After $850,000,000 of redemptions being announced this month, the preferred share market is growing increasingly concerned about the lack of new issue supply. The new Royal Bank NVCC-compliant, rate reset preferred share issue that came to market today was, therefore, very well received. Originally, its size was supposed to be $300,000,000, but strong investor demand allowed it to be upsized to $600,000,000. The dividend rate was set at 3.60%, which was 15 basis points lower than the most recent bank issues in late 2014. However, the reset spread was set at +274 basis points, which was about 50 basis points higher than the late 2014 issues. The significantly higher reset spread led to weakness in the outstanding NVCC bank issues.
The reason for the wider reset spread was the recent bond market rally that followed the Bank of Canada’s surprise rate cut last week. The reset spread for new issues is set at the difference between the dividend rate and the 5-year Canada bond yield at the time of issue. With 5-year Canada bond yields having fallen roughly 50 basis points following the Bank’s move, the reset spread increased commensurately.