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Email this10:33 am
October 21, 2013
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http://www.cdic.ca/en/newsroom.....ittee.aspx
I don't recall that this was ever something CDIC had to think about before, but I guess I'm glad they have.
1:39 pm
October 27, 2013
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It stands to reason that the proposed bail-in legislation by the federal gov't would serve CDIC (and ultimately taxpayer) interests and that of the depositer. New issues of preferred shares (since about 2013 I believe) already include NVCC provisions. The banks have been calling in the 'old' non-compliant versions when it is economic to do so and replacing them with the new NVCC compliant issues. Subordinated debt has followed that trend.
http://www.osfi-bsif.gc.ca/Eng.....s/nvcc.pdf
2:11 am
October 21, 2013
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I'd love it if someone could explain what all of this means in plain English.
Are you saying that the way these banks will be kept afloat is by the people who own preferred shares?
If so, are there enough preferred shares out there to do the job?
What happens if those who hold preferred shares see trouble coming and dump them? I don't understand preferred shares very well, but would their value not then go down, and thus less available for bailing with?
I am imagining that before we get to this extreme situation, the common shares would have already largely turned to dust. Is that correct?
And what abut Jo Blow with the plain old GIC and savings account? Does this scheme protect him, or is he set adrift? Obviously it's too big a job for CIDC, which appears to exist only to rescue savings in small banks. Or do the preferred shares somehow cough up enough money to rescue those accounts?
7:27 pm
October 27, 2013
Online
Not preferred shares alone but also subordinated debt like debentures. And no, if a big 5 bank gets into trouble, then all of that may not be enough to save the bank's balance sheet. BUT it will go a long way to mitigating taxpayer bailout. I have not looked at the terms of NVCC compliant subordinated debentures (would have to peruse via the RBC prospectus noted above to find out) but as an example on the prefs.
If bank common equity drops to $5/share, the OSFI Superintendent can convert the $25 prefs into 5 commons at $5/share. The bank already has the $25 in pocket from the issue of the prefs so it does not matter what the market value of the prefs are. It simply means that the liability on the bank's balance sheet is no longer $25. It could be effectively nothing. Remember it is not necessarily the lack of cash that brings a bank down. It is the balance sheet, i.e. debt. If debt from prefs and debentures can be wiped off the books (converted to shareholder's equity), that goes a long way to help supporting capital ratios.
Hence, no way would I buy a bank pref share. Why not own the commons exclusively?
It is already known that CDIC insurance remains unchanged. Deposit assets up to CDIC limits are guaranteed. There is no risk, indeed less risk, to deposit assets with the bail-in.
10:51 pm
October 21, 2013
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So, it's a measure that may or may not save the bank if it comes to that, but it will save Ottawa from throwing money at it? Is that the idea?
But we are often told that the strength of our economy is related to our strong banks in part. So, if one or more of them is teetering, why would Ottawa want to remain so uninvolved?
CDIC doesn't have enough assets to reimburse all insured funds, so this is why I consider that it's really only there in case a small bank fails, from my point of view as a consumer. If one of our big banks fails, it seems likely the others would likely also be teetering on the edge of collapse, and we would not get all our money back. So, as a consumer and a citizen, wouldn't I want the government to be more active in protecting me? This does not necessarily have to take the form of a bailout, and I don't really like the idea of bailouts, but some action would be needed.
I gather that preferred shares are for people who think our banks are safe and who want a predictable dividend and a less volatile price. I suppose it would protect against having to sell in a downturn?
5:12 am
June 29, 2013
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Loonie said
I gather that preferred shares are for people who think our banks are safe and who want a predictable dividend and a less volatile price. I suppose it would protect against having to sell in a downturn?
I would think people who buy common shares of banks would also think our banks are safe.
I agree with Alta Red - I would buy bank common shares vs bank preferred shares although the bank pref shares do pay high dividends - around 4.5% to 5% these days certainly a good alternative to GICs in a diversified portfolio.
