MUH.PR.A to Liquidate, Default

March 4th, 2011

Mulvihill Asset Management’s MCM Split Share Corp. has announced:

that it will voluntarily dissolve and distribute to shareholders the proceeds to be received from the liquidation of the assets, less all liabilities and all expenses to be incurred in connection with the dissolution and winding up of the Fund. This dissolution is in advance of the scheduled termination date of February 1, 2013. The Fund expects that proceeds from the liquidation will be payable to holders of the Priority Equity Shares on or about March 31, 2011.

In late 2007, the Fund adopted a strategy (the “Priority Equity Portfolio Protection Plan”) to assist the Fund with payment of the original issue price of the priority equity shares (the “Priority Equity Shares”) on the redemption date originally scheduled for February 1, 2013. Given the steep market sell-off in November 2008, the Fund was required to implement the Priority Equity Portfolio Protection Plan and raised its cash levels to ensure compliance with the plan. Since that time, the Fund has been invested in cash and cash equivalents with no equity exposure. For the year ended January 31, 2011, the Fund’s total return was negative 1.3%. Distributions amounting to $0.83 per Priority Equity Share were paid during the year ended January 31, 2011, contributing to an overall decline in the net asset value (“NAV”) of the Fund from $14.24 per Unit (each notional Unit consisting of one Priority Equity Share and one Class A Share) as at January 31, 2010 to $13.23 as at January 31, 2011. The Fund believes that holders of the Priority Equity Shares may be better off reinvesting the proceeds from the voluntary dissolution than by remaining invested in the Fund as a result of the returns available on the Fund’s existing investments.

Given that the Priority Equity Shares rank ahead of the Class A Shares, the Fund expects that holders of the Priority Equity Shares will receive the entire amount of the liquidation proceeds to be paid to shareholders because they are entitled to the first $15.00 of NAV of the Fund per share in priority to other shareholders. As the amount of such liquidation proceeds will be less than $15.00 per Priority Equity Share, the Fund does not expect to be in a position to make any payment to holders of Class A Shares upon dissolution.

The NAV was $13.23 on February 28, according to Mulvihill. There are just over 1.1-million shares outstanding, according to TMXMoney. The fund had been scheduled to wind up on 2013-2-1 but had problems:

The Fund adopted a strategy (the “Priority Equity Portfolio Protection Plan”) to protect holders of the Priority Equity Shares by assisting the Fund with the payment of the original issue price of $15.00 per share on termination date. With the steep market sell off in November 2008 we had to raise our cash levels to ensure compliance with the above feature. The Fund is now in cash and cash equivalents with no equity exposure. During the fiscal year ended January 31, 2010, the annual total rate of return of the Fund was negative 1.42 percent. Distributions amounting to $0.83 per share to Priority Equity shareholders and $0.01 per share to Class A shareholders were paid during the year, contributing to the overall decline in the net asset value from $15.29 per Unit as at January 31, 2009 to $14.24 per Unit as at January 31, 2010.

This portfolio insurance strategy didn’t work out too well for XCM.PR.A or XMF.PR.A, either … at least as far as the sponsors were concerned.

MUH.PR.A was last mentioned on PrefBlog when they announced they were contemplating a reorg. MUH.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

March 4, 2011

March 4th, 2011

The IMF has released the March 2011 edition of Finance and Development. There’s an article by André Meier titled Up or Down:

Some have predicted postcrisis deflation in advanced economies, others high inflation. Worries about either are probably exaggerated.

Historical episodes of persistent large output gaps in advanced economies show a clear pattern of disinflation, supported by weak labor markets and low wage growth. However, declines in inflation appear to become more modest when the initial rate of inflation is already quite low, suggesting some combination of better-anchored inflation expectations and downward nominal rigidities, such as resistance to outright wage cuts. Moreover, fluctuations in oil prices and exchange rates can introduce significant shortterm volatility in inflation outturns.

