TA.PR.J Soft On Low Volume

August 15th, 2014

TransAlta Corporation has announced:

it has completed its public offering (the “Offering”) of 6,600,000 Cumulative Redeemable Rate Reset First Preferred Shares, Series G (the “Series G Shares”) at a price of $25.00 per Series G Share.

The Offering, previously announced on August 6, 2014, includes the partial exercise of the underwriters’ option of an additional 600,000 Series G Shares for proceeds of an additional $15 million bringing the aggregate gross proceeds of the Offering to $165 million. The net proceeds of the Offering will be used for general corporate purposes in support of our business, to reduce short term indebtedness and to fund capital investments of the Corporation and its affiliates.

The Series G Shares were offered to the Canadian public through a syndicate of underwriters led by RBC Capital Markets, CIBC and Scotiabank by way of a prospectus supplement that was filed on August 8, 2014 with securities regulatory authorities in Canada under TransAlta’s short form base shelf prospectus dated December 9, 2013.

Holders of Series G Shares are entitled to receive a cumulative quarterly fixed dividend yielding 5.30% annually for the initial period ending September 30, 2019. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 3.80%. Holders of Series G Shares will have the right, at their option, to convert their Series G shares into Cumulative Redeemable Floating Rate First Preferred Shares, Series H (the “Series H Shares”), subject to certain conditions, on September 30, 2019 and on September 30 every five years thereafter. Holders of Series H Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 3.80%. The Series G Shares are listed on the Toronto Stock Exchange under the ticker symbol TA.PR.J.

TA.PR.J is a FixedReset, 5.30%+380, announced August 6. It will be tracked by HIMIPref™ and has been assigned to the Scraps index on credit concerns.

The issue traded 307,925 shares today (consolidated exchanges) in a range of 24.65-84 before closing at 24.72-75, 204×92. Vital statistics are:

TA.PR.J FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-15
Maturity Price : 23.06
Evaluated at bid price : 24.72
Bid-YTW : 5.25 %

Implied Volatility theory suggests that this issue is about $0.50 expensive, being fairly priced at 24.22 compared to its closing bid of 24.72. TA.PR.F, on the other hand, is about $0.66 cheap, fairly priced at 22.36 compared to its closing bid of 21.70.

ImpVol_TA_140815
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August 14, 2014

August 14th, 2014

Cheap houses in the US are requiring more money down on the mortgage, although it still looks pretty low:

Already beset by stagnant wages, growing student debt and competition from investors who are snapping up listings, those looking to purchase moderately priced houses must also provide more cash up front. The median down payment for the cheapest 25 percent of properties sold in 2013 was $9,480 compared with $6,037 in 2007, the last year of the previous economic expansion, according to data from 25 of the largest metro areas compiled by brokerage firm Redfin Corp.

The median down payment for the cheapest 25 percent of homes was 7.5 percent of the sales price last year, up from a low of 3.1 percent in 2006 and compared with an average 4.2 percent from 2001 through 2007, according to Seattle-based Redfin. For properties in the middle 50 percent, the share rose to 8.8 percent in 2013 from an average 8.2 percent in the seven years leading to the last recession, and for the top quarter it climbed to 20.9 percent from 19 percent.

… while in Canada, forecasters are jostling to see who can predict higher prices:

The Conference Board of Canada on Wednesday boosted its forecast for condo resales and prices in Toronto. It now anticipates that 20,083 condos will sell over MLS in the city this year (a year ago, the Conference Board expected that number to be 19,080) at a median price of $316,744 (it previously expected that to be $310,242).

The Conference Board also raised its forecasts for resale condo prices in Calgary, Edmonton, Vancouver and Victoria, but ratcheted down its expectations slightly for condos prices in Quebec City, Montreal and Ottawa.

Europe’s in a bad way and the Bloomberg editors want pump-priming:

Since the global financial crisis of 2008, the U.S. and the U.K. have seen output grow more slowly than in previous recoveries. That’s nothing to boast about. Still, six years on, gross domestic product is higher in both countries than it was at the pre-crisis peak. Europe’s output remains 2.4 percent below that benchmark. And the gap isn’t closing.

All three of the euro area’s biggest economies — Germany, France and Italy — are failing. Germany’s output actually fell in the second quarter. So did Italy’s, for the second consecutive quarter. (Whether this is a new recession for Italy or a continuation of the old one is debatable.) The European Central Bank currently forecasts a rise in euro-area output of 1 percent this year. Expect that to be revised down next month.

German policy makers have resisted proposals to loosen the euro area’s agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus — but the first is both more urgent and can be delivered more promptly.

But at least the Canada Pension Plan is making money!

The Canada Pension Plan fund earned a 1.6-per-cent return on its investments in its latest quarter as returns slowed from last year’s stellar gains.

The Canada Pension Plan Investment Board, Canada’s largest pension fund manager, said Thursday its assets grew by $7.7-billion in the fiscal first quarter ended June 30, boosting total assets to $226.8-billion from $219.1-billion at the end of March. CPPIB said the gain consisted of $3.4-billion in gains from investments and $4.3-billion from new contributions.

The fund said Thursday it has a five-year rate of return of 8.5 per cent after inflation is taken into account, and a 10-year return of 5.4 per cent, which is well above the rate of return required to ensure the fund is sustainable at the current contribution rate. The Chief Actuary of Canada has projected the fund must earn 4 per cent after inflation on a long-term basis to meet funding projections over a 75-year period.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts down 6bp and FixedResets and DeemedRetractibles both down 4bp. Volatility was completely non-existent. Volume was below average.

