PrefBlog

This issue became the only “Operating Retractible” to have a negative bid-Yield-to-Worst (YTW) on August 17, with a bid price of 25.36.

 It was issued in the spring of 1998 and has an annual coupon of $1.20. The option schedule is:

• Redemption      2005-08-25      2006-08-24  25.500000
• Redemption      2006-08-25      2007-08-24  25.250000
• Redemption      2007-08-25   INFINITE DATE  25.000000
• Retraction      2008-05-25   INFINITE DATE  26.040000

And the calculation of YTW is:

• Call  2006-09-16 YTM: 10.41 % [Restricted: 0.86 %] (Prob: 12.31 %)
• Call  2006-09-24 YTM: -0.43 % [Restricted: -0.05 %] (Prob: 9.32 %)
• Soft Maturity  2008-05-24 YTM: 3.90 % [Restricted: 3.90 %] (Prob: 78.38 %)

And the cash flow for YTW is:

• 2006-09-24  FINAL DIVIDEND   0.10   1.000451   0.10
• 2006-09-24        MATURITY  25.25   1.000451  25.26

Which at least has the advantage of being simple!

HIMIPref™ does not consider the investment merits (or lack thereof!) of this issue when evaluating trades – the eligibleForPurchase function returns code “14” :

pseudoModifiedDuration (Worst) of buy side less than minimum setting

In other words, the issue is simple too short-term to be worth bothering with.

With an annual coupon of only $1.20 and with the bank having the chance to save $0.25 by waiting until the end of August, 2007 to redeem these shares, they will probably be around for another year, no matter what the term until the YTW scenario. From an investor’s perspective, however … Who’s putting a bid on these things???? The most likely scenario has the pre-tax cash flow analysis:

• 2006-11-25        DIVIDEND   0.30   0.989474   0.30
• 2007-02-25        DIVIDEND   0.30   0.979888   0.29
• 2007-05-25        DIVIDEND   0.30   0.970703   0.29
• 2007-08-25        DIVIDEND   0.30   0.961299   0.29
• 2007-11-25        DIVIDEND   0.30   0.951985   0.29
• 2008-02-25        DIVIDEND   0.30   0.942762   0.28
• 2008-05-24  FINAL DIVIDEND   0.29   0.933925   0.27
• 2008-05-24        MATURITY  25.00   0.933925  23.35
• Total Cash Flows    27.0924
• Total Present Value    25.3601
• Discounting Rate 3.9026 % (Annual rate compounded semi-annually)

which doesn’t look all that great to me!

Update, 2008-9-9: And, as a matter of fact, the issue was called for redemption at par, effective 2007-8-27.

This entry was posted on Friday, August 18th, 2006 at 3:06 pm and is filed under Issue 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.