I’m really surprised by the resiliency shown by the two TransCanada PipeLines issues – these are very similar perpetuals, with a $50 par value and pay $2.80 p.a. – a coupon of 5.6%. TCA.PR.X is redeemable at par commencing 2013-10-15, while the TCA.PR.Y is redeemable at par commencing 2014-3-5.
TCA.PR.X was issued in October 1998 as TRP.PR.X, while TCA.PR.Y began life 1999-3-5 as TRP.PR.Y. Four million shares of each series are outstanding so they’re a nice size for non-financial issues.
These issues are perennial favourites of mine. They were hard hit when TRP cut its common share dividend, with the low point being 2000-5-23: TRP.PR.Y had closing quote of 34.80-25 on volume of 6,180 shares. I made a fair bit of money on that – tough times do not lead inevitably to default.
There were some credit worries when they made a big investment in Dec 06, but these were taken care of by an equity issue.
More recently, their 5.6% coupon, far higher than most of their competition in recent years (other issues with similarly high coupons have been called) made them exemplars of the virtues of the PerpetualPremium class – when they yielded 4.10% to call, as they did about a year ago, the difference between this yield and the coupon implied a lot of interest-rate protection for investors.
They’ve weathered the storm of the past year beautifully – well down from the high of 55.71-10 on no volume, reached 2006-12-4 by TCA.PR.Y, but not nearly as badly hit as perpetuals without such high coupons … just chugging along, paying their coupon, and still trading above thier call price.
Which is my problem. Why are they still trading above their call price? The cycle has turned, and a coupon of 5.6% is not as extraordinary as it was a year ago – see the new issues of TD.PR.R, TD.PR.Q and BNS.PR.O all with similar coupons and a call date at par that is further away than the TCA calls (and it is unequivocally better for the call date to be further away, since the call won’t be exercised if you want it to be – and vice versa!).
Why are TCA.PR.X and TCA.PR.Y, both rated Pfd-2(low) by DBRS and P-2 by S&P, trading to yield less than the bank issues, rated Pfd-1 [DBRS] and P-1(low) [S&P]? One explanation may be scarcity value (many players are fully loaded on banks in general and these banks in particular) and another might be extreme sector aversion to financials. But it still doesn’t make a lot of sense to me.
I’ve uploaded some charts, comparing these two issues with others that have a 5.6% coupon…
- YTW TCA.PR.X & W.PR.J
- Modified Duration TCA.PR.X & W.PR.J
- Yield Difference TCA.PR.X & W.PR.J
- Yield Disparity TCA.PR.X
- YTW, CM.PR.E & POW.PR.A
- Modified Duration, CM.PR.E & POW.PR.A
- YTW Difference, CM.PR.E & POW.PR.A
Yield disparity, by the way, is the amount of yield that would have to be added or subtracted from the yield curve in order to achieve a calculated price equal to the market price – some players may know this as the “Z-Spread”. It is not unusual for an issue (such as TCA.PR.X over the past year) to be “always expensive” – this may mean that there is something about the issue that is not incorporated in the model (a restrictive covenant, perhaps, or scarcity value, or … something) but it is clear to see from the chart that TCA.PR.X (and TCA.PR.Y) have become more expensive than usual.
And I completely fail to understand why they’re trading through the banks.
Update, 2008-03-23: In response to prefhound‘s points in the comments, I have uploaded listings for PerpetualDiscount and PerpetualPremium yieldDisparities. Note that these yield disparities contain adjustments for Cumulative Dividends – which I believe to be an artefact, but will admit that I am unsure. The cumulativeDividend adjustment to curve price (and hence curve yield) is quite substantial – without it, TCA.PR.X would appear even more expensive than they do now.