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 -0.2763 % 2,636.3
FixedFloater 4.17 % 3.41 % 26,956 18.58 1 0.0000 % 4,156.5
Floater 2.91 % 3.03 % 45,119 19.61 4 -0.2763 % 2,726.2
OpRet 4.02 % -0.89 % 82,883 0.08 1 0.0000 % 2,721.1
SplitShare 4.23 % 3.77 % 73,038 3.96 6 0.0727 % 3,138.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,488.2
Perpetual-Premium 5.49 % -2.87 % 88,233 0.09 19 0.0351 % 2,437.4
Perpetual-Discount 5.23 % 5.19 % 115,059 15.15 17 -0.0603 % 2,598.0
FixedReset 4.30 % 3.58 % 194,332 8.66 75 -0.0409 % 2,563.2
Deemed-Retractible 4.98 % 0.57 % 106,743 0.11 42 -0.0350 % 2,559.7
FloatingReset 2.65 % 2.04 % 86,660 3.83 6 0.0920 % 2,522.7
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.O Deemed-Retractible 95,742 RBC crossed 44,800 at 26.28.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-13
Maturity Price : 25.75
Evaluated at bid price : 26.22
Bid-YTW : -13.59 %
BNS.PR.B FloatingReset 61,608 Nesbitt crossed 50,000 at 25.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 2.22 %
MFC.PR.E FixedReset 56,325 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 1.71 %
GWO.PR.Q Deemed-Retractible 55,955 Scotia crossed 50,000 at 25.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 5.25 %
TD.PF.B FixedReset 55,817 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-14
Maturity Price : 23.16
Evaluated at bid price : 25.00
Bid-YTW : 3.61 %
TD.PF.A FixedReset 55,051 TD crossed 30,000 at 25.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-14
Maturity Price : 23.26
Evaluated at bid price : 25.34
Bid-YTW : 3.58 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.C SplitShare Quote: 26.13 – 27.13
Spot Rate : 1.0000
Average : 0.8287

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 26.13
Bid-YTW : 3.54 %

IAG.PR.A Deemed-Retractible Quote: 23.31 – 23.69
Spot Rate : 0.3800
Average : 0.2595

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.31
Bid-YTW : 5.56 %

FTS.PR.H FixedReset Quote: 21.05 – 21.50
Spot Rate : 0.4500
Average : 0.3352

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-14
Maturity Price : 21.05
Evaluated at bid price : 21.05
Bid-YTW : 3.48 %

CU.PR.E Perpetual-Discount Quote: 24.10 – 24.59
Spot Rate : 0.4900
Average : 0.3770

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-14
Maturity Price : 23.72
Evaluated at bid price : 24.10
Bid-YTW : 5.08 %

ENB.PR.Y FixedReset Quote: 23.91 – 24.14
Spot Rate : 0.2300
Average : 0.1664

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-14
Maturity Price : 22.73
Evaluated at bid price : 23.91
Bid-YTW : 3.96 %

RY.PR.E Deemed-Retractible Quote: 25.53 – 25.79
Spot Rate : 0.2600
Average : 0.1983

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-13
Maturity Price : 25.50
Evaluated at bid price : 25.53
Bid-YTW : 1.51 %

MAPF Performance: July 2014

August 14th, 2014

The fund underperformed the the indices in July, breaking its streak of six consecutive months of outperformance. The underperformance was largely due to weakness in low-coupon insurance DeemedRetractibles.

relYield_140731
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relYield_140731
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I continue to believe that the decline in the preferred share market remains overdone; the following table shows the increase in yields since May 22 of some fixed income sectors:

Yield Changes
May 22, 2013
to
July 30, 2014
Sector Yield
May 22
2013
Yield
July 30
2014
Change
Five-Year Canadas 1.38% 1.60% +22bp
Long Canadas 2.57% 2.85% +28bp
Long Corporates 4.15% 4.2% +5bp
FixedResets
Investment Grade
(Interest Equivalent)
3.51% 4.69% +118bp
Perpetual-Discounts
Investment Grade
(Interest Equivalent)
6.34% 6.71% +37bp
The change in yield of PerpetualDiscounts is understated due a massive influx of issues from the PerpetualPremium sub-index over the period, which improved credit quality. When the four issues that comprised the PerpetualDiscount sub-index as of May 22, 2013 are evaluated as of July 30, 2014, the interest-equivalent yield is 7.25% and thus the change is +91bp.

ZPR, is an ETF comprised of FixedResets and Floating Rate issues and a very high proportion of junk issues, returned +0.30%, +0.60% and +3.34% over the past one-, three- and twelve-month periods, respectively (according to the fund’s data), versus returns for the TXPL index of +0.32%, +0.74% and +3.90% respectively. The fund has been able to attract assets of about $1,055-million since inception in November 2012; AUM increased by $11-million in July; given an index return of +0.32% an increase of $3.3-million was expected, indicating that money is still flowing into the fund. I feel that the flows into and out of this fund are very important in determining the performance of its constituents.

TXPR had returns over one- and three-months of +0.31% and +1.11%, respectively with CPD performance within expectations.

Returns for the HIMIPref™ investment grade sub-indices for July were as follows:

HIMIPref™ Indices
Performance to July 31, 2014
Sub-Index 1-Month 3-month
Ratchet N/A N/A
FixFloat +4.67% +9.70%
Floater -1.23% +0.11%
OpRet -0.16% +0.25%
SplitShare -0.05% +0.14%
Interest N/A N/A
PerpetualPremium +0.63% +1.14%
PerpetualDiscount +0.74% +1.40%%
FixedReset +0.11% +1.67%
DeemedRetractible +0.38% +1.43%
FloatingReset +0.32% +1.35%

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close July 31, 2014, was $10.5639.

