Bank of Montreal isn't giving up on rate reset preferred share market just yet.
In 2009 these securities were all the rage for banks because they offered a unique way to bump up capital ratios without issuing common shares. But that issuance dried up early in 2010 because the banks were on better footing.
On Wednesday, however, BMO launched a $250-million offering of rate reset preferred shares, catching some people on Bay Street off guard. Not only have the banks all but stopped issuing the product, non-financials have moved into the space, with recent issues coming from RioCan REIT and RONA.
Plus, just last week National Bank of Canada announced it will redeem all of its outstanding rate reset preferred shares at a premium. The bank plans to turn the money it will save from redeeming into a dividend increase on its common shares.
BMO says it is using the money both for general purposes as well as to maintain strong capital ratios. The first reason makes sense. BMO has already said it needs to issue $400-million to partially fund its takeover of Marshall & Ilsley Corp. However, the second explanation is a bit confusing. Under Basel III most of the focus is on common equity -- hence National Bank's sale -- yet BMO is still raising preferred capital.
The latest issue pays 3.9 per cent annually and comes at a spread of 1.15 per cent above 5-year Canada bonds.
Tim Kiladze