The Royal Bank announced today the number of shares that chose fixed rate and floating rate options for the extensions of its RY.PR.I and RY.PR.L issues. The results were interesting and a little puzzling.
Of the 16,000,000 shares outstanding of the RY.PR.I issue, 2,421,185 (15%) chose to convert to the floating rate option. The reset spread on this issue is +193 basis points, so the floating rate issue (RY.PR.J) will pay a rate equivalent to 3-month CDOR + 193 bp. The fixed rate will pay a dividend rate of 3.52% .
Of the 12,000,000 shares outstanding of the RY.PR.L issue, only 530,659 (4%) wanted to convert the floating rate option. As this was less than the 1,000,000 shares required to create the floating rate series, the conversion was not permitted and all of the issue will remain fixed rate. The reset spread of this issue was +267 basis points, which raises the question why didn’t more investors pick the floating rate option given that it would have yielded 0.74% more than the RY.PR.J issue above? The best explanation we can offer is that the fixed rate option will yield 4.26%, and investors realized that they would not receive nearly as much income from the floating rate option if they chose that.
However, the same could be said of the fixed versus floating rate choice of RY.PR.I shares. The lower spread didn’t affect the relative value of fixed versus floating. So the relatively few investors choosing the floating rate option with RY.PR.L is puzzling. Maybe they just decided that floating rate issues were not attractive.
We continue to be cautious about floating rate preferred share issues because of their low absolute yields and the likelihood that their dividend rates will not rise for the next two years as the Bank of Canada maintains its easy monetary policy.