The Toronto-Dominion Bank has announced:
a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 18 (the “Series 18 Shares”).
TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 10 million Series 18 Shares at a price of $25.00 per share to raise gross proceeds of $250 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 18 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.
The Series 18 Shares will yield 4.70% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2023. Thereafter, the dividend rate will reset every five years at a level of 2.70% over the then five-year Government of Canada bond yield.
Subject to regulatory approval, on April 30, 2023 and on April 30 every 5 years thereafter, TD may redeem the Series 18 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 18 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 19 (the “Series 19 Shares”), on April 30, 2023, and on April 30 every five years thereafter. Holders of the Series 19 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury Bill yield plus 2.70%.
The expected closing date is March 14, 2018. TD will make an application to list the Series 18 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.
They later announced:
that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 18 (the “Series 18 Shares”), the size of the offering has been increased to 14 million Series 18 Shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.
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 BIP.PR.E, BEP.PR.M, CM.PR.S, NA.PR.E and MFC.PR.Q: the curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure).
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 the ‘all issues will be called, or at least exhibit price stability’ hypothesis. 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. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.
According to the analysis shown above, the fair value of this issue is 24.17. Careful Assiduous Readers will note that TD.PF.I, a FixedReset 4.50%+301 that commenced trading 2017-7-14, closed today at 25.04-20. The extra 20bp of initial dividend rate is worth $0.05 annually, or a total of a little over $0.20 extra for the new issue … but if they both reset then TD.PF.I will get – to the extent reset rates nine months apart are the same – $0.0775 p.a. more than the new issue. According to the Implied Volatility analysis above, the fair value of TD.PF.I is 24.91.
So, just to be provocactive, I will say that I think the new issue is fairly valued with respect to PF.I and the other NVCC issues with a fair price around $25.10. The relationship to PF.I is likelier to be more stable in the medium term than the absolute prices, which can change with GOC-5 and general market factors.
I get my valuations from a cash flow analysis with probabilities for calls at the reset dates based on a fixed reset spread volatility of 0.08 and a market reset spread of 2.70% (which the new issue sports; although my relative valuation conclusions are not sensitive to 10% changes in these assumptions – nor to GOC-5 itself).
Thanks for making this whole subject interesting!