[tojo]

New issue GWO preferred shares – @ $25 / shr. First one in a long time that is not a 5 yr rate reset, but is perpetual 5.65% yield at par. Someone enlighten me…why would anyone buy this when there are other perpetuals out there in the market with similar credit rating and yield but trading at a discount to par. You will receive an equivalent yield with a good possibility of capital appreciation as well .

 

[Rickson9]

New issue GWO preferred shares – @ $25 / shr. First one in a long time that is not a 5 yr rate reset, but is perpetual 5.65% yield at par. Someone enlighten me…why would anyone buy this when there are other perpetuals out there in the market with similar credit rating and yield but trading at a discount to par. You will receive an equivalent yield with a good possibility of capital appreciation as well .

Maybe some people think that interest rates are at historic lows and have nowhere to go but up, so that future issues will continue to put pressure on the yields of older issues thus increasing their discount to par?

I don't really know.

 

[scomac]

The preferred share market is illiquid and inefficient. On any given day, there can be lots of miss-pricings even amongst closely related issues from the same issuer. I suspect that there is considerable incentive on the part of brokerages directed towards their advisors to get these new issues out the door. Hence the reason these new issues sell even though there may well be better deals in the secondary market for existing issues.

 

[tojo]

Looks like the market agrees this ain't a good deal. The offering was posted 11:00 this morning and is still open as of 8:00pm tonight. 5 year reset prefs normally sell-out within 20 minutes. If anyone wants this you can probably wait until it trades on the secondary market and get it at a slight discount.

 

[Robillard]

tojo,

I'm a little confused. If the GWO issue is going to sell at par, and the dividend yield is 5.65%, that means that the dividend payments will be about $1.41 per year. By comparison, you mention that there are other issues with the same credit rating that have the same yield, but trading at a discount. Shouldn't this mean that one would make the same return on investment? By talking about capital appreciation, are you referring to the gain one would make if and when the issue is called by the issuer?

The market for preferred stock is not very efficient since there is only a small amount on the market, and it is traded vary rarely. Where an issue does trade in the secondary market, the bid-offer spreads can be relatively wide and there isn't much market depth. Purchasing in the primary market is the typical way to get preferred stock since in the secondary market, it is harder to get the volume one desires without driving up the price.

 

[tojo]

tojo,

I'm a little confused. If the GWO issue is going to sell at par, and the dividend yield is 5.65%, that means that the dividend payments will be about $1.41 per year. By comparison, you mention that there are other issues with the same credit rating that have the same yield, but trading at a discount. Shouldn't this mean that one would make the same return on investment? By talking about capital appreciation, are you referring to the gain one would make if and when the issue is called by the issuer?

That's right Robillard...the best example I can give is GWO.PR.H, straight perpetual - same issuer, with an annual dividend of $1.2125, last trade Friday at 20.75, bid/ask 20.75/20.78 with decent volume of 26,265. This gives it a yield at bid of 5.84%. With redemption at $25/shr, one may realize capital gains should the issue be called and a better current yield then the new issue. This could possibly explain why the new issue is still open, as there are better deals out there like GWO.PR.H.

Purchasing in the primary market is the typical way to get preferred stock since in the secondary market, it is harder to get the volume one desires without driving up the price

In fact, for the retail investor, it is very difficult lately to get decent fixed income products on the primary market - new issue GWO excluded. The secondary market is where I pick up most of my prefs, but if my timing and luck is good, I may be able to pick up a few shares on the new listing board.

 

[leslie]

Buying at par vs a discount is more about risk than capital gains.

Since companies will call the shares when trading above par, you have no upside potential when you buy at par. You have only downside risk. Where as when you buy at a discount you have potential in both directions. Learn the basic of Preferreds.

That is the reason to NOT buy perpetuals from the IPO. Exception being the recent reset issues (with the onerous reset calculations - not e.g. BCE prefs) with no downside as long as you hold to 'maturity'.

 

[tojo]

Buying at par vs a discount is more about risk than capital gains

Agreed.

The risk profile in buying a straight perpetual at par, under the current environment, is not symmetrical, i.e. very limited upside, but downside is very possible and potentially severe - should rates go up or spreads widen, this new issue can go into a free-fall...

Again, the market sees this in the new issue, and is staying away...they want at least a rate reset or retraction (shareholder forced redemption) feature to minimize the downside - or at least be compensated by a few hundred basis points to make it worth their while.

For now, I am staying away from such offerings...

 

[scomac]

Buying at par vs a discount is more about risk than capital gains.

Since companies will call the shares when trading above par, you have no upside potential when you buy at par. You have only downside risk. Where as when you buy at a discount you have potential in both directions.

I disagree for a couple of reasons. Firstly, you assume that all prefs that trade above par will be called. That isn't always the case if it isn't in the interest of the issuer to do so. Secondly, interest rate impacts can cause preferreds to trade above par. It has happened with frequency in the past and will do so again in the future. The holder of a preferred share that is trading above par can always sell it to crystallize the capital gain.

That is the reason to NOT buy perpetuals from the IPO. Exception being the recent reset issues (with the onerous reset calculations - not e.g. BCE prefs) with no downside as long as you hold to 'maturity'.

I don't follow your line of thinking here. Why would a reset rate issue not be subjected to downside if held to maturity when a straight fixed rate is? There is the risk of lost opportunity if the rest is unfavourable. You can't have it both ways.

 

[leslie]

Of course, the fact that a pref trades above par does not GUARANTEE being called, but it is a pretty good bet and a valid generalization I think.

Yes prefs do trade above par in the interim before being called. To a SMALL extent this is due to lower interest rates and correctly factors in the capital loss when first callable. To a much greater extent this is due to retail investors mis-pricing securities because they don't do their homework. I will never invest in the PRESUMPTION of market mis-pricing.

The upside gained from a rise in interest rates will only be a benefit until the first call date - a limited time. The downside loss in value because of a fall in interest rates will factor in that fall for perpetuity.

I qualified my comments about the 'hold-to-maturity' to only those with onerous resets - so there is no risk of an unfavourable reset. And I compared the reset issues against the vast majority of the others available which are perpetuals - so have not date when you can cash out for a specific $$.

 

[scomac]

Yes prefs do trade above par in the interim before being called. To a SMALL extent this is due to lower interest rates and correctly factors in the capital loss when first callable. To a much greater extent this is due to retail investors mis-pricing securities because they don't do their homework. I will never invest in the PRESUMPTION of market mis-pricing.

Surely you would take advantage of mis-pricing if it was offered to you? That's quite a bit different than assuming it will be their in the future.

The upside gained from a rise in interest rates will only be a benefit until the first call date - a limited time. The downside loss in value because of a fall in interest rates will factor in that fall for perpetuity.

You're presuming that the present interest rate policy of the time that causes the discount to par will last into perpetuity? It will only last as long as the interest rates keep the discount in place. There is no danger of being called at a discount to par such that you are forced into taking a capital loss.

I qualified my comments about the 'hold-to-maturity' to only those with onerous resets - so there is no risk of an unfavourable reset.

OK, now I get what you meant by onerous.