Returns to July 30, 2014
Period MAPF BMO-CM “50″ Index TXPR
Total Return
CPD – according to Blackrock
One Month -0.22% +0.02% +0.31% +0.28%
Three Months +2.41% +0.59% +1.11% +1.01%
One Year +9.37% +3.92% +4.78% +4.29%
Two Years (annualized) +5.59% +2.63% +2.58% N/A
Three Years (annualized) +4.67% +3.38% +3.14% +2.64%
Four Years (annualized) +7.34% +5.73% +4.92% N/A
Five Years (annualized) +8.92% +6.54% +5.52% +4.88%
Six Years (annualized) +15.71% +6.54% +5.58%  
Seven Years (annualized) +12.14% +4.40% +3.48%  
Eight Years (annualized) +11.30% +3.92%    
Nine Years (annualized) +10.53% +3.83%    
Ten Years (annualized) +10.21% +3.95%    
Eleven Years (annualized) +11.00% +4.14%    
Twelve Years (annualized) +11.19% +4.32%    
Thirteen Years (annualized) +11.20% +4.29%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
* CPD does not directly report its two- or four-year returns.
Figures for National Bank Preferred Equity Income Fund (formerly Omega Preferred Equity) (which are after all fees and expenses) for 1-, 3- and 12-months are +0.23%, +0.96% and +5.03%, respectively, according to Morningstar after all fees & expenses. Three year performance is +3.44%; five year is +5.86%
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are 0.00%, +0.40% and +1.21% respectively, according to Morningstar. Three Year performance is +1.09%; five-year is +3.19%
Figures for Manulife Preferred Income Fund (formerly AIC Preferred Income Fund) (which are after all fees and expenses) for 1-, 3- and 12-months are +0.37%, +1.74% & +1.33%, respectively. Three Year performance is +1.31%; five-year is +3.32%
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are +1.25%, +2.52% & 4.44%, respectively. Three year performance is 4.18%
Figures for National Bank Preferred Equity Fund (formerly Altamira Preferred Equity Fund) are +0.14%, +0.96% and +3.04% for one-, three- and twelve months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is +0.36%, +0.72% and +3.44% for one-, three- and twelve-months, respectively.
Figures for NexGen Canadian Preferred Share Tax Managed Fund are not available since our wise regulators are protecting you from inappropriate knowledge.
Figures for BMO Preferred Share Fund are similarly off-limits.

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

A problem that has bedevilled the market over the past two years has been the OSFI decision not to grandfather Straight Perpetuals as Tier 1 bank capital, and their continued foot-dragging regarding a decision on insurer Straight Perpetuals has segmented the market to the point where trading has become much more difficult. The fund occasionally finds an attractive opportunity to trade between GWO issues, which have a good range of annual coupons (but in which trading is now hampered by the fact that the low-coupon issues are trading near par and are callable at par in the near term), but is “stuck” in the MFC and SLF issues, which have a much narrower range of coupon, while the IAG DeemedRetractibles are quite illiquid. Until the market became so grossly segmented, this was not so much of a problem – but now banks are not available to swap into (because they are so expensive) and non-regulated companies are likewise deprecated (because they are not DeemedRetractibles; they should not participate in the increase in value that will follow the OSFI decision I anticipate and, in addition, are analyzed as perpetuals). The fund’s portfolio is, in effect ‘locked in’ to the MFC & SLF issues due to projected gains from a future OSFI decision, to the detriment of trading gains particularly in May, 2013, when the three lowest-coupon SLF DeemedRetractibles (SLF.PR.C, SLF.PR.D and SLF.PR.E) were the worst performing DeemedRetractibles in the sub-index, and in June, 2013, when the insurance-issued DeemedRetractibles behaved like PerpetualDiscounts in a sharply negative market.

This year, however, the sharp decline in the indices from early-mid-May to early-mid-June did cause sufficient changes in valuation such that some low coupon DeemedRetractibles were swapped into some low-reset FixedResets from the same issuer. This process continued in July.

At this point, the composition of the BMO-CM “50″ index should be discussed; it has greatly outperformed TXPR over the year to May 30, and MAPF holders will have noticed that the fund only just returned to a positive differential against BMO-CM “50″ on a year-over-year basis (again, to May 30). While I have not done a thorough analysis of the difference, I’ve done some approximations – note that the numbers in this section are approximations, but are close enough for government work.

I believe that BMO-CM “50″ has benefitted greatly over the past year by being over-weight in bank Straight Perpetuals relative to other Straight Perpetuals:

Sampling Error in BMO-CM “50″
Class of
Straight
Perpetual
BMO-CM “50″
Weight
May 2013
Proportion of BMO-CM “50″ Straights Shares
Outstanding
May 2014
Proportion
Shares
Outstanding
Performance
May 2013
to
May 2014
Bank DeemedRetractible 17.7% 59.8% 240.5-million 34.9% +4.81%
Insurance DeemedRetractible 6.5% 22.0% 183.5-million 26.6% -0.86%
Bank Straight 1.8% 6.1% 47.2-million 6.8% +4.88%
Straight 3.6% 12.2% 218.6-million 31.7% +0.51%

Thus we see that at the beginning of the downdraft, the BMO-CM “50″ was highly overweighted in Bank DeemedRetractibles, which performed quite well over the year, and highly underweighted in Straight Perpetuals, which underperformed. Weightings in the other two sectors were about right. It’s no wonder the fund struggled to outperform the BMO-CM “50″ index in the period May, 2013, to May, 2014, and no wonder BMO-CM “50″ outperformed TXPR!

In July, insurance DeemedRetractibles underperformed bank DeemedRetractibles:

DRRelPerf_1407Click for Big

… and also strongly underperformed Straight Perpetuals:

straightRelPerf_1407
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Of the regressions shown in the above two charts, the Adjusted Correlation of the Insurance DeemedRetractible performance is a mere 21%, and the other two correlations even worse.

