Selling Preferred shares

[Rick_J-]

I am helping my parents simplify their investment portfolio which was previously at three institutions (two of which were using actively managed mutual funds).

The third account was being managed by an adviser and was invested in individual common stocks, income trusts, REITS, and bonds.

As they have decided to migrate to a couch potato portfolio I am helping them sell there non-bond holdings (the individual bonds are being kept to maturity).

In the process I became aware of the first time of the relatively high spreads and low volume of many preferred shares (especially since my reference point in my own portfolio are highly liquid ETFs eg. VEA, VTI and XIC).

Can any one provide some suggestions about how to best sell several small positions in the following preferred shares:

FTS.PR.F
IAG.PR.E
L.PR.A
RY.PR.H

Is putting in a limit sell at the bid price when their is sufficient volume to cover the sale the best I can expect and thereby eat the average 0.09 spread ?

Is there easy way to find out if they are convertible and what the conversion ratio would be?

Any other thoughts and suggestions would be much appreciated!

[Peculiar_Investor]

Best place for quick reference on preferred shares is PrefInfo - from Hymas Investment Management Inc.. You can find annual dividend, redemption and retraction info there. If you haven't already seen his posts, James Hymas is a member here. You can also check out his blog, PrefBlog for a wealth of information on the day-to-day gyrations of the Canadian preferred share market (and much more).

[AltaRed]

I agree with what P_I has recommended, but yes, definitely put in a limit bid for the sale of these shares at/about ask. Quibbling on a few cents means littel a year from now.

If you are migrating to a couch potato portfolio, I'd suggest you probably are not really that interested in conversion information. Migrate the portfolio and sleep well at night.

[Norbert Schlenker]

Other than simplifying the portfolio, is there a good reason to dispose of four small positions that pay a reasonably reliable and regular tax preferred income stream? If one of the concerns here is transaction costs (spreads and commissions), then the simplest way to avoid the cost is not to trade.

If the desire is nevertheless to trade them out, unless there is some terrible emergency about disposing of the four individual preferred positions, offering them at a limit price is the right way to go. It helps to have some idea of their relative value when setting that price but, in the absence of an ability to calculate that, setting the offered price anywhere between the current bid and ask is a plausible alternative.

Finally, my opinion is that losing 9¢/share on four small positions by hitting the bid is likely immaterial for most portfolios. In the long run, how much difference will it make?

[Rick_J-]

Thanks very much from the replies. Thanks for the reference to James Hymas's blog. I have read his articles before and checked out each on his blog prior to posting, but the amount of information was somewhat overwhelming. The reason I asked about conversion ration is I was wondering if some where trading at an obvious (to others) discount and it would therefore be better to convert to common shares and then sell the common shares.

You guessed right that the primary motive to dispose of the positions is to simplify the portfolio we do not like holding securities that are complex.

The other reservation we have with preferred shares is that are hard to classify in terms of asset class as they have both equity and bond-like features.

Certainly the tax efficiency provided by the dividend tax credit is attractive, but they are wary of letting the tax tail wag the investment dog.

Further by adopting a couch potato portfolio they are seeking to avoid diversify-able risks such as specific companies and sectors.

That said all of your points are well taken and certainly "one time" 9 cent spreads are nothing to worry about over the long term. I was just surprised because I am used to more liquid ETFs.

The only reason to sell in a timely manner is that all their equity holdings (XIC, VEA, VTI) have been bought (the Vanguard one's are in registered accounts) and therefore as long as they hold the preferred shares their equity allocation is about 10% over their target. As most of their equities can be held in registered accounts they are more focused on total return than dividend yield.

The will put a limit sell in at the ask price and make it all or none order and see if it gets filled over the next week or so.

Thanks for the input.

Rick

[adrian2]

The will put a limit sell in at the ask price and make it all or none order and see if it gets filled over the next week or so.

Don't use "All or None", it may be penny wise and pound foolish. Commissions nowadays are inconsequential for your goals.

[IdOp]

IIRC the TSX no longer supports all or none orders.

[zinfit]

I have some NA Bank preferred . The bank has the the right to redeem them at $25 in Feb of 2014. They are trading at $26. Would it be a safe assumption that they redeem the shares on the redemption date? The new rate would be gov't 5 year bond rate plus 4.68. I guess it depends on what happens to interest rates at that time?

[AltaRed]

I have some NA Bank preferred . The bank has the the right to redeem them at $25 in Feb of 2014. They are trading at $26. Would it be a safe assumption that they redeem the shares on the redemption date? The new rate would be gov't 5 year bond rate plus 4.68. I guess it depends on what happens to interest rates at that time?

