CBU.PR.A: Normal Course Issuer Bid Renewed

December 31st, 2010

First Asset CanBanc Split Corp. has announced:

acceptance by the Toronto Stock Exchange (the “TSX”) of the Corporation’s Notice of Intention to make a Normal Course Issuer Bid (the “NCIB”) to permit the Corporation to acquire its Preferred Shares and Class A Shares (collectively, the “Securities”).

Pursuant to the NCIB, the Corporation proposes to purchase through the facilities of the TSX, from time to time, if it is considered advisable, up to 65,998 Preferred Shares and up to 65,998 Class A Shares of the Corporation, representing approximately 10% of the public float which is the same number as the Corporation’s issued and outstanding Securities, being 659,982 Preferred Shares and 659,982 Class A Shares as of the date hereof. The Corporation will not purchase in any given 30-day period, in the aggregate, more than 13,199 Preferred Shares and 13,199 Class A Shares, being 2% of the issued and outstanding Securities as of the date hereof. Purchases of Securities under the NCIB may commence on January 5, 2011. The Board of Directors of First Asset Investment Management Inc., the manager of the Corporation, believes that such purchases are in the best interests of the Corporation and are a desirable use of the Corporation’s funds. All purchases will be made through the facilities of the TSX in accordance with its rules and policies. All Securities purchased by the Corporation pursuant to the NCIB will be cancelled. The NCIB will expire on January 4, 2012.

On December 30, 2009, the Corporation announced that it was making a Normal Course Issuer Bid, which commenced January 5, 2010, to purchase up to 122,735 Preferred Shares and up to 122,735 Class A Shares through the facilities of the TSX. Under the bid, which expires on January 4, 2011, an aggregate of 7,600 Class A Shares were repurchased at an average price of $20.16 per Class A Share including commissions. No Preferred Shares were repurchased.

This is an interesting issue, since the NAV was 38.09 as of November 30 while the capital units were last quoted at 23.10-39, 3×20, and the preferred shares at 12.76-08, 5×20. The securities are trading at a huge discount to NAV!

These numbers are even more dramatic than the ones last discussed on PrefBlog, in the post Why is CBU.PR.A priced so high?.

The annual retraction date is in January and it will be most interesting to see what happens. Given the discount from NAV, it is clear that the retraction feature is valuable. On the other hand, exercising the whole unit retraction feature necessarily involves “selling” the preferred share at its $10 book value rather than the $13-odd market price … and a $13.00 indicates a yield to maturity 2016-1-15 of 0.43%.

One might therefore wish to purchase the capital units in the low $23 area, which is well below their intrinsic value of $28-ish and hold them as a speculation … but then of course one has to start worrying about the effect of MER, etc. Still, MER considerations don’t usually inhibit players from holding the capital units of other vehicles!

CBU.PR.A is not tracked by HIMIPref™.

December 30, 2010

December 31st, 2010

It has been a great year for corporate debt issuance:

Rabobank Nederland, the world’s largest agricultural lender, and Fairfield, Connecticut-based General Electric Co.’s finance unit led $3.19 trillion of offerings, according to data compiled by Bloomberg. Ally Financial Inc., Ford Motor Credit Co. and 509 other speculative-grade companies sold $287 billion of debt in the U.S., smashing the previous record of $162.7 billion in 2009.

Signs the global economic recovery is gaining strength encouraged investors to lend money to borrowers at lower interest rates, allowing Johnson & Johnson and Wal-Mart Stores Inc. to sell bonds at what were then record-low coupons. In the U.S., bond funds took in $234.8 billion this year through October, while investors withdrew money from stock funds, according to the Investment Company Institute in Washington.

Sales still declined 18 percent from last year’s $3.88 trillion as governments withdrew bond guarantees for financial companies trying to weather the credit crisis. Concern that Europe’s sovereign debt crisis would worsen slowed sales in the region.

BIS has released a working paper by Marc Flandreau, Norbert Gaillard and Frank Packer titled To err is human: rating agencies and the interwar foreign government debt crisis:

During the 1930s, rating agencies took up a central role in regulatory supervision that they still have today. The proximate cause for this changeover was the economic shock of the Great Depression. Exploring the performance of rating agencies in assessing the risks of sovereign debt, an important segment of the bond market, we do not find that superior forecasting capacities can explain the agencies’ growing importance.

This paper makes a contribution to this emerging literature on the history of ratings by focusing on the assessment of foreign government debt by US rating agencies during the interwar period. There are two reasons for this focus. … Second, looking at the government debt crisis may add a useful perspective on what remains one of the most (perhaps the most) violent foreign debt disaster in financial history. Between 1931 and 1939, more than half of sovereign borrowers who had issued in New York during 1920–29 defaulted. The episode, an integral part of the catastrophic interwar financial system dislocation, has not yet been studied from this vantage point, although many other aspects of the crisis have been discussed in detail.

We document a large degree of procyclicality of ratings over the period. Perhaps more surprisingly, rating agencies do not appear to have performed particularly well relative to financial markets in forecasting the approaching mess: when we compare the predictive power of agency ratings with that of synthetic ratings based on market yields, we find little that suggests strongly superior performance. Our results leave open the reasons for the emergence of ratings as regulators’ preferred instrument, for superior performance does not appear to have motivated the initial regulatory use of ratings.

Gee, it’s a good thing we’re so much smarter now than they were in the thirties, eh? Imagine, sovereign defaults, depression, the rise of authoritarianism … thank God that could never happen again.

Spain has cut its financing requirements:

Spain’s Treasury said it had managed to cut borrowing from markets in 2010 and would do so again in 2011 because of austerity measures adopted by the government.

For the year ahead, the Treasury estimated net financing needs of &eur;47.2-billion ($62.4-billion) — a decline of 24%from 2010.

But the figure was slightly higher than previously announced because of the country’s &eur;3.588-billion contribution to a European financial rescue for Greece.

Net bond issues in 2010 amounted to €62.1-billion, compared to the &eur;76.8-million forecast at the start of the year, the Treasury said. It was a sharp decline from the &eur;116.7-billion in net bond issues for 2009.

Financing needs declined in 2010 “because of the fiscal austerity measures put in place by the government mid-year to strengthen the stabilization of public accounts.”

PrefBlog doesn’t have a very long list of favourite politicians, but Pennsylvania Governor Ed Rendell comes close:

His latest pronouncement came on Sunday after the National Football League’s rare postponement of a game due to a forecast of snow. In Rendell’s world, real men live to make a touchdown in the snow.

“This is football. Football’s played in bad weather,” Rendell said before the storm struck his city on Sunday but after the NFL had postponed the Sunday-night game.

“We’ve become a nation of wusses,” Rendell declared. “The Chinese are kicking our butt in everything. If this was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down.”

It’s a good column. Later on, the author states:

Pre-wussification, we were an economic powerhouse, and our children were the best-educated in the world, until we decided to sheathe our little princes and princesses in bubble wrap. We give them graduation ceremonies for getting through nursery school, a trophy just for showing up at soccer. We’ve removed play from the playground to keep them from scraping a knee. We intervene like lawyers in every dispute.

For sure. Look at the recent case of Greg Walsh. He was coaching a team of 16-year-olds when:

At the game in question, [black player Andrew] McCullum and a player on the opposing Austin Trophies team were sent to the penalty box after a confrontation. There, two game officials witnessed the player call McCullum “the N-word.”