10:24 am
October 21, 2013
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Yes, I thought afterwards that you would want to believe that the bank is safe, no matter which type of shares you bought.
I would have assumed that common shares paid more than preferreds, but, then, I know nothing about it.
So, if you think the bank (or any corporation for that matter) is safe enough to invest in, why wouldn't you choose the shares with the higher interest rate, especially as it is guaranteed? I read that common shares have voting rights and preferred don't, but unless you are a large institutional investor, what difference can that possibly make? And, besides, would I really vote any differently than others?
The alleged lower share price volatility also seems like a plus.
1:49 pm
October 27, 2013
Online
Preferred shares pay eligible dividends like common equity does. Prefs pay 'more' in dividend yield because they don't share in the growth (capital appreciation) of the corp whereas common equity does. Total Return (dividend yield + capital appreciation) is the attracitveness of common shares and TR on average exceeds the dividend yield of prefs (as it should be for the additional risk). Pref shares are senior to common equity in any bankruptcy. By design, common equity holders are the first to get a big fat 0 in a bankruptcy.
The point of all this is to make debt holders and equity shareholders first in line for saving the company rather than the taxpayer. The way it should be actually.
9:10 pm
April 6, 2013
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AltaRed said
…
If bank common equity drops to $5/share, the OSFI Superintendent can convert the $25 prefs into 5 commons at $5/share. The bank already has the $25 in pocket from the issue of the prefs so it does not matter what the market value of the prefs are. It simply means that the liability on the bank's balance sheet is no longer $25. It could be effectively nothing. Remember it is not necessarily the lack of cash that brings a bank down. It is the balance sheet, i.e. debt. If debt from prefs and debentures can be wiped off the books (converted to shareholder's equity), that goes a long way to help supporting capital ratios.Hence, no way would I buy a bank pref share. Why not own the commons exclusively?
…
If a bank becomes non-viable, then its current common shares likely will be worthless. The worthless common shares will be cancelled under the government's proposed power to permanently cancel existing common shares.
Preferred shares are not debt. They are shares. There's no guarantee preferred shareholders will receive the original $25.
If lucky, there may be some equity left for the preferred shares. If there's a 5¢ of equity left per preferred share, then each $25 NVCC preferred share will become one 5¢ new common share.
After that, each $1,000 bond with NVCC provisions will become $1,000/$0.05 = 20,000 new common shares.
9:20 pm
October 27, 2013
Online
Norman1 said
Preferred shares are not debt. They are shares. There's no guarantee preferred shareholders will receive the original $25.
If lucky, there may be some equity left for the preferred shares. If there's a 5¢ of equity left per preferred share, then each $25 NVCC preferred share will become one 5¢ new common share.
After that, each $1,000 bond with NVCC provisions will become $1,000/$0.05 = 20,000 new common shares.
I fully understand preferred shares are not debt. If I read the NVCC compliant pref prospectuses right, it is a 5 to 1 conversion not 1 for 1. Stilll, prefs could become worthless. Not worth buying. The same process is being contemplated for lifecos but there is no certainly it will happen or when.
10:18 pm
October 21, 2013
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So, if I understand correctly, we are back to AltaRed's original proposition that all shares would be worthless if this arrangement were to kick in.
And so, if preferreds don't have capital appreciation (which I had thought they did), then they are at least the more conservative of the two types of shares, because there is no volatility. Is that correct? (Doesn't sound much different from corporate bonds, which I think are higher on the pecking order but perhaps don't pay as much?)
What are lifecos? Do you mean life insurance companies?
Do you think this new arrangement is likely to have any effect on shareholders' behaviour, e.g. at AGMs? Might they be giving more careful scrutiny?
I once had a chat with a wealth management guy at RBC who said that if I were his client, he would put me in some preferred shares, but I didn't pursue that as I really couldn't understand all that he was saying and I couldn't face the prospect of having no "say" in the matter.
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