The Canadian Preferred Share market continued on its hot streak in March with the S&P/TSX Preferred Share Total Return Index (the “Index”) gaining 1.83%. Series F of Lysander-Slater Preferred Share Dividend Fund (the “Fund”), and Lysander-Slater Preferred Share ActivETF (the “ETF”) outperformed the Index, both posting total returns of 3.10% for the month.
The 5-year Canada bond yield continued to trend higher in March, reaching a high of 1.06% before finishing the month at 1.00%. The increase in the 5-year Canada bond yield helped propel prices of discounted fixed resets and floating rate Preferred Shares higher. Top-performers in March included fixed resets with reset spreads under 225 bps (which were up approximately 5.3% on average), and floating rate Preferred Shares (which were up 5.45% on average). Both the Fund and the ETF benefitted from an overweight position in both categories compared to the Index.
Emera Inc. issued a $200MM 4.25% floor rate reset with a 328 bps reset spread for settlement on April 6, 2021. We purchased this issue for its attractive coupon and defensive features, and intend to hold it as a long-term core position in both the Fund and the ETF.
Redemptions were plentiful during the month. Bank of Nova Scotia called in its $350MM 5.50% rate reset (BNS.PR.E), potentially setting up for a new Limited Recourse Capital Note (“LRCN”) in the near future. Meanwhile, National Bank called in its $400MM 5.60% rate reset (NA.PR.X), and TD Bank called in its $700MM 5.50% rate reset (TD.PF.G). Year-to- date, $1.62BN of Preferred Shares have been called in. We expect approximately $8BN more to be called by year end, resulting in continued upward pressure on prices as supply diminishes.
The LRCN market continues to be active for Canadian issuers. Since the launch of the first Canadian LRCN in July 2020, a total of $8.275BN par value has been issued. The pricing of new LRCNs has contributed to the strong rally in Preferred Shares, which, comparatively, could offer attractive value.
Canadian Western Bank issued their 2nd LRCN in mid-March, coming with a $150MM deal at 5.00%, compared to their first issue which was priced at 6.00%. Intact Financial came with a $200MM deal at 4.125%, which was met with strong demand and currently trades above par value. We expect other large Canadian insurance companies, such as Sun Life Financial and Manulife Financial to call in their relatively expensive high coupon Preferred Shares and replace them with cost-effective LRCNs.
As an active manager, we are continually seeking out the best opportunities in the sector. With multiple positive catalysts on the horizon, we anticipate continued strong Preferred Share market performance throughout the year.
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