Preferreds

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rhenderson
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Re: Preferreds

Post by rhenderson »

More on the TransAlta exchange.

http://business.financialpost.com/news/ ... picks=true

FWIW, I am quite satisfied with the offer because I'm a trader and am more than happy to bail on these PF-3 issues because I really believe that one would have to be wearing super sized rose coloured glasses to think that they would someday trade or be redeemed at par, especially with a company like TA that has slashed the dividend on the common to 4 cents/quarter. :roll:
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Re: Preferreds

Post by jiHymas »

rhenderson wrote:I really believe that one would have to be wearing super sized rose coloured glasses to think that they would someday trade or be redeemed at par
I suspect you are missing the point. The case for the 'No' vote does not depend on the issues trading at par; it is dependent upon the potential for the extant shares to trade above their Notional redemption price. For TA.PR.D, for example, the proposed exchange reduces the redemption price from its current $25.00 to a notional value of $12.575.

I have added an update to both my first and second posts on the topic, to compare TA.PR.D with a 1:1 Notional preferred share that provides the same payoffs as the company's offer.
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Re: Preferreds

Post by lacrosse905 »

Thanks to Peculiar Investor for the alert to the redemption of BNS PR N in January. Sorry to lose that nice 5.25% return, however these funds are in my RIF so will go towards raising funds for withdrawal in 2017.

I also hold in my rif, a couple of good bonds paying a nice return.... one is Greater Toronto Airport Authority and the other is TRP, one expires in 2028 and the other in 2032. The cap gains have been nice and no tax when and if I have to sell them since they are in rif.
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Re: Preferreds

Post by brad911 »

Some big moves today in the market. I think a little more then retail investors entering into new positions post tax-loss, but considering taking some profits here on a few positions that are +20% YoY.
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AltaRed
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Re: Preferreds

Post by AltaRed »

A question for James if he is lurking... I am posting here instead of his blog for broader interest. I see a lot of trading volume for BNS.PR.N that is in the process of being called by BNS on/about Jan 17, 2017. It's already gone ex-dividend.

Why would there be trading volume at all? It doesn't appear from what I've seen on trades that anyone is making any useful arbitrage on a 24.99 vs 25.00 trading price and the odd transaction at 25.01.

Added: The primary buyer today seems to be RBC Capital Markets and Scotia Capital is not a buyer (at least today). Would RBC be collecting (recalling) them on behalf of BNS? Seems to me the best thing for a retail owner of shares is to wait for the no-cost recall rather than spending $10 (which is what I advised my ex to do).
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Re: Preferreds

Post by poedin »

Thegipper wrote:I am thinking the BMO Preferred ETF is a good way of playing the preferreds.
I'm a newbie when it comes to preferred shares, but when looking to switch a minor portion of our FI GIC ladders, ZPR looks like a good addition for a tax efficient income stream compared with current GIC yields.
With ZPR invested with rate resets, I am to understand that these types of prefs will do better than regular bonds if BOC raises rates?
Or at least maintain a steady dividend stream with a neutral BOC (or slight reduction in their key interest rate)?
Please keep in mind I'm trying to keep it relatively simple, so ETFs it will be.
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Re: Preferreds

Post by jiHymas »

AltaRed wrote:A question for James if he is lurking... I am posting here instead of his blog for broader interest. I see a lot of trading volume for BNS.PR.N that is in the process of being called by BNS on/about Jan 17, 2017. It's already gone ex-dividend.

Why would there be trading volume at all? It doesn't appear from what I've seen on trades that anyone is making any useful arbitrage on a 24.99 vs 25.00 trading price and the odd transaction at 25.01.
To be honest, I'm not completely sure, but I can make some points:

You would sell because that gives you the cash sooner than expected, which is always a good thing.
You would buy because you want to cover a short position; closing the position will save you some money on borrow fees and reduce your capital charge on the position.

The redemption was announced on December 9 There will be dealers - and perhaps a few arbitrageurs - who accumulated a position servicing the needs of investors taking or eliminating a position for the 2016 tax year and year-end reporting and are now squaring it off. Note that there was huge volume on December 29, the ex-dividend date: 652,900 shares in only 46 trades.

