I am pleased to pass on another data point illustrating just how absurdly cheap the preferred share market is at the moment:
DBRS Limited (DBRS) assigned a rating of A (low) with a Stable trend to TransCanada PipeLines Limited’s (TCPL or the Company) $1.0 billion 4.34% Unsecured Medium Term Note Debentures (the Notes) due 2049. The rating being assigned is based upon the rating on already-outstanding series of the above-mentioned debt instruments.
DBRS notes that the proceeds from the Notes issue will be used to repay existing indebtedness and for general corporate purposes.
The Notes will rank pari passu, except as to sinking funds and other claims preferred by operation of law, with all other unsecured and unsubordinated indebtedness of the Company.
Sadly, TRP does not have any Straight Preferreds outstanding, but they do have a slew of FixedResets, ranging from TRP.PR.C yielding 5.70% to TRP.PR.G yielding 6.04%. So, for the sake of an argument and assuming a reasonably normal relationship, let’s say a TRP discounted Straight Perpetual would yield about 6.00% dividend, equivalent to about 7.80% interest. Its interest-equivalent Modified Duration as a perpetual annuity will be the inverse of this, or about 12.8. I can’t be bothered to work out the Modified Duration of a 30-year par bond yielding 4.34, but it will be more than this. Options on either instrument will lower the Modified Duration, but basically we can say that the Straight Perpetual preferred will have a little bit lower interest rate risk than the new bond.
Credit Risk will be a little higher for the preferred, but I worked out a long time ago that reasonable assumptions regarding default rates lead to a required credit risk premium of about 20bp. OK, so the preferreds are issued by the holding company and the bonds are issued by the operating company. So tack on another 20bp for credit risk, if you’re so inclined. It doesn’t make much difference to the conclusion!
There’s markedly lower liquidity for the preferred, but not so much of a difference that most of us need to care. If you do have an investment portfolio in which such a liquidity difference is significant, please contact me because I would like to make a proposal to manage your account!
So we’re left with 4.34% on the bond and 7.80% on the notional Straight, with about 20bp of the difference accounted for by Credit Risk. And, what’s more, this difference is in-line with the overall Seniority Spread that I estimate weekly (with a bond indicator that has an average term of about 21.25 years), so it’s not just these particular issues, it’s the whole damn market.
Yep, preferreds are cheap, all right!
DBRS also has a warning for Premier Ford:
DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company) at A (high) and the Commercial Paper rating at R-1 (low). All trends are Stable.
…
However, should political interference adversely affect the Ontario Energy Board’s (OEB) independent regulatory rate making framework or HOI’s operating and financial decisions, DBRS could take a negative rating action.
PerpetualDiscounts now yield 5.40%, equivalent to 7.02% interest at the standard equivalency factor of 1.3x. Lonc corporates now yield 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, a significant narrowing from the 335bp reported April 3.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.0056 % | 2,154.8 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.0056 % | 3,953.9 |
| Floater | 5.43 % | 5.70 % | 42,363 | 14.38 | 3 | 1.0056 % | 2,278.7 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1191 % | 3,280.7 |
| SplitShare | 4.88 % | 4.64 % | 78,537 | 3.84 | 8 | -0.1191 % | 3,917.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1191 % | 3,056.8 |
| Perpetual-Premium | 5.58 % | -8.56 % | 82,751 | 0.09 | 10 | -0.0315 % | 2,956.6 |
| Perpetual-Discount | 5.37 % | 5.40 % | 76,043 | 14.79 | 23 | 0.3223 % | 3,127.1 |
| FixedReset Disc | 5.24 % | 5.34 % | 191,864 | 14.96 | 61 | -0.2937 % | 2,193.5 |
| Deemed-Retractible | 5.20 % | 5.72 % | 93,567 | 8.15 | 27 | 0.0487 % | 3,087.4 |
| FloatingReset | 4.23 % | 4.30 % | 52,626 | 2.70 | 5 | 0.0975 % | 2,406.6 |
| FixedReset Prem | 5.07 % | 3.67 % | 298,016 | 2.21 | 22 | 0.0088 % | 2,585.0 |
| FixedReset Bank Non | 1.98 % | 4.02 % | 135,592 | 2.71 | 3 | 0.1118 % | 2,633.1 |
