Issue Comments

CU.PR.T, CU.PR.V, CU.PR.D to be Redeemed

Well, that didn’t take long!

When CU announced their new issue (which is trading as CIU.PR.A, by the way – I have no idea why it’s not in the “CU” ticker family) I predicted that the CU.PR.T & CU.PR.V would be redeemed (missed the D! But it wasn’t in the HIMIPref™ universe anyway) and, lo and behold, as soon as the new issue settles, CU is announcing:

that, as a result of the successful closing of the CU Inc. issue of $115,000,000 4.60% Cumulative Redeemable Preferred Shares Series 1, it will redeem on May 18, 2007 all of its outstanding Cumulative Redeemable Second Preferred Shares Series Q, R and S at a price of $25.00 per share plus accrued and unpaid dividends per share.

That’s a total of 5,050,105 shares, so it’s a net paydown of debt for them … and a massive decrease in coupon! The average dividend rate on the redeemed shares is just a hair under 5.75% … so payback time on issuance costs won’t come to much.

Issue Comments

BCE Pairs

Boy, BCE and its credit problems is just taking over this blog, aren’t they?

With the confusion and losses, though, comes volatility. And volatility is your friend. I have previously noted the BCE.PR.Y / BCE.PR.Z pair … let’s make a list of all of them!

 

BCE Pairs
Fixed Ratchet Exchange Date
BCE.PR.Z BCE.PR.Y 2007-12-01
BCE.PR.F BCE.PR.E 2010-02-01
BCE.PR.G BCE.PR.H 2011-05-01
BCE.PR.T BCE.PR.S 2011-11-01

A number of BCE issues are not listed here because only one member of the pair is trading.

These pairs are interesting because, in theory, the prices of the elements of the pair should move in lockstep, given that they are exchangeable into each other on the Exchange Date. There will be some degree of uncertainty due to the fact that changes in prime – and changes in percentage of prime paid – will change … but it’s fun to watch.

There would be a fair amount of risk involved in putting on a long/short position to arbitrage the differences for the three longer-dated pairs, due to these uncertainties. If a debt-holder-unfriendly deal goes through, we can assume (or, at least, I will) that retail will panic and all the issues will trade not just below par, but below a reasonable valuation that takes account of the actual risk. This will imply that the Floating-Rate issues will quickly ratchet up to pay 100% of prime … a very different kettle of fish from the other major alternative, that nothing happens. So playing the arbitrage game on the three longer issues could just possibly be a little risky … at least until the uncertainty clears up a little.

But the BCE.PR.Y / BCE.PR.Z pair … that’s more interesting.

 

Comparison as of 4/17
Ticker BCE.PR.Z BCE.PR.Y
Type Fixed Ratchet Floater
Estimated Dividends to Exchange Date $1.00 $0.59 (@ 4% annual rate)
4/17 Quote 24.70-83 24.60-25.20
averageTradingValue 89,605 3,280

So, based on this very brief analysis, it looks as if the BCE.PR.Z are very cheap compared to BCE.PR.Y. Of course, putting a position on could be a major exercise in frustration, given the volume-average of the BCE.PR.Y … but never-the-less, if I was the owner of some Y right now AND if I still liked the BCE name, I know what I’d be doing!

