Preferreds

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gibor
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Re: Preferreds

Post by gibor »

On the other hand, "currency risk" may increase your returns :). imho, US will raise interest rates more agressive than Canada... loonie can be overvalued now
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Re: Preferreds

Post by jiHymas »

gibor wrote: 19 Jul 2017 18:07US prefs ETF yielding 5.6-5.9%, Canadian's CPD and ZPR 3.5-4%.
Just make sure you know how the quoted yield is being calculated and what assumptions are made going forward. Does the yield calculation include the effect of anticipated resets and redemptions?
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Re: Preferreds

Post by marcharry »

soldToSoon wrote: 08 Jul 2017 11:57 1. Go only for issues with highest available credit. That is anything below Pfd 2(L) should be ignored.
2. Assume the absolute worst will happen and only check the yield to worst, that is yield based on the earliest call date.
3. Go for floating issues that have the widest spread. Minimum 300 bps. Why this criteria? This is because in all markets except the ones we just saw in the last 2 years or so, this is a huge premium for high quality issuers. In bond market, the same issuers pay no more than 100 to 200 bps over GOC. A spread of 300 bps or higher makes these issues very expensive for the issuer, especially considering that these issuers are of enormous size in the financial and insurance sectors.
4. If market conditions improve, the issue will very likely be called at the earliest date. You will enjoy your high 3s or low 4s in the meantime.
5. If market conditions don't improve, you are shielded by the high spread. Should BoC bring rates down to zero, you'll be shielded to a large extent by the wide spread. And your expectations were modest to begin with. You might have to wait a little while longer till the conditions improve.
This is basically the strategy that I am trying to use with the bank fixed resets nvcc at ~450Bps over GOC5 - while they may be deemed expensive - a 3% yield looks good to me and the bank will certainly call them at the earliest date as the rate is onerous for them. What is the worst case scenario? James discusses them http://prefblog.com/?p=35102#comments at the link
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Re: Preferreds

Post by Jaunty »

gibor wrote: 19 Jul 2017 18:07 On the other hand, "currency risk" may increase your returns :). imho, US will raise interest rates more agressive than Canada... loonie can be overvalued now
The Economist's Big Mac index doesn't think so http://www.economist.com/content/big-mac-index
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Re: Preferreds

Post by gibor »

As per The Big Mac index, you need to invest into Ukranian grivna that undervalued by 75% or so... :lol:
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Re: Preferreds

Post by milton »

Anyone know anything about ENB.PR.C? It shows up as a (very) lightly traded issue on the stock screeners with no dividend. But it's not listed on Enbridge's Investor site.

The 107 shares that you see traded today is from TD cancelling my trade yesterday. I had asked for ENB.PF.C and the agent filled ENB.PR.C instead. Is ENB.PR.C some kind of 'ghost' share?
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Re: Preferreds

Post by jiHymas »

milton wrote: 02 Aug 2017 12:45Is ENB.PR.C some kind of 'ghost' share?
ENB.PR.C debuted on June 2 after a partial exchange from ENB.PR.B
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Re: Preferreds

Post by milton »

Lots of shares of Aimia prefs changed hands today:

AIM.PR.A volume: 178,570
AIM.PR.B volume: 155,700
AIM.PR.C volume: 164,400

10,000 or so shares of each issue trade on a given day. Below average trading volume for the common shares today. Surprised and curious how so many shares could change hands without moving the price.
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big easy
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Re: Preferreds

Post by big easy »

marcharry wrote: 19 Jul 2017 22:14
soldToSoon wrote: 08 Jul 2017 11:57 1. Go only for issues with highest available credit. That is anything below Pfd 2(L) should be ignored.
2. Assume the absolute worst will happen and only check the yield to worst, that is yield based on the earliest call date.
3. Go for floating issues that have the widest spread. Minimum 300 bps. Why this criteria? This is because in all markets except the ones we just saw in the last 2 years or so, this is a huge premium for high quality issuers. In bond market, the same issuers pay no more than 100 to 200 bps over GOC. A spread of 300 bps or higher makes these issues very expensive for the issuer, especially considering that these issuers are of enormous size in the financial and insurance sectors.
4. If market conditions improve, the issue will very likely be called at the earliest date. You will enjoy your high 3s or low 4s in the meantime.
5. If market conditions don't improve, you are shielded by the high spread. Should BoC bring rates down to zero, you'll be shielded to a large extent by the wide spread. And your expectations were modest to begin with. You might have to wait a little while longer till the conditions improve.
This is basically the strategy that I am trying to use with the bank fixed resets nvcc at ~450Bps over GOC5 - while they may be deemed expensive - a 3% yield looks good to me and the bank will certainly call them at the earliest date as the rate is onerous for them. What is the worst case scenario? James discusses them http://prefblog.com/?p=35102#comments at the link
Same, except I'm holding the bank and lifeco, non-NVCC, floating rate reset preferreds in my taxable plan. Current yields not so juicy but better than 5 year GICs with favorable tax treatment, AA ratings and the prospect of being taken out a par at some point. BNS.PR.D was trading around $17 at one point - with a YTW north of 8% if you believe it will be redeemed in 2022. I guess that was typical at the time but strikes me as just silly.
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Re: Preferreds

