In the early days of FixedReset trading, investors would blithely trade FixedResets as if they were guaranteed to be called on their first Exchange Date.
I tried to warn them!
Look for the research link!
Research: Market Spread Risk for FixedReset Premiums
James:
A reset for the next 5-year cycle: BPO.PR.G
https://bpy.brookfield.com/press-releases/bpo/brookfield-office-properties-announces-reset-dividend-rate-and-conversion
Cheers!
[…] Thanks to Assiduous Reader CanSiamCyp for ensuring I was aware of this. […]
When this pref share category was introduced, it was in response to the loss of confidence in the investibility of perpetuals. Investors watched their valuations tank, in the wake of the credit crash, among other issues, and this class of preferred share became very challenging to continue to issue successfully. So, the fixed reset pref was the answer; it eliminated the “locked in low” dividend yield issue, and with a tenure of 5 years, the shares were issued with an understanding that they’d be redeemed in 5 years, essentially “rolled over” by the issuer, thus protecting the capital part of the investment. Essentially, “pain” was not guaranteed to be gone . . . but the maximum duration of the bleeding was 5 years, then the investment would cash out at cost . . . and with the dividend in the meantime, pain would be “mostly gone”.
But, James’ warning was indeed one to be heeded. As it turns out, fixed resets are rarely being redeemed, only in the odd case, when it’s in the obvious best interest of the issuer . . . otherwise, they simply rollover without redemption at the current 5 year rate, plus any adders per the original issue.
iow . . . a fixed reset pref is really just another redeemable perpetual (with some cute bells and whistles!) . . . so . . . stock up on bandages!
I tried referring to them as Perpetual Resets to emphasize the extension risk … but the nomenclature never caught on.
“Those willing to lend on a five-year
basis should invest in issues that will actually mature in five
years.”
Great line! . . . That article was a very timely piece when you released it some 14 years ago, still very relevant in so many ways today, . . . should be read by everyone who goes anywhere near fixed income as an investing category imo!
Think I should change my handle here from “ratchetrick” to “perpresetrick” . . . !!
“Never-the-less, there is a strong feeling in the investment community at large that these are, effectively, short term instruments and there is certainly a high demand for them.”
Well, those days are most certainly behind us 🙂
“Comparing one FixedReset to another FixedReset is a difficult, but not impossible process; the analysis can be performed with sufficient likelihood of success that it is worth doing.”
Given that “Perpetual Resets” are indeed mostly viewed as such nowadays, the case for buying and holding them as a part of an investment portfolio ought to include, in addition to “clipping our coupons”, the gains to be made in arbitrage from one mis-priced issue to another. We can come to own own conclusions about the value of this activity.
Calling of discounted Perpetual Resets (maybe it can still catch on James!) is an unlikely event made somewhat more likely by the advent of LRCNs. It behooves us to think about it (for example, most recently I, thankfully, concluded that TA.PR.F would be extended and thereby made the obvious switch to TA.PR.D) but not allow it to dominate our assessment of future returns as was vigorously debated here sometime ago in the context of Dundee preferred shares (i.e. buying the lowest priced issue in a family of issues because it has the most upside to par will not, usually, lead to maximum returns).
stusclues . . . you’re lucky TA just decided to extend the F prefs, and continue with the D’s! (as opposed to attempting to redeem them miles below par, with an immediate switch to a new, higher yield issue, at $25/sh) . . . although that little play ultimately failed, the fact that some CFO conjured it up, and actually attempted to execute it brings the entire pref share category into “viability” question (at least at Transalta!)
“although that little play ultimately failed, the fact that some CFO conjured it up, and actually attempted to execute it brings the entire pref share category into “viability” question (at least at Transalta!)”
Is this a joke? If so, I fail to get it.
Every issuer needs to decide whether, or not, to call or extend each and every issue. I should hope that they talked about it. I would hope that “some CFO” was involved, hopefully it was Transalta’s.
In this case, it didn’t make sense to call it. They didn’t. That was predictable. Seems like the system works, more or less.
“although that little play ultimately failed, the fact that some CFO conjured it up, and actually attempted to execute it brings the entire pref share category into “viability” question (at least at Transalta!)”
Is this a joke? If so, I fail to get it.
I think ratchetrick is referring to Transalta’s Sleazy Exchange Offer Attempt
Thanks James for deciphering the reference made by ratchetrick. I’m getting a fresh Americano and starting the journey down the rabbit hole.
“I think ratchetrick is referring to Transalta’s Sleazy Exchange Offer Attempt”
Well that makes sense!