So, are the oil sands now a white elephant?
The last place oil producers want to be when prices plummet to profit-demolishing lows is midstream on a billion-dollar project in one of the costliest parts of the planet to extract crude.
Yet that’s exactly where half a dozen oil sands operators from Suncor Energy Inc. to Brion Energy Corp. find themselves with prices for Canadian oil now hovering around $30 a barrel. While all around them projects have been postponed or canceled, their investments were judged too far along when the oil game suddenly moved from offense to defense.
These projects will add at least another 500,000 barrels a day — roughly a 25 percent increase from Alberta — to an oversupplied North American market by 2017.
…
A general rule of thumb says new plants require a West Texas Intermediate price of $80 a barrel to break even. Western Canada Select, a blend of heavy Alberta crude, is currently selling at a discount of about $14 a barrel to the WTI benchmark, which closed at $46.75 Thursday in New York.
…
Returns on capital invested by Canada’s largest oil-sands producers reached 20 percent at some points over the past five years, according to data compiled by Bloomberg. That figure is now closer to zero or negative for companies such as Athabasca Oil Co. and Cenovus.
There are two things you can sell in this world: entertainment and things. Don’t sell things:
In most AT&T, Sprint, or T-Mobile stores, it takes a while to find the ZTE phones, buried in the back, past the latest from Apple and Samsung. But they’re there. In AT&T stores it’s the ZTE Maven, which has a screen, speakers, and a processor with capabilities somewhere between the iPhone 5 and 6. As Tony Greco, ZTE’s head of U.S. retail marketing, puts it, “These were state-of-the-art features two years ago.” The Maven’s draw, really, is price. Without any subsidies from a wireless carrier, the phone costs just $60. And it’s not even one of the company’s cheaper models.
…
ZTE is quietly becoming a force in the U.S. by selling good enough phones at low prices—smaller prepaid smartphones for $30, basic phones with QWERTY keyboards for about the same, and so on. The Chinese company’s products are among the cheap phones of choice at three of the big four U.S. carriers. (Verizon doesn’t carry them.) ZTE claimed about 8 percent of America’s smartphone market in the second quarter of this year, says researcher IDC, up from 4.2 percent in the first quarter of 2014. That ranks the company fourth among smartphone makers overall, behind Apple, Samsung, and LG. “We came from nowhere, and now we are a solid force,” says Lixin Cheng, head of ZTE’s U.S. operations.
So the question of the day is: if you pay quintuple price, can you really say you’ve bought a “smart” ‘phone?
Thanks to a new thesaurus, I now have many more words to describe the preferred share market:
Let’s let Rajna Gibson Brandon and Christopher Hemmens from the University of Geneva and the University of St. Gallen’s Mathieu Trepanier explain:
“We find that market irrationality has a signicantly negative effect on subsequent stock market returns — proxied by the S&P 500 and the Dow Jones Industrial Average — and exacerbates stock market volatility,” they write in a new research paper. “The full impact takes time to manifest with small downturns at first culminating in a significant negative impact after three days followed by a weak reversal almost a week later.”
By “market irrationality” they are referring specifically to the types of words appearing in the financial press that, to use some fancy words, may prove to be parlous augers for stock prices. They list 141 words, but some of the favorites around here are “bonkers,” “barbarous,” “berserk,” “daft,” “perverse” and “psycho.” (Yes, a lot of words beginning with “b,” the Greek equivalent of which is “beta.”)
Brompton Split Banc Corp., proud issuer of SBC.PR.A was confirmed at Pfd-3(high) by DBRS:
The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to the Preferred Shares as of August 6, 2015, is 55.8%.
In the past year, the performance of the Company has been stable. Current dividend coverage is 1.65 times. Quarterly Preferred Share and monthly Capital Share distributions have remained unchanged since 2013. Other key rating considerations include the credit quality, volatility and diversification of the Portfolio as well as changes in the dividend policies of the underlying companies in the Portfolio.
Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-3 (high) rating of the Preferred Shares issued by Brompton Split Banc Corp.
Canadian Banc Corp., proud issuer of BK.PR.A, was confirmed at Pfd-3(high) by DBRS:
The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. The amount of downside protection available to the Preferred Shares as of August 26, 2015, is 53.4%. The Preferred Share dividend coverage ratio is approximately 1.18 times.
