February 23, 2011

February 23rd, 2011

The Bank for International Settlements has released a working paper by Paolo Angelini, Laurent Clerc, Vasco Cúrdia, Leonardo Gambacorta, Andrea Gerali, Alberto Locarno, Roberto Motto, Werner Roeger, Skander Van den Heuvel and Jan Vlček titled BASEL III: Long-term impact on economic performance and fluctuations:

We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in BCBS (2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility.

The FDIC has released its 4Q10 Quarterly Banking Profile with highlights:

  • Banks Earned $21.7 Billion in Fourth Quarter as Recovery Continues
  • Full-Year Net Income of $87.5 Billion Is Highest Since 2007
  • Asset Quality Improves for Third Consecutive Quarter
  • Institutions Set Aside Half as Much for Loan Losses as a Year Earlier
  • 157 Insured Institutions Failed During 2010

Former Fed governor Hoenig is taking a hard line on Too-Big-To-Fail:

Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat “to our capitalistic system.”

“I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy,” Hoenig said today in a speech in Washington. “They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk.”

The full speech makes some interesting points:

At the Federal Reserve Bank of Kansas City, we estimated the ratings and funding advantage for the five largest U.S. banking organizations during this crisis. In June 2009, these organizations had senior, long-term bank debt that was rated four notches higher on average than it would have been based on just the actual condition of the banks, with one bank given an eight notch upgrade for being too big to fail. Looking at the yield curve, this four-notch advantage translates into more than a 160 basis point savings for debt with two years to maturity and over 360 basis points at seven years to maturity.

So long as we have systemic organizations operating under the government’s protection, we will face the matter of whether we have the will to allow the market and bankruptcy to resolve them. In a major crisis, there will always be an overwhelming impulse to avoid putting such institutions through receivership. Always, it is feared that public confidence will be shattered, creditors or depositors at other institutions will panic, and that there are too many connections that will bring down other institutions. In addition, important services will be lost and the international activities will be too complex to resolve.

Many of these fears are likely overstated. I maintain the view that the long-term consequences are much more severe if we fail to take action to end this cycle of repeated crises. In an environment where market participants are truly at risk, they will be much more likely to take steps to protect themselves, thus reducing the side effects of resolutions, and a failed institution’s essential activities can be continued through bridge banks and other means.

Glad to hear it! Instead of weekend bail-outs, lets have weekend bankruptcies, with governments if necessary, providing Debtor in Possession financing at a punitive interest rate rather than equity infusions.

The Bank for International Settlements has released a working paper by Richhild Moessner, Feng Zhu and Colin Ellis titled Measuring disagreement in UK consumer and central bank inflation forecasts:

We provide a new perspective on disagreement in inflation expectations by examining the full probability distributions of UK consumer inflation forecasts based on an adaptive bootstrap multimodality test. Furthermore, we compare the inflation forecasts of the Bank of England’s Monetary Policy Committee (MPC) with those of UK consumers, for which we use data from the 2001-2007 February GfK NOP consumer surveys. Our analysis indicates substantial disagreement among UK consumers, and between the MPC and consumers, concerning one-year-ahead inflation forecasts. Such disagreement persisted throughout the sample, with no signs of convergence, consistent with consumers’ inflation expectations not being “well-anchored” in the sense of matching the central bank’s expectations. UK consumers had far more diverse views about future inflation than the MPC. It is possible that the MPC enjoyed certain information advantages which allowed it to have a narrower range of inflation forecasts.

I found the charts of consumer expectations enlightening:


Click for Big

An Instinet analyst opines that the TMX-LSX merger will be blocked:

But she argued such positives were outweighed by the fact that LSE would have a slight edge in governance (getting the CEO seat and one more board seat) and that Canada’s influence could be watered down further in coming years.

One of the biggest hurdles may be intangible — the symbolic importance of having a national exchange company.

“Canadian policy seeks to ensure Canada’s “ownership” of its culture. As the Toronto and Montreal Exchanges are important at both strategic and symbolic levels, we do not believe that the government will feel comfortable ceding control of either. While the least concrete, this factor may ultimately prove to be one of the most important determinants in Minister Clement’s decision,” [director of global trading research at brokerage firm Instinet] Ms. [Alison] Crosthwait wrote, adding that public opinion will play a big role.

Gee, I’m sure glad business sense doesn’t enter the equation! That would really complicate matters!

