Preferreds

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Nortel'd
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Re: Preferreds

Post by Nortel'd »

Anyone venture a guess as to why the large number of those “new” rate reset shares are being traded on a daily basis?

Also what is the difference between a PR and PF rate reset?

I am trying to evaluate if, what and when to purchase more preferred shares. Right now I am comparing the behavior of five of the most recent rate resets with older rate reset and fixed rate preferreds.

PPL.PR.K is trading 7% below par (worst credit rating) and TD.PF.G is trading 1.8% above par (best credit rating)

Price ..... Yield ..... Volume .... Issue
23.25 .... 6.18% .... 41,475 ...... PPL.PR.K - Pfd-3 & P-3 (H)
24.93 .... 5.62% ..... 81,645 ..... NA.PR.X - Pfd-2 (L) & P-3 (H) Baa3 (hyb) by Moodys. NVCC Reset
25.50 .... 5.39% ..... 65,236 ..... RY.PR.Q - Pfd-2 & P-2 Baa2 by Moodys (hyb) NVCC Reset"
25.43 .... 5.41% .... 112,233 ..... BNS.PR.E - Pfd-2 & P-2(L), and Baa2 by Moody's NVCC Reset
25.47 .... 5.40% ..... 86,650 ..... TD.PF.G - Pfd-2 & P-2 (BBB) & A3 (hyb)
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Re: Preferreds

Post by AltaRed »

PF means they ran out of letters in the alphabet in the PR designations. I noticed PF show up on ENB prefs and they've been to the trough a lot.
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Arby
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Re: Preferreds

Post by Arby »

It's often mentioned that rate reset preferreds are a product that is sold to retail investors. It appears that institutional investors are also large buyers of rate resets, as per the following excerpt from a Scotia analyst report on Intact Financial (a large property and casualty insurance company):
The rate reset shares contributed just over 60% of Intact’s $1.1B preferred share portfolio at the end of Q3.
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Re: Preferreds

Post by iluvnascar »

Of the ones you mentioned, 4 are bank preferred issues....they are all rate resets....but have no MINIMUM yield at reset. From what I have read, the assumption is that the reset premium is so high, there is literally no chance of them being reset. Instead, they will be redeemed. I have a bit of Royal, BNS, and NA....but no TD at this point. I have bids under market for all of these issues.

OTOH, PPL.Pr.K is a rest where upon reset, you are guaranteed AT LEAST the 5.75% yield that was sold. I bought 2,000 of these at issue; but had Buyers' remorse and sold them (thankfully) at the opening of trading. I subsequently bought back in at $23.00.....which is a yield of 6.25%.


Nortel'd wrote:Anyone venture a guess as to why the large number of those “new” rate reset shares are being traded on a daily basis?

Also what is the difference between a PR and PF rate reset?

I am trying to evaluate if, what and when to purchase more preferred shares. Right now I am comparing the behavior of five of the most recent rate resets with older rate reset and fixed rate preferreds.

PPL.PR.K is trading 7% below par (worst credit rating) and TD.PF.G is trading 1.8% above par (best credit rating)

Price ..... Yield ..... Volume .... Issue
23.25 .... 6.18% .... 41,475 ...... PPL.PR.K - Pfd-3 & P-3 (H)
24.93 .... 5.62% ..... 81,645 ..... NA.PR.X - Pfd-2 (L) & P-3 (H) Baa3 (hyb) by Moodys. NVCC Reset
25.50 .... 5.39% ..... 65,236 ..... RY.PR.Q - Pfd-2 & P-2 Baa2 by Moodys (hyb) NVCC Reset"
25.43 .... 5.41% .... 112,233 ..... BNS.PR.E - Pfd-2 & P-2(L), and Baa2 by Moody's NVCC Reset
25.47 .... 5.40% ..... 86,650 ..... TD.PF.G - Pfd-2 & P-2 (BBB) & A3 (hyb)
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Re: Preferreds

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Rob Carrick in his column today, Lowly preferred shares an intriguing bet for the brave investor, says there is a "bull market in despondency" in the rate reset shares. James Hymas and Richardson GMP's Dustin Van Der Hout both see buying opportunities in a rebound to come.

