Rate-Reset Preferred Shares: The New Standard for Bank Preferred Issuance
Are you looking for tax efficient income? Tired of the low returns offered by GICs? Concerned about credit quality? A relatively new regulatory change has created an opportunity for investors in the world of preferred shares that might make sense for you.
What is a rate-reset preferred?
- These preferred shares have an initial term of five years and usually an initial yield of 5% or greater from recent offerings
- At the end of five years holders have a choice to either convert their preferred share to either another five year-fixed rate preferred share or a five-year floating rate preferred share
What are the highlights?
- Attractive fixed yield of 1.60% to 2.05% above five-year Canada bonds and the spread remains throughout the life of the issue
- Repricing after 5 years ensures these preferred shares should trade at or close to par value or its initial offering price, helping to minimize interest rate risk
- Superior credit quality, well above investment grade
- Tax efficient income benefiting from the dividend tax credit. Pre-tax interest equivalent of at least 7% for investors in the highest tax bracket (Ontario).
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