For instance, a buyer prior to the ex-dividend date will get a dividend and offsetting capital loss, both taxed in 2017, with virtually no risk of an adverse change in the market. Some organizations might consider this to be a worth-while accomplishment.
AltaRed wrote:Added: The primary buyer today seems to be RBC Capital Markets and Scotia Capital is not a buyer (at least today). Would RBC be collecting (recalling) them on behalf of BNS?
I doubt it, but anything's possible! Maybe DS had a big short?
AltaRed wrote:Seems to me the best thing for a retail owner of shares is to wait for the no-cost recall rather than spending $10 (which is what I advised my ex to do).
Yes; this is almost always correct. However, the two reasons given above might sometimes be applicable; in addition, in the case of redemptions at a premium price, it is very often advantageous for retail to sell into the market and take their capital gains or losses with respect to the premium price, while not having to deal with the Deemed Dividend (the excess of the redemption price over par).
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Re: Preferreds

Post by AltaRed »

Thanks James. As always, there are numerous factors/possiblities that I had not given consideration too.
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Re: Preferreds

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poedin wrote:With ZPR invested with rate resets, I am to understand that these types of prefs will do better than regular bonds if BOC raises rates?
Well, bond and pref prices are determined by the market, not by BOC ... but with that caveat aside, yes ... firstly, prefs almost always yield more than bonds, for any given issuer (ie. BCE prefs v. BCE bonds) ... secondly, in a rising rate environment, any fixed-payout issue is going to suffer ... rate-resets will increase their payouts, as long as the issuer chooses not to redeem them, so they will do better than both bonds and fixed-payout prefs, in a rising-yield environment.

Incidentally, that is a key reason rate-resets were created in the first place - to benefit in a rising rate environment. When these things first started appearing, rates were at a long term low, and many thought they couldn't go much lower ... so for companies who needed to raise capital, the rate resets were a much easier sell than traditional fixed-rate prefs ... unfortunately for those who jumped in at the time, rates did go lower. The best time to buy rate-resets is when the threshold rate (GCAN5yr) is at its lowest. That happened, most recently, in Feb 2016. Oddly, many people were bailing out of rate-resets just when they were at their most compelling values ever. The irrational over-selling was an opportunity, though, for anyone who had a truck to back up.
brad911 wrote:Some big moves today in the market … considering taking some profits here on a few positions that are +20% YoY.
Not me ... I have a couple that are ~40% ahead, but their prospects, going forward, are just fine ... I’m not seeing any screaming bargains that I could flip the proceeds into, so not considering any changes at this point.
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Re: Preferreds

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poedin wrote:With ZPR invested with rate resets, I am to understand that these types of prefs will do better than regular bonds if BOC raises rates?
I note Cardhu's response but my take is 'not so sure' with respect to rate reset prefs vs bonds on 'bond yield' increases. As Cardhu said, it is the bond yield curve that drives changes in prices/yields of both bonds and rate resets since the fixed rate resets set their dividend yield based on GOC5 bonds on anniversary date every 5 years. There are also floating resets that reset their yield every 90 days I believe based on 90 day T-bills but I assume if you are talking ZPR, I believe this ETF is based strictly on 5 year Fixed Resets.

Yield will almost always be better on fixed rate resets than on equivalent bonds and such yields are elgigible dividends making them more tax efficient in non-registered accounts. But overall return performance is not easily comparable Try charting and comparing the annual return performance of ZPR vs VSB or VAB for example and you will see ZPR is a lot more volatile (albeit the short life of ZPR does not allow for much comparison). A key reason for that is that prefs have no maturity dates and thus carry increased vulnerability beyond their yield reset dates vis-a-vis bonds that have maturity dates that provide certainty of principal at maturity.
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Re: Preferreds

Post by cardhu »

Good point, re: hard maturity dates, and I agree that ZPR has been (past tense intentional) more volatile than a bond fund ... but ...

1. any charting of PAST performance on ZPR will inevitably include the dark days of late 2015/early 2016 ... I believe (and poedin can correct me if I am wrong) that poedin is considering ZPR as an alternative to GIC’s today, as opposed to 3 years ago ... so that particular bad patch isn’t particularly relevant, or indicative, because ...

