Preferreds

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AltaRed
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Re: Preferreds

Post by AltaRed » 19 Nov 2016 12:23

:thumbsup: Well said. The biggest angst I think amongst some of the investors in resets (timing was everything in hindsight) is the human behavioural part of knowing one's investments in resets are 'underwater'. It does not make them a bad investment with their tax advantaged income relative to interest income (even if they reset at 2.2% based on par). They will come around as they reset every 5 years. Stop looking at the 'red' and carry on McDuff. As for me, I am simply doing swaps on a year-to-year basis to take advantage of some annual cap losses to offset cap gains.
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Re: Preferreds

Post by tinypotato » 22 Nov 2016 00:00

I'm trying to keep the thinking simple.

I look at the rate resets as:

1. Am I willing to take the 4.5%- 5.5% for the next 4-5 years (assuming resets in 2020 or 2021)?

2. If the GCAN5YR stays the same until reset; am I willing to take the slight dip in dividend starting then?

How does this compare to rolling a 4-5yr GIC at 1.8% now? Is the extra ~3% yield worth the risk vs. a GIC?

That's it...

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Re: Preferreds

Post by OnlyMyOpinion » 22 Nov 2016 11:50

tinypotato wrote:I'm trying to keep the thinking simple.
I look at the rate resets as:
1. Am I willing to take the 4.5%- 5.5% for the next 4-5 years (assuming resets in 2020 or 2021)?
2. If the GCAN5YR stays the same until reset; am I willing to take the slight dip in dividend starting then?
How does this compare to rolling a 4-5yr GIC at 1.8% now? Is the extra ~3% yield worth the risk vs. a GIC?
That's it...
What role are the prefs playing in your portfolio? Are they solely to provide a current income stream, or are they to grow your assets?
If the former, I can somewhat understand your comments, except that at some point a capital gain/loss will be realized (perhaps by your estate?)
If the latter, then you probably should be considering the total return that you expect from your prefs.

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Re: Preferreds

Post by rhenderson » 22 Nov 2016 12:28

OnlyMyOpinion wrote:
tinypotato wrote:I'm trying to keep the thinking simple.
I look at the rate resets as:
1. Am I willing to take the 4.5%- 5.5% for the next 4-5 years (assuming resets in 2020 or 2021)?
2. If the GCAN5YR stays the same until reset; am I willing to take the slight dip in dividend starting then?
How does this compare to rolling a 4-5yr GIC at 1.8% now? Is the extra ~3% yield worth the risk vs. a GIC?
That's it...
What role are the prefs playing in your portfolio? Are they solely to provide a current income stream, or are they to grow your assets?
If the former, I can somewhat understand your comments, except that at some point a capital gain/loss will be realized (perhaps by your estate?)
If the latter, then you probably should be considering the total return that you expect from your prefs.
I have 40% of my portfolio in PF-2 minimum floor resets that I purchased solely to provide an income stream. So far most of them are above water but it doesn't really matter what they do because they are either called or provide the income that I counted on. Monthly moves are looked at as noise, nothing else. :|

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Re: Preferreds

Post by jay » 22 Nov 2016 13:03

With GOC5 of 0.99%, the YTW on the Canadian fixed reset market is around 4.7% based on my calculations based on the market constituents as of Jan this year. prefblog.com's fixed reset index shows a YTW of 4.63%. If at time of reset the GOC5 is at 1.5% and only moves up from there, then we are talking about a potential YTW of ~5.5%. What is not to like about that at current levels?

Disclosure: I have 15% of my dividend portfolio in ZPR but I was lucky enough to buy close to the lows (kept averaging down). I have also traded several individual names that a the time had a YTW of 10+% (AIM-A, CPX-A, GMP-A come to mind).

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Re: Preferreds

Post by jay » 22 Nov 2016 13:18

BTW, according to this BMO link, ZPR's YTW is 4.73% as of Oct 31. GOC5 has gone up 0.3% since then.

