Canaccord Preferred Shares
Can someone explain why I can buy Canaccord Preferred Shares at either a 50% discount to par at a 8.39% yield resetting end of 2026, or at a 30% discount to par at a 9.91% yield resetting end of 2027?
The management team tried to buy it out and both their valuation and RBC’s valuation prescribed it enough value to make this seem weird. The UK wealth management alone is worth a lot….
Why are the prefs trading as if this business will go insolvent? I am sure I am missing something here
Based on the most helpful WSO content, there could be several reasons why Canaccord Preferred Shares are trading at a significant discount and with high yields:
Market Perception of Risk: The market might perceive a higher level of risk associated with Canaccord's future cash flows, which could be due to various factors such as industry risk, company-specific risk, or broader economic conditions. This risk perception affects the discount rate investors use to value these shares.
Reset Feature: The reset feature of the preferred shares, which adjusts the dividend yield at a future date, can introduce uncertainty regarding the future income from these shares. The market may be pricing in the risk that the reset yield will be less attractive than the current yield.
Liquidity Concerns: Preferred shares are generally less liquid than ordinary shares, which can lead to larger discounts in their trading prices as investors require a higher return for the added illiquidity risk.
Buyout Attempts: If there have been attempts by management to buy out the preferred shares, it could signal to the market that the shares are undervalued, or conversely, it could also raise concerns about why management is eager to repurchase them.
Credit Risk: The trading price may reflect the market's assessment of the credit risk of the company. If investors believe there is a chance of insolvency or financial distress, they will require a higher yield to compensate for this risk.
Valuation Discrepancies: Sometimes, there can be discrepancies between internal valuations by management or external valuations by firms like RBC and the market's valuation. The market's valuation is influenced by real-time supply and demand dynamics, which can diverge from theoretical or intrinsic valuations.
Market Inefficiencies: At times, securities can be mispriced due to market inefficiencies. Not all market participants may have the same information or interpret the information in the same way, leading to pricing anomalies.
Tax Treatment: The tax treatment of preferred shares can also impact their attractiveness to investors and thus their market price.
It's important to conduct thorough due diligence and possibly consult with a financial advisor to understand all the factors at play before making an investment decision. Remember, high yields often come with high risks, and it's crucial to understand what you might be missing in the analysis.
Sources: Distressed debt / special sits investing - On the job, Why does Preferred trade at discount to Ordinary?, Wishful Thinking and Unpredictable Consequences | The Daily Peel | 12/22/22, Not A Slow Burn | The Daily Peel | 5/10/22
Bump. Interested.
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