Canadian Prefs

[SafetyinNumbers]

Thanks Safety, the DC D's reset at 4.10% over the 90 day Tbill right? But the B'S reset 4.10% over the 5 yr gov't, so we'd likely get better exposure to rising rates owning the B's. But who knows what rates will do?

 

Yes but they are interconvertible meaning that you can exchange your D's for B's (or vice versa) on the reset date. Theoretically, this means the price of the D's and B's should converge by the reset date regardless of what rates do. The same phenomenon exists in AZP.PR.C vs AZP.PR.B.

[longlake95]

Thanks guys!

[longlake95]

anyone buying FFH prefs after this sell off. Good parking place for cash.

http://quote.morningstar.ca/quicktakes/Stock/s_ca.aspx?t=FFH.PR.K&region=CAN&culture=en-CA

[StubbleJumper]

anyone buying FFH prefs after this sell off. Good parking place for cash.

http://quote.morningstar.ca/quicktakes/Stock/s_ca.aspx?t=FFH.PR.K&region=CAN&culture=en-CA

 

 

IMO, that's not a great risk/reward proposition.  Prem Watsa has already come within a hair's breadth of crashing FFH into a wall.  He continues to take bizarre, inordinate risks with shareholder capital, much to the chagrin of common shareholders.  So, the question is why would an investor buy FFH prefs?  Why would one expose himself to the risk that Prem ultimately drives it into a wall when your yield-to-worst on those prefs is currently <6%?  In the most optimistic case, maybe prevailing interest rates decline and maybe FFH does wonderfully well and the prefs return to "par" which would give you a 15% or 20% kicker over some period of time (if it returns to $25 in 6 months, you're laughing all the way to the bank, but if it takes three years, your return would be 10-12%).  So, your best case might be a 10 or 12% return, your base case might be a shade better than 6%, and you are exposed to some level of risk that you will incur a permanent loss of capital.  No thanks.  If you want to invest in FFH, you should buy the common in my opinion.  At least you have the potential for the fabulous upside that could occur from the risks that Prem takes.

 

 

 

SJ

[longlake95]

Thanks stubble, i’ve owned FFH in the past and not really up to speed. Thanks for the colour. More reading to do.

[Cigarbutt]

Thanks stubble, i’ve owned FFH in the past and not really up to speed. Thanks for the colour. More reading to do.

I was involved with the Cs, Ms and Es around 2016, still had the tickers on a watchlist but had not noticed the recent trend. Thanks.

These tend to be illiquid so expectations for lengthy discussions here should be tempered.

 

I disagree slightly with SJ (SJ, it reads as if you're angry at a security which is something that you may want to look into). The prefs risk profile is different and the coverage seems secure under most scenarios (something that cannot be said for the common). Also, the investing "crowd" is different as it almost feels like there are cyclical "rotations" that don't tightly fit with fundamentals and that can affect the risk premium.

 

Presently, a big underlying issue is the direction of Canadian interest rates.

 

Reflecting on this, I was following very closely Fairfax when those preferred securities were issued. If I remember or understood correctly, Mr. Bradstreet was behind the rationale for this capital raise initiative. Retrospectively, this was a very shrewd financing move IMO as 1.46B (CDN)of essentially permanent capital was raised with a cost running at around 4.1% in CDN dollars. They really nailed it with their take on CDN interest rates and the embedded conversion features. Another strong aspect is that they are unlikely to need to redeem them if interest rates rise (unless short term rates rise ++).

[StubbleJumper]

Thanks stubble, i’ve owned FFH in the past and not really up to speed. Thanks for the colour. More reading to do.

I was involved with the Cs, Ms and Es around 2016, still had the tickers on a watchlist but had not noticed the recent trend. Thanks.

These tend to be illiquid so expectations for lengthy discussions here should be tempered.

 

I disagree slightly with SJ (SJ, it reads as if you're angry at a security which is something that you may want to look into). The prefs risk profile is different and the coverage seems secure under most scenarios (something that cannot be said for the common). Also, the investing "crowd" is different as it almost feels like there are cyclical "rotations" that don't tightly fit with fundamentals and that can affect the risk premium.

