BMO.PR.D To Be Redeemed

Bank of Montreal has announced:

its intention to redeem all of its 16,000,000 outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 42 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 42”) for an aggregate total of $400 million on August 25, 2022. The redemption has been approved by the Office of the Superintendent of Financial Institutions.

The Preferred Shares Series 42 are redeemable at the Bank’s option on August 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 $0.275 per share for the Preferred Shares Series 42 announced by the Bank on May 25, 2022 will be paid in the usual manner on August 25, 2022, to shareholders of record on August 2, 2022.

Notice will be delivered to holders of the Preferred Shares Series 42 in accordance with the terms thereof.

BMO.PR.D is a FixedReset, 4.40%+317, NVCC, that commenced trading 2017-6-29 after being announced 2017-6-20. It has been tracked by HIMIPref™ and is currently assigned to the FixedResets (Discount) subindex.

What makes this redemption fascinating is that yesterday BMO announced:

a domestic public offering of $500 million of Non-Cumulative 5-Year Fixed Rate Reset Class B Preferred Shares, Series 50 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 50”).

The Preferred Shares Series 50 will be issued to certain institutional investors at a price of $1,000 per share. Holders will be entitled to receive non-cumulative preferential fixed semi-annual dividends, as and when declared by the Board of Directors of the Bank, payable in the amount of $24.64400000 per share, to yield 7.376 per cent annually, for the initial period to, but excluding, November 26, 2027. Thereafter, the dividend rate will reset every five years at a rate equal to the then 5-Year Government of Canada bond yield plus 4.250 per cent.

Subject to regulatory approval, during the period from October 26, 2027 to and including November 26, 2027 and during the period from October 26 to and including November 26 every fifth year thereafter, on not less than 15 days nor more than 60 days’ notice, the Bank may redeem the Preferred Shares Series 50 in whole or in part at par, plus any declared and unpaid dividends.

Upon the occurrence of certain regulatory events and subject to regulatory approval, the Bank may, at its option and without the consent of the holder, at any time following such occurrence, on not less than 30 days nor more than 60 days’ notice, redeem the Preferred Shares Series 50 in whole but not in part at par, plus any declared and unpaid dividends.

BMO Capital Markets is acting as lead agent on the issue. The anticipated closing date is July 27, 2022. The net proceeds to the Bank from the sale of Preferred Shares Series 50 will be added to the general funds of the Bank and will be utilized for general banking purposes.

The Preferred Shares Series 50 will be offered by way of a prospectus supplement to the Bank’s short form base shelf prospectus dated March 11, 2022, to be filed on or about July 22, 2022 with the securities commissions and other similar regulatory authorities in each of the provinces and territories of Canada.

So the upshot is that BMO is issuing a FixedReset at +425 in order to fund a redemption of BMO.PR.D, a FixedReset +317. The redemption will cost $400-million; the new issue is worth $500-million. And yes, I know that the bank claims that “The net proceeds to the Bank from the sale of Preferred Shares Series 50 will be added to the general funds of the Bank and will be utilized for general banking purposes” but I find that statement somewhat suspicious in view of the timing of these two events.

To say this is unusual is to understate the issue. The only rationale I can think of was suggested by Addenda Capital’s Mark Kaminski In collaboration with François Desjardins, in a piece published in November, 2021:

To understand the rationale behind OTC preferred shares, we first need to look at an instrument that entered the financial market last year: the limited recourse capital note (LRCN).

There is a ceiling, as OSFI pointed out in its July 2020 ruling: LRCNs issued by a federally regulated bank can only fill up 50% of its AT1 bucket. By issuing OTC preferred shares, banks gain the ability to issue more LRCNs. Our understanding of the market’s thinking is that once OSFI is comfortable that there is an established OTC preferred share market, it will raise the LRCN limits.

In essence, the banks are moving regulatory capital from retail investors (i.e. exchange-traded preferred shares) to institutional investors. In our view, OSFI is interested in seeing an established OTC preferred share market in the event that those LRCNs would be converted to preferred shares.

Well, if the coupon and reset rate on the new issue is any indication, it’s going to cost the banks a hell of a lot of money to establish an OTC market for preferreds. And, if the market has any sense at all (not always a good bet), then the yields on LRCNs will be equivalent to these OTC issues, since the LRCN is only an OTC preferred that has been dressed up like a bond to bamboozle the clients of portfolio managers who like to bamboozle their clients.