Developments since the beginning of the global financial crisis are consistent with this pattern. Despite large swings in headline rates, underlying inflation in advanced economies has generally declined, with many core measures reaching the very low rates at which disinflation typically petered out during past [persistent large output gap] episodes. Thus, while upside inflation risks should be limited in countries facing continued economic slack, a slide into outright deflation does not seem very likely either.

There’s also a very hopeful article titled Healing Health Care Finances by Benedict Clements, David Coady, Baoping Shang, and Justin Tyson. Hey, here in Canada, no problem! You see, what we’re going to do is keep standards high but costs low through the use of a well-respected technique that has just been approved by an expert group of 23-year-old B.Comms with clipboards: Doing a shitty job. Whenever something goes wrong and this becomes public knowledge, just fire whoever was standing nearest. Works every time. How many voters really have any insights into the public health system, anyway?

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 17bp and DeemedRetractibles losing 16bp. For all that, the market was relatively well behaved, with only one entry on the Performance Highlights table. Volume remained high.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.0238 % 2,395.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0238 % 3,603.0
Floater 2.50 % 2.27 % 45,102 21.55 4 -0.0238 % 2,586.6
OpRet 4.87 % 3.34 % 59,836 0.40 9 0.0644 % 2,394.0
SplitShare 5.09 % 2.93 % 228,998 1.04 5 -0.0529 % 2,484.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0644 % 2,189.1
Perpetual-Premium 5.75 % 5.65 % 124,741 1.27 10 -0.0556 % 2,032.4
Perpetual-Discount 5.52 % 5.63 % 125,140 14.38 14 -0.2094 % 2,113.4
FixedReset 5.21 % 3.46 % 199,740 2.99 54 0.1696 % 2,281.8
Deemed-Retractible 5.23 % 5.26 % 369,455 8.28 53 -0.1600 % 2,077.9
Performance Highlights
Issue Index Change Notes
GWO.PR.M Deemed-Retractible -1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.68 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.H OpRet 99,471 CIBC sold 28,900 to Desjardins and 34,700 to TD, both at 25.60. Desjardins crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-04-03
Maturity Price : 25.25
Evaluated at bid price : 25.60
Bid-YTW : 0.82 %
TD.PR.Q Deemed-Retractible 63,917 Nesbitt crossed 60,000 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-02
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 5.14 %
MFC.PR.E FixedReset 59,777 Anonymous crossed (?) blocks of 10,000 and 15,000 at 26.60. RBC crossed 16,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 3.66 %
MFC.PR.D FixedReset 52,785 RBC bought blocks of 10,000 and 19,100 from Nesbitt, both at 27.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.40
Bid-YTW : 3.54 %
TD.PR.G FixedReset 42,822 TD sold 14,500 to anonymous at 27.41.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.31
Bid-YTW : 3.48 %
HSB.PR.E FixedReset 42,393 Desjardins crossed 12,900 aat 27.80; Nesbitt sold 15,000 to anonymous at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.76
Bid-YTW : 3.58 %
There were 47 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.P FixedReset Quote: 27.10 – 27.44
Spot Rate : 0.3400
Average : 0.2217

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.10
Bid-YTW : 3.45 %

BAM.PR.H OpRet Quote: 25.60 – 25.97
Spot Rate : 0.3700
Average : 0.2520

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-04-03
Maturity Price : 25.25
Evaluated at bid price : 25.60
Bid-YTW : 0.82 %

GWO.PR.M Deemed-Retractible Quote: 25.15 – 25.54
Spot Rate : 0.3900
Average : 0.2804

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.68 %

BAM.PR.R FixedReset Quote: 26.02 – 26.45
Spot Rate : 0.4300
Average : 0.3206

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 4.75 %

RY.PR.Y FixedReset Quote: 27.46 – 27.70
Spot Rate : 0.2400
Average : 0.1558

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.46
Bid-YTW : 3.43 %

TDS.PR.C SplitShare Quote: 10.41 – 10.77
Spot Rate : 0.3600
Average : 0.2846

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.41
Bid-YTW : -0.18 %

March 3, 2011

March 4th, 2011

The migration of traders continues:

Guggenheim Partners LLC, the closely held investment bank and asset manager, plans to hire as many as 150 staff being pushed out of banks’ proprietary-trading units because of U.S. financial rules enacted last year.

