When rate reset preferred shares were the item back in 2009, the interest rates they paid were all structured to reset after five years. Sure, there was some leeway so that issuers could reset at quarter-end, but the amount by which they missed the five-year mark wasn’t long.
Fast forward to today and you find companies pushing that initial period far past five years. On Monday, Brookfield Asset Management issued $250-million of rate reset preferred shares that pay 4.5 per cent until they reset six and a half years later. Enbridge did the same when it sold $500-million in preferred shares in January, setting its first reset date six and a half years out.
In Brookfield’s case, it looks like the preferred shares were priced off the June, 2018, Government of Canada bond, leading to an interpreted spread of Canadas plus 2.9 per cent. That’s said to be tighter than spreads to the five-year bonds right now, which clearly benefits the issuer.
On top of that, because of the way these preferred shares are structured, that lower spread applies when their interest rate resets in 2018 for the new five-year period.
However, good rates for the issuer typically mean the opposite for the investor. Considering how quickly Enbridge’s blew out, getting upsized from $300-million to $500-million, you have to wonder whether investors even noticed the structural differences. They very easily could have bought in simply based on the issuer’s name and 'preferred shares.'
But while corporate issuers are taking advantage of this longer initial period, financial institutions don’t have the same luxury, according to John Nagel at Desjardins Securities, who helped to structure rate reset preferred shares back in their infancy. For reasons that get quite technical, the Office of the Superintendent of Financial Institutions requires the firms it monitors to make their reset periods the same length.