It was a gloomy day in the Canadian preferred share market, with PerpetualDiscounts down 17bp, FixedResets losing 15bp and DeemedRetractibles giving up 14bp. Volatility continued to be on the low side, with only five entries in the Performance Highlights table, albeit all negatives. Volume was heavy.

PerpetualDiscounts now yield 5.61%, equivalent to 7.85% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.5%, so the pre-tax interest-equivalent spread is now 235bp, a significant increase from the 225bp reported on February 16. It will be remembered that comparability of these levels over the long term has been compromised by drastic changes to index composition necessitated by OSFI’s refusal to grandfather extant preferreds when new capital rules come into force.

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 % 2,392.2
FixedFloater 4.75 % 3.47 % 16,587 19.08 1 0.2187 % 3,586.0
Floater 2.50 % 2.27 % 49,678 21.56 4 0.0238 % 2,582.9
OpRet 4.83 % 3.88 % 92,073 2.19 8 0.0242 % 2,387.3
SplitShare 5.33 % 0.19 % 248,160 0.80 4 0.0806 % 2,474.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0242 % 2,183.0
Perpetual-Premium 5.75 % 5.54 % 123,964 1.29 9 -0.2246 % 2,031.6
Perpetual-Discount 5.55 % 5.61 % 129,329 14.41 15 -0.1724 % 2,108.8
FixedReset 5.26 % 3.87 % 190,867 3.01 54 -0.1476 % 2,255.5
Deemed-Retractible 5.21 % 5.29 % 387,358 8.25 53 -0.1422 % 2,079.6
Performance Highlights
Issue Index Change Notes
FTS.PR.H FixedReset -1.36 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 3.84 %
GWO.PR.H Deemed-Retractible -1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.46
Bid-YTW : 5.74 %
CU.PR.B Perpetual-Premium -1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.58 %
BNS.PR.Z FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.35
Bid-YTW : 4.18 %
BMO.PR.P FixedReset -1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 26.34
Bid-YTW : 3.97 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.A FixedReset 197,606 Nesbitt crossed 125,000 at 25.75 and 50,000 at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 3.95 %
BNS.PR.K Deemed-Retractible 113,817 Nesbitt crossed 80,000 at 24.50; TD crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.47
Bid-YTW : 5.13 %
TD.PR.M OpRet 75,318 RBC crossed 45,700 at 25.65; Desjardins crossed 28,700 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.59
Bid-YTW : 3.82 %
TD.PR.G FixedReset 72,859 Nesbitt crossed 20,000 at 27.00; TD crossed blocks of 25,000 and 12,500 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 26.94
Bid-YTW : 3.92 %
SLF.PR.B Deemed-Retractible 65,012 Nesbitt crossed 50,000 at 23.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.76
Bid-YTW : 5.53 %
CM.PR.L FixedReset 64,139 RBC crossed 50,000 at 27.47.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.41
Bid-YTW : 3.56 %
There were 55 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.Z FixedReset Quote: 24.35 – 25.00
Spot Rate : 0.6500
Average : 0.4759

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.35
Bid-YTW : 4.18 %

TRI.PR.B Floater Quote: 23.00 – 23.97
Spot Rate : 0.9700
Average : 0.8607

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-23
Maturity Price : 22.71
Evaluated at bid price : 23.00
Bid-YTW : 2.27 %

CU.PR.B Perpetual-Premium Quote: 25.12 – 25.42
Spot Rate : 0.3000
Average : 0.1914

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.58 %

TRP.PR.B FixedReset Quote: 25.05 – 25.43
Spot Rate : 0.3800
Average : 0.2735

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-23
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 3.98 %

BAM.PR.J OpRet Quote: 26.86 – 27.30
Spot Rate : 0.4400
Average : 0.3429

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.86
Bid-YTW : 4.33 %

FTS.PR.E OpRet Quote: 26.35 – 26.64
Spot Rate : 0.2900
Average : 0.2089

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-07-01
Maturity Price : 25.75
Evaluated at bid price : 26.35
Bid-YTW : 3.69 %

February 22, 2011

February 23rd, 2011

The Bank of Canada has released a working paper by Katya Kartashova titled The Private Equity Premium Puzzle Revisited:

In this paper, I extend the results of Moskowitz and Vissing-Jørgensen (2002) on the returns to entrepreneurial investments in the United States. First, following the authors’ methodology I replicate the original findings from the Survey of Consumer Finances (SCF) for the period 1989–1998 and show that the returns to private and public equity are similar. I then extend the period under consideration using data from subsequently released waves of SCF 2001, 2004, and 2007 and assess the robustness of their results to this extension. I find that the “private equity premium puzzle” is not a robust feature of the data and does not survive beyond the period of high public equity returns in the 1990s. In particular, returns to entrepreneurial equity remain largely unaffected when public equity returns plunge to near zero values between 1999 and 2001. The average return to private equity exceeds public equity return in 1999-2007 and for the period 1989-2007 as a whole. To validate the results, I provide alternative measures of private equity returns in the data.

