{"id":6046,"date":"2009-03-28T17:30:06","date_gmt":"2009-03-28T21:30:06","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=6046"},"modified":"2009-03-28T17:30:06","modified_gmt":"2009-03-28T21:30:06","slug":"watch-the-details-on-rate-reset-preferreds","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=6046","title":{"rendered":"Watch the Details on Rate-Reset Preferreds"},"content":{"rendered":"<p>Barry Critchley of the <i>Financial Post<\/i> has been all over the map on Fixed-Resets:<\/p>\n<ul>\n<li>He <a href=\"http:\/\/www.prefblog.com\/?p=2205\">adored the initial issues<\/a>\n<li>then he <a href=\"http:\/\/www.prefblog.com\/?p=2872\">sounded a cautionary note<\/a>\n<li>he recently <a href=\"http:\/\/www.prefblog.com\/?p=5898\">published an effusive column<\/a><\/ul>\n<p>&#8230; and now he is <a href=\"http:\/\/www.financialpost.com\/story.html?id=1437485\">warning that &#8220;redeemable&#8221; is different from &#8220;retractible&#8221;<\/a>:<\/p>\n<blockquote><p>If the prefs are not redeemed, in five years holders will be offered a choice of a new fixed-rate pref or an option to convert to a floating-rate pref. The rate will be set at the same spread as the original fixed-rate prefs. (Over time, the spread has widened to 450 basis points from 160 basis points.) The actual rate offered could be lower or higher than the original coupon.<br \/><b>&#8230;<\/b><br \/>Now, Len Ruggins, a former senior financing executive with BCE, has weighed in. He argues the terms are &#8220;greatly tilted in the issuer&#8217;s favour, primarily because of their option to periodically call the issue at their pleasure.&#8221;<br \/><b>&#8230;<\/b><br \/>Ruggins said he &#8220;would buy into these issues if they were non-call for financial advantage for at least 25 years. This, in my mind, would establish a level playing field between the issuer and the investor. I am not trying to cut off a source of capital for our Canadian banks. However, I don&#8217;t think they should take undue advantage of the financially unsophisticated retail investor.&#8221;<\/p><\/blockquote>\n<p>By and large, Mr. Critchley&#8217;s attitude towards the structure has become more cautionary as the terms of new issues have improved! I consider the recent spate of new issues to be somewhat rich compared to PerpetualDiscounts, but to a much smaller degree than they were a year ago. In fact, there is now enough overlap between the more expensive PerpetualDiscounts and the cheaper FixedResets that <a href=\"http:\/\/www.himivest.com\/malachite\/MAPFMain.php\">the fund I manage<\/a> has taken some opportunistic positions in Fixed Resets, as disclosed in <a href=\"http:\/\/www.prefblog.com\/?p=5351\">the portfolio composition review for January 2009<\/a>.<\/p>\n<p>It is interesting to compare this column with the <a href=\"http:\/\/www.prefblog.com\/?p=6042\">column by Rob Carrick<\/a> of the <i>Globe and Mail<\/i>, published on the same day.<\/p>\n<p><b>Update, 2009-3-31<\/b>: In light of the comments to this post by Assiduous Reader <i>GAndreone<\/i>, I thought it would be interesting to post the <a href='http:\/\/www.prefblog.com\/wp-content\/uploads\/2009\/03\/bmoo_1stcall.pdf'>HIMIPref&trade; Option Calculation Box<\/a> for BMO.PR.O as of 2009-3-30. Note that I do not claim that this represents a perfect and correct calculation of what the price of the option would be if it was separable from the preferred share; I will say, however, that the various parameters used as inputs &#8230; er &#8230; how shall I phrase this &#8230; seem to work pretty much OK when used as part of HIMIPref&trade;&#8217;s valuation routine.<\/p>\n<p><b>Update, 2009-3-31<\/b>: There&#8217;s a great <a href=\"http:\/\/www.theglobeandmail.com\/servlet\/story\/RTGAM.20090327.wstmain0328\/CommentStory\/SpecialEvents2\/home#comment3356390\">comment on the G&#038;M story<\/a>:<\/p>\n<blockquote><p>Bruce King from Canada writes: I think James Hymas is stuck with a lot of straight preferreds that have tanked and he&#8217;s hoping to drum up some demand in order to unload them on us. He&#8217;s probably salivating at the chance to generate enough cash to buy some of the new rate-reset preferreds.<\/p><\/blockquote>\n<p>Curses! Foiled!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Barry Critchley of the Financial Post has been all over the map on Fixed-Resets: He adored the initial issues then he sounded a cautionary note he recently published an effusive column &#8230; and now he &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-6046","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/6046","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6046"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/6046\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6046"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6046"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6046"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}