A lingering effect of the downdraft of 2013 has been the return of measurable Implied Volatility (all Implied Volatility calculations use bids from May 30):

ImpVol_GWO_140731
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ImpVol_PWF_140731
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ImpVol_BNS_140731
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Implied Volatility of
Three Series of Straight Perpetuals
July 31, 2014
Issuer Pure Yield Implied Volatility
GWO 4.20% (+0.09) 18% (-2)
PWF 0.83% 3.25% (-2.42) 39% (+12)
BNS 0.09% (+0.08) 30% (-3)
Bracketted figures are changes since June month-end

It is disconcerting to see the difference between GWO and PWF; if anything, we would expect the implied volatility for GWO to be higher, given that the DeemedRetraction – not yet given significant credence by the market – implies a directionality in prices. The GWO data with the best fit derived for PWF is readily distinguishable from the best fit; the best fit has a significantly lower Sum of Squared Errors (0.55 vs 2.08):

ImpVol_GWO_PWFBestFit_140731
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In the September, 2013, edition of PrefLetter, I extended the theory of Implied Volatility to FixedResets – relating the option feature of the Issue Reset Spreads to a theoretical non-callable Market Spread.

ImpVol_BPO_140731
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ImpVol_FFH_140731Click for Big

Implied Volatility of
Two Series of FixedResets
May 30, 2014
Issuer Market Reset Spread
(Non-Callable)
Implied Volatility
BPO 111bp (+34) 40% (0)
FFH 307bp (-4) 9% (-1)
Bracketted figures are changes since June month-end

These are very interesting results: The BPO issues are trading as if calls are a certainty, while FFH issues are trading as if calls are much less likely. The FFH series continues to be perplexing, this time with the four lower-coupon issues showing virtually no implied volatility – with the highest coupon issue (FFH.PR.K) being well off the mark … all I can think of is that the market has decided that FFH.PR.K, with an Issue Reset Spread of 351bp, is sure to be called in 2017, while the other four (highest spread is FFH.PR.C, +315) are not at all likely to be called.

Those of you who have been paying attention will remember that in a “normal” market (which we have not seen in well over a year) the slope of this line is related to the implied volatility of yields in Black-Scholes theory, as discussed in the January, 2010, edition of PrefLetter. As has been previously noted, very high levels of Implied Volatility (in the 40% range, at which point the calculation may be considered virtually meaningless) imply a very strong expectation of directionality in future prices – i.e, an expectation that all issues will be redeemed at par.

It is significant that the preferred share market knows no moderation. I suggest that a good baseline estimate for Volatility over a three year period is 15% but the observed figure is generally higher in a rising market and lower in a declining one … with, of course, a period of adjustment in between, which I suspect we are currently experiencing.

Sometimes everything works … sometimes it’s 50-50 … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’ – although for quite some time, noise trading has taken a distant second place to the sectoral play on insurance DeemedRetractibles; something that dismays me, particularly given that the market does not yet agree with me regarding the insurance issues! There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

There’s plenty of room for new money left in the fund. I have shown in PrefLetter that market pricing for FixedResets is very often irrational and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
June 10.3261 4.81% 0.998 4.80% 1.0000 $0.4957
September 10.0296 5.62% 0.996 5.643% 1.0000 $0.5660
December, 2013 9.8717 6.02% 1.008 5.972% 1.0000 $0.5895
March, 2014 10.2233 5.55% 0.998 5.561% 1.0000 $0.5685
June, 2014 10.5877 5.09% 0.998 5.100% 1.0000 $0.5395
July, 2014 10.5639 5.15% 1.003 5.135% 1.0000 $0.5425
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

Significant positions were held in DeemedRetractible, SplitShare and FixedReset issues on June 30; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31 (banks) or 2025-1-31 (insurers and insurance holding companies) or on a different date (SplitShares). This presents another complication in the calculation of sustainable yield. The fund also holds positions in various SplitShare issues which also have their yields calculated with the expectation of a maturity at par.

I no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as the fund has only a small position in these issues.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas (set at 1.60% for the July 30 calculation) to estimate dividends after reset for FixedResets.

Most funds report Current Yield. For instance, ZPR reports a “Dividend Yield” of 4.6% as of June 30, 2014, but this is the Current Yield, a meaningless number. The Current Yield of MAPF was 4.85% as of June 30, but I will neither report that with any degree of prominence nor take any great pleasure in the fact that it’s a little higher than the ZPR number. It’s meaningless; to discuss it in the context of portfolio reporting is misleading.

However, BMO has taken a significant step forward in that they are no longer reporting the “Portfolio Yield” directly on their website; the information is taken from the “Enhanced Fund Profile” which is available only as a PDF link. CPD doesn’t report this metric on the CPD fact sheet or on their website. I may have one less thing to mock the fundcos about!

It should be noted that the concept of this Sustainable Income calculation was developed when the fund’s holdings were overwhelmingly PerpetualDiscounts – see, for instance, the bottom of the market in November 2008. It is easy to understand that for a PerpetualDiscount, the technique of multiplying yield by price will indeed result in the coupon – a PerpetualDiscount paying $1 annually will show a Sustainable Income of $1, regardless of whether the price is $24 or $17.

Things are not quite so neat when maturity dates and maturity prices that are different from the current price are thrown into the mix. If we take a notional Straight Perpetual paying $5 annually, the price is $100 when the yield is 5% (all this ignores option effects). As the yield increases to 6%, the price declines to 83.33; and 83.33 x 6% is the same $5. Good enough.

But a ten year bond, priced at 100 when the yield is equal to its coupon of 5%, will decline in price to 92.56; and 92.56 x 6% is 5.55; thus, the calculated Sustainable Income has increased as the price has declined as shown in the graph:


Click for Big

The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the long-term results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance has generally been due to exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

August 13, 2014

August 13th, 2014

In the wake of the August jobs number fiasco, it has been suggested that timeliness of delivery of other data should be improved:

It should be noted that the United States doesn’t rely on a household survey to estimate its monthly job numbers. Oh, it conducts one, as a secondary measure; but its primary labour market numbers come from payroll data gathered from employers and government agencies. As such, they are a more accurate measure of actual payroll employment – they reflect things like paycheques issued and taxes paid.

