The S&P/TSX Preferred Share Index earned 1.12% in August. Ongoing demand for the relatively high yield of preferred shares, combined with a shortage of new issues, pushed share prices higher and yields lower early in the month. The new issues that did come to market enjoyed robust investor interest, but pushed the prices of existing issues lower. Institutional participation in preferred shares continued to increase, with one of the new issues having a record number of institutional buyers.
August 16 preferred shares | JZechner Associates

Floating rate preferred shares returned an average 1.87% in the month, and were the top performing sector. It appeared that floating rate issues were playing catch up following a relatively weak start to the third quarter. Fixed rate, rate reset issues earned 1.72% in August, but still trailed perpetual issues both in the third quarter and on a year to date basis. Perpetual issues, though, paused following their strong performance in July, returning only 0.22% in August. The small retractable sector trailed the rest of the market, returning -0.04% in the month.

Two new issues came to market in late August. Both were rate reset issues and both were very well received due to investor demand and relatively few new issues recently. On August 22nd, Westcoast Energy brought W.PR.M, a 5.20% issue with a floor and a 452 basis point reset spread. The issue was upsized from $200,000,000 to $300,000,000 due to strong demand. Curiously, it was allocated 50% to retail investors and 50% to institutional investors. Given that retail orders were paid a 3% commission and institutional orders received only a 1% commission, it appears that Westcoast could have reduced its cost by allocating more to institutional buyers.

The second new issue came a week later from TD Bank and set new records for Canadian preferred shares. The TD.PF.H issue featured a 4.85% dividend rate, no floor on the dividend, and a 412 basis point reset spread. Relative to existing bank issues that were trading at a 3.90% yield to call, the new issue looked attractive. As a result of very strong demand, it was upsized from $300,000,000 to a record $1,000,000,000. The number of institutional participants also set a new standard of 64 buyers. The issue was allocated 75% institutional and 25% retail. Interestingly, the Westcoast Energy issue appeared to have a larger impact on the value of existing issues, notwithstanding the larger size of the TD Bank issue.

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