Royal Bank of Canada has announced:
the applicable dividend rates for its NonViability Contingent Capital (NVCC) NonCumulative 5Year Rate Reset First Preferred Shares, Series BD (the “Series BD shares”) and NVCC NonCumulative Floating Rate First Preferred Shares, Series BE (the “Series BE shares”).
With respect to any Series BD shares that remain outstanding after May 24, 2020, holders will be entitled to receive quarterly fixed rate noncumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).
The dividend rate for the 5year period from and including May 24, 2020 to, but excluding, May 24, 2025 will be 3.20% for the Series BD shares, being equal to the 5Year Government of Canada bond yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BD shares.
With respect to any Series BE shares that may be issued on May 24, 2020, holders will be entitled to receive quarterly floating rate noncumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).
The dividend rate for the floating rate period from and including May 24, 2020 to, but excluding, August 24, 2020 will be 3.01% for the Series BE shares, being equal to the 3month Government of Canada Treasury Bill yield determined as of April 24, 2020 plus 2.74%, as determined in accordance with the terms of the Series BE shares.
Beneficial owners of Series BD shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on May 11, 2020.
RY.PR.J is a FixedReset, 3.60%+274, NVCCcompliant, that commenced trading 2015130 after being announced 2015126. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., RY.PR.J and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average breakeven rates for extant pairs will provide a guide for estimating the breakeven rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.
Click for Big
The market shows odd differences in its enthusiasm for floating rate product; the implied rates until the next interconversion are generally above the current 3month bill rate as the averages for investmentgrade and junk issues are at +0.82% (ignoring the outlier FTS.PR.H / FTS.PR.I, which Exchanges 202061) and +0.28% (ignoring the outliers EMA.PR.A / EMA.PR.B (Exchanges 2020815), and TA.PR.A / TA.PR.D (Exchanges 2021331)), respectively. The utility of this approach, frankly, has been compromised in recent weeks by continued poor quality of closing quotes provided by the Toronto Stock Exchange; dispersion of the results is even higher than normal!
The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the RY.PR.J FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Estimate of FloatingReset (received in exchange for RY.PR.J) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
1.25% 
0.75% 
0.25% 
RY.PR.J 
14.95 
274bp 
15.74 
15.24 
14.74 
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade at a slightly higher price than their FixedReset counterparts, RY.PR.J, although this conclusion is more speculative than usual due to the poor quality of the quotes. Therefore, it seems likely that I will recommend that holders of RY.PR.J make their own decision based on their own portfolios and financial circumstances, with a very slight bias towards the FloatinReset option, but I will wait until it’s closer to the May 11 notification deadline before making a final pronouncement. I will note that once the conversion period has passed it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
This entry was posted on Friday, April 24th, 2020 at 10:36 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
RY.PR.J To Reset At 3.20%
Royal Bank of Canada has announced:
RY.PR.J is a FixedReset, 3.60%+274, NVCCcompliant, that commenced trading 2015130 after being announced 2015126. The issue is tracked by HIMIPref™ and is assigned to the FixedReset (Discount) subindex.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., RY.PR.J and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated). Inspection of the graph and the overall average breakeven rates for extant pairs will provide a guide for estimating the breakeven rate for the pair now under consideration assuming, of course, that enough conversions occur so that the pair is in fact created.
Click for Big
The market shows odd differences in its enthusiasm for floating rate product; the implied rates until the next interconversion are generally above the current 3month bill rate as the averages for investmentgrade and junk issues are at +0.82% (ignoring the outlier FTS.PR.H / FTS.PR.I, which Exchanges 202061) and +0.28% (ignoring the outliers EMA.PR.A / EMA.PR.B (Exchanges 2020815), and TA.PR.A / TA.PR.D (Exchanges 2021331)), respectively. The utility of this approach, frankly, has been compromised in recent weeks by continued poor quality of closing quotes provided by the Toronto Stock Exchange; dispersion of the results is even higher than normal!
The breakeven rate for the junk pairs has been relatively high recently; I confess I’m not quite sure what to make of it.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the RY.PR.J FixedReset, we may construct the following table showing consistent prices for its soonmaybeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade at a slightly higher price than their FixedReset counterparts, RY.PR.J, although this conclusion is more speculative than usual due to the poor quality of the quotes. Therefore, it seems likely that I will recommend that holders of RY.PR.J make their own decision based on their own portfolios and financial circumstances, with a very slight bias towards the FloatinReset option, but I will wait until it’s closer to the May 11 notification deadline before making a final pronouncement. I will note that once the conversion period has passed it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
This entry was posted on Friday, April 24th, 2020 at 10:36 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.