Actually, Statscan does this, too – it’s called the Survey of Employment, Payrolls and Hours (SEPH), and it, too, is published monthly. It relies even more heavily on government payroll-deduction data than the U.S. report, and is considered a highly reliable measure of the labour market.

Notably, the SEPH has diverged considerably from the LFS in recent months. For the first five months of this year, the SEPH shows that employment rose by just 33,600 jobs, or an average of 6,700 a month. But according to the LFS, employment, the gains were almost double that – 62,200, or an average 12,400 a month.

The SEPH’s big drawback is its lack of timeliness. SEPH data lag behind the LFS release by nearly two months; Statscan won’t publish the SEPH for June until Aug. 28. Markets don’t want to wait that long for such a key measure of economic health.

David Watt, chief economist at HSBC Bank Canada, suggests that Statscan should deliver the SEPH at the same time as the LFS, as the U.S. does in its employment report.

The CMHC is crossing its fingers for a soft landing for housing prices:

According to CMHC’s third quarter 2014 Housing Market Outlook, Canada Edition1, housing activity will continue to be supported by economic and demographic fundamentals for the rest of 2014 and into 2015.

Multiple Listing Service® (MLS®2) sales are expected to range between 450,800 and 482,700 units in 2014, with a point forecast of 463,600 units. In 2015, sales are expected to range from 455,800 to 502,900 units, with an increase in the point forecast to 474,300 units.

The average MLS® price is forecast to be between $394,700 and $405,700 in 2014 and between $396,500 and $416,900 in 2015. CMHC’s point forecast for the average MLS® price calls for a 4.5 per cent gain to $399,800 in 2014 and a further 1.8 per cent gain to $406,800 in 2015.

And, surprisingly, bank holdings of insured mortgages are declining:

Canada’s largest banks, as a whole, have seen almost no growth in their insured mortgage portfolios recently, Macquarie Capital Markets analyst Asim Imran discovered.

He found this out by digging through some data that the banking regulator – the Office of the Superintendent of Financial Institutions – gathers.

The growth that banks have shown in their mortgage portfolios of late has come from a strong uptick in uninsured mortgages, he concluded. Chartered banks saw uninsured mortgages rise 13.5 per cent year over year in May (for the Big Six banks it was 12 per cent). Insured mortgages, in contrast, were down 0.8 per cent month over month, and up just 0.1 per cent year over year.

Economic sanctions against naughty countries are having their intended effect:

Deutsche Bank AG plans to hire about 500 compliance, risk and technology employees in the U.S. by year-end, Jacques Brand, its North American chief executive, said in an interview last month. The bank is under investigation for potential violations of U.S. sanctions.

The hiring spree for compliance executives who understand U.S. sanctions laws comes in part from the trend toward appointing outside monitors as a condition of some settlements.

“Having someone who has come directly from those regulatory bodies or otherwise understands the evolving rules and regulations gives firms a significant advantage,” said Justin Mandel, co-founder of JW Michaels & Co., a New York-based recruitment firm that places compliance staff at banks and asset managers. “OFAC is one of those areas where it’s relevant.”

That’s led banks to pay up for top talent. Compensation is often the main reason many leave government jobs.

Recent Treasury job openings on the federal government’s employment website, www.usajobs.gov, have included an OFAC sanctions compliance officer whose salary range is listed as $63,091 to $116,901 a year, according to the website.

At a bank, someone with a similar level of experience as the compliance officer may receive a $170,000 salary, said Stuart Rosenthal, who’s based in Montclair, New Jersey, and runs a recruiting firm focused on placing compliance and regulatory staff.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets winning 16bp and DeemedRetractibles up 13bp. Volatility was minimal. Volume was below average.

PerpetualDiscounts now yield 5.18%, equivalent to 6.73% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread is now about 255bp, unchanged from August 6.

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 0.0691 % 2,643.6
FixedFloater 4.17 % 3.41 % 27,211 18.58 1 0.0000 % 4,156.5
Floater 2.90 % 3.02 % 45,089 19.65 4 0.0691 % 2,733.7
OpRet 4.02 % -1.02 % 76,753 0.08 1 0.1570 % 2,721.1
SplitShare 4.23 % 3.82 % 67,624 3.96 6 0.0794 % 3,135.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1570 % 2,488.2
Perpetual-Premium 5.49 % -4.14 % 82,054 0.08 19 0.0855 % 2,436.6
Perpetual-Discount 5.22 % 5.18 % 113,893 15.17 17 0.1114 % 2,599.6
FixedReset 4.29 % 3.57 % 197,477 8.53 75 0.1643 % 2,564.3
Deemed-Retractible 4.98 % -1.02 % 107,799 0.12 42 0.1260 % 2,560.6
FloatingReset 2.65 % 2.07 % 80,236 3.83 6 -0.1574 % 2,520.4
Performance Highlights
Issue Index Change Notes
TD.PR.P Deemed-Retractible 1.27 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-12
Maturity Price : 25.75
Evaluated at bid price : 26.23
Bid-YTW : -14.64 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.A Floater 304,335 Desjardins crossed three blocks; 100,000 shares, 42,600 and 50,000, all at 20.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.62 %
BMO.PR.W FixedReset 215,710 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 23.14
Evaluated at bid price : 25.00
Bid-YTW : 3.57 %
RY.PR.H FixedReset 116,375 Nesbitt crossed 100,000 at 25.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 23.26
Evaluated at bid price : 25.32
Bid-YTW : 3.55 %
ENB.PF.C FixedReset 88,262 RBC crossed 30,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 23.09
Evaluated at bid price : 24.89
Bid-YTW : 4.06 %
TD.PF.B FixedReset 74,553 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 23.17
Evaluated at bid price : 25.03
Bid-YTW : 3.60 %
PWF.PR.L Perpetual-Discount 68,846 TD crossed 65,000 at 24.89.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 24.54
Evaluated at bid price : 24.85
Bid-YTW : 5.16 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 21.25 – 22.19
Spot Rate : 0.9400
Average : 0.7298

