Yesterday, TransCanada Corp (TRP) issued a $250 million rate reset preferred share with a 2.96% reset spread on November 2020. While the reset spread looked reasonable, the current yield was well below what we believe is fair value. The 3.8% yield on this new issue was 0.3% to 0.5% below similar long dated TRP rate resets. This is probably why the deal was not well received by investors. According to our sources, the syndicate was not able to sell the entire $250MM deal yesterday, and institutional demand was very weak (only 1.2 million of the 10 million shares). Due to the low dividend yield, the NexGen Preferred share Fund did not participate in the deal.
This new issue also appeared to put added pressure on the rate reset market, which was down close to 1% yesterday. Low rate resets and energy-related preferreds were responsible for most of the under-performance, as many issues were down 2% to 4%.
Portfolio Manager, J. Zechner Associates