The Toronto-Dominion Bank has announced (although not yet on their website):
a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 22 (the “Series 22 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 22 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 22 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 22 Shares will yield 5.20% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending April 30, 2024. Thereafter, the dividend rate will reset every five years at a level of 3.27 % over the then five-year Government of Canada bond yield.
Subject to regulatory approval, on April 30, 2024 and on April 30 every 5 years thereafter, TD may redeem the Series 22 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 22 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 23 (the “Series 23 Shares”), on April 30, 2024, and on April 30 every five years thereafter. Holders of the Series 23 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 3.27 %.
The expected closing date is January 28, 2019. TD will make an application to list the Series 22 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 (also not yet on their website):
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 22 (the “Series 22 Shares”), the size of the offering has been increased to 14 million Series 22 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.
The expected closing date is January 28, 2019. TD will make an application to list the Series 22 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.
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 January 19 is 23.32. Note that TD.PF.K, a FixedReset, 4.75%+259, NVCC Compliant issue that commenced trading 2018-9-13 after being announced 2018-9-4, was quoted today at 22.50-65, after trading 4,100 shares in a range of 22.40-72. The fair value of TD.PF.K is 21.24 according to the analysis, so it remains 1.26 expensive four months after issue.
Update, 2019-1-22: It’s interesting to note that the theoretical spread (on a notional non-callable perpetual resettable annuity) is roughly the same as the actual issue spread – which means that TD is basically getting the call options on the issue for free.
Hi,
I am not sure to understand why you are using a single volatility input in your Implied Volatility Analysis, instead of using an adjusted volatility for each ticker..? A security with high reset spread (over 400..) will naturally have lower volatility than a similar security with a lower reset spread..
Could this be why they the TD preferreds where hit hard today….
I am not sure to understand why you are using a single volatility input in your Implied Volatility Analysis, instead of using an adjusted volatility for each ticker..?
Implied Volatility refers to the volatility of the underlying instrument, which in this case is the spread on the notional non-callable resetting perpetual annuity. For details regarding my implementation of Implied Volatility analysis, see the review I wrote.
It is possible that there might be a “volatility smile” – which are often seen in equities with wide and deep options markets – but the poor little Canadian preferred share market can only barely muster enough data – and sophistication – for a first approximation.
Could this be why they the TD preferreds where hit hard today….
Well, I won’t say it’s impossible, but it’s unlikely. There is sometimes an effect on older issues when an issuer comes out with a new one, as there are some investors who love the idea of holding a new issue and sell their old ones to make room for it – but I’d be surprised.
Now, if this issue had been absurdly cheap, instead of absurdly expensive, I’d be more attracted to the idea.