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-13
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 3.38 %

PVS.PR.C SplitShare Quote: 26.16 – 27.00
Spot Rate : 0.8400
Average : 0.6410

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 26.16
Bid-YTW : 3.44 %

TD.PR.Z FloatingReset Quote: 25.18 – 25.48
Spot Rate : 0.3000
Average : 0.2086

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 2.31 %

CU.PR.C FixedReset Quote: 25.70 – 25.99
Spot Rate : 0.2900
Average : 0.2015

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 2.89 %

MFC.PR.L FixedReset Quote: 24.91 – 25.15
Spot Rate : 0.2400
Average : 0.1639

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.91
Bid-YTW : 3.87 %

RY.PR.L FixedReset Quote: 26.56 – 26.84
Spot Rate : 0.2800
Average : 0.2142

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.56
Bid-YTW : 2.77 %

August 12, 2014

August 12th, 2014

Remember that Canadian jobs number I gleefully reported on August 8, thrilled to have my prejudices reinforced? Well, it’s been cancelled:

Statistics Canada has pulled Friday’s disappointing jobs report after discovering an error and officials are working to release new estimates by the end of the week.

Those July numbers are wrong but the federal agency is not giving any indication of the size of the mistake.

Ms. [Sylvie] Michaud [Statistics Canada’s Director General of Education, Labour and Income statistics] said that to her knowledge, this is the first time Statistics Canada has ever pulled its Labour Force Survey.

Speaking of numbers, Kevin Carmichael of the Globe highlights two:

At least Fed chair Janet Yellen has been good about telling everyone about the many gauges she’s watching. Two of them, the rate at which companies are hiring and the rate at which workers are quitting, were updated by the Labor Department Tuesday. Unlike the broader unemployment rate, which is returning to a level at which the Fed typically would equate with full employment, these more granular measures of labour market dynamics suggest the U.S. economy is less than fully healed. The data reinforce Ms. Yellen’s argument that higher borrowing costs can wait.

If Ms. Yellen perceived the quit rate as low in March, she remains disappointed today. Adjusted for inflation, the quit rate was 1.8 per cent in June, unchanged from the start of the year. The rate was 1.6 per cent in June, 2013.

Similarly, employers hired 4.83 million people in June, compared with 4.74 million in May, lifting the hiring rate to 3.5 per cent from 3.4 per cent. The quit and hiring rates sunk during the recession and have steadily climbed from those lows. Yet they still are below pre-recession levels. In the years ahead of the Great Recession, the quit rate floated above 2 per cent and the hiring rate was closer to 4 per cent than 3.5 per cent.

Bloomberg has squared its rot for a big boo-hoo-hoo about competition:

John Turner suspected that brokers were encouraging federal workers to ditch their top-flight retirement plan. So he went under cover.

The former U.S. Labor Department economist called representatives at companies such as Bank of America Corp., Charles Schwab Corp. and Wells Fargo & Co. He identified himself as a potential client grappling with what to do with his own nest egg.

Turner thought he knew the right answer: Leave it alone. As a legacy of his government service, he kept his money in the Thrift Savings Plan, considered the gold standard of 401(k)-type programs for its rock-bottom fees. Yet all but one company told him to roll over all his money into individual retirement accounts. On average, stock funds charge almost 50 times more than the government plan.

“It’s a scandal,” said Turner, director of the Pension Policy Center in Washington. “They are trying to sell me an IRA clearly not in my interest. It’s in their interest. They want to get the fees.”

The pitches are persuasive. Workers who leave jobs with the federal government transferred $10 billion last year out of the Thrift Savings Plan. Forty-five percent of participants who left federal service in 2012 removed all of their funds from the plan and closed their accounts by the end of 2013. To investigate this exodus, the government expects to survey departing workers later this year.

The funds offered by the Thrift Savings Plan look pretty good – index funds with rock-bottom fees; definitely a leading option for the core of a portfolio. And I will certainly not risk evisceration in the comments section by suggesting that the external brokers are all altruistic financial geniuses (genii?) whom I would be happy to trust blindly with the Hymas Fortune.

However, it is well known that many, if not most, employees enrolled in sponsored 401(k)’s are idiots. Two very popular strategies are putting the entire amount into the option labelled as having the lowest risk or, my favourite, the “1/N” strategy where, confronted by N choices, the investor puts an equal amount into each of them.

I see that the Thrift Savings Plan offers ‘Lifecycle’ funds, which ” use professionally determined investment mixes that are tailored to meet investment objectives based on various time horizons”. I’m willing to accept that these represent a decent enough investment strategy, but as someone who has produced various elaborations of the Retirement Calculator from Hell, I know that a lot of estimates and approximations go into doing a good job on this kind of stuff, it’s not easy and it’s not particularly generic, given individual’s circumstances, expectations and foibles.

In many cases, I am sure, gullible federal employees have made a dumb move by transferring their money. But I am equally sure that in just as many cases they’ve been smart to transfer, given their own attitudes towards financial markets. What’s better? Cheap, plain-vanilla financial advice that you ignore, or expensive, plain-vanilla financial advice that you follow?

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts rocketing up 40bp, FixedResets off 1bp and DeemedRetractibles ahead 14bp. Volatility was minimal – surprisingly, I’d say, the PerpetualDiscount win is broadly based. Volume was low.

