Archive for July, 2010

HIMIPref™ Index Rebalancing: July 2010

Saturday, July 31st, 2010
HIMI Index Changes, July 30, 2010
Issue From To Because
RY.PR.H PerpetualDiscount PerpetualPremium Price
CU.PR.A PerpetualDiscount PerpetualPremium Price
GWL.PR.O Scraps PerpetualPremium Volume
BAM.PR.E Ratchet Scraps Volume
CM.PR.R OpRet Scraps Volume

The strong performance of Straight Perpetuals over the past two months means that the PerpetualPremium index has been repopulated, albeit lightly and weakly. Unfortunately, however, low volumes on BAM.PR.E have resulted in its relegation to the Scraps index, leaving Ratchets as an empty set.

There were the following intra-month changes:

HIMI Index Changes during July 2010
Issue Action Index Because
FFH.PR.G Add Scraps New Issue
NPP.PR.A Add Scraps New Issue

July 30, 2010

Saturday, July 31st, 2010

There was a very good essay (which means: “one that I agree with”) in The Economist of July 24 titled Too many laws, too many prisoners that included the information:

For bringing some prescription sleeping pills into prison, he was put in solitary confinement for 71 days. The prison was so crowded, however, that even in solitary he had two room-mates.

Comrade Peace Prize is touting the automaker bail-out (far more expensive than the banking bail-out, but probably cheaper than the Fannie/Freddie bail-out):

Heading into a congressional election season in which polls show the public skeptical about the $84.8 billion rescue and anxious about economy, Obama is using the backdrop of Detroit- area plants owned by GM and Chrysler to promote what he says is an industry revival that has saved more than a million jobs.

“We are going to get all the money back that we invested in those car companies,” Obama said on ABC’s “The View” program.

For sure the money will be paid back! All GM needs is more subsidies:

The price tag? About $41,000. Luxury car prices for a car that is much more about what is under the hood than between the doors. Comfort and feature-wise, the volt is more like a Focus than a Lexus. For that kind of sticker-price you can get a BMW convertible, a Cadillac CTS or a number of well-known luxury cars. This creates a problem in making the desired electric vehicle commercially viable.

In order to compensate for the high cost and the desire to have a more ‘green’ economy, the Federal government implemented a $7,500 tax credit for electric vehicles, reducing the overall price of the Volt to $33,500. That’s right, much like the abomination that was the “Cash for Clunkers” program, our federal government is spending other people’s tax dollars to subsidize the purchase of cars by people who might otherwise choose to buy something else. By doing so they hope that the price tag will be more acceptable to potential buyers.

At least with Cash for Clunkers this taxpayer money was spread around the industry. In this case, however, the qualifying candidates for the program are narrow indeed, although it has provided a boon to the golf cart industry by allowing this subsidy to be given to purchasers of road-worthy golf carts, if equipped with side mirrors and seat belts (wittily referred to by the Wall Street Journal as a “Cash for Clubbers” program).

Still, even after the tax break, the Volt remains a pricey alternative to the typical gasoline-only cars.

Why do we subsidize the auto industry? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

Moody’s is increasingly dubious regarding whether Iceland is investment grade:

Moody’s is “taking it too far,” Economy MinisterGylfi Magnusson said in an interview yesterday, after the rating service cut the outlook on Iceland’s Baa3 foreign currency debt to negative. Moody’s said it will lower the rating to junk if a June court ruling banning some foreign loans hurts the recovery or forces the government to raise debt levels by bailing out the banks.

Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 38 percent against the yen and 30 percent against the franc since Sept. 15, 2008. The government is struggling to pay down a gross debt burden that will swell to 150 percent of economic output this year, Moody’s estimates.

The prospect that Iceland’s economy will return to growth next year is “subject to significant downside risks,” Moody’s said. The economy contracted 6.5 percent in 2009 and will probably shrink a further 2.6 percent this year, the central bank estimates. Output will expand 3.4 percent in 2011, the bank said in its latest forecast in May.

