There was only one, relatively small new issue in January. Brookfield Infrastructure Partners LP issued $300 million of preferred units with a 5.00% initial (and minimum) payout and a 378 basis point reset spread. Rather than paying dividends, the units will payout a portion of the partnership’s taxable income. If the taxable income is insufficient to cover the 5.00% payout, the balance will be paid as a tax deferred return of capital. The issuer estimated, but did not guarantee, that the split between taxable income and return of capital would be 50/50 over the next five years. Institutional investors bought 46% of the issue and retail investors received 54% of it.

Ongoing interest in preferred shares spurred the introduction of two more actively managed preferred share ETF’s. One was from Redwood and the second was offered by Blackrock and managed by Dynamic.

Outlook and Strategy

We are cautiously optimistic regarding preferred shares over the near term. In part, our optimism reflects the yield advantage that preferred shares have versus comparable bonds. And that comparison does not even factor in the tax advantages of preferred shares versus bond. In addition, new issue supply in February may be lighter than demand, because Canadian banks are in “blackout” periods awaiting the release of their first quarter financial results. Our caution arises mainly from how quickly the preferred share market has rallied in the last few months, and the unprecedented need to hedge structured notes based on preferred share indices or ETF’s. Should the demand emanating from the notes falter, we would expect to see rate reset issues give back some of their recent gains. In addition, the recent strong gains in preferred shares have led many institutional investors to pause their buying programmes.

From a longer term prospective, preferred shares remain attractive. Notwithstanding the recent rise in bond yields, we are still in an ultra-low yield environment and the 5.00% yields achievable in preferred share portfolios are very competitive. As well, the lack of correlation to bonds will be valuable if the bond market continues to falter and yields rise.

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