January 15, 2015

January 15th, 2015

There’s some disinflationary news from India:

Reserve Bank of India Governor Raghuram Rajan cut interest rates in an unscheduled review to revive growth in Asia’s third-largest economy after inflation eased. Stocks, bonds and the rupee surged.

Rajan lowered the benchmark repurchase rate to 7.75 percent from 8 percent, he said in a statement today, the first reduction since May 2013. Consumer-price inflation will probably be below the central bank’s target of 6 percent by January 2016, he said.

Rajan has focused on quelling inflation since taking office in September 2013, and today’s move signals confidence that price pressures will remain under control. It sets India on a different path from Brazil and Russia, which raised rates in December to tame inflation and support their currencies.

And here’s a new twist to currency wars:

At 9:30 a.m. today, trading floors across the City of London erupted.

Outbursts of obscenities and confusion followed the Swiss central bank’s surprise decision to abolish its three-year-old policy of capping the Swiss franc against the euro, according to traders in London’s financial district. The U-turn sent the franc as much as 41 percent up against the euro, the biggest gain on record, a move that one trader estimated may cause billions of dollars of losses for banks and their customers.

As the franc spiked, investors said they found themselves unable to trade it amid a lack of price quotes.

“There was a good hour when euro-swiss was untradeable,” said Chris Morrison, London-based head of strategy at Omni Macro Fund, a hedge fund which oversees $550 million. “Clearly there was no liquidity.”

Forex.com, a currency-trading website, said it halted services briefly “until we get confirmation from our liquidity providers that we can get Swissie liquidity.” Dealing resumed at about 10:30 a.m. London time.

Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.

“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”

Sometimes we have to leave Never-Never Land:

“The decision has been a surprise for markets — you can’t do it in any other way,” SNB President Jordan told reporters in Zurich today. “We came to conclusion that it’s not a sustainable policy.”

The change comes just one week before ECB policy makers meet to discuss new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro.

The SNB spent billions defending the cap after introducing it in September 2011. Jordan said today it may intervene again.

“The SNB doesn’t see any future any more for their floor with the strong U.S. dollar and the QE ahead at the ECB,” said Alessandro Bee, strategist at Bank J Safra Sarasin AG in Zurich.

I tip my hat to those who followed the example of George Soros and decided that the CHF/EUR rate was unsustainable. Sometimes the politicians and bureaucrats just need to be TOLD!

It looks like Canada is off Target:

Target Corp. (TGT) will walk away from Canada less than two years after opening stores there, putting an end to a mismanaged expansion that racked up billions in losses.

The Canadian division, which employs 17,600 people, is seeking court approval to begin liquidation, the Minneapolis-based retailer said today in a statement. Dismantling operations north of the border will lead to a $5.4 billion writedown this quarter, though it will boost profit by next year, Target said.

Fixing the Canada unit, which had amassed more than $2 billion in operating losses since 2011, has been a top priority for Chief Executive Officer Brian Cornell. After taking the reins in August, he spent a portion of his early days at the company touring operations in the country. The woes plaguing the chain’s 133 stores there ranged from empty shelves to prices being higher than at locations in the U.S.

“We were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell said today. “This was a very difficult decision, but it was the right decision for our company.”

DBRS comments:

DBRS therefore believes that Target’s decision to wind down its Canadian business is more reflective of the Company’s inability to achieve its own strategic, operational and financial milestones within this market rather than any indication of broader weakening of the Canadian retail sector.

This event, however, has no effect on ratings in the retail sector at the present time because DBRS believes that the business risk profile of the overall sector should remain within its current bandwidth over the near to medium term. This outlook is based on DBRS’s:
– view that new competition will emerge (including the impact of growing online retailing) and that the trend toward equilibrium in the sector will continue after this temporary reduction in competition;
– and concern about Canadian consumers becoming more challenged because of high debt levels as well as potentially higher interest rates and lower residential real estate prices in the future.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 12bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is lengthy yet again, dominated by low-spread FixedReset losers as the Canada 5-Year yield dropped to an incredible 1.02%. Will we go below 1%? Place yer bets, gents, place yer bets! Volume was low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

  • based on Implied Volatility Theory only
  • are relative only to other FixedResets from the same issuer
  • assume constant GOC-5 yield
  • assume constant Implied Volatility
  • assume constant spread

Here’s TRP:

impVol_TRP_140115
Click for Big

So according to this, TRP.PR.A, bid at 21.53, is $0.69 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.48 and resetting at +154bp on 2016-1-30 is $1.09 rich.

impVol_MFC_140115
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MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

impVol_BAM_140115
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There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.12 and appears to be $0.87 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.18 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

impVol_FTS_140115
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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.75, looks $0.79 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.20, looks $1.08 expensive and resets 2019-3-1

pairs_FR_140115
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Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