2. the volatility among rate resets during that dark period was driven as much by market irrationality than by rates (yields) ... that’s what made it such a compelling bargain for those of us who had trucks to back up ... the bond market is more mature, and generally speaking, I think market participants understand it better ... so while there was panic in the streets over rate-resets as GOC5 dropped below 0.5% for the first time EVER, the bond market reaction was much more sedate, more measured, predictable even ... driven by yields alone, rather than by both yields and emotions ... now that the rate reset market has had time to sit back and digest what happened, I doubt that that degree of panic would arise again.
AltaRed wrote:such yields are elgigible dividends making them more tax efficient in non-registered accounts.
More tax-efficient than what, though? … the caveat that should always (but almost never does) accompany such statements is … eligible dividends in a taxable account are more tax-efficient than interest in a taxable account … however, that is as far as their tax-efficiency goes … they are LESS tax-efficient than both interest and eligible dividends in a registered account, in most cases. I hold most of my rate-reset pref ladder in RRSP, for the preferential tax treatment.
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Re: Preferreds

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As noted in the sell thread I have started to exit some of the positions I backed the truck up for last year with poorer credit quality. I agree to a certain degree with cardhu, but we are likely at different points of the investing cycle. I am still contributing rather then maintaining or withdrawing so my sell motivation will be different than many investors of preferreds.
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Re: Preferreds

Post by Thegipper »

I don't think past performance will have much application with ZPR. The yield is strong and the room for BOC rate cuts is becoming limited. In fact the situation in the US might cause rate increases in Canada.
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Re: Preferreds

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brad911 wrote:I agree to a certain degree with cardhu, but we are likely at different points of the investing cycle.
Probably … however, I am also still contributing rather than maintaining or withdrawing, so that fact, on its own, cannot account for any difference in motivation … I think I’m closer to pulling the ripcord than you are, though … my motivation for adding prefs, aside from the fact that they were screaming bargains at the time, was to tilt the portfolio a little more toward income-generation. When I was your age, investment income was a PITA, not something to be sought out.
brad911 wrote:As noted in the sell thread I have started to exit some of the positions I backed the truck up for last year with poorer credit quality.
Nice entry on the ENB.ph … I got into that one a little too soon so have only ~22% gain..
Thegipper wrote:I don't think past performance will have much application with ZPR. The … room for BOC rate cuts is becoming limited.
BOC rates do not determine ZPR performance. GOC5yr yields have more than doubled since their recent lows, while BOC rate has remained static.
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Re: Preferreds

Post by poedin »

Thanks cardhu, Altared, brad911, & Thegipper for the discussion and points to ponder. :D
With this being the first entry into prefs, I will be going with ZPR to replace a portion of maturing GICs (annual pay) in a taxable account. I can live with the volatility, yet it's the extra yield (& DTC to boot) and a greater diversified retirement income that's driving this decision.
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Re: Preferreds

Post by Koogie »

poedin wrote:Thanks cardhu, Altared, brad911, & Thegipper for the discussion and points to ponder. :D
With this being the first entry into prefs, I will be going with ZPR to replace a portion of maturing GICs (annual pay) in a taxable account. I can live with the volatility, yet it's the extra yield (& DTC to boot) and a greater diversified retirement income that's driving this decision.
And you in turn have given me (and probably others) something to think about as well by posing your questions. :thumbsup:

One of my 2017 resolutions is to diversify my FI portion. I am not entirely comfortable still with classifying preferreds as FI (I am very conservative.. :P ) I guess will have to start reading the stack of articles I have printed off from prefblog.
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Re: Preferreds

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Koogie wrote:I am not entirely comfortable still with classifying preferreds as FI (I am very conservative.. :P )
For which reason(s)? Because short of a call by the issuer, there is no maturity date and thus no implied/stated redemption value? Or because they are subordinate to secured debt? Or both?

The former should be of most concern unless one is dipping into poor credit quality (non-investment grade), in which case, both issues carry material risk.

