Natixis Canada Blog

Month: July 2014

A Busy Day in the Preferred Share Market: Comments from Jeff Herold, CFA

The preferred share market was very busy yesterday with TD Bank and BMO raising $800 million in new issues.  TD started the day, issuing a 5 year rate/reset preferred with a spread of 227 basis points and a 3.80% dividend (a new low yield in NVCC preferreds).  Investor demand was over $800 million, and TD increased the deal from $300 million to $500 million.  A few hours later, BMO launched a similar deal with a 3.80% dividend and a 222 basis point spread.  Demand was significantly lower for the BMO deal, most likely because the market was still digesting the TD issue, and BMO was not able to up-size the $300 million issue. The NexGen preferred share fund did not participate in either issue, as the 3.8% dividend yield appears low when compared to current holdings (the average yield of the preferred shares held in the fund is 5.2%).

In other news, BCE announced this morning that they will be acquiring Bell Aliant.  The majority of the transaction, $3 billion of the approximate $4 billion, will be financed through the issuance of BCE common shares.  As part of the deal, BCE will offer holders of Bell Aliant preferred shares, the opportunity to exchange their existing Bell Aliant preferreds into new BCE preferreds with the same financial terms.  We view this as a positive development for Bell Aliant preferred shareholders, as BCE is a stronger, more diversified telecom company.  This is confirmed by both S&P and DBRS, who have BCE preferred shares rated higher than Bell Aliant preferred shares.  We anticipate tendering the NexGen Preferred Share Fund’s Bell Aliant holdings into the new BCE preferred shares upon competition of the transaction.

Dax Letham

Royal Bank Redemptions: Comments from Ian Clare

As expected, Royal Bank announced it will redeem both the $275,000,000 RY.PR.T (series AT) and $400,000,000 RY.PR.X (Series AV) on August 25, 2014.  Both issues trade ex-dividend on July 22, 2014.

RY.PR.T has a 6.25% dividend with a reset spread of 406 basis points and RY.PR.X has a 6.25% dividend with a reset spread of 442 basis points.

The economic motivation for redeeming is clear when you compare these issues to the two recent Royal Bank NVCC-compliant preferred share issues at a 4.00% dividend with reset spread of 221 basis points and 3.90% dividend with reset spread of 226 basis points.

Ian Clare

Five Years Into The Recovery

Jeff Young – NexGen Financial

Canadian equities, after trailing most markets last year, are leading the major global markets this year largely on the strength of resource stocks. This is a welcome change for producers of hard assets which have seen their stock prices under pressure since 2011. Gold, base metal and oil and gas stocks were generally lagJeff Young Photogards in last year’s global equity rally. This year investors have refocused on the space as one of the few statistically cheap areas of the market. Also helping the resource stock rally is a resurgence in inflation concerns and global geopolitical risks such as the crisis in Ukraine, and increasing level of unrest in the Middle East.

Investment Opportunities

Five years into the market recovery it is becoming increasingly difficult to find obviously cheap assets. Equity market index valuations are above their long term averages but have traded higher for significant periods of time in the past. The more defensive sectors continue to work off the high valuations they achieved over the last several years but are still not cheap. In Canada, Utilities and REITs have seen the largest valuation corrections and are now more in line with long term averages, whereas Pipelines and Telecoms are still well above these levels. As shown in Figure 2, the cyclical sectors (white line) are slowly closing the valuation (EV/EBITDA) gap with defensive sectors (orange line) with the spread between the valuations of the two represented by the yellow line in the lower panel. Recent strong performance has seen the relative valuations for cyclical stocks continue to rise as prices have moved ahead of expected improvements in individual company fundamentals.

To read more of Jeff’s commentary about the current market landscape and potential investment opportunities, click here.

Rising Investor Complacency?

Darren Ducharme & Harold Scheer – Baker Gilmore

Markets generally moved higher during the quarter. Government bond yields continued to decline, led by longer maturities, as evolving views on the neutral level of central bank policy rates caused yield curves to flatten. Equity prices moved higher – led by emerging market stocks – and credit spreads tightened; performance in commodity markets was mixed. Implied volatility measures remained low, with analysts split on whether this reflects rising investor complacency or markets forecasting that current levels of monetary policy stimulus will remain in place for an extended period.

To read more of Darren and Harold’s about the market landscape, as well as their outlook and strategy, click here.

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