I’m spending $25 a day on cell phone data charges. I wonder if Bell will give me a refund.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.7486 % 2,534.5
FixedFloater 4.43 % 3.61 % 20,589 18.28 1 -0.2325 % 3,992.6
Floater 2.99 % 3.11 % 55,505 19.46 4 -0.7486 % 2,694.3
OpRet 4.04 % 1.35 % 95,742 0.42 1 0.0394 % 2,756.4
SplitShare 4.26 % 4.03 % 36,072 3.63 5 -0.1576 % 3,206.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0394 % 2,520.4
Perpetual-Premium 5.44 % -6.20 % 57,563 0.08 19 -0.0165 % 2,499.2
Perpetual-Discount 5.15 % 5.00 % 99,777 15.39 16 0.2325 % 2,694.3
FixedReset 4.21 % 3.48 % 203,528 16.68 77 -0.1153 % 2,540.7
Deemed-Retractible 4.95 % 1.11 % 98,567 0.20 39 0.0356 % 2,620.5
FloatingReset 2.70 % 2.05 % 61,774 3.43 7 0.0404 % 2,480.2
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset -3.60 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.45
Bid-YTW : 5.23 %
TRP.PR.B FixedReset -2.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 16.90
Evaluated at bid price : 16.90
Bid-YTW : 3.76 %
SLF.PR.G FixedReset -2.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.34
Bid-YTW : 5.12 %
BAM.PR.X FixedReset -1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 3.83 %
HSE.PR.A FixedReset -1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 3.72 %
GWO.PR.N FixedReset -1.69 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.40
Bid-YTW : 5.02 %
BAM.PR.B Floater -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 16.93
Evaluated at bid price : 16.93
Bid-YTW : 3.12 %
GWO.PR.I Deemed-Retractible -1.46 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 5.60 %
MFC.PR.F FixedReset -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.01
Bid-YTW : 4.41 %
BAM.PR.K Floater -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 16.88
Evaluated at bid price : 16.88
Bid-YTW : 3.13 %
TRP.PR.A FixedReset 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 21.53
Evaluated at bid price : 21.53
Bid-YTW : 3.71 %
NA.PR.Q FixedReset 1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 26.03
Bid-YTW : 2.19 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PF.G FixedReset 182,691 RBC crossed 98,200 at 25.76; TD crossed 65,300 at 25.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 23.35
Evaluated at bid price : 25.70
Bid-YTW : 3.93 %
BNS.PR.R FixedReset 178,218 Nesbitt crossed blocks of 124,900 and 50,000, both at 25.60.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 3.17 %
GWO.PR.M Deemed-Retractible 150,240 Scotia crossed blocks of 100,000 and 50,000, both at 26.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.30
Bid-YTW : 1.06 %
TD.PF.C FixedReset 113,328 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 23.18
Evaluated at bid price : 25.06
Bid-YTW : 3.42 %
W.PR.H Perpetual-Premium 109,820 RBC crossed 109,000 at 25.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-14
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 2.59 %
MFC.PR.N FixedReset 106,242 RBC crossed 25,000 at 25.16; TD crossed 56,700 at 25.25.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 3.66 %
NA.PR.W FixedReset 105,800 Scotia crossed 60,000 at 25.08; TD crossed 35,000 at 25.07.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 23.18
Evaluated at bid price : 25.06
Bid-YTW : 3.42 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.B FixedReset Quote: 16.90 – 17.65
Spot Rate : 0.7500
Average : 0.5061

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-15
Maturity Price : 16.90
Evaluated at bid price : 16.90
Bid-YTW : 3.76 %

GWO.PR.N FixedReset Quote: 20.40 – 21.00
Spot Rate : 0.6000
Average : 0.3894

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.40
Bid-YTW : 5.02 %

MFC.PR.A OpRet Quote: 25.37 – 25.78
Spot Rate : 0.4100
Average : 0.2249

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-19
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 1.35 %

GWO.PR.I Deemed-Retractible Quote: 23.02 – 23.63
Spot Rate : 0.6100
Average : 0.4315

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 5.60 %

SLF.PR.E Deemed-Retractible Quote: 23.31 – 23.73
Spot Rate : 0.4200
Average : 0.2795

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.31
Bid-YTW : 5.44 %

GWO.PR.S Deemed-Retractible Quote: 25.82 – 26.22
Spot Rate : 0.4000
Average : 0.2742

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.82
Bid-YTW : 4.89 %

BBD.PR.B, BBD.PR.C & BBD.PR.D Downgraded to P-5(high) by S&P

January 15th, 2015

Bombardier announced a ‘pause’ today and the market paused its bids:

Bombardier Inc. (BBD/B) tumbled the most in at least 26 years after moving to cut about 1,000 jobs and book $1.4 billion in pretax fourth-quarter costs as it halts work on the Learjet 85 business aircraft.

The dismissals will take place in Kansas and Mexico, and result in severance expense of $25 million this quarter, said Bombardier, which didn’t predict when the Learjet 85 program will resume. Profit in the aerospace and trainmaking units for 2014 will fall short of previously announced targets.

Bombardier’s pullback on the Learjet 85, which was described as a “pause” in the face of weak demand, underscored the company’s struggle in developing new planes. The Learjet 85 is already more than a year behind schedule, and Montreal-based Bombardier eliminated about 3,500 aerospace jobs last year as it postponed the CSeries airliner for the fourth time.

“It’s really not clear to me what ‘pause’ means,” said Cam Doerksen, an analyst at National Bank of Canada Financial in Montreal who rates Bombardier as sector perform. “This is a pretty sizable charge, and this suggests to me this may be longer than a typical delay. This appears to be an indefinite pause.”

The cost to protect Bombardier’s debt from default within 5 years jumped 125 basis points to 481 basis points at 4:17 p.m., according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. The contracts are at the highest level since January 2012.

and S&P cut their credit rating by a notch:

  • •Montreal-based Bombardier Inc. announced it would pause its Learjet 85 program due to weak demand and has revised its business aircraft market forecast downward.
  • •In addition, the company revised its 2014 guidance, including reduced earnings before interest and taxes margins at both the aerospace and
    transportation divisions.
  • •Because of Bombardier’s reduced profitability, pricing pressures on new aircraft, and revised escalation assumptions in the transportation division on some contracts that affected estimated future revenues, we
    have reassessed our comparable rating modifier on the company and revised it to “neutral” from “positive”.
  • •As a result, we are lowering our ratings on Bombardier, including our long-term corporate credit rating to ‘B+’ from ‘BB-’
  • •The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than previously forecast.


The ratings on Bombardier reflect what we view as the company’s “satisfactory” business risk profile and “highly leveraged” financial risk profile. Our ratings take into consideration the company’s leading market positions in the transportation and business aircraft segments, as well as its product range and diversity. These positive factors are partially offset, in our opinion, by the continued execution risk associated with the entry into service of the CSeries jet, high leverage, and reported profitability that has been weak in both the aerospace and transportation divisions.

The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than we previously forecast. Furthermore, the outlook incorporates our opinion that, given Bombardier’s current leverage and debt-to-cash flow metrics, there remains very limited room for delays on project execution or margin
deterioration.

We could lower the rating on Bombardier should its new aircraft program experience further delays or order levels do not allow for profitable production, resulting in a reassessment of the company’s business risk profile. In addition, we could take a negative rating action should Bombardier face liquidity pressures, which could result from either deteriorating headroom under its covenants or an inability to refinance upcoming maturities.

These issues have previously been downgraded to P-4(low) by S&P in February 2014 and to Pfd-4(low) by DBRS. All are tracked by HIMIPref™ and all are relegated to the Scraps index on credit concerns.

