National Bank of Canada has announced:
that it has closed its domestic public offering of non-cumulative 5-year rate reset first preferred shares series 42 (non-viability contingent capital (NVCC)) (the “Series 42 Preferred Shares”). National Bank issued 12 million Series 42 Preferred Shares at a price of $25.00 per share to raise gross proceeds of $300 million.
The offering was underwritten by a syndicate led by National Bank Financial Inc.
The Series 42 Preferred Shares will commence trading on the Toronto Stock Exchange today under the ticker symbol NA.PR.G.
The Series 42 Preferred Shares were issued under a prospectus supplement dated June 4, 2018 to National Bank’s short form base shelf prospectus dated November 21, 2016.
NA.PR.G is a FixedReset, 4.95%+277, NVCC compliant, announced 2018-05-31. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.
The issue traded 711,342 shares today in a range of 24.85-96 before closing at 24.94-95. The slight discount to par isn’t bad, given that TXPR is down about 0.25% from the close immediately prior to the announcement date. Vital statistics are:
| NA.PR.G | FixedReset | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2048-06-11 Maturity Price : 23.12 Evaluated at bid price : 24.94 Bid-YTW : 4.85 % |
The new issue is ridiculously expensive according to Implied Volatility Analysis:
Click for Big
According to this analysis, the fair value of the new issue on June 11 is 23.86.
It is probably a bit late to weigh in on this. I think NA.PR.G is fairly valued for current market conditions in the NA series.
I looked at cash flows and probability of call if the company can now issue new prefs with a (market) reset spread around 2.8% (as they just did).
For a simplistic illustration, the closest pref in price is PR.C which also trades around par.
PR.G 4.95% +2.77% resets Nov 15, 2023
PR.C 4.45% + 3.43% resets Nov 15, 2022
There is about an 80% chance PR.C will be called in 4.5 years vs about 50% PR.G will be called (assuming, but not that sensitive to, a market reset spread volatility of 0.10; independent of GOC-5). Although PR.C has a higher reset spread, the investor is unlikely to see it and must suffer 0.5% lower annual dividends in the meantime.
When the probability of call is more than 50% the “Expected Future Current Yield” has less and less relevance (none in the case of super premium prefs PR.X and PR.A with +490 and +466 reset spreads and 99% chance of call).
Using the probability of call with cash flow approach, NA.PR.W (3.90% + 225; resetting Feb 15, 2020) is the most overvalued by about 65 cents.
Sometimes the cash flow with probability approach gives similar results to implied volatility and sometimes the results are different. For NA.PR.G they are different and $25.08 is my estimated “fair value” compared with other NA issues.
[…] was issued as a FixedReset, 4.95%+277, NVCC compliant, that commenced trading 2018-6-11 after being announced 2018-05-31. It is tracked by HIMIPref™ and is assigned to the FixedResets […]