Loren M. Katzovitz and Patrick Hughes, 49-year-old managing partners who have worked together since 1993, are launching Guggenheim Global Trading LLC in Purchase, New York, with an initial investment of $500 million as soon as June 1, they said yesterday in an interview. The firm plans to hire 100 to 150 traders and manage as much as $2 billion, they said.

Much the same thing is happening in Canada:

The cultural gulf between Canada’s independent securities firms – with their eat-what-you-kill pay structures – and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.

The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.

It will be interesting to see how this plays out. I can tell you that the quality of institutional bond desk personnel has declined over the past 15 years. There’s still lots of the old guys around, but as they retire and move on, they’re being replaced by order-takers.

General Growth, the object of Brookfield’s affections, is taking advantage of better tone in the CMBS market:

General Growth Properties Inc. (GGP), the U.S. mall owner planning to refinance $5 billion of mortgage debt, tapped UBS AG and Morgan Stanley (MS) to fund loans as banks rebuild inventory to back bonds tied to commercial real estate.

UBS agreed to provide a $375 million loan on the 977,000- square-foot Providence Place Mall in Rhode Island, according to a person with direct knowledge of the deal who declined to be identified because the talks are private. Morgan Stanley will lend about $150 million for a Humble, Texas property, according to a person familiar with those negotiations. The banks plan to package the loans for sale as securities, the people said.

General Growth, which emerged from the largest real estate bankruptcy in U.S. history in November after piling up $27 billion in debt, plans to refinance $5 billion in mortgages in 2011, Chief Executive Officer Sandeep Mathrani said during a March 1 conference call with analysts. Property owners nationwide are benefiting as the Federal Reserve keeps its benchmark interest rates near-zero to stimulate economic growth.

General Growth buckled under its debt load when the market for commercial-mortgage backed bonds shut down in 2008 and the company was unable to refinance properties. The real estate investment trust has $18.2 billion in outstanding mortgage debt, Mathrani said.

A mixed, relatively quiet day on the Canadian preferred share market, as PerpetualDiscounts lost 5bp, FixedResets were down 7bp, and DeemedRetractibles gained 4bp. There are only two entries on the Performance Highlights table – and neither would have made had their closing bids been a penny lower. Volume remained at elevated levels.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.2625 % 2,396.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2625 % 3,603.8
Floater 2.50 % 2.27 % 44,561 21.55 4 0.2625 % 2,587.2
OpRet 4.87 % 3.33 % 59,910 0.40 9 0.0086 % 2,392.5
SplitShare 5.09 % 3.19 % 232,068 1.05 5 0.1416 % 2,485.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0086 % 2,187.7
Perpetual-Premium 5.74 % 5.55 % 125,081 1.27 10 0.0079 % 2,033.5
Perpetual-Discount 5.51 % 5.61 % 125,531 14.40 14 -0.0455 % 2,117.9
FixedReset 5.21 % 3.51 % 197,858 2.99 54 -0.0697 % 2,278.0
Deemed-Retractible 5.23 % 5.24 % 374,462 8.29 53 0.0429 % 2,081.2
Performance Highlights
Issue Index Change Notes
BMO.PR.J Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 5.01 %
BNA.PR.E SplitShare 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.55
Bid-YTW : 5.19 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.D FixedReset 176,634 Desjardins crossed 11,000 at 27.22 and 50,000 at 27.25. RBC crossed blocks of 49,200 and 33,900 at 27.25, then bought 22,800 from Nesbitt at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.18
Bid-YTW : 3.80 %
TD.PR.G FixedReset 141,482 Desjardns crossed 50,000 at 27.50, then 70,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.40
Bid-YTW : 3.37 %
SLF.PR.F FixedReset 112,710 Desjardins crossed 110,000 at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 3.64 %
W.PR.H Perpetual-Discount 96,137 RBC crossed three blocks: 41,000 shares, 23,800 and 25,000, all at 24.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-03-03
Maturity Price : 23.29
Evaluated at bid price : 24.26
Bid-YTW : 5.71 %
BNS.PR.X FixedReset 75,416 Desjardins crossed blocks of 25,600 and 45,000, both at 27.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.37
Bid-YTW : 3.41 %
FTS.PR.C OpRet 62,329 TD crossed 50,000 at 25.70 and 11,100 at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-01
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : 3.01 %
There were 45 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.I Deemed-Retractible Quote: 22.23 – 22.69
Spot Rate : 0.4600
Average : 0.3282