The Bank of England has released a working paper by Filipa Sá, Pascal Towbin and Tomasz Wieladek titled Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation:

A number of OECD countries experienced an environment of low interest rates and a rapid increase in housing market activity during the last decade. Previous work suggests three potential explanations for these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how these effects change with the structure of the mortgage market and the degree of securitisation, we augment the VAR to let the coefficients vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and real residential investment. The responses of housing variables to both types of shocks are stronger in countries with more developed mortgage markets, roughly doubling the responses to a monetary policy shock. The amplification effect of mortgage-backed securitisation is particularly strong for capital inflows shocks, increasing the response of real house prices, residential investment and real credit by a factor of two, three and five, respectively.

A mixed day on the Canadian preferred share market, but mainly down. PerptualDiscounts gained 9bp, FixedResets lost 8bp and DeemedRetractibles were off 14bp. Volume picked up a bit, to 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 -0.2853 % 2,391.6
FixedFloater 4.76 % 3.48 % 16,345 19.07 1 -0.1747 % 3,578.2
Floater 2.50 % 2.27 % 50,423 21.57 4 -0.2853 % 2,582.3
OpRet 4.83 % 3.78 % 92,161 2.20 8 -0.0918 % 2,386.7
SplitShare 5.34 % 1.16 % 251,174 0.80 4 0.1362 % 2,472.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0918 % 2,182.5
Perpetual-Premium 5.74 % 5.53 % 122,573 1.06 9 0.0154 % 2,036.1
Perpetual-Discount 5.54 % 5.61 % 129,352 14.39 15 0.0877 % 2,112.5
FixedReset 5.25 % 3.81 % 184,749 3.02 54 -0.0829 % 2,258.8
Deemed-Retractible 5.20 % 5.26 % 389,993 8.23 53 -0.1420 % 2,082.5
Performance Highlights
Issue Index Change Notes
BAM.PR.O OpRet -1.54 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 4.18 %
PWF.PR.M FixedReset -1.30 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.62
Bid-YTW : 3.85 %
HSB.PR.C Deemed-Retractible -1.26 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.34
Bid-YTW : 5.55 %
FTS.PR.G FixedReset -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 4.35 %
BNS.PR.Z FixedReset 1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 4.06 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.D FixedReset 161,156 Nesbitt crossed 150,000 at 27.06.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.07
Bid-YTW : 3.91 %
TD.PR.Y FixedReset 89,061 Nesbitt crossed 50,000; RBC crossed 21,700; and Nesbitt crossed another 10,000; all at 26.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.94
Bid-YTW : 3.81 %
RY.PR.X FixedReset 77,048 RBC crossed 48,200 at 27.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.02
Bid-YTW : 3.89 %
BMO.PR.J Deemed-Retractible 68,191 Nesbitt crossed 50,000 at 23.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 5.05 %
PWF.PR.K Perpetual-Discount 66,166 Nesbitt crossed 50,000 at 23.02.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-22
Maturity Price : 22.76
Evaluated at bid price : 22.97
Bid-YTW : 5.43 %
TD.PR.G FixedReset 57,055 Nesbitt crossed 20,000 at 27.05; TD crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.01
Bid-YTW : 3.83 %
There were 41 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRI.PR.B Floater Quote: 23.02 – 24.00
Spot Rate : 0.9800
Average : 0.7409

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-22
Maturity Price : 22.73
Evaluated at bid price : 23.02
Bid-YTW : 2.27 %

RY.PR.W Deemed-Retractible Quote: 24.34 – 24.73
Spot Rate : 0.3900
Average : 0.2553

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.34
Bid-YTW : 5.25 %

ELF.PR.F Deemed-Retractible Quote: 22.49 – 23.14
Spot Rate : 0.6500
Average : 0.5260

