HIMIPref News

What about risk control?

Prefblog reader Drew asks on the Comments and Requests: HIMIPref thread:

My impression is that HIMIPref does not merely select the most attractive issues for purchase but rather factors in the relative risks between different categories of preferred shares – chiefly retractible versus perpetual – with a view to constructing a safer portfolio than if the focus was placed solely on the most attractive issues. Is my impression correct?

This impression is essentially correct. A lot of thought has gone into the risk control aspects of HIMIPref, although the exercise of these controls is much more explicit when optimizing according to the portfolio method than with the issue method.

 With the parameterization currently supplied with HIMIPref for the issue method, a great deal of emphasis is placed on the potential for trading profits and the value of each issue relative to its price given all its risk attributes. Thus, the primary comparison for a split-share, for example, is other split shares; comparisons to perpetuals have a great influence, but are less important. It is unlikely that any class of shares could have so many issues far above the curve that they totally dominate other classes … after all, if there were too many issues like this, then the curve itself would move!

Thus, a certain amount of diversification of risk-attributes is built into the trading model. Should the subscriber wish it, this diversification can be amplified or reduced, by fiddling with the constraintSpecificationRecord that resides on the client-side.

Market Action

July 21, 2006

Index Current Yield (at bid) YTW Average Trading Value Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.13% 4.14% 105,226 17.17 2 -0.2200% 996.2
Fixed-Floater 5.21% 4.16% 95,800 13.49 5 0.0401% 996.9
Floater 4.55% -16.23% 62,137 6.44 5 0.1185% 1001.5
Op. Retract 4.74% 3.46% 81,046 3.08 18 0.2040% 994.1
Split-Share 5.17% 4.08% 50,179 2.80 14 0.1054% 999.9
Interest Bearing 6.86% 5.29% 66,397 2.22 7 +0.0366% 1,008.4
Perpetual 5.20% 4.65% 195,398 6.86 54 0.0815% 1,001.8
Major Price Changes
Issue Index Change Notes
Boring! Not a single index-included issue gained or lost more than 1%!
Volume Highlights
Issue Index Volume Notes
TCA.PR.Y Perpetual 97,662  
RY.PR.W Perpetual 31,800 Scotia crossed 25,000 @ 25.60 … issue up 0.24% on day
MFC.PR.B Perpetual 15,050  
BC.PR.C FixedFloater 10,752  

A fairly quiet day – the volume highlight was definitely the TCA.PR.Y, trading over $5-million worth, but there wasn’t really a lot of movement.

 Scotia’s cross of 25,000 RY.PR.W is interesting … the closing YTW was 4.70%, compared with the 4.87% at which the RY.PR.B closed. Not a precise swap, certainly, since the RY.PR.B only traded 9,202 shares but could perhaps be related. The YTW of the RY.PR.W is based on a call in March, 2014, at $25.00. It pays a nickel more than the RY.PR.B and has a similar redemption schedule, simply shifted to be 18 months earlier.

As noted in the post BNA.PR.A, an error was fixed today, with the effect that it is now calculated to have a YTW of 5.05% at its price of 26.01-30 based on a call in October, 2006, at 25.75. Yesterday, it had been calculated to have a YTW of -13.1% at pretty much the same price.

The change in this issue has changed the average calculated YTW of the splitShare index markedly. What can I say? Sometimes these things really do have a grossly negative YTW!

Data Changes

BNA.PR.A

I was writing a piece about negative Yield-to-Worst as it affected index reporting and decided that I should check BNA.PR.A to see how much of it had been redeemed to date … to my horror, I found that the terms of the issue had been changed on 2003-08-21 and I’d missed it.

The change has been put through to the server-side data. If any clients happen have a position in this issue, the security code will have to be changed on the client-side transactions and holdings files. The old Security Code was A37700; the new code is A37702.

 The only information I’ve found on this change of terms has been in SEDAR and I can’t link to anything there according to the Terms of Use.

 As for the YTW after the change … well, let’s just say it’s not negative any more!

New Issues

Power Financial Series L

I got word of another new issue today – “Power Financial Corporation Non-Cumulative First Preferred Shares Series L”

 Dividend rate of 5.1%.

Callable commencing October 31, 2011 @ $26, declining by $0.25 annually until October 31, 2015 – callable afterwards at $25.00. It’s a perpetual issue – no retractions!

The issuer can purchase shares for cancellation (i) at any price prior to 2011-10-31, and (ii) for less than the contemporary redemption price afterwards.

Rated Pfd-1(low) by DBRS – same as the big banks (other than CIBC!).

 8-million shares worth $200-million.

 Payment and delivery is “on or about August 4, 2006”.

 This one looks pretty good, based on the information at hand. I’ll be preparing a press release as soon as the prospectus is available and I’m sure of my ground.

Update & Bump : So the press release has been issued. I like this issue … I think it will go to an immediate premium over issue price.

Administration

Comment Moderation Policy

By posting a comment to this site, you are assigning all rights to your comments to Hymas Investment Management Inc. including, without restriction, the right to republish or delete these comments.

 I encourage commentary, criticism and questions, asking only that language be parliamentary. Users who are repeatedly abusive, either to myself, my associates or to other commenters may be banned.

 It is my intention to moderate with a light hand, but lightness is in the eye of the beholder. Those who are furious with my decisions and outraged at deletion of their comments are encouraged to start their own blog.

