Preferreds

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like_to_retire
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Re: Preferreds

Post by like_to_retire »

bpither wrote:I think the note means that any redeemable amount above $25 will be considered a dividend and eligible for the dividend income credit?
Yeah, this is standard for a redemption. The difference between the Paid Up Capital ($25) and the redemption price ($26), is a deemed taxable dividend.

So, for tax purposes you'll get $25 (less your ACB as a capital gain) and $1 (plus the final dividend amount) as a taxable dividend.

It's always wise to look at your own tax bracket and decide if you would rather all capital gains or capital gain plus the dollar dividend. It may provoke you to sell the shares before redemption (hopefully as close to $26 as possible) so that the entire amount (at market) will be capital gain.

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Re: Preferreds

Post by adrian2 »

See one example from PrefBlog plus a more extreme case for entertainment value (the latter is obviously not applicable for CM.PR.I).
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Re: Preferreds

Post by bpither »

Very interesting.
I've notice slight price shifts over the past few days. Could it be buyers/sellers 1) buying at $25.90 to pick up a bit of profit (and the dividend over $25) from 2) sellers preferring the capital gain?

This leads to the next question. Might be a wacky one but I'm always looking for a bargain.

When the preferred is redeemable on January 31st @$26 and I wanted the premium dividend component could I purchase shares up to the redemption date? I'm wondering since I have a large cash balance and might want to profit from arbitrage if there is suddenly a worthwhile spread during the next three weeks.

Of course I would be competing with computers and institutions!
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adrian2
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Re: Preferreds

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bpither wrote:When the preferred is redeemable on January 31st @$26 and I wanted the premium dividend component could I purchase shares up to the redemption date? I'm wondering since I have a large cash balance and might want to profit from arbitrage if there is suddenly a worthwhile spread during the next three weeks.
I would not count on an arbitrage opportunity based on price alone. However, if you have a strong enough preference for receiving multiples of $1k dividends together with $1k capital losses, the floor is yours. I very much doubt that the institutions care for such a bundle, but as an individual you might have a scenario where it makes sense.
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Re: Preferreds

Post by Norbert Schlenker »

A couple of notes on CM.PR.I for bpither ...

1. There may be an extra small stub dividend paid to those who hold out to the bitter end, because the redemption date doesn't correspond to the regular dividend date.

2. If you do take the redemption, you pay no commissions (or lose the spread).

On the BMO.PR.V example that Adrian linked from prefblog, I'd be interested to know if James ever got an answer from Investor Relations about the negative deemed dividend.
... $1k dividends together with $1k capital losses, the floor is yours. I very much doubt that the institutions care for such a bundle ...
I suspect institutions have a distinct preference for that bundle. They are corporations so the dividend is tax free to them while the loss can probably be classified on income account. I wouldn't be surprised to see the issue trade above redemption because of the tax benefits.
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Re: Preferreds

Post by like_to_retire »

bpither wrote:Very interesting.
I've notice slight price shifts over the past few days. Could it be buyers/sellers 1) buying at $25.90 to pick up a bit of profit (and the dividend over $25) from 2) sellers preferring the capital gain?

This leads to the next question. Might be a wacky one but I'm always looking for a bargain.

When the preferred is redeemable on January 31st @$26 and I wanted the premium dividend component could I purchase shares up to the redemption date? I'm wondering since I have a large cash balance and might want to profit from arbitrage if there is suddenly a worthwhile spread during the next three weeks.

Of course I would be competing with computers and institutions!
I had CM.PR.H redeemed in this fashion last year, and I set up a spreadsheet to calculate the conditions when it would be smarter to sell it than wait for the redemption. I looked every day at the market price to make the decision. In the end it was better to wait in my case. Be sure to remember when you make your calculations that the gross up and DTC have changed in 2012.