CIBC has reopened some USD covered bond deals:

DBRS has today assigned ratings of AAA to the Series CB5 (Tranche 2) and Series CB7 (Tranche 2) covered bonds issued under the Canadian Imperial Bank of Commerce (CIBC) Global Public Sector Covered Bond Programme (the Programme). The USD 400 million Series CB5 (Tranche 2) covered bonds are a re-opening of the existing Series CB5 (Tranche 1) covered bonds and have the same coupon rate (2.00%) and maturity date (February 4, 2013). Similarly, the USD 600 million Series CB7 (Tranche 2) covered bonds are a re-opening of the existing Series CB7 (Tranche 1) covered bonds and have the same coupon rate (2.60%) and maturity date (July 2, 2015). All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other.

I wasn’t able to learn the price at which these went out the door, but was able to learn that they were issued as Rule 144a private placements: so retail can go suck eggs, the regulators have destroyed the market.

And now Toronto hosts Caribana again – complete with its perennial funding problems, despite the fact that it brings a tidal wave of cash into the city. Meanwhile, the totally synthetic Luminato is awash in cash (like its cousin, Nuit Blanche) despite having an economic impact, as near as I can figure, of half a dozen extra coffees being sold so the ribbon cutters can stay awake during each others’ speeches. But synthetic events are just so much easier to control than grass-roots ones, don’t you agree? And provide employment for the right sort of people. But anyway, have fun at Caribana, everyone – and if you’re under thirty, kiss a girl for me!

The month ended on a somnolent note, with very quiet trading in the Canadian preferred share market. PerpetualDiscounts gained 4bp and FixedResets were up 10bp, taking the median weighted average yield to worst on the latter class down to 3.46% – the eighth-lowest on record. All seen lower market yiels were at the end of March, 2010.

PerpetualDiscounts now yield 5.89%, equivalent to 8.25% interest at the standard 1.4x conversion factor. Long Corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 275bp, a surprising increase from the 265bp recorded on July 28. Corporates have been on wheels!


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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 2.89 % 2.96 % 23,089 20.14 1 0.0000 % 2,078.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0262 % 3,149.2
Floater 2.52 % 2.14 % 38,827 22.00 4 0.0262 % 2,244.6
OpRet 4.88 % 3.59 % 92,059 0.33 11 0.1416 % 2,342.3
SplitShare 6.22 % 2.87 % 73,865 0.08 2 0.0000 % 2,229.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1416 % 2,141.8
Perpetual-Premium 5.94 % 5.75 % 105,684 1.79 4 -0.1085 % 1,937.2
Perpetual-Discount 5.82 % 5.89 % 178,057 14.03 73 0.0406 % 1,862.5
FixedReset 5.32 % 3.46 % 307,644 3.43 47 0.1013 % 2,227.7
Performance Highlights
Issue Index Change Notes
PWF.PR.O Perpetual-Discount 1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-30
Maturity Price : 24.39
Evaluated at bid price : 24.60
Bid-YTW : 5.93 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.A Perpetual-Discount 30,873 RBC crossed 25,000 at 20.06.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-30
Maturity Price : 19.98
Evaluated at bid price : 19.98
Bid-YTW : 6.02 %
BAM.PR.J OpRet 25,985 YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.08
Bid-YTW : 4.82 %
TRP.PR.A FixedReset 23,651 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 3.83 %
TD.PR.O Perpetual-Discount 23,400 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-30
Maturity Price : 21.65
Evaluated at bid price : 21.65
Bid-YTW : 5.64 %
RY.PR.A Perpetual-Discount 19,947 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-30
Maturity Price : 20.08
Evaluated at bid price : 20.08
Bid-YTW : 5.55 %
TD.PR.Q Perpetual-Discount 16,570 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-30
Maturity Price : 24.65
Evaluated at bid price : 24.88
Bid-YTW : 5.65 %
There were 11 other index-included issues trading in excess of 10,000 shares.

BPO to Reshuffle Assets, Become Pure Office Play

Friday, July 30th, 2010

Brookfield Properties has announced:

a strategic repositioning plan to transform itself into a global pure-play office property company. The plan includes the acquisition of an interest in a significant portfolio of premier office properties in Australia from Brookfield Asset Management (BAM: NYSE, TSX, Euronext) as well as the divestment of Brookfield Properties’ residential land and housing business.

Brookfield Properties has agreed to enter into a transaction with Brookfield Asset Management whereby Brookfield Properties will pay Brookfield Asset Management A$1.6 billion (US$1.4 billion) for an interest in 16 premier Australian office properties comprising 8 million square feet in Sydney, Melbourne and Perth which are 99% leased. The properties have a total value of A$3.8 billion (US$3.4 billion).

