Royal Bank has announced:
a domestic public offering of $200 million of Non-Cumulative, 5 year rate reset Preferred Shares Series AP.
The bank will issue 8.0 million Preferred Shares Series AP priced at $25 per share and holders will be entitled to receive non-cumulative quarterly fixed dividend for the initial period ending February 24, 2014 in the amount of $1.5625 per share, to yield 6.25% annually. The bank has granted the Underwriters an option, exercisable in whole or in part, to purchase up to an additional 3.0 million Preferred Shares at the same offering price.
Subject to regulatory approval, on or after February 24, 2014, the bank may redeem the Preferred Shares Series AP in whole or in part at par. Thereafter, the dividend rate will reset every five years at a rate equal to 4.19% over the 5 year Government of Canada bond yield. Holders of Preferred Shares Series AP will, subject to certain conditions, have the right to convert all or any part of their shares to non-cumulative floating rate preferred shares Series AQ (the “Preferred Shares Series AQ”) on February 24, 2014 and on February 24 every five years thereafter.
Holders of the Preferred Shares Series AQ will be entitled to receive a non-cumulative quarterly floating dividend at a rate equal to the 3-month Government of Canada Treasury Bill yield plus 4.19%. Holders of Preferred Shares Series AQ will, subject to certain conditions, have the right to convert all or any part of their shares to Preferred Shares Series AP on February 24, 2019 and on February 24 every five years thereafter.
The offering will be underwritten by a syndicate led by RBC Capital Markets. The expected closing date is January 14, 2009.
January 14 will be a busy day! The new NA 6.60%+463 and TD 6.25%+437 issues will also be settling then.
Does your opinion on these issues change now that they’re coming out with a current yield in the same range as a perpetual? As an example, RY.PR.F has a current yield of between 6.2% and 6.3% right now. It seems to me that the equation shifts to being a bet on interest rate direction more than anything else. I’m interested in other views on this.
Does your opinion on these issues change now that they’re coming out with a current yield in the same range as a perpetual?
Tricky question!
My opinion has not changed: the inflation protection is worth about one-half of the Canada 5-30 term spread, which is now 180bp as interest, equal to about 130bp as dividend; half that is 65bp.
The potential for capital gain on the perpetuals is worth about 15bp.
Net the two figures, I’d say the Fixed-Resets have about a 50bp advantage over PerpetualDiscounts right now. So – speaking in very rough terms, as I’m sure you’ll appreciate – given a yield of 6.25% on the Fixed-Resets, I’m indifferent to a PerpetualDiscount of the same name yielding
5.75%. 6.75%.Therefore, in the absence of a view on future interest rates, I prefer these new Fixed-Resets (which are cheap to other fixed-resets) to RY.PR.F (which is expensive to other PerpetualDiscounts).
Why would anyone change series AP into or for series AQ? The five year bond rate will be higher than 3 mo. treasuries and the 4.19%+ applies to both
The five year bond rate will be higher than 3 mo. treasuries
Not necessarily!
Why would anyone change series AP into or for series AQ?
The rate on Series AQ will change quarterly based on 3-month bills, while the rate on AP is set in 5-year stages.
[…] although Fixed-Resets are (not surprisingly) reacting poorly to the flood of new issuance (RY, 6.25%+419, NA, 6.60%+463, TD, 6.25%+437) at higher […]
Please note the correction in my response to meander. PerpetualDiscounts should yield 50bp more than FixedResets of the same name for indifference, not 50bp less.
[…] a Fixed-Reset 6.25%+419 issue announced January 6, has settled successfully, closing at 25.30-33, 30×20, after trading […]