New Issues

New Issue : EPCOR Power Equity Ltd. 4.85% Perpetuals

I have been advised of a new issue from EPCOR Power Equity Ltd, 4.85% Perpetuals.

Issue size is 5-million shares = $125-million.

Ratings are P-2(low) by S&P, Pfd-3(high) by DBRS

Settlement is May 25.

As yet I do not have the redemption schedule, so I’ll have to update this later.

Update: The press release states:

The Issuer has also granted the underwriters an over-allotment option, exercisable at any time up to 30 days following closing of the Offering, to acquire an additional 750,000 Series 1 Shares at the issue price of $25.00 per Series 1 Share. If the option is fully exercised, it would increase the total gross proceeds of the Offering to $143.75 million….

The Series 1 Shares will pay cumulative dividends of $1.2125 per share per annum, yielding 4.85% per annum, payable quarterly on the last business day of March, June, September and December of each year. The first quarterly dividend of $0.42305 per share is expected to be paid on September 28, 2007.

The Series 1 Shares will not be redeemable by the Issuer before June 30, 2012. On or after this date, the Series 1 Shares will be redeemable by the Issuer in whole or in part, at the Issuer’s option, on at least 30 and not more than 60 days prior notice.

… but nothing about the schedule of redemption prices.

Update: I am advised that:

The Series 1 Shares are not redeemable by the Corporation before June 30, 2012. On or after June 30, 2012, the Series 1 Shares will be redeemable by the Corporation in whole or in part, at the Corporation’s option, on at least 30 and not more than 60 days prior notice by the payment of the amount in cash per Series 1 share. Such redemption may be made upon payment in cash of the amount of $26.00 per Preferred Share if redeemed during the 12 months commencing June 30, 2012; $25.75 per Preferred Share if redeemed during the 12 months commencing June 30, 2013; $25.50 per Preferred Share if redeemed during the 12 months commencing June 30, 2014; $25.25 per Preferred Share if redeemed during the 12 months commencing June 30, 2015; and, if redeemed on or after June 30, 2016 at a Redemption Price of $25.00 per Series 1 Share plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption.

HIMIPref News

Average Volume Calculation for New Issues

Recently, assiduous reader Drew had some questions about the volume-average calculation of the recent new issue CFS.PR.A.

The HIMIPref summary screen indicates that the average trading volume of CFS.PR.A is 119,000 shares, well in excess of its volume over the recent past. Could you please explain this. I am guessing that higher liquidity is positive for valuation and vice versa. If this guess is correct, what sort of impact would the actual trading volume of CFS have on its valuation score?

…that would require an average trading volume of 10000 shares. Unless my memory is deceiving me again, it does not trade anything like that volume on an average basis. Today’s trading volume of 2000 seems closer to average, if a little high.

To understand the design decisions that have been made, it is necessary to understand the two major uses of volume-average in the HIMIPref™ system (which are fed into the model via averageTradingValue:

  • the averageTradingValue is used to create a liquidityMeasure, that quantifies the dollar value traded vs. other issues. This measure (which is capped) is fed into the yield curve calculation and the yieldCurvePremiumLiquidity is calculated. In other words, it is considered that there is a spread to the curve assigned to the marketplace for liquidity, just as there is a spread assigned for credit ratings and everything else. When the curve gets re-applied to the instrument’s characteristics to determine the curvePrice of the instrument, the dollars-and-cents value of the instrument’s liquidity then becomes part of its valuation.
  • During simulations, it is assumed that a portfolio can sell one-half of the volume-average at the bid price, or buy this quantity at the ask price.

For many years, the first point was moot. I was unable to discern any premium paid in the marketplace for liquidity – every day’s premium was 0.00%, or at at most one or two bp, the effect of mathematical accidents more than anything else. This changed a few years ago. Hesitantly at first, and then with increasing ferocity, the mathematical model started to assign a premium to liquidity which now stands at about 17bp per liquidity unit; the range of values of the liquidity unit varies between -1 and +2. Hence, liquidity has become more important to the marketplace.

