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Canadian Prefs


A_Hamilton
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I think it is a mix of fear for credit quality with many of them having been issued since 08 and of lower future distributions. I also think that most people buying these things are retail investors and being income seekers, not accustomed to such sharp moves down. Combine this with low liquidity and the recent end of tax loss selling and you had the recipe for a disaster.

 

I can understand for the fixed rate reset since some of them will reset at much lower distributions but, you can find some of them staying at current payout until 2019. Some re-setting in 2016 are even quite attractive at the new rate.

 

For the floaters, the selloff is borderline crazy since you have near zero downside risk on the distribution with the 3 month T-bill approaching zero and the bank prime rate also close to the absolute bottom and you are fully protected for any increase in interest rates.

 

These things are also marginable. So you can easily structure a basket where you will make an attractive spread vs your borrowing cost (the interest cost also gets a higher deductibility on your taxes vs the dividend income), protect yourself against rising interest rates depending on which ones you choose and likely realize overall an attractive capital gain over time on little money down in a lower risk asset class.

 

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I'm looking closely at the Canaccord Genuity series A prefs (CF.PR.A). Yield resets in mid-2016 at the five year bond rate plus 3.21%. That works out to $0.9775 per share annually, an 11.2% yield as of today. The Dundee prefs which have been mentioned on another thread have similar yields. I own the Dundee ones and will probably be buying the Canaccord ones soon.

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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%

 

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I'm looking closely at the Canaccord Genuity series A prefs (CF.PR.A). Yield resets in mid-2016 at the five year bond rate plus 3.21%. That works out to $0.9775 per share annually, an 11.2% yield as of today. The Dundee prefs which have been mentioned on another thread have similar yields. I own the Dundee ones and will probably be buying the Canaccord ones soon.

 

Seems like the small brokerages (dundee, canaccord, gmp) have very low preferred prices? I know dundee has some resource assets which may need to be written down, can the same be said for the others?

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Garth Turner on Prefs - page 7 & 8 - charts not posted here are in below pdf....

 

http://www.turnerinvestments.ca/pdfs/Turner-Investments-2015-In-Review.pdf

 

Tough Year for Canadian Preferred Shares

If there’s one thing that Canadian preferred shares don’t like it’s falling interest rates. The two Bank of Canada interest

rate cuts in 2015 sealed the fate of Canadian preferred share prices and led to one of the weakest performances for

preferred shares since the credit crisis. Companies, particularly banks, creating abundant supply through new issuance,

retail-investor selling, which tends to be undisciplined and reactionary, and finally downward pressure at year-end from

tax-loss selling put the finishing touches on a year to forget for Canadian preferred shares. Preferred share prices fell a

remarkable 19% in 2015. The attractive dividends limited the downside somewhat, but even after dividends, the sector

still declined almost 15%.

 

Our Take for 2016

 

While 2015 was a dark year for Canadian preferreds, it wasn’t without hope. At year-end, we finally saw the US Federal

Reserve raise its overnight rate and we believe this could mark an extended period of steadily higher North American

interest rates. The correlation between the US benchmark overnight rate and our own benchmark rate has been close

to 90% over the past 30 years and we believe the Bank of Canada will not be able to adopt an interest rate policy that’s

in opposition to the US’s for long. More importantly, the correlation between the US 5-year Treasury yield and the

Government of Canada (GoC) 5-year bond yield has been greater than 95% over the past 30 years. Inevitably, where

US bond yields go, Canadian bonds follow. Because most Canadian preferred shares are structured as ‘rate resets’ their

dividends are indirectly pegged to the GoC 5-year bond yield. Therefore rising interest rates and bond yields are positive

for prices. Given our interest rate outlook, we believe preferred shares are an important asset class for our clients to

have exposure to over the next several years. Preferred share yields are now also compelling (roughly 5%) due to the

2015 sell-off and we believe this yield has become very attractive vs. other fixed income vehicles, such as corporate

bonds, which could create additional buying interest for preferreds in 2016.

 

 

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Canaccord prefs...

 

http://canadianvalueinvesting.com/?p=158

 

 

Cannacord Genuity Preferred Shares

 

Posted on February 14, 2016

 

Canaccord Genuity (TSX:CF) made headlines on Friday, posting a $3.91 per share loss on what was mostly from a goodwill write-off. If you strip out the goodwill and an impairment in an investment in Canadian First Financial, the loss was a more manageable $0.25 per share.