 

Presently, a big underlying issue is the direction of Canadian interest rates.

 

Reflecting on this, I was following very closely Fairfax when those preferred securities were issued. If I remember or understood correctly, Mr. Bradstreet was behind the rationale for this capital raise initiative. Retrospectively, this was a very shrewd financing move IMO as 1.46B (CDN)of essentially permanent capital was raised with a cost running at around 4.1% in CDN dollars. They really nailed it with their take on CDN interest rates and the embedded conversion features. Another strong aspect is that they are unlikely to need to redeem them if interest rates rise (unless short term rates rise ++).

 

 

Not angry about a security.  I have my views about FFH, but I don't diminish the bad characteristics and focus only on the good.  The bad is what can either slowly erode shareholder value or, in the worst circumstances, result in a permanent loss of capital.

 

Turning to the question of the FFH prefs, is it your view that the current valuation offers a reasonable risk/reward proposition?  As I suggested up-thread, the yield-to-worst is less than 6 percent.  There is some potential upside if general interest rates decline (IMO, unlikely in the near term) or if FFH racks up ridiculously good results and company specific risk spreads tighten.  However, that upside is not enormous (ie, ~20% if the prefs make a return to $25), and unless interest rates head south, it's hard to imagine the prefs soaring.  And then there's the risk of permanent loss of capital from some unknown event or decision.

 

So, looking at the entire universe of securities out there, how do the FFH prefs slot in?  If a fellow were dead-set in favour of buying a pref, why would you buy an FFH pref at <6% YTW when there are any number of chartered bank prefs and life insurer prefs available with a similar YTW?  We know that a P&C insurer has an inherent risk of financial failure, and my take is that a lifeco or a supervised Canadian bank do not.  So why take that risk when you are not really paid for it?  Going a step further, if an eligible Canadian dividend is the main attraction along with the potential for some upside, why would you buy an FFH preferred (or any bank or lifeco pref) rather than the BNS common?  Given that Canadian chartered banks do not cut their dividends as a rule, you could hold the view that the BNS common has a YTW of 4.71% today, with some growth highly likely in the divvy and a solid prospect of a capital gain.  And again, a permanent loss of capital is nearly inconceivable with the BNS common.

 

FWIW, the only Canadian pref that I hold is something that I bought 18 months ago that I will likely hold for another 5-ish years, but I have every expectation that it will return 10%+ over that time.  At that return, I am being paid for risk.

 

 

SJ

[Cigarbutt]

^BTW, I agree essentially with the above.

This is only seen as a potential window of opportunity to earn 10 to 15% over a relatively short period of time.

The pupils have constricted but have not reached for the glove box yet.

Longing for longer term ideas and pupils continue to be dilated looking in that direction.

[StubbleJumper]

^BTW, I agree essentially with the above.

This is only seen as a potential window of opportunity to earn 10 to 15% over a relatively short period of time.

The pupils have constricted but have not reached for the glove box yet.

Longing for longer term ideas and pupils continue to be dilated looking in that direction.

 

 

 

So, is your thesis that the FFH prefs are currently undervalued and that Mr. Market will come to his senses and re-value the shares at some point in the next year or two?  Or is it the case that you have observed that the FFH prefs have dived over the past month and you are speculating that there will be a dead-cat bounce from which you can profit?

 

If it's the former, you'd get your ~10% if you collect up the divvy for a year and the price rises by ~$1 during a year.  But, I guess my question would be, "Why would the market price FFH prefs at a YTW of 5.3% in today's interest rate environment?"  Because that's what it would take for the price to rise by $1.

 

If it's the latter, I'd say it's not my investing style, but if it works for you more power to you.  My only observation is that I'd think hard about waiting to pull the trigger in later December when tax-loss selling might be at its peak.  It should be a no-brainer for pref-holders to sell their shares prior to the end of 2018 and re-buy some other pref from the same company (ie, if you have an unrealized capital loss on XYZ.pr.a,  you sell it to crystallize your loss and you immediately re-invest the proceeds in XYZ.pr.b). 

