Toronto bank towers and skyline Nov. 10, 2010.Moe Doiron/The Globe and Mail
Investors are bingeing on preferred shares as declining interest rates have them looking to buy now before coupons fall further.
Preferred share sales in Canada in the past few days have hit $1.5-billion and counting, as banks and other issuers dive into the market.
Royal Bank of Canada on Friday announced a $250-million sale of preferreds that was increased to $500-million. Toronto-Dominion Bank followed, seeking $300-million and bumping that to $500-million thanks to a swollen order book. Brookfield Asset Management sought $250-million and got $300-million.
Wednesday, just as it announced earnings, Bank of Montreal launched a $250-million sale that will probably end up bigger by day's end.
There's a confluence of factors driving the burst of issues. The banks need to go to market, but they had to wait until their quarterly reports came out, to assure investors that there were no surprises in store.
They are also calling older preferred shares whose structure ran afoul of regulators. Since those shares were about to reset to higher rates, the banks are replacing them with new preferred shares that are compliant with latest capital rules.
That creates a natural demand on the investor side. As the shares they hold are called, investors end up with piles of cash and need somewhere to put that money.
There is a feeling that it's better not to wait, because with interest rates falling, investors are ready to put that money to work before rates go lower. Yields on Government of Canada bonds have been on a downward trend for several months.
So other issuers may well do as Brookfield did – given the demand for the banks' paper, anyone who needs capital now has a window to tap the preferred market.