The other boy’s coach benched him for the rest of the second period, but when he rejoined the ice at the beginning of the third period without anyone coming over to apologize or offer an explanation, Walsh was outraged.

The whole team agreed to forfeit the game they were winning in support of McCullum.

Walsh was suspended for a year by the OMHA, amidst controversy – the Star made this a cause celebre, canonizing the coach for ‘standing by his player’..

Think about it. These were two 16-17 year old boys, more balls than brains if my memories of adolescence can be trusted, they had been in a “confrontation” on the ice for which they had been penalized, they were jawing back and forth at each other in the penalty box … It certainly doesn’t sound like anything was either organized or premeditated. What message is the Star sending here? “If you’re involved in an activity and somebody calls you a nasty name, then what you should do is run home crying to mommy”, that’s what it sounds like to me.

Jackie Robinson wouldn’t have been able to even watch a major league game with that attitude.

It was another very slow day in the Canadian preferred share market, but the rally was hot enough, as PerpetualDiscounts gained 18bp and FixedResets were up 11bp.

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 0.1852 % 2,310.1
FixedFloater 4.81 % 3.53 % 30,162 18.94 1 0.3554 % 3,494.1
Floater 2.59 % 2.37 % 51,881 21.28 4 0.1852 % 2,494.3
OpRet 4.78 % 3.31 % 63,828 2.35 8 0.1438 % 2,398.4
SplitShare 5.34 % 1.28 % 779,820 0.94 4 0.0050 % 2,444.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1438 % 2,193.2
Perpetual-Premium 5.69 % 5.54 % 148,542 5.40 27 0.1172 % 2,019.0
Perpetual-Discount 5.40 % 5.45 % 274,135 14.75 51 0.1759 % 2,029.2
FixedReset 5.22 % 3.32 % 330,199 3.10 52 0.1084 % 2,273.0
Performance Highlights
Issue Index Change Notes
TD.PR.P Perpetual-Discount -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 24.67
Evaluated at bid price : 24.91
Bid-YTW : 5.35 %
ELF.PR.F Perpetual-Discount -1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 21.85
Evaluated at bid price : 21.85
Bid-YTW : 6.09 %
SLF.PR.B Perpetual-Discount 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 21.72
Evaluated at bid price : 22.03
Bid-YTW : 5.46 %
NA.PR.N FixedReset 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-14
Maturity Price : 25.00
Evaluated at bid price : 27.01
Bid-YTW : 2.47 %
BNS.PR.K Perpetual-Discount 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 23.34
Evaluated at bid price : 23.60
Bid-YTW : 5.08 %
NA.PR.M Perpetual-Premium 1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-14
Maturity Price : 25.00
Evaluated at bid price : 26.38
Bid-YTW : 5.16 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Y FixedReset 86,220 Nesbitt crossed 80,000 at 27.59.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.60
Bid-YTW : 3.49 %
CM.PR.H Perpetual-Discount 29,567 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 22.34
Evaluated at bid price : 22.52
Bid-YTW : 5.32 %
BNS.PR.L Perpetual-Discount 13,521 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 21.93
Evaluated at bid price : 22.05
Bid-YTW : 5.10 %
BNS.PR.M Perpetual-Discount 12,591 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 21.89
Evaluated at bid price : 22.00
Bid-YTW : 5.11 %
PWF.PR.K Perpetual-Discount 12,589 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 22.61
Evaluated at bid price : 22.80
Bid-YTW : 5.51 %
RY.PR.A Perpetual-Discount 12,337 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-30
Maturity Price : 21.62
Evaluated at bid price : 21.95
Bid-YTW : 5.11 %
There were 3 other index-included issues trading in excess of 10,000 shares.

December 29, 2010

December 30th, 2010

There’s an interesting, albeit badly in need of editing, paper by Alessandro Fontana titled The persistent negative CDS-bond basis during the 2007/08 financial crisis:

I study the behavior of the CDS-bond basis – the difference between the CDS and the bond spread – for a sample of investment-graded US firms. I document that, since the onset of the 2007/08 financial crisis it has become persistently negative, and I investigate the role played by the cost of trading the basis and its underlying risks. To exploit the negative basis an arbitrageur must finance the purchase of the underlying bond and buy protection. The idea is that, during the crisis, because of the funding liquidity shortage and the increased risk in the financial sector, which exposes protection buyers to counter-party risk, the negative basis trade is risky. In fact, I find that basis dynamics is driven by economic variables that are proxies for funding liquidity (cost of capital and hair cuts), credit markets liquidity and risk in the inter-bank lending market such as the Libor-OIS spread, the VIX , bid-asks spreads and the OIS-T-Bill spread. Results support the evidence that during stress times asset prices depart form frictionless ideals due to funding liquidity risk faced by financial intermediaries and investors; hence, deviations from parity do not imply presence of arbitrage opportunities.

The Basel Committee continued its attempts to deflect public attention from its incompetence with the release of Pillar 3 disclosure requirements for remuneration. The financial crisis had a lot more to do with tranche retention and the lack of minimum turnover standards for securities designated Available For Sale than any compensation packages.

Econbrowser‘s James Hamilton discusses the 2010 changes in the yield curve in his post Changes in the Yield Curve:

One goal of the Fed’s second round of quantitative easing begun at the start of November was to flatten the yield curve. That obviously didn’t happen, and I discussed some of the reasons why a few weeks ago. A second goal was to increase inflationary expectations, which was achieved.

Even so, all we’ve done is moved back to about where we were a year ago. And a year ago, if you recall, things really weren’t that great.

But at least now we’re moving in the right direction.

The Globe & Mail ran a story on insurance fraud on Monday that I confess I don’t fully understand:

Again, the real money was made through a clinic, by submitting stacks of claims for false treatments under Ontario’s no-fault insurance system that averaged more than $250,000 per accident.

For an initial fee of $500, any person – not necessarily a doctor – can register as the owner of a clinic, hire practitioners and bill insurers for claims. In order to file those claims, a doctor or registered practitioner’s name, signature, and other billing information is needed, but this is sometimes forged.

Using confidential documents obtained from U.S. investigators, which were then cross-referenced with information gathered from court and corporate searches in Canada, The Globe and Mail has learned that at least one person indicted in the biggest auto insurance crackdown ever seen in the United States has since opened a rehabilitation business in Ontario, operating under the noses of regulators and lawmakers.

I don’t get it. OK, I understand the bit about since the regulators basically allow cost-plus charging of premiums, there’s very little incentive to show any initiative in checking out possible fraud. But honestly, when a clinic you’ve never heard of sends you a bill for $250,000 … don’t you send some clerk to go check them out? Call the practitioners involved? Ask for some back-up? and flag the clinic for a higher rate of spot checks until they’ve been in business for a year? This seems to me to be such a basic part of good business practice that I am astounded it’s not standard, especially considering that cashing a $500 cheque requires a rectal probe.

The Globe published my letter regarding the Mordecai Richler tempest.

The Canadian preferred share market rally continued today on unsurprisingly very low volume, with PerpetualDiscounts gaining 15bp and FixedResets up 3bp.

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread is now about 220bp, with all figures basically unchanged from December 22.

