BIP.PR.E Settles Firm on Modest Volume

Brookfield Infrastructure hasn’t announced anything, but their new issue of BIP.PR.E settled today.

BIP.PR.E is a FixedReset, 5.00%+300M500, ROC, announced January 15. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex on the basis of its P-2(low) rating from S&P (it is not rated by DBRS).

The issue traded 421,809 shares today in a range of 24.85-00 before closing at 24.93-95. Vital statistics are:

Maturity Type : Limit Maturity
Maturity Date : 2048-01-23
Maturity Price : 23.13
Evaluated at bid price : 24.93
Bid-YTW : 4.96 %

This issue looks quite expensive to me, according to Implied Volatility Analysis:

Click for Big

We see in this chart many of the same features we saw when reviewing the recent new issues of NA.PR.E, BEP.PR.M and CM.PR.S:

  • The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
  • The prior issues are trading relatively near to, or well above par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue is 23.41, down from the announcement day estimate of 23.50 – and, remember, that is before making any adjustments for the ridiculously steep Implied Volatility calculation curve.

4 Responses to “BIP.PR.E Settles Firm on Modest Volume”

  1. prefQC says:

    Hi James,

    How do you calculate a YTW of 4.96% ? The current 5yr GoC is more than 200 bps, and so, given the current bid slightly below par and assuming that the 5y GoC “stays constant” until the next reset date in 5 years, shouldn’t the YTW be greater than 5% ? (I’m ignoring for the moment the minimum guaranteed reset rate of 5%.)

  2. jiHymas says:

    The calculation is assuming that the price in 30 years (the “limit” in the term “limit-maturity”) will be 23.13.

    See “Digression Regarding End-Prices for Yield-to-Perpetuity Calculations” in the FixedReset October 2016 Review.

  3. mbarbon says:

    At first, I wonder if the “minimum” is causing the market to think rosy, but two of the issues you state here don’t have those floors.

    The CM has +2.45 which is richer than the previous preferred shares, but not by that much.. This is not enough to make it trade at par as you have stated.

    Just wondering if these issues are simply getting sucked into ETF’s/Mfunds that have had such great positive returns and have attracted the attention of new investors. These new investors are piling in with an influx of new capital that the managers must take care of… Just wondering….

  4. jiHymas says:

    Just wondering if these issues are simply getting sucked into ETF’s/Mfunds

    I really don’t know. The new issues won’t be in any indices yet – and so won’t be bought by CPD or ZPR – but there may be some buying that anticipates their addition and is hoping for a bounce.

    I also don’t know how much money preferred share mutual funds are taking in, so I’m not really much help at all, am I?

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