Archive for September, 2008

RPB.PR.A & RPQ.PR.A : Downgrades, Watches & Credit Events

Friday, September 26th, 2008

CC&L Group announced yesterday:

that Standard & Poor’s (“S&P”) placed its ratings on CC&L ROC’s Preferred Shares on CreditWatch with negative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. The Preferred Shares are currently rated P-2 (high).

The move comes as a result of the Lehman Brothers Holdings Inc. credit event announced on September 15, 2008 as well as several downgrades of companies held in the Reference Portfolio as a consequence of the ongoing extremely difficult conditions facing the United States financial system.

The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol RPQ.PR.A.

There was another announcement that:

Standard & Poor’s (“S&P”) lowered its ratings on ROC III’s Preferred Shares from P-2 (low) to P-4 (high) and placed them on CreditWatch with negative implications. As indicated in a press release dated September 11, 2008, the ratings on the Preferred Shares were expected to be adversely affected by recent events. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion.

The move comes as a result of credit events in the Reference Portfolio, namely Lehman Brothers Holdings Inc., Fannie Mae and Freddie Mac, as well as several downgrades of companies held in the Reference Portfolio as a consequence of the ongoing extremely difficult conditions facing the United States financial system. CC&L and ROC III are reviewing and will explore the options, legal and otherwise, that are available to ROC III relating to the delivery of the credit event notices in respect of Fannie Mae and Freddie Mac.

The Preferred Shares are listed for trading on the Toronto Stock Exchange under the symbol RPB.PR.A.

And, just in time for the weekend comes today’s announcement:

that the closure of Washington Mutual (“WaMu”) by the Office of Thrift Supervision and naming of the Federal Deposit Insurance Corporation (“FDIC”) as receiver is expected to constitute a credit event under the Companies’ credit linked notes (“CLN”). TD Bank is the issuer of the CLN for ROC III and The Bank of Nova Scotia is the issuer of the CLN for CC&L ROC.

This credit event is a consequence of the ongoing extremely difficult conditions facing the United States financial system. Connor, Clark & Lunn is disappointed with the impact this crisis has had on the performance of the Companies and is reviewing strategic alternatives for the Companies.

RPB.PR.A
Additional
Credit
Events
Maturity
Value
3.0 $25.00
3.4 25.00
4.0 17.75
5.0 5.75
6+ $0.00
RPQ.PR.A
Additional
Credit
Events
Maturity
Value
4.0 $25.00
4.4 25.00
5.0 15.26
6+ $0.00

The last post on these issues was in connection with the Lehman bankruptcy. Neither of these issues is tracked by HIMIPref™.

SEC and BSC

Friday, September 26th, 2008

Reuters reports:

The U.S. Securities and Exchange Commission is ending its program to supervise large independent investment banks now that the five participants have collapsed or reorganized.

… while Dealbreaker handles the stage directions:

SEC officials mount their horses, tip their hats, and ride off into the sunset. Pan back to show village burned to the ground and citizenry slaughtered, voiceover by Wilfred Brimley waxing poetic, “They did what they came to do. Their work here was done.”

The official SEC Press Release states:

The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns.

So let the finger-pointing begin! The SEC Inspector General has released two reports on the matter; the first, titled SEC’s Oversight of Bear Stearns and Related Entitites: Broker-Dealer Risk Assessment Program is a classic of its genre – there wasn’t enough box-ticking, so everything went wrong. Accordingly, the Inspector-General has recommended additional box-ticking.

There is more meat in the second report, titled SEC’s Oversight of Bear Steams and Related Entities: The CSE Program, which, interestingly, has been liberally sprinkled with redactions.

There is a bias in the report which must be borne in mind when formulating policy, stated on page 9 of the PDF as:

Bear Stearns was com liant with the CSE program’s capital and liquidity requirements; however, its collapse raises questions about the adequacy of these requirements;

While I agree that such questions have been raised, they are irrelevant and should be consigned to the trash bin. It should not be the purpose of regulation to ensure that nothing will ever collapse. The proper purpose of regulation in the capital markets should be to ensure that collateral damage in the event of such a collapse is minimized and does not lead to systemic failure.

I will certainly agree that there is evidence that the BSC bankruptcy managed to achieve the potential for collateral damage and contagion, but when examining the apparent failure of regulation to prevent this occurance, it must be borne firmly in mind that regulators should not care a whit whether the firm goes bust, subordinated debt-holders lose money and everybody loses their jobs. Such events are part of business and an attempt to regulate them out of the realm of possibility will ultimately hurt the economy more than it helps.

If, however, it can be shown (or at least persuasively argued … I don’t want to set the bar too high!) that the Treasury guarantee of the assets was absolutely required in order to save the system, THEN we have a failure of regulation which should be examined for potential improvements.

Bear Stearns’ increasing reliance on secured funding indicates that, although it appeared to be compliant with CSE program’s capital requirement, the market did not perceive it to be sufficiently capitalized to justify extensive unsecured lending. In this sense, Bear Stearns was not adequately capitalized.

These facts illustrate that although Bear Stearns was compliant with the CSE program’s ten percent Basel capital requirement, it was not sufficiently capitalized to attract the funding it needed to support its business model. Although the Commission has maintained that liquidity (not capital) problems caused Bear Stearns’ collapse, this audit found that it is entirely possible that Bear Stearns’ capital levels could have contributed to its collapse by making lenders unwilling to provide Bear Stearns the funding it needed.

The fact that Bear Stearns collapsed while it was compliant with the CSE program’s capital requirements raises serious questions about the adequacy of the CSE program’s capital ratio requirements.

Well, no it doesn’t, as I asserted above. The fact that Bear’s collapse due to liquidity issues while it was compliant with capital requirements HAD SYSTEMIC IMPLICATIONS is what raises serious questions about the adequacy of the CSE programme’s capital ratio requirements.

To summarize, as early as November 2006, Bear Steams was implementing a more realistic approach to liquidity planning than contemplated by the CSE programsy liquidity stress test. While this more realistic approach may have helped Bear Steams in the summer of 2007, it was not sufficient to save the firm in March 2008. Bear Steams’ initiative to line up secured funding indicates that the crisis which occurred in March 2008 was not totally unanticipated by Bear Steams, in that Bear Steams had been taking specific steps to avoid such a crisis for more than a year before it occurred.

According to the expert retained by OIG in conjunction with this audit, the need for Basel IIfirms to undertake specific efforts to line up committed secured funding in advance of a stressed environment depends on the extent to which the Basel I1firms can rely on secured lending facilities from the central bank during a liquidity crisis. On the one hand, if it is assumed that secured lending facilities will always be available from the central bank, lining up committed secured lending facilities is not necessary. In this case, a liquidity stress test, which assumes that secured lending facilities will automatically be available is appropriate. On the other hand, if it is assumed that collateralized central bank lending facilities might not be available during a time of market stress, Basel II firms have incentives to line up committed secured lending facilities, in advance, from other sources. In the context of CSE firms which are not banks, the policies of the Federal Reserve towards making collateralized loans to non-banks becomes an important element of their liquidity planning process.