BCE.PR.F To Reset At 3.110%

January 15th, 2015

BCE Inc. has announced (emphasis from original) that it:

will, on February 1, 2015, continue to have Cumulative Redeemable First Preferred Shares, Series AF (“Series AF Preferred Shares”) outstanding if, following the end of the conversion period on January 19, 2015, BCE Inc. determines that at least one million Series AF Preferred Shares would remain outstanding. In such a case, as of February 1, 2015, the Series AF Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the average of the yields to maturity compounded semi-annually, determined on January 12, 2015 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period. The “Selected Percentage Rate” determined by BCE Inc. for such period is 259.4%. The “Government of Canada Yield” is 1.199% . Accordingly, the annual dividend rate applicable to the Series AF Preferred Shares for the period of five years beginning on February 1, 2015 will be 3.110%.

The rate was reset in 2010 to 4.541%, so this is a 32% cut to the dividend, which will no doubt cause much wailing and gnashing of teeth.

This is not much of a premium over the 3.00% (100% of Prime) paid by the RatchetRate issue, BCE.PR.E, and as it turns out the breakeven prime rate as determined by the pairs equivalency calculator is only 3.55% given today’s closing bids of 20.04 for BCE.PR.F and 20.50 for BCE.PR.E.

That is to say that IF BCE.PR.E continues to trade below par and therefore continues to pay 100% of prime, and if the average prime rate from now until the next interconversion date in 2020 exceeds 3.55%, THEN BCE.PR.E will have been the better choice.

As one can see, this is a fairly modest hurdle, compared to that implied by other FixedFloater/RatchetRate Strong Pairs:

pairs_FF_140114
Click for Big

Given that there is a presumed immediate gain of $0.46 available by converting BCE.PR.F to BCE.PR.E and that the risk of this being reduced during the period between the decision date and the date that converters receive their replacement shares is small (since, all else being equal, a reduction in the price of BCE.PR.E implies a reduction in the Break-Even Prime Rate, which is already on the low side), I recommend that holders of BCE.PR.F convert to BCE.PR.E. Holders of BCE.PR.E should retain their shares.

Note that while the company requires notification of conversion prior to 5:00 p.m. (Eastern time) on January 19, 2015, brokerage houses will have deadlines a day or two in advance of the company deadline – so there’s not much time to waste!

January 14, 2015

January 14th, 2015

Yessir, one has to admire all those hard-nosed market timers who positioned themselves for “rising interest rates”:

Treasury 30-year bonds yields are tumbling to record lows as the collapse in oil and commodity prices smothers inflation and hampers global economic growth.

Global sovereign yields fell to records in the U.K., France, Canada and Japan as a report showed retail sales in the U.S. slumped in December by the most in almost a year, reflecting a broad-based retreat that may prompt economists to cut growth forecasts. The slide prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after speculating that rates could rise as soon as April.

Even at the record low yield of 2.39 percent reached today, 30-year Treasuries are attractive to global investors looking at negative returns on the sovereign debt of nations including German with the European Central Bank expected to add to its bond-buying program as policy makers seek to avert deflation.

The Treasury sold $13 billion of 30-year bonds at an auction-record-low yield of 2.430 percent.

Thirty-year bond yields dropped five basis points, or 0.05 percentage point, to 2.45 percent as of 2:31 p.m. in New York, according to Bloomberg Bond Trader data. The momentum that caused the previous record low of 2.44 percent set on July 26, 2012, to be eclipsed is being driven by the following factors.

  • GLOBAL SLOWDOWN THREAT …
  • LOW INFLATION …
  • RELATIVE RETURNS…
  • FED TIMING …

Larry Berman of the Globe passes on chief markets economist at Capital Economics John Higgins’ reasons, one of which was missed in the above:

Two, financial institutions are adapting to stricter regulations regarding leverage and assets, creating more demand for safe government bonds.

JPMorgan’s Jamie Dimon is complaining about the regulatory three-ring circus:

Jamie Dimon, grappling with multibillion-dollar legal costs and rising capital requirements at JPMorgan Chase & Co. (JPM), said overlapping efforts by U.S. regulators place banks “under assault.”

“We have five or six regulators or people coming after us on every different issue,” Dimon, 58, said today on a call with reporters after New York-based JPMorgan reported fourth-quarter results. “It’s a hard thing to deal with.”

JPMorgan, the largest U.S. bank by assets, posted a drop in fourth-quarter profit amid $990 million of legal expenses, about double what some analysts predicted. The legal costs, mostly tied to probes into currency rate-rigging, follow even bigger payments in 2013 related to mortgage bonds sold before the 2008 crisis by JPMorgan and firms it acquired.

Dimon, who was lauded during the crisis for JPMorgan’s role in buying Bear Stearns Cos. and Washington Mutual Inc.’s banking operations, has criticized the government for penalizing JPMorgan for those firms’ actions.

“In the old days, you dealt with one regulator when you had an issue, maybe two,” said Dimon, 58. “Now it’s five or six. It makes it very difficult and very complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”

Another hilarious spoofing case in US markets:

And then there is Aleksander Milrud, who allegedly built his spoofing robot out of lots of human traders in China and Korea and maybe elsewhere. Milrud was charged with spoofing today by federal prosecutors and the Securities and Exchange Commission, making him by my count only the second person to be charged with criminal spoofing. The claim is that Milrud recruited lots of traders in China and Korea, and then assigned them to spoof stocks from two accounts each. In the “dirty” account, a trader would enter lots of spoof orders to move the market. In the “clean” account, he’d enter a few orders the other way, to take advantage of the market move. The connections between those accounts, and between them and Milrud, were then further obscured by a series of tubes or whatever. 2 The traders could move fast because “Milrud worked with a gaming software company to develop ‘hot keys’ that allowed his traders to quickly place and cancel multiple orders via their computers with only a few strokes of their keyboards.” Because the next best thing to being an algorithm is being a human with a really fancy keyboard.

I see no reason that spoofing should be a crime. To the extent that it causes additional limit orders to be on the board, spoofing is good! I’m not concerned about the spoofees, because they’re just traders, playing a traders’ games. A fundamental investor can only be helped by spoofing.

One argument that can be made in favour of outlawing spoofing is that the ‘bad’ orders will drive out the ‘good’ – i.e., that legitimate speculative market makers will exit the market because they don’t understand it any more. I’m not so sure that this will be the case; I haven’t seen any evidence to support this view, although if may very well be that lots exists.

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets losing 22bp and DeemedRetractibles off 3bp. There is another lengthy Performance Highlights table, dominated by losing FixedResets. Volume was low.