Market Action

April 17, 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 4.18% 4.16% 43,923 17.01 2 -0.9225% 1,032.3
Fixed-Floater 5.15% 4.18% 95,927 16.9 6 -2.4640% 993.1
Floater 4.57% -15.67% 55,849 0.13 4 -0.0097% 1,055.7
Op. Retract 4.73% 3.19% 84,668 2.11 17 -0.0196% 1,033.6
Split-Share 5.02% 3.83% 153,377 3.38 12 -0.0457% 1,048.6
Interest Bearing 6.51% 4.09% 62,716 2.28 5 +0.2018% 1,046.6
Perpetual-Premium 5.04% 4.01% 186,513 5.43 53 -0.0432% 1,058.8
Perpetual-Discount 4.53% 4.56% 858,953 16.29 11 -0.0254% 1,064.6
Major Price Changes
Issue Index Change Notes
BCE.PR.I FixedFloater -6.5421% Did I say there was some carnage yesterday? I’m going to have to get out the dictionary and refresh my understanding of the word. However, the drop in this issue was exaggerated by Nesbitt’s sales totallying 1,300 shares in the last six minutes of trading, which took the price down from 24.12 to 23.62. On the one hand, one can feel sympathy for the market-maker: they’re supposed to stabilize the market and sell liquidity, not catch falling knives. On the other hand, the closing quotation of 23.00-24.40, 10×10, seems like a rather large spread. Oh – yeah. The exchange/reset date on these is 2011-08-11; until then, they have an annual dividend of 4.65%.
BCE.PR.G FixedFloater -3.2020% Exchange/Reset date is 2011-05-01. Can’t fault the market maker on this one, although the closing quote’s fairly wide at 23.58-20, 10×5. The last trade of the day was a sale of 600 shares by Dundee at $23.50, timestamped 2:14, marking a new 52-week low for this issue. It traded as high as 24.70 in the morning.
BCE.PR.A FixedFloater -1.8211% Exchange/Reset date is 2007-09-01; until then these pay 5.03% of par. Heavy volume for this issue of 27,385 shares, with something of an odd close: Nesbitt bought 2,000 shares in six trades in the last 18 minutes, taking the price up from 24.00 prior to this sequence to the close of 24.69. The buyer should have waited! The closing quote was 24.26-40, 5×10.
BCE.PR.Z FixedFloater -1.6720% Exchange/Reset date is 2007-12-1; until then they pay 5.319% of par. Afterwards … I bet it’s less! Volume of 2,272 shares was about average for this issue, maybe a little light. These traded in a range of 24.62-25.50 on the day, closing quote 24.70-83, 1×5
BCE.PR.C FixedFloater -1.4800% Exchange/Reset date is 2008-03-01; until then they pay 5.54% of par. Closed at 24.63-15, 3×4.
BCE.PR.H RatchetRate -1.2445% Exchange/Reset date is 2011-05-11; they exchange with the BCE.PR.G above, which makes pairs trading an interesting speculation. Closed at 24.60-94, 1×10.
Volume Highlights
Issue Index Volume Notes
ELF.PR.G PerpetualPremium 56,000 Desjardins crossed 50,000 at 25.20. Now with a pre-tax bid-YTW of 4.71% based on a bid of 25.11 and a call 2015-11-16 at 25.00
CM.PR.I PerpetualPremium 50,845 Now with a pre-tax bid-YTW of 4.58% based on a bid of 25.23 and a call 2016-3-1 at 25.00.
BNS.PR.J PerpetualPremium 49,860 RBC crossed 25,000 at 26.50, then another 15,000 at the same price. Now with a pre-tax bid-YTW of 4.28% based on a bid of 26.40 and a call 2013-11-28 at 25.00
GWO.PR.I PerpetualDiscount 38,860 TD crossed 28,700 at 24.95. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.91 and a limitMaturity.
BNS.PR.L PerpetualDiscount 36,897 Now with a pre-tax bid-YTW of 4.52% based on a bid of 24.92 and a limitMaturity.

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

PrefLetter

PrefLetter News Release!

Never mind trivial stuff like the BCE uncertainty on a day like today!

PrefLetter has not only gone live, but it is telling the world!

TORONTO, April 17 /CNW/ – Hymas Investment Management Inc. (“HIMI”) announced today that it has initiated a preferred share newsletter, available to subscribers either resident in Ontario or registered with the Autorité des marchés financiers. The newsletter will be published following the close of the Toronto Stock Exchange on the second Friday of each month and will contain at least one recommendation for each of the major classes of preferred share currently trading.

“Preferred shares are a very attractive alternative to corporate bonds for taxable investors”, said James Hymas, President of the firm, “but very little commentary or analysis of any kind is available. This newsletter will make it possible for retail investors – and advisors who subscribe – to approach the market with confidence that all the reasonable alternatives have been carefully examined prior to a professional, specialist, recommendation.”

Clients have the alternative of purchasing the “Previous Issue”, “Next Issue” and “Full Year Subscription”. A full year subscription includes the previous issue as a bonus.

Further details are available at www.prefLetter.com; clients may subscribe on-line and – if they wish – receive the prior issue of the newsletter via eMail immediately. The first subscription issue of PrefLetter has been published, prepared as of April 13.

This service joins www.prefInfo.com, a site providing summary information regarding over 150 actively trading preferred share issues, and www.prefBlog.com, a site offering free daily commentary on matters of interest to Canadian preferred share investors, as HIMI’s contribution to efficient financial markets.