Brookfield Properties will fund the transaction from available liquidity of US$1.3 billion and from a US$750 million subordinate bridge acquisition facility from Brookfield Asset Management, which will be repaid from the completion of some or all of the following: asset sales, including a sell down of Brookfield Properties’ equity interest in its publicly-listed company Brookfield Office Properties Canada (TSX: BOX.UN), or other financing or capital activities.

A supplemental information package relating to this transaction is available on Brookfield Properties’ website at www.brookfieldproperties.com.

As a further step in the strategy of converting Brookfield Properties into a global pure play office company, the company announced that it intends to divest of its residential land and housing division. To this end, Brookfield Properties intends to commence discussions with Brookfield Homes Corporation (NYSE: BHS) regarding the possible merger of these operations with Brookfield Homes. Should the merger proceed, Brookfield Properties’ equity interest in the residential business would be converted into a listed security in the merged entity which Brookfield Properties would then dispose of through an offering to its shareholders. Brookfield Asset Management would commit to acquire any shares of the merged entity that are not otherwise subscribed for in the offering, thereby ensuring that Brookfield Properties will successfully dispose of its residential interests and receive full proceeds.

The pricing supplement is titled Australia Office Portfolio Transaction and is of great interest:

BPO’s interest in the Portfolio will be acquired through a Total Return Swap entitling BPO to the net cash flows and any changes in the value of the properties
  • This structure preserves the benefit of property-level financing and will allow for efficient transfer of this Portfolio at a future date into a different ownership entity, e.g. public vehicle or private fund in order to continue BPO’s asset management strategy
  • BPO will be property manager for the portfolio and will make or approve all significant decisions relating to the properties, including refinancingsand other decisions relating to the property debt
  • BPO will be responsible for additional capital requirements and will be entitled to any proceeds from refinancings from the properties
  • BPO will have an option to acquire the properties at anytime

The total return swap concept is fascinating, but I haven’t yet thought through all the implications, particularly since the contract is with the parent.

On the whole, the deal seems to me to be a continuation of the basic Brookfield philosophy of accumulating assets at the parent level and then pushing them into subsidiaries; attracting co-investors and increasing (non-recourse!) leverage along the way. It hasn’t been too long since they last did this, with the BPP conversion to a REIT.

BPO has several series of preferreds outstandng: BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L and BPO.PR.N.

Update: This is credit-neutral, according to DBRS:

The rating confirmation also takes into consideration that, from a financial risk perspective, the Acquisition is expected to have a neutral impact on the Company’s balance sheet ratios. DBRS expects Brookfield to fund the Acquisition with available liquidity, including un-drawn bank facilities ($788 million) and a cash balance ($475 million) totalling approximately $1.3 billion and from a $750 million bridge facility provided by BAM. Over the next several quarters, DBRS expects Brookfield to repay this bridge facility with a combination of proceeds from the following: a sell-down of the Company’s interest in Brookfield Office Properties Canada (the REIT; of which the Company currently owns a 91% interest), asset sales and other capital activities. As a result, DBRS estimates that the Company’s debt-to-capital ratio will remain close to 55% (including preferred shares) and EBITDA interest coverage should modestly improve to the 2.35 times range (including capitalized interest). This level of interest coverage remains at the low end of the range for the current rating category. However, DBRS takes comfort in the fact that Brookfield has made good progress in improving its overall financial flexibility position and that office fundamentals in the Company’s core markets are showing signs of improvement.

Overall, DBRS believes that the Acquisition complements Brookfield’s existing high-quality office portfolio and offers an immediate and sizeable presence in a new market. Over time, DBRS expects Brookfield to grow this platform, which should further benefit leasing initiatives and tenant retention rates.

July 29, 2010

Friday, July 30th, 2010

The Europeans are taking a look at High Frequency Trading:

High-frequency trading will be investigated by regulators to “better understand any risks,” Europe’s top market watchdog said in a report on proposed industry rules.

A planned European Union market regulator should also have the power to set standards for the tools used by high-frequency traders, such as the practice of placing computer servers close to trading venues to speed up market access, the Committee of European Securities Regulators told the European Commission.

Powers for the proposed European regulator should keep pace “with new technological advances, increasingly fragmented equity markets” and “shortcomings” in post-trade information, Sally Dewar, a managing director at the U.K. Financial Services Authority, said in an e-mailed statement today.