Surely it would make more sense to insist that an Exchange listing be sought for the preferred shares underlying the LRCNs? One could even insist that issuance of an LRCN should involve the issuance of X shares to the vehicle through which this charade is being funnelled, with another X shares being issued to the public with an Exchange listing. Or would that make the bamboozlement too transparent?

One way or another, something very odd is happening, with no disclosure made to the investing public.

Thanks to Assiduous Reader CanSiamCyp for bringing the redemption to my attention, and for previously bringing the OTC issue to my attention.

8 Responses to “BMO.PR.D To Be Redeemed”

  1. xalier says:

    Thanks for posting the information on the BMO.PR.D redemption and the OTC preferred shares.

    I would appreciate a clarification on the OTC preferred share announced yield. I am confused about the way the yield of 7.376 per cent annually is calculated based on a dividend paid semi-annually of $24.64400000 paid on each $1000 share. Simplifying and ignoring compounding, I calculate the yield to be about 24.644*2/1000 or ~4.93 per cent annually.

    For example for BMO.PR.F, the details from the prospectus are:

    $25.00 per Preferred Share Series 46 to yield initially 5.10% per annum based on a quarterly dividend of $0.31875.

  2. jiHymas says:

    I am confused about the way the yield of 7.376 per cent annually is calculated based on a dividend paid semi-annually of $24.64400000 paid on each $1000 share.

    Good eye! You can find the prospectus on SEDAR by searching for “Bank of Montreal Jul 22 2022 18:29:09 ET Prospectus (non pricing) supplement (other than ATM) – English PDF 1218 K”.

    The holders of Non-Cumulative 5-Year Fixed Rate Reset Class B Preferred Shares, Series 50 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 50”) of Bank of Montreal (the “Bank”) will be entitled to receive fixed rate noncumulative preferential cash dividends, as and when declared by the board of directors of the Bank (the “Board of Directors”), subject to the provisions of the Bank Act (Canada) (the “Bank Act”), for the initial period from and including the closing date to, but excluding, November 26, 2027 (the “Initial Fixed Rate Period”), payable semi-annually on the 26th day of May and November in each year, or if such day is not a business day, on the next business day, at a rate per annum equal to 7.373% or $73.73 per Preferred Share Series 50 per annum. The initial dividend, if declared, shall be payable on November 26, 2022 and shall be $24.64400000 per share, based on the anticipated closing date of July 27, 2022. See “Details of the Offering”.

  3. niagara says:

    Manulife has chosen to reset MFC.PR.I:
    https://www.manulife.com/en/news/manulife-financial-corporation-announces-conversion-privilege-of-non-cumulative-rate-reset-class-1-shares-series-9.html

    As of 11:30am, this pref is down $1 on the news. Seems a bit of an extreme reaction. The new fixing rate is Aug 22. Based on current GOC5yr ( I know, extrapolating current yields into the future is a crap shoot), the new divvy will be 5.5%….about 5.8% based on the current mkt price.

  4. niagara says:

    Manulife has chosen to reset MFC.PR.I:
    https://www.manulife.com/en/news/manulife-financial-corporation-announces-conversion-privilege-of-non-cumulative-rate-reset-class-1-shares-series-9.html

    As of 11:30am, this pref is down $1 on the news. Seems a bit of an extreme reaction. The new fixing rate is Aug 22. Based on current GOC5yr ( I know, extrapolating current yields into the future is a crap shoot), the new divvy will be 5.5%….about 5.8% based on the current mkt price.

  5. stusclues says:

    “Seems a bit of an extreme reaction”

    According to Implied Volatility Theory, it is still too expensive at $23.78.

  6. niagara says:

    “According to Implied Volatility Theory, it is still too expensive at $23.78.”

    I understand implied volatility as it pertains to option pricing but I must admit to be rather ignorant on how it applies to pricing preferreds. James has kindly posted a paper on it (and a calculator) so I shall endeavour to read that upon return from my first vacation in three years.

    For now, I am quite happy with the prospect of getting a 5.75-6% Divvy from an investment grade name for the next 5 years. Of course, I may regret this a year from now in GOC 5yr is 4.75%.

  7. stusclues says:

    “James has kindly posted a paper on it (and a calculator)”

    Yep. IMO James’ work on IVT is a stellar intellectual contribution to the evaluation of pricing of preferred shares. At today’s, closing prices MFC.PR.I is the most relatively expensive of available MFC fixed reset issues. Issues .F/L/M/N are all dramatically cheaper (better relative buys).

  8. […] action, particularly the pop after 4pm, was probably due to tomorrow’s redemption of BMO.PR.D and reinvestment of the proceeds by index and other […]

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