PerpetualDiscounts now yield 5.00%, equivalent to 6.50% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, unchanged from January 7.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

  • based on Implied Volatility Theory only
  • are relative only to other FixedResets from the same issuer
  • assume constant GOC-5 yield
  • assume constant Implied Volatility
  • assume constant spread

Here’s TRP:

impVol_TRP_140114
Click for Big

So according to this, TRP.PR.A, bid at 21.23, is $0.92 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.47 and resetting at +154bp on 2016-1-30 is $1.08 rich.

impVol_MFC_140114
Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

impVol_BAM_140114
Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.53 and appears to be $0.88 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.30 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

impVol_FTS_140114
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.85 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.24, looks $1.16 expensive and resets 2019-3-1

pair_FR_140114
Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3238 % 2,553.6
FixedFloater 4.42 % 3.60 % 20,887 18.30 1 0.4671 % 4,001.9
Floater 2.97 % 3.07 % 55,289 19.57 4 -0.3238 % 2,714.7
OpRet 4.04 % 1.44 % 95,937 0.42 1 0.0000 % 2,755.3
SplitShare 4.26 % 3.96 % 35,237 3.63 5 -0.0473 % 3,211.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,519.4
Perpetual-Premium 5.44 % -5.17 % 57,116 0.08 19 0.0433 % 2,499.6
Perpetual-Discount 5.16 % 5.00 % 100,957 15.39 16 -0.0713 % 2,688.0
FixedReset 4.20 % 3.47 % 205,816 16.71 77 -0.2204 % 2,543.6
Deemed-Retractible 4.95 % 1.05 % 100,114 0.21 39 -0.0335 % 2,619.6
FloatingReset 2.70 % 2.20 % 60,973 3.43 7 -0.2990 % 2,479.2
Performance Highlights
Issue Index Change Notes
PWF.PR.P FixedReset -2.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 20.63
Evaluated at bid price : 20.63
Bid-YTW : 3.51 %
TRP.PR.C FixedReset -2.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 20.47
Evaluated at bid price : 20.47
Bid-YTW : 3.46 %
FTS.PR.J Perpetual-Discount -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.76
Evaluated at bid price : 24.15
Bid-YTW : 4.96 %
NA.PR.Q FixedReset -1.50 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 25.63
Bid-YTW : 2.77 %
BNS.PR.Z FixedReset -1.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 3.20 %
PWF.PR.A Floater -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 2.71 %
GWO.PR.N FixedReset -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 4.81 %
PWF.PR.T FixedReset -1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.82
Bid-YTW : 3.29 %
TD.PR.Y FixedReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 2.96 %
FTS.PR.M FixedReset 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.36
Evaluated at bid price : 25.61
Bid-YTW : 3.58 %
ENB.PR.Y FixedReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 21.90
Evaluated at bid price : 22.36
Bid-YTW : 4.15 %
MFC.PR.B Deemed-Retractible 1.76 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.26
Bid-YTW : 5.10 %
BNS.PR.Y FixedReset 3.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 3.42 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.H FixedReset 204,551 RBC crossed 191,800 at 18.64.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 3.62 %
BAM.PF.G FixedReset 155,828 RBC crossed 149,400 at 25.76.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.35
Evaluated at bid price : 25.70
Bid-YTW : 3.93 %
CM.PR.P FixedReset 110,897 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.18
Evaluated at bid price : 25.07
Bid-YTW : 3.41 %
TD.PF.C FixedReset 107,610 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.18
Evaluated at bid price : 25.06
Bid-YTW : 3.42 %
HSE.PR.A FixedReset 52,404 Nesbitt crossed 13,800 at 20.90, then sold 10,000 to anonymous at the same price. TD crossed 21,900 at 20.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 20.87
Evaluated at bid price : 20.87
Bid-YTW : 3.66 %
BNS.PR.N Deemed-Retractible 37,395 TD crossed 35,000 at 25.79.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-27
Maturity Price : 25.50
Evaluated at bid price : 25.75
Bid-YTW : -5.00 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.P FixedReset Quote: 20.63 – 21.31
Spot Rate : 0.6800
Average : 0.4723

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 20.63
Evaluated at bid price : 20.63
Bid-YTW : 3.51 %

NA.PR.Q FixedReset Quote: 25.63 – 26.23
Spot Rate : 0.6000
Average : 0.4084

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 25.63
Bid-YTW : 2.77 %

PWF.PR.A Floater Quote: 19.50 – 20.65
Spot Rate : 1.1500
Average : 0.9951

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 2.71 %

BNS.PR.Z FixedReset Quote: 24.25 – 24.67
Spot Rate : 0.4200
Average : 0.2771

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 3.20 %

FTS.PR.J Perpetual-Discount Quote: 24.15 – 24.68
Spot Rate : 0.5300
Average : 0.3924

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-14
Maturity Price : 23.76
Evaluated at bid price : 24.15
Bid-YTW : 4.96 %

BMO.PR.R FloatingReset Quote: 25.37 – 25.70
Spot Rate : 0.3300
Average : 0.2066

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 2.05 %

January 13, 2015

January 14th, 2015

So today the Prime Minister’s Office admitted the oil price drop is bad via one of its flunkies:

The plunge in oil prices is “on the whole” a negative for Canada’s economy and may delay its return to full potential, Bank of Canada Deputy Governor Tim Lane said.

“We will closely monitor its broader impacts on growth and the delay it may cause to the economy’s return to its production potential,” Lane said in a speech today in Madison, Wisconsin.

Economists are interpreting his remarks as confirmation the central bank will hold off raising interest rates for the time being. Governor Stephen Poloz and fellow members of the bank’s governing council will publish their next rate decision on Jan. 21, along with a quarterly policy report that will provide a detailed impact analysis of falling oil prices.

Canada’s dollar rose 0.2 percent to C$1.1953 per U.S. dollar at 3:58 p.m. Toronto time. It has depreciated by more than 10 percent in the last six months, as the price of benchmark crude oil has plunged 54 percent. A depreciating currency makes Canadian goods cheaper to foreign customers.

“Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada,” Lane said. “Estimating the magnitude of that overall impact requires carefully analyzing the interplay between the various effects as they work through the economy.”

Suncor agreed:

Suncor Energy Inc. (SU), Canada’s largest oil company, said it will cut 1,000 jobs, lower its 2015 capital budget by about 13 percent and delay projects to weather collapsing prices.

