The Bank of Montreal has announced:
a domestic public offering of $500 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 40”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets.
The Preferred Shares Series 40 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending May 25, 2022, as and when declared by the Board of Directors of the Bank, payable in the amount of $0.28125 per share, to yield 4.50 per cent annually.
Subject to regulatory approval, on or after May 25, 2022, the Bank may redeem the Preferred Shares Series 40 in whole or in part at par. On May 25, 2022, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 3.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 40 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 41 (Non-Viability Contingent Capital (NVCC)) (“Preferred Shares Series 41”) on May 25, 2022, and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 41 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the Board of Directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill Yield plus 3.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 41 into an equal number of Preferred Shares Series 40 on May 25, 2027, and on May 25 of every fifth year thereafter.
The anticipated closing date is March 9, 2017. The net proceeds from the offering will be used by the Bank for general banking purposes.
Implied Volatility analysis indicates that (subject to the usual caveats) this issue is well priced relative to the other BMO NVCC FixedResets:
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Mind you, though, the Implied Volatility of this set of issues is enormous – 33%! Such a high figure (I suggest that a more rational number is in the 5%-10% range) is suggestive of the idea that an expectation of market directionality is influencing the relative pricing of the different issues; specifically, I suggest that there is an influential view in the market that since these shares are issued by a bank, everything will be OK and they’ll all trade around par forever. We have seen that this assumption can sometimes lead to bad result – boy, have we ever!
I suggest that the level of Implied Volatility implies that a flattening of the indicated curve is more likely than a future steepening – regardless of whether this involves yields of the high-spread issues declining or of low-spread yields increasing, or any other combination of movements – and that therefore the higher-spread issues may be expected to outperform … provided Black-Scholes holds in this particular case! It is entirely possible that Assiduous Readers will have their own views on market direction – a change in spreads, a change in the GOC-5 yield, whatever – and that these views might influence their choice.