They also note at the bottom that
Yield to Worst (YTW) Assumes the lower of YTC and YTM for each line. This measure will tend to be overly conservative.

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Re: Preferreds

Post by jay » 23 Nov 2016 14:31

b.t.w., with all this talk about rising interest rates, shouldn't fixed resets be moving higher instead of lower?

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Re: Preferreds

Post by AltaRed » 23 Nov 2016 15:49

jay wrote:b.t.w., with all this talk about rising interest rates, shouldn't fixed resets be moving higher instead of lower?
My view is that those that have recently reset (2015-2016) have 4-5 years left at the current 'low' rates and there is no incentive for anyone to bid those ones up for some time (GOC5 yields could actually be lower in 2019 or 2020). But those that are going to reset in 2017 will likely get the biggest bounce since the impact of GOC5 bond yield changes will 'improve' their odds (relative to 2 months ago) the best.

Added: Indeed, I took the significant bounce of BAM.PR.X with a reset in 2017 and put the cash towards MFC.PR.F which reset just 3-4 months ago. That way, I know what my yield will be until 2021 rather than speculating on what BAM.PR.X will be.
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Re: Preferreds

Post by rhenderson » 23 Nov 2016 16:30

jay wrote:b.t.w., with all this talk about rising interest rates, shouldn't fixed resets be moving higher instead of lower?
In the past month alone there has been a flood of new issues and the market can only absorb so much so perhaps many of the older issues have been sold off as funds seek some of the newer ones at or close to par ?

Eg the latest $ 1.0 billion TRP issue.

http://prefblog.com/?p=33938

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Re: Preferreds

Post by AltaRed » 23 Nov 2016 16:49

For sure, the new 'minimum' floor ones would be disproportionately attracting money. Investors just have to be aware most of these will likely be called given their 'rich' wide spreads. That said, hard to argue with that kind of tax advantaged income in the 5 year holding period.
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Re: Preferreds

Post by tinypotato » 24 Nov 2016 22:26

AltaRed wrote:
jay wrote:b.t.w., with all this talk about rising interest rates, shouldn't fixed resets be moving higher instead of lower?
My view is that those that have recently reset (2015-2016) have 4-5 years left at the current 'low' rates and there is no incentive for anyone to bid those ones up for some time (GOC5 yields could actually be lower in 2019 or 2020). But those that are going to reset in 2017 will likely get the biggest bounce since the impact of GOC5 bond yield changes will 'improve' their odds (relative to 2 months ago) the best.

Added: Indeed, I took the significant bounce of BAM.PR.X with a reset in 2017 and put the cash towards MFC.PR.F which reset just 3-4 months ago. That way, I know what my yield will be until 2021 rather than speculating on what BAM.PR.X will be.

I'm taking a similar approach; looking at issues that don't have a reset until 2020/2021. I'm comfortable knowing what the yield will be for a few years at least.

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Re: Preferreds

Post by Peculiar_Investor » 09 Dec 2016 18:18

Back in March 2015, lacrosse905 wrote:Still hold two pfd's in reg. account, but wouldn't be surprised if they are called....BNS PR.N @5.25 and HSBC Pfd C @ 5.1%. Checked James Hymas's site nothing to confirm there, or I didn't see it.
If you still hold BNS.PR.N then you are getting your wish Scotiabank Announces Redemption of Preferred Shares Series 16
Scotiabank (TSX: BNS) (NYSE: BNS) today announced that it intends to exercise its right to redeem all outstanding Non-cumulative Preferred Shares Series 16 of Scotiabank (the "Series 16 Shares") on January 27, 2017, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to shareholders in accordance with the share conditions.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank.