Now, what of new issues? When issues are announced, they are valued on a preIssue basis, with the volume-average deemed to be 100,000 shares. This figure is fairly arbitrary – all I can say is that it seems to work pretty well, most of the time. As soon as the the issue starts trading, the volume will decline below this figure after a week (usually!) and the value for volume-average (and hence, the value of the liquidity curvePriceComponent) will decline with it. This will basically take the path of an exponential moving average – see the various links in this post for an explanation.

The trouble with CFS.PR.A is that it turned out to be a ridiculously small issue – only 1,610,000 shares were issued (virtually all to retail, I’ll warrant) – so the 100,000 estimate of average trading volume was very, very high. The daily volume of the issue (see graph) hasn’t been much at all and hence the decay of volume-average has been a relatively smooth curve (graph) that still hasn’t declined to a reasonable estimate of what the volume actually is.

The system works better with issues of normal size and trading patterns, like the recent new issue SLF.PR.E. I have uploaded a graph comparing volume-averages, as well as a graph of the SLF.PR.E daily spot volumes.

So … CFS.PR.A does (as far as I can tell) have a volume-average (and hence a valuation) that is over-estimated by HIMIPref™. That part’s easy. What’s more difficult is deciding what, if anything, to do about it. If I get any ideas, I’ll programme them!

 

Market Action

May 4, 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 4.58% 4.59% 43,333 16.28 2 -0.3161% 990.0
Fixed-Floater 5.33% 4.48% 135,556 16.51 6 +0.1191% 970.0
Floater 4.72% -20.46% 73,173 10.96 3 +0.0395% 1,064.3
Op. Retract 4.73% 3.16% 85,916 2.32 17 +0.0848% 1,034.0
Split-Share 4.96% 4.16% 175,793 3.89 12 +0.0203% 1,046.5
Interest Bearing 6.49% 4.87% 61,987 2.24 5 +0.0788% 1,049.2
Perpetual-Premium 5.13% 4.53% 170,664 5.25 48 +0.0360% 1,050.2
Perpetual-Discount 4.61% 4.63% 790,950 16.15 18 -0.0460% 1,053.8
Major Price Changes
Issue Index Change Notes
BCE.PR.I FixFloat -1.3072% Exchange/Reset date is 2011-8-1 (Exchanges with series ‘AJ’, not issued); until then pays 4.65% of par. Good volume today of 17,292 shares in a range of 22.90-00, so it seems a little unfair that it was down, closing at 22.65-00, 22×14.
WN.PR.E PerpetualDiscount -1.0309% Downgraded yesterday by S&P. Now with a pre-tax bid-YTW of 4.99% based on a bid of 24.00 and a limitMaturity. Still the lowest-yielding Weston Perpetual – see the comparables.
WN.PR.D PerpetualPremium +1.0121% Downgraded yesterday by S&P … what, me worry? Now with a pre-tax bid-YTW of 5.26% based on a bid of 24.95 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
TOC.PR.B Scraps (would be Floater, but there are volume concerns) 530,500 Presumably due to the rumours of a bid for Reuters. This young feller-me-lad pays 70% of Canadian Prime on par value, and closed today up a bit, at 25.30-54, 3×2. Callable any time at $25.00.
FBS.PR.B SplitShare 530,500 What’s a mature split-share doing with this kind of volume? Better ask Nesbitt, they crossed 500,000 at 10.13. Callable every December 15 at $10, until maturity at $10.00 2011-12-15 … the pre-tax bid-YTW is 2.78% based on a bid of 10.20 and a call 2008-1-14 (heh … the inclusion in the programming of maturityNoticePeriod leads to imprecision on occasion. Oh, well, sue me …) at $10.00. The buyer is obviously hoping that the shares (or at least a significant fraction thereof) will survive until the hardMaturity 2011-12-15, to have yielded 4.45%. And, mind you, the big buyer only paid 10.13 for them (plus commission!), so it’s not as bad as it looks.
BNS.PR.L PerpetualPremium 118,645 Now with a pre-tax bid-YTW of 4.53% based on a bid of 24.92 and a limitMaturity.
CM.PR.H PerpetualPremium 112,840 Now with a pre-tax bid-YTW of 4.37% based on a bid of 25.70 and a call 2014-4-29 at 25.00.
RY.PR.G PerpetualDiscount 110,700 Recent new issue. Now with a pre-tax bid-YTW of 4.61% based on a bid of 24.51 and a limitMaturity.
SLF.PR.A PerpetualPremium 58,305 Now with a pre-tax bid-YTW of 4.44% based on a bid of 25.61 and a call 2014-4-30 at 25.00.