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.49
Bid-YTW : 6.72 %

BAM.PR.O OpRet Quote: 25.65 – 26.05
Spot Rate : 0.4000
Average : 0.2825

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 4.18 %

POW.PR.D Perpetual-Discount Quote: 22.96 – 23.32
Spot Rate : 0.3600
Average : 0.2430

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-22
Maturity Price : 22.75
Evaluated at bid price : 22.96
Bid-YTW : 5.51 %

IAG.PR.E Deemed-Retractible Quote: 25.50 – 25.85
Spot Rate : 0.3500
Average : 0.2447

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 5.86 %

ASC.PR.A Directors Recommend Term Extension

February 23rd, 2011

Manulife Asset Management Limited has announced:

that the Corporation’s board of directors has reviewed the terms of a proposed extension of the termination date of the Class A Shares and Preferred Shares of the Corporation for an additional term of five years from May 31, 2011 to May 31, 2016 and has determined that the extension is in the best interests of the Corporation and its securityholders and unanimously recommends that securityholders vote in favour of such extension.

The proposed extension would provide securityholders the potential to benefit from a more complete market recovery of the Corporation’s net asset value.

A special meeting of holders of the Class A Shares, Preferred Shares and Class J Shares of the Corporation (the “Securityholders”) has been called and will be held on April 4, 2011 to consider and vote upon the extension (the “Special Meeting”). Securityholders of record of the Corporation at the close of business on February 18, 2011 are entitled to receive notice of and vote at the Special Meeting. Further details of the extension are outlined in a management information circular that has been delivered to Securityholders in connection with the Special Meeting.

Asset coverage of the preferreds is currently 1.1+:1.

The Management Information Circular is not yet available on SEDAR.

As previously discussed, Manulife is disgracing itself by engaging in such an egregious form of shareholder abuse. With such skimpy first-loss protection, no preferred shareholder in his right mind will vote in favour of the deal.

Vote No.

RON.PR.A Achieves Premium on Good Volume

February 23rd, 2011

Rona Inc. has announced:

that it has closed its previously announced bought deal public offering of Cumulative 5 Year Rate Reset Series 6 Class A Preferred Shares (the “Series 6 Class A Preferred Shares”) at a price of $25.00 per Series 6 Class A Preferred Share purchased by a syndicate of underwriters led by National Bank Financial Inc. and BMO Capital Markets, acting as joint bookrunners. The offering results in a total of 6,000,000 Series 6 Class A Preferred Shares being issued today by RONA for gross proceeds of $150,000,000. The underwriters have an over-allotment option to purchase up to an additional 900,000 Series 6 Class A Preferred Shares at a price of $25.00 per Series 6 Class A Preferred Share, exercisable for a period of 30 days from closing on the same terms and conditions as the offering. If the over-allotment option is exercised in full, the total gross proceeds to RONA will be $172,500,000.

RON.PR.A is a FixedReset, 5.25%+265, announced February 1. The issue traded 454,407 shares today in a range of 25.10-35 before closing at 25.13-15, 2×3.

Vital Statistics are:

RON.PR.A FixedReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 5.17 %

RON.PR.A will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

GMP.PR.B Slides on Sub-par Volume

February 23rd, 2011

GMP Capital has announced:

the completion of its offering of 4,000,000 Cumulative 5-Year Rate Reset Preferred Shares, Series B ( the “Series B Shares”) of GMP at a purchase price of $25.00 per Series B Share, for aggregate gross proceeds of $100,000,000. The Series B Shares are expected to commence trading on the Toronto Stock Exchange on February 22, 2011 under the trading symbol “GMP.PR.B”.

The offering was underwritten on a bought deal basis by a syndicate co-led by National Bank Financial Inc., GMP Securities L.P. and Scotia Capital Inc., that included BMO Nesbitt Burns Inc., CIBC World Markets Inc., RBC Dominion Securities Inc., Canaccord Genuity Corp., Macquarie Capital Markets Canada Ltd., Desjardins Securities Inc., Dundee Securities Ltd., Haywood Securities Inc., HSBC Securities (Canada) Inc., Raymond James Ltd. and Wellington West Capital Markets Inc.

GMP has granted to the underwriters an over-allotment option, exercisable for a period of 30 days following closing, to purchase up to an additional 600,000 Series B Shares which, if exercised in full, would increase the gross proceeds to $115,000,000.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

GMP.PR.B is a FixedReset 5.50%+289 announced February 1. The issue traded 183,700 shares today in a range of 24.63-90 before closing at 24.68-69, 4×20.

