New Issue: TD 5.60% Perps

TD has announced:

that it has entered into an agreement with a group of underwriters led by TD Securities Inc. for an issue of 8 million Non-cumulative Class A First Preferred Shares, Series R (the “Series R Shares”), carrying a face value of $25.00 per share, to raise gross proceeds of $200 million. TD intends to file in Canada a prospectus supplement to its January 11, 2007 base shelf prospectus in respect of this issue.
    TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series R Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full.
    The Series R Shares will yield 5.60% per cent annually and are redeemable by TD for cash, subject to regulatory consent, at a declining premium after approximately five years.
    The issue is anticipated to qualify as Tier 1 capital for TD and the expected closing date is March 12, 2008.

Name of issue: Toronto-Dominion Bank (The) Non-cumulative Class A First Preferred Shares, Series R

Size: 8-million shares @ $25; greenshoe option for another 2-million shares

Ratings: DBRS Pfd-1; S&P P-1(low); Moody’s Aa2

Dividend: $1.40 p.a., long first dividend of $0.54082 payable July 31 (assuming March 12 Closing)

Redemption: Redeemable at $26.00 commencing April 30, 2013; Redemption price declines by $0.25 every April 30 until April 30, 2017; redeemable at $25.00 on and after April 30, 2017.

Underwriting terms: bought deal, subject to syndication, “disaster out”, “regulatory out”, “rating change out” and “material adverse change out”.

Closes: 2008-3-12

 

You don’t need to look far for a comparable! The issue is virtually identical to the recent TD.PR.Q issue, which differs only in a three month shift in the redemption schedule. TD.PR.Q closed 2008-2-29 at 25.59-65.

Update: Using the closing yield curve on 2008-3-3 for taxable accounts, HIMIPref™ calculates a fair value (“curvePrice“) of $25.48 for the new issue, compared with $25.57 for TD.PR.Q.

To my great pleasure, the fitting error of the yield curve has jumped considerably today – more fitting error means more mispricing means more trading opportunities!

Update, 2008-03-04: TD has announced:

that a group of underwriters led by TD Securities Inc. has exercised the option to purchase an additional 2 million Non-cumulative Class A First Preferred Shares, Series R (the “Series R Shares”) carrying a face value of $25.00 per share. This brings the total issue announced on March 3, 2008, and expected to close March 12, 2008, to 10 million shares and gross proceeds raised under the offering to $250 million.

Update 2008-3-4: Using the closing taxable curve, fair value $25.37.

Update 2008-3-7: Closing taxable curve, fair value $25.24.

Update 2008-3-11: Fair value $25.24 when marked to the closing taxable curve. The symbol when it starts trading tomorrow morning will be TD.PR.R. The fair value of the comparable, TD.PR.Q, is 25.29; it closed at 25.10-15.

30 Responses to “New Issue: TD 5.60% Perps”

  1. madequota says:

    Happy now?

    OK, the long-awaited, predicted, and eagerly anticipated by Mr. Hymas, new issue is here.

    TD.PR.Q, as well as BMO and BNS’s previous 5.6% issues are down by about a half dollar per share.

    This was also predicted, and nervously anticipated by . . . me.

    Tomorrow, the Canadian bank rate will either be dropped from it’s current level of 5.75% to either 5.5% or very possibly 5.25%. Yet, TD thinks it’s smart to issue preferred debt at 5.6%. In a word . . . Duh.

    Why is the continued flooding of the market with discounted pref shares a good thing again?

    madequota

  2. jiHymas says:

    It’s not clear to me why there should be a fixed relationship between the bank rate and the price of Tier 1 Equity. Can you elucidate?

  3. lystgl says:

    If rates are expected to go down, why would existing 5.6% prefs (BNS, TD) be down? Simply because TD is issuing some more of the same isn’t flooding the market, I’m sure, and a downward trend in interest rates should be good for existing pref prices, no?

  4. jiHymas says:

    lystgl … there may be some worries that (i) TD is merely the first of many issuers, who really will flood the market, or (ii) that TD is really smart and prefs are extremely expensive at 5.6%.

    After the horrors of 2007, there will be a lot of nervousness among the cowboys.

    downward trend in interest rates … I can’t address this until you tell me which interest rates.

  5. lystgl says:

    # jiHymas Says:
    March 3rd, 2008 at 2:32 pm

    downward trend in interest rates … I can’t address this until you tell me which interest rates.