Although the credit quality of the underlying assets of the Portfolio is strong, the Portfolio is concentrated in the financial services industry. As a result, its value has recently seen a slight deterioration due to the weak performance of common shares of the six Canadian Banks since the beginning of 2015. The floating nature of dividend distributions to Preferred Shares and Class A Shares, although mitigated by predetermined ranges of dividend yields, may potentially increase the volatility of the protection available to holders of the Preferred Shares in a high interest rate environment.
Based on these considerations and aforementioned performance metrics, DBRS confirms the Pfd-3 (high) rating of the Canadian Banc Corp. Preferred Shares.
It was another fine day for the Canadian preferred share market, with PerpetualDiscounts gaining 12bp, FixedResets winning 45bp and DeemedRetractibles up 16bp. The Performance Highlights table is notable for having very few losers today. Volume was very low.
For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.
Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread
Here’s TRP:
Click for Big
TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.67 to be $0.93 rich, while TRP.PR.C, resetting 2016-1-30 at +164, is $0.83 cheap at its bid price of 13.10.
Click for Big
Another good fit today for MFC, with Implied Volatility dropping a bit again today.
Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 24.00 to be 0.30 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 19.77 to be 0.31 cheap.
Click for Big
The fit on the BAM issues continues to be horrible.
The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.07 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20..85 and appears to be $1.02 rich.
Click for Big
FTS.PR.K, with a spread of +205bp, and bid at 18.80, looks $0.46 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.30 and is $0.50 cheap.
Click for Big
Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.94%, with no outliers. Note that the distribution is bimodal, with NVCC non-compliant bank issues averaging -1.25% and the unregulated issues averaging -0.51%. There is one junk outlier below -1.80% and one above +0.20%.
Click for Big
Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2490 % | 1,658.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2490 % | 2,900.5 |
| Floater | 4.42 % | 4.50 % | 56,166 | 16.34 | 3 | -0.2490 % | 1,763.5 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1221 % | 2,774.2 |
| SplitShare | 4.64 % | 4.87 % | 66,031 | 3.10 | 3 | 0.1221 % | 3,251.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1221 % | 2,536.7 |
| Perpetual-Premium | 5.72 % | 5.42 % | 59,641 | 2.01 | 8 | 0.0594 % | 2,490.1 |
| Perpetual-Discount | 5.46 % | 5.52 % | 75,759 | 14.63 | 30 | 0.1244 % | 2,589.0 |
| FixedReset | 4.73 % | 4.20 % | 178,014 | 16.09 | 74 | 0.4543 % | 2,150.1 |
| Deemed-Retractible | 5.15 % | 5.08 % | 102,708 | 5.52 | 33 | 0.1619 % | 2,576.5 |
| FloatingReset | 2.43 % | 3.80 % | 49,700 | 5.95 | 9 | -0.0216 % | 2,173.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.F | FloatingReset | -2.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 14.16 Evaluated at bid price : 14.16 Bid-YTW : 3.98 % |
| SLF.PR.H | FixedReset | -1.82 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.85 Bid-YTW : 6.55 % |
| FTS.PR.F | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 22.07 Evaluated at bid price : 22.30 Bid-YTW : 5.52 % |
| SLF.PR.C | Deemed-Retractible | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.06 Bid-YTW : 6.73 % |
| TD.PF.E | FixedReset | 1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 22.95 Evaluated at bid price : 24.45 Bid-YTW : 3.63 % |
| BAM.PR.R | FixedReset | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 17.07 Evaluated at bid price : 17.07 Bid-YTW : 4.68 % |
| CM.PR.Q | FixedReset | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 22.45 Evaluated at bid price : 23.30 Bid-YTW : 3.77 % |
| BAM.PF.C | Perpetual-Discount | 1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.20 Evaluated at bid price : 21.20 Bid-YTW : 5.83 % |
| BMO.PR.Y | FixedReset | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 22.62 Evaluated at bid price : 23.65 Bid-YTW : 3.72 % |
| SLF.PR.D | Deemed-Retractible | 1.31 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.90 Bid-YTW : 6.83 % |
