Bank of Montreal has announced:
its intention to redeem all of its 20,000,000 outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 40 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 40”) for an aggregate total of $500 million on May 25, 2022. The redemption has been approved by the Office of the Superintendent of Financial Institutions.
The Preferred Shares Series 40 are redeemable at the Bank’s option on May 25, 2022 (the “Redemption Date”) at a redemption price of $25.00 per share. Payment of the redemption price will be made by the Bank on the Redemption Date.
Separately from the payment of the redemption price, the final quarterly dividend of $0.28125 per share for the Preferred Shares Series 40 announced by the Bank on March 1, 2022 will be paid in the usual manner on May 25, 2022, to shareholders of record on May 2, 2022.
Notice will be delivered to holders of the Preferred Shares Series 40 in accordance with the terms thereof.
BMO.PR.C is a FixedReset, 4.50%+333, that commenced trading 2017-5-25 after being announced 2017-2-28. It has been tracked by HIMIPref™ and has been assigned to the FixedResets (Premium) subindex.
Thanks to Assiduous Reader niagara for bringing this to my attention!
Get ready for some version of a 5.5% – 5.75% BMO new issue, probably a perpetual. And watch it trade in the $22 – $23 range less than a month later . . . Go BMO Go!
Yields go up so stocks and duration assets go down, which punishes market sentiment, which leads to a run to bonds, which pushes yields down which improves the risk sentiment leading to an increase in stock and duration asset prices. Which will then lead to yields going up….
that’s a pretty winding road, skeptical! kinda makes sense . . . as long as there’s no potholes along the way! lol . . . sadly, the daily “noise” is generally the result of individual items, usually media propagated. Yesterday, good old Tiff kinda confirmed a 50bp hike coming up, and at the same time kinda confirmed that 75bp isn’t going to happen this time. Apparently the market was well on the way to pricing the 75bp move in, so today it’s taking it back down to 50bp. Of course, Lavrov suggesting that a nuclear war is in the cards hasn’t helped much either. At the end of the day, we always have “assorted stupidity” to deal with in the markets. When Trump was in charge, we had it every day . . . then, he got booted and things calmed down. Covid seemed to be manageable as well. But right now, the rate hike thing, the Putin thing, the Covid in China thing . . . omg . . . investors don’t want to be in anything much; as always, it’ll pass, but for now . . . the world is seemingly coming to an end. Good thing it actually isn’t coming to an end; it needs to be intact so that all the bad investment decisions being made now can translate into profits for everyone who visits this blog!
ratchetrick, does BMO need to issue pref shares from Tier 1 capital perspective?
Ratchetrick: “Get ready for some version of a 5.5% – 5.75% BMO new issue, probably a perpetual…”
Niagara: …”does BMO need to issue pref shares from Tier 1 capital perspective?
One fund manager at the end of February was already referring to a rumored new issue of a 5-5.25 BMO Limited Recourse Capital Note (“LRCN”) and how (they felt) it had led to a sell off in existing LRCNs from issuers that were able to come to market with tremendous demand for sub 4.3% coupon rates. As things turned out, only 8 days later March 8) BMO announced its $ 750,000 LRCN but at a much higher 5.624% / GOC + 4.03.
The .75 billion LRCN is more than sufficient to pay for the redemption of BMO.PR.C, so it begs the question whether there is any incentive in BMO coming back to the market, given present conditions.
Hi guys! The thing I’m thinking is if rates are going to rise over several months or more…. then a perpetual issued now at 5.5 or a bit more, could look quite prudent in a year or so, if we’re into 7%ish yields by then. Maybe the thinking is “just do it while we can”? idk … these banks do a good job looking after their best interests, especially in this area of debt issuance!
7% would destroy the economy or there would be such rampant inflation to justify that
If investment grade preferreds are paying 7%
imagine what ordinary businesses would be paying or long term debt of BBB or less companies, mortgages etc
But heck you never know
I remember buying preferreds at 9% 30 years ago
But there is far too much debt now to sustain that unless we go full monty money printing
We’re already at 5.5% … is 7% really that far off? A couple 50bp rate hikes, which seem imminent… and we’re pretty close?!
7% preferreds from banks/insurance companies mean about 9.5% pre tax, after accounting for the new surtax on banks and insurance companies.
I have a feeling that if we go to 7%, it would not be because of rise in rates but because of an unfavorable market event. Rising rates in a favorable market shrink credit spreads and we saw that back in 2021 fall/early winter when a few perpetuals were issued in the 4.5 to 4.75 range. Reminiscent of 2007 when several preferreds were issued at 4.5 to 5% range by banks and insurance companies. At that time the Goc5 was in the 3 to 4% range but the spreads were virtually non existent. I gleaned this from archives of this site and other places and of course James will have the depth and width on historical context of that time.
The past few months seem to suggest that if credit in general is getting destroyed, preferreds will get clobbered even if they are of the of floating rate variety issued by investment grade issuers. Doesn’t mean it can’t change on a dime. After all, inverse bond ETFs are thriving and generating windfall for those short bonds. Perhaps the confused status of preferreds is the reason.
The market sell off is probably signaling that a rise in rates isn’t salubrious for the economy and it’s going to cause major issues related to employment, growth and asset prices.
The scariest thing is that for major stock indices, we are not even down to pre-pandemic levels, while the ever worrying preferreds have managed to return all the hefty gains of the pandemic. And some more.
Some excellent insight there, skeptical! The only thing I’d add might be a quick review of what happened in 2008, when perpetuals were the alternative to floaters. The tank job started when issuer yields were around 5%, and with each passing day, the secondary market yields climbed steadily, easily surpassing that. But, and here’s the part that made me crazy then . . . an already bad situation was totally exacerbated by issuers, mainly the banks, rushing to the market to lock in cash at rates they clearly saw as rising. I specifically remember a short stretch, when one by one, we had a 5.4% issue, then a 5.5, from the schedule 1’s . . . then a few days later a 5.75% from I believe it was Laurentian . . . culminating a few days later with a 6% from National Bank. It was a veritable flooding of the pref market that just caused the parade of secondary selloffs to keep on going. From an investing standpoint, it was as close to sickening as one could imagine. Sooooo . . . can it happen again? Count on it. Just a few thoughts based on the reality of the past!
Thanks for the 2008 recap. I was not a participant at that time. But couple of differences at this time are- the generally favourable conditions of the banks and financial institutions and the availability of LRCNs, at least to some extent. Right now, these companies are flush with cash and they have been redeeming issues across the board. Can this change? Absolutely.
Till a month ago, even the pipelines, both Enb and TRp were redeeming preferreds because of alternative means of financing.
What will change this?
Widening of credit spreads and breakdown of credit markets. Then the poor preferred holders will be offered juicy yields for 5 years.
Both the recent IFC and BEP issues point in that direction. Both now trade well below par.
Are we there yet? No, but we are going in that direction.
Skeptical, you have a very clear picture of the reality at this particular point in time, I’d say! LRCNs? You’re right . . . they weren’t around then, and they’re definitely a factor now. Not sure how the banks will manipulate their Pref/LRCN behaviour, but it’ll be interesting to watch (and hopefully participate in effectively!) As far as banks being “flush with cash” . . . they were in 2008 as well; in fact, they seemingly always have been. Earning $1B+ every quarter for years has certainly added to their ~ahem~ financial stability. But make no mistake . . . this situation has absolutely ZERO effect on their attitude towards manipulating the credit markets. They’re the best at doing what they do . . . probably in the entire world.