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

Issue Comments

TOC.PR.B the Next Credit Worry?

I don’t think my regular readers will be surprised if I mention that I have something of a philosophical disdain for floating rate issues. They trade with lower yields (generally!) than their fixed-rate cousins and there’s not really a lot of reason for that. Sure, there is a certain amount of interest rate protection built into the concept of a floating rate, which is very nice to have – but, as I pointed out in an article last August one very big reason why short rates are lower than long rates is credit risk … and with a floating rate preferred share, you have perpetual credit risk.

So anyway, Reuters announced today:

it has received a preliminary approach from a third party which may or may not lead to an offer being made for Reuters. There is no certainty an offer will be made or necessary approvals, including those required under Reuters constitution, will be received.

It has been mooted that the suitor is Thomson:

News and financial data provider Reuters said it had received a takeover approach from an unidentified bidder, sending its shares up almost a third, with Canadian publisher Thomson widely touted as the suitor.

Canada’s Globe and Mail newspaper reported on its Web site on Friday that Thomson was in talks to buy London-based Reuters, citing sources close to both companies.

Reuters and Thomson both declined to comment.

There is more speculation on Bloomberg.

Thomson has some CAD denominated bonds outstanding, maturing in 2014. I have been advised that the spread on these bonds has moved from +48bp to +110bp, which is a hell of a move for a seven year bond. Let’s see … modified duration is, oh, call it 6 years, yield change 62bp, 6×0.62 = 3.72 … that’s a 3.7% price change on the bond. And I don’t mean the price went up! It would appear that the bond market – or, at the very least, a few trigger-happy participants thereof – are concerned about the financing of the deal.

The preferreds will be on the volume charts for today’s market action report! 245,800 shares traded, including a block of 41,800 at 25.50 crossed by National Bank; 96,300 crossed by Scotia at the same price; and another 103,700 crossed by Scotia at the same price again.

TOC.PR.B has been around since the beginning of time, drifting in and out of the HIMI Preferred Indices as the volume waxes and wanes. The last change was removal at the end of February.

Update, 2007-05-07: Thomson has issued a press release:

The Thomson Corporation (NYSE: TOC; TSX:TOC) confirmed today that it has made a preliminary approach to the Board of Directors of Reuters Group Plc. that may or may not lead to an offer being made for Reuters.

A further announcement will be made in due course.

Issue Comments

BNA.PR.A, BNA.PR.B, BNA.PR.C Downgraded by DBRS

DBRS has announced:

has downgraded the rating of BAM Split Corp. (the Company) to Pfd-2 (low) from Pfd-2, with a Stable trend, with respect to the 6.25% Class A Preferred Shares; the 4.95% Class AA Preferred Shares, Series 1; and the 4.35% Class AA Preferred Shares, Series 3 (collectively, the Preference Shares).

The entire portfolio (the Portfolio) owned by the Company is composed solely of Class A Limited Voting Shares of Brookfield Asset Management Inc. The downgrade reflects DBRS’s revisions to its rating approach for single name split share issuers. Pursuant to DBRS’s publication of January 31, 2007 (Split Share Issuers: A Performance Overview), the rating assigned for a preferred share issued by a single name split share company will generally be limited to the rating applicable to the corporate preferred shares related to those shares in the supporting Portfolio, unless there are structural or other features built into the split share issuer which serve to further enhance its credit quality. Brookfield Asset Management Inc.’s Preferred Shares are currently rated Pfd-2 (low) with a Stable trend by DBRS.

