September featured less volatility for many financial markets than in recent months, not just for preferred shares, but also for bonds and equities. In a month when the S&P/TSX Preferred Share index returned -0.10%, the FTSE TMX Canada Bond Universe earned 0.25% and the S&P/TSX Composite gained 1.22%. Even U.S. stocks, as measured by the S&P 500, were subdued, returning only 0.02% (in U.S. dollar terms).

As can be seen in the chart below, the preferred share market weakened markedly on September 7th, led by a selloff in rate reset issues. The timing of the weakness coincided with a new Bank of Nova Scotia rate reset issue. Not surprisingly, the new issue was priced attractively versus existing issues and that prompted selling of those issues to buy the new one. The selling was primarily in older, legacy rate reset issues rather than more recent issues, such as the 5.50% bank issues of the last twelve months. The selling lasted a week and then the market began to recover. For the month as a whole, rate reset issues declined -0.16%. The other major type of preferred shares, perpetual issues, performed slightly better, finishing little changed for the month.Preferred Share performance - 09/2016

New preferred share issue activity was light in September, with only two deals coming to market. As noted above, Bank of Nova Scotia brought a new issue, BNS.PR.H, early in the month. It had a 4.85% dividend rate that matched the recent jumbo TD Bank deal, a +419 basis point reset spread, and of course there was no floor to the dividend rate given OSFI’s prohibition on that structure for banks. The BNS issue was well received because it offered a better yield than many existing issues and was upsized from $300,000,000 to $500,000,000. Institutional investors purchased 60% of the deal. The second new issue was from Capital Power. The issue, CPX.PR.G, featured a 6.00% dividend (with a floor) and a reset spread of +526 basis points. Although the Capital Power deal was upsized from $150,000,000 to $200,000,000, it was not an institutional favourite: only 10 institutional investors participated and were allocated 13% of the issue. Concerns about Capital Power’s creditworthiness were likely why so few institutional investors participated. We participated in the Bank of Nova Scotia new issue and did not buy the Capital Power preferred shares.

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