The Royal Bank Fixed-Reset 6.25%+350 announced November 24 settled today on good volume and little price movement – a departure from recent norms for which the underwriters will doubtless be grateful!
It traded 389,932 shares in a range of 24.85-05, closing at 25.00-03, 40×177. From the bid of 25.00, the YTW is 5.89% to the limitMaturity, while the yield to the five year call is 6.27%.
It’s interesting to see how these new issues are effecting the trading prices of the older issues — that is to say, not as much as it would appear that they should.
I’m just looking at strait cash yields on the three 5 year reset issues that RY now has outstanding. Unless I’m missing some important data, their call/reset dates are the same, which makes it trivial to compare their yield on cost and projected yields on reset in various interest rate environments. As of this AM, cash yield on cost is:
ry.pr.i – 5.83%
ry.pr.l – 5.83%
ry.pr.n – 6.25%
Huh?
Not only is the current cash yield of the new issue substantially higher than the older issues, but in the reset scenario the cash yield resets higher as well — how much higher depends on what the benchmark rate is at the time of the reset.
Again, huh?
It seems to me that the only scenario in which i and l turn out better for the investor is yield to first call, where the capital gain gooses returns a bit, particularly i. This seems foolish to me, for two reasons:
1) If it’s to the bank’s advantage to keep these issues outstanding, they will, so you have to assume that a perpetual issue is just that, perpetual.
2) In the event that the bank is calling in some pref shares, they’re most likely to call in their most expensive issues — which of these three is clearly the most recent.
One is left to conclude that these fixed reset issues are trading as though they are in fact 5 year issues. Which they are not.
Am I missing something?
nb. I don’t own any fixed reset pref shares, but market anomalies are a very interesting topic.
Well, it’s a sloppy, sloppy market and the agreement of the current yield of the Royals is actually pretty good.
At the close last night, the HIMIPref™ preTax bid-YTW for the RY PerpetualDiscounts was:
RY.PR.A 7.15%
RY.PR.B 7.39%
RY.PR.C 7.46%
RY.PR.D 7.28%
RY.PR.E 7.28%
RY.PR.F 7.32%
RY.PR.G 7.32%
RY.PR.H 7.35%
RY.PR.W 7.03%
Preferreds are not a very efficient market!
The potential for capital gain is something that needs to be taken into consideration – see, for example, the post Negative Convexity? Negative Schmonvexity!. There is no chance for a capital gain on RY.PR.N; but there is a chance for RY.PR.I & RY.PR.L. This chance is worth something … we can argue for as long as we please about how big a chance and how much it’s worth … but I don’t think the qualitative idea that there IS a chance and it IS worth something is open to debate. It is right and proper that the yield-to-perpetuity on RY.PR.N be greater than on the other two, as compensation for missing this chance.
You will note, however, that the PerpetualDiscounts as a group yield about maybe 7.30% (with a chance for a greater capital gain, although the probability must be calculated differently), implying that investors are willing to give up 150bp-odd for the reset feature. This seems excessive to me.
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