December 31, 2021


The Canadian Western Bank rate reset shares CWB.PR.B is updated and rated Sell at $24.72. And the higher yielding CWB.PR.D is rated Weak Sell / Hold at $26.74.

Rate reset preferred shares are meant to be better than perpetual preferred in that their interest rate will be reset higher if interest rates rise as has been continuously expected since  rate reset shares were invented. The problem is that rates kept falling unexpectedly and so the shares fell in price. On the other hand if rate do rise a lot the issuers have the option to redeem them on the reset dates every five years. That tends to cap their upside somewhere around $27. And if you buy above $25 you will suffer a capital loss if it is redeemed at $25. 

The experience has been that these shares can be very good investments when bought at steep discounts say under $20 or even sometimes down at $15 or so. When bought at or near $25 or above they have usually not been great investments.

CWB.PR.B yields 4.35% which is not bad but not great and will reset April 30 2024. It will reset at 2.76% above the 5 year Canada bond yield. With inflation now a concern a yield of say 4.35% is not as attractive as it looked a year ago. This particular share has not traded above $25 since 2014. And is swooned down near $15 in 2016 and lower than that in march 2020. We had it rated a Buy at times at prices well under $20.  I had not expected this to ever get back near $25 and now that it has, it is a good opportunity to sell.

CWB.PR.D yields a very attractive 5.61% and does not reset until April 30, 2024. My concern with this one is that it is 7% above the potential redemption price of $25. The yield is good. But there is little chance for any meaningful capital gain and there is a chance of redemption at a 7% decline. And there is always some chance that the price could decline under $25. That seems unlikely given its 4.04% spread above the 5 year Canada bond but stranger things have happened. Overall, I would be inclined to sell rather than buy but those who are strictly seeking yield may find it a reasonable choice. I would find this one much more worthy of consideration if it drops to $25.50 or less.

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