In the heavily redacted section detailing Finding 2; that [the SEC] did not adequately address several significant risks that impact the overall effectiveness of the CSE programme; the report states:

Bear Stearns had a high concentration of mortgage securities. Prior to Bear Stearns becoming a CSE, TM was aware that its concentration of mortgage securities had been steadily increasing.

Yet, notwithstanding [redacted] and warnings in the Basel standards, TM did not make any efforts to limit Bear Steams’ mortgage securities concentration.

Further, a leverage limit is recommended for the future:

Although banking regulators have established a leverage ratio limit, the CSE program has not established a leverage ratio limit. The adoption of leverage limits must be reassessed in light of the circumstances surrounding the Bear Steams’ collapse, especially since some individuals believe that this policy failure directly contributed to the current financial crisis.

I note with amusement that in this official review of risk management and supervision thereof, Wikipedia is cited as a source for a definition. Really! Page 20, note 110. Get with the programme, guys – Wikipedia is not an authoritative source.

Model validation personnel, modelers, and traders all sat together at the same desk.”‘ According to the OIG expert, sitting together at the same desk has the potential advantage of facilitating communication among risk managers and traders but has the potential disadvantage of reducing the independence of the risk management function from the trader function, in both fact and appearance.

This is really bad, a violation of the most basic principles of internal risk control.

In 2006, the expertise of Bear Steams’ risk managers was focused on pricing exotic derivatives and validating derivatives models. At the same time, Bear Steams’ business was becoming increasingly concentrated in mortgage securities, an.area in which its model review still needed much work. The OIG expert concluded that, at this time, the risk managers at Bear Steams did not have the skill sets that best matched Bear Steams’ business model.

And that part’s just bizarre! The concept is, however, endemic in the industry … ‘Hey, Fred! You’re doing Preferred Shares this week!’

Furthermore, the OIG expert believes that meaningful implementation of high grade and high yield mortgage credit spread scenarios requires both a measure of sensitivity of mortgage values to yield spreads as well as a model of how fundamental mortgage credit risk factors make yield spreads fluctuate. These fundamental factors include housing price appreciation, consumer credit scores, patterns of delinquency rates, and potentially other data. These fundamental factors do not seem to have been incorporated into Bear Stearns’ models at the time Bear Stearns became a CSE.

… doesn’t look like they were much good at quant work …

When selling an asset, Tier 1capital is reduced by the amount of losses on the sale, but capital requirements are also reduced by removing the asset from the bank’s portfolio. A bank looking to improve its Basel capital ratios by selling assets therefore has a perverse incentive not to sell assets that have modest capital requirements relative to the markdowns the banks should have taken but has not yet taken. This perverse incentive tends to amplify the tendency for markets to freeze up and become illiquid by reducing trading volume that would othennrise occur as banks sell losing positions into the market. On the one hand, these perverse incentives are mitigated to the extent that capital requirements on such assets are high and valuations are appropriately conservative. For assets that face a 100% capital haircut, for example, the bank gains no improvement in its capital ratios by avoiding taking a markdown, and the bank increases its capital by the proceeds of any asset sales. On the other hand, these perverse incentives are worsened to the extent that supervisors allow banks to avoid marking assets down quickly enough, to avoid taking appropriate valuation adjustments in a timely manner, or to understate assets’ risks.

Similar to what Dealbreaker claimed yesterday.

There is much of interest in the report; but a lot of the juicy stuff has been redacted, presumably because it was provided to the SEC on a confidential basis.

Update, 2008-10-7: Via Dealbreaker and Bloomberg comes some juicy stuff about all the redactions:

An unedited version of the 137-page study posted to Grassley’s Web site Sept. 26 showed that Bear Stearns traders used pricing models for mortgage securities that “rarely mentioned” default risk. A link on the site to the full report wasn’t working today.

The firm lost one a top modeler “precisely when the subprime crisis was beginning to hit” and writedowns were being taken, the full report said. “As a result, mortgage modeling by risk managers floundered for many months,” according to the unedited document, quoting internal SEC memos from April and December 2007. The comments were removed from the edited version publicly released by the SEC.

Trading and Markets unit members saw that Bear Stearns traders dominated less-experienced risk managers, the inspector general reported in sections that were excised from the public report.

“As trading performance remained strong for years in a row, it clearly wasn’t career-enhancing to stand in the way of increasingly powerful trading units demanding more balance sheet and touting their state of the art risk-management models,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, and a former chief financial officer at Lehman Brothers Holdings Inc.

In other words, the risk managers were there as part of the standard box-ticking exercise, not because anybody in management really wanted them to do anything. I noted on April 16 one particularly nasty report with respect to a Merrill Lynch CDO offering of a corporate finance guy bullying a trader to make his underwriting go.

September 25, 2008

Thursday, September 25th, 2008

Henry Blodgett of Clusterstock emphasizes a point I made September 23 regarding market value vs. intrinsic value of the securities targetted for TARB purchase in a post Warren Buffet reveals bailout’s dirty little secret:

Bernanke and Paulson want to pay a phantom “hold-to-maturity” price that is above the prices at which the banks are currently valuing their trash assets. The logic is that the banks’ carrying value is somehow artificially depressed by a lack of liquidity. (This logic is weak: If anything, the banks are trying to conceal how badly off they are by overstating the value of the assets).

Hat Tip: Naked Capitalism. Thanks to the miracles of modern hagiography, Mr. Blodgett sees no need to provide analysis supporting his thesis that banks are engaged in a coverup. Mr. Buffet is quoted (irelevantly) in the same post, so it must be true.

Dealbreaker is usually both vulgar and entertaining; on occasion they publish analysis that reflects their roots in the trading community. This is one of those times:

Mark-to-market accounting incentivizes markets to go illiquid when asset prices sink, exactly when liquidity is critical. You create an environment where an institution isn’t just poised to lose the difference between their current mark on the instrument they are selling and the transaction price, but a large multiple of that as that transaction triggers markdowns on the rest of the toxic paper. How do you handle that as a institution holding sludge? Wait. And if you see some sludge that is offered so cheaply that you couldn’t normally resist buying it? Wait, if you are holding similar assets. Liquidity has been frozen up to prevent revealing that many of these institutions might be insolvent at the current market prices. That’s the kind of thing that is going to happen when the institutions likely to go insolvent control most of the liquidity.

