The market for preferred shares is booming – if your idea of a boom includes the dollar-volume of shares being issued and the stellar yields being offered. So far this year, according to Dealogic, U.S. companies have issued a total of $44.5-billion (U.S.) worth of preferred shares, way up from $17.3-billion this time last year, which was itself a robust year.
The reason comes down to the widespread attempt of suffering financial firms to shore up their battered balance sheets after writing down billions of dollars worth of assets tied to the subprime mortgage market, and they have had to entice risk-averse investors with hefty yields.
Citigroup Inc. recently issued $6-billion in preferred shares, with yields of 8.4 per cent. JPMorgan Chase & Co. issued $6-billion of preferred shares just last week. And Merrill Lynch & Co. Inc.'s $2.6-billion issue offered yields of more than 8.6 per cent. Meanwhile, many existing preferred shares have been on a wild rise over the past year, with yields taking off even as interest rates fall.
In Canada, the Big Banks have also been issuing preferred shares at a busy clip, also with attractive yields. But why have yields on U.S. and Canadian preferred shares stayed stubbornly high when central banks have been slashing interest rates? Normally, when a central bank cuts rates, fixed-rate preferred shares will rise in price, sending the yields down – which is similar to the way bonds behave. Not this time.
“This is the first time in my career where I have seen interest rates continually going down, and so is the preferred share market,” said John Nagel, a preferred share analyst at Desjardins Securities. “For 25 years, it has always been inversely related” – meaning that preferred shares would generally rise in price when rates came down, and vice versa.
“In this kind of market, the price of the shares is reflecting that it's the underlying creditworthiness that is of more concern and is really taking over the pricing mechanism.”
