New Issues

PFR.UN Quietly Files Preliminary Long Form Prospectus

SEDAR has a copy of this – there has been no news release. I have an interest in this vehicle having written about it, so thought I’d point out the prospectus.

It contains the paragraph:

In addition, if the call or redemption price of a Notional Security is less than the Traded Price upon its inclusion in the Notional Preferred Portfolio, and that Notional Security is redeemed, NAV will be negatively impacted. 20% of the Notional Securities are callable at par prior to the Termination Date, and the weighted average Trading Price premium above par for these securities (as of , 2007) is approximately %. As a result, if all such Notional Securities are called prior to the Termination Date, all else being held constant, the NAV would decrease by approximately 

Why shouldn’t they issue more units? The Globe and Mail reports that the NAV is $24.00 compared to a market price of $25.50.

Market Action

February 2, 2007

Technical difficulties (like mainly the fact that I have no brains at all and wiped out a few records in files that now have to be rebuilt … if this gets any worse I’m going to condemned to analyzing equities) preclude preparation of the Index Reports for the next few days. This post will be updated in due course. Sorry!

Major Price Changes
Issue Index Change Notes
DIV.PR.A SplitShare -1.1538% Still with a pre-tax bid-YTW of -11.19%, (yes, that’s NEGATIVE DOUBLE FIGURES) based on a bid of $25.70 and an immediate call at $25.20. This possibility was discussed briefly on January 9 when the yield-to-worst on the SplitShare index went negative.
CM.PR.R OpRet -1.0943% Now with a pre-tax bid-YTW of 3.48% based on a bid of $26.21 and a call 2008-5-30 at $25.75. There wasn’t much volume for this move – only 2,300 shares – but perhaps somebody wanted to switch into the new issue.
AL.PR.E Floater +1.1278% This also did well yesterday, but with volume of only 1,600 shares one can’t read too much into it.
TOC.PR.B Floater +2.2291% Closed at $26.60-99 10×9 on volume of 1,223 shares. Retail’s gone wild!
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 450,415 New issue settled today. Now with a pre-tax bid-YTW of 4.57% based on a bid of $24.68 and a limitMaturity.
SLF.PR.D PerpetualDiscount 72,139 Presumably driven by the trading in SLF.PR.E. Now with a pre-tax bid-YTW of 4.54% based on a bid of $24.70 and a limitMaturity.
CM.PR.I PerpetualPremium 67,176 Now with a pre-tax bid-YTW of 4.55% based on a bid of $25.34 and a call 2016-3-1 at $25.00.
GWO.PR.I PerpetualDiscount 58,460 Now with a pre-tax bid-YTW of 4.58% based on a bid of $24.76 and a limitMaturity.
WN.PR.D PerpetualPremium 52,650 RBC crossed 50,000 at $26.15. Now with a pre-tax bid-YTW of 4.58% based on a bid of $26.17 and a call 2014-10-31 at $25.00. There’s a lot more interest rate protection here than with the other high-volume issues today, but the credit’s not as good. Choose your risks!

There were twelve other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

Update, finally!

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 4.04% 4.05% 27,587 17.37 1 -0.1600% 1,037.8
Fixed-Floater 4.81% 3.51% 105,544 8.21 7 +0.0566% 1,041.0
Floater 4.43% -30.91% 58,710 6.55 5 +0.6735% 1,058.5
Op. Retract 4.72% 2.28% 75,304 2.10 18 -0.0176% 1,026.9
Split-Share 5.16% 0.67% 278,230 2.53 13 -0.1583% 1,042.7
Interest Bearing 6.70% 4.73% 71,564 3.89 6 +0.1780% 1,034.7
Perpetual-Premium 5.03% 4.10% 239,367 5.02 51 +0.0398% 1,051.8
Perpetual-Discount 4.55% 4.58% 1,133,846 16.25 10 -0.0965% 1,052.6
Index Construction / Reporting

Index Adjustments, February 2, 2007

As a result of the corporate actions by Faircourt and a new issue by Sunlife, the following index adjustments have been made:

Index Adjustments, 2007-02-02
Index Old Ticker Old Security Code New Ticker New Security Code
InterestBearing FCN.PR.A B35002 Cash @ 10.05 N/A
Scraps FCF.PR.A B35001 Cash @ 10.05 N/A
Scraps FCI.PR.A B35000 Cash @ 10.05 N/A
PerpetualDiscount Cash @ 25.00 N/A SLF.PR.E A48984

Note that the cash recorded as a result of the Faircourt actions is fictitious: $10.05 is the bid price today of FIG.PR.A, the continuing security. Processing a formal re-org inside the indices would result in having this issue included four times, which is three too many.

