Indeed I have found the Constellation debentures interesting. Mark Leonard has said (in a letter? in one of those old Q&A's he did for a while? can't remember) that he considers these very cheap, flexible debt and would happily do more debentures like it, which I took as a good indicator that Constellation is unlikely to ever call these. And for a long time these traded such that getting called in five years would result in a very unsatisfactory return, vs now's merely low return. The capped downside now makes them more attractive (as does the reasonably high likelihood of being able to sell at a higher price at some point before maturity).
One thing I'd say is that the tax treatment of preferred shares (dividends vs interest) likely makes the spread of the yields on the preferred shares ETF and CSU.DB make more sense. I believe 1.3x is the number used by James Hymas (ie. a dividend of $1 is worth $1.3 of interest). That said, a 6.9% yield on the preferred ETF vs YTM of 6.4% for CSU.DB would still strike me as too narrow a spread.
Thanks Tyler. Yes, that rings a bell for me too as it relates to them being very unlikely to be called early.
Very good point on tax comparability. I used to work at a pension fund, so taxes don’t naturally pop into my head when it think about these things haha. But yes, when adjusting for taxes, the preferred share ETF yields a bit more than the $CSU.DB. Debentures do rank ahead of preferred shares in the capital stack, so it seems reasonable-ish.
Indeed I have found the Constellation debentures interesting. Mark Leonard has said (in a letter? in one of those old Q&A's he did for a while? can't remember) that he considers these very cheap, flexible debt and would happily do more debentures like it, which I took as a good indicator that Constellation is unlikely to ever call these. And for a long time these traded such that getting called in five years would result in a very unsatisfactory return, vs now's merely low return. The capped downside now makes them more attractive (as does the reasonably high likelihood of being able to sell at a higher price at some point before maturity).
One thing I'd say is that the tax treatment of preferred shares (dividends vs interest) likely makes the spread of the yields on the preferred shares ETF and CSU.DB make more sense. I believe 1.3x is the number used by James Hymas (ie. a dividend of $1 is worth $1.3 of interest). That said, a 6.9% yield on the preferred ETF vs YTM of 6.4% for CSU.DB would still strike me as too narrow a spread.
Thanks Tyler. Yes, that rings a bell for me too as it relates to them being very unlikely to be called early.
Very good point on tax comparability. I used to work at a pension fund, so taxes don’t naturally pop into my head when it think about these things haha. But yes, when adjusting for taxes, the preferred share ETF yields a bit more than the $CSU.DB. Debentures do rank ahead of preferred shares in the capital stack, so it seems reasonable-ish.
My comparison to the $CPD.TO ETF also isn’t perfect because there’s a mix of 5-year resets, perpetuals, floaters, etc. in there. https://canadianpreferredshares.ca/etfs/blackrock-etf-cpd-in-depth-data-analytics/