In general, huge corrections like this usually only reverse when prices get so low that value investors and their ilk creep out and cant help but start buying. The problem here is that there isn’t enough price discovery to tempt them out, or that the normal buyers (Goldman, etc.) face mark-to-market triggers that prevent them wanting any transactions at all. Buffett seems mercifully free of both constraints.

The opportunities TARP affords for this sort of unsupported assertion is one reason why I don’t like the plan and would prefer to see Treasury – if necessary – purchasing senior preferred shares with a punitive distribution and a proviso that shares junior to the new issue get no dividends while the issue is outstanding. If Treasury buys so much as a nickel’s worth of sub-prime paper, debate over side-issues will overwhelm any practical benefits. Even if they make a collosal profit, the move will be decried as ‘too risky but lucky!’ and condemned on grounds of idealogical impurity.

There are reports that TARP will be approved, one way or another, complete with politically driven executive compensation limits and maybe even a 25bp tax on stock trades. Fearless prediction: TARP will fail for the same reason MLEC failed: a politically satisfactory backstop makes no business sense for the participants.

Willem Buiter, writing in VoxEU, sees the problem as being one of insolvency, not illiqudity:

As the full horror story of the bad investments and bad loans made by so many American banks has gradually been revealed, it is clear that the US banking sector faces an insolvency crisis and not just an illiquidity crisis. The number of impaired mortgages is exploding, and not just in the subprime and Alt-A categories, but across the whole residential mortgage spectrum. Impaired commercial and industrial mortgages are rising fast. Bad loans to the construction industry and to developers are mushrooming. ABS backed by automobile loans, by credit card receivables are tottering in growing numbers as are many other unsecured household loans. With the economy slowing down and probably entering recession soon, even exposures to the non-financial corporate sector will become more vulnerable.

In a nutshell, the US banking sector needs recapitalisation.

That leaves just two sources of capital. The first is the US federal government. It could inject capital into US banks, say by purchasing preference shares. I would uncouple such a capital injection from Paulson’s toxic asset purchase plan. The market illiquidity problem is related to but not the same as the banks’ capital deficiency problem. The government could implement a system-wide capital injection by specifying maximum leverage ratios (or minimum capital ratios) for various categories of financial institutions. It could then inject capital in return for preference shares to bring all these leverage ratios down to the maximum levels (all the capital ratios up to the minimum levels).

Finally, there is my preferred solution to the capital deficiency problem: the compulsory conversion of some of the banks’ debt into equity. Again, this could be done by the government specifying maximum leverage ratios (or minimum capital ratios) for various categories of financial institutions. Different kinds of debt then would be mandatorily converted into equity (preference shares or ordinary shares) with the proportion of each category of debt to be converted into stock inversely related to the seniority of the debt. These proportions would have to satisfy the requirement that all leverage ratios be brought down to the maximum levels (all capital ratios up to the minimum levels).

It’s a very well written article in Mr. Buiter’s inimitable style. But although his concerns about solvency may well be justified, he presents no evidence that this is indeed the case. In any event, I have grave concerns about due process with respect to his mandatory conversion programme … this is insolvency restructuring stuff, usually carried out when the institution has, in fact, been proved to be insolvent. And, until somebody can show me otherwise, I will continue to believe that rumours of widespread insolvency in the US financial sector are greatly exaggerated.

In a speech available on the BoC website, Carney applauded TARP, albeit with very little discussion of its merits and alternatives:

Similarly, private asset sales have been limited by the complexity of the underlying assets, the ongoing impairment of securitization markets, difficulties in supplying financing to leveraged buyers and the desire of investors to “time the market.” In sum, banks have an increasing need for capital, but it has become more difficult to raise it.

In this environment, the U.S. government’s initiative to buy distressed assets is critically important. The plan announced by Treasury Secretary Paulson and being developed through discussions in the U.S. Congress is bold and timely. The size and breadth of support provided by this measure will help firms “rightsize” their balance sheets, re-liquefy closed markets and establish market prices for these distressed assets. This should eventually encourage private buyers to re-enter the market and complete the deleveraging process. A well-executed program will undoubtedly speed the resolution of this crisis and limit its economic cost.

But how urgent is the problem? Well, judging by the action at the discount window, pretty damn urgent!

Commercial banks and bond dealers borrowed $217.7 billion from the Federal Reserve as of yesterday, more than double the prior week, as the financial crisis worsened and private funding dried up.

Loans to commercial banks through the traditional discount window totaled $39.3 billion as of yesterday, up from $33.4 billion, the Fed said. Borrowing by securities firms totaled $105.7 billion, up from $59.8 billion. Under a new emergency program announced Sept. 19, banks borrowed $72.7 billion as of yesterday to buy commercial paper from money-market mutual funds.

The figures are from the Fed’s H.4.1 Statistical Release. It’s not clear to me, however, how much of that borrowing is happening because the banks can’t get funding anywhere else, and how much is because it’s cheap credit. We can assume that the AIG need is real, though!

The three-month London Interbank Offered Rate in dollars was 3.77 percent today, the highest since January. Commercial banks can take out up to 90-day loans from the Fed at 2.25 percent. Primary dealers pay the same rate for overnight loans. The AIG loan accrues interest at three-month Libor plus 8.5 percentage points.

In 2001, the discount rate was a half-point below the Fed’s benchmark federal funds rate. In 2003, the Fed reset the discount rate at 1 percentage point above federal funds. The Fed reduced the spread to a half point in August 2007 and to a quarter point in March 2008.

We shall see how it all works out. There is opposition to TARP from a group of economists and a group of Republicans. Meanwhile Fortress Investment Group is building a war-chest to go shopping for distressed paper:

Fortress has risen 38 percent in the past two weeks in New York trading as investors anticipate private-equity and hedge- fund firms will profit from financial turmoil by snapping up companies and assets at distressed prices. Fortress rose 51 cents, or 3.9 percent, to $13.50 in New York Stock Exchange composite trading today.

Private-equity firms are shifting from the large leveraged buyouts that dominated Wall Street during 2006 and 2007, raising funds to snap up distressed debt and mortgage securities. Fortress oversees about $35 billion.

… and rumours are floating that JPMorgan will buy up WaMu’s deposits. The will be a major announcement tonight, of some kind anyway:

JPMorgan Chase & Co. (NYSE: JPM) will host a conference call at 9:15 p.m. (Eastern Time) tonight, September 25, 2008. You may access the conference call by dialing 1-877-238-4671 (U.S. and Canada) / 1-719-785-5594 (International) – access code: 814030 or via live audio webcast at www.jpmorganchase.com under Investor Relations/Investor Presentations. Materials and further communication will be available on this website at the time of the call.

