The new issue of Royal Bank 4.5% perpetuals announced April 17 settled today and met a very poor reception, trading in a range of 24.48-60 and closing at 24.49-50, 20×12.
I’m at a bit of a loss to understand this and can only speculate that the continuing BCE debacle has caused a little nervousness amongst retail, while institutional buyers may be filled up on Royal after their string of new issues:
| RY Issues Tracked by HIMIPref™ | ||
| Ticker | Listing Date | Shares |
| RY.PR.K | 1998-4-27 | 12,000,000 |
| RY.PR.W | 2005-01-31 | 12,000,000 |
| RY.PR.A | 2006-04-04 | 12,000,000 |
| RY.PR.B | 2006-07-20 | 12,000,000 |
| RY.PR.C | 2006-11-01 | 8,000,000 |
| RY.PR.D | 2006-12-13 | 10,000,000 |
| RY.PR.E | 2007-01-19 | 10,000,000 |
| RY.PR.F | 2007-03-14 | 8,000,000 |
| RY.PR.G | 2007-04-26 | 10,000,000 |
RY.PR.K is retractible – all the others are perps.
However, it might not matter a lot whether the market is fed up with the name or not! Examining the figures for Royal’s tier one capital limits, we see that they had room to issue preferred of $520-million on February 6 (after the issuances of RY.PR.C, RY.PR.D & RY.PR.E and redemption of RY.PR.O) and with the 18-million shares issued since then have used up $450-million of that. That leaves a mere $70-million in issuance room and they might not be willing to go to market for such a paltry amount.
Note I will admit that I am somewhat at a loss to reconcile their Preferred Share Tier One Capital of $1,345-million at year end with their list of issues outstanding. The figure of $1,345-million is referred to in the MD&A on page 66 of the Annual Report – this table contains no mention of any preferred shares in Tier Two Capital, which is where I would expect to find the retractible issue RY.PR.K. Note 18 on Page 130 of the Report shows $1,050-million perpetuals, and $298-million “Preferred Share Liabilities”, specifically including RY.PR.K (Series N). So I guess that, somehow or other, they were able to include RY.PR.K in Tier 1 Capital.
So, given that the RY.PR.O has been redeemed, their Tier One Capital preferred situation now looks like this:
| Tier 1 Capital / Preferreds / Royal Bank | |
| Item | Value (million) |
| Outstanding, year-end | 1,345 |
| Redeemed | (150) |
| Issuance | 1,150 |
| Current Total | 2,345 |
| Preferred Limit, as of Year-End 2006 | 2,415 |
All in all, they’re very close to their limit now, unless they boost their equity capital in other ways, like hiking ATM fees. But fear not! The RY.PR.K becomes redeemable at par 2007-08-24 (although not retractible by holders until 2008-8-24) and eliminating this issue with open up another $300-million of issuance room.
| RY.PR.G & Comparatives | |||
| Data | RY.PR.G | BNS.PR.M | BAM.PR.? |
| Price due to base-rate | 22.47 | 22.49 | 23.29 |
| Price due to short-term | -0.21 | -0.21 | -0.21 |
| Price due to long-term | 1.29 | 1.29 | 1.27 |
| Price to to Cumulative Dividends | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (2) | 0.00 | 0.00 | -0.62 |
| Price due to Liquidity | 1.53 | 1.53 | 1.48 |
| Price due to error | -0.06 | -0.06 | 0.08 |
| Price due to Credit Spread (low) | 0.00 | 0.00 | -0.62 |
| Curve Price (Taxable Curve) | 25.02 | 25.04 | 24.68 |
| Dividend Rate | 1.125 | 1.125 | 1.1875 |
| Quote 4/26 | 24.49-50 | 24.89-92 | 25.00 Issue |
| YTW (at bid, after tax) | 3.66% | 3.61% | 3.79% |
| YTW Date | Infinite | Infinite | 2016-8-30 / Infinite |
| Credit Rating (DBRS) | Pfd-1 | Pfd-1 | Pfd-2(low) |
| YTW (Pre-Tax) | 4.61% | 4.55% | 4.76% |
| YTW Modified Duration (Pre-Tax) | 16.23 | 16.31 | 15.95 |
| YTW Pseudo-Convexity (Pre-Tax) | 1.15 | -30.29 | -55.80 |
It is not my habit to include such an incomparable comparable as the BAM new issue, but I just couldn’t resist! BAM has a boatload of preferreds outstanding, and if we can blame overall market tone and angst for today’s RY.PR.G debacle, then the May 9 BAM settlement could prove interesting in the extreme.
The securityCode for RY.PR.G is A45016, replacing the preIssue code of P87500. A reorgDataEntry has been processed.
What do you want to bet that the greenshoe won’t be exercised? Instead it looks like the underwriter has just now lined up a bunch of bids to cover its short position. Perhaps the $0.50 cent per share profit will provide prove comforting against the fact that they so badly botched the pricing, and screwed their clients in the process.
Don’t forget underwriting fees!
You’re very harsh, Drew, anyone would think you bought some! I don’t think the pricing, in and of itself, was particularly aggressive: on announcement date I thought (via HIMIPref) they were fairly priced (curve price of about $25.10) and on listing date I still think they’re worth about $25.00. I think the underwriters simply ran into timing problems with retail too worried about BCE and institutional demand exhausted by the run of issuance.
But that’s just speculation on my part. Marketting of the deal could well have been botched if the various salesmen decided that this one would just sell itself. I don’t know.
At current prices – down again today – I’d say that anybody looking for value in the PerpetualDiscount segment should have these on a shortlist.
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