PrefBlog

I have received a communication from a novice investor that ties together a lot of things that I’ve been writing about …

I came across the report on TD issuing the tier 1 notes and, in my attempt to find further information, subsequently stumbled on your blog.

I was just wondering if you could provide insights on this issuance. I’m new to the investment game and I’d like to establish a solid fixed-income foundation before looking at equities. Based on a quick overview of the preliminary prospectus, these notes appear to be subordinated debt, exchangeable into preferred stock in case of insolvency. I don’t particularly like this provision; I’d rather own the kind of senior debt that triggers liquidation in the event of defaulted payments.

In any case, could you please lay out the basics of these tier 1 notes and explain how they differ from ‘traditional’ bond debt.

I discussed the new issue of TD CATS earlier today; it is similar to December’s BMO issue.

As far as discussion of the basics of bank debt are concerned, I am sufficiently immodest as to suggest my own essay, titled “A Vale of Tiers”. Note that sometimes assigning seniority to different types of bank debt can be a mug’s game: see BAs or BDNs – What’s the Difference?.

Also, could you comment on the following:

– What do you think of currency risk when it comes to investing in foreign securities? I look at the TSX and it’s really missing the ‘pizzazz’ of stocks from south of the border. My feeling is that I should avoid foreign investments because it adds a dimension (currency risk) that I know little to nothing about; nor do I want to deal with it.

I suggest that most portfolios should have a certain amount of currency exposure. How much of your expected expenditures are foreign-currency dependent? The answer is probably more than you think – oil is traded in USD and we pay for winter fruits and vegetables in USD. However, there is probably a certain amount of exposure in any portfolio anyway … most resource stocks will be USD dependent to at least some extent.

I make no recommendations on currency exposure. It’s just not what I do!

Does Canada have a decent tool for gaining (free) transparency into the bond market, like ‘finra’ in the U.S.?

In the “Canadian Fixed Income Data” section of the links in the right hand panel, I link to both Canadian Bond Indices and Perimeter. That’s the best I know of for Canada … but thanks for mentioning FINRA – I’ve just added that link to the US Fixed Income Data section.

Do you share the view that preferreds are at an inherent disadvantage owing to the lack of upside potential relative to common stock on the one side, and lack of security relative to bonds on the other? This is what I understood from reading Ben Graham’s ‘Security Analysis’. But things may have changed since 1934 😉

I discussed Benjamin Graham’s views recently. Basically, he was writing at a time when tax rules made preferred stocks far more attractive to corporations than to individuals … so by the time that corporations had finished sifting the offerings, there wasn’t much left for retail! A similar situation is found in Canada when considering holding preferred shares in a Registered Plan – taxable investors are so favoured by legislation that there’s rarely anything left available that would be attractive for non-taxable holders.

Any expertise you’d be willing to share would be greatly appreciated. Perhaps you could reply on your blog for the benefit of your readers.

My pleasure – and I hope you become an Assiduous Reader!

This entry was posted on Thursday, January 15th, 2009 at 6:59 pm and is filed under Reader Initiated Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.