    Isn’t Mr. Carney expected to announce a 25 bp lowering of the bank rate (50 maybe) and much like bonds, shouldn’t existing (higher dividend paying prefs) become more valuable because of it?

  6. madequota says:

    Mr. Hymas . . . The relationship between the bank rate and any fixed rate vehicle is simple: as the bank rate goes down, the value and hence, price of any fixed yielding security should go up. Period.

    Think about it; if in the extreme sense the bank rate (which influences borrowing and interest paying accounts directly) went down to, say 1% . . . would a bond, pref share, or even a Hymas-issued IOU that was fixed at, say 8%, not have a value way higher than it’s par-issued price. Of course it would.

    Therefore, when a bank issues paper of any kind the day before a bank rate cut, and they do this at a rate that will almost certainly be higher than the prime rate they use to lend money out . . . well, they are “stupid”. Let’s think about that: they pay me 5.6% on the money I “lend” them when I buy their prefs . . . and they only charge me 5.25 – 5.5% for money they lend to me (perhaps to buy their own prefs, as I’ve suggested in the past).

    Tier 1 or otherwise, if they did this all day long, they would . . . well . . . go bankrupt eventually. Is this elucide enough?

    lystgl . . . if I can buy TD’s new issue at $25, why would I buy their existing issue at $25.65? Why would I not sell (or short sell) their existing issue at any price I can get above $25, and use that cash to buy their new issue at $25? Makes sense to me . . . and unfortunately to most of the market as well, who accordingly has bid these 5.6% prefs way down today on the IPO news.

    Am I the only reader here that’s actually interested in avoiding losing money?

    madequota

  7. jiHymas says:

    Mr. Hymas . . . The relationship between the bank rate and any fixed rate vehicle is simple: as the bank rate goes down, the value and hence, price of any fixed yielding security should go up. Period.

    Quite frankly, madequota, this is nonsense. A bankrate set too low will fuel inflation, decreasing the price of long bonds as much as you like. There is absolutely no “correct” slope of the yield curve.

    Term extension trades – such as busted Orange County in 1994 – have a risk. A term premium is not necessarily free money. As with everything else in life, “it depends”.

    Further, I suggest you read through the posts on regulatory capital. It is quite apparent that you either do not understand, or are deliberately ignoring, the importance of Tier 1 capital in bank regulation. Briefly: They cannot borrow $20 at 4% and lend $20 at 5.25% unless they have AT LEAST $1 in Tier 1 capital. If we assume that the spread on a potential $20 is 1.25%, what rate is the “indifference rate” (the rate at which the whole deal is a break-even proposition) for the necessary $1 in Tier 1 Capital? Show your work.

    You are also assuming that there is an infinite amount of the new issue available. This breathtaking assumption is quite unjustified.

  8. kaspu says:

    Sigh….

  9. madequota says:

    OK . . . there’s at least 3 items in that response that I must deal with . . . but unfortunately the market has me a little over-involved at this moment . . . more to come

    Let me just say this for now: If a bank has 5.6% paper trading at 3% above par; is it not safe to say that any new issue (of identical Tier, quality, etc.) cannot safely be sold for, at most a 1% discount to this? In other words, if their existing 5.6% prefs have a market value of $25.75, can they not successfully sell a new $25 par issue at say 5.5%? This not only nets them more $$, but keeps their existing investors somewhat happy about the fact that they’re not getting trashed by their own issuer.

    More importantly, it would reassure the market that preferred share investing actually makes some sense. Based on the predictable response in the market today to TD’s new issue, more and more investors seem to be throwing up their arms, and telling TD et al . . . to just *&^? off, and keep their flooding paper.

    madequota

  10. kaspu says:

    Actually, I’m throwing kisses at TD and, for that matter, any other bank that is willing to give me 5.6% tax-advantaged. Just to remind everybody, 5 year is 3.6%, 10 year is 3.6%. 300 basis points (424 in my tax bracket) is loverly.

  11. jiHymas says:

    If a bank has 5.6% paper trading at 3% above par; is it not safe to say that any new issue (of identical Tier, quality, etc.) cannot safely be sold for, at most a 1% discount to this?

    No, this is not a safe thing to say. It’s a reasonable ballpark guess, a first approximation, a place to start, but it does not represent an analysis worth a nickel.

    Selling $200-million plus of preferreds in a primary offering is a far cry from where they trade in lots of a thousand.

    You might be very happy to buy a chocolate bar from me for $1.00. What will you bid on a million chocolate bars?

