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New wrinkles in preferreds

Bank of Nova Scotia and TD Bank have both issued new preffered shares this week.

We have long been critical of the recent trend of issuing non-cumulative, perpetual preferreds, and BNS and TD have made a very small step in the right direction.

  • BNS - 5% non-cumulative coupon for 5 years.  Thereafter a floating coupon of Canada 5 year bond yield +170 bps, which resets every five years.
  • TD - 5% non-cumulative coupon for 5 years.  Thereafter a floating coupon of Canada 5 year bond yield +160 bps, which resets every five years.

Both issues can be exchanged on the 5 year reset dates into a different series of pref that floats at Canada T-Bills + 170bps, resetting quarterly.

Commentary - The coupons essentially equal Canada 5 year + 170 now, so these are basically 5 year reset floaters.  These would be somewhat better (you could elect to get the quarterly resets if you thought rates were going to rise over the next 5 years),

HOWEVER - BNS and TD can call these in at $25 at their discretion on every reset date. 

What does this mean? - If corporate yield spreads narrow in from the current 170bps over Canadas, the bank will call these away from you and re-issue at lower rates.  We are at historically wide credit spreads for the Canadian banks, and they are likely to narrow as the credit crisis passes.  The holder of these securities would miss out on that credit improvement.

We applaud the first step, but there need to be many more before these preferreds really show some value to the investors.



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