RY.PR.K

The Yield-to-Worst on this issue went negative on 2006-08-21, joining BMO.PR.G to be the second member of the “Operating Retractibles” index with negative YTW.

The option schedule on the RY.PR.Ks is:

  • Redemption      2004-08-24      2005-08-23  25.750000
  • Redemption      2005-08-24      2006-08-23  25.500000
  • Redemption      2006-08-24      2007-08-23  25.250000
  • Redemption      2007-08-24   INFINITE DATE  25.000000
  • Redemption      2003-08-24      2004-08-23  26.000000
  • Retraction      2008-08-24   INFINITE DATE  25.000000

And the (pre-tax) YTW Scenario analysis is:

  • Call  2006-09-20 YTM: 9.13 % [Restricted: 0.75 %] (Prob: 13.55 %)
  • Call  2006-09-23 YTM: -2.32 % [Restricted: -0.21 %] (Prob: 8.85 %)
  • Call  2006-12-19 YTM: 2.70 % [Restricted: 0.89 %] (Prob: 5.21 %)
  • Soft Maturity  2008-08-23 YTM: 3.87 % [Restricted: 3.87 %] (Prob: 72.39 %)

This is another one of those situations which may ultimately force me to define yet another yield measure: “Yield-to-Best-For-Issuer”. The YTW is based on an immediate call at $25.25, which would lead to an absolute loss of money from yesterday’s closing bid of $25.40 (never mind the closing offer of $25.59!). If Royal waits a year prior to calling, however, they will save themselves $0.25 on the call price and only pay $1.1750 in extra dividends for that period. They can calculate their net cost of funds for the next twelve months, then as less than $1.00 on a $25.00 loan, which is considerably below what they would have to pay on a new perpetual issue (although another retractible might possibly be competitive: CGI.PR.C pays $0.975 and is quoted at $25.45-74).

No matter how it’s sliced, it’s very unlikely that you’ll see HIMIPref™ recommending this issue in the near future … too short-term, for one thing.

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