A replay of the conference call will be available beginning at approximately 1:00 a.m. on September 26 through midnight, Thursday, October 9 by telephone at (888) 348-4629 (U.S. and Canada); access code: 942856 or (719) 884-8882 (International). The replay will also be available via webcast on www.jpmorganchase.com under Investor Relations, Investor Presentations.

Bloomberg reports that this will happen by fiat of the FDIC. Flash! JPMorgan buys WaMu’s deposits for a premium of about 1%! Now … that’s what I call a bargain. Cash is king! Flash! JPM is marking down WM’s assets by $30-billion (out of $296-billion assets at WM carrying value) as part of the transaction. See page 18 of the presentation.

Covered bonds in the States are not having a nice time:

Bank of America Corp. was the last U.S. bank to issue the bonds, selling $1.5 billion of the securities in June 2007. The spread on the Charlotte, North Carolina-based lender’s three-year notes has widened almost eight-fold to 184 basis points, according to Citigroup Inc. prices on Bloomberg.

The only other U.S. issuer is Washington Mutual, which put itself up for sale last week. Its 6 billion euros ($8.8 billion) of covered bonds were downgraded one level to Baa1, the third- lowest investment-grade ranking, by Moody’s.

The spread on its $2 billion of 4.375 percent bonds due 2014 has surged to 678 basis points, from 26 basis points when the notes were sold in May 2007, according to Royal Bank of Scotland Group Plc prices on Bloomberg.

Speaking of bear markets, how about that California real-estate, eh?:

California home prices tumbled a record 41 percent in August from a year earlier as foreclosure sales pushed down values in the biggest U.S. state.

The median price of an existing, single-family detached home fell to $350,140 and will likely fall further, the Los Angeles- based California Association of Realtors said today in a report. Sales increased 56.7 percent from August 2007 and 1.8 percent from July.

And the sales number! Far be it from me to put any credence in technical analysis, but that’s consistent with mass forced liquidation near the bottom of the market. And, bless their hearts, the guys at Dealbreaker have actually put together some numbers on housing bubble profits:

In summary, our incomplete and work-in-progress calculations figure for something like $2 trillion in fees flowing to various parties in the real-estate, mortgage, securitization and securitization^2 businesses between 2003 and mid-2008. That’s some serious swag, and you don’t have to look very far to see why no one was in much of a hurray to shut any of it down or to rock the boat.

In fact, the Dealbreaker guys did a fantastic job today, highlighting an extraordinarily testy letter from the FDIC to Bloomberg. Let’s have a little more honest reporting and a little less yellow journalism!

I’m searching for the precise metaphor to use regarding the backlash against hedge funds in the UK – should it be ‘shooting the messenger’ or ‘killing the goose that laid the golden eggs’?:

As Lehman Brothers Holdings Inc. filed for bankruptcy and HBOS Plc was pushed into a government-brokered takeover, U.K. regulators and lawmakers found a culprit: the estimated 980 hedge funds that reside in Britain, mostly in London. Harbinger Capital Partners Fund chief Philip Falcone was singled out by the Daily Mirror. The tabloid used a front-page story on Sept. 18 to brand him a “greedy pig” for short selling, or making bets that Edinburgh-based HBOS would lose market value.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.67% 4.74% 82,600 15.81 6 +0.5878% 1,097.1
Floater 5.40% 5.41% 49,314 14.81 2 -1.9683% 744.9
Op. Retract 5.00% 4.83% 128,034 3.49 14 +0.1492% 1,046.5
Split-Share 5.53% 6.73% 51,735 4.31 14 +0.1448% 1,013.4
Interest Bearing 6.57% 7.52% 52,928 5.18 2 +0.1149% 1,083.9
Perpetual-Premium 6.20% 5.89% 56,569 2.17 1 -0.7874% 1,000.9
Perpetual-Discount 6.13% 6.20% 178,816 13.60 70 -0.0927% 871.6
Fixed-Reset 5.06% 4.93% 1,297,601 14.26 10 +0.1004% 1,119.2
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -3.8343% Whoosh! Definitely not a money market vehicle!
GWO.PR.H PerpetualDiscount -1.9277% Now with a pre-tax bid-YTW of 6.00% based on a bid of 20.35 and a limitMaturity.
ELF.PR.F PerpetualDiscount -1.8242% Now with a pre-tax bid-YTW of 7.65% based on a bid of 17.76 and a limitMaturity.
BAM.PR.N PerpetualDiscount -1.4163% Now with a pre-tax bid-YTW of 7.48% based on a bid of 16.01 and a limitMaturity.
FFN.PR.A SplitShare -1.2632% Asset coverage of just under 1.8:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 6.60% based on a bid of 9.38 and a hardMaturity 2014-12-1 at 10.00.
LFE.PR.A SplitShare -1.0152% Asset coverage of 2.2+:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 6.06% based on a bid of 9.75 and a hardMaturity 2012-12-1 at 10.00
BSD.PR.A InterestBearing +1.0274% Asset coverage of just under 1.5:1 as of September 19 according to Brookfield Funds. Now with a pre-tax bid-YTW of 8.43% (mostly as interest) based on a bid of 8.85 and a hardMaturity 2015-3-31 at 10.00.
BNA.PR.A SplitShare +1.0305% See BNA.PR.C, below
CM.PR.A OpRet +1.1462% Now with a pre-tax bid-YTW of 4.45% based on a bid of 25.37 and a call 2009-11-30 at 25.25.
SLF.PR.E PerpetualDiscount +1.1558% Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.38 and a limitMaturity.
WFS.PR.A SplitShare +1.3001% Asset coverage of just under 1.6:1 as of September 18, according to Mulvihill. Now with a pre-tax bid-YTW of 7.95% based on a bid of 9.35 and a hardMaturity 2011-6-30.
BNA.PR.C SplitShare +2.4485% Asset coverage of 3.2+:1 as of August 31 according to the company. Coverage now of 2.7+:1 based on BAM.A at 28.38 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 10.25% based on a bid of 15.90 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (7.55% to 2010-9-30) and BNA.PR.B (9.58% to 2016-3-25)
IAG.PR.A PerpetualDiscount +2.7933% Now with a pre-tax bid-YTW of 6.29% based on a bid of 18.40 and a limitMaturity.
BCE.PR.Z FixFloat +2.7945%  
Volume Highlights
Issue Index Volume Notes
BCE.PR.I FixFloat 887,316 Scotia crossed 884,000 at 24.55.
NTL.PR.F Scraps (would be ratchet, but there are credit concerns) 349,483 Scotia crossed 250,000 at 4.25.
RY.PR.I FixedReset 102,455 CIBC crossed 15,400 at 25.03, then bought 32,600 from RBC at 25.02, then Nesbitt bought 12,500 from RBC at 25.02.
BNS.PR.Q FixedReset 98,258 RBC crossed 80,000 at 25.00.
BAM.PR.O OpRet 61,765 TD bought 18,800 from Nesbitt at 21.90, then 10,000 from anonymous at the same price. Now with a pre-tax bid-YTW of 8.24% based on a bid of 21.90 and optionCertainty 2013-6-30 at 25.00. Compare with BAM.PR.H (6.55% to 2012-3-30), BAM.PR.I (6.38% to 2013-12-30) and BAM.PR.J (6.28% to 2018-3-30).
BNA.PR.A SplitShare 59,000 CIBC crossed 50,000 at 24.50. See BNA.PR.C, above.

