Market Action

June 1, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.36% 5.43% 35,195 14.96 2 +0.2894% 954.9
Fixed-Floater 5.59% 5.50% 141,295 15.01 7 +0.0191% 898.7
Floater 4.78% -3.64% 85,719 5.9 3 +0.1602% 1,050.9
Op. Retract 4.80% 3.85% 82,948 2.97 17 -0.1688% 1,022.7
Split-Share 5.03% 4.55% 187,553 4.05 15 -0.2839% 1,040.6
Interest Bearing 6.60% 6.54% 85,139 6.14 4 +0.1248% 1,045.1
Perpetual-Premium 5.36% 4.79% 132,692 5.88 34 -0.0909% 1,027.1
Perpetual-Discount 4.90% 4.94% 564,256 15.62 29 -0.4319% 993.3
Major Price Changes
Issue Index Change Notes
ELF.PR.G PerpetualDiscount -3.0872% Now with a pre-tax bid-YTW of 5.18% based on a bid of 23.23 and a limitMaturity.
LFE.PR.A SplitShares -2.0992% A recent addition to the SplitShare index, following its April addition to the HIMIPref™ universe. Now with a pre-tax bid-YTW of 4.73% based on a bid of 10.26 and a hardMaturity 2012-12-1.
GWO.PR.E OpRet -1.9985% Now with a pre-tax bid-YTW of 4.07% based on a bid of 25.50 and a call 2011-4-30 at 25.00. There is some uncertainty regarding GWO’s capital market plans.
MFC.PR.A OpRet -1.7301% Now with a pre-tax bid-YTW of 3.78% based on a bid of 25.56 and a softMaturity 2015-12-18 at 25.00.
SLF.PR.C PerpetualDiscount -1.2719% Now with a pre-tax bid-YTW of 4.94% based on a bid of 22.51 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.1038% Now with a pre-tax bid-YTW of 4.97% based on a bid of 22.40 and a limitMaturity.
BCE.PR.G FixFloat -1.0732% Exchange/Reset date is 2011-5-1 (exchanges with BCE.PR.H); until then, pays 4.35% of par. Closed at 20.28-92, 5×7 (new low of 20.25 hit today); the Hs closed at 22.75-94, 20×5.
CM.PR.J PerpetualDiscount -1.0066% Now with a pre-tax bid-YTW of 5.03% based on a bid of 22.62 and a limitMaturity.
BAM.PR.G FixFloat +1.4894% Exchange/Reset date is 2011-10-31 (exchanges with BAM.PR.E); until then, pays 4.35% of par. Closed at 23.85-00, 5×5; the Es closed at 24.85-00, 13×12. The Es are currently paying $0.09125 monthly = $1.095 p.a = 4.38% of par.
PWF.PR.H PerpetualPremium +1.5288% Now with a pre-tax bid-YTW of 5.02% based on a bid of 25.90 and a call 2012-1-9 at 25.00.
Volume Highlights
Issue Index Volume Notes
TD.PR.O PerpetualPremium 70,000 Now with a pre-tax bid-YTW of 4.79% based on a bid of 25.24 and a call 2014-11-30 at 25.00.
MFC.PR.B PerpetualDiscount 62,290 Now with a pre-tax bid-YTW of 4.71% based on a bid of 24.70 and a limitMaturity.
RY.PR.G PerpetualDiscount 57,236 Now with a pre-tax bid-YTW of 4.92% based on a bid of 23.10 and a limitMaturity.
CM.PR.I PerpetualDiscount 56,035 Now with a pre-tax bid-YTW of 4.90% based on a bid of 24.20 and a limitMaturity.
BNS.PR.M PerpetualDiscount 48,100 Now with a pre-tax bid-YTW of 4.89% based on a bid of 23.35 and a limitMaturity.

There were twenty-four other $25-equivalent index-included issues trading over 10,000 shares today.