    Pricing new issues is more art than science. Sometimes the underwriters get it right … sometimes the underwriters get it wrong. If the new issue yielded, say, 5.5%, there is the possibility that buyers would experience sticker-shock and refuse to buy paper at 5.5% when it was being sold for 5.6% five weeks ago. Is this the case now? I don’t know … I’m not plugged into the sources of information that might let me make a good guess.

    I have, however, made my guess about whether or not to subscribe to the new issue. I think I guess right about 60% of the time, which is enough to make good returns for the fund.

  12. madequota says:

    It will be interesting to see what your response is next week, when RBC, who has yet to weigh in on any pref offering in recent history, comes to market at 5.9% . . . or 6.1%.

    Then, the 5.6% TD’s you think are such good value today will almost certainly open in the mid to low $24′s, triggering an instant [paper, but very real] loss.

    How would your fundholders respond to that? You can say Tier 1, real return, etc. all day long, but the reality is you bought prefs at $25 that you could have bought for $24, and to any intelligent investor, this is the only reality that matters.

    I will predict right now, with utmost certainty, that the floodgates are looking to swing wide open once again. RBC is probably the most unruly of the group, and they are pounding the market on the sell side, especially in their own issues.

    1 million chocolate bars? I guess this addresses your own question regarding infinite supplies. With prefs, there have been, for the better part of the last year; that’s for sure . . . and the trend seems to continue with morbid regularity. I’d like to be excited about this like you and Kaspu, but the net result for anyone long prefs when this happens is always the same, stunted growth, and at least short term losses.

    madequota

  13. kaspu says:

    If they come out with a 5.9% or a 6.1%, I can assure you that Baby Duck will be flowing in the Kaspu household. The trick is not to buy on margin, and not to sell below one’s purchase price (cough! cough!)

  14. kaspu says:

    And, by the way, we’re talking about vintage Baby Duck….none of that cheap stuff

  15. jiHymas says:

    madequota

    You will have noted, of course, that I have not offered an opinion regarding whether this new issue is good, bad or indifferent. The closest I have gotten to that is a note that this issue is very similar to TD.PR.Q, and noted Friday’s closing price.

    With respect to my fund’s unitholders … I stand on my record. You have yet to demonstrate that you have any comprehension of the difference between shit and shinola.

    Publish your (audited!) results.

    Quite frankly, madequota, I’m getting a little tired of you. Always whining, and in this thread demonstrating complete ignorance of why the market even exists in the first place.

  16. madequota says:

    I thought my comments were, from a trading perspective, quite interesting and topical. You’ve made your point.

  17. jiHymas says:

    madequota

    If you choose to post your belief that a particular issue is (a) too cheap and, (b) indicative of a coming flood that will knock the market down

    … you are free to do so and I (and other Assiduous Readers, I’m sure) will read your remarks with interest. The more evidence and argument you supply in support of your views, the more interesting your posts will be and the more credible your opinions.

    Once you start calling other players stupid, however, (RBC’s trader, TD’s treasury) you’d better be prepared to demonstrate complete mastery of the subject and intimate familiarity with their situation and motivations – or be prepared to have yourself ripped a new one.

  18. jiHymas says:

    I have an Assiduous Reader who prefers to remain anonymous. This particular Assiduous Reader has an ear a lot closer to the ground than I do and believes three things …

    (a) The deal could have been done at 5.50%
    (b) TD is happy paying 5.60% anyway, because this was a small price to pay to ensure the deal got done in a difficult market
    (c) madequota is long a big whack of TD.PR.Q

  19. adrian2 says:

    FWIW, TDW itself has closed its “new issue” offering of the R preferreds.

  20. jiHymas says:

    adrian2 … not bad! Sold out in a day, at least according to the (affiliated brokerage of the) lead underwriter.

    OK … so other potential issuers know that there is appetite for prefs at 5.60% … and this is where things get more interesting!

  21. kaspu says:

    I too am long a large amount of the TD Q (7000), but I have no problem with it taking a bit of a hit today. At the end of the day, the 5.6% is a lovely thing to have…and I also bought a whack of the new issue (also 7000) today. And if some other bank wants to sell me a 5.6% tomorrow, I’ll buy a whack of that. It’s all about that spread, baby (with apologies to Sheila Copps)

  22. lystgl says:

    At first I was nonplussed and just a little hurt that you didn’t respond to my second post, however, being an assiduous (diligent no longer) reader of PrefBlog, I’m rather glad you didn’t.

  23. kaspu says:

    I’ve always wondered, if one can be nonplussed, can one ever be plussed?