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 -0.1603 % 2,305.8
FixedFloater 4.83 % 3.55 % 31,393 18.93 1 -0.4423 % 3,481.7
Floater 2.59 % 2.39 % 54,023 21.23 4 -0.1603 % 2,489.7
OpRet 4.79 % 3.30 % 65,994 2.36 8 0.1488 % 2,395.0
SplitShare 5.34 % 1.38 % 812,288 0.94 4 0.0101 % 2,444.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1488 % 2,190.0
Perpetual-Premium 5.70 % 5.54 % 154,023 5.37 27 0.1470 % 2,016.6
Perpetual-Discount 5.40 % 5.43 % 278,145 14.72 51 0.1459 % 2,025.6
FixedReset 5.22 % 3.42 % 337,843 3.10 52 0.0348 % 2,270.6
Performance Highlights
Issue Index Change Notes
TRP.PR.B FixedReset -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 24.90
Evaluated at bid price : 24.95
Bid-YTW : 3.72 %
MFC.PR.C Perpetual-Discount -1.74 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 20.37
Evaluated at bid price : 20.37
Bid-YTW : 5.57 %
PWF.PR.A Floater -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 21.59
Evaluated at bid price : 21.85
Bid-YTW : 2.39 %
PWF.PR.E Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 23.25
Evaluated at bid price : 24.27
Bid-YTW : 5.71 %
TCA.PR.Y Perpetual-Premium 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 46.64
Evaluated at bid price : 49.90
Bid-YTW : 5.53 %
POW.PR.B Perpetual-Discount 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 23.56
Evaluated at bid price : 23.83
Bid-YTW : 5.62 %
ELF.PR.F Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 21.91
Evaluated at bid price : 22.20
Bid-YTW : 5.98 %
PWF.PR.F Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 23.74
Evaluated at bid price : 24.05
Bid-YTW : 5.54 %
W.PR.J Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 24.06
Evaluated at bid price : 24.32
Bid-YTW : 5.77 %
BAM.PR.I OpRet 1.41 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-01-28
Maturity Price : 25.50
Evaluated at bid price : 25.86
Bid-YTW : -11.69 %
GWO.PR.J FixedReset 1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 27.17
Bid-YTW : 3.00 %
BAM.PR.R FixedReset 1.44 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 4.58 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Q FixedReset 36,706 TD crossed 25,000 at 26.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-24
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.28 %
BNS.PR.Y FixedReset 28,555 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 25.06
Evaluated at bid price : 25.11
Bid-YTW : 3.47 %
CM.PR.J Perpetual-Discount 19,622 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 5.27 %
BNS.PR.L Perpetual-Discount 19,002 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 22.04
Evaluated at bid price : 22.16
Bid-YTW : 5.16 %
SLF.PR.A Perpetual-Discount 18,787 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 21.55
Evaluated at bid price : 21.55
Bid-YTW : 5.55 %
BNS.PR.M Perpetual-Discount 17,176 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-29
Maturity Price : 22.02
Evaluated at bid price : 22.14
Bid-YTW : 5.16 %
There were 8 other index-included issues trading in excess of 10,000 shares.

December 24, 2010

December 24th, 2010

There’s less room at the trough for wind and solar lobbyists:

Investors pulled 931 million euros ($1.2 billion) in the first 10 months, already eclipsing the full-year withdrawals in 2008 when the global financial crisis spooked investors, according to data compiled by Lipper Inc. Last year clean-energy funds captured 1.3 billion euros of new money, Lipper said.

“The new-energy market and related stocks were significantly impacted by the credit crisis,” Robin Batchelor, manager of the $2.9 billion BlackRock New Energy Fund, said in an e-mail. Reduced demand for energy and “the fact that governments were perceived to have many new worries on their agenda combined to create a difficult environment,” he said. New York-based BlackRock is the world’s largest money manager.

U.S. investment slumped this year amid investor doubt about government energy policy, while the sovereign debt crisis has limited prospects for economic growth in Europe. Governments in Germany, Spain and Italy cut subsidies for photovoltaic panels.

China continues to push offshore yuan trading:

Hong Kong banks will be allowed to tap the 20 billion yuan ($3 billion) fund from next month should the city’s yuan clearing bank run out of funds set under a quarterly quota.

The Hong Kong Monetary Authority made 10 billion yuan available in October using a swap agreement with China’s central bank after an 8 billion yuan quota proved insufficient. Chinese Premier Wen Jiabao is allowing the currency to become more readily available beyond China’s borders to reduce reliance on U.S. dollars in trade and finance.

“They’re hurtling toward this now,” said Gavin Parry, managing director of Hong Kong-based Parry International Trading Ltd. “They’re really using Hong Kong as the settlement and clearing hub for offshore deposit and transactions” in yuan, he said.

Hong Kong aims to grow as an offshore center for yuan trading and HKMA Chief Executive Norman Chan said yesterday deposits totaled 280 billion yuan at the end of November, up from 220 billion yuan a month earlier. The city received 130 billion yuan in net trade payments from China in the first 11 months, he told reporters in Hong Kong.

That’s a lot more useful than whimpering about global resolutions to develop a new currency!

Together with the above, dim sum bond issuance is booming:

HSBC Holdings Plc and Standard Chartered Plc, the biggest foreign underwriters of yuan bonds sold in Hong Kong, say sales will double in 2011 as demand outstrips supply and the yuan appreciates.

New issues may increase to a record 80 billion yuan ($12 billion) next year, with as much as 30 billion yuan of sales in the first quarter, according to HSBC, the No. 2 underwriter of so-called dim sum bonds. Standard Chartered, the fourth largest this year, says sales could top as much as 100 billion yuan as Moscow-based United Co. Rusal and BP Plc plan issues. Offerings in 2010 total 40.7 billion yuan, data compiled by Bloomberg show.

The Bank of Canada has released a working paper by Kimberly Beaton, René Lalonde and Stephen Snudden titled The Propagation of U.S. Shocks to Canada: Understanding the Role of Real-Financial Linkages:

This paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada’s Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions. We find that U.S. financial shocks, as well as real shocks, have important effects on the Canadian economy. Moreover, financial frictions on both the demand and supply sides of credit amplify the first round impact of all types of U.S. shocks on the U.S. economy, as well as the second round impact on Canada. Real-financial linkages also increase the persistence of the Canadian response to U.S. shocks. We find that the interaction between the endogenous response of commodity prices and U.S. financial frictions plays an important role in the propagation of U.S. shocks to the Canadian economy. Finally, real-financial linkages also help to generate the positive cross correlation between domestic demand in the United States and Canada observed in the data, which is difficult to explain with a model where the transmission of shocks between countries is only based only on trade.

Unsurprisingly enough, it was a sleepy foreshortened day on the Canadian preferred share market, but the rally managed to sputter along, with PerpetualDiscounts gaining 9bp and FixedResets basically flat.

