Assiduous Reader prefhound commented:
May I be baffled at the relative prices/yields of the two Yellow Pages Prefs?:
YPG.PR.A closing $19.80; Dividend $1.0625; Retractible Dec 31, 2012 for a YTM = 11.1%.
YPG.PR.B closing $11.75; Dividend $1.25; Retractible Jun 30, 2017 for a YTM = 17.1%
We are used to flaky pref prices when the lower priced issue has a smaller dividend, but here the Pref A has a lower dividend and lower current yield than the Pref B (5.4 vs 10.7%) — and that is before its lower capital gains potential!
If it is a yield curve difference (due to the extra 4.5 years for the pref B), then YPG.PR.B yields 11.1% through Dec 31, 2012 and 26.5% for the period 2013-retraction. Should we conclude that the company will be fine for 3 years and then fall apart in the subsequent five?
BAM and BPO retractible prefs of different maturity dates often have very similar yields to maturity, but not YPG. The YPG.PR.B yield is often more than PR.A, but the current 6 points seems absurd. If both Pref A and Pref B had the same yields to retraction, the Pref B should be $16.82 — more than 40% higher!
I smell arbitrage potential here, but am not sure how long it would take to sort out. Do you have any special insight into this pair?
… and I responded …
I think it all comes down to mortgages.
There is a very real preferred habitat amongst retail investors for short-term bonds, which are usually defined as bonds with five years or less to maturity, which just happens to be the term of most Canadian mortgages.
When you add in the fact that the number of watchers is reduced dramatically by the Pfd-3(high) rating, I think you have an explanation.
You are quite right that BPO retractibles all yield in the same ballpark – but that ballpark is the “penalty yield” ballpark … it is, perhaps, best thought of as a company that is not getting the benefit of the five-year cliff.
And BAM’s just plain wierd.
I suspect that any rationalization of the YPG.PR.B yield will have to wait until 2011-12, when retail will start thinking of it as something with a maturity instead of one of them never get yer money back things.
As I have previously disclosed, the fund holds a position in YPG.PR.B, taken as an optimization trade after the downgrade of BCE.PR.I made me uncomfortable with the fund’s weighting in that name. It’s a relatively small position, with a portfolio weight within the bounds I consider prudent. Barring an increase in credit concern, I’ll hold the damn thing to maturity at a yield of 17+%!
Yellow Pages recently announced that:
it has extended the term of the $500 million tranche of its core revolving credit facility by an additional year to May 2012. Combined with the $200 million revolving tranche, the full amount of the $700 million core revolving credit facility now matures in May 2012. This facility can be used for general corporate purposes and serves as back-up to the commercial paper program.
With the combination of the core revolving credit facility and the $450 million credit facility established in 2008, Yellow Pages Income Fund has access to $1.150 billion in long term committed bank lines, providing ample liquidity to fund its operations and to refinance the Series 1 Medium Term Notes maturing in April 2009.
I note from their most recent Management Discussion and Analysis:
In April 2009, YPG will be repaying at maturity the series 1 medium term notes issued in April 2004 ($450 million) and currently intends to draw under the New Revolving Facility to refinance these notes. We will also continue to monitor conditions in the fixed income market.
…
YPG Holdings Inc. has a total of $300 million of Exchangeable Unsecured Subordinated Debentures outstanding (the Exchangeable Debentures). The Exchangeable Debentures have a maturity date of August 1, 2011 and are exchangeable at any time, at the option of the holder, for units of the Fund at an exchange price of $20.00 per unit.
So the exchangeable-ha-ha debs mature in 2011 – prior to retraction for YPG.PR.A, so fears regarding these two refinancings is not the issue.