  24. lystgl says:

    # kaspu Says:
    March 3rd, 2008 at 8:10 pm

    “I’ve always wondered, if one can be nonplussed, can one ever be plussed?”

    plussed

    plussed can be found at Merriam-WebsterUnabridged.com.

  25. jiHymas says:

    kaspu – it is indeed all about the spread … good luck with the position! Tell me – if you feel like it! – do you trade these positions at all, or do you buy-and-hold?

    lystgl – My apologies for not responding to your second post. Basically, short rates do not necessarily have anything to do with long rates and corporate rates do not necessarily have anything to do with Canada rates.

    The first is due to the different factors influencing the ends of the yield curve. The short end will trade off monetary policy – the bank rate – while the long end will trade off inflation expectations. These are related, but not identical, factors and the interplay between them will (to a large extent) determine the slope of the yield curve. There’s also supply and demand to worry about and other factors, but that’s the basic idea.

    The second spread is due to default risk. Corporate bonds (like preferreds!) have an asymettric payoff – you can always lose a lot more than you can win (if the company goes bankrupt and recovery on your holding is less than 100%). In times of stress, therefore, corporate spreads will widen as investors demand more yield to compensate for the added risk – this is a feature of recessions. In good times, spreads narrow as investors believe that bankruptcy is less of a fear.

    When talking about perps, both factors are accentuated – because there is no set maturity date, affecting the applicable term spread, and because prefs are junior to bonds, increasing the risk of recovery in bankruptcy.

    Besides all that, there is the market discounting factor. You know the expectations, I know the expectations … so does everybody else. Right now you have one-month BAs trading through the (current) bank rate, yielding 3.81% vs. the Bank Rate of 4.00%. The market is clearly anticipating a cut and is already pricing it in.

    All these factors interact in chaotic ways (meaning that you can’t really forecast a particular output from a given input) and if you don’t understand it you’re in illustrious company – reading up on “Greenspan’s Conundrum” will probably help you feel better. It sure makes me feel better!

    So, no, you can’t simply draw a straight line between a cut in the bank rate (input) and a rise in preferred share prices (output). Many a slip ‘twixt the cup and the lip!

  26. kaspu says:

    sorry about the late reply…I just got back from a regular monthly family business meeting (37 people), and the migraine is just only beginning to subside just now….

    In answer to your question, Mr. Hymas….it depends on whether the pref market is trending up or down. all other things being equal…if I can make in a cap gain in under 8 months what I can earn off the dividend in a year, I will book the cap gain, which is fully sheltered in my circumstance….I can almost always find ,sooner or later, an acceptable new position. this is why I have no problem with some issues going down…..there is always a buy somewhere in a down market. It is only when the pref market is going crazy up, and all the new issues are in the mid 4% (as was the case a year ago), that I get agravated, since I have to decide whether or not I should book the cap gain and invest at a lower yield, which thereby forces me to hope only for a cap gain from the new investment. Again, the biggest problem I have is getting sufficient product in a diverse enough range. I don’t buy splits unless I’m getting what i consider enough of a risk premium. right now, I’m buying these new prefs and others like the ELF twins, and, before my big mouth, the CCS, hand over fist. I also like the EPP and the Westcoasts.I honestly don’t see the down side with an 18 month horizon. On the U.S. side, I love the Nexen and the BMO V….to be able to invest my US dollars in Canadian issues and get the 1.41 tax advantage is nice thing. that’s a 600 basis point spread to the US 2 year!

  27. kaspu says:

    sorry.. I ran out of space. One last thing, if I may…for me, it is always all about being able to sleep at night. Thus, no margin, ever, and no panic selling. With good quality prefs, the regular dividends is like a cup a hot cocoa.

  28. jiHymas says:

    Thanks, kaspu … it’s always interesting to learn how other people do it! And congratulations on surviving your meeting – that sounds like a very grim ordeal!

    Thus, no margin, ever, and no panic selling. With good quality prefs, the regular dividends is like a cup a hot cocoa.

    Isn’t it, though?! If you ever think of a product or service that I should be selling, but am not selling … let me know, willya?

  29. [...] TD.PR.R, announced March 3, settled today and was unable to trade above par, with volume of 771,292 in a range of 24.85-97. The closing quotation was 24.88-90, 29×2. [...]

  30. [...] New issue settled today. Now with a pre-tax bid-YTW of 5.65% based on a bid of 24.88 and a limitMaturity. [...]

Leave a Reply

You must be logged in to post a comment.