Notwithstanding the rating adjustment, the Portfolio has continued to perform well, having appreciated 11% since January 31, 2007. The current downside protection of over 77% provides significant capital protection to the holders of the Preference Shares. The Portfolio generates a sufficient yield (after expenses) to provide 1.21 coverage times over the distribution of dividends to the Preference Shares. If necessary, the Company may write covered calls or sell a portion of the Portfolio to fund the dividend on the Preference Shares.

So in other words, the rating is limited by the rating on the underlying securities, in the absence of mitigating factors. The publication they are referring is on their site.

The announcement does not appear to be related to BAM’s asset spin-off … but you never know!

BNA.PR.C is a recent new issue. The company changed its name last year, when the ticker symbol of the underlying shares changed from BNN to BAM.

Issue Comments

Weston Comparables

OK, so now that Weston has been downgraded by S&P (with DBRS still considering the possibility) and now that the shares have started to get hit, I thought it would be fun to look at some comparables:

Pfd-3 [high/-/low] (DBRS) Fixed-Rate Perpetuals
Issue DBRS Rating S&P Rating Coupon Quote, 5/3 Pre-tax bid-YTW YTW Mod Dur YTW Pseudo-Convexity
FAL.PR.H Pfd-3 (high) P-2(low)  1.625  25.61-63 4.58%  0.95  -4.82 
LB.PR.E Pfd-3 P-3(high)  1.3125  25.25-33 5.22%  5.23  -59.93 
FTS.PR.F Pfd-3 (high) P-2(low) Watch Positive  1.225 25.43-51  4.63%  7.07  -1.93 
LB.PR.D Pfd-3 P-3(high) 1.50 26.11-19  4.91%  1.60  -547.3 
WN.PR.A Pfd-2 (low) CW-Negative P-3(high) 1.45 25.30-44  5.71%  3.29  -67.2 
WN.PR.C Pfd-2 (low) CW-Negative P-3(high) 1.30 24.91-00  5.27%  15.00  -30.26 
WN.PR.D Pfd-2 (low) CW-Negative P-3(high) 1.30 24.70-07  5.32%  14.92  -9.99 
WN.PR.E Pfd-2 (low) CW-Negative P-3(high) 1.1875 24.25-44  4.94%  15.57  1.15 

Not many comparables, eh?