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Re: Preferreds

Post by jiHymas »

Norbert Schlenker wrote:On the BMO.PR.V example that Adrian linked from prefblog, I'd be interested to know if James ever got an answer from Investor Relations about the negative deemed dividend.
Just a copy-paste from the prospectus. No meaningful answer.
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Re: Preferreds

Post by westinvest »

Catching up with this thread I was reminded to do another pass at YTW calculations for my portfolio of preferreds because prices have been moving upwards. As noted upthread, a couple of the banks are now looking a bit anemic for YTW and I'll have to keep a sharp eye on prices for those, but in the process of doing the calculations I came across ENB.PR.A, which I have held since about 2000 - cost base of about $22.67, currently trading at about $26.50 - but this issue has been redeemable at $25 since 2007, so YTW is negative if Enbridge redeems this anytime in the next year. Question is, why haven't they redeemed this yet? You would think they could obtain capital at a cheaper price (they were able to issue a RR preferred at around 4% recently).
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Re: Preferreds

Post by StuBee »

Hello everyone!

I am currently thinking about what to do with my TFSA...

Are there any Preferred's with "GIC like" qualities. For instance, with a rate-reset preferred is the interest rate risk sufficiently reduced for the shares to trade at (or near) par at the time of reset (or at least at a relatively certain more or less predictable amount)? If the rate is good, and I know that I can sell it at a foreknown price within a 5 year period, it is like a GIC.

Evidently there is no CDIC coverage! I fully realize that I will have to determine credit risk for myself.

Thanks for any replies.
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Re: Preferreds

Post by scomac »

StuBee wrote:Are there any Preferred's with "GIC like" qualities.
No! :shock:
For instance, with a rate-reset preferred is the interest rate risk sufficiently reduced for the shares to trade at (or near) par at the time of reset (or at least at a relatively certain more or less predictable amount)?
No. The chief determinant will be the reset premium. If it favours the issuer, they will allow the issue to reset. The market price will then reflect the prevailing interest rate for a similar quality of credit at the time of reset. Whether or not that amounts to near the par value will be completely unknown. In fact, I think it would be best to assume that if an issue is allowed to reset, it will do so at a rate to par that is less than the prevailing rate for a similar quality credit.
If the rate is good, and I know that I can sell it at a foreknown price within a 5 year period, it is like a GIC.
The market seems to be betting on this outcome. Until we have a sufficient number of issues either resetting or get called, the market has no historical benchmark to price these issues.
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Re: Preferreds

Post by StuBee »

Thank-you Scomac
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Re: Preferreds

Post by adrian2 »

StuBee wrote:I am currently thinking about what to do with my TFSA...

Are there any Preferred's with "GIC like" qualities.
Holding a preferred in a TFSA results in the loss of the dividend tax credit, which is a big advantage preferreds start with. Personally, I would not buy prefs in a TFSA, but YMMV.
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Re: Preferreds

Post by Springbok »

adrian2 wrote:
StuBee wrote:I am currently thinking about what to do with my TFSA...

Are there any Preferred's with "GIC like" qualities.
Holding a preferred in a TFSA results in the loss of the dividend tax credit, which is a big advantage preferreds start with. Personally, I would not buy prefs in a TFSA, but YMMV.
Even with a DTC, most people will still pay tax on preferred share dividends in a taxable account and will pay even more in a registered account on withdrawal. In a TFSA you get the full amount of the dividend tax free.

Not sure just what IS best to put in TFSA. Foreign income perhaps, but not if there is withholding tax? REITs (or so called tax efficient funds) because of ROC content? GICs when they were worth buying :( That is mostly what I have been doing.

I haven't used pfds in TFSAs because I am more concerned about capital losses when interest rates start to rise, and there is no way to use those from a TFSA to offset CGs.

And to try and answer Stubees question - Wouldn't split preferreds be GIC-like? Fixed retraction date and fixed distribution until then? I have BNA.PR.C and PIC.PR.A (not in TFSA, but could be). Shouldn't be any capital loss on those unless they defaulted?
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Re: Preferreds

Post by Sensei »

Hi,

This is a very general question which requires a little background information.