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.23
Bid-YTW : 5.88 %

TDS.PR.C SplitShare Quote: 10.46 – 10.78
Spot Rate : 0.3200
Average : 0.2019

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.46
Bid-YTW : -0.80 %

BAM.PR.P FixedReset Quote: 27.50 – 27.84
Spot Rate : 0.3400
Average : 0.2389

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.50
Bid-YTW : 4.41 %

RY.PR.L FixedReset Quote: 26.45 – 26.75
Spot Rate : 0.3000
Average : 0.2000

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 3.62 %

BAM.PR.R FixedReset Quote: 26.10 – 26.40
Spot Rate : 0.3000
Average : 0.2007

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 4.68 %

PWF.PR.H Perpetual-Premium Quote: 24.92 – 25.19
Spot Rate : 0.2700
Average : 0.1781

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-03-03
Maturity Price : 24.64
Evaluated at bid price : 24.92
Bid-YTW : 5.83 %

SplitShare Capital Unit Debate

March 3rd, 2011

Assiduous Readers will remember that I was quoted in a recent article by John Heinzl expressing a strong opinion on the Capital Units issues by SplitShare corporations:

For those reasons, Mr. Hymas says the capital shares are only appropriate for “suckers.”

This statement has attracted a certain amount of commentary and I have received some material criticizing my views. All further quotes in this post have been taken, in order, from an eMailed commentary – it has been interspersed with my commentary, but is quoted verbatim and in its entirety.

Response to “Ups and Downs of Doing The Splits” – John Heinzl, Globe and Mail, March 2, 2011

I have had a lot of involvement in split shares over the last two years, and I have to differ markedly from the assessment of Mr. Hymas, who prefers the preferreds to the capital units. I believe the exact opposite to be the case.

The split-share preferreds have limited upside, yet unlimited downside. They are essentially equity investments with a ‘preferred share’ wrapper. Most have downside protection to some degree, but rest assured, they can fall pretty well as much as the equity market can.

Asymmetry of returns is a feature of all fixed income, not simply SplitShare preferreds. Naturally, they can default, and one must take account of the chance of default: but firstly most will have Asset Coverage of at least 2:1 at issue time – meaning that the underlying portfolio can drop by half before the preferred shareholders take any loss at all – and secondly the Capital Unitholders will be wiped out before the preferred shareholders lose a penny.

No, there are no guarantees – there never are. But the preferreds have at issue time a significant amount of first-loss protection provided by the Capital Units.

The capital units are a whole other story. In my view they offer the BEST deal out there.

Imagine if you had a $100,000 portfolio of Canadian equities. You are totally exposed to the performance of the underlying assets, so a market fall of 50% takes an equivalent bite out of your assets. Now suppose instead you invest in a capital share with the following characteristics: leverage factor is 3.75 times. Discount to NAV is 20%. Maturity is 3 years. (These numbers are most assuredly achievable).

These numbers can be illustrated by the following:
Preferred Par Value: $10.00
Whole Unit NAV: $13.64
Price of Capital Units: $2.91

However, the capital units are issued at a premium to NAV (since they absorb all the issue expenses) of 5-10%. Thus, by choosing this example, you are to a degree saying that the Capital Units are only worth buying once they have lost about 25% of their value relative to NAV and have lost most of their NAV as well. I claim that this shows that the guys who paid full price for them are suckers.

