Exhausting Media Reports!

Click Here to Read Original PDF

(February 2016)
The Preferred Share Market has unique offerings available.

 

Here’s news: Look beyond the exhausting Media reports! Look for assets that are holding their own

First, let’s underscore some important philosophical approaches here: We are investors, not speculators. But you know that already, or you would not be receiving this bulletin.

Amid all of the noise and haste that is making the Market news, we see that there are several securities that have been holding their own, and some doing more than that.

There are few who would question that the Preferred Share market has been in shreds. The cost of financing today has become a wholly different 'animal' and the Preferred Shares have had to evolve to accommodate it, well beyond the feature of being paid ahead of the Common. The Preferred Share Market has unique offerings available.

To illustrate: in January 2015, the Royal Bank elected to raise financing using a 5 year reset with a 3.6% coupon. Every 5 years it will reset to 2.74% plus the 5yr Government of Canada interest rate. They raised their $600M. We did not think this was a good idea. We chose not to participate. The issue is now trading at $18.80 (that’s down 25% from its issue price) In today’s environment, it is now worth $450M. Ouch.

Clearly, the bank had to dig deeper to address their cost of financing. A year later, in December 2015, they issued another Reset Preferred with a much higher coupon of 5.5%. The reset feature on this preferred will reset to 4.53% plus the 5yr Government of Canada Interest Rate. That represents a much better deal than that issued 12 months earlier. This issue is now trading above issue price of $25 and holding its own. Notable is that this is the first time such issues have traded over par in a year.

The good news to the canny investor is, as you can see here, should the interest rates go up, you are covered as at the turnover, you will have the raised 5yr Government of Canada interest rate plus the fixed reset spread [fixed for the life of the security] working for you. Let’s be clear: if the GOC 5yr rate is at 2% at that turnover, your will be receiving 4.53% plus 2% for 6.53% yield. Nice. Should interest rates go down, you are still covered with a good yield. Or the issuer can call it in at $25 per share.