Due to my non-residency status, I'm very limited in what I can do with my TDW account. No margin, no shorts, not even covered calls. It's a straight cash only account. I completely understand it. If I was a bank, I'd do the same thing, so I'm not complaining.

However, it also limits my ways of hedging. I can see how I might do this with some form of derivative like an option to sell, but of course I can't.

Here's the question. Would buying a preferred share hedge against a drop in the common stock price?

Here is what I'm thinking. I own quite a few common shares of STD (Santandar). The share price has dropped dramatically, but still pays a respectable dividend. But is it sustainable? Even though it appears to be a solid bank, with any more trouble in Europe, I'm not so sure.

Therefore, I'm thinking about a preferred issue. This seemed to be what people were doing with YLO. One issue is STD series C. According to Alan Young (Seeking Alpha), it has a coupon of 6.5% and trades at around $20.81 today so a yield of 7.8%. It is callable 2017. Would the preferred increase in value if the stock price dropped? I'm wondering about the possible scenarios of owning both the stock and the preferred.

Thanks if you have an opinion.

BTW, thanks for the input on CPD. I've given up on this plan based on info I rec'd.
Cheers

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Re: Preferreds

Post by like_to_retire »

Sensei wrote:Hi,

Would buying a preferred share hedge against a drop in the common stock price?

One issue is STD series C. According to Alan Young (Seeking Alpha), it has a coupon of 6.5% and trades at around $20.81 today so a yield of 7.8%. It is callable 2017. Would the preferred increase in value if the stock price dropped? I'm wondering about the possible scenarios of owning both the stock and the preferred.
The market value of preferreds is generally linked to corporate long bond rates, and to the companies ability to pay the dividend and principal. Also remember that preferreds are generally a retail product, and retail is quite panicky, so the companies fortunes will affect the price on an exaggerated scale (in my opinion). If the common drops, you can be assured retail will panic.

If bonds rates rise (as most think they will), then the price of your preferred will drop. It's already quite a bit below par, so that issue doesn't have much of a chance of being called in 2017.

I'm not liking your plan.

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Re: Preferreds

Post by patriot1 »

Springbok wrote: Even with a DTC, most people will still pay tax on preferred share dividends in a taxable account and will pay even more in a registered account on withdrawal. In a TFSA you get the full amount of the dividend tax free.
You get everything tax free in a TFSA.

The problem is that the market prices preferreds against bonds based on the perceived differences in risk/return in a taxable account. If you buy preferreds in a TFSA, you're getting the same difference in risk with a smaller spread in return.

That is, your risk/return in a TSFA would be a lot better if you bought a bond from the same issuer.

And thanks for the discussion re CM.PR.I which I also hold and will (quickly) decide whether to hold or fold. :D
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Re: Preferreds

Post by Springbok »

patriot1 wrote:
The problem is that the market prices preferreds against bonds based on the perceived differences in risk/return in a taxable account. If you buy preferreds in a TFSA, you're getting the same difference in risk with a smaller spread in return.

That is, your risk/return in a TSFA would be a lot better if you bought a bond from the same issuer
My comment was just that a pfd in a TFSA would put more in your pocket than the same one in a taxable account that benefited from a DTC.

Your comment seems to relate to whether or not a pfd should be bought in a TFSA. I don't do it because of risk of a capital loss that I cannot offset. But I might do it with one of the split pfds that I mentioned.

Regarding your point about market pricing of bonds vs pfds. I thought I might try and check to see what the spread might be. I would need to choose a pfd and a bond from say one of the major banks that could be compared directly? The pfds are usually perpetual with possibility of being called. And the bonds would have various fixed terms. I gave up because I realized I had no idea how to choose two suitable candidates :|

Do you have a real life example?
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Re: Preferreds

Post by patriot1 »

Sensei wrote: Here's the question. Would buying a preferred share hedge against a drop in the common stock price?
Not what most people would call a hedge. A typical example:
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Re: Preferreds

Post by Sensei »

Hi,

OK, I get the gist of the two responses and thanks.

