{"id":9405,"date":"2010-01-14T17:48:26","date_gmt":"2010-01-14T21:48:26","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=9405"},"modified":"2010-01-14T17:48:26","modified_gmt":"2010-01-14T21:48:26","slug":"national-post-cheers-on-fixedresets","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=9405","title":{"rendered":"National Post Cheers on FixedResets"},"content":{"rendered":"

The National Post had an article on preferreds yesterday by Eric Lam And David Pett, Reset preferred shares fill trust gap<\/a> with all the incisive, hard-hitting reporting that made the National Post what it is today: bankrupt:<\/p>\n

John Nagel, vice-president at Desjardins Securities, preferred shares department, and one of the creators of reset preferreds, said the shares give investors much more flexibility.<\/p>\n

“The very low interest-rate scenario that we’re in … if rates are a lot higher five or six years from now, there’s the option of going floating or being redeemed. That’s very attractive,” he said.<\/p><\/blockquote>\n

Flexibility? The redemption option belongs to the issuer. The holder – if not redeemed – has the relatively trivial opportunity to choose between fixed and floating. The flexibility that counts belongs to the issuer.<\/p>\n

\nTo date, almost all of the reset preferreds have gained in value from the price they were originally issued. That represents an added bonus for investors who got in early, but it also presents a particular challenge for investors looking to get in on the action now as they may face lower yields and the potential for large capital losses as shares get redeemed on the reset date at par.<\/p>\n

Clearly, it’s important to think about the exit strategy right from the beginning.<\/p>\n

“When you buy it, assume the worst,” Mr. Nagel said.<\/p>\n

“The secret is to look at these six months or nine months ahead of [maturity], and make a decision. If you think they’re going to be redeemed, you should sell.”<\/p><\/blockquote>\n

Sell to whom? At what price?<\/p>\n

If the bond yield has risen substantially, the issuer is likely going to redeem the shares to prevent you from cashing in on the elevated rates.<\/p><\/blockquote>\n

This part is nonsense. The redemption decision will have everything to do with credit spreads on the market – can they borrow on more attractive terms? – and virtually nothing to do with the absolute value of “bond yield” – assuming that by “bond” they mean five-year Canadas.<\/p>\n

On the other hand, if the bond yield is low and it looks like the shares will be reset, the best bet — available in the vast majority of cases — is to convert to floating rate preferred shares, which are usually pegged to the Government of Canada three-month treasury bills plus the spread.<\/p><\/blockquote>\n

Hopeless nonsense. In a normal environment, a five year bond will outperform treasury bills bought and rolled for a five-year term. Not always, but more often than not.<\/p>\n

Investors should remember that while FixedResets can certainly mitigate the effects of a rise in yields, you pay through the nose for that benefit; the bond market, as a whole, ascribes zero value to this benefit<\/a>. And the credit risk is forever. Should Bad Things happen to Groupe Aeroplan – although it is hard to imagine bad things happening to a company that combines air travel with green stamp savings books – they will not be able to refinance at +375, not redeem, and the prefs will be trading at a big discount.<\/p>\n","protected":false},"excerpt":{"rendered":"

The National Post had an article on preferreds yesterday by Eric Lam And David Pett, Reset preferred shares fill trust gap with all the incisive, hard-hitting reporting that made the National Post what it is …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-9405","post","type-post","status-publish","format-standard","hentry","category-interesting-external-papers"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/9405","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=9405"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/9405\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9405"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9405"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9405"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}