Market Action

May 3, 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 4.54% 4.54% 43,015 16.36 2 +1.9433% 993.1
Fixed-Floater 5.34% 4.46% 132,904 16.55 6 +0.4778% 968.9
Floater 4.72% -20.35% 74,024 10.96 3 -0.2077% 1,063.9
Op. Retract 4.74% 3.11% 85,438 2.59 17 -0.0860% 1,033.1
Split-Share 4.96% 4.17% 177,638 3.89 12 +0.0845% 1,046.3
Interest Bearing 6.50% 4.76% 62,536 2.24 5 -0.0196% 1,048.4
Perpetual-Premium 5.13% 4.53% 170,598 5.23 48 -0.1002% 1,049.8
Perpetual-Discount 4.61% 4.63% 796,170 16.16 18 -0.1202% 1,054.3
Major Price Changes
Issue Index Change Notes
WN.PR.D PerpetualPremium (for now!) -2.2556% Downgraded today by S&P. Now with a pre-tax bid-YTW of 5.32% based on a bid of 24.70 and a limitMaturity.
WN.PR.C PerpetualPremium (for now!) -1.5804% Downgraded today. Now with a pre-tax bid-YTW of 5.27% based on a bid of 24.91 and a limitMaturity.
WN.PR.E PerpetualDiscount -1.4628% Downgraded today. Now with a pre-tax bid-YTW of 4.94% based on a bid of 24.25 and a limitMaturity.
WN.PR.A PerpetualPremium -1.3261% Downgraded today. Now with a pre-tax bid-YTW of 5.71% based on a bid of 25.30 and a call 2011-1-14 at 25.00.
BCE.PR.H Ratchet +1.4951% Exchange/Reset date is 2011-05-01 (Exchange with BCE.PR.G, which pays 4.35% of par until then). The only trading today was a buy of 1,000 shares by MacDougall, executed in four tranches at prices from 23.98-07. Closed at 23.76-28, 3×4. The Gs closed at 22.50-74, 7×3.
BCE.PR.R FixFloat +1.5071% Exchange/Reset date is 2010-12-01 (Exchange with series ‘Q’, not issued); until then, pay 4.54% of par. Nesbitt crossed 200,000 at 22.95. Closed at 22.90-05, 10×2.
BCE.PR.S Ratchet +2.3965% Exchange/Reset date is 2011-11-1 (Exchange with BCE.PR.T, which pay 4.502% of par until then). Closed at 23.50-75, 7×1.
Volume Highlights
Issue Index Volume Notes
BCE.PR.R FixFloat 206,800 Discussed above.
SLF.PR.E PerpetualDiscount 131,800 TD crossed 99,100 at 24.85, then another 25,000 at the same price. Now with a pre-tax bid-YTW of 4.57% based on a bid of 24.81 and a limitMaturity.
BAM.PR.E Scraps (Would be Ratchet, but there are volume concerns) 110,000 One trade, crossed for cash by Desjardins.
BCE.PR.Z FixFloat 104,318 Desjardins crossed 100,000 at 23.81. Exchange/Reset date is 2007-12-1 (Exchange with BCE.PR.Y); until then, pay 5.319% of par. The Zs closed at 23.80-90, 27×18; the Ys at 23.60-74, 7×2.
CM.PR.H PerpetualPremium 85,647 RBC crossed 50,000 at 25.68; National Bank crossed 24,000 at the same price. Now with a pre-tax bid-YTW of 4.40% based on a bid of 25.66 and a call 2014-4-29 at 25.00.
BCE.PR.A FixFloat 79,710 Desjardins crossed 74,800 at 23.85. Exchange/Reset date is 2007-9-1 (Exchange with Series ‘AB’, not issued); until then, pay 5.03% of par. Closed at 23.76-94, 5×4.

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

Issue Comments

Great-West Releases Quarterly Report … Everything on Hold

Great-West has released its 1Q07 report. There are two issues I was looking forward to hearing about:

(i) GWO.PR.X / GWO.PR.E Issuer Bid: Nothing happened! The company did not purchase any shares of either target on the open market in the first quarter. There was also no announcement regarding the possible redemption of CL.PR.B … I suspect they’re still getting their ducks in a row for …

(ii) Financing of the Putnam Acquisition: There was no announcement, just a reiteration that financing will include issues of equity, debentures and hybrids [probably preferred shares – JH], bank credit and securitization of the tax benefits.

Issue Comments

S&P Downgrades Loblaw, Weston

S&P has announced:

it lowered its long-term corporate credit and senior unsecured debt ratings on Toronto-based Loblaw Companies Ltd. by one notch, to ‘BBB+’ from ‘A-‘. Standard & Poor’s also lowered its long-term corporate credit and senior unsecured debt ratings on parent company George Weston Ltd. by one notch, to ‘BBB’ from ‘BBB+’. In addition, the Canadian scale CP rating on George Weston was lowered to ‘A-2’ from ‘A-1(Low)’, and the preferred stock rating on George Weston was lowered to ‘P-3(High)’ from ‘P-2(Low)’. At the same time, the ratings on both companies were removed from CreditWatch with negative implications, where they were placed Feb. 8, 2007, following Loblaw’s much weaker-than-expected earnings in the fourth quarter (ended Dec. 30, 2006). The outlook on both companies is stable.

