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Preferred shares
September 13, 2019
7:29 am
Bud
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I think the industry lost its way they became somewhat suspect when they transitioned from vanilla. Back in the day it was simple borrowing money for a percentage return. Id give up the div. tax credit for a return to the old days. Now it seems to have a decent return one has to buy at the bottom a pfd ipo can no longer be counted on. Like bonds a lack of transparency. Only interested in the most secure or ones that will be called for sure.

September 13, 2019
1:57 pm
Righand
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"Only interested in the most secure or ones that will be called for sure."

Lmao, methinks that you're a bit late because people seem to be slowly waking up to reality and most of these are already trading close to or above par.

Do your homework, there are a few issues left that are PF-2 rated, have a floor and can still be purchased for a bit below par.

There are a few of the high spread banks left "that will be called for sure" but they are trading closer to $ 26 than par.

September 13, 2019
8:15 pm
Bud
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Righand said
"Only interested in the most secure or ones that will be called for sure."

Lmao, methinks that you're a bit late because people seem to be slowly waking up to reality and most of these are already trading close to or above par.

Do your homework, there are a few issues left that are PF-2 rated, have a floor and can still be purchased for a bit below par.

There are a few of the high spread banks left "that will be called for sure" but they are trading closer to $ 26 than par.  

Same old wheres the beef! What i like about this forum is the membership really digs into everything even the obvious. Ur post is almost meaningless show me the money a few issues left u say? Names proof they wont blow up structure specifics not some cutsie spreadsheet with a hundred issues. Spoon feed us. Im skeptical.

September 15, 2019
3:23 pm
Bud
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Post ur best pfd idea, lets put it thru the grinder.

Late?

"Unfortunately, when it came to the Canadian preferred shares market, falling yields
were not a positive with the universe made up of almost 70% fixed-resets."

A lotta hot air

September 16, 2019
1:38 pm
dentgal
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My OLD financial advisor put me heavily into these. I never understood them. When they tanked, he fired me!! I'm still stuck with them in my portfolio--all at huge losses and don't know how to get out of them.

September 16, 2019
1:55 pm
AltaRed
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How you unwind these positions depends on the specific issue, whether it is a fixed reset or perpetual, whether low or high spread, whether there is a floor, and the timing of the next reset date.

I am speculating but I will guess many of these might have been bought at their IPO (original issue date). Many FAs with full service brokerages that underwrite these things are under pressure to find sheep in the retail sector to sell them too, and/or many FAs thought like many of us that the GoC 5 year yield had no where to go but up. If so, I do understand your pain. Unless purchase timing was excellent, i.e bottom feeding, you have hefty unrealized losses on the books.

For most retail investors, the best answer on fixed resets may be to ride these things out for 5-10 years into the future. GoC5 interest rate will ultimately have to increase to the 2.5-3% range some day, allowing for reset rates to be higher than you have today. That will pretty much wipe out most of the capital losses.

I have just a few fixed resets left in my portfolio and I am likely looking at 2025-2030 to sell them.

If you want to understand these better, I'd suggest you follow James Hymas on http://prefblog.com/ He is the guru on these things.

September 16, 2019
3:41 pm
canadian.100
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dentgal said
My OLD financial advisor put me heavily into these. I never understood them. When they tanked, he fired me!! I'm still stuck with them in my portfolio--all at huge losses and don't know how to get out of them.  

I would say ``HOLD``- do not get out of them at this time (unless you need cash) - you are likely earning very good dividends which have the benefit of the Dividend Tax Credit. Interest rates will bottom out and start to rise at one point and the market value will improve. If you did sell and wanted to reinvest what would be your alternatives - low rate GICS or HISAs - not great. The biggest hit has likely already happened to reset pref shares - and I believe there is potential in the future for them coming back, in 5 to 10 years as AltaRed says. Bear in mind that the issuers of these Pref Shares were pretty much all solid companies - Banks, Insurance, Resources - none has gone under or is likely to. In the meantime just keep collecting those dividends.

September 17, 2019
6:39 am
Bud
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I disagree James is a guru to who most of what he blogs few understand. There was an article written some years back by a former cfo maybe of bell who talked about most pfds previously being straight. Since then they have become much less secure. I again challenge anyone to post one pfd for analysis that is a solid bet like prefs use to be. James if ur out there someone call him over.

September 17, 2019
9:25 am
canadian.100
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Bud said
I again challenge anyone to post one pfd for analysis that is a solid bet like prefs use to be. James if ur out there someone call him over.  

In response to your "challenge", Bud - here are 3 reset Preferred Shares which have pretty much held their values since issued and give a VERY nice dividend yield. Many other Preferreds have not held their value due to their reset formula. But you asked for one that looks good. Here are 3.
TRP.PR.K Issue price 25 Current value 25.20 Div Yield 4.9%
ENB.PF.I Issue price 25 Current value 25.44 Div Yield 5.1%
RY.PR.W Issue price 25 Current value 24.25 Div Yield 5.1%
(correction - the RY issue is a perpetual not a reset but a decent issue and yield)

September 17, 2019
10:45 pm
Bud
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TRP.PR.K
ENB.PF.I
RY.PR.W 

Why have these three held their value?
Downside, worst case scenario, what could drive them down?
They are all callable at the corporations pleasure right so all perpetual?
Downside what could go wrong just rates moving up? For every 1% rise in rates how much value will they lose.

September 18, 2019
8:04 am
Norman1
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AltaRed said

For most retail investors, the best answer on fixed resets may be to ride these things out for 5-10 years into the future. GoC5 interest rate will ultimately have to increase to the 2.5-3% range some day, allowing for reset rates to be higher than you have today. That will pretty much wipe out most of the capital losses.