There’s nothing wrong with them familiarizing themselves with the issue – the rules-makers should know how the game is played! – but the Europeans have come up with so much wierd stuff lately that it will be most interesting to see what comes of it.

The bill to encourage banks to extend small-business credit has stalled in the Senate:

Senate Republicans blocked a measure that would cut taxes and ease credit for small businesses, saying they objected that Democrats refused to consider their amendments to extend expiring tax breaks.

The Senate voted 58-42 today to end debate on the bill, falling short of the 60 votes required to consider the legislation for passage.

The legislation was faulted by Republicans such as Senator Richard Shelby of Alabama for being a government rescue similar to the $700 billion bank bailout of 2008. The program might induce banks to make risky loans, lawmakers said.

“The lack of credit for small businesses is a problem that needs to be addressed,” Shelby said during Senate debate last week. “I do not, however, believe that we should try and solve this problem with another expensive and bureaucratic government program.”

There will be congressional hearings into Basel III, which should satisfy my desire to understand the changes better. I mean, we’re certainly not going to see any discussion by OSFI or the Ottawa Mickey Mouse League, are we?

Christopher Dodd and Barney Frank, authors of the U.S. financial overhaul, plan hearings on the status of global talks to revise bank-capital standards amid worries that proposed rules are being watered down.

The Senate Banking Committee, chaired by Dodd, will hold the discussions on the Basel process in September, said Sean Oblack, a spokesman for the Connecticut Democrat. Frank, the Massachusetts Democrat who heads the House Financial Services Committee, also plans to hold a hearing on the subject, said spokesman Steven Adamske. Neither panel has set a date nor decided who will be asked to testify.

Say what you like about what comes out of Congress – and I do! – the research that goes into these hearings is first-rate.

TD Bank has issued 5-year covered bonds in USD at 2.20%:

DBRS has today finalized the rating of AAA on the Covered Bonds, Series 1 (the Covered Bonds) issued under The Toronto-Dominion Bank (TD) EUR 10 billion Global Public Sector Covered Bond Programme (the Programme). The Covered Bonds (USD 2 billion) have a coupon rate of 2.20% and a hard-bullet maturity date of July 29, 2015.

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of TD, which is the second largest bank in Canada and rated AA and R-1 (high) with a Stable trend by DBRS. Second, in addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified collateral pool (the Cover Pool) of prime credit home equity lines of credit (HELOCs) insured by Canada Mortgage & Housing Corporation (CMHC). CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS. The Cover Pool was approximately $10.7 billion as of April 19, 2010. Third, the Covered Bonds benefit from several structural features, such as a reserve fund, when applicable; a minimum rating requirement for swap counterparties, servicer and cash manager; and, lastly, the funding of pre-maturity liquidity if TD’s rating falls below certain thresholds.

Little of interest happened on reasonably good volume today, with PerpetualDiscounts up 2bp and FixedResets about as close to flat as you can get.

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 2.88 % 2.96 % 23,452 20.16 1 0.0000 % 2,078.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0914 % 3,148.4
Floater 2.52 % 2.15 % 39,083 21.96 4 -0.0914 % 2,244.0
OpRet 4.89 % 3.57 % 92,120 0.34 11 -0.0814 % 2,339.0
SplitShare 6.22 % 1.71 % 76,900 0.08 2 0.0429 % 2,229.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0814 % 2,138.8
Perpetual-Premium 5.93 % 5.66 % 106,845 1.79 4 -0.1871 % 1,939.3
Perpetual-Discount 5.82 % 5.89 % 184,222 14.05 73 0.0155 % 1,861.7
FixedReset 5.32 % 3.47 % 312,437 3.43 47 0.0016 % 2,225.5
Performance Highlights
Issue Index Change Notes
HSB.PR.D Perpetual-Discount -2.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-29
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.94 %
POW.PR.D Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-29
Maturity Price : 21.31
Evaluated at bid price : 21.31
Bid-YTW : 5.92 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.H OpRet 59,500 TD crossed blocks of 40,000 and 18,600 shares, both at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-10-30
Maturity Price : 25.25
Evaluated at bid price : 25.61
Bid-YTW : 1.81 %
TD.PR.G FixedReset 44,685 TD crossed blocks of 15,000 and 11,000 shares, both at 27.51.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.50
Bid-YTW : 3.49 %
TD.PR.O Perpetual-Discount 43,723 Nesbitt crossed 15,200 at 21.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-29
Maturity Price : 21.65
Evaluated at bid price : 21.65
Bid-YTW : 5.64 %
TD.PR.K FixedReset 35,085 TD crossed 20,000 at 27.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 3.59 %
RY.PR.X FixedReset 27,030 RBC crossed 20,000 at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.60
Bid-YTW : 3.48 %
MFC.PR.D FixedReset 26,672 TD crossed 15,900 at 27.91.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.78
Bid-YTW : 3.81 %
There were 34 other index-included issues trading in excess of 10,000 shares.