The company will spend C$1 billion ($836 million) less this year than originally forecast in November, following Canadian Natural Resources Ltd. (CNQ) in revising its budget lower this week. Suncor also plans to reduce operating expenses by C$600 million to C$800 million in two years, according to a company statement today.

So what do you do when you have too much oil?

Refiners, tankage firms and traders that invested in oil storage capacity are benefiting as the slump in crude to below $45 a barrel deepened what’s called contango, a relatively rare situation where prices for oil delivery later this year are higher than current prices. Vitol Group, Mercuria Energy Group Ltd. and Gunvor Group Ltd. are among the commodity houses poised to profit by storing oil and petroleum products to sell in the future.

“There is significant storage demand from traders wanting to cash in on that specific opportunity,” Martijn den Drijver, an analyst at SNS Securities in Amsterdam, said in an interview.

Mercuria, the fourth-largest independent oil trader, owns about 40 million barrels of storage in locations from Texas, South Africa and China to Belgium and the Netherlands, according to its website. The firm is looking primarily at its land-based storage facilities to play the contango, said Matt Lauer, a spokesman for the company with major trading operations in Geneva. Mercuria hasn’t moved to secure any floating storage in tankers at sea

I mentioned the Caisse’s intention to build transit in Quebec yesterday. DBRS is sanguine, but assumes independence:

DBRS Limited (DBRS) today notes that the Caisse de dép?t et placement du Québec (the Caisse) has entered into an agreement with the Government of Québec (the Government) to execute major infrastructure projects in the province. This new agreement is consistent with the Caisse’s strategy to grow its private market holdings, particularly infrastructure investments, amid the current low interest rate environment. Further, it allows the Caisse to capitalize on its unique understanding of the Québec market and address growing infrastructure needs in the province. Additionally, the Caisse’s current Québec concentration levels will not be affected. DBRS notes that the agreement is of a commercial nature, and importantly, the independence of the Caisse is a key feature and is by no means compromised by this agreement. This move has no implications on DBRS’s current ratings of the Caisse or its financing subsidiary, CDP Financial Inc.

Operationalization of the agreement will be dependent upon the introduction of legislative amendments, which is expected in the coming months. The new legislation will allow for the creation of the new infrastructure subsidiary, CDPQ Infra. Also, it will expand the Caisse’s current practice of merely investing in infrastructure projects, to accommodate the new business model, which will include project planning, development, construction and operation. Once established, it is expected that over time CDPQ Infra will expand its mandate to build, finance and operate infrastructure projects globally.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets down 55bp and DeemedRetractibles off 2bp. The Performance Highlights table is suitably lengthy with quite a few FixedReset losers and one solitary winner – a PerpetualDiscount. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

  • based on Implied Volatility Theory only
  • are relative only to other FixedResets from the same issuer
  • assume constant GOC-5 yield
  • assume constant Implied Volatility
  • assume constant spread

Here’s TRP:

impVol_TRP_140113
Click for Big

So according to this, TRP.PR.A, bid at 21.66, is $1.12 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.00 and resetting at +154bp on 2016-1-30 is $1.39 rich.

impVol_MFC_140113
Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

impVol_BAM_140113
Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.48 and appears to be $0.94 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.41 and appears to be $1.02 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

impVol_FTS_140113
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.96 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.26, looks $1.23 expensive and resets 2019-3-1

pairs_FR_140113
Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.9206 % 2,561.9
FixedFloater 4.44 % 3.62 % 21,713 18.27 1 -0.0115 % 3,983.3
Floater 2.96 % 3.07 % 56,883 19.57 4 -0.9206 % 2,723.5
OpRet 4.04 % 1.43 % 97,225 0.43 1 0.0000 % 2,755.3
SplitShare 4.25 % 3.95 % 35,160 3.63 5 0.2187 % 3,212.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,519.4
Perpetual-Premium 5.44 % -4.90 % 57,908 0.08 19 0.0620 % 2,498.5
Perpetual-Discount 5.15 % 5.03 % 101,405 15.36 16 0.0793 % 2,690.0
FixedReset 4.20 % 3.48 % 203,213 16.70 77 -0.5543 % 2,549.3
Deemed-Retractible 4.95 % 0.85 % 100,479 0.13 39 -0.0244 % 2,620.5
FloatingReset 2.69 % 1.97 % 61,140 3.44 7 -0.3894 % 2,486.7
Performance Highlights
Issue Index Change Notes
BNS.PR.Y FixedReset -4.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 3.90 %
PWF.PR.A Floater -2.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 2.68 %
IFC.PR.A FixedReset -2.38 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.11
Bid-YTW : 4.86 %
ENB.PR.F FixedReset -2.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.41
Evaluated at bid price : 23.02
Bid-YTW : 4.11 %
PWF.PR.P FixedReset -2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 21.23
Evaluated at bid price : 21.23
Bid-YTW : 3.41 %
BAM.PR.X FixedReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 21.48
Evaluated at bid price : 21.48
Bid-YTW : 3.76 %
ENB.PR.D FixedReset -1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.09
Evaluated at bid price : 22.48
Bid-YTW : 4.09 %
HSE.PR.A FixedReset -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 20.80
Evaluated at bid price : 20.80
Bid-YTW : 3.67 %
ENB.PR.N FixedReset -1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.53
Evaluated at bid price : 23.32
Bid-YTW : 4.17 %
MFC.PR.B Deemed-Retractible -1.81 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.84
Bid-YTW : 5.32 %
ENB.PR.Y FixedReset -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 21.67
Evaluated at bid price : 22.02
Bid-YTW : 4.22 %
TRP.PR.F FloatingReset -1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 21.34
Evaluated at bid price : 21.62
Bid-YTW : 3.24 %
BAM.PR.T FixedReset -1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 23.64
Evaluated at bid price : 25.30
Bid-YTW : 3.48 %
BAM.PR.R FixedReset -1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 23.89
Evaluated at bid price : 25.41
Bid-YTW : 3.49 %
IFC.PR.C FixedReset -1.65 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 2.86 %
BAM.PF.B FixedReset -1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 23.32
Evaluated at bid price : 25.30
Bid-YTW : 3.76 %
TRP.PR.A FixedReset -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 3.75 %
ENB.PR.T FixedReset -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.15
Evaluated at bid price : 22.72
Bid-YTW : 4.17 %
FTS.PR.H FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 18.80
Evaluated at bid price : 18.80
Bid-YTW : 3.62 %
FTS.PR.M FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 23.25
Evaluated at bid price : 25.25
Bid-YTW : 3.65 %
CU.PR.E Perpetual-Discount 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 24.18
Evaluated at bid price : 24.60
Bid-YTW : 5.02 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Y FixedReset 202,830 Scotia crossed 200,000 at 23.48.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 3.90 %
ENB.PR.N FixedReset 124,932 Nesbitt crossed 117,900 at 23.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.53
Evaluated at bid price : 23.32
Bid-YTW : 4.17 %
ENB.PF.G FixedReset 120,513 Nesbitt crossed 117,900 at 24.57.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.95
Evaluated at bid price : 24.50
Bid-YTW : 4.06 %
BMO.PR.P FixedReset 107,124 RBC crossed 100,000 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : -0.33 %
POW.PR.G Perpetual-Premium 91,647 TD crossed 40,000 at 26.25. RBC crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 26.21
Bid-YTW : 4.72 %
GWO.PR.P Deemed-Retractible 45,825 TD crossed 40,000 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.95
Bid-YTW : 4.81 %
There were 14 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.Y FixedReset Quote: 22.50 – 23.45
Spot Rate : 0.9500
Average : 0.5676