Index Construction / Reporting

HIMI Index Performance, May 2007

Performance of the HIMI Indices for May was:

Total Return, May 2007
Index Performance
Ratchet -2.05%
FixFloat -4.70%
Floater -1.20%
OpRet -0.78%
SplitShare -0.09%
Interest -0.39%
PerpetualPremium -2.20%
PerpetualDiscount -5.36%

The Claymore Preferred ETF may be viewed, with caution, as a proxy for the S&P/TSX Preferred Share Index. Caution is required due to tracking error – the ETF will deliver performance according to what it actually holds and how well it is able to do things like reinvest its dividends, which is not the same thing as an index return. I suspect that tracking error this month will be larger than it will be in the future, since it has issued a great many units. Additionally, the fund’s NAV will be reported after MER of 0.45% p.a.

Be that as it may, the NAV on 5/31 was $19.44; the NAV on 4/30 was $19.91. Therefore, NAV Performance for May 2007 for CPD was -2.36%, net of MER (which will be just under 0.04% monthly).

Diversified Preferred Share Trust, DPS.UN is the main competitor of CPD. It doesn’t publish month-end NAVs, but the May 30 NAV was $22.55, while the May 2 NAV was $23.11, so its performance for this four-week period was -2.42%, net of its MER of about 0.04% for the period. The corresponding figures for CPD are $19.48, $19.90, -2.11%. Ouch! I presume that DPS.UN underperformed due to its greater weight in BCE issues, but that’s merely speculation.

It should also be noted that the HIMI Indices are prepared using the closing bids, which can be a very different thing from the closing price. When averaged over a lot of issues the difference should be minimal, but you can’t tell until you rip apart the data.

Caution should also be used in interpreting the differences between the various HIMI Indices. I will suggest that the lousy performance in Ratchet and FixFloat have a lot more to do with nervousness about BCE’s credit than the intrinsic performance of those investment classes – both of those subindices held entirely BCE for the period.

One very interesting thing that happened this month is that a lot of the yieldCurvePremiumLiquidity disappeared, as shown in this graph. I interpret the change in the premium as reflecting a desire by some holders, at least, to get out of the sector in size and quickly; such holders might simply sell their most liquid holdings to adjust portfolio exposures; this will affect the prices of these issues; hence, liquidity will become a lot less expensive. The PerpetualDiscount index is the most liquid of all the sub-indices – it’s dominated by recent issues, apart from anything else – and thus a portion of the decline in this index might be attributed to this factor rather than the intrinsic characteristics of the investment.

Such a hypothesis gains some support from examination of the changes in the yield curve, which I found a little surprising. The long-end hasn’t moved by nearly as much as one might have expected. Note that this graph is of the TAXABLE curve and refers to SPOT YIELDS … therefore, the x-axis shows the yield one might expect on a “stripped dividend”, after tax.

Attribution analysis is tricky and very implementation dependent. I might return to this topic on the weekend.

Index Construction / Reporting

HIMI Index Rebalancing: May 31, 2007

There was a lot of activity this month: a huge migration from PerpetualPremium to PerpetualDiscount; a transfer of all the Weston issues to Scraps due to credit concerns; and a transfer of several issues from Scraps due to increased volume.

The changes are:

HIMI Index Rebalancing, May 31, 2007
Ticker From To Because
WN.PR.C PerpetualPremium Scraps Credit
SLF.PR.B PerpetualPremium PerpetualDiscount  Price 
MFC.PR.B PerpetualPremium PerpetualDiscount Price 
POW.PR.D PerpetualPremium PerpetualDiscount Price
CM.PR.H PerpetualPremium PerpetualDiscount Price
WN.PR.A PerpetualPremium Scraps Credit
PWF.PR.D Scraps OpRet Volume
LFE.PR.A Scraps SplitShare Volume
FTU.PR.A Scraps SplitShare Volume
BAM.PR.G Scraps FixFloat Volume
WN.PR.B OpRet Scraps Credit
MST.PR.A Interest Scraps Volume
BMO.PR.J PerpetualPremium PerpetualDiscount Price
ELF.PR.G PerpetualPremium PerpetualDiscount Price
RY.PR.B PerpetualPremium PerpetualDiscount Price
CM.PR.I PerpetualPremium PerpetualDiscount Price
WN.PR.D PerpetualPremium Scraps Credit
GWO.PR.H PerpetualPremium PerpetualDiscount Price
PWF.PR.K PerpetualPremium PerpetualDiscount Price
SLF.PR.A PerpetualPremium PerpetualDiscount Price
WN.PR.E PerpetualDiscount Scraps Credit
Market Action

