Why is CBU.PR.A priced so high?

The mailbag brings the following:

I have followed your blog for quite some time, and have found it both interesting and quite informative. I recently got a report from CIBC that says that CBU.PR.A had a yield to maturity of only 0.5%, which seems very low, any idea why someone would want to buy this name? It seems like a no brainer to sell it, and swap it out for something else with similar risk, but a higher yield. But maybe I’m missing something.

Ah yes … when people want to know what’s going on, they come to me. When they want to do actual cash business, they go to CIBC. Story of my life. But since my interlocuter was careful to insert some flattery into the request, why not?

CBU.PR.A was last discussed on PrefBlog in the post CBU.PR.A Announces Normal Course Issuer Bid and at that time I noted that:

benefitted to the point where a unit sold at $25 last fall is now worth $35.65 and the capital units are trading at a big fat discount to intrinsic value.

This still the case. The NAV is currently $36.61, against prices of $21.10 for the capital units and $12.75 for the prefs.

According to the prospectus:

Annual Concurrent Retraction: A holder of a Preferred Share may concurrently retract an equal number of Preferred Shares and Class A Shares on the second last Business Day of January of each year (the “Annual Retraction Date”), commencing in January 2010, at a retraction price equal to the NAV per Unit on that date, less the pro rata portion of the Note then outstanding and less any costs associated with the retraction, including commissions and other such costs, if any, related to the liquidation of any portion of the Portfolio required to fund such retraction. The Preferred Shares and Class A Shares must both be surrendered for retraction at least ten Business Days prior to the Annual Retraction Date. Payment of the proceeds of retraction will be made on or before the 15th Business Day of the following month.

According to the fund’s 2009 Report, the Note had a value 2009-12-31 of about $1.7-million or slightly less than $0.10 per unit.

There are also monthly retractions available at a discount; these were highlighted in the last post.

So if you buy both a capital unit and a preferred share, you are essentially buying a closed end fund at a discount of about 8% that you can liquidate at the end of the year. By me, this is just another instance of the occasionally highly lucrative Split Share Retraction Game and the question is not ‘Why is CBU.PR.A priced so high?’, but ‘Why is CBU priced so low?’

For an answer to the latter question, however, Assiduous Readers will have to query somebody who works at a brokerage that is on television a lot.

CBU.PR.A is not tracked by HIMIPref™.

One Response to “Why is CBU.PR.A priced so high?”

  1. […] These numbers are even more dramatic than the ones last discussed on PrefBlog, in the post Why is CBU.PR.A priced so high?. […]

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