Natixis Canada Blog

Month: January 2015


Pref Update: Increasing concern about the lack of new issue supply

Jeff Herold
Jeff Herold, J. Zechner Associate, Lead Fixed Income Manager

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.

Jeff Herold

Pref Update: BMO sets redemption date rather than resetting rate

Bank of Montreal announced today that it would be redeeming its $400,000,000 BMO.PR.P issue, rather than resetting the dividend. The redemption is effective February 25th at $25.00 per share.

We had expected the redemption, because the issue was not NVCC-compliant and thus received increasingly less credit as regulatory capital. Some investment dealers were apparently surprised by the redemption notice because they thought the potential new dividend rate was sufficiently lower than new issues that the savings to the bank would be worthwhile. However, with a reset spread of +241 basis points, and 5-year Canada bonds yielding about 0.85%, the new dividend rate would have been about 3.26% compared with roughly 3.75% for a new issue. Those savings were not enough when the issue received only 70% credit as capital, and that credit reduces by 10% a year going forward.

Jeff Herold

TD Bank Minding Its P’s and Q’s

Jeff Herold
Jeff Herold, J. Zechner Associate, Lead Fixed Income Manager

The TD Bank announced after the market close today that it would be calling all 10,000,000 shares of the TD.PR.P and all 8,000,000 shares of the TD.PR.Q perpetual preferred share issues, effective March 2, 2015. The redemption price in each case is $25.50 plus accrued dividends from January 31st to March 1st.

The announcement clearly caught some investors off guard. The TD.PR.P issue closed at $26.20, which means its annualized yield to redemption will be -23%. The TD.PR.Q issue closed at $26.09, which means an annualized yield to call of -18.7%. Ouch!

The TD announcement should reinforce the need to constantly monitor holdings to control risk of untimely redemptions.

Jeff Herold

 

Tailwinds & Headwinds: Markets in 2015

keith graham photo2014 was another volatile year in the financial markets. The NexGen Turtle Canadian Equity & Turtle Canadian Balanced Funds generated attractive absolute returns for clients throughout the year. They continued to do so with significant lower volatility than the markets in general and most peer group funds. Our focus on Capital Growth at a Conservative Pace continues and, while at times it can cause our performance to look “turtle like” in “relative” terms, sharp market downturns such as was experienced in the final quarter of 2014 in Canada provide good reminders to investors that “slow and steady” usually wins the race!

As we have stated before we believe that much of the strength in the global financial markets over the past few years has been driven by Central Bank activity rather than fundamental economic and/or earnings growth. Much of the moves in the equity markets can be attributed to multiple expansion regarding the prices paid per dollar of earnings or cash flow rather than a commensurate growth in earnings/cash flow. Broadly speaking, the only real earnings per share growth came from share buybacks which reduced share counts therefore reducing the denominator. In many cases the numerator – actual earnings – changed very little. This trend was driven by unsustainably low interest rates which allowed companies to borrow very cheaply and buy back shares. We don’t believe this type of “financial engineering” is a reason to pay higher multiples for companies.Read More…

BoC Rate Cut Update: The Bank of Canada surprised the markets today

Jeff Herold
Jeff Herold, J. Zechner Associate, Lead Fixed Income Manager

The Bank of Canada surprised the markets today by cutting its interest rate by 25 basis points. According to Bloomberg zero of the 22 economists that they surveyed had predicted the rate cut.

The Bank said that it was concerned about the impact of the sharply lower oil price on both Canadian economic activity and inflation. It noted that other areas of the economy were improving and that the decline in the exchange rate would be beneficial to the export sector. The Bank is expecting that the Canadian economy will expand by 2.1% this year, as the weaker oil price is offset by the lower exchange rate, a stronger US economy, and the Bank’s easier monetary policy.

Canadian bond prices across all maturities moved higher in reaction to the BoC announcement. The largest yield declines were in the shorter maturities. The Loonie sold off close to 2 cents so that US$1.00 = CA$1.23.

The NexGen Canadian Bond fund is participating in the gains this morning, although its duration was slightly shorter than the benchmark. Its emphasis on the mid term sector should prove beneficial as the yield curve steepens.

Investing always involves uncertainty. The Bank of Canada’s decision was a significant surprise. This provides another example of why it can be crucial to include bonds in your portfolio diversification strategy.

Jeff Herold
Portfolio Manager, NexGen Canadian Bond Funds

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.