Index Construction / Reporting

Index Adjustments, February 1, 2007

As a result of the corporate actions by Bell / BCE and by CIBC, the following index adjustments have been made:

Index Adjustments, 2007-02-01
Index Old Ticker Old Security Code New Ticker New Security Code
FixedFloater BC.PR.B A38006 BCE.PR.G A39014
FixedFloater BC.PR.C A38005 BCE.PR.I A39016
Scraps BC.PR.E A38007 BCE.PR.H A39015
PerpetualPremium CM.PR.B A42013 $26 Cash N/A
Index Construction / Reporting

Index Rebalancing, January 31, 2007

This is another placeholding post, I’m afraid, but I’ll update it later.

Index Rebalancing 2007-01-31
Ticker From To Reason
FIG.PR.A Backdate InterestBearing Backdate
BNA.PR.A Scraps SplitShare Volume
MUH.PR.A Scraps SplitShare Volume
PAY.PR.A Scraps SplitShare Volume
PWF.PR.A Scraps Floater Volume
PWF.PR.D Scraps OpRet Volume
CAC.PR.A SplitShare Scraps Volume
RY.PR.A PerpetualPremium PerpetualDiscount Price
MFC.PR.C PerpetualPremium PerpetualDiscount Price
IAG.PR.A PerpetualPremium PerpetualDiscount Price
BAM.PR.M PerpetualPremium PerpetualDiscount Price

Data Changes

FCN.PR.A / FCF.PR.A / FCI.PR.A / FIG.PR.A Merger Reflected on TSX

As noted earlier, all approvals for this merger were received. The merger has now been reflected on the TSX and FIG.PR.A is the continuing symbol. reorgDataEntries have been processed for each of the exchanges effected:

Continuing Ticker : FIG.PR.A
Ticker Security Code
FCN.PR.A B35002
FCF.PR.A B35001
FCI.PR.A B35000
Continuing Code : B39000

 

6,700 shares of FIG.PR.A traded today in a range of $10.01-15. The closing quotation was $10.05-10, 20×50. The TSX is now reporting 17,464,308 shares of this issue outstanding – quite a nice size for an interest bearing split share.

Data Changes

SLF.PR.E Sinks on First Day of Trading

In the announcement of this new issue I claimed that the curvePrice of this issue was $24.73 and I am pleased to announce that the close on the first day of trading was $24.73, bang on. The closing quotation was $24.68-72, 8×66.

(Note: The link to “first day of trading” may not work as desired. It’s just a link to the SunLife press release on the SunLife site announcing completion of the issue. SunLife has some kind of bizarre script in place, presumably to ensure that their press releases remain secret.) 

Rather odd trading in this issue today, actually. The volume was 450,415, but there were only four trades after noon, totalling 6,420 shares. The trading range for the day was $24.64-75.

The issue has been added to HIMIPref™ and a reorgDataEntry processed to reflect the change from the preIssue securityCode of P50010 to the new security code of A48984.

Primers

Preferreds & Tier 1 Capital (Part I)

I had a refreshing look at some bank balance sheets today, comparing capital structures.

Tier One Capital of Two Banks
  CIBC BMO
Total Tier 1 Capital (millions) 11,935 16,641
Common Shareholders’ Equity 83.2% 86.9%
Preferred Shares 25.0% 6.3%
Innovative Tier 1 Capital Instruments 0.0% 13.2%
Non-controlling interests in subsidiaries 0.0% 0.0%
Goodwill -8.2% -6.6%

There’s a good explanation of just what Tier 1 Capital is in CIBC’s most recent MD&A:

We use a three-tiered approach to set market risk and stress limits on the amounts of risk that we can assume in our trading and non-trading activities, as follows:

  • Tier 1 limits are our overall market risk and worst-case scenario limits.
  • Tier 2 limits are designed to control the risk profile in each business.
  • Tier 3 limits are at the desk level and designed to monitor risk concentration and the impact of book-specific stress events.