Many investors will be familiar with Mr. Hymas due to his articles in Canadian Moneysaver, which seek to communicate the elements of preferred share investing to smaller investors. Prior to founding HIMI, Mr. Hymas was Chief Operating Office and portfolio manager at Greydanus, Boeckh & Associates, Inc. (GBA), responsible for all research and portfolio management activities within the firm. GBA achieved first quartile fixed income results with a $1.7-billion bond portfolio until its acquisition by TD Asset Management.

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For further information: James Hymas, (416) 604-4204, jiHymas@himivest.com

Issue Comments

BCE on Credit Watch Negative : DBRS

Following the announcement that BCE is in talks with privatizers, DBRS has announced that they:

today placed the ratings of BCE, A (low)/R-1 (low)/R-2 (high)/Pfd-2 (low), and its wholly owned subsidiary, Bell Canada, “A”/R-1 (low)/BBB (high), (collectively, BCE or the Company) Under Review with Negative Implications following the Company’s announcement today that it is reviewing strategic alternatives with a view to maximize shareholder value….Given the Company’s current operating structure, DBRS notes that any transaction that takes leverage above 4.0 times debt to EBITDA could cause its ratings to decline below the investment-grade threshold of BBB (low).

No word from S&P yet. I’ll keep you posted.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

Update: S&P has joined the fun:

Standard & Poor’s Ratings Services today said it placed its ratings, including its ‘A-‘ long-term corporate credit rating, on Montreal, Que.-based telecommunications provider BCE Inc. and its wholly owned subsidiary, Bell Canada (collectively, BCE), on CreditWatch with negative implications, following the announcement that it had entered into discussions with a group of leading Canadian pension funds to explore the potential privatization of the company.

…

Should the leveraged buyout of BCE be successful, we expect debt leverage and corresponding credit metrics will materially weaken from our current expectations; adjusted debt leverage will significantly increase from our expectations of 2.6x at year-end 2007, which could lead to a multinotch downgrade, possibly to speculative-grade.

In the event a privatization is not consummated, we believe the company will be faced with increasing shareholder pressures for some form of leveraging transaction over the near term, which could also lead to lowering the ratings, given that BCE/Bell Canada has modest debt capacity under the current ratings.

New Issues

New Issue : Royal Bank 4.5% Perpetual, Series AG

Can’t tell your players without a programme! Royal is continuing the pattern of opportunistic issuance I predicted in early February.

They have now announced the following:

Issue: 4.50% Non-Cumulative First Preferred Shares, Series AG

Size: 10-million shares, = $250-million @ the 25.00 issue price.

Redemption: Redeemable at $26.00 commencing May 24, 2012, call price declines by $0.25 every May 24 thereafter until redeemable at $25.00 from May 24, 2016 on.

Provisional ratings: Pfd-1 by DBRS, P-1 (low) by S&P

Closing: The expected closing date is April 26.

More Later.

Later, not much more: You know what? I’m not going to bother reviewing this one much at all. The dividend rate is identical to RY.PR.D & RY.PR.E, while the redemption schedule differs only in that the new issue’s schedule starts three months later. The curve price of the two comparables is in the 25.40-50 range, but a large part of this is the dividend payable on these issues – they both go ex-Dividend on 2007-04-23.

The new issue is entirely reasonable and maybe just a little bit cheap according to its curve price.

Issue Comments

BCE in Buyout Talks?

Reuters has reported:

BCE Inc. has entered talks with a group of Canadian pension funds that could lead to the company being taken private, Canada’s top telecommunications group said on Tuesday.

I have seen long Bell bonds offered at 270bp over Canadas – a widening of 50bp over yesterday.

I have previously noted the event risk on the BCE preferreds … which, while having been hurt lately, have suffered not nearly as much as the Bonds … a widening of 50bp in one day? on bonds with a duration of about maybe 12? That’s 6% on price.

Retail – which means holders of BCE preferreds – may well do what retail is best at: ignore the situation until they’ve been told 20 times, then over-react big time.

This could be interesting.

