Natixis Canada Blog

Month: May 2014

A Well-Received Issue by RBC

On Friday, the Royal Bank of Canada came to market with its second NVCC-compliant, rate/reset preferred share. The dividend rate will be 3.90% and the reset spread will be +226 basis points. Demand was very strong and the issue was upsized from $250 million to $500 million.

While the issue was well received, we did not participate in the offering as this new issue is yielding only 3.9%. Currently, the fund holds a Royal Bank perpetual preferred share with a dividend and current yield of 4.9%.

Dax Letham

Enbridge, Great West Life and HSBC: Comments from Dax Letham

This week saw corporate issuers come to the preferred share market, with two well received deals by Enbridge Inc. and Great West Life. On Monday, Enbridge issued $500MM worth of fixed rate reset preferreds with an initial dividend rate of 4.4% and a reset spread +2.64%. The issue was originally for $250MM but was upsized to $500MM because of very strong demand. Institutional orders were exceptionally robust due to the large number of redeemed issues this year, and the attractive dividend yield on these new preferreds. By our estimates, the new Enbridge shares were 0.20% to 0.50% higher in yield than existing Enbridge rate resets, which led us to purchase them for the NexGen Preferred share fund. Following the deal, most of the outstanding Enbridge preferred shares sold off in the secondary market by $0.20 to $0.40 (see chart below as an example). One notable exception was the Enbridge perpetual preferred share that the NexGen fund owns, which actually rose $0.20 on the day. With the closing of this transaction, Enbridge will make up about 9.6% of the preferred share market. With many ETF’s trying to replicate this exposure, investors should be asking themselves if such a large exposure to a single corporate issuer is the appropriate risk and diversification level for their portfolio. As a reference point, the NexGen Preferred Share Fund’s largest single corporate issuer exposure is 5.3% and the fund currently owns 4.8% in Enbridge preferred shares.

Enbridge Preferred 4.40% Series 9 (not held in the NexGen Preferred Share Fund)

Source: Bloomberg

On Tuesday, Great West Life (GWO) issued $200mm worth of perpetual preferred shares with a 5.2% dividend yield. This new issue offered a similar current yield as the existing GWO holding in the fund, however it offered a slightly higher yield to call. The Fund sold out of a majority of its existing holding and rolled into the new GWO to pick up this yield.

Finally, on Friday HSBC Bank Canada announced that it would be redeeming all of their $250MM Series E preferred shares. These preferreds were expected to be called as they carried a 6.6% dividend and would have been reset at 4.85% over Government of Canada bonds. This issue last traded at $25.39, so current holders will receive a 0.84% return if they hold this preferred to maturity.

Dax Letham

Manulife Redemptions: Comments from Dax Letham

As expected, Manulife announced after the close Friday that it will be redeeming its $450,000,000 Series 4 preferred shares (MFC D), on June 30th. This issue closed at $25.42 on Thursday, so current holders will receive a negative yield (-0.30%) to redemption as the issue will be redeemed at $25.00. The shares are now trading at $24.98 – $24.99, because the preferred also went ex-dividend on Friday and will not receive any further dividends before they are called.

Year to date, corporate issuers have announced $5.1 billion of preferred shares to be redeemed, compared to only $3.4billion of new issuance. With another $1.5 billion expected to be redeemed by July 30th, we anticipate that preferred share prices will grind higher as demand continues to outstrip supply.

Dax Letham

A Week of Issues: Comments from Ian Clare

CU Inc. has announced that it will redeem its Series 2 (CIU.PR.B) at a price of $25.00 per share. The $160,000,000 issue had a 6.7% dividend and a reset spread of +481bps. The redemption date will be June 1, 2014.

A reminder that several issues were redeemed in the last week of April:

– BNS.PR.T, $325,000,000, redemption date April 26th

– BNS.PR.X, $275,000,000, redemption date April 26th

– CM.PR.L, $325,000,000, redemption date April 30th

– CWB.PR.A, $208,825,000, redemption date April 30th

– TD.PR.E, $300,000,000, redemption date April 30th

– TD.PR.G, $375,000,000, redemption date April 30th

Ian Clare

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