While discounts of market price to intrinsic value are not unknown, they are by no means automatic. I gave a seminar on SplitShares in March, 2009 – the very height of the crisis! – and used the following chart to illustrate the fact that, even (or particularly!) when distressed, these things will generally trade at a premium to intrinsic value:


Click for Big

The seminar was videotaped and is available for viewing (and downloading in Apple QuickTime format for personal use) for a small fee.

You could invest $26,667 in the capital units, and put the remainder in cash or investment grade bonds yielding , say, 3.5%. By doing so you get the same upside as the underlying assets.

Actually, it will be a bit better, because at maturity the discount will be made up, so you get an extra kicker of 6% per year. But in the event of a 50% fall in the market, although you would probably lose all of the value of the capital units, your cash would remain at $73,333, plus interest. You have dramatically outperformed on the downside, losing about 27% vs. 50%.

Yes, certainly, but you are not looking at the situation at issue time. You are looking for a distressed situation, in which somebody (the sucker) has already taken an enormous loss, not just on the NAV but also on the market price relative to NAV. Your illustration relies on the same presumption as the attractiveness of the preferred shares: the willingness of the sucker to take the first loss.

Not all split share capital units are attractive: some trade at premiums, and offer little leverage. Remember, these things are effectively long-dated options or warrants, although – even better – they can receive dividends. Any option or warrant calculator will tell you that if the capital units are priced correctly they should trade at a premium, not a discount, especially when leverage increases.

I discussed the valuation of Capital Units as options in my Seminar on SplitShares and provided the following charts. The first shows the theoretical value – given reasonable assumptions regarding volatility – of the capital units as the Whole Unit NAV changes. I will also note that this computation of theoretical value ignores all of the cash effects in the portfolio – dividends in, dividends out, fees and expenses out and portfolio changes to offset these effects – that will, in general, reduce the attractiveness of the Capital Units.


Click for Big

The second shows the premium of expected market price over intrinsic value as the NAV changes:


Click for Big

Instead, over the last few years I have seen cases where capital units offered leverage of up to 20 times, and yet still traded at a discount to NAV. That remarkable set of circumstances enabled investors to replace all-equity portfolios with a capital shares and cash combination portfolio which limited their equity exposure, and hence risk, to a fraction of what would otherwise be the case. Yet without losing any upside.

The remarkable paradox about capital units is that the higher the leverage, and hence the risk, in these things, the more one can reduce portfolio risk.

Scott Swallow, Financial Advisor
Manulife Securities Incorporated

Scott, I suggest that the critical element of your argument is the phrase “remarkable set of circumstances” and that, in the absence of such remarkable circumstances, our views are probably not very different.

Perhaps, as printed, my “sucker” epithet was too general – I certainly did not mean to suggest that all capital units were always bad all the time at all prices. If somebody offers to sell me capital units with an intrinsic value of $10 for a penny each, I’ll back up the truck! As I like to say, at the right price, even a bag of shit can be attractive: I buy fifteen of them every spring for my garden! So, perhaps I can be faulted for not qualifying my statement enough – but the reporter and I were talking about the issuance of these securities and he only had 1,000 words or so to work with – a full investigation of Split Shares takes considerably more space than that.

But your argument, as stated earlier, rests on the assumption that somebody else has taken a double loss – first on NAV, then on market price relative to NAV. I claim, that given the risk-reward profile of capital units at issue time in general, the IPO buyers (and most of those in the secondary market) are suckers.