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 -0.0370 % 2,309.5
FixedFloater 4.81 % 3.52 % 30,357 18.97 1 0.0442 % 3,497.2
Floater 2.59 % 2.36 % 56,173 21.33 4 -0.0370 % 2,493.7
OpRet 4.80 % 3.43 % 68,340 2.37 8 -0.1773 % 2,391.4
SplitShare 5.35 % 1.36 % 845,675 0.95 4 -0.0050 % 2,444.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1773 % 2,186.8
Perpetual-Premium 5.70 % 5.51 % 154,661 5.34 27 0.0484 % 2,013.7
Perpetual-Discount 5.40 % 5.45 % 286,305 14.72 51 0.0886 % 2,022.6
FixedReset 5.22 % 3.39 % 342,492 3.12 52 0.0050 % 2,269.8
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset -1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 25.46
Evaluated at bid price : 25.51
Bid-YTW : 3.93 %
BAM.PR.I OpRet -1.20 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-30
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : 3.62 %
IAG.PR.A Perpetual-Discount -1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 20.88
Evaluated at bid price : 20.88
Bid-YTW : 5.54 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.R FixedReset 82,050 Nesbitt sold two blocks of 10,000 each to RBC at 25.60, then crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 23.32
Evaluated at bid price : 25.63
Bid-YTW : 4.57 %
RY.PR.X FixedReset 41,249 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.60
Bid-YTW : 3.47 %
CM.PR.J Perpetual-Discount 11,772 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 21.42
Evaluated at bid price : 21.42
Bid-YTW : 5.25 %
MFC.PR.C Perpetual-Discount 11,600 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 20.73
Evaluated at bid price : 20.73
Bid-YTW : 5.47 %
BAM.PR.B Floater 11,022 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 18.41
Evaluated at bid price : 18.41
Bid-YTW : 2.85 %
BAM.PR.K Floater 10,800 Nesbitt crossed 10,000 at 18.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-24
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 2.88 %
There were 1 other index-included issues trading in excess of 10,000 shares.

Desjardins Bids for WES

December 23rd, 2010

Desjardins has announced:

that it has entered into a support agreement with Western Financial Group (TSX:WES), the largest insurance and financial services retailer in Western Canada with 121 offices in British Columbia, Alberta, Saskatchewan and Manitoba, pursuant to which it will acquire all of the issued and outstanding common shares of Western Financial at a price of $4.15 per common share in cash (the ‘’Offer’’) for a total transaction value of $443 million.

Holders of convertible preferred shares and convertible unsecured debentures of Western Financial may participate in the Offer by converting such securities into common shares of Western Financial Group and tendering such shares to the Offer. By exercising the relevant conversion rights and participating in the Offer, holders of the following securities would receive the following premiums over par values: Series 2 preferred shares ‐ 15%; Series 5 preferred shares ‐ 48%; and convertible unsecured debentures ‐ 38%.

Great. Now I’m going to get all kinds of questions about convertible preferreds.

Series 5 is WES.PR.C which was issued in September 2009. The prospectus (available on SEDAR) states:

The Preferred Shares are convertible into our common shares (“Common Shares”) at the option of the holder at any time, or if called for redemption, on the business day immediately preceding the date fixed for redemption, at a conversion price of $2.81 per Common Share (the “Conversion Price”), being a rate of 35.5872 Common Shares per Preferred Share, subject to adjustment. See “Details of the Offering – Conversion”.

A nice windfall indeed!

WES.PR.D is Series 2, which closed in December 2009. According to the 2009 Annual Report:

Series 2 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $3.60 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $3.60 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

Unfortunately, WES.PR.A is Series 3:

Series 3 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $7.25 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $7.25 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

… and WES.PR.B is Series 4:

Series 4 Preferred shares issued by the Company are convertible at the holder’s option at any time into common shares at a fixed conversion price of $6.90 per share. These shares are redeemable by the Company only after the third anniversary and up to the fifth anniversary if the common shares are trading at or greater than 135% of the $6.90 conversion price. These shares have been recorded as equity. Dividends paid and accrued are recorded against retained earnings.

None of the WES preferred shares are tracked by HIMIPref™.

Update, 2011-1-21: Takeover bid documents mailed.

December 23, 2010

December 23rd, 2010

Allied Irish has joined the cortege:

Ireland’s High Court said Allied Irish Banks Plc can be taken over by the government without shareholder approval, as the lender became the fourth bank to fall under state control since 2008.

Finance Minister Brian Lenihan secured approval from the Dublin-based court today to inject 3.7 billion euros ($4.8 billion) into the lender by Dec. 31 and raise its stake to 92 percent from 19 percent, the Finance Ministry said in a statement. Allied Irish, Ireland’s biggest company by market value in 2007, recorded its biggest share price drop in 22 months in Dublin trading. Worth almost 21 billion euros at its peak, the bank’s market value today was 341 million euros.

In Hungarian news:

Fitch cut Hungary’s long term foreign currency credit rating to BBB- with a negative outlook on Thursday, warning that the lack of a coherent medium-term fiscal strategy undermined confidence in the sustainability of public finances.

“The reversal of pension reforms and lack of a coherent medium-term fiscal strategy undermines confidence in the long-term sustainability of the public finances,” it said in a statement.

The Bank of Canada has published a few working papers of note lately … I haven’t gone through them carefully (they’re in a HUGE pile, marked “later”), but the first one is by H. Evren Damar, Césaire A. Meh and Yaz Terajima, titled Leverage, Balance Sheet Size and Wholesale Funding:

Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage.

The second one is by Étienne Bordeleau and Christopher Graham, titled The Impact of Liquidity on Bank Profitability:

The recent crisis has underlined the importance of sound bank liquidity management. In response, regulators are devising new liquidity standards with the aim of making the financial system more stable and resilient. In this paper, the authors analyse the impact of liquid asset holdings on bank profitability for a sample of large U.S. and Canadian banks. Results suggest that profitability is improved for banks that hold some liquid assets, however, there is a point at which holding further liquid assets diminishes a banks’ profitability, all else equal. Moreover, empirical evidence also suggests that this relationship varies depending on a bank’s business model and the state of the economy. These results are particularly relevant as policymakers devise new standards establishing an appropriate level of liquidity for banks. While it is generally agreed upon that banks undervalued liquidity prior to the recent financial crisis, one must also consider the tradeoff between resilience to liquidity shocks and the cost of holding lower-yielding liquid assets as the latter may impact banks’ ability to generate revenues, increase capital and extend credit.

OSFI released a final version of the Capital Adequacy Requirements Guidelines A-1 and A for deposit taking institutions.

Volume in the Canadian preferred share market eased off to merely average levels, but the rally spluttered along, with PerpetualDiscounts up 1bp and FixedResets gaining 22bp.

There is an early close on the Toronto Stock Exchange tomorrow, as all the players have to rush home and tell their mommies how hard they work. It is also the last day of trading for settlement in 2009, which is important for tax purposes, so watch the clock as closely as if you worked for a fundco!