May 31, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.35% 5.42% 36,715 14.98 2 +1.7006% 952.1
Fixed-Floater 5.76% 5.51% 162,487 14.96 6 -0.2911% 898.5
Floater 4.79% -2.81% 88,032 11.14 3 +0.2836% 1,049.2
Op. Retract 4.79% 3.80% 85,906 2.93 17 -0.2482% 1,024.4
Split-Share 5.01% 4.41% 215,947 3.94 13 -0.2466% 1,043.5
Interest Bearing 6.55% 6.44% 72,642 5.33 5 -0.2872% 1,043.8
Perpetual-Premium 5.26% 4.85% 197,455 8.17 48 -0.1731% 1,028.0
Perpetual-Discount 4.89% 4.93% 642,053 15.64 19 -0.0997% 997.6
Major Price Changes
Issue Index Change Notes
PWF.PR.K PerpetualPremium (pre-rebalancing) -1.6064% Now with a pre-tax bid-YTW of 5.10% based on a bid of 24.50 and a limitMaturity.
POW.PR.C PerpetualPremium -1.5757% Now with a pre-tax bid-YTW of 5.41% based on a bid of 25.61 and a call 2012-1-5 at 25.00
LBS.PR.A SplitShare -1.5209% Now with a pre-tax bid-YTW of 4.75% based on a bid of 10.36 and a hardMaturity 2013-11-29 at 10.00.
BAM.PR.J OpRet -1.4599% Now with a pre-tax bid-YTW of 4.59% based on a bid of 27.00 and a softMaturity 2018-3-30 at 25.00.
IGM.PR.A OpRet -1.4105% Now with a pre-tax bid-YTW of 4.28% based on a bid of 26.56 and a call 2009-7-30 at 26.00.
BSD.PR.A InterestBearing -1.4000% Now with a pre-tax bid-YTW of 6.24% (as interest) based on a bid of 9.86 and hardMaturity 2015-3-31 at 10.00.
BAM.PR.M PerpetualDiscount -1.2848% Now with a pre-tax bid-YTW of 5.23% based on a bid of 23.05 and a limitMaturity.
ELF.PR.G PerpetualPremium (pre-rebalancing) -1.1546% Now with a pre-tax bid-YTW of 5.01% based on a bid of 23.97 and a limitMaturity.
WN.PR.E PerpetualDiscount (pre-rebalancing) -1.0865% Now with a pre-tax bid-YTW of 5.30% based on a bid of 22.76 and a limitMaturity.
RY.PR.B PerpetualPremium (pre-rebalancing) -1.0673% Now with a pre-tax bid-YTW of 4.90% based on a bid of 24.10 and a limitMaturity.
AL.PR.E Floater +1.0359%  
WN.PR.C PerpetualPremium (pre-rebalancing) +1.5327% Now with a pre-tax bid-YTW of 5.39% based on a bid of 24.51 and a limitMaturity.
BCE.PR.S Ratchet +3.4803%  
Volume Highlights
Issue Index Volume Notes
BCE.PR.C FixFloat 412,955  
BCE.PR.A FixFloat 333,000 Nesbitt crossed 325,500 at 22.90 for Cash.
BCE.PR.R FixFloat 210,750  
CM.PR.I PerpetualPremium (pre-rebalancing) 129,720 Now with a pre-tax bid-YTW of 4.89% based on a bid of 24.25 and a limitMaturity.
TD.PR.O PerpetualPremium 80,600 Nesbitt crossed 70,000 at 25.40. Now with a pre-tax bid-YTW of 4.69% based on a bid of 25.40 and a call 2014-11-30 at 25.00.