Vital Statistics are:

GMP.PR.B FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-22
Maturity Price : 24.63
Evaluated at bid price : 24.68
Bid-YTW : 5.63 %

GMP.PR.B will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

Update, 2011-3-1: Despite a quote of 24.75-87 and the fact that the high since issue date is 24.90, they were able to announce full take-up of the greenshoe:

GMP Capital Inc. (“GMP”) (TSX: GMP) announced today that it has closed the over-allotment option granted to the underwriters in connection with GMP’s bought deal public offering of Cumulative 5-Year Rate Reset Preferred Shares, Series B (the “Series B Shares”), which closed on February 22, 2011. As a result of the exercise of the over-allotment option, GMP sold an additional 600,000 Series B Shares at a price of $25.00 per share for additional gross proceeds of $15,000,000. In total, GMP has issued 4,600,000 Series B Shares for aggregate gross proceeds of $115,000,000. The Series B Shares trade on the Toronto Stock Exchange under the trading symbol “GMP.PR.B”.

GMP intends to use the net proceeds from the offering for general corporate purposes, which will include the redemption of the senior unsecured notes issued on November 1, 2006 by Griffiths McBurney L.P., an indirect wholly-owned subsidiary of GMP, in the aggregate principal amount of $60 million, such redemption to occur in accordance with the note indenture governing the notes, and may include acquisitions and investments with a view to growing or expanding GMP’s businesses.

New Issue: BA (sub) FixedReset 4.85%+209

February 22nd, 2011

Bell Aliant has announced:

that its subsidiary Bell Aliant Preferred Equity Inc. (the “Company”) will be issuing 10,000,000 Cumulative Rate Reset Preferred Shares, Series A (the “Series A Preferred Shares”), at a price of $25.00 per Series A Preferred Share, for aggregate gross proceeds of $250 million on a bought deal basis to a syndicate of underwriters led by BMO Capital Markets and Scotia Capital Inc.

The underwriters have been granted an over-allotment option to purchase an additional 1,500,000 Series A Preferred Shares at the offering price. Should the over-allotment option be fully exercised, the total gross proceeds of the Series A Preferred Share offering will be $287.5 million.

The Series A Preferred Shares will pay cumulative dividends of $1.2125 per share per annum, yielding 4.85%, payable quarterly (with the first quarterly dividend to be paid June 30, 2011), for the initial five year period ending March 31, 2016. The dividend rate will be reset on March 31, 2016 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 2.09%. The Series A Preferred Shares will be redeemable by the issuer on or after March 31, 2016, in accordance with their terms.

Holders of the Series A Preferred Shares will have the right, at their option, to convert their shares into Cumulative Floating Rate Preferred Shares, Series B, (the “Series B Preferred Shares”) subject to certain conditions, on March 31, 2016 and on March 31 every five years thereafter. Holders of the Series B Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.09%.

The Series A Preferred Shares will be offered for sale to the public in each of the provinces and territories of Canada pursuant to a short form prospectus to be filed with Canadian securities regulatory authorities in all Canadian provinces and territories. The offering is scheduled to close on or about March 9, 2011, subject to certain conditions, including obtaining all necessary regulatory approvals.

The net proceeds of this offering will be used to fund a voluntary $200 million contribution to Bell Aliant’s pension plans and for general corporate purposes, including the repayment of indebtedness under Bell Aliant’s commercial paper program and the financing of fibre-to-the-home (FTTH) and other investments.

DBRS comments:

DBRS has today assigned a rating of Pfd-3 (high), with a Stable trend, to Bell Aliant Preferred Equity Inc.’s preferred share issuance totalling $250 million (the Preferred Shares) with a $37.5 million over-allotment option. The Preferred Shares are cumulative five-year rate reset preferred shares with an initial dividend rate of 4.85%.

This share issuance was initiated by Bell Aliant Preferred Equity Inc. today for settlement on or around March 9, 2011.

The preferred shares will be fully and unconditionally guaranteed by Bell Aliant Regional Communications Inc. (Bell Aliant GP), the general partner and guarantor of Bell Aliant Regional Communications, Limited Partnership (Bell Aliant LP; rated BBB (high)/R-1 (low) by DBRS) and its debt obligations.

