I had an interesting conversation with an investing peer Thursday evening about the unexpected change in activity this week in the preferred share and debt markets.
Experienced investors will often make a reference to the fact that, “The Debt Market Knows All.”
What is suprising is not the fact that TD Bank (TD), Royal Bank (RY) and CIBC (CM) chose to issue new series of 5-Year Rate Reset preferred shares, but instead the terms of those issues. While many companies have struggled to raise cost effective capital in this difficult economic environment the Canadian banks have been able to raise preferred equity with relative ease.
If you took the time to examine the preferred issues over the past 10 months or so there are a few interesting observations:
- TD and RY have each raised over $1B in equity
- RY has continuously issued preferreds at a discount to its peers
- Each 5-Year Rate Reset issue has progressively increased either the initial yield or subsequent reset yield as the cost of capital has increased
The trend, of progressively rising reset yields appeared to have stopped with the most recent three issues with TD, RY and CM’s reset yields dropping dramatically from their previous issues.
These “less lucrative terms” as my friend Scott pointed out might be marking the bottom for Canadian banks as they report quarterly earnings and could be raising capital not because they need to, but because they choose to. All of them touched new 52-week lows and quarterly earnings, as of yet, haven’t been disastrous.
Only time will tell if this is the bottom, but with valuations tumbling and yields near the historically high end for many of the banks I took the opportunity to increase my positions in RY and Bank of Nova Scotia (BNS) on Tuesday.
Vote for the Canadian Bank you want to read about in a future stock analysis!