There were thirty-nine other $25-equivalent index-included issues trading over 10,000 shares today.

New Issues

New Issue : GlobalBanc Advantaged 8, 4.5%, 5.5-Year Retractibles

This is an interesting one.

GlobalBanc Advantaged 8 Split Corp. announced today (via CCN Matthews) that:

it has filed and has received a receipt dated May 30, 2007 from the securities regulators of all the Canadian provinces and territories for the final prospectus for its offering of Preferred Shares and Class A Shares, for a total maximum offering size of up to $150 million. The Preferred Securities have been provisionally rated Pfd-2 by DBRS Limited. The offering is scheduled to close on or about June 26, 2007.  The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the shares, subject to fulfillment by the Company of the requirements of the TSX (Class A Shares – GBA; and Preferred Shares – GBA.PR.A).

….
The investment objectives with respect to the Preferred Shares are: (i) to provide holders with fixed cumulative preferential quarterly cash distributions that are expected to consist of non-taxable returns of capital and capital gains in the amount of $0.1125 per Preferred Share, representing a yield on the issue price of the Preferred Shares of 4.5% per annum; and (ii) to return $10.00 per Preferred Share at the time of redemption of such Preferred Shares on December 15, 2012. The Preferred Shares have been provisionally rated Pfd-2 by DBRS Limited.

I have not yet decided whether this issue will be included in the HIMIPref™ universe.

Update, 2007-08-12: This issue will not be tracked by HIMIPref™. The TSX reports that there are only 2.7-million shares outstanding, for a total par value of $27-million.

Issue Comments

PAY.PR.A to Purchase & Retire 10.8% of Issue

This is something both interesting and complicated – it would have to happen at month-end! PAY.PR.A announced today:

the final results of its modified Dutch auction-type substantial issuer bid to repurchase (the “Offer”) up to 300,000 of its preferred shares (TSX: “PAY.PR.A”) which expired at 5:00 p.m. (EST) on May 30, 2007

    Based on the final report provided by the depositary for the Offer, 224,644 preferred shares have been deposited and not withdrawn. Pursuant to the terms of the Offer, HIPAYS determined the purchase price to be $25.90 per preferred share (the “Purchase Price”) to put it in a position to take up the maximum number of preferred shares deposited to the Offer for an aggregate purchase amount of $5,818,279.60.
    All preferred shares properly deposited to the Offer at auction tender prices below the Purchase Price will be purchased at the Purchase Price. Payment to holders of preferred shares tendered and accepted for purchase will be made as soon as practicable, but otherwise in compliance with the Offer.
    The purchased preferred shares represent approximately 10.8% of the preferred shares outstanding as of May 30, 2007. After the purchase, approximately 1,860,752 preferred shares will remain outstanding.

According to the press release that announced the offer:

On July 31, 2008 (the “Termination Date”) the preferred shares will be redeemed for $25.00 and the remaining 15 distributions from the expiry of the Offer to the Termination Date will amount to $1.719. Accordingly, the yield to maturity of a preferred share at $25.50 to the Termination Date is 3.86% and the yield to maturity of a preferred share at $25.90 to the Termination Date is 2.57%.

Now, at first glance, this doesn’t seem to make much sense. Why would the company purchase its own prefs at a premium to par and at a lousy yield-to-maturity? 

I suspect the key may be found in my last comment on this issue:

As far as I can make out from the prospectus, the “Preferred Repayment Portfolio” will be delivered in its entirety to CIBC on the termination date in exchange for the amount due on maturity of the prefs. This is a bit of bad new for the Capital Unit Holders (because it means the current excess value of $3,901,000 will be lost), but the pref holders don’t care!

So I suspect that this is worthwhile for the Capital Unit Holders because they will now capture the excess value … or, at least, a fraction of it! I’m not sure about this, though, so confirmation or denial of this hypothesis is left as an exercise for the student.