 

Canaccord also whacked the dividend on the common shares, deciding the cash would be better used to shore up the balance sheet. Can’t say I disagree, they’re in need of some cost cutting, especially in the Canadian part of the business. These guys rode the commodity boom up to $12 per share back in 2014, and now that it’s over they really need to punt some of the dead weight. As part of earnings the company announced a reduction of something like 8% of its workforce, a nice step in the right direction.

 

Basically, the company has four divisions — Canada, U.S.A., Europe, and Asia/Australia. With the exception of Canada, which is down 11% YOY over the last nine months, the other parts of the company aren’t doing so bad.

 

I’m not especially excited about the common shares at this point. Much of the book value is still made up of intangible assets, something that doesn’t really excite me. Canaccord is still getting a decent share of new deals, so there’s clearly some sort of moat there. But competition is fierce in the capital markets business, and I don’t think it would be terribly difficult for one or two of the big players to aggressively crowd out Canaccord, especially in a soft market.

 

Although at the same time, the company has a history of crashing hard during bear markets. Shares were this cheap as recently as 2012, eventually increasing some 200% just two years later in 2014. Investors have done well riding the trends of this company before, and there’s no reason to think today would be any different.

 

Where Canaccord does become interesting (at least to me) in when you look at the preferred shares. There are two outstanding, the series A and the series C.

 

The As reset at the GoC five-year bond rate plus 3.21% on September 30th, 2016. They have a current yield of 17.5% (trading at $7.86 each), and have an implied yield of 12.1% for the next five years. You’re looking at a return of about 13% over the next six years, plus potential capital appreciation.

 

The Cs are similar. They yield 14.6%, paying out $0.36 per quarter, currently trading at $9.85 each. They reset on June 30th, 2017 at the GoC five-year rate plus 4.03%. The implied yield at the conversion date would be 11.8%. Add in the 14.6% you’d be getting for a year and a half, and you’re looking at the same sort of return as the As, just stretched out over a little longer time period.

 

There’s only one reason why these things would trade at such high yields, and that’s because investors are worried the company is going to zero. I’m not sure I understand the concern, since there’s $400 million in cash compared to just $15 million in corporate debt on the balance sheet. There are also some lease obligations, but these only total something like $60 million over the next decade. Very manageable.

 

I see very little risk of a 2008-type of event to really rock these investment bankers to their cores either. This is just a cyclical company which is experiencing a temporary downturn that investors think will last forever. Like the last time it happened. And the time before.

 

This looks a lot like my investment in Dundee’s preferred shares. As long as you think the company is strong enough to survive the downturn, these preferred shares are a screaming bargain. Once the company recovers and investors think these preferred shares deserve a 6% dividend again, the upside is easily 100%, and you get paid to wait.

 

I believe Canaccord can get itself to a break-even company with just a few more cuts. If that happens, these preferred shares are safe. And if not, the giant hoard of cash should be enough to ensure the preferred share dividends get paid.

 

Disclosure: No position, but I will likely initiate one this week. Long Dundee common shares and preferred shares.

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Most of the preferred shares mentioned here have moved up at least 20 -30% over the last three months.  Aimia's preferreds moved up around 20% but then fell back around the time of their dividend.  Any ideas why they aren't moving up with the other ones?

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I own their preferred's and believe that you are very well compensated for the risk with a dividend yield of 11% + on all of them now. The AIM.PR.B has the highest yield of any of the floaters that I know of and by far.

 

A few concerns related to the company are: slowdown in air travel due to lower activity in Western Canada, renewal of their contract with Air Canada in 2020, majority of free cash flow used for stock dividend and buybacks instead of paying off debt and preferred's at these prices. Although, they said they would retain cash this year by slowing down buybacks to repay $200 million of debt due next year.

 

The balance sheet remains very strong with $938 million in liquid investments, $718 million in debt, provisions and pension obligations and $323 million worth of preferred's at par. Although, $300 million in short term investments needs to be kept as redemption reserve.

 

With the company generating about $140 million a year in EBITDA minus maintenance capex, it is hard to understand why the preferred's trade at such distress level.

 

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Someone is dumping the AIM.PR.C today with no similar selling in the "A" or "B":

 

Current yield or until March 31, 2019: 12.35%

 

Yield post March 31, 2019: 9.85%

 

Very much worth buying IMO if you are looking for low tax yield (Canadian eligible dividends) and capital appreciation.

 

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