The supplemental disclosures provide a breakdown of the maturities:
| Yellow Pages Debt Term Structure |
||
| Date | Amount | Market Yield |
| 2009-4-21 | $450-million | |
| 2011-2-28 | $150-million | |
| 2011-8-1 | $300-million | |
| 2012-12-31 Retraction YPG.PR.A |
$300-million | 11.21% (Dividend) |
| 2014-4-21 | $300-million | 8.36% |
| 2016-2-25 | $550-million | 8.57% |
| 2017-6-30 Retraction YPG.PR.B |
$200-million | 17.67% (Dividend) |
| 2019-11-18 | $250-million | 9.25% |
| 2036-2-15 | $350-million | |
The revolving credit line (of which $359-million is drawn) has maturities:
| Yellow Pages Credit Line Maturities |
|
| Date | Amount |
| 2011-5-8 | $450-million |
| 2012-5-25 | $200-million |
| 2011-5-21 | $500-million |
There is a significant refunding due between the two pref series … but it’s not as if the entire debt matures between the two issues’ maturities, at least! If they can refinance the April maturity (currently being refunded via the credit line) with a ten-year term, that will remove at least a little uncertainty.
I should note that a significant proportion of the YPG.PR.B yield is back-end-loaded; that is, dependent upon maturity at par. It’s only yield if you actually get the money!
Finally, I will note the DBRS Press Release of 2008-11-6:
The rating remains underpinned by the Company’s dominance as the incumbent directories publisher in Canada, a market which continues to maintain high usage rates in traditional print directories, and supports a meaningful and growing online directories and vertical media platform.
The rating is further supported by YPG’s industry leading EBITDA margins of roughly 55% and the Company’s strong liquidity position, as evidenced by good free cash flow generation (approximately $130 million for the latest twelve months ending September 30, 2008), over $600 million of undrawn availability under its $950 million committed bank facilities at the end of the third quarter of 2008, and capability and flexibility to refinance upcoming maturities (including $450 million in notes which mature in April 2009).
…
YPG’s free cash flow is expected to continue to demonstrate solid growth through 2010 as a result of the Company’s limited capital requirements and a gradual reduction in the distribution payout ratio as YPG prepares to become fully taxable on January 1, 2011.Through the end of 2008, DBRS expects YPG’s credit metrics to remain stable on a year-over-year basis, with DBRS-adjusted gross debt-to-EBITDA ranging between 2.90 times and 3.00 times. This is also expected to continue through 2009.
YPG is expected to continue to manage its balance sheet in a conservative manner, balancing strategic acquisitions and unit repurchases in line with its long-term unadjusted leverage targets, maintaining net debt-to-EBITDA between 2.80 times and 3.20 times (at September 30, 2008, this metric stood at roughly 2.90 times). These targets remain within the context of a strong investment grade rating when considering the Company’s favourable business risk profile and free cash flow capacity.
Both issues are tracked by HIMIPref™ and both are incorporated in the “Scraps” index due to credit concerns. The last mention of YPG.PR.A discussed its issue price and the last mention of YPG.PR.B commented on its hostile reception on its opening day in June 2007.
Very nice work on short notice!
A few last points:
1. The YPG.PR.B vs .A discrepancy is (a) getting worse and (b) mostly a 2009 phenomenon — i.e. during supposedly recovering markets, PR.B is wandering to its own drummer.
2. A YTW difference of 1% from pre-2009 makes a lot more sense than 6% and is consistent with your research tables above.
3. Your note about “significant proportion of the YPG.PR.B yield is back-end-loaded” is not as bad as it sounds: the current yield is 5 points higher than PR.A and both need six points of capital gain (although PR.B needs these six points for 4.5 more years!)
4. I wonder if the hostile reception to PR.B means dealer inventory abounds. Given the 2008 tracking of YTW with PR.A, it seems unlikely.
All in all, it seems worth an arb trade to me!
FWIW, as an Assiduous Watcher of YPG.PR.B, let me add that for the past few days an “iceberg” sell order at $11.75 was present, i.e. the apparent sell quantity was always 10 lots or less, but as a bid got filled and exhausted the available quantity for sell, another batch of to be sold shares appeared at $11.75. It never traded above that price for the past week.
Draw your own conclusions, I happen to be long the stock BTW.
Adrian
I wonder if the hostile reception to PR.B means dealer inventory abounds.
I wouldn’t think so. It’s been more than a year and a half now.
I have heard – but have not even seen any formal research myself, let alone verified it – that poor underwritings are persistent. If an issue doesn’t get into the strong hands of buy-and-hold investors at issue time, it never gets there and always trades strangely.
