The Royal Bank Fixed-Reset 5.60%+267 closed today, an event fraught with interest due to the question posed on October 28: “through or wide?”.
The problem, you see, is that the extant fixed-resets are all trading with a yield-to-five-year-call well in excess of the 5.60% dividend and simultaneously with a yield-to-limitMaturity well below the 5.60% dividend. Thus, if the market considers these issues to be five-years, the new Royal should trade at a discount to par; if it considers them to be perpetuals, at a premium. This is the first case where the initial fixed coupon and the subsequent resets were significantly enough different from extant issues to make such a comparison meaningful.
And the results are in! RY.PR.L traded 418,820 shares today and closed at 24.70-75. After accounting for underwriter support, we can draw a preliminary conclusion, based mainly on the fact that the issue trades at a discount to par: the market considers it to be a five year. Probably. The issues trade with less five year variance than perpetual variance but the results are not devoid of ambiguity … they never are! That’s what makes this fun!
| RY.PR.L and some comparators | |||||
| Ticker | Fixed | Reset | Quote | Yield to 5-year call |
Yield to limitMaturity |
| RY.PR.L | 5.60% | +267bp | 24.70-75 | 5.90% | 5.61% |
| TD.PR.Y | 5.10% | +168bp | 23.75-99 | 6.29% | 4.92% |
| RY.PR.I | 5.00% | +193bp | 23.70-99 | 6.33% | 5.15% |
| TD.PR.A | 5.00% | +196bp | 23.45-00 | 6.59% | 5.23% |
| TD.PR.S | 5.00% | +160bp | 23.57-24.69 | 6.42% | 4.86% |
We’ll get another data point on Wednesday, when the TD 5.60%+274 settles.
I am looking forward too to see how my new TD 5.6% + 274 bps will do. I had also subscribed to the the TD 5.6 straight perps issued a year before IIRC such that they can only do better. What we now need is a new issue at much less advantageous terms to confirm to the market that those TD and RY Reset issues were one of a kind not to be seen again. I do hope to be right if this credit / liquidity crisis in in fact ending or nearing its end.
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