FFN.PR.A Releases Semi-Annual Report

Friday, July 30th, 2010

Financial 15 Split Corp. II has released its semi-annual statements to May 31, 2010.

Dividend receipts declined to about $1.3-million in 1H10 from about $2.1-million in 1H09, while expenses rose to $461,000 from $390,000 due to higher valuations and a small expense for Service Fees. Accordingly, Income Coverage for the Preferred Shares dropped to 0.6-:1 in 1H10 from 1.0+:1 in 1H09.

FFN.PR.A was last mentioned on PrefBlog when the Capital Unit Distribution was suspended in June (hah! No Service Fees to pay this quarter!). FFN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

FTN.PR.A Releases Semi-Annual Report

Friday, July 30th, 2010

Financial 15 Split Corp. has announced:

that its semi-annual financial statements and management report of fund performance for the period ended May 31, 2010 are now available at www.sedar.com and the Company’s website at www.financial15.com.

The Report (to 2010-5-31) states:

During April 2010, the Company issued 1,980,000 Class A and Preferred shares at a unit price of $20 for total net proceeds after the payment of agents fees of $37.5 million. As a result of this offering, one time issue costs and agents fees in connection with the offering increased the expense ratio during the period. The Company did not immediately invest the proceeds into the financial services stocks as reflected by the higher cash position as at May 31,2010 thus benefiting from the opportunity to purchase the core stocks at lower levels than those in April.

Net investment income was $1.1-million, while distributions on preferred shares amounted to $2.1-million, so income coverage for the six months to May 31, 2010, was 0.5+:1, a huge reduction from the 1.2+:1 recorded in 1H09.

Cash on the balance sheet represented 17% of total assets, but this does not explain the sharp decline in income coverage – the secondary offering closed in mid-April, so the cash was only there for about six weeks.

Instead, it appears that several other factors had dominance:

  • Dividend receipts declined from about $3-million to about $2-million
  • Management and Service fees increased to about $670,000 in 1H10 from about $340,000 (net) in 1H09

Note 6 to the financials reads in part:

The Company is responsible for all expenses incurred in connection with the operation and administration of the Company, including, but not limited to, ongoing custodian, transfer agent, legal and audit expenses.

Pursuant to the administration agreement, the Manager is entitled to an administration fee payable monthly in arrears at an annual rate of 0.10% of the transactional net assets of the Company, which includes the outstanding Preferred shares, calculated as at each monthly valuation date and an amount equal to the service fee payable to dealers on the Class A shares at a rate of 0.50% per annum. No service fee will be paid in any calendar quarter if regular dividends are not paid to holders of Class A shares in respect of each month in such calendar quarter.

Pursuant to the terms of the investment management agreement, Quadravest is entitled to a base management fee payable in arrears at an annual rate equal to 0.65% of the transactional net assets of the Company, which include the outstanding Preferred shares, calculated as at each monthly valuation date. In addition, Quadravest is entitled to receive a performance fee subject to the achievement of certain pre-established total return thresholds.

Total management fees of $519,631 (May 31, 2009-$373,315), incurred during the period, include the administration fee and base management fee. No performance fees were paid in 2010 or 2009.

Clearly, the Service Fee increased because the capital unitholders received all their dividends in the first half so all Service Fees were payable. In 1H09, no service fees were payable – there was even a rather odd recovery!

Management fees increased due to the increase in assets of the fund.

So it looks like the expenses are probably here to stay – provided the NAV holds up above $15.00 and the capital unit distributions are made – but it is rather odd that dividend receipts have declined so precipituously despite the increase in assets. At some point it will be most interesting to attempt to reconcile these data with the disclosed holdings – how much of this is the result of actual dividend cuts for the common shares held, and how much due to selection of lower yielding securities?

