It will be recalled that CPX.PR.E will reset at 5.238% effective June 30.
CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013314 after being announced 201335. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., CPX.PR.E and the FloatingReset, CPX.PR.F, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3month bill rate and the averages for investmentgrade and junk issues are similar, at +1.25% and +1.23%, respectively – although these breakeven rates are much closer to the market rate than has often been the case! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the CPX.PR.E FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Estimate of FloatingReset CPX.PR.F (received in exchange for CPX.PR.E) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
1.75% 
1.25% 
0.75% 
CPX.PR.E 
22.48 
315bp 
22.15 
21.66 
21.17 
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of CPX.PR.E continue to hold the issue and not to convert.
If you do wish to convert, note that the deadline for notifying the company is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.
I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
This entry was posted on Friday, June 8th, 2018 at 10:22 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
CPX.PR.E : Convert or Hold?
It will be recalled that CPX.PR.E will reset at 5.238% effective June 30.
CPX.PR.E is a FixedReset, 4.50%+315, that commenced trading 2013314 after being announced 201335. It is tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., CPX.PR.E and the FloatingReset, CPX.PR.F, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3month bill rate and the averages for investmentgrade and junk issues are similar, at +1.25% and +1.23%, respectively – although these breakeven rates are much closer to the market rate than has often been the case! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the CPX.PR.E FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of CPX.PR.E continue to hold the issue and not to convert.
If you do wish to convert, note that the deadline for notifying the company is 3:00 p.m. (MDT) / 5:00 p.m. (EDT) on June 15, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.
I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
This entry was posted on Friday, June 8th, 2018 at 10:22 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.