Issue Comments

SBN.PR.A Issues Additional Shares

S Split Corp announced today:

that it has completed an issuance of additional Shares at prices of $15.00 per Class A Share and $10.00 per Preferred Share for additional gross proceeds of $6.25 million pursuant to the exercise of the over-allotment option granted to the Company’s agents in its recently completed initial public offering. All together, the Company has raised total gross proceeds of $118.75 million under the offering. The Class A Shares and the Preferred Shares are listed on the Toronto Stock Exchange under the symbols SBN and SBN.PR.A, respectively.

SBN.PR.A commenced trading May 17.

Market Action

May 30, 2007

Scheduling problems related to month-end mean I’m going to have to delay production of the daily Market Action report until tomorrow … sorry!

HIMIPref™ has been updated, but that’s all I’m going to get done tonight. Anecdotal evidence only … but I saw some definite signs of Retail Panic today. Some PWF.PR.I traded at 25.49? Ridiculous.

Update, 2007-5-31:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.41% 5.51% 37,700 14.92 2 -2.8671% 936.2
Fixed-Floater 5.75% 5.43% 153,772 15.00 6 -0.5095% 901.1
Floater 4.81% -0.03% 82,883 5.61 3 -0.0400% 1,046.3
Op. Retract 4.78% 3.68% 85,176 2.94 17 -0.1094% 1,027.0
Split-Share 5.00% 4.32% 216,581 3.82 13 -0.0038% 1,046.1
Interest Bearing 6.53% 6.34% 72,397 5.33 5 +0.3799% 1,046.8
Perpetual-Premium 5.25% 4.94% 193,433 8.20 48 -0.3872% 1,029.8
Perpetual-Discount 4.89% 4.92% 649,289 15.65 19 -1.0231% 998.6
Major Price Changes
Issue Index Change Notes
BCE.PR.S Ratchet -5.8952%  
GWO.PR.H PerpetualPremium (for now!) -3.1621%  
IAG.PR.A PerpetualDiscount -3.0216%  
GWO.PR.I PerpetualDiscount -2.5578%  
BAM.PR.N PerpetualDiscount -2.1684%  
CM.PR.J PerpetualDiscount -2.0627%  
WN.PR.D PerpetualPremium (for now!) -2.0276%  
GWO.PR.G PerpetualPremium -2.0270%  
WN.PR.C PerpetualPremium (for now!) -1.9496%  
RY.PR.F PerpetualDiscount -1.8803%  
PWF.PR.I PerpetualPremium -1.8667%  
WN.PR.E PerpetualDiscount -1.6667%  
CIU.PR.A PerpetualDiscount -1.6427%  
BAM.PR.M PerpetualDiscount -1.4768%  
BCE.PR.C FixFloat -1.2500%  
BCE.PR.A FixFloat -1.2148%  
MFC.PR.C PerpetualDiscount -1.1740%  
GWO.PR.E SplitShare -1.0062%  
BSD.PR.A Interest +1.2146%  
Volume Highlights
Issue Index Volume Notes
BBD.PR.D Scraps (would be FixFloat, but there are credit concerns) 756,568  
PWF.PR.K PerpetualPremium (for now!) 97,100  
BNS.PR.M PerpetualDiscount 76,755  
RY.PR.G PerpetualDiscount 63,520  
BNS.PR.L PerpetualDiscount 60,900  
CM.PR.P PerpetualPremium 57,650  

There were forty-seven other $25-equivalent index-included issues trading over 10,000 shares today.

Sorry this update was so late! But now I must begin working on May 31!