I have made the assumption the banks would redeem due to the rich dividend rates. Hence the reason I sold some of my perpetuals (not resets) in 2011. YMMV

[adrian2]

I have some NA Bank preferred . The bank has the the right to redeem them at $25 in Feb of 2014. They are trading at $26. Would it be a safe assumption that they redeem the shares on the redemption date? The new rate would be gov't 5 year bond rate plus 4.68. I guess it depends on what happens to interest rates at that time?

5yr + 4.68% is a very rich rate. My vote is to sell it.

[Pickles]

I have some NA Bank preferred . The bank has the the right to redeem them at $25 in Feb of 2014. They are trading at $26. Would it be a safe assumption that they redeem the shares on the redemption date? The new rate would be gov't 5 year bond rate plus 4.68. I guess it depends on what happens to interest rates at that time?

5yr + 4.68% is a very rich rate. My vote is to sell it.

But when? Immediately? If so, where to reinvest?

[adrian2]

I have some NA Bank preferred . The bank has the the right to redeem them at $25 in Feb of 2014. They are trading at $26. Would it be a safe assumption that they redeem the shares on the redemption date? The new rate would be gov't 5 year bond rate plus 4.68. I guess it depends on what happens to interest rates at that time?

5yr + 4.68% is a very rich rate. My vote is to sell it.

But when? Immediately? If so, where to reinvest?

My investigative skills made me guess this is the security in question, NA.PR.O, a Fixed-Reset 6.60%+463, IPO'd 2 years ago near the depths of '09.

Napkin calculation: it loses $1 ~= 4% in 2 years, that's 2% per annum. In the interim it pays 6.6.%, so you net 4.6% yearly (6.6% div - 2% capital loss). That's not so bad nowadays, so I'd revise my recommendation to grin and bear it. Of course numbers are approximate, as quoted yield is from par, so it will be slightly worse in real life.

[jiHymas]

Napkin calculation

Alternative calculation for NA.PR.O

Current price 27.45
Call Price 25.00
Settlement Date 2012-1-9
Call Date 2014-2-15
Quarterly Dividend 0.4125
Cycle 2 (FMAN)
Pay Date 15
Include First Dividend? Yes (goes ex Wednesday Jan 11)
First dividend value (if different) [blank]

Current Yield 6.0%
Annualized Quarterly Yield to Call: 2.3%

If the security in question is NA.PR.L, which closed today at 26.00-09, then there is a call schedule:
Redemption 2010-05-15 2011-05-14 26.000000
Redemption 2014-05-15 2022-01-30 25.000000
Redemption 2012-05-15 2013-05-14 25.500000
Redemption 2013-05-15 2014-05-14 25.250000
Redemption 2011-05-15 2012-05-14 25.750000
Maturity 2022-01-31 2022-01-31 25.000000

The "Maturity" is a Deemed Maturity due to the NVCC rules. You can take it as seriously as you like.

[Peculiar_Investor]

zinfit, been there, done that, with TD.PR.G. Might I suggest a re-read of Financial Webring Forum • View topic - Canadian preferred shares: Greedy or Fearful? might be worthwhile as it covers much of the same ground.

That said, I too would have guessed NA.PR.O and was going to suggest using Yield Calculator for Resets « PrefBlog to determine the Yield-to-Worst (YTW). According to http://www.theglobeandmail.com/globe-in ... =NA.PR.O-T it closed at $27.45 today. On 16-Dec-2011, James evaluated it at $27.21 and calculated Bid-YTW : 2.66 %. I'm a bit confused as James had previously mentioned these, NA: Issuer Bid for NA.PR.N, NA.PR.O, NA.PR.P « PrefBlog and recommended they be tendered.

There are still 8 dividend payments remaining before the reset, so you'll receive $3.30 in dividends, which is offset by the $2.45 capital loss from today's price if the issue is redeemed, rather than reset.

So I guess the decision comes down to which is valued more, the income stream or the capital.

[jiHymas]

With respect to NA.PR.L, I show:

Evaluated at bid price : 26.0000

Call 2012-02-08 YTM: 1.51 % [Restricted: 0.12 %] (Prob: 26.57 %)
Call 2012-04-08 YTM: 3.62 % [Restricted: 0.89 %] (Prob: 6.18 %)
Call 2012-05-15 YTM: 1.14 % [Restricted: 0.40 %] (Prob: 8.57 %)
Call 2013-05-15 YTM: 3.09 % [Restricted: 3.09 %] (Prob: 5.81 %)
Hard Maturity 2022-01-31 YTM: 4.47 % [Restricted: 4.47 %] (Prob: 52.87 %)


Yield to Worst : 1.1374 %

[zinfit]

Thanks for the guidance. I will collect the next dividend and get out.