I cannot take a view on the validity of this claim. Use at your own risk!
for the past few days an “iceberg” sell order at $11.75 was present
This may well be related to the entire price decline. If a dealer gets a large order from an insistent client that he can’t cross, he’ll start moving the price gradually to where it can be done. Maybe that takes a few days, maybe it takes a month and a half; that’s between the trader and his client.
The client might say, for instance, ‘OK, you’ve got the order firm, but don’t take down the price by more than fifty cents a week.’
One may hypothesize:
i) huge sell order
ii) no buyers
iii) move down price until there is buyer interest, i.e. $11.75
iv) move the order in itsy-bitsy pieces.
Is it true? Well – all I can say is that if the market springs back up as soon as the iceberg is exhausted, I’ll consider it close enough to the truth for horseshoes. I’ve seen a lot of action – particularly in the past year – consistent with this sequence.
Thks James, Prefhound & Adrian, Very interesting observations, analysis and discussion.
James’ possible general explanation: “If an issue doesn’t get into the strong hands of buy-and-hold investors at issue time, it never gets there and always trades strangely.” might be the explaination for the long illogical discrepancy between BAM.PR.M & N (although perhaps over and even reversed since the last month or so).
I should perhaps keep this comment for another occasion but I am particularly curious about these “iceberg” sell (or buy) orders as I run into those from time to time like the Titanic.
Are those orders “automatized” or is there a trader watching all day long the stock? As soon as you buy the 2, 5 or 10 lots where the iceberg lies, it is almost immediately topped off with more lots. I sometimes play with it putting a bid one cent lower (sell order) or higher (buy order) to see it going almost immediately one cent in front of me. It will better me up to a certain point. I witdraw mine it goes back to where it was. I sometimes suspect it is one of you guys playing games.
Getting even further off topic but in the same direction, I also note with high volume ETFs (such as XFN) constant fairly large “buy” and “sell” orders (usually in 200, 100 or 66 lots) which apparently mirror each other and move together as if there is a trick whereby, at the end of the day, someone with very large pockets (the ETF manager itself I suspect) will be making money anyway just on the spread of its constant simultaneous “iceberg” sell and buy bids which move automatically along a corridor which must be established by some computerised real time calculations of the underlying stocks composing the ETF.
might be the explaination for the long illogical discrepancy between BAM.PR.M & N
I’ll agree with you there. That pairing is so close, however, that one would like to hope, at least, that it will arbitrage away relatively quickly.
“iceberg” sell (or buy) orders as I run into those from time to time like the Titanic.
Are those orders “automatized” or is there a trader watching all day long the stock? As soon as you buy the 2, 5 or 10 lots where the iceberg lies, it is almost immediately topped off with more lots.
Yes, instantaneously. See Icebergs, Retail & RS, particularly the update.
I sometimes play with it putting a bid one cent lower (sell order) or higher (buy order) to see it going almost immediately one cent in front of me. It will better me up to a certain point. I witdraw mine it goes back to where it was.
That’s not an iceberg, that’s an instance of algorithmic trading (although it could be an iceberg as well).
There’s lots of packagers of algorithmic trading software around; I’m told that ITG is one of the better ones.
Any trading rule you can express logically can be programmed. The one you are describing sounds like: “Place a bid for 100 shares at the lower of (i) the otherwise best bid + one cent, or (ii) 18.75 [or whatever]”
This sort of thing is very useful for market makers, since they can fulfill their responsibilities (to maintain tight spreads, and hopefully make a bit of money for their firm), while fiddling less with routine stuff.
Other algorithms can be as complex as you’re willing to programme.
Note that algorithmic trading is distinct from quantitative analysis. The former is simply execution, while the latter is computer-aided analysis. The desired prices for a trade are the output of quant analysis and are the input of algorithmic trading. When the two programme types are strapped together, then you’ve got automation with a vengeance!
I also note with high volume ETFs (such as XFN) constant fairly large “buy” and “sell” orders (usually in 200, 100 or 66 lots) which apparently mirror each other and move together as if there is a trick
I’m not familiar with this market; there are lots of ways people make money from the markets; and there are lots more ways peoply try to make money from the markets.