While normally this type of corporate structure would raise the issue of structural subordination relative to Bell Aliant LP, DBRS believes that provisions undertaken between the various entities – as part of inter-company loans and guarantees – mitigate this concern while appropriately ranking the preferred shares behind the senior indebtedness of Bell Aliant LP and Bell Aliant GP. (Bell Aliant GP has no external debt outstanding.)

DBRS expects Bell Aliant Preferred Equity Inc. to indirectly lend the proceeds to Bell Aliant LP. With the proceeds, Bell Aliant LP intends to make a lump-sum voluntary payment to certain pension plans and use the remainder for general corporate purposes, including the repayment of indebtedness and the financing of investments and acquisitions.

Update 2011-03-09: Closing delayed until 3/15.

What Happened to the BNS.PR.Z Regulatory Event?

February 21st, 2011

I have been under the impression that BNS.PR.Z has a Regulatory Event clause and made mention of this when the issue was posted for trading. This assertion was based on the December 2 Material Documents:

Lock-Up Agreeement (Material Document, English, Dec. 2, 2010, 310K)

Upon the occurrence of a Regulatory Event, BNS may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Floating Rate Preferred Shares upon payment in cash for each Floating Rate Preferred Share so redeemed of an amount equal to $25.00 per Floating Rate Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by BNS of a notice or advice from the Superintendent that all or any portion of the Floating Rate Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including BNS, from time to time.

Support Agreement (Material Document – English, December 2, 2010, 374K)

Upon the occurrence of a Regulatory Event, the Offeror may, at its option, with the prior approval of the Superintendent, on not more than 60 nor less than 30 days’ notice, redeem all or any number of the then outstanding Offeror Reset Preferred Shares upon payment in cash for each Offeror Reset Preferred Share so redeemed of an amount equal to $25.00 per Offeror Reset Preferred Share together with all declared and unpaid dividends to the date fixed for redemption.

“Regulatory Event” means the receipt by the Offeror of a notice or advice from the Superintendent that all or any portion of the Offeror Reset Preferred Shares no longer qualify as Tier 1 capital under the Canadian bank capital guidelines issued by the Superintendent or other governmental authority in Canada concerning the maintenance of adequate capital reserves by Canadian chartered banks, including the Offeror, from time to time.

However, when looking for definitive, prospectus-like, language to quote to exemplify a Regulatory Event I found:

Security Holders Documents – English, February 1, 2011:

Nothing. There is nothing I can see in the Security Holders’ Documents that would indicate that the bank has the option to call at par given the occurance of a Regulatory Event.

There is also nothing in the Offer to Purchase … DundeeWealth dated 2010-12-15, which is linked on the Scotia preferred share page as the “Prosp.”.

There is also nothing in the similarly linked Share Terms, which I believe is idential to the the “Security Holders Documents” on SEDAR.

So what happened?

February 18, 2011

February 18th, 2011

No commentary today because … er … because … um … because it’s a full moon! That’s it, full moon tonight, therefore no commentary.

A good day on the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets down 1bp, and DeemedRetractibles gaining 4bp. Volatility continued to be very low, with only one entry in the Performance Highlights table; volume subsided to average 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 0.0476 % 2,398.5
FixedFloater 4.75 % 3.47 % 16,920 19.10 1 -0.4348 % 3,584.4
Floater 2.50 % 2.26 % 49,519 21.58 4 0.0476 % 2,589.7
OpRet 4.83 % 3.71 % 62,447 2.21 8 -0.0404 % 2,388.9
SplitShare 5.35 % 0.78 % 261,573 0.81 4 0.0606 % 2,468.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0404 % 2,184.5
Perpetual-Premium 5.74 % 5.48 % 124,486 1.07 9 0.0507 % 2,035.8
Perpetual-Discount 5.54 % 5.61 % 130,461 14.42 15 0.1331 % 2,110.6
FixedReset 5.25 % 3.77 % 183,931 3.03 54 -0.0054 % 2,260.7
Deemed-Retractible 5.20 % 5.23 % 392,981 8.26 53 0.0397 % 2,085.5
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset 1.40 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.16
Bid-YTW : 4.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.L Deemed-Retractible 42,490 TD crossed 35,000 at 24.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.99
Bid-YTW : 5.04 %
RY.PR.B Deemed-Retractible 38,973 TD crossed 25,000 at 24.20.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 5.08 %
HSB.PR.D Deemed-Retractible 24,700 Desjardins crossed 17,000 at 24.05.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 5.59 %
TRP.PR.B FixedReset 22,755 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.03 %
GWO.PR.L Deemed-Retractible 20,450 RBC crossed 12,000 at 25.07.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 5.75 %
RY.PR.A Deemed-Retractible 20,399 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.04 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.24 – 23.89
Spot Rate : 0.6500
Average : 0.4791