On November 29, 2016, the Board of Directors of Scotiabank announced a quarterly dividend of $0.328125 per Series 16 Share. This will be the final dividend on the Series 16 Shares and will be paid in the usual manner on January 27, 2017, to shareholders of record at the close of business on January 3, 2017, as previously announced. After January 27, 2017, the Series 16 Shares will cease to be entitled to dividends.
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Re: Preferreds

Post by AltaRed » 09 Dec 2016 18:56

That was to be expected. It's not NVCC compliant. Had advised my ex to leave it sit into her account until it was called.
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Re: Preferreds

Post by AnonymouslyInvesting » 11 Dec 2016 11:24

All of those non-NVCC issues will most likely be called at some point, but the banks have until the end of 2022 before they lose their Tier 1 capital treatment. The BNS.N issue was a perpetual with a fairly high dividend at 5.25% (at par). Some of the rate reset non-NVCCs that are due to reset in 2017 and have very low reset spreads might get extended for another 5 years. I think caution should before buying these. If you hold them already at a loss in a non-registered account, this might be a good way to harvest some losses and go into something that will compensate you for the next 5 years on a yield basis, assuming these reset at low rates.

For example, BNS.Y is trading at $20.82 and yields ~2.20%. Not a great level. But the next call date is in April 2020. That would be an annualized capital gain to call date of about 5.30%. Tack the dividend on that and you're looking at an Annualized All-In Yield to Call of about 7.50%. The risk is obviously that it isn't called, but given that BNS has already been buying and retiring these shares on the open market signals their intention to call the issue. BMO.Q is in a similar situation.

Anyone looking at floaters? They've done well with the uptick in rates lately. Waiting for a pullback might be a good time to enter the market. TRP.F is a good one - spread is 1.92% over the 3 month T-Bill rate. Some of the BCE floaters are attractive too - these trade off of Prime (i.e. 100% of Prime or 70% of Prime are common for these types of floaters). The Canadian banks have been reluctant to lower Prime to match the decreases in the Bank of Canada's overnight rate (Banks lowered by about 15 bps vs. BoC lowering rates by 25 bps). The conversation around rates has moved to an potential increase in rates next year rather than a decrease, but I think these floaters linked to Prime are a good way to protect on the downside and have decent upside.
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Re: Preferreds

Post by AltaRed » 11 Dec 2016 12:27

If you have been following this thread, you wlil notice that most of us follow James Hymas' thoughts and analysis on PrefBlog where he provides calculations on individual issues. Some subscribe to his PrefLetter and/or also invest in his fund.

I am not ready to consider the floaters simply because I don't believe Canada will get its economic act together any time soon. If so, 3 month T-bills will likely thus go nowhere. Tis a question of how clear one's crystal ball is. A lot of investors took a bet over the past 5 years on fixed resets on the assumption GOC5 bond yields 'just had to go up'. So much for that. Hence the new fixed reset issues with yield floors...which are really likely nothing more than 5 year money that will be called.
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Re: Preferreds

Post by AnonymouslyInvesting » 11 Dec 2016 14:51

AltaRed - I would agree that Canada has a long way to go before we get a meaningful rally in rates and inflation. However, even if the 3 month T Bill and Prime stays flat, you can get paid ~4.50% to wait.

I'm glad you brought up a crystal ball - the theory of owning floaters can be the 'anti-crystal ball' since floaters can act as a hedge from the movement elsewhere in your fixed income bucket. Regular bonds and perpetual prefs should see their price go down as interest rates move up, whereas a floating rate pref should see its price increase. Rate resets are somewhere in the middle, depending on your reset schedule and spreads. For example, CPD is down about 2% over the past month, whereas TRP.F is up about 3% over that time. It doesn't just have to be a speculative position.

I certainly agree - if you were in rate reset prefs in 2014 and 2015 it was very painful. But hey, if I can buy something in fixed income at par that will pay close to 5% annually and get called at par in 5 years...that sounds pretty good to me.
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Re: Preferreds

Post by AltaRed » 11 Dec 2016 15:07

AnonymouslyInvesting wrote:I certainly agree - if you were in rate reset prefs in 2014 and 2015 it was very painful. But hey, if I can buy something in fixed income at par that will pay close to 5% annually and get called at par in 5 years...that sounds pretty good to me.
If one can get them called at par. Likely only the non-NVCC compliant and wide spread ones though. Some folk are picking up the lifeco resets on the premise the regulator might someday have the balls to force the lifecos into the same NVCC compliant situation as the banks.