Market Action

April 16, 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 4.14% 4.11% 43,992 17.08 2 +0.5045% 1,041.9
Fixed-Floater 5.02% 4.02% 93,975 17.06 6 -0.4046% 1,018.1
Floater 4.57% -15.74% 56,073 0.13 4 +0.0100% 1,055.8
Op. Retract 4.73% 3.17% 84,022 2.11 17 -0.0949% 1,033.8
Split-Share 5.02% 3.79% 156,666 3.17 12 -0.0604% 1,049.1
Interest Bearing 6.52% 5.60% 63,254 2.28 5 -0.0944% 1,044.5
Perpetual-Premium 5.04% 3.97% 186,958 5.31 53 -0.0256% 1,059.0
Perpetual-Discount 4.53% 4.56% 873,569 16.30 11 -0.0656% 1,064.8
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixedFloater -1.5758% Exchange/Reset date is 2011-05-01. The carnage in BCE issues continues! This issue traded as low as 24.17, a 52-week low, before closing at 24.36-84, 10×10.
CM.PR.P PerpetualPremium -1.0158% Odd! I haven’t noticed the CIBC walking into any sharp objects lately. Now with a very attractive pre-tax bid-YTW of 4.43% based on a bid of 26.31 and a call 2012-11-28 at $25.00.
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 80,935 Desjardins crossed 50,000 at 24.99. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.92 and a limitMaturity.
CU.PR.B PerpetualPremium 56,400 Nesbitt crossed 40,000 at 27.20, then Scotia crossed 10,000 at the same price. Perhaps the sellers were making room for the pending new issue – but then, what were the buyers doing? Now with a pre-tax bid-YTW of 3.06% based on a bid of 27.02 and a call 2008-07-01 at $26.00 … it won’t yield much more than bonds, unless CU decides to waive the call.
W.PR.H PerpetualPremium 51,200 Scotia crossed 50,000 at 26.65. Now with a pre-tax bid-YTW of 4.25% based on a bid of 26.63 and a call 2013-2-14 at $25.00.
PWF.PR.I PerpetualPremium 41,200 Nesbitt crossed 40,000 at 26.65. Now with a pre-tax bid-YTW of 3.81% based on a bid of $26.50 and a call 2008-05-30 at $26.00.
CM.PR.I PerpetualPremium 32,650 Now with a pre-tax bid-YTW of 4.56% based on a bid of 25.27 and a call 2016-03-01 at $25.00

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

PrefLetter

PrefLetter Live!

I am very pleased to announce that PrefLetter is now accepting subscriptions (from Ontario residents and those registered with the Quebec securities commission).

Top recommendations for “Best of Class” for each type of preferred share!

You may purchase the previous issue, the next issue, or subscribe for a year. Subscribing for a year gets you the previous issue as a bonus.

PrefLetter is prepared from market conditions at the close of the second Friday of each month and is delivered to subscribers prior to the opening of the TSX on the following Monday. Enjoy!

Miscellaneous News

Synthetic Floating Rate Preferreds : Better than BCE?

Readers will have noticed that the market’s extreme dependence upon a single issuer as a source of Floating Rate issues. This dependence has even led to the closing of a major fund to new investment.

So: this is where financial engineering comes in. There is very little need to actually have floating rate issues … one can have a portfolio of perpetuals and swap the income stream into floating rate, via Interest Rate Swaps. Interest rate swaps are a huge market, big enough that the Chicago Board of Trade has designed a thirty-year swap contract to complement its wildly successful 10-year contract.

Swaps in Canada are traded Over-the-Counter by the bigger banks. Essentially, one party agrees to pay a fixed rate for a definite term – this fixed rate will be very closely related to the fixed rate the bank pays on its direct obligations of similar term. In return, the counterparty agrees to pay the three-month Bankers’ Acceptance rate, reset periodically, for the same term. Obligations are netted, to minimize credit risk as far as possible.

Therefore, there is no real need to rely on BCE for floating rate preferreds! You can buy a portfolio of bank-issued perpetuals and swap the income stream into something based on the BA rate.

It’s not a perfect hedge. There’s basis risk (bank prefs might not trade the same way as bank bonds, just for starters!), there’s tax risk (if short rates go to 25% then sure, you’ve got a pre-tax hedge, but not a post-tax one!) and there’s term risk (however much I may assume it in the programming, thirty years is not equal to infinity), to name but three.

On the other hand I, for one, would much rather have a bank-floater-equivalent than a BCE floater (all else being equal), so a few risks are acceptable, as long as they are quantified and understood.

I’ve uploaded a more detailed proposal. Does anyone have, say, $50-million in perps they want to convert to floaters?