Update 2007-01-30 : It should be noted that the blogging software I use gives me the ability to specify words and phrases, the use of which can lead to a comment being “held for moderation” or simply deleted, untouched by human hand. These words and phrases usually relate to consumer goods … anybody with more than two minutes experience on the Internet will know the type of thing. However, one perfectly honest commenter ran afoul of the “too many links” rule, it being one of spam’s hallmarks that there are often a large number of links.

Your comment should appear immediately. If not, then please contact me and I will revise my lists … maybe!

Market Action

July 20, 2006

Index Current Yield (at bid) YTW Average Trading Value Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.10% 4.11% 108,185 17.23 2 0.2405% 998.4
Fixed-Floater 5.21% 4.12% 96,213 13.48 5 -0.0707% 996.5
Floater 4.55% -14.26% 61,650 6.44 5 -0.1351% 1000.3
Op. Retract 4.75% 3.58% 81,962 3.18 18 -0.0766% 992.1
Split-Share 5.17% 2.74% 53,109 2.78 14 0.0045% 998.9
Interest Bearing 6.87% 5.29% 67,915 2.23 7 +0.0033% 1,008.08
Perpetual 5.20% 4.71% 197,997 7.01 54 -0.0897% 1,001.0
Major Price Changes
Issue Index Change Notes
W.PR.J Perpetual -1.07% Gaps lower on higher than normal volume and trades at 52-week low
RY.PR.B Perpetual -2.80% New issue not well received at all! See new issue posting
Volume Highlights
Issue Index Volume Notes
RY.PR.B Perpetual 41,040 Down a lot from new issue price! See new issue posting
BCE.PR.C FixedFloater 29,650 RBC crossed 26,800 @ 25.40 (=bid). This issue becomes a ratchet rate in Mar/08
MFC.PR.B Perpetual 21,333 TD sold total 10,900 shortly prior to close, almost all at $24.36 (was 24.55-65 yesterday)
POW.PR.D Perpetual 19,800  
SLF.PR.A Perpetual 12,615 Traded in range 24.80-89

An active day! There were 12 issues trading in excess of 10,000, with the real driver, it appears, being the horrible reception of the RY.PR.B, which commenced trading at a disasterous discount to their issue price.

 Let’s see … the bid is now $24.30 … the issue price was $25.00 … 12-million shares were issued … carry one and move the decimal … that a loss of $8.4-million! Some of this seems to be an over-reaction (see Crazy Pricing!, but never-the-less, $8.4-million is a lot of money to drop in my neighborhood. See what happens when you don’t subscribe to HIMIPref?

Issue Comments

Crazy pricing! RY.PR.A vs. RY.PR.B on 2006-07-20

OK, so the new issue was very badly received and the underwriters didn’t try to catch the falling knife and support the issue during the distribution phase.

 But these relative prices are crazy! RY.PR.A started trading just a few months ago (and I didn’t like them either) and the terms of these two issues are virtually identical: the redemption schedule is simply shifted three months along, the ‘A’ issue pays a dividend of $1.1125 annually and the ‘B’ issue pays $1.1750.

So basically, you get 6.25-cents more per share in annual dividend with the B.

Closing Quotation of A : 24.40-45

Closing Quotation of B : 24.30-45

 Let’s not ever call the pref market efficient!

New Issues

Royal Bank 4.7% Perpetual, Series AB

I’ve just issued a press release on this issue … and it’s negative, although not horribly so.

 There’s a huge premium being placed on liquidity nowadays and it would seem that Royal Bank is exploiting it for all it’s worth (and why not?). I’m amazed that they can find enough purchasers to cover all $300-million worth … but the dividend funds are sitting on all kinds of cash and are desperate to put it to work, as far as I can tell.

 My fearless prediction is that this issue will, like RY.PR.A did on April 4, open at about $24.75 – no need to rush to subscribe for this issue! I will then fearlessly predict that the issue will underperform its peers over the next year, as the liquidity premium fades away and the thing starts to be priced in accordance with the overall curve.

 Update And Bump, 2006-7-20 : Well that was a great opening, wasn’t it? They started trading today and closed at 24.30-45 on volume of 41,040 shares. Even worse than I thought … it may have been that the Power Financial new issue with an extra 40bp of coupon got everybody wondering just how much this stuff was worth.

Or it may have been my press release!

 

Index Construction / Reporting

Index Construction

The indices reported in the Market Action category are experimental.

 While the definition of the indices and their composition is expected to be fairly stable, the index levels will change once I have the programming in place to compile historical figures.

 There are two requirements for inclusion in a reported index,

  • The Average Trading Value as defined by HIMIPref must exceed $25,000 (a daily moving average, with some adjustments to prevent over-estimation), and
  • The DBRS rating must be Pfd-2(low) or better

 The indices have been defined as:

  • Ratchet : All Ratchet Rate preferred during the period in which they are paying a floating rate
  • FixedFloater : All Fixed-Floaters during their fixed rate period
  • Floating : all Floating Rate issues paying a set percentage of Canadian Prime, during their floating-rate period
  • Operating Retractible : all Retractible issues that have been issued by operating companies and pay dividends
  • SplitShare : All splitShare issues that pay dividends
  • Interest Bearing : All issues that pay interest, regardless of the type of issuer (note that most are currently split shares and all are considered retractible, but “Interest Bearing” trumps)
  • Perpetual : All perpetual issues