So I’m guessing, but I think it’s a pretty good guess to say that these are algorithmic basket trades. There’s an algorithmic programme constantly updated in the background, working out wherever it can sell a basket comprised of all the ETF constituents in their proper proportions. It then works out how much it can bid for the ETF itself and make a profit on the exchange. As soon as things line up, or the ETF order gets filled …. WHAM! The “basket trade” of underlying stocks gets executed. And hey, presto, that’s what keeps the ETF within a nickel of its fair value.
It wouldn’t be the ETF manager; it would be a specialist on the street (at a brokerage). It would not surprise me if there were several full time jobs on Bay Street devoted to the care and feeding of this process.
I hope this thread is not getting too stale for me to re-join.
I, too, notice the iceberg orders, but, as James defines it, I think most of them are algorithmic, rather than fundamental — which works to the fundamentalist’s advantage.
I, as a fundamentalist, am happy to take my fills from folks determined to sell or buy at/near some fixed price that makes no sense compared with other issues from the same company.
For example, recently I was arbitraging short PWF.PR.I against long PWF.PR.K and there was an “endless” supply of PR.K at $15. These issues differ in dividends by 20% but in price by 35%, Yields 7.3% vs 8.3% respectively means a relative mispricing of about $2.00. Now that the iceberg on PR.K seems to have been exhausted, the price is $15.30 and may move up higher rather quickly. By recognizing the iceberg, I knew I could buy at $15 and focussed on shorting the illiquid PR.I at a decent price.
From my perspective, the icebergs are at least a source of liquidity, and they don’t seem to prevent the market from finding rational relative yields over time (a few days) — except, so far, for a 45-day position in BMO.PR.K – Pr.H.
If the icebergs were based on fundamentals, they might be expected to constrain relative prices so that $1-3 opportunities would not arise. Therefore, I conclude that most of them are somehow based on recent trading prices, without regard to fundamentals. Furthermore, since the incidence of icebergs MAY vary with the issuer, they could be coming from the market maker, who might vary by issuer.
Yeah, the PWF.PR.Ks at $15 were a good deal!
I don’t believe that you can assign icebergs as being either fundamental or algorithmic in nature. They’re a trading technique, that’s all.
I see the situation as:
i) Institution decides to sell PWF.PR.K for good reasons or bad
ii) Dealer cannot find counterparty
iii) Take down the price until there’s interest
iv) Sell the position in itsy-bitsy pieces.
Which is to say, the same explanation I’ve hypothesized for YPG.PR.B.
Why an iceberg? Well, I don’t have the data for how many changed hands at that price. Call it 50,000 shares. If they’d shown an offer for 50,000 shares on the board, they would have scared away the buyers and been lucky to get $14 for them. So they showed it with an iceberg, 1000 shares at a time, so that no more than 1000 shares were ever showing as the offer.
In other words: a large sell order in an illiquid market caused a distortion of price. Sellers of liquidity – that is, those who were willing to fill the order by selling something else – made out like bandits.
Liquidity is expensive. In this case, you are suggesting that the price of liquidity is $2.00 per share.
On an unrelated thread, Assiduous Reader vanCoffee commented:
The prospectus is available from SEDAR, company “YPG Holdings”, dated 2007-6-1.
YPG.PR.B is retractible for $25 cash – a hard retraction rather than the more usual soft type. The section of the prospectus in question allows the company to force a soft-retraction into new units (or other securities) of a successor corporation to Yellow Pages Income Fund (YLO.UN).
This could indeed be a horrible occurance for YPG.PR.B holders if the reorganization in question is the result of financial stress, since the minimum conversion price is $2 / new share. This provision of a conversion price floor is – as far as I know – universal amongst retractibles; the issuers do not want to take the chance of a so-called death spiral.
When a company gets into trouble, this floor price can become highly important, as holders of IQW.PR.C found out.
[…] yields of YPG.PR.A and YPG.PR.A were discussed on PrefBlog last March; while the junkier credits have surged in price since then, they closed last night at […]