PrefBlog

National Bank of Canada has announced:

that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 34 (non-viability contingent capital (NVCC)) (the “Series 34 Preferred Shares”). National Bank issued 16 million Series 34 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $400 million.

The offering was underwritten by a syndicate led by National Bank Financial Inc.

The Series 34 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.X.

The Series 34 Preferred Shares were issued under a prospectus supplement dated January 15, 2016 to National Bank’s short form base shelf prospectus dated December 1, 2014.

NA.PR.X is a FixedReset, 5.60%+490, announced 2016-1-13. It will be tracked by HIMIPref™ and has been added to the FixedReset subindex.

NA.PR.X traded 796,852 shares today (consolidated exchanges) in a range of 24.65-99 before closing at 24.84-85, 57×31. Vital Statistics are:

A little softness is reasonable, given the wild market action in the time since the announcement. The TXPL price index closed at 597.06 on announcement day, January 13, and at 587.78 today, for a decline of 1.56%. Mind you, this was via a low of 560.24 on January 18, 6.17% below the initial figure … some players might have gotten cold feet!

Implied Volatility analysis is not possible for the NA issues, since there are only three of them including the new issue. However, comparison to today’s analysis for TD shows that the issue is attractively priced. The high level of Implied Volatility leads to the conclusion that there is a 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 issues) will significantly outperform the lower-spread issues.

The NA issues are priced very close to the TD curve, with perhaps a slight yield premium.

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 +490 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 35% 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 Saturday, January 23rd, 2016 at 2:09 am and is filed under Issue Comments. 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.