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 0.1852 % 2,310.4
FixedFloater 4.81 % 3.52 % 30,601 18.98 1 -1.3100 % 3,495.6
Floater 2.59 % 2.36 % 56,449 21.34 4 0.1852 % 2,494.6
OpRet 4.79 % 3.28 % 71,127 2.37 8 0.1296 % 2,395.7
SplitShare 5.35 % 1.25 % 880,611 0.96 4 0.1010 % 2,444.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1296 % 2,190.6
Perpetual-Premium 5.70 % 5.51 % 155,902 5.34 27 0.0612 % 2,012.7
Perpetual-Discount 5.41 % 5.46 % 290,751 14.71 51 0.0141 % 2,020.9
FixedReset 5.22 % 3.39 % 352,467 3.12 52 0.2169 % 2,269.7
Performance Highlights
Issue Index Change Notes
MFC.PR.C Perpetual-Discount -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 20.55
Evaluated at bid price : 20.55
Bid-YTW : 5.52 %
NA.PR.L Perpetual-Discount -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 23.02
Evaluated at bid price : 23.26
Bid-YTW : 5.27 %
BAM.PR.G FixedFloater -1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 25.00
Evaluated at bid price : 22.60
Bid-YTW : 3.52 %
GWO.PR.I Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.32 %
SLF.PR.G FixedReset 1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.72 %
FTS.PR.G FixedReset 1.30 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 3.19 %
POW.PR.D Perpetual-Discount 2.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 22.70
Evaluated at bid price : 22.90
Bid-YTW : 5.46 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.D Perpetual-Discount 61,159 TD crossed blocks of 16,000 and 12,000, both at 20.12.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 20.07
Evaluated at bid price : 20.07
Bid-YTW : 5.57 %
BAM.PR.R FixedReset 60,736 Nesbitt sold two blocks of 10,000 to RBC, both at 25.60, then crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 23.30
Evaluated at bid price : 25.58
Bid-YTW : 4.58 %
SLF.PR.A Perpetual-Discount 34,254 TD crossed 20,000 at 21.59.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 21.37
Evaluated at bid price : 21.37
Bid-YTW : 5.59 %
CM.PR.D Perpetual-Premium 31,967 TD crossed 25,000 at 25.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.22
Bid-YTW : 4.63 %
CM.PR.H Perpetual-Discount 29,202 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 22.27
Evaluated at bid price : 22.44
Bid-YTW : 5.34 %
BAM.PR.K Floater 28,500 Nesbitt crossed 10,000 at 18.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-23
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 2.88 %
There were 31 other index-included issues trading in excess of 10,000 shares.

KSP.UN: S&P No Longer Rates Underlying Interest

December 23rd, 2010

Standard & Poor’s has announced:

it affirmed its ‘CCC-‘ unsolicited long-term counterparty credit ratings and negative outlook on Kingsway Financial Services Inc. and its subsidiaries (Kingsway). Subsequently, we withdrew the unsolicited ratings.

“Our ratings on Kingsway Financial Services and its subsidiaries were based on the group’s weak operating performance, liquidity, capital adequacy, competitive position, and financial flexibility,” said Standard & Poor’s credit analyst Pablo Feldman.

Kingsway reduced its outstanding senior unsecured debt rated by Standard & Poor’s and held by third parties to about $36.9 million as of Sept. 30, 2010, from $176.8 million at year-end 2009. Kingsway financed this debt reduction with cash obtained from the sale of some of its subsidiaries and assets. “Because the company now has only a small amount of outstanding rated senior unsecured debt, we are withdrawing our unsolicited ratings,” said Mr. Feldman.

The negative outlook reflected our assessment of the company’s operating performance, liquidity, capital adequacy, competitive position, and financial flexibility as weak. We believe that the company has a high level of financial leverage and that its operating companies face a difficult underwriting environment. We also believe that Kingsway Financial Services is highly dependent upon favorable business, financial, and economic conditions to meet its financial obligations.

One of those financial obligations involves the future health of Kingsway Linked Return of Capital Trust, trading as KSP.UN and sponsored by Scotia Managed Companies:

The Trust was created to provide holders with exposure to a senior note issued by an affiliate of Kingsway Financial Services Inc. Holders of the LROC Preferred Units will receive primarily tax-deferred quarterly distributions of $0.3125 per LROC Preferred Unit representing a yield of 5.00% per annum on the $25.00 per LROC Preferred Unit offering price.

KSP.UN was last mentioned on PrefBlog when DBRS withdrew its rating last year. KSP.UN is not tracked by HIMIPref™.

December 22, 2010

December 22nd, 2010

Americans are paying their bills:

Loans at least 30 days overdue, a signal of future write- offs, dropped for the 13th consecutive month to 4.38 percent, the lowest since December 2007, Moody’s said today in a report. Loans delinquent 30 to 59 days, the earliest sign of trouble, declined to 1.14 percent, near an all-time low. Write-offs for loans deemed uncollectible, a lagging indicator, fell to 8.58 percent from October’s 8.79 percent.

The drop in new delinquencies bolsters the firm’s “expectation that charge-offs will ultimately break below the 7 percent mark later in 2011,” Jeffrey Hibbs, a Moody’s analyst, wrote in the report.

The S&P / Experian indices show the improvement to be broadly based – and dramatic!

There’s an interesting twist in the Goldman / Greece derivative imbroglio:

The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion- euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

Ha-ha! The notes will show, I’ll bet a nickel, that everybody knew about it and ignored it.

TD is still looking for deals:

Toronto-Dominion’s bid for the auto-finance company “doesn’t really alter” the Toronto-based bank’s appetite for smaller transactions, Chief Executive Officer Edmund Clark said.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

Towers Perrin reports:

Near-zero equity returns and slight increases in interest rates translated into stable pension funding in November. The Towers Watson Pension Index remained unchanged for the month at 68.3. The index remains down 4.6% for the year.

They have also published Towers Watson–Forbes Insights 2010 Pension Risk Survey:

There is a strong desire on the part of plan sponsors to reduce the risk of their pension plans. Many plans are signifi cantly underfunded in the aftermath of the financial crisis, and their sponsors have experienced the resulting pressure on corporate cash flows. Rather than rushing to seek higher investment returns to close this funding gap, however, the majority of sponsors attach greater importance to reducing risk. The most favored strategy is to seek a better alignment of assets with liabilities — for example, through liability-driven investment programs. Executives expect to increasingly utilize swaps, options and other hedging derivatives to achieve better risk management. More plan sponsors today are setting formal funding policies in place of ad hoc decisions. Over time, lump sum payments and annuity purchases are also expected to be vehicles for settling DB obligations on a wholesale basis.

There is trouble in the state of Denmark:

Denmark says the Basel Committee on Banking Supervision’s rules will force the country’s lenders to dump top-rated mortgage debt to meet new requirements on holdings and may destroy the world’s third-biggest covered-bond market.

The Nordic country is planning to challenge the rules, published on Dec. 16. and Economy Minister Brian Mikkelsen has already taken Denmark’s grievances to the European Commission.

Denmark’s lenders, which hold more than half the country’s $490 billion of mortgage bonds, would be forced to sell off holdings to comply with Basel’s 40 percent cap on using the securities as liquid assets, [director of the Association of Danish Mortgage Banks] Arnth Jensen said.

Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank.

The regulation of Money Market Funds is attracting renewed notice:

Federal Reserve Chairman Ben S. Bernanke said investor speculation over which money market mutual funds are likely to be bailed out by their parent companies during a crisis can undermine the stability of the industry that manages $2.79 trillion.

Bernanke, in a Dec. 9 letter to Anthony J. Carfang, partner in Chicago consulting firm Treasury Strategies, said market developments that reinforce speculation whether money funds may be bailed out are a “concern” and sponsor support should be addressed in the context of planned reforms of the industry.

Carfang in November criticized a proposal by Moody’s Corp. that its ratings of money funds take into account the likelihood of a parent bailout in the event of losses. Bernanke, in the letter, encouraged Carfang to submit his views of the Moody’s proposal to the Securities and Exchange Commission.

Carfang has called the Moody’s proposal “fundamentally disruptive,” saying the ratings firm would have no objective way of gauging whether a money manager would prop up a fund in trouble.