 

 

SJ

[Cigarbutt]

^Take the Cs. In a few weeks (4-6) the price went from 24.xx to 21.xx and I just can't explain it. Annualized dividend=1.1415

Humbly stated, one doesn't need to understand everything under certain scenarios and the rationale may still be value-based.

I remember similar dynamics with OdysseyRe A and B preferreds. Did you play that game too?

[StubbleJumper]

^Take the Cs. In a few weeks (4-6) the price went from 24.xx to 21.xx and I just can't explain it. Annualized dividend=1.1415

Humbly stated, one doesn't need to understand everything under certain scenarios and the rationale may still be value-based.

I remember similar dynamics with OdysseyRe A and B preferreds. Did you play that game too?

 

 

So you are thinking about playing it through a paired-trade with the idea that the valuation gap will close (hopefully in your favour!)?  That makes good sense.

 

I did not do any paired-trades with ORH prefs.  I loaded up on ORH prefs when the yield-to-worst was in the teens.  A reinsurer is always a risky investment, but my YTW was relatively high and there was always the prospect that the ORH prefs would return to "par".  That prospect seemed pretty distant in 2009, but I eventually unloaded my ORH prefs for ~$26/sh which exceeded my wildest expectations. Did something similar with BMO's Harris Bank prefs.

 

More generally, I'm not watching the preferred universe too carefully these days, but nearly everything that I have glanced at looks like its fairly valued.

 

 

SJ

[no_free_lunch]

I took a small position in the fairfax prefs.  From what I understand, they reset the dividend in a year, and based on todays rates it would reset at $.33 per quarter.  That would push the yield up almost 20%.  It's not too enticing so I will keep it small for now. 

 

In general a number of prefs have sold off over the past couple months.  However fairfax seems like a better than average bet.

[no_free_lunch]

The brookfield preferred's are getting interesting.  Series 25 (BAM.PR.S) is a floating rate that adjusts each quarter and is set at government of canada tbill + 2.3%.    It is has dropped from $21 at end of October to $16.67 today.    It currently yields 5.7% and would need to move up by 25% to get back to end of October levels.  It is also floating rate so you have some protections there.

[no_free_lunch]

Fairfax prefs are getting cheap.  It's not hard to see double digit returns at these prices.  Fairfax is not without risk but it's investment grade, conservative and fairly diversified.  Seems like a decent cash alternative.

 

Does anyone see any other good deals in preferreds?

[sculpin]

I believe all of the below Canadian preferred shares are quite attractive given the risk profile of the issuer trading at current yields in excess of 10% on both the  5yr and floaters. For the 5 year reset I have chosen those with resets not going to take place until at least 2019.

 

Preferred Share Positions

 

Issuer                   Dividend             Reset Rate

 

Atlantic Power Series 2 (AZP.PR.B) $1.39 31 Dec 19 5Yr + 4.18%

 

Atlantic Power Series 1 (AZP.PR.A) $1.2125 Fixed

 

 

Aimia Preferred A Series 1 (AIM.PR.A) $1.125 31 Mar 20 5Yr + 3.75

 

Aimia Preferred B Series 2 (AIM.PR.B) $1.04 Floating 90Day +3.75%

 

 

Dundee Securities Series 2 (DC.PR.B) $1.422 30 Sep 19 5YR + 4.1%

 

Dundee Securities Series 3 (DC.PR.D) $1.14 Floating 90Day + 4.1%

 

 

Transalta Series G (TA.PR.J) $1.325 30 Sep 19 5Yr + 3.8%

 

In the past month have reacquired both the Atlantic Power prefs above & the Transalta. Have owned the DC.PR.B when they dipped earlier in the year. As well, own both the the GMP prefs - the floater GMP.PR.C and the fixed reset GMP.PR.B acquired over the last 2 months.

[gokou3]

Isn't this trade a bit early relative to the prices seen during 2014-16? The high quality prefs like bce may go to 50% par again if there are signs of Canadian cb rate drop which may happen given the challenges in the oil and real estate industries.

[sculpin]

Isn't this trade a bit early relative to the prices seen during 2014-16? The high quality prefs like bce may go to 50% par again if there are signs of Canadian cb rate drop which may happen given the challenges in the oil and real estate industries.