[adrian2]

Thanks for the guidance. I will collect the next dividend and get out.

With the super efficient market, the price will drop by the amount of the dividend -- or maybe by 188% of the dividend, or even 670% - not too likely, IMO. But trying to collect another dividend is a mug's game.

[Pickles]

Ok, I decided to sell CM.PR.D whose redemption date at par is coming up in 3 months. I bid $26 a couple of days ago. All of a sudden, not only was my order filled today but it has continued to rise and has sold as high as $26.22. Considering there is only one 36 cent dividend left and it can be redeemed for $25 at the end of April, what the heck is going on? Anybody out there was an explanation?? Inspired guess??

[adrian2]

Ok, I decided to sell CM.PR.D whose redemption date at par is coming up in 3 months. I bid $26 a couple of days ago.

You meant to write "I ask $26"?

Anybody out there was an explanation?? Inspired guess??

Non-assiduous readers of PrefBlog? Madness of crowds? You made your target, leave some crumbs (or negative value, likely) for others who can't be bothered by redemption schedules et al.

[Pickles]

Ok, I decided to sell CM.PR.D whose redemption date at par is coming up in 3 months. I bid $26 a couple of days ago.

You meant to write "I ask $26"?

Anybody out there was an explanation?? Inspired guess??

Non-assiduous readers of PrefBlog? Madness of crowds? You made your target, leave some crumbs (or negative value, likely) for others who can't be bothered by redemption schedules et al.

It's the sudden non-assiduousness and madness that puzzles me. Did I miss something?

And oops, yes I asked, not bid.

[like_to_retire]

It's the sudden non-assiduousness and madness that puzzles me. Did I miss something?

The madness happens all the time with preferreds.

There will be two preferreds from the same company of identical attributes, when all of a sudden one takes off and is totally out of whack with its partner. It makes no sense.

I do believe this is how Mr. Hymas makes money.

ddd

[Pickles]

It's the sudden non-assiduousness and madness that puzzles me. Did I miss something?

The madness happens all the time with preferreds.

There will be two preferreds from the same company of identical attributes, when all of a sudden one takes off and is totally out of whack with its partner. It makes no sense.

I do believe this is how Mr. Hymas makes money.

ddd

Using the "yield to Worse calculator" in finiki, I find that the yield on CM.PR.D, bought today at the highest price of $26.22 is negative 11.12%! The buyer stands to receive one dividend of $0.36 and lose $1.22 when the share is redeemed at par at the end of April.

Thanks to the discussions here and the helpful calculator contributed by Shakespeare (and updated for resets with help from James Hymas) I have avoided similar idiocy.

[jiHymas]

I do believe this is how Mr. Hymas makes money.

Naw, that's how the clients make money (usually). I just send out bills.

[Peculiar_Investor]

Has anyone used James' spreadsheet, Preferred Share Spreadsheets on GoogleDocs: Yield Calculator « PrefBlog?

I am pleased to announce that the Yield-to-Call Calculator spreadsheet, originally developed by Keith Betty in MS-Excel format, has been reformatted to Google Docs format by Rob Vassov and made available publicly by Hymas Investment Management Inc.

I stumbled upon it when searching PrefBlog for information on Keith's spreadsheet. I've been fiddling with the Excel version in an attempt to automate the Yield-to-Worst calculation. This effort was launched as I have a couple of candidates for selling, PWF.PR.O and IAG.PR.F are both trading well north of par.

I'm thinking thatPreferred Shares - finiki should be has been updated to reference this new version of the spreadsheet.

[Descartes]

Ok, I decided to sell CM.PR.D whose redemption date at par is coming up in 3 months. I bid $26 a couple of days ago.

You meant to write "I ask $26"?

Anybody out there was an explanation?? Inspired guess??

Non-assiduous readers of PrefBlog? Madness of crowds? You made your target, leave some crumbs (or negative value, likely) for others who can't be bothered by redemption schedules et al.

I would like that it was as cut-and-dry as this ( ...perhaps it is with CIBC which has a history of redemption).

Here is a quote from Mr.Hymas (no disrespect intended) about POW.PR.A that has been redeemable at par since June 2008 and has been above par for a while:
there’s a very good chance (YTW!) the issue will be called in the near future.
This entry is from 2006.