The reset dividend rates will be higher with higher interest rates. But, that doesn't mean the share price will recover. It depends on the exact reset preferred share one owns.

The early rate reset preferred shares reset to something like 5-year Gov't of Canada plus 1.65%. After investors got burned, later ones had reset to something better, like 5-year Gov't of Canada plus 3.0%.

No-one will ever pay full $25 par value for something that pays GoC + 1.65% when they can pay full $25 par for something that pays GoC + 3.0%.

The issuer of the early ones won't ever redeem. Why redeem something that costs GoC + 1.65% when the current going rate is GoC + 3.0%?

September 18, 2019
9:08 am
AltaRed
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The spreads are based on what the GOC5 rate is at the time PLUS what it takes to sell the IPO. Some 10 years ago or so, GOC5 was high (relative basis) and there wasn't much spread needed between the marketing rate and the bond rate. Example: a 165bp spread was likely based on a then 5.5% market dividend rate and a GOC5 bond yield of (5.5-1.65) 3.85%. Hence the low spread.

It was only in more recent years that the market dividend rate and bond rate widened necessitating wide spreads. Plus, of course, credit rating of the issuer. A BBB type issuer is going to have to IPO their prefs at a higher dividend yield than TD.

People will buy low spreads, especially on the lifecos, on the premise that some day the regulator will enforce NVCC compliance on the lifecos like they did with banks about 5 years ago, necessitating the lifecos to call the non-complying prefs at par, and replace them with NVCC compliance issues. Large cap gains will received. The premise that will happen seems to be steadily over the horizon but is not out of the question.

September 18, 2019
8:07 pm
Norman1
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The last time I looked, the NVCC provisions are actually optional for the banks.

There are incentives for the banks to have NVCC provisioned debt or preferred shares. But, if their existing bonds or preferred shares have a great rate for the issuing bank, the bank may just decide to let them be and issue new bonds/preferred shares with NVCC provisions for capital requirements.

September 18, 2019
8:13 pm
Bud
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Good point Norm. And if we go into negative rate territory 3s suffer to.

Back to these three i looked at the Royal prospectus briefly didnt see a link to bonds what is so special about them bank can convert to common. Im not seein the nuts n bolts to be confident to buy. If it was straight easy decision. The enb trp prospectuses who can accurately deciphre them. You can understand some of it but they make it time consuming to get a grip like the'yre hiding something wheres the single sheet clear summary with specifics.

These three lay it out are the yields fixed no conversion to bond+yield aka goc. Ok fix yield do we have any redemption rights probably not. Ok then my only capital downside is what higher rates? Prices yield look good buy?

TRP.PR.K close 25.19 4.86%
ENB.PF.I 25.24 5.1
RY.PR.W 25.05 4.87

September 18, 2019
9:26 pm
AltaRed
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Norman1 said
The last time I looked, the NVCC provisions are actually optional for the banks.

There are incentives for the banks to have NVCC provisioned debt or preferred shares. But, if their existing bonds or preferred shares have a great rate for the issuing bank, the bank may just decide to let them be and issue new bonds/preferred shares with NVCC provisions for capital requirements.  

Except they have been calling them. I am not aware of any non-NVCC compliant bank issues left in the market. Haven't confirmed that though.

September 21, 2019
10:46 am
Norman1
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Sure. If they have the opportunity to redeem non-NVCC 3.5% preferred shares and replace them with slightly more expensive 3.75% NVCC ones, the bank will probably do it. But, no-one will be calling non-NVCC 2.5% ones to replace them with 4.75% NVCC ones.

There are still bank preferred shares outstanding that don't have NVCC provisions. I found a few:

Symbol Issue Size Description Redeemable
RY.PR.A $300,000,000 Royal Bank Non-Cumulative First Preferred Series AA Since May 24, 2011
RY.PR.C $200,000,000 Royal Bank Non-Cumulative First Preferred Series AC Since November 24, 2011
RY.PR.E $250,000,000 Royal Bank Non-Cumulative First Preferred Series AE Since February 24, 2012
BMO.PR.Q $250,000,000 Bank of Montreal rate-reset Preferred Class B Series 25 August 25, 2016 and
every 5 years
BNS.PR.D $250,000,000 Bank of Nova Scotia, Series 31 floating Rate April 26, 2015 and
every 5 years

It is not like the Big 5 are in a hurry to issue NVCC preferred shares to replace the non-NVCC ones that no longer count as regulatory capital.

Each of the series of preferred shares above is about $250 million. If a bank makes $1 billion net profit each quarter, then each quarter's worth of profits, less the dividends paid out, effectively replaces a series or two of their preferred shares.

September 21, 2019
11:00 am
AltaRed
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Good to know about those issues. May look at their terms out of curiosity.

September 21, 2019
8:35 pm
Bud
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Is it possible to explain those preferreds in a few sentences. For example, gic matures in 3yrs at an annual yield of 3%

Go ahead try RY.PR.W not for me for everyone else. Prove u understand

To the securities industry happy to buy ur product when ur ready to be transparent.

September 22, 2019
9:02 am
Norman1
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AltaRed said
Good to know about those issues. May look at their terms out of curiosity.

There's likely more non-NVCC bank preferred shares than the ones I listed. I sampled a few of the preferred shared prospectus documents on these three share information pages and not all of them:

It would be quite a bit of work to go through all of them plus the ones for CIBC and TD. Royal Bank, for example, has 17 series of preferred shares, some with NVCC provisions and some not.

September 22, 2019
11:35 am
Bud
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how to profit from this information? prospectus too hard to understand enough to decide

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