Market Action

May 29, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.23% 5.29% 38,271 15.20 2 +0.3434% 963.8
Fixed-Floater 5.72% 5.40% 153,589 15.12 6 -0.1473% 905.7
Floater 4.80% -0.03% 80,956 5.62 3 +0.2412% 1,046.7
Op. Retract 4.77% 3.65% 85,023 2.94 17 +0.0498% 1,028.1
Split-Share 5.00% 4.36% 220,392 3.95 13 -0.1239% 1,046.1
Interest Bearing 6.55% 6.45% 70,572 5.33 5 +0.0006% 1,042.8
Perpetual-Premium 5.22% 4.83% 189,803 8.04 48 -0.3053% 1,033.8
Perpetual-Discount 4.87% 4.87% 649,224 15.73 19 -0.7814% 1,009.0
Major Price Changes
Issue Index Change Notes
RY.PR.A PerpetualDiscount -2.7473% New 52-week low of 23.10 today … and the closing bid was below this figure! Now with a pre-tax bid-YTW of 4.86% based on a bid of 23.01 and a limitMaturity.
BNS.PR.M PerpetualDiscount -2.0903% New 52-week low of 23.27 today. Now with a pre-tax bid-YTW of 4.87% based on a bid of 23.42 and a limitMaturity.
CM.PR.I PerpetualPremium (for now!) -1.8182% New 52-week low of 24.03 today. Now with a pre-tax bid-YTW of 4.88% based on a bid of 24.30 and a limitMaturity.
CM.PR.H PerpetualPremium (for now!) -1.7822% Now with a pre-tax bid-YTW of 4.88% based on a bid of 24.80 and a limitMaturity.
SLF.PR.B PerpetualPremium (for now!) -1.6000% Now with a pre-tax bid-YTW of 4.87% based on a bid of 24.60 and a limitMaturity.
BMO.PR.J PerpetualPremium (for now!) -1.5152% New 52-week low of 23.30 today. Now with a pre-tax bid-YTW of 4.83% based on a bid of 23.40 and a limitMaturity.
BNS.PR.L PerpetualDiscount -1.5000% New 52-week low of 23.65 today. Now with a pre-tax bid-YTW of 4.80% based on a bid of 23.64 and a limitMaturity.
CU.PR.B PerpetualPremium -1.4857% New 52-week low of 25.85 today. Now with a pre-tax bid-YTW of 5.25% based on a bid of 25.86 and a limitMaturity.
RY.PR.G PerpetualDiscount -1.4831% New 52-week low of 23.15 today. Now with a pre-tax bid-YTW of 4.89% based on a bid of 23.25 and a limitMaturity.
RY.PR.E PerpetualDiscount -1.4831% New 52-week low of 23.25 today. Now with a pre-tax bid-YTW of 4.86% based on a bid of 23.25 and a limitMaturity.
BAM.PR.M PerpetualDiscount -1.4553% Now with a pre-tax bid-YTW of 5.08% based on a bid of 23.70 and a limitMaturity.
WN.PR.A PerpetualPremium (for now!) -1.3708% New low of 24.64 today. Now with a pre-tax bid-YTW of 5.89% based on a bid of 24.64 and a limitMaturity. A recent downgrade.
RY.PR.D PerpetualDiscount -1.1083% New low of 22.55 today. Now with a pre-tax bid-YTW of 4.87% based on a bid of 23.20 and a limitMaturity.
PWF.PR.K PerpetualPremium (for now!) -1.0727% Now with a pre-tax bid-YTW of 5.01% based on a bid of 24.90 and a limitMaturity.
SLF.PR.C PerpetualDiscount -1.0372% New 52-week low of 22.90 today. Now with a pre-tax bid-YTW of 4.85% based on a bid of 22.90 and a limitMaturity.
GWO.PR.H PerpetualPremium +1.1182% Now with a pre-tax bid-YTW of 4.62% based on a bid of 25.30 and a limitMaturity.
BCE.PR.S Ratchet +1.3167% Exchange/Reset date is 2011-11-1 (exchanges with BCE.PR.T, which pays 4.502% of par until then). Closed at 22.90-38, 2×5, on zero volume. The Ts closed at 21.55-05, 10×1, on zero volume.
IGM.PR.A OpRet +1.3650% Making up for yesterday’s losses. Now with a pre-tax bid-YTW of 3.34% based on a bid of 27.07 and a call 2009-7-30 at 26.00.
BCE.PR.R FixFloat +1.4735% Partial recovery from yesterday’s losses, but there was a new 52-week low of 20.05 anyway. Exchange/Reset date is 2010-12-1 (exchanges with series ‘Q’, not issued); until then, pays 4.54% of par. Closed at 20.66-15, 1×1.
IAG.PR.A PerpetualDiscount +2.8112% Roaring back from yesterday’s losses, but set a new 52-week low of 24.00 anyway. Closed at 24.49-63, 20×5, so I bet the low seller feels silly. Now with a pre-tax bid-YTW of 4.68% based on a bid of 24.49 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BBD.PR.D Scraps (would be FixFloat, but there are credit concerns) 187,480 Nesbitt crossed 15,000 at 18.95. Exchange/Reset date is 2007-8-1 – see the pairs analysis. The Ds closed at 18.90-95, 60×15; the Bs closed at 19.45-60.
TD.PR.O PerpetualPremium 120,940 Now with a pre-tax bid-YTW of 4.69% based on a bid of 25.39 and a call 2014-11-30 at 25.00.
SLF.PR.B PerpetualPremium (for now!) 84,265 Now with a pre-tax bid-YTW of 4.87% based on a bid of 24.60 and a limitMaturity.
CM.PR.H PerpetualPremium (for now!) 72,899 Now with a pre-tax bid-YTW of 4.88% based on a bid of 24.80 and a limitMaturity.
GWO.PR.H PerpetualPremium 68,898 Now with a pre-tax bid-YTW of 4.62% based on a bid of 25.30 and a call 2014-10-30 at 25.00. There is some uncertainty as to what GWO will be doing in the capital markets in the near future.
BMO.PR.J PerpetualPremium (for now!) 38,050 Now with a pre-tax bid-YTW of 4.83% based on a bid of 23.40 and a limitMaturity.

