Manulife pref deal hits the sweet spot

Put it down to market conditions, given that the same

company offered investors the same security with the only difference being the two deals were separated by a gap of 14 months.

As a result, a fixed-wrate reset preferred share financing done by

Manulife Financial Corp. in August 2014 was a much easier sell than a similar offering completed in June 2013.

On Monday, Manulife announced a $250-million offering of Tier 1 capital in the form of five-year rate

reset pref shares that came with a coupon of 3.90%. While the yield was not as attractive, as the 3.80% recently enjoyed by Royal Bank of Canada and TD Bank, the financing can still be termed low-cost capital.

The coupon was made up of two elements: a base rate (equal to the yield on five-year Canada bonds) plus a spread of 236 basis points. And the yield of 3.90% hit investors’ sweet spot, so much so that the

issuer upped the size of the deal to $350-million.

A couple of reasons are at work: in a low interest rate world, both now and the foreseeable future, investors are still focused on receiving an attractive yield; and there

is a heightened confidence about Manulife which recently announced a major profit increase and a hike in its dividend — though the annual dividend is still below what investors used to receive a few years back.

That confidence is reflected in the share price: Manulife now trades at $21; in June 2013 the shares were trading in the $15-$16 range.

Monday’s outcome contrasts with a $200-million offering, priced to yield 3.80% that Manulife brought to market in June 2013. That coupon was made up of the yield on five-year Canada bonds and a spread of 222 basis points.

That issue didn’t meet with much of a reception and unlike Monday’s

deal, the underwriters and the company didn’t up the size of the deal. From Manulife’s perspective, that lack of interest didn’t affect what it received in gross proceeds given that the transaction was done via

a bought deal. Accordingly, to the extent that there was any unsold stock when the deal closed, the underwriters assumed the resulting liability.

So what’s the difference? “The market was a little less robust [in

2013] than today,” noted one investment banker. “The market was more receptive Monday and investors still have a strong appetite for yield.”

Manulife’s deal this week was for

so-called old style rate reset pref shares and not for non-viable contingent capital that was recently offered up by Royal and TD. Indeed under current bank capital rules, banks are, effectively, not allowed to issue old style pref shares. Instead they have to issue capital that is Basel III compliant.

It’s possible that the new pref share deal may have affected trading in the pref share issue completed last year. On Monday, invest

ors may have traded up by selling the lower-coupon June 2013 pref and buying the new higher coupon issues. For the first time in at least a month, the June prefs traded below $25 per share. On the day, almost

50,000 shares were traded — the most in a month — while the prefs closed at $24.98.