BMO.PR.A Commences Trading After Partial Exchange From BMO.PR.Q

BMO.PR.A, the new FloatingReset that has come into existence via partial exchange from BMO.PR.Q, is now trading.

The 19% conversion rate has been reported previously. BMO.PR.Q now pays 1.805% (on par) until 2021-8-25, while BMO.PR.A will pay 3-month bills +115bp, reset quarterly.

BMO.PR.A closed August 26 with a quote of 20.00-25.00 (!).

Vital statistics are:

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.00
Bid-YTW : 6.00 %

It will be noted that the prospectus does not mention the NVCC rules except as follows:

The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (‘‘OSFI’’) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 25 and, if and when issued, the Preferred Shares Series 26 as a result may not fully qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the Preferred Shares Series 25 and the Preferred Shares Series 26 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 25 and the Preferred Shares Series 26, if any, in accordance with their respective terms.

Accordingly, I treat these shares as having a DeemedRetraction for analytical purposes, which results in the ‘Hard Maturity’ dated 2022-1-31 in the box above.

The $0.10 price difference between the two elements of the Strong Pair BMO.PR.Q / BMO.PR.A implies a break-even three-month bill rate of +0.57% – at the high end of the range defined by other investment-grade Strong Pairs.

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