There were twenty-three other index-included $25-pv-equivalent issues trading over 10,000 shares today

Research: BAs or BDNs

Wednesday, September 24th, 2008

Bankers’ Acceptances or Bearer Deposit Notes? What’s safer? What’s the difference?

This article was a long time in the making; I made interim notes in the post Seniority of Bankers’ Acceptances and republished a paper from the BoC Review, The Evolution of Bankers’ Acceptances in Canada.

Look for the research link!

September 24, 2008

Wednesday, September 24th, 2008

Interesting news on the CDS market today … it isn’t as big as we thought:

The credit-default swap market, used to hedge against bond losses and speculate on corporate credit risk, shrank for the first time as efforts to eliminate duplicate trades cut contracts outstanding by 12 percent.

The volume of outstanding trades fell to $54.6 trillion from $62 trillion in the first half, the International Swaps and Derivatives Association said in a statement today. It was the first decline since ISDA started surveying traders in 2001.

After the March collapse of securities firm Bear Stearns Cos., 17 banks that handle about 90 percent of the trading in credit derivatives agreed to a list of initiatives to curb market risks. That included tearing up trades that offset each other, which cuts down on the day-to-day payments, paperwork and monitoring by bank staffs and reduces the potential for errors. It also may reduce the amount of capital that commercial banks are required to hold against the trades on their books.

The first stage of compression, completed Aug. 27, with the participation of 14 dealers, reduced contracts submitted on North American telecommunications companies by 56 percent, Markit Group Ltd. and Creditex Group Inc., which are processing the tear-ups, said this month. The second stage, completed Sept. 4, with 15 dealers, cut contracts on European telecommunications companies by 53 percent.

Well, PerpetualDiscount yields were recently higher (6.22% on September 18), but today’s closing bid-YTW of 6.20% was otherwise last seen on August 11 (when falling) and July 7 (6.23%, when rising). A fair bit of sloppy action today, especially with BAM.PR.K falling out of bed!

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.69% 4.77% 81,889 15.77 6 +0.0023% 1,090.7
Floater 5.29% 5.30% 49,671 15.00 2 -5.1597% 759.9
Op. Retract 5.00% 4.90% 126,977 3.60 14 -0.2403% 1,044.9
Split-Share 5.54% 6.78% 51,274 4.31 14 -0.1431% 1,012.0
Interest Bearing 6.58% 7.53% 52,674 5.18 2 +0.1075% 1,082.7
Perpetual-Premium 6.15% 5.52% 55,613 2.18 1 +1.1952% 1,008.9
Perpetual-Discount 6.12% 6.20% 179,642 13.60 70 -0.2049% 872.4
Fixed-Reset 5.07% 4.94% 1,326,864 14.25 10 -0.0397% 1,118.1
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -10.2353% Whoosh! Definitely not a money market vehicle! Only two trades today, 700 at 17.00 and 200 at 17.01 (looks like it was the same order on one side) and closed at the Toronto Market Maker Special Deal of 15.26-16.94, 5×2.
MFC.PR.C PerpetualDiscount -2.7979% Now with a pre-tax bid-YTW of 6.05% based on a bid of 18.76 and a limitMaturity.
IAG.PR.A PerpetualDiscount -2.4523% Now with a pre-tax bid-YTW of 6.47% based on a bid of 17.90 and a limitMaturity.
ELF.PR.G PerpetualDiscount -2.1084% Now with a pre-tax bid-YTW of 7.49% based on a bid of 16.25 and a limitMaturity.
BAM.PR.I OpRet -1.9592% Now with a pre-tax bid-YTW of 6.41% based on a bid of 24.02 and softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.75% to 2012-3-30), BAM.PR.J (6.28% to 2018-3-30) and BAM.PR.O (8.18% to 2013-6-30).
BMO.PR.J PerpetualDiscount -1.8240% Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.30 and a limitMaturity.
SLF.PR.E PerpetualDiscount -1.7838% Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.17 and a limitMaturity.
FTN.PR.A SplitShare -1.5152% Asset coverage of just under 2.2:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 5.78% based on a bid of 9.75 and a limitMaturity.
CM.PR.A OpRet -1.5116% Now with a pre-tax bid-YTW of 5.03% based on a bid of 25.41 and a softMaturity 2011-7-30 at 25.00.
BNA.PR.A SplitShare -1.3821% Asset coverage of 3.2+:1 as of August 31 according to the company. Coverage now of 2.6+:1 based on BAM.A at 27.40 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 8.10% based on a bid of 24.26 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (9.70% to 2016-3-25) and BNA.PR.C (10.57% to 2019-1-10).
SLF.PR.C PerpetualDiscount -1.2931% Now with a pre-tax bid-YTW of 6.11% based on a bid of 18.32 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.2500% Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.17 and a limitMaturity.
TD.PR.O PerpetualDiscount -1.1893% Now with a pre-tax bid-YTW of 5.94% based on a bid of 20.77 and a limitMaturity.
SLF.PR.A PerpetualDiscount -1.1651% Now with a pre-tax bid-YTW of 6.13% based on a bid of 19.51 and a limitMaturity.
BNA.PR.C SplitShare -1.1465% See BNA.PR.A, above.
SLF.PR.B PerpetualDiscount -1.1039% Now with a pre-tax bid-YTW of 6.13% based on a bid of 19.71 and a limitMaturity.
BAM.PR.M PerpetualDiscount +1.8622% Now with a pre-tax bid-YTW of 7.29% based on a bid of 16.41 and a limitMaturity.
FFN.PR.A SplitShare +2.0408% Asset coverage of just under 1.8:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 6.35% based on a bid of 9.50 and a hardMaturity 2014-12-1 at 10.00.
CM.PR.P PerpetualDiscount +2.0659% Now with a pre-tax bid-YTW of 6.76% based on a bid of 20.75 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BAM.PR.O SplitShare 285,143 CIBC crossed 213,600 at 21.90, bought 16,300 at that price from Nesbitt, then another 40,000 at the same price from anonymous. See BAM.PR.I, above.
RY.PR.B PerpetualDiscount 268,630 Nesbitt crossed 260,000 at 19.45. Now with a pre-tax bid-YTW of 6.14% based on a bid of 19.40 and a limitMaturity.
GWO.PR.G PerpetualDiscount 205,750 Nesbitt crossed 200,000 at 21.50. Now with a pre-tax bid-YTW of 6.09% based on a bid of 21.50 and a limitMaturity.
PWF.PR.G PerpetualDiscount 181,800 TD crossed 180,000 at 24.50. Now with a pre-tax bid-YTW of 6.14% based on a bid of 24.40 and a limitMaturity.
NA.PR.K PerpetualDiscount 109,170 Nesbitt crossed 107,000 at 23.75. Now with a pre-tax bid-YTW of 6.25% based on a bid of 23.71 and a limitMaturity.