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 0.2911 % 2,641.8
FixedFloater 4.17 % 3.41 % 27,469 18.58 1 -0.1754 % 4,156.5
Floater 2.90 % 3.03 % 45,501 19.62 4 0.2911 % 2,731.8
OpRet 4.02 % 0.75 % 76,432 0.08 1 -0.2350 % 2,716.8
SplitShare 4.23 % 3.84 % 62,618 3.96 6 0.0184 % 3,133.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2350 % 2,484.3
Perpetual-Premium 5.49 % -2.88 % 83,086 0.08 19 0.0352 % 2,434.5
Perpetual-Discount 5.22 % 5.20 % 115,239 15.15 17 0.3986 % 2,596.7
FixedReset 4.29 % 3.55 % 198,658 8.57 75 -0.0108 % 2,560.0
Deemed-Retractible 4.98 % 0.10 % 108,713 0.22 42 0.1366 % 2,557.4
FloatingReset 2.65 % 2.04 % 79,825 3.83 6 0.0919 % 2,524.4
Performance Highlights
Issue Index Change Notes
TRP.PR.A FixedReset -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 22.20
Evaluated at bid price : 22.90
Bid-YTW : 3.68 %
FTS.PR.J Perpetual-Discount 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 23.96
Evaluated at bid price : 24.35
Bid-YTW : 4.94 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.X FixedReset 256,104 Called for redemption August 24.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.86 %
RY.PR.T FixedReset 186,376 Called for redemption August 24.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.86 %
BNS.PR.Q FixedReset 113,366 RBC crossed blocks of 73,800 and 35,300, both at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.13 %
TD.PF.B FixedReset 107,090 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 23.16
Evaluated at bid price : 24.99
Bid-YTW : 3.61 %
ENB.PR.N FixedReset 82,467 Scotia crossed blocks of 25,000 shares, 38,500 and 10,000, all at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 23.19
Evaluated at bid price : 24.91
Bid-YTW : 4.02 %
BNS.PR.A FloatingReset 82,104 RBC crossed 74,500 at 25.64.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-11
Maturity Price : 25.50
Evaluated at bid price : 25.67
Bid-YTW : -7.93 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.G Deemed-Retractible Quote: 25.61 – 25.98
Spot Rate : 0.3700
Average : 0.2570

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-11
Maturity Price : 25.50
Evaluated at bid price : 25.61
Bid-YTW : -2.58 %

TRP.PR.A FixedReset Quote: 22.90 – 23.20
Spot Rate : 0.3000
Average : 0.1969

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 22.20
Evaluated at bid price : 22.90
Bid-YTW : 3.68 %

FTS.PR.H FixedReset Quote: 21.33 – 21.58
Spot Rate : 0.2500
Average : 0.1536

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 21.33
Evaluated at bid price : 21.33
Bid-YTW : 3.50 %

BAM.PF.D Perpetual-Discount Quote: 22.05 – 22.35
Spot Rate : 0.3000
Average : 0.2080

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-12
Maturity Price : 21.76
Evaluated at bid price : 22.05
Bid-YTW : 5.62 %

IAG.PR.G FixedReset Quote: 26.25 – 26.50
Spot Rate : 0.2500
Average : 0.1769

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 2.69 %

BAM.PF.A FixedReset Quote: 25.55 – 25.79
Spot Rate : 0.2400
Average : 0.1709

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 4.08 %

August 11, 2014

August 11th, 2014

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 17bp, FixedResets flat and DeemedRetractibles up 13bp. Volatility was minimal. Volume was low.

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 0.3757 % 2,634.1
FixedFloater 4.17 % 3.40 % 27,572 18.60 1 0.0000 % 4,163.9
Floater 2.91 % 3.04 % 45,457 19.59 4 0.3757 % 2,723.9
OpRet 4.01 % -2.24 % 73,860 0.08 1 0.2749 % 2,723.2
SplitShare 4.23 % 3.82 % 58,911 3.97 6 0.0397 % 3,132.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2749 % 2,490.1
Perpetual-Premium 5.49 % -1.52 % 82,712 0.08 19 -0.1012 % 2,433.6
Perpetual-Discount 5.24 % 5.20 % 113,988 15.15 17 -0.1738 % 2,586.3
FixedReset 4.29 % 3.56 % 193,251 8.54 75 0.0005 % 2,560.3
Deemed-Retractible 4.99 % -0.44 % 111,433 0.22 42 0.1320 % 2,553.9
FloatingReset 2.65 % 2.04 % 77,289 3.77 6 0.0197 % 2,522.1
Performance Highlights
Issue Index Change Notes
FTS.PR.J Perpetual-Discount -1.60 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 23.68
Evaluated at bid price : 24.05
Bid-YTW : 5.01 %
MFC.PR.K FixedReset -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 3.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.E FixedReset 278,811 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 0.47 %
ENB.PR.P FixedReset 169,263 Nesbitt crossed blocks of 100,000 and 50,000, both at 24.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 22.96
Evaluated at bid price : 24.35
Bid-YTW : 4.02 %
TD.PF.B FixedReset 118,000 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 23.17
Evaluated at bid price : 25.02
Bid-YTW : 3.60 %
RY.PR.I FixedReset 75,717 Scotia crossed blocks of 33,500 and 28,000, both at 25.32.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 3.11 %
MFC.PR.K FixedReset 45,761 RBC bought 19,200 from National at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 3.83 %
TRP.PR.B FixedReset 27,222 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 3.53 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.C SplitShare Quote: 26.13 – 26.95
Spot Rate : 0.8200
Average : 0.5354

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 26.13
Bid-YTW : 3.51 %

BAM.PR.K Floater Quote: 17.30 – 17.90
Spot Rate : 0.6000
Average : 0.3986

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 17.30
Evaluated at bid price : 17.30
Bid-YTW : 3.06 %

POW.PR.C Perpetual-Premium Quote: 25.21 – 25.50
Spot Rate : 0.2900
Average : 0.1830