James suggests ZPR,CPD, and PPS for people not able to do their own research (he kindly says for people who don't have enough time) and he and Mr. Van der Hout each suggest three (different) individual shares.

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Re: Preferreds

Post by like_to_retire »

Inquisitive wrote:.....there is a "bull market in despondency" in the rate reset shares.
Yeah, that's an understatement. In fact the article is a cornucopia of understatement when it says:

***
"It’s a sign of how bizarre things are in the world of finance that supposedly safer preferred shares are falling much harder than the broader stock market. Preferreds were once a low-drama alternative to bonds for generating reliable investment income. Now, they’re a top name on any ranking of wealth-destroying investments.

Are you the sort of investor who follows investing giant Sir John Templeton’s words about buying when other investors are despondently selling? Then check out preferred shares because there’s a bull market in despondency here. As of midweek, the S&P/TSX preferred share index was off about 28 per cent in the past 12 months and 35 per cent in total over the previous three years.


***
It has felt like falling knives for the last two years as I have continued to add to my rate reset preferred shares, even altering my allocation between perpetuals and rate resets to take advantage of what "appear" to be great prices for many rate resets.

If I look at my stable of preferred shares, I see great future potential, with anticipated possibilities of pent up gains to come, but they continue to disappoint. Even with the "bear market" in equities so far this year, I am in the black with my equities and beating the index handily, but it matters not, because just like last year, my preferred share allocation is killing me.

I would think long and hard about getting into rate resets that the article recommends. It's a risky business. I rue the day they introduced these things and I bought into the logic. Straight perpetuals were so simple and predictable. Rate resets - meh.

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Re: Preferreds

Post by Thegipper »

like_to_retire wrote:
Inquisitive wrote:.....there is a "bull market in despondency" in the rate reset shares.
Yeah, that's an understatement. In fact the article is a cornucopia of understatement when it says:

***
"It’s a sign of how bizarre things are in the world of finance that supposedly safer preferred shares are falling much harder than the broader stock market. Preferreds were once a low-drama alternative to bonds for generating reliable investment income. Now, they’re a top name on any ranking of wealth-destroying investments.

Are you the sort of investor who follows investing giant Sir John Templeton’s words about buying when other investors are despondently selling? Then check out preferred shares because there’s a bull market in despondency here. As of midweek, the S&P/TSX preferred share index was off about 28 per cent in the past 12 months and 35 per cent in total over the previous three years.


***
It has felt like falling knives for the last two years as I have continued to add to my rate reset preferred shares, even altering my allocation between perpetuals and rate resets to take advantage of what "appear" to be great prices for many rate resets.

If I look at my stable of preferred shares, I see great future potential, with anticipated possibilities of pent up gains to come, but they continue to disappoint. Even with the "bear market" in equities so far this year, I am in the black with my equities and beating the index handily, but it matters not, because just like last year, my preferred share allocation is killing me.

I would think long and hard about getting into rate resets that the article recommends. It's a risky business. I rue the day they introduced these things and I bought into the logic. Straight perpetuals were so simple and predictable. Rate resets - meh.

ltr
With the pending negative interest rate policies I bailed out my remaining resets.
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Re: Preferreds

Post by like_to_retire »

Thegipper wrote:With the pending negative interest rate policies I bailed out my remaining resets.
Then you must have taken a massive capital gains hit.

I''m not ready for that. I still have hope.

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Re: Preferreds

Post by SoninlawofGus »

like_to_retire wrote: I''m not ready for that. I still have hope.
ltr
As do I, though I also purchased James' newsletter last year and followed his recommendations, during probably the worst year imaginable -- so I'm out that $200 as well (not his fault). One of the reasons I went the rate-reset route was to try to take advantage of the NVCC compliance issue speculation for insurance preferreds. Between the time I bought the newsletter and now, the certainty of that seems to have dwindled, so I'm no longer leaning towards that being likely -- any substantive information is very sparse. Also, I was surprised to see that even some of the bank issues which are designated as non-compliant are trading lower than one would think.