However, the income coverage should improve to some extent in the second half as the cash on the balance sheet is invested.

FFH.PR.G Settles

Thursday, July 29th, 2010

This should have been posted yesterday, July 28. Sorry!

Fairfax Financial Holdings Ltd. has announced that it:

has completed its previously announced public offering of Preferred Shares, Series G (the “Series G Shares”) in Canada. As a result of the underwriters’ exercising in full their option to purchase an additional 2,000,000 Series G Shares, Fairfax has issued 10,000,000 Series G Shares for gross proceeds of $250 million. Net proceeds of the issue, after commissions and expenses, are approximately $242 million.

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

The Series G Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC, RBC Capital Markets and Scotia Capital, and that also included TD Securities, National Bank Financial, Cormark Securities, GMP Securities, Canaccord Genuity, Desjardins Securities and HSBC Securities (Canada).

FFH.PR.G is a FixedReset, 5.00%+256, announced July 20.

Vital statistics are:

FFH.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-28
Maturity Price : 24.80
Evaluated at bid price : 24.85
Bid-YTW : 5.05 %

FFH.PR.G will be tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

NPP.PR.A Settles

Thursday, July 29th, 2010

This should have been posted yesterday, July 28. Sorry!

Northland Power Income Fund has announced:

the closing of the previously announced offering of Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) by Northland Power Preferred Equity Inc. (the “Corporation”), an indirect wholly-owned subsidiary of the Fund. The Series 1 Preferred Shares are guaranteed by the Fund. The Corporation issued a total of 6 million Series 1 Preferred Shares at $25.00 per share for gross proceeds of $150 million. The offering was made on a bought deal basis through a syndicate of underwriters led by CIBC.

The Series 1 Preferred Shares commence trading on the TSX today under the symbol NPP.PR.A.

The Corporation intends to loan the net proceeds of the offering to NPIF Holdings L.P., a subsidiary of the Fund, which will use the funds to: (i) finance the remaining $51 million equity infusion in North Battleford Power L.P.; (ii) finance the $26 million equity infusion in Mount-Louis Wind L.P.; and (iii) repay certain non-recourse project debt in the amount of $40 million. The remainder of the loan will be used by NPIF Holdings L.P. for general corporate purposes.

NPP.PR.A is a FixedReset, 5.25%+280, announced July 6.

Vital statistics are:

NPP.PR.A FixedReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 5.11 %

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

July 28, 2010

Wednesday, July 28th, 2010

The migration from bank prop desks to hedge funds is continuing:

Citigroup Inc. may move a team of proprietary traders into its hedge-fund unit, one of at least three alternatives the U.S. bank is studying to comply with the Dodd-Frank Act, people briefed on the matter said.

Traders in the Citi Principal Strategies unit, led by Sutesh Sharma, would be reassigned to Citi Capital Advisors, which mostly oversees money for outside investors, said the people, speaking anonymously because the talks are preliminary. The bank would set up the traders as hedge-fund managers and seed their funds, then raise money from outside investors to redeem its stakes, the people said.

Good thing? Bad thing? Who knows? Who cares? This particular Volcker Rule is simply knee-jerk feel-goodism and the implications have never been studied.

Maybe the Citigroup guys can move to Singapore!

Singapore hedge fund startups are on the rise after the central bank approved new rules that didn’t impose a licensing requirement on most funds.

Seven new hedge funds set up in May and June, according to Eurekahedge Pte, after the Monetary Authority of Singapore said in April that small funds can keep operating without a license as part of its review.

“Singapore did not shoot itself in the foot by putting up proposals that will kill off the business,” said Kher Sheng Lee, a senior associate in the financial services group at Philadelphia-based law firm Dechert LLP in Hong Kong. “While some places are moving towards over-regulation with rigid rules and increase in compliance costs, Singapore has attempted to go for sensible regulation.”

Singapore is vying with Hong Kong for a slice of the global $1.7 trillion hedge-fund industry as the region’s growth leads the world. Singapore has made it easier for hedge funds to set up shop on the island than in other Asian cities such as Hong Kong, where hedge-fund managers face the same licensing requirements as mutual-fund managers.