Post by milton »

There's an interesting article on advisor.ca on Aimia suspending dividends to their preferred shares:

http://www.advisor.ca/investments/marke ... nds-241092

The article concludes that:
The cut to Aimia’s preferred dividends is an ongoing mystery. Based on Aimia’s past actions, as well as the general precedent set by the market, the reasoning [e.g. the CBCA test] seems dubious. Until clarity is brought to the CBCA through either an amendment or an enforcement statement from regulators, advisors will be at risk.
Did you know that 25% of dividend paying companies on the TSX don't meet pararaph 42 of the Canada Business Corporation Act (CBCA), which states:
A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.
I wrote Aimia IR asking for a comment and received a reply thanking me for forwarding. Man I hope there's some larger fish out there than me who will stir up the pot at Aimia.
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Re: Preferreds

Post by jay »

James Hymass in this prefblog post points out that (bold/underline is mine)
I just noticed we’ve passed a milestone of sorts … both today and 2017-10-4, the “Median Duration-to-Worst” of the FixedReset subindex is less than 5, indicating that the average (see note, below) investment-grade FixedReset will now be called in the worst-case scenario … for a long time it has been insurance sector “Deemed Retractions” that have been medians. October 4 was the first time since November 28, 2014 that this has happened … it will be remembered that although December 1, 2014 was only a moderately negative day, but it was shortly followed by the reset of TRP.PR.A TO 3.266%. This reset was a wake-up call for the (surprisingly many) who hadn’t been paying attention to projected reset rates and I consider this to be the start of the bear market that reached its nadir in February 2016.
Not sure what this means going forward, but I am starting to feel not too comfortable with my 12% allocation to ZPR and been contemplating selling some. It served me very well the last 1.5 years and helped lift my entire portfolio but maybe it is time to bring down to a more acceptable allocation like 5-10%.
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Re: Preferreds

Post by milton »

Not sure what this means going forward
Would it mean that, if the average investment-grade FixedReset is trading below the redemption price, the price should move up closer to $25 seeing that the market is expecting it to be called?
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Re: Preferreds

Post by milton »

Aubrey Basdeo, managing director at BlackRock's fixed income division in Canada has a short article re prefs on Seeking Alpha:

https://seekingalpha.com/article/412062 ... es-may-yet

He compares the price of CPD to the GoC5yr yield. He also mentions expectation of banks following TD's lead in issuing Tier 1 notes south of border and possibly increasing demand for existing prefs in Canada. Some good news for long suffering pref investors?
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Re: Preferreds

Post by Hogwild »

Thanks for that article, milton. A nice find.

When I see how many corners corporations are cutting to be able to juice quarterly numbers, I feel that the current rally, can't go on much longer. Also, I think a lot of the pos. news (Trump's tax cuts) are already at least largely baked into stock prices now.


So I'm wondering about prefs again. Because of Audrey Basdeo's article, as linked above, I'm once more thinking about buying TD.PF.B or TD.PF.C. Both are rate-resets with a 4% -ish current yield, I'm thinking they might be worth holding until the next reset period, at which point we might see a nice cap gain.