Well, no. A credit rating is a prediction about probabilities, inherently subjective on two counts. CRAs are paid to use their judgement; and when they’re wrong, all the backseat drivers can point out they’re being paid by the issuers. That’s the way the game is played.

I woule much prefer explicit credit support, but the industry prefers boxticking; regulators so far have endorsed boxticking, becaue it requires more manpower to check.

The rally in the Canadian preferred share market continued today, on easing but still elevated volume. PerpetualDiscounts gained 31bp, while Fixed Resets were up 25bp.

PerpetualDiscounts now yield 5.42%, equivalent to 7.59% interest at the standard equivalency factor of 1.4x. Long corporates yields have plumetted to about 5.4% (maybe just a bit over) so the pre-tax interest-equivalent spread now stans at about 220bp, a significant widening from the 210bp reported on December 15, as the improvement in tone in the bond market has not been matched by the preferred market.

But big rallies can tend to be sloppy affairs, as the guys running the BMO Long Corporate ETF can tell you:


Click for big
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 0.5837 % 2,306.1
FixedFloater 4.75 % 3.26 % 31,847 18.91 1 0.4386 % 3,542.0
Floater 2.59 % 2.36 % 57,166 21.33 4 0.5837 % 2,490.0
OpRet 4.79 % 3.28 % 72,188 2.38 8 -0.0480 % 2,392.6
SplitShare 5.35 % 1.25 % 917,290 0.96 4 0.1719 % 2,442.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0480 % 2,187.8
Perpetual-Premium 5.70 % 5.60 % 156,558 5.41 27 0.1966 % 2,011.5
Perpetual-Discount 5.40 % 5.42 % 287,802 14.71 51 0.3071 % 2,020.6
FixedReset 5.22 % 3.43 % 342,724 3.08 52 0.2508 % 2,264.8
Performance Highlights
Issue Index Change Notes
BAM.PR.I OpRet -1.68 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-01-21
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : -5.66 %
MFC.PR.D FixedReset -1.60 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.05
Bid-YTW : 4.17 %
PWF.PR.E Perpetual-Discount -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 23.25
Evaluated at bid price : 24.29
Bid-YTW : 5.70 %
FTS.PR.G FixedReset -1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 3.69 %
GWO.PR.H Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 23.07
Evaluated at bid price : 23.30
Bid-YTW : 5.22 %
PWF.PR.K Perpetual-Discount 1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 22.58
Evaluated at bid price : 22.77
Bid-YTW : 5.51 %
TD.PR.O Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 23.79
Evaluated at bid price : 24.05
Bid-YTW : 5.10 %
IAG.PR.F Perpetual-Premium 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.74 %
SLF.PR.A Perpetual-Discount 1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 21.50
Evaluated at bid price : 21.50
Bid-YTW : 5.55 %
TRP.PR.C FixedReset 1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 23.38
Evaluated at bid price : 25.75
Bid-YTW : 3.72 %
BMO.PR.L Perpetual-Premium 1.36 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-24
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 5.18 %
PWF.PR.A Floater 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 21.86
Evaluated at bid price : 22.10
Bid-YTW : 2.36 %
ELF.PR.G Perpetual-Discount 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 6.06 %
MFC.PR.C Perpetual-Discount 3.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 5.41 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.I Perpetual-Discount 59,025 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 22.10
Evaluated at bid price : 22.23
Bid-YTW : 5.36 %
RY.PR.B Perpetual-Discount 54,485 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 22.45
Evaluated at bid price : 22.61
Bid-YTW : 5.25 %
GWO.PR.I Perpetual-Discount 41,460 TD crossed 20,000 at 21.08.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 5.38 %
MFC.PR.D FixedReset 35,020 Desjardins bought 13,400 from Nesbitt at 27.34.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.05
Bid-YTW : 4.17 %
TD.PR.O Perpetual-Discount 31,438 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 23.79
Evaluated at bid price : 24.05
Bid-YTW : 5.10 %
BAM.PR.K Floater 29,290 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-22
Maturity Price : 18.19
Evaluated at bid price : 18.19
Bid-YTW : 2.88 %
There were 44 other index-included issues trading in excess of 10,000 shares.

December 21, 2010

December 21st, 2010

The TD / Chrysler deal got done:

Toronto-Dominion Bank agreed to buy Chrysler Financial Corp. from Cerberus Capital Management LP for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition.

The purchase includes $5.9 billion in assets and about $400 million in goodwill, Canada’s second-biggest bank said today in a statement. Toronto-Dominion doesn’t intend to issue stock.

and Cerberus investors are relieved:

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

So basically, Chrysler was a finance company with a captive manufacturing arm. I love it.

DBRS commented:

that TD Bank US Holding Company’s (TD Bank US or the Company) ratings, including its Issuer & Senior Debt rating of AA (low), are unaffected by its announced acquisition of Chrysler Financial’s U.S. operations. The trend on all ratings is Stable.

DBRS believes the acquisition of Chrysler Financial will not have a material impact on the earnings and only a modest impact on the capital of the Company’s parent, The Toronto-Dominion Bank (TD; Deposits & Senior Debt rated AA with a Stable trend). Specifically, TD’s Tier 1 capital ratio is expected to decline by 55 to 60 basis points on a pro forma basis from the 12.2% TD reported at October 31, 2010. Consequently, the risk profile for TD remains solid, notwithstanding the execution risk concerns of growing in the auto finance business. DBRS notes that TD continues to have the resources, motivation and ability to support the Company, if needed. As such, there are no rating implications at this time.

Ernst & Young’s in trouble over Repo 105:

New York Attorney General Andrew Cuomo sued Ernst & Young LLP, accusing the firm of facilitating a “major accounting fraud” by helping Lehman Brothers Holdings Inc. deceive the public about its financial condition.

The state seeks to recover more than $150 million in fees collected by Ernst & Young for work performed for Lehman from 2001 to 2008, plus investor damages and equitable relief, Cuomo said. He will be sworn in as New York governor on Jan. 1. His successor will be New York Democratic state Senator Eric T. Schneiderman.

Lehman, once the fourth-largest investment bank, failed in September 2008 because of risky real estate bets and too much debt, which it tried to hide from investors, partly by using so- called Repo 105 trades, according to bankruptcy examiner Anton Valukas’s report.

Responding to the Valukas report in March, Ernst & Young said leverage ratios reported in Lehman’s management discussion and analysis “were the responsibility of management, not the auditor. They are not part of the audited financial statements.”

Responding to one suit, filed in April on behalf of retirement funds including the Alameda County Employees’ Retirement Association in Oakland, California, Ernst & Young said in court papers that even Valukas “did not find that Lehman’s accounting for the Repo 105 transactions was wrong.”

In his report, Valukas faulted the accounting firm because it “did not evaluate the possibility that Repo 105 transactions were accounting-motivated transactions that lacked a business purpose,” and didn’t take a stand on whether Lehman’s extensive use of the device was “material” and should be reported.

“Financial statements may be materially misleading even when they do not violate GAAP,” he wrote in his report.

Cuomo, who has powers to bring criminal charges, brought a civil suit against Ernst & Young. Arthur Andersen LLP, the accounting firm that was accused of destroying Enron Corp. documents, was convicted of obstructing justice in 2002 and is now largely defunct.