This follows the earlier downgrade of Loblaw by DBRS, who have not yet announced a decision regarding Weston, and the Credit Watch Negative announcement by S&P.

Weston has the following preferred issues outstanding: WN.PR.A WN.PR.B WN.PR.C WN.PR.D & WN.PR.E

Market Action

May 2, 2007

The index rebalancing for April month-end has been completed, but updating the index values will have to wait until tomorrow. However, I do have the other two tables!

Major Price Changes
Issue Index Change Notes
GWO.PR.G PerpetualPremium -1.1069% Nothing particularly exciting happened in the trading – it looks like the bids just dried up. Now with a pre-tax bid-YTW of 4.67% based on a bid of 25.91 and a call 2014-1-30 at 25.00.
BCE.PR.Z FixFloat +1.0208% Exchange/Reset date is 2007-12-1 (Exchange with BCE.PR.Y); until then, pay 5.319% of par. Closed at 23.75-95, 20×2; the Ys closed at 23.03-74, 2×2.
BCE.PR.G FixedFloater +1.7800% Exchange/Reset date is 2011-5-1 (Exchange with BCE.PR.H); until then, pay 4.35% of par. Closed at 22.30-40, 2×11; the Hs closed at 23.41-03, 13×5.
BCE.PR.I FixFloat +2.2411% Exchange/Reset date is 2011-8-1 (Exchange with series ‘AJ’, not issued); until then, pay 4.65% of par. Closed at 22.81-09, 1×1.
BCE.PR.R FixFloat +3.0137% Exchange/Reset date is 2010-12-01 (Exchange with series ‘Q’, not issued); until then, pay 4.54% of par. Closed at 22.56-64, 2×3.
Volume Highlights
Issue Index Volume Notes
BCE.PR.C FixedFloater 256,250 Nesbitt crossed 100,000 at 24.00, then another 150,000 at the same price. Exchange/Reset date is 2008-03-01 (exchange with series ‘AD’, not issued); until then pay 5.54% of par.
RY.PR.G PerpetualDiscount 87,900 Recent new issue. Now with a pre-tax bid-YTW of 4.61% based on a bid of 24.51 and a limitMaturity.
BNS.PR.M PerpetualDiscount 65,825 Scotia crossed 40,000 at 24.86, then another 10,000 at the same price. Now with a pre-tax bid-YTW of 4.56% based on a bid of 24.85 and a limitMaturity.
TD.PR.N OpRet 50,800 TD crossed 41,800 at 26.93. Now with a pre-tax bid-YTW of 2.89% based on a bid of 26.81 and a call 2009-5-30 at 26.00 … The buyer is obviously hoping they last longer, preferably until their softMaturity 2014-1-30 at $25.00, which will yield 3.41%. Well … hope is a fine thing!
TD.PR.M OpRet 50,600 Scotia crossed 50,000 at 26.90. A somewhat more careful buyer for this one! Now with a pre-tax bid-YTW of 3.12% based on a bid of 26.74 and a call 2009-5-30 at 26.00 … the softMaturity at 25.00 on 2013-10-30 implies a yield of 3.52%.

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

Update, 2007-05-03

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 4.60% 4.61% 42,886 16.26 2 -0.3010% 974.2
Fixed-Floater 5.36% 4.45% 128,173 16.56 6 +1.3299% 964.3
Floater 4.71% -19.85% 73,776 11.00 3 -0.1016% 1,066.1
Op. Retract 4.73% 3.07% 83,864 2.30 17 +0.1552% 1,034.0
Split-Share 4.96% 4.19% 180,610 3.89 12 +0.1361% 1,045.4
Interest Bearing 6.50% 4.69% 61,881 2.25 5 -0.0078% 1,048.6
Perpetual-Premium 5.13% 4.50% 171,637 4.90 48 +0.0075% 1,050.8
Perpetual-Discount 4.60% 4.62% 808,321 16.17 18 -0.0085% 1,055.6