| TRP.PR.B | FixedReset | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 12.21 Evaluated at bid price : 12.21 Bid-YTW : 4.19 % |
| BAM.PR.M | Perpetual-Discount | 1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 5.77 % |
| NA.PR.S | FixedReset | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.45 Evaluated at bid price : 21.45 Bid-YTW : 3.89 % |
| TRP.PR.G | FixedReset | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 4.35 % |
| MFC.PR.M | FixedReset | 1.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.70 Bid-YTW : 5.91 % |
| BAM.PR.T | FixedReset | 1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 17.68 Evaluated at bid price : 17.68 Bid-YTW : 4.59 % |
| HSE.PR.C | FixedReset | 1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.15 Evaluated at bid price : 21.15 Bid-YTW : 4.75 % |
| MFC.PR.H | FixedReset | 1.69 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 4.51 % |
| TD.PR.T | FloatingReset | 1.79 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.70 Bid-YTW : 3.53 % |
| TRP.PR.C | FixedReset | 1.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 13.10 Evaluated at bid price : 13.10 Bid-YTW : 4.45 % |
| BAM.PF.D | Perpetual-Discount | 2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.31 Evaluated at bid price : 21.60 Bid-YTW : 5.76 % |
| HSE.PR.E | FixedReset | 2.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.76 Evaluated at bid price : 22.15 Bid-YTW : 4.89 % |
| NA.PR.W | FixedReset | 2.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 20.80 Evaluated at bid price : 20.80 Bid-YTW : 3.85 % |
| BMO.PR.W | FixedReset | 2.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 3.72 % |
| PWF.PR.P | FixedReset | 3.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 16.00 Evaluated at bid price : 16.00 Bid-YTW : 3.73 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.K | FixedReset | 99,506 | RBC crossed blocks of 47,200 and 30,000, both at 19.95. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.77 Bid-YTW : 6.24 % |
| RY.PR.Z | FixedReset | 72,000 | RBC crossed 50,000 at 21.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 21.28 Evaluated at bid price : 21.56 Bid-YTW : 3.63 % |
| BNS.PR.O | Deemed-Retractible | 69,410 | RBC sold 12,200 to anonymous at 25.62; 10,000 to TD at 25.62, and another 20,000 to TD at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-04-27 Maturity Price : 25.25 Evaluated at bid price : 25.60 Bid-YTW : 4.14 % |
| IAG.PR.G | FixedReset | 55,881 | RBC crossed 50,000 at 23.95. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.78 Bid-YTW : 4.34 % |
| BAM.PF.B | FixedReset | 42,250 | Desjardins crossed 36,800 at 20.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-09-03 Maturity Price : 20.24 Evaluated at bid price : 20.24 Bid-YTW : 4.44 % |
| MFC.PR.G | FixedReset | 34,467 | RBC crossed 30,000 at 22.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.53 Bid-YTW : 5.07 % |
| There were 18 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| RY.PR.M | FixedReset | Quote: 22.72 – 24.00 Spot Rate : 1.2800 Average : 1.0892 YTW SCENARIO |
| RY.PR.H | FixedReset | Quote: 21.55 – 22.25 Spot Rate : 0.7000 Average : 0.5119 YTW SCENARIO |
| TRP.PR.F | FloatingReset | Quote: 14.16 – 15.14 Spot Rate : 0.9800 Average : 0.8062 YTW SCENARIO |
| FTS.PR.F | Perpetual-Discount | Quote: 22.30 – 22.85 Spot Rate : 0.5500 Average : 0.3983 YTW SCENARIO |
| HSE.PR.G | FixedReset | Quote: 22.31 – 22.90 Spot Rate : 0.5900 Average : 0.4392 YTW SCENARIO |
| VNR.PR.A | FixedReset | Quote: 19.80 – 20.37 Spot Rate : 0.5700 Average : 0.4658 YTW SCENARIO |
I have a question for my education.
I look at MFC.PR.L vs BMO.PR.S. The MV difference is now $2.87 based on today’s close. The terms are similar with MFC paying .10% less dividend and having a 17bp lower reset spread. Both issues reset around the same time. My back of the envelope calculation says that should put the BMO issue around $1.00 higher than the MFC issue. I realize I am comparing across different credits (although both P2H I think) and names, but I struggle to find why the additional premium of roughly $1.87. Are my rough calculations or data wrong? Do the banks really command that much of a premium (discount on yield) just because they are the banks/do people still fear MFC that much? Thank you.