March 2, 2011

March 2nd, 2011

DBRS has released a commentary titled Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings:

  • Sovereign credit ratings serve as a general benchmark for all other DBRS credit ratings. DBRS uses a case-by-case approach when rating non-sovereign entities or transactions, and avoids using a static “sovereign ceiling” concept, because this would imply that ratings are capped at the sovereign rating. DBRS does not institute a maximum number of notches between the sovereign rating and non-sovereign ratings.
  • Financial institution and corporate ratings are typically constrained by the sovereign rating, although both could have a higher credit rating that that of the central government, with the level of operations outside of the country of domicile typically being a key consideration. Structured Finance ratings are addressed on a case-by-case basis and in many instances can be higher than the sovereign rating.
  • In certain cases, country risks, which do not necessarily result in sovereign rating changes, may also affect non-sovereign ratings.
  • Within the Euro zone, non-sovereign ratings may enjoy a lower degree of influence from sovereign-related stresses, since there is far lower exchange rate risk, less regulatory risk and existing support mechanisms from European institutions.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts were up 10bp, FixedResets gained 6bp, but DeemedRetractibles got knocked back for 16bp. Not much volatility, with only two issues on the Performance Highlight list. Volume was above average.

PerpetualDiscounts now yield 5.61%, equivalent to 7.28% at the now standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest equivalent spread is now about 180bp. Given the change in the equivalency factor, this is not really comparable to prior figures; the raw data for February 23 was 5.61% for PerpetualDiscounts and 5.50 for Long Corporates, so the change is really zero.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1549 % 2,389.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1549 % 3,594.4
Floater 2.51 % 2.27 % 46,275 21.55 4 -0.1549 % 2,580.5
OpRet 4.87 % 3.58 % 59,276 0.40 9 0.0086 % 2,392.3
SplitShare 5.09 % 2.79 % 230,587 1.05 5 0.2252 % 2,482.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0086 % 2,187.5
Perpetual-Premium 5.74 % 5.54 % 131,810 6.19 10 -0.0536 % 2,033.3
Perpetual-Discount 5.51 % 5.61 % 127,283 14.41 14 0.1032 % 2,118.8
FixedReset 5.21 % 3.48 % 197,756 3.00 54 0.0635 % 2,279.6
Deemed-Retractible 5.23 % 5.24 % 379,719 8.28 53 -0.1605 % 2,080.3
Performance Highlights
Issue Index Change Notes
SLF.PR.B Deemed-Retractible -1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.18
Bid-YTW : 5.69 %
CIU.PR.B FixedReset 1.30 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.35
Bid-YTW : 3.76 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.D Deemed-Retractible 81,904 RBC crossed blocks of 26,000 and 48,600, both at 21.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.85
Bid-YTW : 6.03 %
FTS.PR.H FixedReset 62,609 RBC crossed 58,000 at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 3.91 %
RY.PR.F Deemed-Retractible 60,741 TD crossed 50,000 at 23.70.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.68
Bid-YTW : 5.13 %
BNS.PR.O Deemed-Retractible 56,070 RBC crossed 50,000 at 25.66.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-26
Maturity Price : 25.00
Evaluated at bid price : 25.78
Bid-YTW : 5.14 %
CM.PR.D Deemed-Retractible 55,580 Desjardins crossed 40,000 at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.61
Bid-YTW : 1.90 %
TRP.PR.C FixedReset 52,676 RBC bought 17,500 from Scotia at 25.45 and crossed 20,900 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-29
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 4.08 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.B Deemed-Retractible Quote: 22.59 – 22.88
Spot Rate : 0.2900
Average : 0.1765

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.59
Bid-YTW : 5.86 %

MFC.PR.C Deemed-Retractible Quote: 21.93 – 22.22
Spot Rate : 0.2900
Average : 0.1862

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.93
Bid-YTW : 6.06 %

GWO.PR.F Deemed-Retractible Quote: 25.05 – 25.34
Spot Rate : 0.2900
Average : 0.1990

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 5.50 %

ELF.PR.F Deemed-Retractible Quote: 22.45 – 22.79
Spot Rate : 0.3400
Average : 0.2679

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.45
Bid-YTW : 6.77 %

TRP.PR.A FixedReset Quote: 25.55 – 25.99
Spot Rate : 0.4400
Average : 0.3679

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.90 %

CM.PR.K FixedReset Quote: 26.62 – 26.95
Spot Rate : 0.3300
Average : 0.2589

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.62
Bid-YTW : 3.53 %

New Issue: BMO FixedReset 3.90%+115

March 2nd, 2011

The Bank of Montreal has announced:

a domestic public offering of $250 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 25 (the “Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares exercisable at any time up to two days before closing.