There were twenty-two other index-included $25-pv-equivalent issues trading over 10,000 shares today

Research: The Swoon in June

Wednesday, September 24th, 2008

The preferred share market did very poorly in June 2008 – not just in terms of return, but, what’s worse, in terms of theory! Look for the Research Link!

Bonus! Several paragraphs needed to be hastily revised (and the charts renumbered!) to meet space restrictions:

Update: The article states:

A certain amount of algebra starting from Equation (3) of the article “Modified Duration” in CMS, May 2007 leads to the conclusion that the Macaulay Duration of a perpetual annuity with a yield per period of “r” is (1+r)/r. Therefore, from Equation (2) of that article, the Modified Duration (which measures the sensitivity of price to yield changes) is simply 1/r.

The algebra is linked in the post PerpetualDiscount Duration Calculation.

September 23, 2008

Tuesday, September 23rd, 2008

The drive to send the CDS market to London and Dubai continues, with Christopher Cox of the SEC jumping on the bandwagon:

U.S. Securities and Exchange Commission Chairman Christopher Cox said Congress should grant authority to regulate the credit-default swaps market amid concern the bets are helping fuel the global financial crisis.

Lawmakers should “provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets,” Cox told the Senate Banking Committee today at a hearing in Washington.

Cox today said investors who buy swaps without owning the underlying debt may be similar to naked short sellers who sell stocks they don’t own or borrow. Such short sales can flood the market and illegally drive down stocks.

Similar to naked shorts of stocks? Well … hasn’t that been obvious from the beginning? The mechanics of CDSs have been discussed on PrefBlog; Mr. Cox’s full remarks have been posted at the SEC site.

The theory that Sarbanes-Oxley makes the US capital markets less attractive is one to which I subscribe; but there is a column on VoxEU by Craig Doidge, George Andrew Karolyi and Rene M. Stulz that takes the opposite view:

In a recent paper, we examined the 59 firms that deregistered in the six months after Rule 12h-6 was adopted.1 Our analysis shows that deregistering firms have poor growth opportunities and experienced poor stock return performance over a number of years before deregistration. Compared to other foreign firms cross-listed on US exchanges, deregistering firms also have a significantly lower “cross-listing premium”, the valuation difference between cross-listed firms and their home-market counterparts, and this lower cross-listing premium cannot be explained by an adverse impact of Sarbanes-Oxley.

Overall, the evidence supports the hypothesis that foreign firms list shares in the US in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a US listing becomes less valuable to corporate insiders, so such firms are more likely to deregister and go home.

I’m not sure that the Sarbanes-Oxley is as easily excused as all that. I quite agree that companies will – in general – make a rational investment choice when listing in the US and will leave when the costs outweigh the benefits. If Sarbanes-Oxley is a cost, however, a decision to leave becomes more likely. More insidiously, and much harder to examine in an academically satisfactory way, is the initial decision to list.

For example, Marsh Carter of the NYSE stated in 2006:

Finally, foreign companies are unquestionably concerned about the costs and added regulatory burdens associated with the U.S. regulation, including Sarbanes-Oxley.

Indeed, one of the underlying motivations for companies listing in the U.S. is the increase in value – which averages about 30 percent — that accrues as a result of adhering to the high standards of governance that the U.S. markets demand. But companies are increasingly viewing the costs associated with these regulatory requirements, as well as their impact on the speed with which they can reach the market, as outweighing the valuation premium they offer. The way that the requirements of Section 404 were implemented is perceived to have resulted in substantial cost and duplication of effort that has caused international companies to conclude that the additional costs of our regulatory structure outweigh the benefits.

When the London Stock Exchange surveyed 80 international companies that conduced IPOs on its market, it reported that 90 percent of the companies that had listed on the LSE felt that the demands of U.S. corporate governance rules made listing in London more attractive. The Wall Street Journal recently reported that small U.S. companies are turning to London’s small-cap market, AIM, for a variety of reasons, including the regulatory costs of going public. The article noted that “one of the reasons most commonly cited is the strain of Sarbanes-Oxley regulations in the [United S]tates.”

Also in VoxEU, Jeffrey Frankel wants a piece of the bank action, not just Bagehot:

What Mallaby calls the core insight is also the crux of Krugman’s logic (“Cash for Trash”):

“…the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to – a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.”

This follows a call by Charles W. Calomiris for preferred stock buys rather than loans:

Instead of buying toxic assets, the US government should buy preferred stock capital in ailing banks that could raise matching private sector equity. This would avoid the intractable problems of how the government should value the toxic assets and directly address the banks’ immediate problem – a lack of bank capital.

I like that idea a lot better. Look, a lot of the problem here is simply that sub-prime paper is not being rationally priced and the owners are being forced to mark to market. I recently noted that Moody’s is projecting a 22% loss on 2006 vintage mortgages. As I have discussed at length, the AAA portion of subprime debt is subordinated by roughly 20% (the precise amount will depend on the deal). So, OK, the mezzanine and equity portions have been wiped out … but the AAA tranches are only a little impaired. But as was noted by the OECD paper previously discussed, the mark-to-market on these things is a discount of 14%!

I suggest that banks do not want to sell paper worth $98 for only $86. They want to hoard their cash, let the paper run off gradually, and get their $98. So they won’t want to sell to Treasury at “market price” and Treasury will not – politically – be able to come close to “intrinsic value”. Stand off. To fix the problem in a Bagehotish sort of way, allow the banks term financing at Fed Funds + 100bp … which is the old discount window + 50bp, and the new discount window + 75bp. This is similar to the preferred stock idea of Calomiris, but gets the capital threat to Treasury more deeply subordinated, particularly if there’s a nice stiff haircut in the loan value.

CEBS has released a rather bureaucratic Statement on the Current Crisis Situation with the main points (bolded in the original):

  • In our view, banks’ exposures to Lehman Brothers are manageable and mostly non-material, compared to the banks’ total assets and capital base.
  • With respect to EU banks’ exposures on AIG: given the US government support provided to AIG, EU bank supervisors view that this counterparty risk can be sufficiently mitigated for the moment.