 

Maybe but we are in the throes of tax loss selling with extremely fear driven markets & news. Could see the floaters falling further  but the longer dated fixed resets & fixed payments (depending on industry) should not drop on any rate drop....at least theoretically lol.

 

 

[longlake95]

i'm looking hard at TA.PR.H series E. I was in the G's. But i like the E's.

[no_free_lunch]

Isn't this trade a bit early relative to the prices seen during 2014-16? The high quality prefs like bce may go to 50% par again if there are signs of Canadian cb rate drop which may happen given the challenges in the oil and real estate industries.

 

It certainly could be too early.  However, some of the fairfax prefs (series C) are within a few percent of their 2016 bottoms and below where they spent the majority of that period. If they can ever get back to levels from a couple months ago you have 30-35% upside plus a 6.3% yield, and on a relatively low risk company.

[no_free_lunch]

I really don't know anything about Transalta.  They appear a bit riskier.  However the yield is higher and the underlying stock still pays a dividend, which could be cut and provides a buffer for the preferreds.  I would need to do some work on them but thanks for the suggestions all.

 

Dundee is indeed an interesting situation.  I am just not quite there yet with it.  If I started to see a turnaround operationally this would be a no brainer but for now I will just watch.

[SafetyinNumbers]

I like the AZP.PR.A, it’s a perpetual fixed rate and the company has been buying them back while reducing leverage.

 

The ALA.PR.A and ALA.PR.U are also interesting if rates are not going to plunge.

 

I think the GMP.PR.B are more attractive than the Dundee pref as they will reset very high if the 5 year doesn’t plunge. The Dundee pref have held up rather well in the face of all this pref selling.

[StubbleJumper]

I like the AZP.PR.A, it’s a perpetual fixed rate and the company has been buying them back while reducing leverage.

 

The ALA.PR.A and ALA.PR.U are also interesting if rates are not going to plunge.

 

I think the GMP.PR.B are more attractive than the Dundee pref as they will reset very high if the 5 year doesn’t plunge. The Dundee pref have held up rather well in the face of all this pref selling.

 

 

I like Atlantic Power prefs in general.  Management has simplified the story by telegraphing very clearly the debt reduction schedule and giving an idea of the EBITDA reduction schedule.  The revenue is largely guaranteed under contract, the debt is locked in (subject to covenants), so all that's left is operational execution.  In 4 or 5 years, this thing will be pretty much entirely de-leveraged and about all that will be left will be the few prefs that are not bought back in the interim.  It's nice to have one that doesn't get tossed on the "too hard" pile.

 

 

SJ

[Cardboard]

I believe that the best deals right now, for say a 6 month trade, are preferreds from low risk, little to no issue businesses. They have come down really hard in price with no change to the business.

 

BCE.PR.H comes to mind. It has dropped around 25% in 2 months. Can't be a change from higher interest rates. Nor from a seriously challenged business.

 

Fairfax preferreds also fit that category IMO.

 

So you get decent income while waiting for a price rebound once the VIX normalizes.

 

These things get into a downtrend, liquidity is low, then selling becomes a vicious circle or well beyond any reasonable assessment of what caused the decline in the first place.

 

Cardboard

[SafetyinNumbers]

It seems to be a combination of credit spreads widening and interest rate expectations. Any floaters like BCE.PR.H such as TRI.PR.B have been hammered but so have perpetual fixed rate pref like SLF.PR.D.

[Rod]

It seems to be a combination of credit spreads widening and interest rate expectations. Any floaters like BCE.PR.H such as TRI.PR.B have been hammered but so have perpetual fixed rate pref like SLF.PR.D.

 

I wonder if the drop in the prefs isn't simply due to a drop in stocks? If you look at a 5 year chart comparing a pref ETF like CPD and XIC the correlation is very close. Maybe it's just fear. Prefs rebounded sharply with the market in the last few days too. What would that have to do with interest rates?

 

I bought some Brookfield Office BPO.PR.P early last week at $15.50. At that price and with a 5 yr at 2%, it would reset to 8%, which struck me as entirely too high.