Natixis Canada Blog

Month: March 2014

Canadian Banks Announce Redemptions: Comments from Dax Letham

Three banks announced that they would be redeeming almost $1 billion in preferred shares over the next three months ($883 million on April 30th and $110 million on June 16th). TD Bank is calling the $300,000,000 TD.PR.E and the $375,000,000 TD.PR.G, Canadian Western Bank is maturing the $208,825,000 CWB.PR.A and Laurentian Bank will redeem the $110,000,000 LB.PR.E. The TD and Canadian Western Bank issues were expected to be redeemed, as they are not NVCC-compliant and have high reset spreads (between 437 and 500 basis points), while Laurentian Bank launched a $125,000,000 new preferred share issue to fund the LB.PR.E. 

Investors who elect to hold these preferred shares to redemption can expect to make very modest returns, as all four issues were trading above the $25 call price. Using yesterday’s TSX closing price, the two TD preferred shares will yield investors less than 0.5%, while the Canadian Western Bank and the Laurentian Bank preferred shares will yield investors less than 1.5%. 

So far this month, over $1.9 billion in redemptions have been announced, compared to only $600 million in preferred share new issuance. This supply imbalance has been highlighted by us for some time, and has put a bid into the preferred market over the last few months. While we expect new issuance to increase in the upcoming weeks, we do not anticipate it to keep up with future redemption announcements, which could equal $1.5 billion next quarter. We have positioned the fund to take advantage of this opportunity, by holding what we deem to be high yielding, high quality, and perpetual preferred shares. We believe this strategy can benefit mutual fund, ETF, and individual investors who are looking to reinvest cash they have received from recently announced redemptions.

Dax Letham

Scotiabank Redemptions: Comments from Jeff Herold, CFA

On March 6th, Bank of Nova Scotia announced that it would be redeeming both the $325,000,000 BNS.PR.T and the $275,000,000 BNS.PR.X issues, effective April 26th. However, because April 26th is a Saturday, holders will have to wait until April 28th to get their money back. A quarterly dividend will be payable along with the redemption.

The redemptions were wholly expected because both issues had 6.25% dividend rates and reset spreads of +414 and +446 basis points, respectively.

Investors should consider if selling these issues ahead of the redemption date and reinvesting early would be appropriate for them. Depending on the price obtained and their particular tax situation, investors may be further ahead by realizing the capital gain that still exists rather than waiting for the dividend and redemption. By selling early, investors may also avoid the reinvestment challenge as a total of $1.8 billion of preferred shares are redeemed between April 28th and April 30th

Brookfield Asset Management Redemptions: Comments from Jeff Herold, CFA

A little surprise from Brookfield Assets Management this morning: the company announced that they will be redeeming the $175,000,000 Series 12 preferred shares (BAM.PR.J), effective March 31, 2014. The redemption price will be $26.00 plus accrued dividends. The company is refinancing these preferred shares with a rate/reset issue yielding 4.40%.

Investors were clearly not expecting this, because the shares traded in a range of approximately $26.46 to $26.69 over the last month. At $26.50, the yield to redemption is -6.87%.

The shares were originally issued by Brascan Corp. in 2003 and carried a 5.40% dividend rate. They would have been retractable at the investors option in 2018 through a conversion to common shares process.

The NexGen Canadian Preferred Share fund has never held the BAM.PR.J issue. We have thought other preferred shares offered better value and less risk.

Jeff Herold

CIBC Redemptions: Comments from Jeff Herold

CIBC announced today that it will be redeeming its $325,000,000 Series L preferred shares (CM.PR.L), effective April 30th. It is worth highlighting is that it closed at 25.42 yesterday, so holders will be getting a negative yield (-0.14%) through to redemption.

We anticipate there will be several more redemption notices in the coming weeks, including the following issues:
– BNS.PR.T $325,000,000, expected redemption date April 26th
– BNS.PR.X $275,000,000, expected redemption date April 26th
– CWB.PR.A $208,825,000, expected redemption date April 30th
– TD.PR.E $300,000,000, expected redemption date April 30th
– TD.PR.G $375,000,000, expected redemption date April 30th

In total, just over $1.8 billion of preferred shares will likely be redeemed in late April, and investors will be scrambling to reinvest. Investors can retain these shares or they can sell in advance of the redemption, potentially realizing a capital gain, and reinvest ahead of the rush.

Jeff Herold

Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.