So we can all sleep better at night. C-EBS has spoken!

James Hamilton of Econbrowser makes an interesting point regarding Monday’s spike in oil prices:

The most striking thing about yesterday’s oil prices was the disparity between different futures contracts. The October contract, which expired yesterday, did indeed settle at $120.92, up more than $16. But oil for delivery in November closed at $109.27, an increase of only $6.62, and longer-forward contracts saw an even more modest increase. Unquestionably what was going on was a short squeeze, in which traders who had sold the October contract short were scrambling to close out their positions before expiration, and having a hard time finding people willing to take the other side.

I’m guessing that part of the answer must be that some of these operators were following rules of thumb which usually work just fine in a properly functioning market, and weren’t alert to the profit opportunities at hand. I certainly would not expect a discrepancy of this magnitude to persist for as long as 24 hours.

But another possibility that suggests itself is some degree of local monopoly power in the Cushing market. If you’re selling that $121 October oil, you might not be anxious to cook the golden goose by bringing any extra oil to the temporarily thirsty market. This might be a reasonable case for the FTC and CFTC to investigate the mechanics of exactly what happened yesterday.

PerpetualDiscounts were off a bit today on average volume. The excitement of the day was Nesbitt’s crosses of BCE issues – some of them usually very sleepy traders.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.69% 4.77% 77,965 15.78 6 -0.1530% 1,090.7
Floater 5.00% 5.01% 48,092 15.49 2 -1.3746% 801.2
Op. Retract 4.99% 4.68% 122,680 3.42 14 +0.0718% 1,047.4
Split-Share 5.53% 6.72% 51,553 4.32 14 -0.4710% 1,013.4
Interest Bearing 6.59% 7.55% 53,596 5.18 2 -1.0366% 1,081.5
Perpetual-Premium 6.23% 6.06% 57,480 2.17 1 +0.1996% 997.0
Perpetual-Discount 6.11% 6.18% 180,055 13.62 70 -0.1222% 874.2
Fixed-Reset 5.06% 4.93% 1,361,337 14.26 10 +0.0202% 1,118.5
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -2.8144%  
BSD.PR.A InterestBearing -2.7778% Asset coverage of just under 1.5:1 as of September 19 according to Brookfield Funds. Now with a pre-tax bid-YTW of 8.64% based on a bid of 8.75 and a hardMaturity 2015-3-31 at 10.00.
POW.PR.D PerpetualDiscount -2.5373% Now with a pre-tax bid-YTW of 6.40% based on a bid of 19.59 and a limitMaturity.
BNA.PR.B SplitShare -2.2564% Asset coverage of 3.2+:1 as of August 31 according to the company. Coverage now of just under 2.7:1 based on BAM.A at 27.84 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 9.56% based on a bid of 19.06 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (7.33% to 2010-9-30) and BNA.PR.C (10.41% to 2019-1-10).
BCE.PR.Z FixFloat -2.1658%  
BNA.PR.C SplitShare -1.8750% See BNA.PR.B, above.
IAG.PR.A PerpetualDiscount -1.6086% Now with a pre-tax bid-YTW of 6.31% based on a bid of 18.35 and a limitMaturity.
HSB.PR.C PerpetualDiscount -1.2683% Now with a pre-tax bid-YTW of 6.34% based on a bid of 20.24 and a limitMaturity.
CIU.PR.A PerpetualDiscount -1.2339% Now with a pre-tax bid-YTW of 6.06% based on a bid of 19.21 and a limitMaturity.
DFN.PR.A SplitShare -1.0132% Asset coverage of just under 2.3:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 5.80% based on a bid of 9.77 and a hardMaturity 2014-12-1 at 10.00.
GWO.PR.I PerpetualDiscount +1.0609% Now with a pre-tax bid-YTW of 6.26% based on a bid of 18.10 and a limitMaturity.
BMO.PR.H PerpetualDiscount +1.4520% Now with a pre-tax bid-YTW of 6.20% based on a bid of 21.66 and a limitMaturity.
BCE.PR.R FixFloat +1.5833%  
Volume Highlights
Issue Index Volume Notes
BCE.PR.D Scraps (would be Ratchet but there are volume concerns) 405,000 Nesbitt crossed 395,000 at 25.50.
BCE.PR.B Scraps (would be Ratchet but there are volume concerns) 326,500 Nesbitt crossed 325,500 at 24.99.
BCE.PR.R FixFloat 200,800 Nesbitt crossed 200,000 at 24.38
BCE.PR.Y Ratchet 60,278 Nesbitt crossed 59,000 at 24.80.
BCE.PR.A FixFloat 56,425 Nesbitt crossed 47,500 at 24.65
BAM.PR.O OpRet 55,400 CIBC crossed 40,400 at 22.00. Now with a pre-tax bid-YTW of 8.40% based on a bid of 21.75 and optionCertainty 2013-6-30 at 25.00. Compare with BAM.PR.H (6.74% to 2012-3-30), BAM.PR.I (5.97% to 2013-12-30) and BAM.PR.J (6.28% to 2018-3-30).
RY.PR.I FixedReset 53,398  

There were twenty-two other index-included $25-pv-equivalent issues trading over 10,000 shares today

September 22, 2008

Monday, September 22nd, 2008

Morgan Stanley and Goldman Sachs are turning into banks; on September 16 I said:

I suspect that all this will change; in ten years, says I, all the global Large Complex Financial Institutions will be banks with access to multiple discount windows.

Sometimes things move faster than you think! The Bank of England published a list of their selected LCFIs … all banks now, or bust, every one. Although some of those players might no longer qualify as sufficiently large for the A list!

Accrued Interest calls for more regulation of CDSs, repeating his call for exchange trading, standardizing contracts and increasing margin requirements. While I agree that margin requirements are in order – with the regulators demanding that such-and-such margin be put up, or the equivalent is deducted from capital – I’m not entirely sure he’s right about the implications:

Increasing collateral requirements would force protection buyers to be more judicious about which names they short.

Now, it seems to me that if I buy protection with a five-year CDS at 500bp, my maximum loss is 25% of notional, and that’s in gross dollars, not present value. If I sell protection, my maximum loss is 100% of notional. It seems to me that any rational margining requirement is going to force protection sellers to be more judicious about which names they go long; the same will also work out relative to current reality, since a large part of the problem is that protection buyers have been relatively powerless hedge funds, while sellers have been insurers – who were enabled to put on massive leverage due the their policy of not doing the deal if they had to put up collateral.

Naked Capitalism reprints a report that New York State is moving into CDS regulation, presumably in an effort to drive all the business to London or Dubai.