There were thirty-four other $25-equivalent index-included issues trading over 10,000 shares today.

The prospectus for the Co-operators new issue is now on SEDAR and the issue has been added to the HIMIPref™ universe on a preIssue basis. It doesn’t look pretty!

Reader Initiated Comments

How Low Can They Go?

It’s been quite the day of eMails for me! In addition to the relatively technical questions about PrefLetter, I received one that asked:

Can you tell me if there is a rule of thumb in determining rates companies offer for new preferred offerings as it relates to the BOC key rate?

In a word: No.

When a company thinks it might wish to offer preferreds, they contact their Corporate Finance guys at the dealers and ask them where they think they might sell a deal. After looking at comparables, thinking about the tone of the market, talking to the people on the front lines who will actually be selling the deal, all that kind of thing, Corporate Finance comes up with a guess and then the company decides if it makes sense for them.

That being said, there is usually some consistency – look at all the recent Pfd-1 perpetuals done lately with a 4.5% coupon, for example.

At some point, I’m going to get out my records and write an article about the historical trend of perpetual issuance, comparing the grossed-up interest rate equivalent with long Canadas – which is as close to the standard as exists.

In 2005, the new issue spread (according to some third party information I have) varied in a range of Canadas +140bp to Canadas +200bp.

In 2006, it was more like Canadas +200 to Canadas +250.

In 2007 … well, let’s see. High quality perps have been going at 4.50% … use 1.4x to gross that up, that’s 6.30% interest-equivalent. Long Canadas spent the first quarter in the 4.10%-4.30% range, mostly, so that’s a spread of Canadas +200 to Canadas +220, roughly in line with 2006.

Long Canadas are – taking today’s sell-off into account – trading in the 4.45% area, so we’ll say that perpetual prefs should be in the 6.55% interest-equivalent area, which is the 4.68% dividend area, which is more or less where they actually are, as of last night.

The major weaknesses of this back-of-the-envelope calculation are:

  • Spreads could change due to perceived corporate weakness, particularly in the banking sector. They certainly changed in 2005/06!
  • Ranges of the spreads are very large: 50bp!
  • Those are new issue spreads I’m talking about. Logically, spreads on (deep) discount perpetuals should be smaller, as there is the opportunity to make a significant capital gain before your have to worry about the potential of a call.
  • Preferreds are dominated by retail, which is prone to panic.

But, all that being said … let’s make a deal: You guess where long Canadas are going to be, and I’ll guess where perpetuals are going to be!