The Preferred Shares will be issued to the public at a price of $25.00 per Preferred Share and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending August 25, 2016, as and when declared by the board of directors of the Bank, payable in the amount of $0.24375 per Preferred Share, to yield 3.90 per cent annually.

Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 1.15 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 26 on August 25, 2016 and on August 25 of every fifth year thereafter. Holders of the Preferred Shares Series 26 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 1.15 per cent.

The anticipated closing date is March 11, 2011. The net proceeds from the offering will be used by the Bank for general corporate purposes.

There is a long first coupon on this ($0.4461 payable August 25) so mark your calendars – there might be some trading opportunities!

I haven’t seen anything definitive yet, but I believe this will be the first issue with the new NVCC Clause; I will be most interested to see just exactly what it looks like.

They also announced a announced a new issue of sub-debt:

it intends to issue subordinated indebtedness under its Canadian Medium Term Note Program. The issue, the Series G Medium Term Notes, First Tranche, is a $1.5 billion public offering due 2021. Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a floating rate equal to the rate on 3 month CDOR plus 1.09% (paid quarterly) thereafter to maturity.

Bank of Montreal may, at its option, with the prior approval of the Office of the Superintendent of Financial Institutions Canada, redeem the subordinated indebtedness, in whole or in part, on not less than 30 days and not more than 60 days notice to registered holders, at any time or from time to time on or after July 8, 2016 at par together with accrued and unpaid interest to but excluding the date fixed for redemption.

The net proceeds of the offering, which is expected to close on March 9, 2011, will be used for general corporate purposes of Bank of Montreal.

This makes things doubly interesting, because OSFI expects different treatment of different levels of capital should the NVCC clause be triggered. I presume they’ve consulted with OSFI regarding the wording of the two clauses; these issues could well set the paradigm.

Update, 2011-3-8: The sub-debt prospectus supplement on SEDAR (Mar 4 2011 Prospectus supplement – English) states:

The Notes may not fully qualify as non-common Tier 2 capital under new Canadian bank capital guidelines.

The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (‘‘OSFI’’) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Notes as a result may not fully qualify as non-common Tier 2 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the Notes would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 2 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the Notes in accordance with their terms.

The similarly available prospectus for the preferreds states:

Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 25 as a result may not fully qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 25 in accordance with their terms.

The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (‘‘OSFI’’) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 25 and, if and when issued, the Preferred Shares Series 26 as a result may not fully qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the Preferred Shares Series 25 and the Preferred Shares Series 26 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 25 and the Preferred Shares Series 26, if any, in accordance with their respective terms.

Marginal Tax Rates: Alberta 2011

March 2nd, 2011

E&Y have analyzed Alberta tax rates as of 2011-1-15 and we may draw some conclusions from these data:

Investors Taxable Income Marginal Rate on Interest Marginal Rate on Dividends Equivalency Factor
Widows & Orphans $30,000 25.00% 0.00% 1.33
Professionals $75,000 32.00% 7.85% 1.36
Plutocrats $150,000 39.00% 17.72% 1.35

Equivalency factors have declined marginally since my 2010 post on this topic.

Two nuances should be noted. Firstly, E&Y appears to have put a floor of 0.00% on the published marginal tax rate for dividends; in fact, the tax on dividends can be negative if the taxpayer has other income available to soak up the excess dividend tax credit. This will increase the equivalency factor for “Widows & Orphans”.

Secondly, if the taxpayer is subject to OAS clawback, the equivalency factor will decline by about 0.1. It should be noted that this figure is an extremely rough estimate and is based solely on the direct income tax effect – there may be other net-income-tested benefits to the taxpayer, such as drug plans, which will exacerbate the decline.