Plans are being drawn up for Bernanke’s hagiography:

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, “because the policies tend to reinforce each other.”

A day of moderate volume in the Canadian preferred share market, with the volume totally dominated by FixedResets. PerpetualDiscounts were up 4bp and FixedResets gained 11bp on the day, with little volatility.

Update, 2010-7-29: PerpetualDiscounts now yield 5.90%, equivalent to 8.26% interest at the standard equivalency factor of 1.4x. Long Corporates yield 5.6%, so the pre-tax interest-equivalent spread is now about 265bp, unchanged from the figure reported on July 21.

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 2.87 % 2.95 % 22,859 20.18 1 0.2471 % 2,078.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0914 % 3,151.3
Floater 2.51 % 2.15 % 39,515 21.98 4 -0.0914 % 2,246.1
OpRet 4.88 % 1.18 % 92,327 0.26 11 0.0885 % 2,340.9
SplitShare 6.22 % -2.21 % 71,193 0.08 2 0.4527 % 2,228.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0885 % 2,140.6
Perpetual-Premium 5.92 % 5.34 % 106,717 1.79 4 0.0319 % 1,943.0
Perpetual-Discount 5.82 % 5.90 % 181,411 14.01 73 0.0350 % 1,861.4
FixedReset 5.32 % 3.50 % 318,525 3.44 47 0.1056 % 2,225.4
Performance Highlights
Issue Index Change Notes
POW.PR.D Perpetual-Discount -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-28
Maturity Price : 21.09
Evaluated at bid price : 21.09
Bid-YTW : 5.99 %
HSB.PR.D Perpetual-Discount 2.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-28
Maturity Price : 21.49
Evaluated at bid price : 21.77
Bid-YTW : 5.80 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.R FixedReset 123,076 Scotia crossed 75,000 at 26.30; TD crossed 24,400 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 3.59 %
TD.PR.Y FixedReset 103,635 Desjardins bought 12,300 from National at 26.20; 50,000 from anonymous at the same price; and 35,500 from TD at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-30
Maturity Price : 25.00
Evaluated at bid price : 26.19
Bid-YTW : 3.51 %
SLF.PR.F FixedReset 101,700 RBC crossed blocks of 78,500 and 18,000, both at 27.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.50
Bid-YTW : 3.47 %
RY.PR.Y FixedReset 54,392 Scotia crossed 40,000 at 27.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-24
Maturity Price : 25.00
Evaluated at bid price : 27.55
Bid-YTW : 3.52 %
BNS.PR.Y FixedReset 36,347 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-28
Maturity Price : 24.59
Evaluated at bid price : 24.64
Bid-YTW : 3.59 %
TRP.PR.A FixedReset 32,470 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.78
Bid-YTW : 3.95 %
There were 27 other index-included issues trading in excess of 10,000 shares.

July 27, 2010

Tuesday, July 27th, 2010

Life has become a little more annoying for ETF investors:

Recently, BlackRock stopped publishing the management expense ratio for its ETFs on the iShares Canada website. Instead, investors are shown the management fee for iShares ETFs.

Management fees are just one component of the costs that investors pay to own ETFs and mutual funds. There are also operating expenses (administrative and legal costs, for example), and taxes.

Bank of Montreal and Claymore Investments publish management fee info on their websites. To find out about MERs, you have to look at their semi-annual management reports on fund performance (download them at sedar.com).

The Bank of Canada has released a working paper by Emanuella Enenajor, Alex Sebastian, and Jonathan Witmer titled An Assessment of the Bank of Canada’s
Term PRA Facility
:

This paper empirically assesses the effectiveness of the Bank of Canada’s term Purchase and Resale Agreement (PRA) facility in reducing short-term bank funding pressures, as measured by the CDOR-OIS spread. It examines the behaviour of this spread around both term PRA announcement dates and term PRA operation dates, using an event-study methodology to control for developments in other money markets (i.e., using the U.S. LIBOR-OIS spread) as well as proxies for Canadian banking sector credit risk. Overall, there is robust evidence that the term PRA announcements reduced bank funding costs at both 1-month and 3-month terms, whereas we find no evidence of an impact from term PRA operations. However, given the small number of term PRA announcements in our sample, caution should be taken in attributing the reduction in the CDOR-OIS spread solely to the term PRA announcements, since other concurrent events (including other announcements by the Bank of Canada) may have also contributed to a compression in the CDOR-OIS spread.