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Re: Preferreds

Post by fireseeker »

Linking to a Finpost story about minimum rate floors in reset prefs, which I find challenging to assess.
http://business.financialpost.com/news/ ... eset-yield
Quotes in the piece from James Hymas prompted a rebuttal at Prefblog, with a reader arguing that James's dismissal of floors is wrong-headed, that the feature is insurance that is surely worth something.
If I understand this correctly, the argument against ascribing value to minimum reset features is that if the gap between the floor rate and prevailing rates at the time of reset is significant, the issuer will simply call the pref and issue new ones at the lower prevailing rate.
In other words, the chances of the minimum taking effect are virtually nil and would never be at a significant premium to current rates.
Is that right?
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Re: Preferreds

Post by jiHymas »

fireseeker wrote: 05 Dec 2017 19:32If I understand this correctly, the argument against ascribing value to minimum reset features is that if the gap between the floor rate and prevailing rates at the time of reset is significant, the issuer will simply call the pref and issue new ones at the lower prevailing rate.

In other words, the chances of the minimum taking effect are virtually nil and would never be at a significant premium to current rates.
Is that right?
In that scenario, the holder has avoided a capital loss, whether realized or unrealized.

Of course, the above paragraph assumes there is a significant decline in the prices of non-floor issues which is not necessarily as assured or as dramatic as people like to think.
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Re: Preferreds

Post by minimalist »

I'm new to preferred shares so sorry if these are newbie questions.

Why are all bank and most insurance company preferreds non-cumulative?

Should I be concerned about this?

Having cumulative rights obviously seems to be good for the investor so it seems logical to focus on cumulative issues only notwithstanding other differences.

From the FP piece referenced above:

"In Hymas’s view, a coupon that starts with a five is required. In the meantime, he says that better value lies in the secondary market."

Does this mean that the running yield and yield to call has to be greater than 5% to be attractive to him?
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Re: Preferreds

Post by jiHymas »

minimalist wrote: 06 Dec 2017 19:20From the FP piece referenced above:

"In Hymas’s view, a coupon that starts with a five is required. In the meantime, he says that better value lies in the secondary market."

Does this mean that the running yield and yield to call has to be greater than 5% to be attractive to him?
I would have looked at the recent ENB issue and BPO issue if they had coupons of 5.25% (and resets to match, of course) instead of the actual 4.90%.
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Re: Preferreds

Post by shellybear »

Kind of a newbie at these preferreds as well, but have a question. I see there are some different kinds of preferreds. Was looking at some rate reset , and also some floating rate .... in an environment where interest rates are rising, is a floating rate a better choice?
And rate reset, how are these affected by interest rates? I have noted some having their dividends chopped substantially on the reset date....
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Re: Preferreds

Post by AltaRed »

It takes a long time to understand preferreds. My recommendation? Subscribe to PrefLetter for a year or two first, or at least read James' PrefBlog daily for about a year first.
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Re: Preferreds

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Re: Preferreds

Post by shellybear »

Thanx for those links that cleared a lot up. As i suspected , for instance buying a rate reset preferred with a 5 year term locked in at 4.5% , will not pay as high a dividend as its counterpart floating rate preferred in a environment where interest rates are jumping even half a percent per year...
In the opposite scenerio , with interest rates dropping to near zero, (which we have seen in the past 10 years or so), rate resets have held their dividend value better , while floating rate preferreds have tanked.
I have noted many rate reset preferreds hitting the end of their term and seeing the dividends chopped. But have enjoyed reasonably high rates while real interest rates were near zero.
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Re: Preferreds

Post by milton »

In the Globe today "These Preferred Shares are Looking Particularly Attractive Now":

https://www.theglobeandmail.com/globe-i ... e37320877/

Lots of positive articles now the pref market has rebounded 29 percent! Article discusses FTS.PR.H, MFC.PR.I, SLF.PR.I, IAG.PR.G, and TD.PF.A in light of possible rate increases.
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Re: Preferreds

Post by adrian2 »

milton wrote: 13 Dec 2017 22:52 In the Globe today "These Preferred Shares are Looking Particularly Attractive Now":

https://www.theglobeandmail.com/globe-i ... e37320877/

Lots of positive articles now the pref market has rebounded 29 percent! Article discusses FTS.PR.H, MFC.PR.I, SLF.PR.I, IAG.PR.G, and TD.PF.A in light of possible rate increases.
For subscribers only. :(
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Re: Preferreds

Post by DavidR »

The article mentions Fortis, Manulife etc but there is no specific discussion other than this rationale:
Mr. Grieve calculated that if the bond yield rises to 2.5 per cent, the Fortis preferred shares would be reset at 5.8 per cent, and could send the share price back up to par – implying a gain of $8 a share from the current level, or 47 per cent.
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