I just dipped my pinky toe in this market, but I pretty well got it chopped off. I'm not selling, but mostly in part to the low remaining value of the shares. I just don't understand this market well enough beyond the simple retractables (which are unfortunately scarce). I should not have gotten involved in something I'm not very knowledgeable about.

As an aside, what happens to rate resets if the negative rate + the real yield is negative? Does that get subtracted from the value of the preferred, or is 0 the floor?
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Re: Preferreds

Post by like_to_retire »

SoninlawofGus wrote:I was surprised to see that even some of the bank issues which are designated as non-compliant are trading lower than one would think.
It's puzzling for sure.
SoninlawofGus wrote:As an aside, what happens to rate resets if the negative rate + the real yield is negative? Does that get subtracted from the value of the preferred, or is 0 the floor?
I would say that if an issue with a normal spread of +250 were to reset, and the GOC5 was -1.0%, then it will reset to 1.50%. How low could it actually go - I can't imagine if it calculated to below zero, that they would post a figure less than zero.

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Re: Preferreds

Post by scomac »

We've got more to worry about than rate reset preferred shares if GoC 5 yr. are yielding -1.0%!
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Re: Preferreds

Post by rich »

I have also followed Mr Hymas' advice over the years but have been more restrained in switching to rate resets, preferring to keep most of my perpetuals and collect 5.5-6% annual dividends for the next 25 years (hopefully). Still, have about 25% in rate resets and these have fallen much more precipitously than perpetuals. I am strongly considering tax loss harvesting (again) and dumping a bunch of them in favour of CPD. I have no doubt better times will come for preferreds.
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Re: Preferreds

Post by Thegipper »

rich wrote:I have also followed Mr Hymas' advice over the years but have been more restrained in switching to rate resets, preferring to keep most of my perpetuals and collect 5.5-6% annual dividends for the next 25 years (hopefully). Still, have about 25% in rate resets and these have fallen much more precipitously than perpetuals. I am strongly considering tax loss harvesting (again) and dumping a bunch of them in favour of CPD. I have no doubt better times will come for preferreds.
I am going with perpetuals and some splits with a hard maturity . Perpetuals might be a real bargain if we are looking at a long period of low rates and low inflation.
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Re: Preferreds

Post by like_to_retire »

Thegipper wrote:I am going with perpetuals............
Thegipper wrote:Perpetuals might be a real bargain if we are looking at a long period of low rates and low inflation.
That's the rub isn't it. The logic behind the rate resets was that if interest rates rise, then the perpetuals would get hammered, and they would. The rate resets would offer protection against that scenario because they'd reset at a higher rate. No-one and I mean no-one anticipated that interest rates would drop and stay low forever, because the perception of that situation has been very hard on rate resets.

Even now, if I look at a chart of randomly selecting 3 perpetuals and 3 rate resets in my stable of preferred shares, a sensible person would say that the best potential for gains would be the rate resets that show an approximate drop of -55%. The perpetuals have fared much better, down about -18%.

The chart shows 3 perpetuals tracking higher (GWO.PR.I, IAG.PR.A, SLF.PR.D), versus 3 rate resets (CIU.PR.C-2016, ENB.PR.H-2018, FTS.PR.H-2020).