The rules for just what can be included in Tier 1 are set by the Office of the Superintendent of Financial Institutions Canada in, for instance PRINCIPLES GOVERNING INCLUSION OF INNOVATIVE INSTRUMENTS IN TIER 1 CAPITAL and more particularly in Banks/T&L A – Part I Capital Adequacy Requirements

Preferred Shares (Tier 1)

Preferred shares will be judged to qualify as tier 1 instruments based on whether, in form and in substance, they are:

  • subordinated;
  • permanent; and
  • free of mandatory fixed charges.

Subordination
Preferred shares must be subordinated to depositors and unsecured creditors of the DTI. If preferred shares are issued by a subsidiary or intermediate holding company for the funding of the DTI and are to qualify for capital at the consolidated entity (non-controlling interest), the terms and conditions of the issue, as well as the intercompany transfer, must ensure that investors are placed in the same position as if the instrument was issued by the DTI.

Permanence
To ensure that preferred shares are permanent in nature, the following features are not permitted:

  • retraction by the holder;
  • obligation for the issuer to redeem shares;
  • redemption within the first five years of issuance; and
  • any step-up representing a pre-set increase at a future date in the dividend (or distribution) rate.

Any conversion other than to common shares of the issuer or redemption is subject to
supervisory approval and:

  • redemption can only be for cash or the equivalent;
  • conversion privileges cannot be structured to effectively provide either a redemption of or return on the original investment.

For example, an issue would not be considered non-cumulative if it had a conversion feature that compensates for undeclared dividends or provides a return of capital.
Free of Mandatory Fixed Charges
Preferred shares included in tier 1 capital are not permitted to offer the following features:

  • cumulative dividends;
  • dividends influenced by the credit standing of the institution;
  • compensation to preferred shareholders other than a dividend; or
  • sinking or purchase funds.

In addition, the non-declaration of a dividend shall not trigger restrictions on the issuer other than the need to seek approval of the holders of the preferred shares before paying dividends on other shares or before retiring other shares. Non-declaration of a dividend would not preclude the issuer from making the preferred shares voting or, with the prior approval of the Superintendent, making payment in common shares.

To conform to accepted practice, in the event of non-declaration of a dividend, approval of the holders of preferred shares may be sought before:

  • paying dividends on any shares ranking junior to the preferred shares (other than stock dividends in any shares ranking junior to the preferred shares);
  • redeeming, purchasing, or otherwise retiring any share ranking junior to the preferred shares (except out of the net cash proceeds of a substantially concurrent issue of shares ranking junior to the preferred shares);
  • An increase over the initial rate after taking into account any swap spread between the original reference index and the new reference index.
  • redeeming, purchasing or otherwise retiring less than all such preferred shares; or
  • except pursuant to any purchase obligation, sinking fund, retraction privilege or
    mandatory redemption provisions attached to any series of preferred shares, redeeming,
    purchasing or otherwise retiring any shares ranking on a parity with such preferred
    shares.

Examples of Acceptable Features
Outlined below are examples of certain preferred share features that may be acceptable in tier 1 capital instruments:

  • a simple call feature that allows the issuer to call the instrument provided the issue cannot be redeemed in the first five years and, after that, only with prior supervisory approval;
  • a dividend that floats at some fixed relationship to an index or the highest of several indices, as long as the index or indices are linked to general market rates and not to the financial condition of the borrower;
  • a dividend rate that is fixed for a period of years and then shifts to a rate that floats over an index, plus an additional amount tied to the increase in common share dividends if the index is not based on the institution’s financial condition and the increase is not automatic, not a step-up, nor of an exploding rate nature; and
  • conversion of preferred shares to common shares where the minimum conversion value or the way it is to be calculated is established at the date of issue.

Examples of conversion prices are: a specific dollar price; a ratio of common to preferred share prices; and a value related to the common share price at time of conversion.
Examples of Unacceptable Features
Examples of preferred share features that will not be acceptable in tier 1 capital are:

  • an exploding rate preferred share, where the dividend rate is fixed or floating for a period and then sharply increases to an uneconomically high level;
  • an auction rate preferred share or other dividend reset mechanism in which the dividend is reset periodically based, in whole or part, on the issuer’s credit rating or financial condition; and
  • a dividend-reset mechanism that does not specify a cap, consistent with the
    institution’s credit quality at the original date of issue.

