The Canadian Preferred Share market was down slightly in October, with the S&P/TSX Preferred Share Total Return Index (the “Index”) losing 0.88%. In the same period, Series F of Lysander-Slater Preferred Share Dividend Fund (the “Fund”) and Lysander-Slater Preferred Share ActivETF (the “ETF”) lost 1.87% and 1.88%, respectively, on a total return basis.
The Bank of Canada (the “Bank”) raised its overnight rate by 50bps, which was less than the anticipated 75bp increase. In its statement, the Bank noted that future rate increases would depend on its assessment of how the economy was responding to monetary tightening.
In terms of redemption activity during the month, Pembina Pipeline called in its 5.25% floor rate-reset (PPL.PR.C) 1, which had a 365bp reset spread. Had it been extended, the issue would have carried an approximate 7.25% coupon rate. Neither the Fund nor the ETF held a position in this issue.
TD Bank and National Bank surprised the market by not calling TD.PF.I (301bp reset spread) and NA.PR.C (343 reset spread) for redemption on their reset date. The decision not to redeem ended a 27-month trend for the banks to call in their traditional $25 par value fixed rate-resets on their reset date and replace them with Limited Recourse Capital Notes (“LRCNs”) or $1000 institutional Preferred Shares2. The surprise development sent existing bank fixed rate-resets lower which we believe is now fully priced in relative to the market. Both the Fund and ETF hold an overweight positioning in discounted bank fixed rate resets relative to the Index, which we can attribute to the Fund’s and ETF’s relative short-term underperformance for the month.
It is our opinion that all traditional bank Preferred Shares will be called in at some point upon their respective reset dates, but the banks will do it on a needed basis and will continue to replace them with LRCNs or $1000 institutional Preferred Shares.
Looking forward, we expect interest rates to peak and then flatten out at some point over the next few quarters. We also look for new issue reset spreads to tighten in to more historical levels. These developments would benefit existing Preferred Shares that are yielding 7.50% to north of 10% (all else equal) the most, in our opinion.
The Fund and ETF have continued to add to positions in discounted rate-resets, focusing on issues with a relatively short term to reset/redemption. As an active manager, we continually seek out the best opportunities in the Preferred Share market for our fund investors based on market conditions.
1, 2. Bloomberg Finance L.P.
