PPL / VSN Ticker Change

As previously discussed, ticker changes are required to reflect the assumption of Veresen’s preferreds by Pembina Pipeline. These changes came into effect today.

So the changes are:

VSN to PPL Ticker Conversions
Effective 2017-10-05
Old Ticker Old Description New Description New Ticker
VSN.PR.A Veresen Inc. Cumulative Series ‘A’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 15 PPL.PR.O
VSN.PR.C Veresen Inc. Cumulative Series ‘C’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 17 PPL.PR.Q
VSN.PR.E Veresen Inc. Cumulative Series ‘E’ Pr Pembina Pipeline Corporation Cl ‘A’ Pr Ser 19 PPL.PR.S

Implied Volatility analysis of the PPL preferreds yields a very interesting result:

Click for Big

The curve is extraordinarily steep, giving rise to an Implied Volatility of 40%, which is a ludicrously high number beyond which I refuse even to calculate possible fitting errors. This can arise in two major situations:

  • Market participants feel that all issues will be redeemed at par; this invalidates the Black-Scholes option theory used in the analysis as market prices will no longer be directionless over time, or
  • Market participants feel that GOC-5 yields will increase dramatically and are willing to pay a premium for low-spread, low-cost issues, as these are more highly leveraged to the benchmark yield

With respect to the first possibility, I can think of no reason to believe that PPL will redeem its preferreds except in reaction to the normal ebb and flow of credit spreads. With respect to the second, this is not what we observe in two major investment-grade series:

Click for Big

The BAM series has a very reasonable Implied Volatility of 9%; note that the pattern of variance is quite odd, with the slope appearing to be negative for the lower-spread, non-floor issues.

Click for Big

The MFC series has an Implied Volatility of 17%, which is too high (although most of these series have Implied Volatilities that I consider unreasonably high) if the future is supposed to be directionless, but far too low if you believe, as I do, that Deemed Retractions for insurers will be seen in the future.

So it’s all something of a mystery! I suggest, however, that the lower-spread PPL issues look vulnerable to underperformance relative to their higher-spread siblings in the absence of dramatic overall market move, as Implied Volatility moves to a more reasonable level.

Leave a Reply

You must be logged in to post a comment.