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-18
Maturity Price : 22.97
Evaluated at bid price : 23.24
Bid-YTW : 2.24 %

FTS.PR.H FixedReset Quote: 25.50 – 25.95
Spot Rate : 0.4500
Average : 0.3315

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.73 %

GWO.PR.F Deemed-Retractible Quote: 25.40 – 25.74
Spot Rate : 0.3400
Average : 0.2389

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 5.43 %

BAM.PR.I OpRet Quote: 25.31 – 25.70
Spot Rate : 0.3900
Average : 0.3014

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 5.17 %

PWF.PR.L Perpetual-Discount Quote: 23.31 – 23.54
Spot Rate : 0.2300
Average : 0.1655

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-18
Maturity Price : 23.10
Evaluated at bid price : 23.31
Bid-YTW : 5.51 %

GWO.PR.M Deemed-Retractible Quote: 25.25 – 25.45
Spot Rate : 0.2000
Average : 0.1360

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 5.81 %

February 17, 2011

February 17th, 2011

There’s an interesting claim of regime switching in stock-bond correlations:

Based on his analysis of data over the past 20 years, the tipping point is a yield of about 4 per cent.

When the 10-year government bond yield is below that threshold, bond yields and the S&P/TSX composite index tend to move together, with a positive correlation of 0.49, strategist with UBS Securities Canada] Mr. [George] Vasic found. That’s to be expected, because very low bond yields are usually associated with sluggish or recessionary conditions, and when the economy starts to improve, yields and stocks both rise.

However, when bond yields are between 4 per cent and 6 per cent, stocks and bond yields tend to move in opposite directions, with a correlation of negative 0.56. In other words, when yields are already high and climbing, the stock market starts to feel the brunt of rising interest rates. (A correlation of 1 represents a perfect positive relationship, while negative 1 indicates a perfect inverse relationship.)

One thing that is well known is that correlation signs reverse in times of financial stress; it’s unclear whether this is anything new.

Prices slid somewhat in the Canadian preferred share market today, with PerpetualDiscounts down 7bp, FixedResets losing 6bp and DeemedRetractibles off 8bp. Volatility was low, with only one issue in the Performance highlights. Volume was heavy.

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 -0.0476 % 2,397.3
FixedFloater 4.73 % 3.44 % 16,753 19.13 1 0.0000 % 3,600.1
Floater 2.50 % 2.26 % 48,511 21.58 4 -0.0476 % 2,588.5
OpRet 4.82 % 3.70 % 60,009 2.22 8 -0.0579 % 2,389.9
SplitShare 5.35 % 0.78 % 270,715 0.81 4 -0.0940 % 2,467.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0579 % 2,185.3
Perpetual-Premium 5.74 % 5.51 % 122,037 1.08 9 0.1214 % 2,034.8
Perpetual-Discount 5.55 % 5.62 % 129,236 14.35 15 -0.0708 % 2,107.8
FixedReset 5.24 % 3.77 % 180,063 3.03 54 -0.0631 % 2,260.8
Deemed-Retractible 5.20 % 5.26 % 396,341 8.26 53 -0.0799 % 2,084.7
Performance Highlights
Issue Index Change Notes
PWF.PR.I Perpetual-Premium 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.25
Evaluated at bid price : 25.45
Bid-YTW : 4.17 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.B Floater 114,005 Desjardins crossed 45,000 at 18.97, then sold 50,000 to CIBC at 18.98.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 2.79 %
RY.PR.I FixedReset 79,945 TD crossed blocks of 20,000 and 49,700, both at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : 3.66 %
BAM.PR.M Perpetual-Discount 69,545 Desjardins crossed blocks of 23,500 and 35,000, both at 21.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 21.26
Evaluated at bid price : 21.26
Bid-YTW : 5.68 %
BNS.PR.M Deemed-Retractible 63,671 TD crossed 25,000 at 24.02; RBC crossed the same number at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.01
Bid-YTW : 5.03 %
SLF.PR.A Deemed-Retractible 56,567 Desjardins crossed 45,000 at 23.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.69
Bid-YTW : 5.50 %
RY.PR.F Deemed-Retractible 49,700 TD crossed 39,200 at 23.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.82
Bid-YTW : 5.04 %
There were 51 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.H OpRet Quote: 25.27 – 25.90
Spot Rate : 0.6300
Average : 0.4569