From the graph, it doesn't look like the perpetuals are the bargain, but that depends on the future. Rate resets are a real conundrum to me.
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Re: Preferreds

Post by Arby »

I could never understand why more people aren't buying split preferred shares. If you're buying preferreds for income and capital preservation, then it seems to me that split preferreds are the best choice. They typically offer a fixed dividend, and have a fixed maturity date when you have a very good chance of getting paid back the face value. I loaded up on splits during the 2008-09 financial crisis, when they traded at 10%-20% below face value. I've been happily collecting my dividends each year, and know that I have the option to cash out at the face value at the fixed maturity date. Actually, now is a pretty good time to consider split preferreds, as many are trading a a slight discount to face value, which doesn't happen very often.
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Re: Preferreds

Post by Thegipper »

Arby wrote:I could never understand why more people aren't buying split preferred shares. If you're buying preferreds for income and capital preservation, then it seems to me that split preferreds are the best choice. They typically offer a fixed dividend, and have a fixed maturity date when you have a very good chance of getting paid back the face value. I loaded up on splits during the 2008-09 financial crisis, when they traded at 10%-20% below face value. I've been happily collecting my dividends each year, and know that I have the option to cash out at the face value at the fixed maturity date. Actually, now is a pretty good time to consider split preferreds, as many are trading a a slight discount to face value, which doesn't happen very often.
Agree. They are the closest thing to a real hard maturity preferred.
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Re: Preferreds

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Re: Preferreds

Post by 2 yen »

Thoughts on Loblaws L.PB Currently yielding about 5.7%. $25 redemption price on June 30, 2024.

The closest I own for any consumer staples is NWC (Northwest company). Looking to put part of a maturing GIC into a reasonably reliable preferred share.

Currently own some BAM.PB and POW.PM, both now redeemable at $25, but no indication from either company that they are thinking about it.

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Re: Preferreds

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2 yen wrote:Thoughts on Loblaws L.PB Currently yielding about 5.7%. $25 redemption price on June 30, 2024.

The closest I own for any consumer staples is NWC (Northwest company). Looking to put part of a maturing GIC into a reasonably reliable preferred share.

Currently own some BAM.PB and POW.PM, both now redeemable at $25, but no indication from either company that they are thinking about it.

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Is that a guaranteed maturity date on June 30,2024? It's very difficult to find a preferred with a hard maturity date .
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Re: Preferreds

Post by like_to_retire »

Thegipper wrote:Is that a guaranteed maturity date on June 30,2024?
Gipper, I believe he said " $25 redemption price on June 30, 2024.".

That's redemption, and not retraction. It's a straight perpetual.

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Re: Preferreds

Post by SoninlawofGus »

PVS.PR.D has a hard maturity of Oct 2021 and is trading below par value.
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Re: Preferreds

Post by 2 yen »

like_to_retire wrote:
Thegipper wrote:Is that a guaranteed maturity date on June 30,2024?
Gipper, I believe he said " $25 redemption price on June 30, 2024.".

That's redemption, and not retraction. It's a straight perpetual.

ltr
Thanks guys, that's what I meant.

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Re: Preferreds

Post by Thegipper »

SoninlawofGus wrote:PVS.PR.D has a hard maturity of Oct 2021 and is trading below par value.
I have this one. You get a nice yield and you get your $25 per share in Oct 2021. There are are some shorter maturing PVS .PR shares as well.
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Re: Preferreds

Post by 2 yen »

Thegipper wrote:
SoninlawofGus wrote:PVS.PR.D has a hard maturity of Oct 2021 and is trading below par value.
I have this one. You get a nice yield and you get your $25 per share in Oct 2021. There are are some shorter maturing PVS .PR shares as well.
Interesting. Didn't know this one. Thanks.

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Re: Preferreds

Post by jay »

Based on 170 rate-reset issues, I did some worst-case analysis (GOC-5 = -0.3%) and calculated that with a (weighted) average spread of 2.77%, the average annual dividend will be ~$0.62. For that to produce a yield that compares to the new and more attractively structured rate resets (the ones with a floor on yield like BAM/CU/TD/BNS/RY etc...), say 5%, a typical preferred would have to be priced around $12.4. Applying this to ZPR sets its value at 7.5$.

At the current price of 8.5'sh, ZPR is pricing in a GOC5 of 0% for its current yield to be 5% (post reset).

My data and calculations might be off a bit. If someone has done similar calculations, please share your results.

EDIT: the 0.62$ dividend is based on 25$ par, i.e. (0.0277-0.003)*25
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