I realize I am comparing across different credits (although both P2H I think)
BMO.PR.S is Pfd-2 by DBRS; MFC.PR.L is Pfd-2(high); S&P has them at P-3(high) and P-2(high).
My back of the envelope calculation says that should put the BMO issue around $1.00 higher than the MFC issue.
I’m not sure what else you wrote on the back of the envelope, but I prefer to use the New and Improved FixedResets Yield Calculator according to the instructions at What is the Yield of HSE.PR.A.
BMO.PR.S pays 1.00 p.a. until 2019-5-25, when it resets at +233. It is bid at 22.39. The next dividend will be payable about November 25.
MFC.PR.L pays 0.975 until 2019-6-19, when it resets at +216. It is bid at 19.67. The next dividend will be payable about December 19 (the ex-date for the September dividend has passed).
I will assume, for now, that the GOC-5 yield will be constant forever at 0.75%, and that the prices of these issues will be unchanged for 30 years.
This leads to a calculated yield of 3.64% for BMO.PR.S and 3.94% for MFC.PR.L. That’s a pretty big spread, considering that MFC is a better credit! To make MFC.PR.L yield the same as BMO.PR.S over 30 years, we have to increase the price to 21.25, which is a huge jump. Mind you, BMO.PR.S is far more liquid than MFC.PR.L, but there’s nothing all that bad about the latter’s liquidity.
And that’s not all! In the above, I have assumed a constant price for thirty years. This is reasonable in the case of BMO.PR.S, which is NVCC-compliant, but a bit more open to dispute in the case of MFC.PR.L.
If you believe, as I do, that the NVCC rules will eventually be applied to insurance companies and insurance holding companies, then this means that MFC.PR.L will eventually not be eligible as Tier 1 Capital. In the case of the banks, the market appears to accept that this means the redemption at par of NVCC non-compliant issues is fairly certain; however, the market does not currently accept my thesis that OSFI will extend the rules.
There is lots of discussion in PrefLetter regarding my belief in NVCC rule extension; you can make your own assumptions and arrange your portfolio accordingly.
Do the banks really command that much of a premium (discount on yield) just because they are the banks
That is my belief. In this case, it is also possible that there are some – not a majority, but some – investors who mistakenly value BMO.PR.S in line with NVCC non-compliant issues, which would boost its price a bit from otherwise.
“…my belief in NVCC rule extension; you can make your own assumptions and arrange your portfolio accordingly.”
My feeling is that if you believe they will be recalled for the NVCC reason, and are in fact deemed retractables, then there is no downside to buying them instead of other similarly priced (for credit rating, yield, reset spread, and dates) issues, seeing as how you can get the capital gains bonus. The problem is that you will then have to reinvest your money in other issues at that time. If the environment will be worse (for investors), then other issues, that are not deemed retractables, will likely be called back anyhow, as the issuer can, and will, do so if the environment suits them. If the environment will be better for investors, then you will have good issues to choose from.
Am I missing something, or are these really offering potential bonuses for no risk?
Until “that time” comes, in a decade or so, SLF.PR.J has a YTW of 9.5% per annum. That’s more than double your money (almost 2.5 times). At that time the environment will be what it will be, equal for both investors who have enjoyed the ride in the deemed retractables just tendered in for par, and others who have ridden other issues. There’s nothing we can do about future interest rates.
It’s all a relative game, and unfortunately it’s too hard to play the long/short game which would be more of a “money for nothing” theme.
My feeling is that if you believe they will be recalled for the NVCC reason, and are in fact deemed retractables, then there is no downside to buying them instead of other similarly priced (for credit rating, yield, reset spread, and dates) issues, seeing as how you can get the capital gains bonus.
There is a downside – the insurance issues are a little more expensive than unregulated issues that are otherwise comparable. This premium is small, however.
The problem is that you will then have to reinvest your money in other issues at that time.
Well, sort of. If you buy and hold until they are redeemed then yes, you will be constrained to reinvest at a time when you might not wish to do so.
However, if the rule extension is announced, there will be a very long phase-in period (for banks it was ten years) and a relatively short market-adjustment period (which took a year or so for banks, but in this scenario the market will know how such issues should be priced). So there will be lots of time in such a scenario to realize the NVCC-related gains and reinvest in something more to your taste.
Thanks. I think I’m beginning to understand this stuff.