Marginal Tax Rates: BC 2011

March 2nd, 2011

E&Y have analyzed British Columbia tax rates as of 2011-1-15 and we may draw some conclusions from these data:

Investors Taxable Income Marginal Rate on Interest Marginal Rate on Dividends Equivalency Factor
Widows & Orphans $30,000 20.06% 0.00% 1.25
Professionals $75,000 32.50% 8.11% 1.36
Plutocrats $150,000 43.70% 23.91% 1.35

Equivalency factors have declined marginally since my 2010 post on this topic.

Two nuances should be noted. Firstly, E&Y appears to have put a floor of 0.00% on the published marginal tax rate for dividends; in fact, the tax on dividends can be negative if the taxpayer has other income available to soak up the excess dividend tax credit. This will increase the equivalency factor for “Widows & Orphans”.

Secondly, if the taxpayer is subject to OAS clawback, the equivalency factor will decline by about 0.1. It should be noted that this figure is an extremely rough estimate and is based solely on the direct income tax effect – there may be other net-income-tested benefits to the taxpayer, such as drug plans, which will exacerbate the decline.

Marginal Tax Rates: Ontario 2011

March 2nd, 2011

E&Y have analyzed Ontario tax rates as of 2011-1-15 and we may draw some conclusions from these data:

Investors Taxable Income Marginal Rate on Interest Marginal Rate on Dividends Equivalency Factor
Widows & Orphans $30,000 20.05% 0.00% 1.25
Professionals $75,000 32.98% 11.72% 1.32
Plutocrats $150,000 46.41% 28.19% 1.34

Equivalency factors have declined slightly since my 2010 post on this topic

Two nuances should be noted. Firstly, E&Y appears to have put a floor of 0.00% on the published marginal tax rate for dividends; in fact, the tax on dividends can be negative if the taxpayer has other income available to soak up the excess dividend tax credit. This will increase the equivalency factor for “Widows & Orphans”.

Secondly, if the taxpayer is subject to OAS clawback, the equivalency factor will decline by about 0.1. It should be noted that this figure is an extremely rough estimate and is based solely on the direct income tax effect – there may be other net-income-tested benefits to the taxpayer, such as drug plans, which will exacerbate the decline.

SXT.PR.A Maturity Confirmed

March 2nd, 2011

Sixty Split Corp. has announced:

The Board of Directors of Sixty Split Corp. has declared today an ordinary dividend of $0.3563 per Preferred Share payable on March 15, 2011 to holders of record at the close of business on March 14, 2011.

Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.3563 per Preferred Share.

The Capital Shares and Preferred Shares will be redeemed by the Company on March 15, 2011 (the “Redemption Date”) in accordance with the redemption provisions of the shares. Pursuant to these provisions, the Preferred Shares will be redeemed at a price per share equal to the lesser of $25.00 and the net asset value per Unit. The Capital Shares will be redeemed at a price per two Capital Shares equal to the amount by which the net asset value per unit exceeds $25.00. The net asset value per unit was $68.86 as at March 1, 2011.

Holders of Capital Shares who requested to receive their redemption payment in portfolio securities and gave notice to this effect and tendered $25.00 for every two Capital Shares by February 14, 2011 will receive their pro rata share of the portfolio securities. The redemption of Capital Shares and Preferred Shares will constitute a taxable disposition of the Company’s shares at the time of the redemption whether the payment is received in the form of cash or portfolio securities.

A further press release will be issued by the Company in connection with the redemption prices on March 14, 2011. Payment of the amounts due to holders of Capital Shares and Preferred Shares will be made by the Company on March 15, 2011.

Sixty Split Corp. is a mutual fund corporation created to hold a portfolio of common shares and income funds of the companies and trusts that make up the S&P/TSX 60 Index. Capital Shares and Preferred Shares of Sixty Split Corp. are listed for trading on The Toronto Stock Exchange under the symbols SXT and SXT.PR.A respectively.

Update, 2011-3-14:Final redemption prices