On the thread for April 27, Drew asked:
The YTW of split shares and perpetual premium shares seems to have risen over the last month substantially more than that of perpetual discount shares. My impression is that the bond yield curve has not flattened like this. Am I correct and, if so, do you have a theory?
Well, first off, let’s look at the index data: March 30:
| 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 |
| Op. Retract |
4.72% |
3.04% |
85,479 |
2.16 |
17 |
-0.0828% |
1,034.0 |
| Split-Share |
5.01% |
3.14% |
158,951 |
3.31 |
14 |
+0.0234% |
1,052.8 |
| Perpetual-Premium |
5.02% |
3.56% |
219,123 |
5.15 |
53 |
-0.0031% |
1,059.8 |
| Perpetual-Discount |
4.53% |
4.54% |
762,721 |
15.37 |
10 |
-0.0157% |
1,066.8 |
…and for April 27:
| 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 |
| Op. Retract |
4.73% |
3.22% |
84,115 |
2.38 |
17 |
-0.0108% |
1,033.0 |
| Split-Share |
5.03% |
4.29% |
179,611 |
4.02 |
12 |
+0.1756% |
1,046.1 |
| Perpetual-Premium |
5.07% |
4.50% |
222,579 |
6.25 |
54 |
-0.1567% |
1,051.4 |
| Perpetual-Discount |
4.57% |
4.59% |
924,984 |
16.22 |
12 |
-0.0112% |
1,056.4 |
From these indications, we see huge apparent changes in the yield of split shares. There are, as always, details of the analysis that must be understood before we pat ourselves on the back, however.
Consider the April 27 Split Share Index. Well, it looks like one thing that’s going to happen soon is that MUH.PR.A and ASC.PR.A will be moved to the “Scraps” index, on grounds of insufficient averageTradingValue, but never mind that.
One thing we notice is that DFN.PR.A & FFN.PR.A have much higher YTWs than FTN.PR.A, thanks to the recently approved term extensions on the former two issues. Be sure to write a thank-you note to your friendly neighborhood capital unit holder for the gift! Another thing we notice when looking at the index table is that the Split-Share index has been hit a lot harder than the Operating-Retractible index. This effect is due, I think, to a lack of understanding in the marketplace in general as to the nature of a split-share corporation. For example, one commenter on Financial Webring Forum stated that he was “not interested in … split shares that mature at NAV”.
Well, the preferred share component of a split share corp does not mature at NAV, absent default. The last two words are very important, because as I showed in the article Are Floating Prefs Money Market Vehicles?, Split Shares have, historically, been more susceptible to credit downgrades than other classes of share. However, readers who have read Using Credit Ratings When Buying Preferreds and Split Shares will know how to watch for the signs of an imminent downgrade. It seems to me that DBRS has been tightening its standards for Split Share credit ratings in the past year or two; as well, while the nature of a split share makes the rating more volatile, it also makes credit analysis a lot easier! So, while you have to watch them, so what? You have to watch everything in this uncertain world.
Some institutional investors, as well, don’t like Split Shares: one reasonably good reason is that not only are issue sizes relatively small, but they are rarely available as a new issue bought en bloc unless you also buy the Capital Units. One relatively bad reason is that many institutional guys don’t understand them either, another is that buying them might give the impression that they are sub-contracting asset management to the Split-Share’s sponsor, or at least have to explain to clients why that is not a fair characterization.
So in the end, Split Shares become not just a playground for retail, but for a relatively small component of the retail preferred share buying populace at that. This makes them much more susceptible to volatility and what I currently believe is contagion from the continuing woes of BCE.
I’ve uploaded a graph of the yieldCurvePremiumRetractible and the yieldCurvePremiumSplitShareCorp. On April 27, these values stood at -0.44% and +0.40%, respectively, changing from -0.42% and +0.34%, respectively, on March 30. So, yeah, Split Share spreads have widened quite noticeably over the past month. I’ve also uploaded a graph of the core yield curves at year-end, March month-end and now, for your inspection. All these curves and spreads, I hasten to note before I forget, are AFTER TAX.
Malachite Aggressive Preferred Fund currently has a relatively high exposure to Split Shares, so I could be accused of talking up my inventory. I could also be accused of putting my money where my mouth is. Take your pick – you have been warned!