FWIW, I have a range of perpetuals and fixed resets to hedge yield curve changes, never mind lifeco/bank commons on one side and the capital intensive pipes, etc. on the other side. For me, goldilocks suits my retirement profile just fine...though I wouldn't necessarily know what to do with her if she literally fell into my lap.
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Re: Preferreds

Post by AnonymouslyInvesting » 11 Dec 2016 15:41

Didn't you just say:
Hence the new fixed reset issues with yield floors...which are really likely nothing more than 5 year money that will be called.
My comment was assuming that you were correct. Even if they aren't called, they're still better than anything issued over the past few years although the new issue supply has been getting worse in terms of coupon and spreads.

You are quite correct about the conventional thinking of lifeco's having to issue NVCC. Might take a while though.

Fair enough, but for others there is some interesting opportunities elsewhere in the market with natural hedging feature.
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Re: Preferreds

Post by AltaRed » 11 Dec 2016 16:36

AnonymouslyInvesting wrote:Didn't you just say:
Hence the new fixed reset issues with yield floors...which are really likely nothing more than 5 year money that will be called.
My comment was assuming that you were correct. Even if they aren't called, they're still better than anything issued over the past few years although the new issue supply has been getting worse in terms of coupon and spreads.
Indeed. I misinterpreted your own comment on the new issues with floors. Not bad FI in one's taxable account especially for a 5 year period.
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Re: Preferreds

Post by Arby » 11 Dec 2016 19:29

AnonymouslyInvesting wrote:if I can buy something in fixed income at par that will pay close to 5% annually and get called at par in 5 years...that sounds pretty good to me.

You should take a look a split preferred shares. They're not exactly fixed income, but a pretty close proxy. They typically have a 5 year term, and they are called at par. Many have a YTM of around 5%.

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Re: Preferreds

Post by rhenderson » 20 Dec 2016 00:38

TransAlta arranges preferred share exchange.

Existing issues up over 10% today.

http://www.stockwatch.com/News/Item.asp ... A&region=C

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Re: Preferreds

Post by Peculiar_Investor » 20 Dec 2016 00:49

The direct link to TransAlta's press release is TransAlta Corporation Announces Preferred Share Exchange | TransAlta.

I've posted a comment on December 19, 2016 « PrefBlog as James didn't mention it in his daily briefing.
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Re: Preferreds

Post by Thegipper » 20 Dec 2016 01:42

I am thinking the BMO Preferred ETF is a good way of playing the preferreds.

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Re: Preferreds

Post by Peculiar_Investor » 20 Dec 2016 07:30

Peculiar_Investor wrote:The direct link to TransAlta's press release is TransAlta Corporation Announces Preferred Share Exchange | TransAlta.

I've posted a comment on December 19, 2016 « PrefBlog as James didn't mention it in his daily briefing.
I wonder how James really feels :lol: -- TA Proposes Sleazy Exchange Offer « PrefBlog
James Hymas wrote:So, to put things in a nutshell, Transalta wants to eliminate (more or less) potential capital gains should spreads narrow in the future, and reduce potential income increases should GOC-5 yields increase in the future; all this for a very, very tiny increase in current income. Hell, why not send them the deed to your house and car, while you’re at it?

This is a shitty deal for shareholders. Vote No. I will note that as a matter of practicalities, the idea of selling into this stupidly inflated market and becoming indifferent to how this abusive deal turns out is also quite attractive.
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Re: Preferreds

Post by milton » 20 Dec 2016 19:34

You'd think that there would be quite a few holders of TA prefs who would vote yes simply because they bought in the last couple of years at prices below the current levels?

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