A quiet day, although there were a few violent price moves. PerpetualDiscounts eked out a small gain.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.69% 4.75% 76,525 15.79 6 +0.4252% 1,092.4
Floater 4.93% 4.93% 47,936 15.62 2 -0.1479% 812.4
Op. Retract 4.99% 4.74% 121,316 3.42 14 -0.1266% 1,046.7
Split-Share 5.50% 6.64% 51,489 4.33 14 -0.6815% 1,018.2
Interest Bearing 6.52% 7.35% 54,023 5.20 2 -0.3172% 1,092.8
Perpetual-Premium 6.24% 6.15% 57,941 2.18 1 +0.0000% 995.0
Perpetual-Discount 6.10% 6.17% 181,364 13.63 70 +0.0474% 875.2
Fixed-Reset 5.07% 4.93% 1,392,623 14.26 9 +0.0402% 1,118.3
Major Price Changes
Issue Index Change Notes
ELF.PR.F PerpetualDiscount -3.5676% Now with a pre-tax bid-YTW of 7.50% based on a bid of 18.11 and a limitMaturity.
BMO.PR.H PerpetualDiscount -2.7778% Now with a pre-tax bid-YTW of 6.29% based on a bid of 21.35 and a limitMaturity.
FFN.PR.A SplitShare -2.3109% Asset coverage of just under 1.8:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 6.76% based on a bid of 9.30 and a hardMaturity 2014-12-1 at 10.00.
WFS.PR.A SplitShare -2.1164% Asset coverage of just under 1.6:1 as of September 11 according to Mulvihill. Now with a pre-tax bid-YTW of 8.36% based on a bid of 9.25 and a hardMaturity 2011-6-30 at 10.00.
LBS.PR.A SplitShare -1.5000% Asset coverage of just under 2.0:1 as of September 18, according to Brompton Group. Now with a pre-tax bid-YTW of 5.85% based on a bid of 9.85 and a hardMaturity 2013-11-29 at 10.00.
ELF.PR.G PerpetualDiscount -1.4793% Now with a pre-tax bid-YTW of 7.30% based on a bid of 16.95 and a limitMaturity.
LFE.PR.A SplitShare -1.1964% Asset coverage of 2.3+:1 as of September 15 according to the company. Now with a pre-tax bid-YTW of 5.60% based on a bid of 9.91 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.J OpRet -1.0526% Now with a pre-tax bid-YTW of 6.27% based on a bid of 23.50 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.73% to 2012-3-30), BAM.PR.I (5.89% to 2013-12-30) and BAM.PR.O (8.49% to 2013-6-30).
DFN.PR.A SplitShare -1.0030% Asset coverage of just under 2.3:1 as of September 15, according to the company. Now with a pre-tax bid-YTW of 5.60% based on a bid of 9.87 and a hardMaturity 2014-12-1 at 10.00.
PWF.PR.E PerpetualDiscount +1.1739% Now with a pre-tax bid-YTW of 5.97% based on a bid of 23.27 and a limitMaturity.
HSB.PR.C PerpetualDiscount +1.4349% Now with a pre-tax bid-YTW of 6.26% based on a bid of 20.50 and a limitMaturity.
CIU.PR.A PerpetualDiscount +2.3684% Now with a pre-tax bid-YTW of 5.98% based on a bid of 19.45 and a limitMaturity.
BCE.PR.Z FixFloat +2.8266%  
IAG.PR.A PerpetualDiscount +5.0704% Now with a pre-tax bid-YTW of 6.20% based on a bid of 18.65 and a limitMaturity. You know, in HIMIPref™ I calculate a value named flatBidPriceVolatility. This issue has the highest such value of any index-included issue, second only to HPF.PR.B in the universe. I’d love to know who the market maker is, but the TSX keeps this information secret.
Volume Highlights
Issue Index Volume Notes
BNS.PR.M PerpetualDiscount 55,800 National Bank crossed 50,000 at 19.77. Now with a pre-tax bid-YTW of 5.79% based on a bid of 19.76 and a limitMaturity.
NA.PR.L PerpetualDiscount 39,500 National Bank crossed 20,000 at 20.10, then another 15,000 at 20.12. Now with a pre-tax bid-YTW of 6.14% based on a bid of 20.06 and a limitMaturity.
RY.PR.I FixedReset 34,218  
BNS.PR.R FixedReset 29,660  
BCE.PR.A FixedFloater 22,655 CIBC crossed 20,400 at 24.76.

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

PFD.PR.A: Purpose of Meeting Announced

Monday, September 22nd, 2008

I previously reported an upcoming meeting of PFD.PR.A holders, but was unable to provide details.

JovFunds Management has announced:

that, further to the Press Release of September 12, 2008, the special meetings of the preferred shareholders of Charterhouse and unitholders of the Funds that will occur on October 20, 2008, are being held to consider the following proposals
  • to Replace the Trustee with an Affiliate of the Trustee…
  • Reduction in Quorum Size of the Funds…
  • Eliminate the Termination Date for Deans Knight and Fairway Diversified…
  • Authority to Convert Charterhouse to an Open-Ended Mutual Fund Trust…
  • Authority to Suspend the Retraction of Preferred Shares…
  • Authority to Amend the Declaration of Trust of Long Reserve in the Event that Long Reserve is Converted to an Open-Ended Mutual Fund…

See the actual press release for further details of these points.

PFD.PR.A is not tracked by HIMPref™.

FTU.PR.A Rebalances after LEH Debacle

Monday, September 22nd, 2008

U.S. Financial 15 Split Corp. has announced:

it has added PNC Bank to its 15 core holdings as a replacement to Lehman Brothers Holdings.

The weakening of the financial sector in U.S. markets has accelerated in recent weeks and has lead to dramatic losses in market value for many financial services companies in the United States and around the world. Unprecedented U.S. government intervention in the last two weeks has occurred in an attempt to stabilize markets and restore confidence in the credit markets.

PNC Bank is one of the largest financial services companies in the country with over $139 billion in assets and providing personal banking, wealth management, business banking and corporate and institutional services for organizations all over the world.

US Financial 15 invests in a high quality portfolio consisting of 15 U.S. financial services companies as follows: American Express, American International Group, Bank of America, Citigroup, Fifth Third Bancorp, The Goldman Sachs Group, J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, PNC Bank, SunTrust Banks, U.S. Bancorp, Wachovia Corporation, Washington Mutual and Wells Fargo.

FTU.PR.A had asset coverage of just over 1.0:1 as of September 15, according to the company. It was last mentioned on PrefBlog when it had a very exciting time in mid-July and was (very briefly) reviewed in context in my article SplitShares and the Credit Crunch.

FTU.PR.A is tracked by HIMIPref™ and is a member of the “Scraps” index. It would be part of the “SplitShare” index, but there are credit concerns.