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-10
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 0.79 %

FTS.PR.J Perpetual-Discount Quote: 24.05 – 24.50
Spot Rate : 0.4500
Average : 0.3710

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 23.68
Evaluated at bid price : 24.05
Bid-YTW : 5.01 %

ENB.PR.J FixedReset Quote: 25.24 – 25.49
Spot Rate : 0.2500
Average : 0.1718

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 23.27
Evaluated at bid price : 25.24
Bid-YTW : 3.98 %

PWF.PR.P FixedReset Quote: 23.20 – 23.49
Spot Rate : 0.2900
Average : 0.2194

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-08-11
Maturity Price : 22.77
Evaluated at bid price : 23.20
Bid-YTW : 3.34 %

New Issue: MFC FixedReset, 3.90%+236

August 11th, 2014

Manulife Financial Corporation has announced:

a Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 17 (“Series 17 Preferred Shares”). Manulife will issue 10 million Series 17 Preferred Shares priced at $25 per share to raise gross proceeds of $250 million. The offering will be underwritten by a syndicate of investment dealers co-led by Scotia Capital Inc., RBC Capital Markets and TD Securities and is anticipated to qualify as Tier 1 capital for Manulife. The expected closing date for the offering is August 15, 2014. Manulife intends to file a prospectus supplement to its June 23, 2014 base shelf prospectus in respect of this issue.

Holders of the Series 17 Preferred Shares will be entitled to receive a non-cumulative quarterly fixed dividend yielding 3.90 per cent annually, as and when declared by the Board of Directors of Manulife, for the initial period ending December 19, 2019. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.36 per cent.

Holders of Series 17 Preferred Shares will have the right, at their option, to convert their shares into Non-cumulative Rate Reset Class 1 Shares Series 18 (“Series 18 Preferred Shares”), subject to certain conditions, on December 19, 2019 and on December 19 every five years thereafter. Holders of the Series 18 Preferred Shares will be entitled to receive non-cumulative quarterly floating dividends, as and when declared by the Board of Directors of Manulife, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.36 per cent.

Manulife intends to use the net proceeds from the offering to partially fund the redemption of Manulife’s Non-cumulative Rate Reset Class 1 Shares Series 1 (the “Series 1 Preferred Shares”) on September 19, 2014.

Later, they added:

that as a result of strong investor demand for its previously announced Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 17 (“Series 17 Preferred Shares”), the size of the offering has been increased to 14 million shares. The gross proceeds of the offering will now be $350 million. The offering will be underwritten by a syndicate of investment dealers co-led by Scotia Capital Inc., RBC Capital Markets and TD Securities and is anticipated to qualify as Tier 1 capital for Manulife. The expected closing date for the offering is August 15, 2014. Manulife intends to file a prospectus supplement to its June 23, 2014 base shelf prospectus in respect of this issue.

Manulife intends to use the net proceeds from the offering to fund the redemption of Manulife’s Non-cumulative Rate Reset Class 1 Shares Series 1 (the “Series 1 Preferred Shares”) on September 19, 2014.

This issue is priced in-line with extant issues, according to Implied Volatility theory:

ImpVol_MFC_FR_140811
Click for Big

I continue to be puzzled about why the Implied Volatility for MFC FixedResets is so high.

MFC.PR.E To Be Redeemed

August 11th, 2014

Manulife Financial Corp. has announced:

its intention to redeem all of its outstanding 14,000,000 Non-cumulative Rate Reset Class 1 Shares Series 1 (“Series 1 Preferred Shares”) for cash on September 19, 2014. The Series 1 Preferred Shares are redeemable at Manulife’s option on September 19, 2014, at a redemption price per Series 1 Preferred Share equal to C$25.00 for an aggregate total of C$350 million. Formal notice will be delivered to holders of Series 1 Preferred Shares in accordance with the terms outlined in the share provisions for the Series 1 Preferred Shares.

Separately from the redemption price, the final quarterly dividend of C$0.35 per Series 1 Preferred Share will be paid in the usual manner on September 19, 2014 to shareholders of record on August 19, 2014. After the Series 1 Preferred Shares are redeemed, holders of Series 1 Preferred Shares will cease to be entitled to distributions of dividends and will not be entitled to exercise any rights as holders other than to receive the redemption price.

No surprise here – with an Issue Reset Spread of 323bp, this was rather expensive money for them. They have separately announced their intention to issue at +236.

MFC.PR.E commenced trading 2009-6-3 after being announced 2009-5-25.

August PrefLetter Released!

August 11th, 2014

The August, 2014, 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.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the August, 2014, issue, while the “Next Edition” will be the September, 2014, issue, scheduled to be prepared as of the close September 12 and eMailed to subscribers prior to market-opening on September 15.

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.

LFE.PR.B Semi-Annual Report 2014

August 10th, 2014

Canadian Life Companies Split Corp has released its Semi-Annual Report to May 31, 2014.

Figures of interest are:

MER: 1.43% of the whole unit value, “presented to reflect the normal operating expenses of the Company excluding
any one time secondary offering expenses.”

Average Net Assets: We need this to calculate portfolio yield. The Total Assets of the fund at year end was $190.0-million, compared to $199.9-million on May 31, so call it an average of $195.0-million. Preferred share dividends of $4,229,154 were paid over the half year at 0.625 p.a., implying average units outstanding of 13.53-million, at an average NAVPU of about $14.05, implies $190.2-million. That’s reasonably good agreement! Say the Average Net Assets are $192.6-million.

Underlying Portfolio Yield: Income received of $2,871,701 divided by average net assets of $194.7-million, multiplied by two because it’s semiannual is 2.98%.

Income Coverage: Net investment income of $1,873,801 (after adding back warrant subscription fees) divided by preferred share dividends of $4,229,154 is a rather low 44% – but consistent with the figure for 2013.