POW.PR.B : Current call, so what?

The yield-to-worst on POW.PR.B is now negative. It closed today at 26.46-65, but it is currently callable at $26.00:

POW.PR.B Embedded Options
Redemption 2006-11-28 2007-11-27 26.000000
Redemption 2007-11-28 2008-11-27 25.750000
Redemption 2008-11-28 2009-11-27 25.500000
Redemption 2009-11-28 2010-11-27 25.250000
Redemption 2010-11-28 INFINITE DATE 25.000000

This gives rise to: 

POW.PR.B optionCalculationList
Call 2007-01-11 YTM: -6.26 % [Restricted: -0.51 %] (Prob: 35.43 %)
Call 2007-04-11 YTM: 2.20 % [Restricted: 0.72 %] (Prob: 5.03 %)
Call 2007-12-28 YTM: 3.32 % [Restricted: 3.32 %] (Prob: 7.25 %)
Call 2008-12-28 YTM: 3.76 % [Restricted: 3.76 %] (Prob: 3.72 %)
Call 2009-12-28 YTM: 3.93 % [Restricted: 3.93 %] (Prob: 2.86 %)
Call 2010-12-28 YTM: 4.03 % [Restricted: 4.03 %] (Prob: 2.57 %)
Option Certainty 2035-01-21 YTM: 5.05 % [Restricted: 5.05 %] (Prob: 43.13 %)


I’ve uploaded some graphs:

I can’t say I really understand why the price should have gone up so spectacularly recently. One can make the usual argument that since the redemption premium declines by $0.25 annually, the net cost to the company is not the coupon of 1.3375, but $0.25 less than this, or $1.0875, but this is less than the current financing cost only by half the saving. The company’s treasurer has the immediate option of reducing permanent costs by about $0.125 p.a. (gross of issuance costs), at the expense of a few years loss of charges … but this analysis assumes that the current refinancing level will be available a few years hence. It might not be.

And why should the price spike now?

The best an investor can reasonably hope for is a yield of 4.03% if it lasts until its $25.00 call; there are lots of issues with similar characterists that have such a yield without the risk of negative returns. The new RY.PR.D issue settles tomorrow and yields 4.50%. RY.PR.W has a yield to worst of 4.02%, with a 2014 call date, without the risk of an intervening call. The same can be said for POW.PR.D, pre-tax bid-YTW of 4.36% based on a call 2014-11-30, with no intervening call risk – and it’s a more active trader and the same name!

So the whole situation is very mysterious and I consider POW.PR.B to be very expensive at current levels.

One Response to “POW.PR.B : Current call, so what?”

  1. […] Corp. issues tracked by HIMIPref™ are POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D and POW.PR.F. The first four are included in the PerpetualDiscount Subindex; […]

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