“Regulators are concerned there will be no competitors left” to audit U.S. companies, [accountant Barry] Epstein said.

The Valukas report and Repo 105 was discussed on PrefBlog on March 12, 2010.

Patrick Jenkins of the Financial Times points out a rather obvious knock-on effect about the obsession with bonuses … obvious, that is, to all but politicians:

Many US and Swiss banks are considering paying higher salaries and lower bonuses to top bankers based in the European Union, mostly in London, to ensure they comply with new instructions from the Committee of European Banking Supervisors (CEBS), the pan-EU regulator, limiting cash pay-outs.

Some European politicians had expected that non-EU banks would apply their rules globally on a voluntary basis.

But one senior European banker said: “Politicians are naïve if they think we will impose EU rules on a global basis. The ironic effect will be another hike in salaries, which is a fixed cost, which rather makes a nonsense of the idea of pay for performance.”

Speaking of banks, there is some thought that Deutsche is playing a moral hazard game:

Deutsche Bank’s core capital ratio, a buffer against possible losses, may fall to the lowest level among eight competitors under new Basel III rules in 2012, even after it raised 10.2 billion euros ($13.4 billion) in a share sale in October, according to Christopher Wheeler, an analyst at Mediobanca SpA.

[CEO Josef] Ackermann, who shunned German government aid during the credit crisis, warned at a Frankfurt conference in September against a “dangerous race to the top” among banks seeking to lift reserves above Basel III requirements years before the rules kick in. Deutsche Bank, the largest German bank, may be able to hold less capital than peers, and borrow more to enhance returns, because its clients are convinced the government would never let it fail, analysts and investors said.

Deutsche Bank also relies more than competitors on borrowed funds, or leverage, to increase returns. Its assets amounted to 51 times shareholders’ equity on Sept. 30, up from 48 times at the end of 2006, based on International Financial Reporting Standards. Only Brussels-based Dexia SA has higher leverage among Europe’s 15 biggest listed banks. Investment banks’ extensive use of borrowed funds, which can exaggerate risks, was blamed by Federal Reserve Chairman Ben S. Bernanke for contributing to the financial crisis.

Deutsche Bank prefers to use U.S. Generally Accepted Accounting Principles, which net out derivatives positions, to measure its leverage. By that standard, its assets at the end of September matched its goal of 25 times equity, up from 23 times a year earlier and down from 38 times in mid-2008, company reports show. By comparison, Goldman Sachs assets were 12 times capital at the end of September.

And the Canadian preferred share market was on wheels … again! PerpetualDiscounts were up 34bp and FixedResets gained 26bp. Volume eased off a little, but remains elevated.

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 0.3615 % 2,292.7
FixedFloater 4.77 % 3.47 % 32,068 19.05 1 0.0000 % 3,526.6
Floater 2.61 % 2.39 % 52,926 21.23 4 0.3615 % 2,475.5
OpRet 4.79 % 3.22 % 71,304 2.37 8 0.0816 % 2,393.7
SplitShare 5.36 % 1.24 % 954,424 0.96 4 -0.3778 % 2,437.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0816 % 2,188.9
Perpetual-Premium 5.71 % 5.57 % 156,568 5.41 27 0.2662 % 2,007.5
Perpetual-Discount 5.42 % 5.45 % 288,596 14.72 51 0.3374 % 2,014.4
FixedReset 5.24 % 3.49 % 338,426 3.09 52 0.2580 % 2,259.1
Performance Highlights
Issue Index Change Notes
IAG.PR.A Perpetual-Discount -2.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 21.25
Evaluated at bid price : 21.25
Bid-YTW : 5.44 %
ELF.PR.G Perpetual-Discount -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 19.71
Evaluated at bid price : 19.71
Bid-YTW : 6.15 %
FTS.PR.F Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 22.50
Evaluated at bid price : 22.66
Bid-YTW : 5.45 %
POW.PR.D Perpetual-Discount -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 22.19
Evaluated at bid price : 22.35
Bid-YTW : 5.60 %
FTS.PR.G FixedReset 1.15 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.26 %
TD.PR.C FixedReset 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.94
Bid-YTW : 3.25 %
BAM.PR.B Floater 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 18.23
Evaluated at bid price : 18.23
Bid-YTW : 2.87 %
PWF.PR.E Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 23.38
Evaluated at bid price : 24.59
Bid-YTW : 5.62 %
SLF.PR.E Perpetual-Discount 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 20.19
Evaluated at bid price : 20.19
Bid-YTW : 5.60 %
BAM.PR.J OpRet 1.51 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 26.00
Evaluated at bid price : 26.85
Bid-YTW : 4.12 %
SLF.PR.C Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 20.02
Evaluated at bid price : 20.02
Bid-YTW : 5.59 %
GWO.PR.I Perpetual-Discount 1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 21.13
Evaluated at bid price : 21.13
Bid-YTW : 5.35 %
SLF.PR.D Perpetual-Discount 1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 5.58 %
NA.PR.L Perpetual-Discount 2.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 23.53
Evaluated at bid price : 23.80
Bid-YTW : 5.14 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.E OpRet 232,500 Nesbitt bought three blocks from TD, two of 10,000 and one of 20,000, all at 26.80. TD crossed 21,900 at 26.75. Nesbitt bought two more blocks from TD, 25,000 at 26.80 and 15,000 at 26.75. TD crossed 81,200 at 26.76. Desjardins bought three blocks from TD, each of 15,000 shares, all at 26.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-07-01
Maturity Price : 25.75
Evaluated at bid price : 26.78
Bid-YTW : 3.22 %
SLF.PR.D Perpetual-Discount 124,072 RBC crossed 116,200 at 19.93.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 20.05
Evaluated at bid price : 20.05
Bid-YTW : 5.58 %
MFC.PR.C Perpetual-Discount 94,565 RBC crossed 67,800 at 20.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-12-21
Maturity Price : 20.21
Evaluated at bid price : 20.21
Bid-YTW : 5.61 %
IGM.PR.B Perpetual-Premium 64,410 Nesbitt crossed 50,000 at 25.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.29
Bid-YTW : 5.89 %
BMO.PR.H Perpetual-Premium 62,278 Nesbitt crossed 50,000 at 25.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-27
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 5.11 %
CM.PR.D Perpetual-Premium 59,382 Nesbitt crossed 50,000 at 25.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.54
Bid-YTW : 4.80 %
There were 44 other index-included issues trading in excess of 10,000 shares.

TMX DataLinx: "Last" != "Close"

December 21st, 2010

Like the old man said … “If you go out and buy financial data and you assume something, you make an ASS out of U and ME both.”

Assiduous Readers will recall that on December 2 I reported a stupid quote for GWO.PR.J and indulged in a rant; I also sent a note of inquiry to the TSX:

According to information reported on TMXMoney.com for December 2, GWO.PR.J traded 2,831 shares in a range of 27.41-64 and the last of the eleven trades was at 3:33pm. The closing quote was 24.81-27.54, 4×9.

I have four questions that arise from the closing quotation:

i) Who is the market-maker for this security?

ii) Will the TMX be investigating the circumstances that led to this ridiculous closing quote?

iii) Will the TMX be announcing the results of such an investigation?

iv) Will the TMX be implementing any sanctions against the market maker for this security?

I eventually received a reply:

A closing quote is considered to be the quote at the close of the regular trading session at 4pm. Market Maker responsibilities end at 4pm. The actual closing quote at 4pm on Dec.2 for this issue was 27.04 – 27.54.

