{"id":2205,"date":"2008-05-29T12:37:01","date_gmt":"2008-05-29T16:37:01","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=2205"},"modified":"2008-05-29T12:37:01","modified_gmt":"2008-05-29T16:37:01","slug":"fixed-resets-critchley-likes-ruggins-doesnt","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=2205","title":{"rendered":"Fixed-Resets : Critchley Likes, Ruggins Doesn't"},"content":{"rendered":"

Barry Critchley of the Financial Post has written another column, reiterating his earlier praise<\/a> of the structure. In the current column, BNS Offers Investors Better Deal<\/a> he states:<\/p>\n

But in five years, investors know that the yield on the new fixed-rate pref will be set at the same spread over Canada bonds as was the original pref share. (Every five years, investors have the ability to move in and out of fixed or floating pref shares.)<\/p>\n

In this way, the issuer won’t benefit from any improvement in credit spreads over the five-year period.<\/p><\/blockquote>\n

This is not correct. If credit spreads improve significantly, the issue will be called. One of the Big Black Marks against this structure is the 5-year call at par; the standard provisions for a normal fixed rate issues are a 5-year-call at a premium, declining to a 9-year call at par. Those extra four years are very important.<\/p>\n

Of more interest are the reported comments of Len Ruggins … but I might just be saying that because I agree with him!<\/p>\n

In response to an earlier column that focused on Scotia’s original deal, Ruggins called and gave his thoughts. In short, he didn’t like the earlier deal because the issuer is paying a yield that is lower than what it would have paid had it chosen to issue a perpetual pref share.<\/p>\n

“The bank has issued a Tier 1 security that will most likely be redeemed in five years’ time [because] a regular bank perpetual [issued today] would require a dividend in excess of 5%.<\/p>\n

“If market interest rates and dividend yields return to a more normal level in 2013 it is unlikely that the banks will reset the rate on these prefs. I would have bought this issue, if the bank had said that it would not be callable for, say, 20 years, thereby paying a very good dividend which is reset every five years. I’ll bet that during the last year of this issue, the pref will trade on the assumption that it is going to be called regardless of where the Canada bond is trading,” said Ruggins.<\/p><\/blockquote>\n

Hat tip to Assiduous Reader tobyone<\/i> who brought the column to my attention<\/a>.<\/p>\n

Newly Assiduous Reader meander<\/i> likes the structure, as he explains in his comment on the new issue TD+160<\/a>. As for myself, I will stick to my previously published analysis<\/a>: these issues, at these rates, are trading as pretend-five-year money. If they actually WERE five year money, I’d be scooping them up by the hatfull. If there was a 20-year no-call period and I could actually be assured of receiving these headline spreads for a lengthy period … back up the truck!<\/p>\n

But since the credit risk is actually perpetual and my absolute best case scenario is that it’s five year money … I’ll wait until I’m actually paid to take on that credit risk.<\/p>\n

Or, to put it another way … look at Table #1 in my previously published analysis<\/a>: would you have bought this structure in February ’07 if the fixed rate had been 4.0% with a +60bp reset? If so, how would you feel?<\/p>\n

Fixed-Resets – according to me – share the sales and investment philosophy of Principal Protected Notes:<\/p>\n