LTR said bond prices will rise and therefore the preferred will drop and STD won't call the preferred. Maybe, maybe not.

Patriot 1 shows that share price and preferred prices move more or less together, so it is not a good hedge (or any kind of hedge.)

If I go through with the preferred plan anyway, then some more questions:

1. Clearly I will continue to receive the coupon rate even after the preferred is callable, right?

2. How long can a company not call a preferred? Is there a time limit??
Cheers

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Re: Preferreds

Post by like_to_retire »

Sensei wrote:LTR said bond prices will rise and therefore the preferred will drop and STD won't call the preferred. Maybe, maybe not.
No, I said if bond rates rise, not prices.
1. Clearly I will continue to receive the coupon rate even after the preferred is callable, right?
Yes, unless the coupon is suspended - not likely.
2. How long can a company not call a preferred? Is there a time limit??
No time limit on a perpetual. That's what the name implies.

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Re: Preferreds

Post by Sensei »

like_to_retire wrote:
Sensei wrote:LTR said bond prices will rise and therefore the preferred will drop and STD won't call the preferred. Maybe, maybe not.
No, I said if bond rates rise, not prices.
Correct and that is what I understood you to mean. Error of inattention! Maybe, maybe not refers to whether interest rates will rise. I live in an environment where interest rates have not moved much for years. However, I see your point.
1. Clearly I will continue to receive the coupon rate even after the preferred is callable, right?
Yes, unless the coupon is suspended - not likely.
2. How long can a company not call a preferred? Is there a time limit??
No time limit on a perpetual. That's what the name implies.

ltr
Does it? How?
Cheers

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Re: Preferreds

Post by Peculiar_Investor »

like_to_retire wrote:No time limit on a perpetual. That's what the name implies.
Read http://www.financialwisdomforum.org/for ... 00#p454600 for a specific example that caused Norbert to scratch his head in wonder.
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Re: Preferreds

Post by Nemo2 »

Sensei wrote:
No time limit on a perpetual. That's what the name implies.

ltr
Does it? How?
Perpetual: Never ending or changing.
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Re: Preferreds

Post by DavidR »

Sensei wrote:
2. How long can a company not call a preferred? Is there a time limit??
Some preferred shares give the shareholder the right to sell the share back to the company at par on a specific date, but many preferred shares have no such provisions (usually outlined in the prospectus). This latter type are referred to as 'perpetual' preferred shares. Some perpetual preferred shares have provisions that will allow the company to call the shares, if it suits the company, but there is no guarantee that they will ever do so.
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Re: Preferreds

Post by Springbok »

AltaRed wrote: I think the sweet spot for prefs is gone personally and unless one is especially savvy and knowledgeable about prefs, it is a minefield.
After several days of reading here and elsewhere, I have a much better understanding of the subject. I think I have come to same conclusion at Alta :o

Bernanke says he will keep interest rates down for another 2 or 3 years, but that presumably implies that after that they will increase.

As 70somethings, our time horizon in limited (say 15 years). I am afraid we (or our estate) could be stuck with perpetuals that have dropped in value by a large % due to interest rates and/or another recession. Maintaining the cash flow would be nice, but not when capital is at risk.

Our perpetuals (CM.PR.E/G, POW.PR.A, PWF.PR.E) are mostly showing a modest CG,s so perhaps I should sell them (including the deemed retractible TD.PR.R)). The two splits we own carry more risk, but are retractable withing reasonable time span, so we will probably keep them.

If I sell, I will likely buy income equities in taxable account and increase fixed income allocation in registered accounts.

Am I doing the right thing?
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