4 Responses to “March 10, 2020”

1. Carrie says:

   March 10, 2020 at 8:15 pm

   A few thoughts and a question at the end:

   I notice that your Fixed Reset Premium issues are mostly not ‘premium’ anymore. You have also changed the maturity On those ‘discounted premiums’ from the call date to ‘plus 30 years’. I also flipped them to plus 30 years once they went below 25. Issues with floors I assume maturity at call. I suspect we’re not the only ones who do that. So that would explain why people pay up for them. All those people out there who had a 2 or 3 year time horizon are much safer in those issues as further rate cuts won’t really matter to them. Whereas a drop of half a percent on a 14 year duration investment will justify a 7% drop. That’s without spreads rising, which they are and we get a double whammy. Plus another .5% rate cut expected in June and I suppose we can expect another 7% drop on any fixed resets trading under $25.

   Anyway, that’s just my thinking out loud to see if this makes sense to anybody else. My question is this: Where do you now draw the line on what is premium and what is discount for fixed resets? Personally I use a cutoff of 4% reset rate and let a few honorary members at 3.8% on the list too. I will continue to call them ‘premium’ even though they are not because it’s going to get really bizarre if we get to only one premium issue existing in the ‘fixed reset-premium’ category.

2. jiHymas says:

   March 10, 2020 at 9:42 pm

   I notice that your Fixed Reset Premium issues are mostly not ‘premium’ anymore. You have also changed the maturity On those ‘discounted premiums’ from the call date to ‘plus 30 years’.

   As noted, the maturity details form part of the “YTW [Yield-to-Worst] Scenario”; i.e., that sequence of event where the issuer does not default but uses its embedded options to minimize the yield that will be realized by the purchaser. Sometimes the result of these manipulations is surprising; there are many instances, for instance, in which an issue is priced below par but the YTW Scenario is for a call on the next Exchange Date; this is generally due to large enough mismatches between the current and the expected dividend.

   My question is this: Where do you now draw the line on what is premium and what is discount for fixed resets?

   The more searching question is “When do you draw the line?”. If we look at RY.PR.R, for instance, we see that it is labelled above as a FixedReset Premium, even though it is bid at 24.40. However, on February 28 it was bid at 25.72 and I only shuffle things between the subindices at month-end. And, honesty compels me to confess, I haven’t done my February month-end duties yet because I’ve been busy answering routine questions from the auditors.

   Issues with floors I assume maturity at call. I suspect we’re not the only ones who do that.

   I claim that that is a mistake. An important part of the rationale behind assuming a call is the ability of issuers to refinance with a lower coupon. This ignores the effect of issue costs, which include a 3% selling commission and prospectus costs, but you have to draw the line somewhere!

   So you’re looking to issue something new which is worse for the investor than the issue currently trading below par, but which will sell at par. I don’t think that’s reasonable.

   For example, take BIP.PR.E. This is a FixedReset, 5.00%+300M500, ROC, that commenced trading 2018-1-23. It is now bid at 21.76 to yield 5.73% to perpetuity. I will agree that this is an extreme example, but I suggest it is unreasonable to assume it will be called at the next opportunity.

   it’s going to get really bizarre if we get to only one premium issue existing in the ‘fixed reset-premium’ category.

   There were a couple of times prior to 2007 when the “Perpetual-Discount” (Straights trading below 25.00) sub-index disappeared completely! It really mucked up my Seniority Spread calculations!

3. mbarbon says:

   March 11, 2020 at 1:39 pm

   Just wondering given things mentioned above, namely

   1. The possibility of a company going broke, and thus no return of capital and no future dividends…

   2. Changing the call date to 30+ Years.

   Plus adding

   1. Low interest rates are going to me here for a while given GOC30y is at 0.9%

   2. Virtually no company has redeemed the rate reset bonds at anything close to par.

   Is there any value in coming up with the “current value” of the future stream of dividends for the next 30 years, and comparing that to the current value of the preferreds.

   By doing this, you can then compare this calculated value against the mkt value of the preferred and any residual would be the “risk” associated with that company still being around for a return of capital + continuation of dividends after 30 yrs ….

4. skeptical says:

   March 11, 2020 at 2:29 pm

   Just to change the mood, I was doing a simple math problem with my ten year old. The problem was:
   If you have $100 and spend 5% of it everyday, when will you have spent all the money?
   To my surprise, she got the right answer.

   That’s the positive way of looking at CPD and other sufferers of the preferred market. So long as businesses’ exist, we’ll never get to zero.

   🙂