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.50
Bid-YTW : 3.90 %

ENB.PR.N FixedReset Quote: 23.32 – 23.84
Spot Rate : 0.5200
Average : 0.3432

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.53
Evaluated at bid price : 23.32
Bid-YTW : 4.17 %

PWF.PR.A Floater Quote: 19.76 – 20.75
Spot Rate : 0.9900
Average : 0.8253

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 19.76
Evaluated at bid price : 19.76
Bid-YTW : 2.68 %

ENB.PR.D FixedReset Quote: 22.48 – 22.85
Spot Rate : 0.3700
Average : 0.2220

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 22.09
Evaluated at bid price : 22.48
Bid-YTW : 4.09 %

BAM.PF.B FixedReset Quote: 25.30 – 25.69
Spot Rate : 0.3900
Average : 0.2487

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-13
Maturity Price : 23.32
Evaluated at bid price : 25.30
Bid-YTW : 3.76 %

GWO.PR.I Deemed-Retractible Quote: 23.42 – 23.84
Spot Rate : 0.4200
Average : 0.2968

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.42
Bid-YTW : 5.37 %

January 12, 2015

January 13th, 2015

Assiduous Readers will remember that implementation of the National Securities Regulator has turned out to be an excuse for the creation of arbitrary government powers. Now some pension funds have joined the attack:

The Healthcare of Ontario Pension Plan (HOOPP), the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan Board submitted a joint comment letter in December to federal Finance Minister Joe Oliver urging officials to remove pension plans from the draft Capital Markets Stability Act, which is still under review and has not yet been adopted.

HOOPP chief executive officer Jim Keohane said in an interview the act gives the proposed new regulator unprecedented powers to order companies or funds under its control to do anything it deems necessary to prevent systemic risks in the financial system.

“This act, as it reads right now, gives this regulator unbelievable powers that no other regulator in the world has,” he said.

“It can prohibit or restrict any business activities that we undertake. It could force us not to trade securities. The regulator can at its discretion order us to do anything it deems necessary to address systemic risk. It’s completely open-ended,” Mr. Keohane said.

The Caisse is going to build transit in Quebec:

The Caisse de dépôt et placement du Québec is set to boost its bet on infrastructure under a new deal with Quebec that will see the pension fund take over financing and ownership of new public transit projects in the province.

The pension-fund manager, which has assets of $214-billion, has struck an agreement with Quebec’s Liberal government that will see it be the maître d’oeuvre, or project owner, for new transit projects in the French-speaking province. Details of the deal are scheduled to be made public at a news event in Montreal on Tuesday.

Sources familiar with the agreement described it as “a new way of financing and running public transportation infrastructure” for Quebec that will see the Caisse assume ownership over new transit assets and responsibility for building them. Essentially, the province is privatizing the plan for new public transportation projects but with an investor with which it has an established and privileged relationship.

It’s hard to make this out. Is it a plan for current workers to fund current retirees, by overcharging for services? Or is it a plan to pillage the fund by undercharging? All one can really say is that when Big Government jumps into bed with itself, it’s the public who gets screwed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets up 14bp and DeemedRetractibles gaining 5bp. There is a lengthy performance highlights table notable for BAM FixedResets on the good side. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

  • based on Implied Volatility Theory only
  • are relative only to other FixedResets from the same issuer
  • assume constant GOC-5 yield
  • assume constant Implied Volatility
  • assume constant spread

Here’s TRP:

impVol_TRP_140112
Click for Big

So according to this, TRP.PR.A, bid at 21.55, is $1.01 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.99 and resetting at +154bp on 2016-1-30 is $1.18 rich.

**************************************

Having reached this point in the report I lost my internet connection. There were “network problems” at Bell Highspeed and there are still problems. I have been working today using my cell phone as a Wi-Fi hotspot; not a very good substitute, but good enough. Since I don’t work for BCE, I am aware of the value of redundancy!

So this report is foreshortened. Sorry!