| FixedReset Ins Non | 4.98 % | 6.55 % | 106,900 | 8.30 | 22 | -0.0477 % | 2,262.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.G | FixedReset Disc | -2.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 18.75 Evaluated at bid price : 18.75 Bid-YTW : 6.04 % |
| BAM.PR.R | FixedReset Disc | -2.29 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 16.24 Evaluated at bid price : 16.24 Bid-YTW : 5.86 % |
| BAM.PR.T | FixedReset Disc | -2.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 16.35 Evaluated at bid price : 16.35 Bid-YTW : 5.90 % |
| TD.PF.J | FixedReset Disc | -1.93 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.54 Evaluated at bid price : 21.81 Bid-YTW : 5.02 % |
| IFC.PR.G | FixedReset Ins Non | -1.66 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 6.79 % |
| BIP.PR.F | FixedReset Disc | -1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.76 Evaluated at bid price : 22.15 Bid-YTW : 5.78 % |
| MFC.PR.H | FixedReset Ins Non | -1.11 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.25 Bid-YTW : 6.06 % |
| EMA.PR.H | FixedReset Disc | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 22.58 Evaluated at bid price : 23.49 Bid-YTW : 5.25 % |
| BAM.PR.K | Floater | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 12.24 Evaluated at bid price : 12.24 Bid-YTW : 5.70 % |
| MFC.PR.K | FixedReset Ins Non | 1.08 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.73 Bid-YTW : 6.98 % |
| TRP.PR.A | FixedReset Disc | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 14.85 Evaluated at bid price : 14.85 Bid-YTW : 5.95 % |
| PWF.PR.A | Floater | 1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 13.75 Evaluated at bid price : 13.75 Bid-YTW : 5.10 % |
| CU.PR.G | Perpetual-Discount | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 5.37 % |
| BAM.PR.N | Perpetual-Discount | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.12 Evaluated at bid price : 21.12 Bid-YTW : 5.67 % |
| SLF.PR.G | FixedReset Ins Non | 1.90 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 15.05 Bid-YTW : 8.69 % |
| MFC.PR.L | FixedReset Ins Non | 1.94 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 17.91 Bid-YTW : 7.74 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| VNR.PR.A | FixedReset Prem | 241,633 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 23.25 Evaluated at bid price : 24.85 Bid-YTW : 4.38 % |
| BMO.PR.W | FixedReset Disc | 67,970 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 18.15 Evaluated at bid price : 18.15 Bid-YTW : 5.33 % |
| BIP.PR.F | FixedReset Disc | 52,155 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.76 Evaluated at bid price : 22.15 Bid-YTW : 5.78 % |
| BAM.PF.B | FixedReset Disc | 46,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 18.85 Evaluated at bid price : 18.85 Bid-YTW : 5.74 % |
| CU.PR.G | Perpetual-Discount | 41,295 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 5.37 % |
| BAM.PR.N | Perpetual-Discount | 40,200 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-04-10 Maturity Price : 21.12 Evaluated at bid price : 21.12 Bid-YTW : 5.67 % |
| There were 21 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| NA.PR.E | FixedReset Disc | Quote: 20.19 – 20.69 Spot Rate : 0.5000 Average : 0.3465 YTW SCENARIO |
| GWO.PR.S | Deemed-Retractible | Quote: 24.30 – 24.67 Spot Rate : 0.3700 Average : 0.2452 YTW SCENARIO |
| TRP.PR.E | FixedReset Disc | Quote: 16.90 – 17.20 Spot Rate : 0.3000 Average : 0.1980 YTW SCENARIO |
| MFC.PR.H | FixedReset Ins Non | Quote: 22.25 – 22.67 Spot Rate : 0.4200 Average : 0.3199 YTW SCENARIO |
| TD.PF.E | FixedReset Disc | Quote: 21.75 – 22.21 Spot Rate : 0.4600 Average : 0.3708 YTW SCENARIO |
| GWO.PR.P | Deemed-Retractible | Quote: 24.80 – 25.09 Spot Rate : 0.2900 Average : 0.2089 YTW SCENARIO |
TRP.PR.G yielding 6.04%
This is based on constant current GOC 5 year of 1.55% and spread of 2.96, right?
Why? Do you get markedly different results when using the yield calculator for FixedResets?
Hi all,
Question again pls. Was thinking now is a good time to buy some HPR on the dip. Will there be a little capital appreciation after the sell off in Dec? Any advice pls would be appreciated. Thanks again.
Will there be a little capital appreciation after the sell off in Dec? Any advice pls would be appreciated.
My advice is not to attempt market timing.
ok. Thanks again.