FWIW, I currently have about a 7.5% allocation to prefs (both straight perpetuals and fixed resets) in my portfolio and I have them in a separate class in my asset allocation chart so that I can 'visualize' them either way. In a way, prefs are not that much different than junk bonds except they provide higher tax effective income in a taxable account. I would not own prefs if I had more room in my RRSP for fixed income.
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Re: Preferreds

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AltaRed wrote:
Koogie wrote:I am not entirely comfortable still with classifying preferreds as FI (I am very conservative.. :P )
For which reason(s)? Because short of a call by the issuer, there is no maturity date and thus no implied/stated redemption value? Or because they are subordinate to secured debt? Or both?
The former should be of most concern unless one is dipping into poor credit quality (non-investment grade), in which case, both issues carry material risk.
FWIW, I currently have about a 7.5% allocation to prefs (both straight perpetuals and fixed resets) in my portfolio and I have them in a separate class in my asset allocation chart so that I can 'visualize' them either way. In a way, prefs are not that much different than junk bonds except they provide higher tax effective income in a taxable account. I would not own prefs if I had more room in my RRSP for fixed income.
Firstly, I claim no particular insight because as I have said, I have no real experience of the sector. Based on the limited reading I did in late 2015/early 2016, I remember rejecting them at the time as unnecessary (even when the sector began crashing and later when ZPR was at all time lows)

I concluded that I obviously did not have the skills at the time to select individual issues and that would leave me with the ETFs. ZPR/CPD have been quite volatile the last couple of years and volatility is not something I have yet learned to appreciate in a FI holding :lol:

They have also both trimmed their payouts in the past (I guess because of the resets). Again not something I like or am used to in an FI product.

Plus I worry that getting into preferreds is a form of reaching for yield. Something I have been trying to train myself to avoid.
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Re: Preferreds

Post by AltaRed »

I agree ETFs are the best choice for most investors in the pref space. I'd suggest investors really do not need prefs in their portfolios. The more I look at it, knowing what I know now, I'd probably skip them entirely. I've experimented, gotten bruised here and there, and will not add to my holdings.
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Re: Preferreds

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AltaRed wrote:I agree ETFs are the best choice for most investors in the pref space. I'd suggest investors really do not need prefs in their portfolios. The more I look at it, knowing what I know now, I'd probably skip them entirely. I've experimented, gotten bruised here and there, and will not add to my holdings.
:thumbsup:

Yup. Products designed to benefit the issuers.
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Re: Preferreds

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Insomniac wrote:
AltaRed wrote:I agree ETFs are the best choice for most investors in the pref space. I'd suggest investors really do not need prefs in their portfolios. The more I look at it, knowing what I know now, I'd probably skip them entirely. I've experimented, gotten bruised here and there, and will not add to my holdings.
:thumbsup:

Yup. Products designed to benefit the issuers.
Such is the motis operendi of financial engineering.

FWIW I'm not really a fan of the ETF's either for that matter due to the gross inefficiency of the preferred share market. In most situations I believe that you would be further ahead to avoid preferreds entirely or hire a professional like James Hymas to navigate the waters for you.
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Re: Preferreds

Post by ockham »

scomac wrote:
Insomniac wrote:
AltaRed wrote:I agree ETFs are the best choice for most investors in the pref space. I'd suggest investors really do not need prefs in their portfolios. The more I look at it, knowing what I know now, I'd probably skip them entirely. I've experimented, gotten bruised here and there, and will not add to my holdings.
:thumbsup:

Yup. Products designed to benefit the issuers.
Such is the motis operendi of financial engineering.

FWIW I'm not really a fan of the ETF's either for that matter due to the gross inefficiency of the preferred share market. In most situations I believe that you would be further ahead to avoid preferreds entirely or hire a professional like James Hymas to navigate the waters for you.
Thank you, gentlemen, just the words needed to save me from some serious work.

All the pref talk here had made me think I should do homework on prefs. I held ZPR for a time last year in the hope that having money at stake would motivate me to educate myself. Failed attempt. Couldn't shake the thought that the complexity of the product was more likely to be to the issuers' benefit than mine. Plus, I'd watched my MIL's financial advisor churn prefs in her account. Something was always being called or needed replacing, and he always seemed to have a new issue at hand. A complex product beloved by financial advisors?? Best avoided, I felt.

Therefore, glad to read that those who did the serious work reached the same conclusion.
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Re: Preferreds

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As Scomac eloquently put it, this is an example of an area where most investors would likely be best served by employing James Hymas to do the heavy lifting.
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Re: Preferreds

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Didn't Norbert write a little essay years ago talking about how James' alpha was completely worth it?
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Re: Preferreds

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brad911 wrote:Didn't Norbert write a little essay years ago talking about how James' alpha was completely worth it?
This?
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