I’ll write more on this later. I’m really just organizing my thoughts on this matter and getting my ducks in a row for an article!

New Issues

New Issue : CIBC 4.5% Perpetual

Well, yet another bank leaps into action with a new 4.5% perpetual!

This is actually rather nice, having so many issues that are so similar (SunLife, Scotia, Royal and BMO) … I forsee many happy hours in the years ahead, swapping between them in a low-risk dividend-capture strategy.

Anyway … CIBC is issuing 10-million of these shares (up to another 2-million may be issued) for an issue size of $250-million (up to $300-million). The provisional rating from DBRS is Pfd-1(low); the S&P provisional is P-1(Low).

CIBC 4.5% Perp Ser 32 Redemption Schedule
From To Strike
2012-04-30 2013-04-29 $26.00
2013-04-30 2014-04-29 $25.75
2014-04-30 2015-04-29 $25.50
2015-04-30 2016-04-29 $25.25
2016-04-30 INFINITE DATE $25.00

The anticipated closing date is February 14, 2007

Update & Bump : Let’s look at a few comparables …

Curve Prices (and other info) on CM.PR.? and comparables
Data CM.PR.? CM.PR.I CM.PR.H RY.PR.D
Price due to base-rate 23.83 24.54 24.79 23.96
Price due to short-term 0.11 0.11 0.11 0.11
Price due to long-term 0.33 0.34 0.34 0.34
Price due to Liquidity 1.00 1.03 0.23 1.04
Price due to error 0.03 0.03 0.02 -0.02
Price due to Credit Spread (Low) -0.71 -0.73 -0.71 NA
Curve Price $24.60 $24.77 $25.44  $25.43
Quote 2/1 Issue
$25.00
25.39-44 25.76-99 25.00-09
Annual Dividend $1.125 $1.175 $1.20 $1.125
After-Tax YTW 3.58% 3.59% 3.45% 3.61%
Pre-Tax YTW 4.50% 4.52% 4.34% 4.55%
Market Action

February 1, 2007

Technical difficulties (like mainly the fact that I have no brains at all and wiped out a few records in files that now have to be rebuilt … if this gets any worse I’m going to condemned to analyzing equities) preclude preparation of the Index Reports for the next few days. This post will be updated in due course. Sorry!

Major Price Changes
Issue Index Change Notes
BCE.PR.C FixedFloater +1.1041%  
HSB.PR.C PerpetualPremium +1.1236% Now with a pre-tax bid-YTW of 3.87% based on a bid of $27.00 and a call 2010-7-30 at $26.00
AL.PR.E Floater +1.3717%  
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualPremium 203,400 Now with a pre-tax bid-YTW of 4.52% based on a bid of $25.39 and a call 2016-3-1 at $25.00
RY.PR.E PerpetualDiscount 172,524 Recent new issue. Now with a pre-tax bid-YTW of 4.53% based on a bid of $24.96 and a limitMaturity
BMO.PR.J PerpetualDiscount 59,550 Recent new issue. Now with a pre-tax bid-YTW of 4.53% based on a bid of $24.96 and a limitMaturity.
SLF.PR.B PerpetualPremium 29,090 Now with a pre-tax bid-YTW of 4.43% based on a bid of $25.75 and a call 2014-10-30 at $25.00.
GWO.PR.I PerpetualDiscount 28,975 Now with a pre-tax bid-YTW of 4.58% based on a bid of $24.77 and a limitMaturity.

There were ten other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

Update, finally!

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 4.03% 4.03% 27,943 17.39 1 +0.1603% 1,039.5
Fixed-Floater 4.82% 3.58% 108,216 6.36 7 +0.1919% 1,040.4
Floater 4.46% -24.77% 59,009 6.60 5 +0.2230% 1,051.4
Op. Retract 4.72% 2.49% 75,761 2.10 18 -0.0205% 1,027.1
Split-Share 5.15% -0.40% 284,727 2.53 13 +0.0263% 1,044.4
Interest Bearing 6.65% 6.08% 67,549 4.71 7 -0.0275% 1,032.8
Perpetual-Premium 5.04% 4.07% 242,162 4.99 51 +0.0838% 1,051.4
Perpetual-Discount 4.55% 4.58% 973,833 16.24 9 +0.0627% 1,053.6