**************************************

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 1.1856 % 2,585.7
FixedFloater 4.39 % 3.63 % 22,622 18.08 1 -0.2304 % 3,983.7
Floater 2.93 % 3.06 % 57,228 19.59 4 1.1856 % 2,748.8
OpRet 4.04 % 1.42 % 96,010 0.43 1 0.0394 % 2,755.3
SplitShare 4.26 % 4.11 % 36,378 3.64 5 0.1317 % 3,205.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0394 % 2,519.4
Perpetual-Premium 5.45 % -3.26 % 59,225 0.08 19 0.0289 % 2,497.0
Perpetual-Discount 5.16 % 5.01 % 102,832 15.37 16 -0.0977 % 2,687.8
FixedReset 4.17 % 3.42 % 205,386 8.58 77 0.1426 % 2,563.5
Deemed-Retractible 4.95 % 0.31 % 101,558 0.14 39 0.0498 % 2,621.1
FloatingReset 2.68 % 1.94 % 60,498 3.40 7 -0.0343 % 2,496.4
Performance Highlights
Issue Index Change Notes
TRP.PR.B FixedReset -2.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 17.58
Evaluated at bid price : 17.58
Bid-YTW : 3.61 %
CU.PR.E Perpetual-Discount -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.80
Evaluated at bid price : 24.20
Bid-YTW : 5.11 %
GWO.PR.P Deemed-Retractible -1.53 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 5.07 %
BNS.PR.Y FixedReset -1.51 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.44
Bid-YTW : 3.26 %
SLF.PR.G FixedReset -1.46 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.90
Bid-YTW : 4.80 %
BAM.PR.K Floater 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 17.12
Evaluated at bid price : 17.12
Bid-YTW : 3.08 %
GWO.PR.H Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.49
Bid-YTW : 5.16 %
BMO.PR.M FixedReset 1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 2.68 %
FTS.PR.H FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 19.03
Evaluated at bid price : 19.03
Bid-YTW : 3.58 %
PWF.PR.A Floater 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 20.25
Evaluated at bid price : 20.25
Bid-YTW : 2.61 %
BAM.PF.F FixedReset 1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 3.75 %
IAG.PR.G FixedReset 1.65 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.47
Bid-YTW : 1.91 %
BAM.PR.B Floater 1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 17.24
Evaluated at bid price : 17.24
Bid-YTW : 3.06 %
MFC.PR.C Deemed-Retractible 1.93 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.80
Bid-YTW : 5.19 %
BAM.PR.R FixedReset 2.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.86
Bid-YTW : 3.12 %
BAM.PR.T FixedReset 2.06 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.17 %
BAM.PR.X FixedReset 2.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 21.53
Evaluated at bid price : 21.91
Bid-YTW : 3.65 %
Volume Highlights
Issue Index Shares
Traded
Notes
NA.PR.W FixedReset 83,650 Nesbitt crossed 40,000 at 25.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.16
Evaluated at bid price : 25.03
Bid-YTW : 3.42 %
CM.PR.P FixedReset 78,370 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.17
Evaluated at bid price : 25.05
Bid-YTW : 3.41 %
BMO.PR.P FixedReset 76,400 RBC crossed 75,000 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : -1.63 %
TD.PF.C FixedReset 75,186 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.17
Evaluated at bid price : 25.05
Bid-YTW : 3.42 %
TRP.PR.D FixedReset 31,400 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.26
Evaluated at bid price : 25.13
Bid-YTW : 3.53 %
PWF.PR.H Perpetual-Premium 28,300 Scotia crossed 25,000 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-11
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : -14.91 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.A FixedReset Quote: 22.65 – 25.00
Spot Rate : 2.3500
Average : 1.3535

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.65
Bid-YTW : 4.56 %

MFC.PR.I FixedReset Quote: 26.16 – 27.20
Spot Rate : 1.0400
Average : 0.5801

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.16
Bid-YTW : 2.72 %

BAM.PR.T FixedReset Quote: 25.75 – 26.75
Spot Rate : 1.0000
Average : 0.5876

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.17 %

CU.PR.E Perpetual-Discount Quote: 24.20 – 24.81
Spot Rate : 0.6100
Average : 0.3575

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 23.80
Evaluated at bid price : 24.20
Bid-YTW : 5.11 %

MFC.PR.H FixedReset Quote: 26.13 – 26.69
Spot Rate : 0.5600
Average : 0.3310

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.13
Bid-YTW : 2.61 %

TRP.PR.B FixedReset Quote: 17.58 – 18.19
Spot Rate : 0.6100
Average : 0.4003

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-01-12
Maturity Price : 17.58
Evaluated at bid price : 17.58
Bid-YTW : 3.61 %

January PrefLetter Released!

January 12th, 2015

The January, 2015, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The regular appendices reporting on DeemedRetractibles and FixedResets are included. There is also a table showing the 2014 performance and 2014-12-31 data for all issues tracked by HIMIPref™.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the January, 2015, issue, while the “Next Edition” will be the February, 2015, issue, scheduled to be prepared as of the close February 13 and eMailed to subscribers prior to market-opening on February 16.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!

Note: Assiduous Reader DG informs me:

In case you have any other Apple users: you need to install a free App from the apple store called “FileApp”. It comes with it’s own tutorial and allows you to download and save a PDF file.

TXPR / TXPL Quarterly Rebalancing: January 2015

January 12th, 2015

S&P Dow Jones Indices Canadian Index Operations has announced

the following index changes as a result of the quarterly S&P/TSX Preferred Share Index and S&P/TSX Preferred Share Laddered Index Reviews. These changes will be effective at the open on Monday, January 19, 2015.

S&P/TSX Preferred Share Index

ADDITIONS

Symbol

Issue Name

CUSIP

BAM.PF.G

BROOKFIELD ASSET MANAGEMENT INC CL A PR SR 42

112585 51 8

BPO.PR.A

BROOKFIELD OFFICE PROP INC CL AAA PR SER ‘AA’

112900 68 3

CM.PR.P

CIBC 3.75% CLASS A PREFERRED SERIES 41

136069 42 4

HSE.PR.C

HUSKY ENERGY INC 4.50% PREFERRED SERIES 3

448055 40 0

MFC.PR.N

MANULIFE FINANCIAL 3.80% CLASS 1 PREFERRED SERIES 19

56501R 67 6

NA.PR.W

NATIONAL BANK OF CANADA 1ST PR SERIES ’32′

633067 28 5

TD.PF.C

TD BANK CLASS A 1ST PREFERRED SERIES 5

891145 65 8

DELETIONS

Symbol

Issue Name

CUSIP

BMO.PR.R

BANK OF MONTREAL FLTG RATE CL ‘B’ PR SER 17

063671 77 0

BNS.PR.A

BANK OF NOVA SCOTIA (THE) PR SERIES ’19′

064149 73 5

BNS.PR.R

BANK OF NOVA SCOTIA (THE)5-YR RESET PR SER 22

064149 69 3

GWO.PR.M

GREAT-WEST LIFECO INC. 5.80% 1ST PR SERIES M

39138C 81 7

L.PR.A

LOBLAW COMPANIES LIMITED 2ND PR SERIES ‘A’

539481 60 6

PWF.PR.I

POWER FINANCIAL CORP. 6% SERIES ‘I’ 1ST PR

73927C 84 5

RY.PR.C

ROYAL BANK OF CANADA 1ST PR SERIES ‘AC’

