PrefBlog

The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 12 (the “Series 12 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 12 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 12 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 12 Shares will yield 5.5% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2021. Thereafter, the dividend rate will reset every five years at a level of 4.66% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on April 30, 2021 and on April 30 every 5 years thereafter, TD may redeem the Series 12 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 12 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 13 (the “Series 13 Shares”), on April 30 2021, and on April 30 every five years thereafter. Holders of the Series 13 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury bill yield plus 4.66%.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes

They later announced:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 12 (the “Series 12 Shares”), the size of the offering has been increased to 28 million Series 12 Shares. The gross proceeds of the offering will now be $700 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is January 14, 2016. TD will make an application to list the Series 12 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

Holy smokes! $700-million! Monster!

Implied Volatility analysis shows that the issue is attractively priced. While the curve-fitting implies a decent price concession of $0.25 [theoretical price is $25.25], the very high level of Implied Volatility leads to the conclusion that there is a very high degree of directional bias in the pricing of TD’s NVCC-compliant FixedResets. As this bias recedes (assuming that it ever does!), Implied Volatility will decline, the curve will flatten and the higher-spread issues (most notably the new issue) will significantly outperform the lower-spread issues.

Note that the NVCC non-compliant issues are so obviously differentiated from the NVCC-compliant ones that they are not included in the calculation, although they are shown in the chart.

On the other hand, the directional bias could be quite right! There will be many among us who think that +466 is an utterly ridiculous spread for solid bank – NVCC or no NVCC – and that spreads will narrow once memories of 2015 fade. Given this particular scenario, the lower-spread issues will shine: a calculation based on projected calculated values of 250bp Spread and 10% Implied Volatility implies that the extant TD NVCC-compliant preferreds will enjoy total capital gains in the area of 20% (more precisely, the average of the five extant NVCC-compliant issues is +18.4%) which, if achieved in a reasonable timeframe, will dwarf the yield advantage of the new issue for which capital gains will be a big fat zero.

So pays yer money and takes yer chances, gents, roll up, roll up! If you think current market conditions are the new normal, you’ll like the new issue. If you think this is a transitory crash, you won’t.

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This entry was posted on Wednesday, January 6th, 2016 at 1:38 am and is filed under New Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.