that NVCC-compliant preferreds will perform rationally during the early stages of credit deterioration, I think that they’ll perform worse during the late stages, due to uncertainty over what OSFI will do.”
My understanding is that NVCC means the automatic conversion of preferred shares into common shares if the OSFI feels the bank may be non-viable. Is the conversion at the usual $25 divided by the current common share price? If so, then if you got the preferred at a discount, wouldn’t the NVCC trigger actually result in a capital gain, assuming you can sell the common share, once converted, at the current price?
I hope I am not way off here…
See the post Feds Consulting on Bank Recapitalization Regime.
First, the floor price for conversion is $5, so it’s difficult to imagine a scenario in which the market value of the common would exceed the par value of the preferreds.
The feds are proposing to have the power to cancel common shares (that existed prior to conversion (which will be good, if anything, for preferred shareholders if this is what emerges from the legislative process), but there is also NVCC sub-debt to consider.
Sub-debt will convert at 1.5x face value (subject to the same floor), and then there’s bail-in senior debt to consider; to provide any kind of seniority at all it must convert at more that 1.5x and even the risible Canadian Bond Investors Association has proposed a multiplier applied to senior debt would be much higher than the proposed 1.1-2x range referenced in the consultation paper.
The Credit Union Central of Canada also wants highly favourable terms for senior bail-in debt.
Many of these problems could be avoided by mandating that preferred shares and sub-debt have “high-trigger” conversions, but the idiots in Ottawa have decided that “low-trigger” is the way to go.
This is all quite confusing. I’ve read most of the linked articles, but am still confused.
If the floor value is $5, does that mean 1 pref will get 5 common upon conversion, assuming the common is priced at that time below $5, and the pref is the usual $25?
Does it also mean that the prefs can be forced to convert to common which are then cancelled before you get a chance to sell them?
If the floor value is $5, does that mean 1 pref will get 5 common upon conversion, assuming the common is priced at that time below $5, and the pref is the usual $25?
Yes.
Does it also mean that the prefs can be forced to convert to common which are then cancelled before you get a chance to sell them?
I don’t think so, under the current proposals. But the current proposals are not yet the law!
Thank you for your help.