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 5.47 %

ELF.PR.F Deemed-Retractible Quote: 22.45 – 22.92
Spot Rate : 0.4700
Average : 0.3352

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.45
Bid-YTW : 6.74 %

BAM.PR.J OpRet Quote: 26.80 – 27.00
Spot Rate : 0.2000
Average : 0.1327

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 4.36 %

BAM.PR.R FixedReset Quote: 25.80 – 26.14
Spot Rate : 0.3400
Average : 0.2794

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.89 %

PWF.PR.M FixedReset Quote: 26.71 – 27.00
Spot Rate : 0.2900
Average : 0.2352

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.71
Bid-YTW : 3.71 %

POW.PR.D Perpetual-Discount Quote: 23.00 – 23.24
Spot Rate : 0.2400
Average : 0.1855

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-02-17
Maturity Price : 22.79
Evaluated at bid price : 23.00
Bid-YTW : 5.49 %

BoC Releases Winter 2010/2011 Review

February 17th, 2011

The Bank of Canada has released its Winter 2010/2011 Review with articles:

  • Competition in the Canadian Mortgage Market
  • Adverse Selection and Financial Crises
  • Payment Networks: A Review of Recent Research
  • Conference Summary: Financial Globalization and Financial Instability

The second article, Adverse Selection and Financial Crises by Koralai Kirabaeva has an interesting chart:


Click for big

The market for subprime mortgages was relatively small, comprising only about 25 per cent of the outstanding amount in the US$6 trillion mortgage-backed securities (MBS) market and about 30 per cent of total nonagency MBS issuance in the years before the crisis (Gorton 2008b). Direct losses from household defaults on subprime mortgages are estimated to be about US$500 billion, but the subprime crisis triggered losses in the U.S. stock market that reached US$8 trillion in October 2008 (Brunnermeier 2009).

In explaining the disproportionate effect of the subprime-mortgage crisis on the financial system, one can identify a number of amplification mechanisms that can significantly increase the initial impact of adverse selection: an increase in uncertainty about asset values, a flight to liquidity, and a misassessment of systemic risk. Increasing uncertainty about asset values contributes to the decline in demand for these assets, while a flight to liquidity and an underestimation of systemic risk cause a shortage of liquid assets in the market.

Direct loss estimates during the crisis ranged from $175-billion to $565-billion. It’s a pity Kirabaeva didn’t footnote his $500-billion figure. The Brunnermeier paper confines itself to “several hundred billion dollars”.

And I am still waiting for somebody, anybody, to estimate how much of these losses were borne by the senior (AAA) tranches of securitized subprime, that (although subjected to very major credit rating downgrades) may well have passed through the cataclysm with only minor losses.

The higher preference for liquid assets during a crisis can be viewed as precautionary liquidity hoarding because of a tightening in funding liquidity. A higher preference for liquidity may alleviate the problem of adverse selection, since assets are more likely to be sold because the seller needs to raise liquidity rather than because of an asset’s low quality. Nevertheless, a higher demand for liquid assets also implies a lower demand for illiquid assets. If the demand for illiquid assets is sufficiently low, then the asset’s price will be determined by the liquidity available in the market rather than by the expected return on the asset (Allen and Gale 2004). Hence, an increase in liquidity preference can lead to fire-sale pricing and possibly to a market freeze.

Government intervention during crises may create a moral hazard problem: if market participants anticipate such interventions, then their optimal holdings of risky assets are larger. Government bailouts (debt guarantees) can be inevitable during crises, and as a result, they lead to the inefficient allocation of capital towards risky investments. The pre-emptive policy response is an ex-ante requirement for larger holdings of safe assets (e.g., capital requirements), which offsets systemic externalities and reduces the probability of market breakdowns during crises (Kirabaeva 2010).

I am disappointed to see that there is no discussion of the possibility that a better policy response might be the provision of liquidity at a penalty rate.

Update: The mortgage article made the Financial Post, in a piece by John Greenwood titled Why do mortgage rates rise fast, fall slowly?