There’s some speculation that the European stress test actually worked:

The gap between European and U.S. benchmark credit-default swap indexes, used to hedge against losses or speculate on creditworthiness, narrowed to 0.7 basis point today, the lowest since June 4, prices from Markit Group Ltd. show. That premium soared to a record 23 basis points on May 7 on concern that budget deficits in southern Europe would infect credit markets worldwide.

Bond investors are turning their attention to the global economic recovery’s sustainability after European banks and regulators provided a better view into balance sheets of the region’s lenders and Spain sold 3.4 billion euros ($4.42 billion) of debt in an auction. Stress test results released July 23, which showed 84 of 91 banks passing, reassured investors by detailing their sovereign debt holdings.

However, this could just as well be relief over the softening of the Basel III proposals which was disussed yesterday:

Banks worldwide applauded changes to proposed capital and liquidity standards that relaxed aspects of the rules and gave lenders as much as eight years to comply.

Lobbying groups in Europe and the U.S. praised the changes announced July 26 by the Basel Committee on Banking Supervision as steps in the right direction, while firms including Deutsche Bank AG and UBS AG welcomed the softening of rules proposed by the committee in December. European and Japanese bank stocks surged.

The 54-member Bloomberg Europe Banks and Financial Services Index rose 4.5 percent to 121.14, the biggest gain since European leaders crafted a 750 billion-euro ($973 billion) rescue package on May 10.

Sumitomo Mitsui Financial Group Inc., Japan’s second- largest bank by market value, led banks higher in Tokyo. Sumitomo Mitsui rose 2.8 percent to 2,587 yen, the most in more than two weeks. Mitsubishi UFJ Financial Group Inc., the nation’s largest bank, gained 2.5 percent, while Mizuho Financial Group Inc. climbed 2.2 percent.

U.S. bank stocks hardly budged.

The Canadian preferred share market had another good day on moderate volume, with PerpetualDiscounts up 12 bp and FixedResets gaining 1bp. Hardly any volatility.

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 2.86 % 2.95 % 23,801 20.14 1 0.0000 % 2,073.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0914 % 3,154.2
Floater 2.51 % 2.13 % 41,136 22.02 4 0.0914 % 2,248.2
OpRet 4.89 % 1.93 % 95,487 0.26 11 -0.0884 % 2,338.9
SplitShare 6.25 % 5.48 % 71,938 0.08 2 0.2377 % 2,218.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0884 % 2,138.7
Perpetual-Premium 5.90 % 5.33 % 106,561 1.80 4 0.1770 % 1,942.4
Perpetual-Discount 5.82 % 5.91 % 183,256 13.98 73 0.1219 % 1,860.8
FixedReset 5.32 % 3.52 % 321,653 3.44 47 0.0087 % 2,223.1
Performance Highlights
Issue Index Change Notes
HSB.PR.D Perpetual-Discount -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-27
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.94 %
POW.PR.D Perpetual-Discount 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-27
Maturity Price : 21.38
Evaluated at bid price : 21.38
Bid-YTW : 5.90 %
BNS.PR.O Perpetual-Discount 2.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-27
Maturity Price : 24.61
Evaluated at bid price : 24.84
Bid-YTW : 5.66 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.A FixedReset 123,800 Desjardins bought three blocks from RBC, one of 23,000 and two of 10,000, all at 26.20. Desjardins crossed 50,000, and RBC crossed 25,000, both at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.52 %
TD.PR.C FixedReset 84,354 RBC crossed blocks of 50,000 and 25,000, both at 26.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 3.47 %
BNS.PR.P FixedReset 44,898 Desjardins bought two blocks from National, 11,000 at 26.19 and 12,200 at 26.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.17
Bid-YTW : 3.22 %
MFC.PR.D FixedReset 39,334 TD crossed 27,400 at 27.72.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.72
Bid-YTW : 3.87 %
BNS.PR.Y FixedReset 35,790 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-27
Maturity Price : 24.57
Evaluated at bid price : 24.62
Bid-YTW : 3.59 %
BNS.PR.N Perpetual-Discount 28,456 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-07-27
Maturity Price : 23.12
Evaluated at bid price : 23.30
Bid-YTW : 5.66 %
There were 31 other index-included issues trading in excess of 10,000 shares.