After frothing at the mouth a bit, I sent the following eMail to my data provider, TMX DataLinx, who get a fat cheque every month for providing me with data:

As you will be aware, I have been a purchaser of your historical data for about ten years; and was a customer prior to then through my previous employer, Greydanus Boeckh & Associates Inc.

Amongst the data I purchase from you are the “last bid price” and the “last ask price”.

On December 2, 2010, you reported to me that these values were 24.81 and 27.54 for GWO.PR.J.

An inquiry to the exchange regarding this quote elicited the information that “A closing quote is considered to be the quote at the close of the regular trading session at 4pm. Market Maker responsibilities end at 4pm. The actual closing quote at 4pm on Dec.2 for this issue was 27.04 – 27.54.” as shown in the forwarded eMail, below.

(i) What is the difference between the data you have been selling me and the “closing quote”?

(ii) How may I purchase the “closing quote” from you?

Finally, after a fair number of reminders, a few telephone conversations and a conference call, I have sent the following eMail to the Product Manager at TMX DataLinx:

I write to you to request a new product be made available for data download through your “TMX DataLinx Market Data” facility.

This product would be accessed by entering the password-protected page http://marketdata.tsx.com/MOTD/ clicking “Custom Queries”, “New Query” and “Stock Prices” (or, after the first run, via “Saved Queries”).

Options for “Closing Bid” and “Closing Ask” would be added to the list of “Data Items”.

These data would provide the last quotation of the day at which one board lot of the security in question could be transacted; i.e. a snapshot of the market quotation immediately before the close of the regular trading session.

They would be distinct from the extant “Last Bid” and “Last Ask” data items currently available, since these two items represent the quotation at the end of the extended trading session. They will not necessarily reflect the market quotation at the close of the regular trading session since:
(i) Orders in the book at the close of the regular trading session may have been cancelled in the interim
(ii) Orders entered in the interim will not be included in the book unless they are at the Last Sale Price; they will be rejected by the Exchange.

It has been suggested that I could recover these data by clicking “Trades and Quotes” instead of “Custom Queries” and downloading the file for a period of time near the close. The “Closing Bid” and “Closing Ask” could then be determined through inspection of the downloaded data.

Such a solution is not practical because:
(i) Time resolution in this facility is limited to increments of one minute. There could, conceivably, be thousands of quotes for each security during this time frame and the cost of these data could be enormous
(ii) Data will only be recovered if the quote changes during the specified time. Thus, for some subset of the security list not known in advance, a prior time increment would need to be queried, which, in addition to being time consuming, would still bring with it the risk of enormous cost as specified in objection (i).

Therefore, I request that the “Closing Bid” and “Closing Ask”, which would together comprise the last quotation of the day at which an investor could execute at least one board lot on either side during the regular trading session, be made available as downloadable data under the same terms and conditions as your extant “Last Bid” and “Last Ask” data items.

I venture to suggest that most purchasers of the “Last Bid” and “Last Ask” data (including myself, until recently!) are under the impression that they are, in fact, purchasing the “Closing Bid” and “Closing Ask”. If you should find a customer who is not only aware of the difference, but prefers the “Last Bid” and “Last Ask” data, I would very much appreciate it if you could ask him to call me (416 604 4204) and explain, since I can see no possible use for these items which do not necessarily represent actionable bids and offers.

Prior correspondene on this issue is appended to this eMail

I don’t think I’m the only one who does not appreciate the difference between “Last” and “Close”; this is particularly important at this time of the year, when funds are required to provide a reconciliation between their normal method of reporting NAV and the new standards, as elucidated in the 2009 Financial Statements for PIC:

Net Assets per unit is the difference between the aggregate value of the assets of the Fund and the aggregate value of the liabilities excluding Preferred shares of the Fund on that date and including the valuation of securities at bid prices divided by the number of units then outstanding. For years prior to 2007, securities were valued at closing prices. The change to the use of bid prices is due to accounting standards set out by the Canadian Institute of Chartered Accountants adopted November 1, 2007 relating to Financial Instruments.

The Fund has adopted, effective November 1, 2008, Canadian Institute of Chartered Accountants (“CICA”) amendments to Handbook Section 3862, “Financial Instruments – Disclosures”. The revised disclosure requirements are intended to improve disclosures about fair value and liquidity risk. The amendments establish a three-tier hierarchy as a framework for disclosing fair value based on inputs used to value the Fund’s investments. The hierarchy of inputs is summarized below: (1) Level 1 – for unadjusted quoted prices in active markets for identical assets or liabilities

Securities are valued at fair value, which is determined by the closing bid price on the recognized stock exchange on which the securities are listed or principally traded. If no bid prices are available, the securities are valued at the closing sale price.

These rules have been discussed by Price-Waterhouse.

Naturally, it may be that I am the only investment manager in the world to have made this error. But, given the ubiquitous nature of the “Last Bid” and “Last Ask” on the web (fed to QuoteStream, for instance, which republishes it on the TSX’s own TMX Money website), I’ll bet I have lots of company.

Fortunately, this can only have a positive effect on the presumed efficiency of the HIMIPref™ simulations, which define the parameterization of the analytics; the programme sells at the presumed bid and buys at the offer; in nearly all cases the “Last” will be worse than the “Close” – the only exception will be when the Last Sale Price is the bid (ask) at the close and becomes the ask (bid) at the end of the extended session. Thus, simulations may have executed notional trades at worse prices than those actually available, or have missed opportunities; both of which will have resulted in underestimation of the value of the analytics.

For your further reading pleasure, here are some extracts from the TSX Trading Rules:

Rule 4-901 states:

Rule 4-901 General Provisions (Amended)
(1) All listed securities shall be eligible for trading during the Special Trading Session, provided that a MOC Security shall not be eligible for trading until the completion of the Closing Call in respect of that MOC Security.
(2) Except as otherwise provided, all transactions in the Special Trading Session shall be at the Last Sale Price for each security.
(3) Except as otherwise provided, the normal rules of priority and allocation and all other Exchange Requirements shall apply to the Special Trading Session.

Amended (March 29, 2004)

Rule 1-101 states:

“Last Sale Price” means:
(a) in respect of a MOC Security, the calculated closing price; and
(b) in respect of any other listed security, the last board lot sale price of the security on the Exchange in the Regular Session.
Amended (March 10, 2006)

Update, 2010-12-23: I do not believe that the extended session (whence the “last bid” and “last ask” quotes are obtained) meets the CICA definition of an active market:

[CICA Handbook] Para. 3855.A44. “A financial instrument is regarded as quoted in an active market when quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices reflect actual and regularly occurring market transactions on an arm’s length basis. Fair value is defined in terms of a price agreed upon by a willing buyer and a willing seller in an arm’s length transaction. The objective of determining fair value for an instrument that is traded in an active market is to arrive at the price at which a transaction would occur at the balance sheet date in that instrument (i.e., without repackaging the instrument) in the most advantageous active market for that instrument to which the entity has immediate access. The existence of published price quotations in an active market is the best evidence of fair value, and when they exist they are used to measure the financial asset or financial liability.”

The “last” quotes do not reflect “actual and regularly occurring” (or even possible) market transactions, since any transactions in the extended session must occur at the Last Sale Price.