780102 60 4

TRI.PR.B

THOMSON REUTERS CORPORATION FLTG RATE PR II

884903 30 3

TD.PR.T

TORONTO-DOMINION BANK(THE) FLTG RT PR SER T

891145 72 4

W.PR.H

WESTCOAST ENERGY INC. 5.50% 1ST PR SERIES ’7′

95751D 88 8

S&P/TSX Preferred Share Laddered Index

ADDITIONS

Symbol

Issue Name

CUSIP

BAM.PF.G

BROOKFIELD ASSET MANAGEMENT INC CL A PR SR 42

112585 51 8

BAM.PF.E

BROOKFIELD ASSET MANAGEMNT INC CL A PR SER 38

112585 55 9

BPO.PR.A

BROOKFIELD OFFICE PROP INC CL AAA PR SER ‘AA’

112900 68 3

CM.PR.P

CIBC 3.75% CLASS A PREFERRED SERIES 41

136069 42 4

EMA.PR.F

EMERA INCORPORATED PR SERIES ‘F’

290876 80 4

ENB.PF.C

ENBRIDGE INC. PR SER ’11′

29250N 59 2

ENB.PF.E

ENBRIDGE INC. PR SER ’13′

29250N 57 6

ENB.PF.G

ENBRIDGE INC. PR SER ’15′

29250N 55 0

HSE.PR.C

HUSKY ENERGY INC. 4.50% PREFERRED SERIES 3

448055 40 0

MFC.PR.N

MANULIFE FINANCIAL 3.80% CLASS 1 PREFERRED SERIES 19

56501R 67 6

NA.PR.W

NATIONAL BANK OF CANADA 1ST PR SERIES ’32′

633067 28 5

TD.PF.C

TD BANK CLASS A 1ST PREFERRED SERIES 5

891145 65 8

SBN.PR.A Semi-Annual Report 2014

January 12th, 2015

S Split Corp. has released its Semi-Annual Report to June 30, 2014.

Figures of interest are:

MER: According to the report:

The management expense ratio (“MER”) is the sum of all fees and expenses for the stated period, including federal and provincial sales taxes but excluding transaction fees and Preferred share distributions, divided by the average net asset value, excluding the Redeemable Preferred Share liability.

Given that the NAVPU at the beginning of the period was 19.86, and 20.97 at the end, we may approximate the total assets as double the amount ‘excluding the Redeemable Preferred Share liability’, which results in a MER for analytical purposes of about 1.25%.

Average Net Assets: We need this to calculate portfolio yield.The beginning of period assets is the sum of Capital Unitholders equity and Preferred Share value: ($30.73-million + $31.16-million) = 61.9-million, while end of period assets are (32.11-million + 29.26-million) = 61.4-million. So call the average assets $61.6-million.

Underlying Portfolio Yield: Total Income (dividends, securities lending and interest) of $1.753-million over half a year (but getting three quarterly dividends, due to Scotia’s strange dividend policies, so only multiply by four-thirds!) divided by average net assets of $61.6-million is 3.79% p.a. This is reasonably close to Scotia’s currently quoted yield of 4.19%.

Income Coverage: Two thirds of dividend income (see above) is 1.168-million and expenses are 0.772-million, for net income of 0.396-million to cover preferred dividends of $0.818-million is 48%.

BCE.PR.F To Reset Effective February 1; Holders May Exchange to BCE.PR.E

January 11th, 2015

BCE Inc. has announced:

1. Holders of BCE Inc. Series AF Preferred Shares have the right to convert all or part of their shares, effective on February 1, 2015, on a one-for-one basis into Cumulative Redeemable First Preferred Shares, Series AE of BCE Inc. (the “Series AE Preferred Shares”).

2. Holders not wishing to convert or who do not comply with the instructions set out in paragraph 3 below by the appropriate deadline will, subject to paragraph 6 below, retain their Series AF Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 5 below. However, but subject to paragraph 6 below, on February 1, 2020, and every five years thereafter, holders of both Series AF Preferred Shares and Series AE Preferred Shares will have the right to convert their shares into shares of the other series.

3. Registered holders electing to convert all or part of their Series AF Preferred Shares into Series AE Preferred Shares must complete and sign the conversion panel on the back of their Series AF Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on January 19, 2015, to one of the following addresses of CST Trust Company:…


5. As of February 1, 2015, the Series AF Preferred Shares will, should they remain outstanding, pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on January 12, 2015 by two investment dealers appointed by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 259.4%. The annual dividend rate applicable to the Series AF Preferred Shares will be published on January 14, 2015 in the national edition of The Globe and Mail, the Montreal Gazette and La Presse and will be posted on the BCE Inc. website at www.bce.ca.

Given that the GOC-5 rate is currently 1.22%, paragraph 5 implies that the new rate will be about 3.165%, although the precise figure won’t be known until January 12 … at which point, according to paragraph 3, holders will have only a week to make their decision regarding conversion and instruct their broker. Note that broker deadlines will, in almost all cases, be prior to the January 19, 2015, deadline of the company.

Holders of BCE.PR.E also have the right to convert to BCE.PR.F. Note that the company can force conversion to (or retention of) a particular element of this Strong Pair if there will not be many of the other one outstanding if everybody gets their first choice. However, given recent conversion ratios of AZP.PR.B / AZP.PR.C, FFH.PR.C / FFH.PR.D and TRP.PR.A / TRP.PR.F, it seems reasonably likely that both elements will remain outstanding.

Following the 2010 conversion, only about 1.4-million BCE.PR.E (the RatchetRate issue) were left outstanding, compared to about 14.6-million BCE.PR.F (the FixedFloater). BCE.PR.F reset to 4.451% in 2010 implying that the projected future rate of 3.165% is a 29% reduction in dividend.

The current Strong Pair prime breakeven rates are widely scattered, but average about 3.8%:

PL_150109_App_FR_Chart_34
Click for Big

If we assume that the new rate on BCE.PR.F will be 3.165% and that the pair will have a break-even prime rate of 3.84%, then the current bid of 20.67 on BCE.PR.E implies a bid of 19.96 on BCE.PR.F, compared to its actual current bid of 20.27, so we may see a little bit more of a drop once the new rate is announced. One way or another, it looks likely at this point that conversion to the RatchetRate BCE.PR.E will be the preferred course of action at decision time.

The price difference over the past year of the two issues (bid price BCE.PR.F less bid price BCE.PR.E):

BCEPRF_BCEPRE_bidDiff_150109
Click for Big