Royal Bank of Canada has announced (on October 25):
a domestic public offering of Non-Cumulative, 5-Year Rate Reset Preferred Shares Series BO.
Royal Bank of Canada will issue 12 million Preferred Shares Series BO priced at $25 per share to raise gross proceeds of $300 million. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 2 million Preferred Shares Series BO at the same offering price.
The Preferred Shares Series BO will yield 4.80 per cent annually, payable quarterly, as and when declared by the Board of Directors of Royal Bank of Canada, for the initial period ending February 24, 2024. Thereafter, the dividend rate will reset every five years at a rate equal to 2.38 per cent over the 5-year Government of Canada bond yield.
Subject to regulatory approval, on or after February 24, 2024, the bank may redeem the Preferred Shares Series BO in whole or in part at par. Holders of Preferred Shares Series BO will, subject to certain conditions, have the right to convert all or any part of their shares to Non-Cumulative Floating Rate Preferred Shares Series BP on February 24, 2024 and on February 24 every five years thereafter.
Holders of the Preferred Shares Series BP will be entitled to receive a non-cumulative quarterly floating dividend, as and when declared by the Board of Directors of Royal Bank of Canada, at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 2.38 per cent. Holders of Preferred Shares Series BP will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series BO on February 24, 2029 and on February 24 every five years thereafter.
The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.
We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business 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 Series BO, the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is November 2, 2018.
We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business purposes.
Thanks to Assiduous Reader dodoi for pointing out I was late posting this announcement.
The new issue is quite expensive according to Implied Volatility Analysis:
Click for Big
According to this analysis, the fair value of the new issue on October 26 is 23.77.
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. Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue.