Archive for October, 2010

October 26, 2010

Tuesday, October 26th, 2010

UBS is is projecting another massive loss for MFC:

Ongoing low interest rates are making things increasingly difficult for life insurance companies which rely heavily on fixed income investments such as government bonds to cover future policy holder liabilities.

In a note to clients this morning UBS analyst Peter Rozenberg predicted Manulife Financial Corp. will be hardest hit, putting it on track for a loss in the third quarter of $1.48-billion.

CFTC Commissioner Bart Chilton has demonstrated his complete ignorance of the market:

Bart Chilton, a commissioner with the futures regulator, said “mini-flash crashes occur all too often” following a surge in high-frequency trading.

“They don’t cause as much of a disruption as that of May 6, but more than once this year, runaway algos have disrupted markets. By that I mean, cost people money,” Chilton said in prepared remarks for an energy conference in Las Vegas.

“We should explore ways to hold those who set off runaway robotic trades accountable,” he said.

At least one algorithm is know to have disrupted the oil markets this year. Infinium Capital Management said in August it was the company at the center of a six-month probe by CME Group Inc into why a new trading
program malfunctioned, racking up a million-dollar loss in about a second on February 3.

Some might think that Infinium Capital Management was fined a million bucks by the markets – which went directly into the pockets of the not-so-dumb traders – and that that’s accountability enough. But then the regulators wouldn’t have anything to do.

OSFI’s in a little difficulty:

Auditor General Sheila Fraser said in a report that the Office of the Superintendent of Financial Institutions (OSFI) adequately supervised the banks at present.

“However, the growing volume and complexity of its work is increasing the demands on its human resources,” she wrote, noting an ever larger number of complex financial products.

“This challenge, combined with pressures on training and compensation, could affect the office’s ability to attract and retain qualified staff to maintain its capacity and competency to carry out its supervisory mandate.”

Ms. Fraser said that, as of March 10 this year, 10% of positions on large bank supervisory teams and 12% of jobs on the specialist groups that support the teams were vacant. Half the positions have been open for a year.

She cited OSFI as saying there “was little flexibility to address unexpected events” and said the time taken to dealing with documents resulted in less time available for detecting and analyzing risks.

A good day overall in the Canadian preferred share market on continued strong volume, with PerpetualDiscounts gaining 13bp, while FixedResets lost 2bp.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1648 % 2,175.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1648 % 3,296.2
Floater 2.88 % 3.19 % 87,838 19.24 3 0.1648 % 2,349.4
OpRet 4.93 % 3.92 % 99,450 0.74 9 0.0260 % 2,364.2
SplitShare 5.83 % -27.07 % 65,989 0.09 2 0.8110 % 2,413.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0260 % 2,161.8
Perpetual-Premium 5.69 % 5.03 % 142,440 5.34 19 0.0741 % 2,017.8
Perpetual-Discount 5.41 % 5.42 % 247,947 14.68 58 0.1341 % 2,019.4
FixedReset 5.27 % 3.07 % 338,774 3.24 47 -0.0196 % 2,275.3
Performance Highlights
Issue Index Change Notes
POW.PR.B Perpetual-Discount 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-26
Maturity Price : 23.71
Evaluated at bid price : 24.00
Bid-YTW : 5.61 %
BNA.PR.C SplitShare 1.57 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 22.69
Bid-YTW : 5.91 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.A OpRet 181,000 Called for redemption. Desjardins bought 180,500 from Nesbitt at 24.98.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2011-07-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 5.41 %
BNS.PR.P FixedReset 95,415 National crossed 25,000 at 26.51; Nesbitt crossed 50,000 at 26.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 2.46 %
CM.PR.K FixedReset 84,247 RBC crossed 75,000 at 27.21.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.17
Bid-YTW : 2.86 %
POW.PR.D Perpetual-Discount 72,425 RBC crossed 46,800 at 23.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-26
Maturity Price : 22.76
Evaluated at bid price : 22.96
Bid-YTW : 5.48 %
TRP.PR.B FixedReset 68,300 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-26
Maturity Price : 24.96
Evaluated at bid price : 25.01
Bid-YTW : 3.30 %
RY.PR.C Perpetual-Discount 66,500 RBC crossed two blocks of 30,000 each, both at 22.41.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-26
Maturity Price : 22.26
Evaluated at bid price : 22.40
Bid-YTW : 5.13 %
There were 57 other index-included issues trading in excess of 10,000 shares.

October 25, 2010

Monday, October 25th, 2010

A lot of corporate debt is being called for redemption:

Not since 2004 have borrowers had as much incentive to tender for their bonds, prompting companies from mining firm Rio Tinto Plc in London to New York-based television network CBS Corp. to redeem debt.

Companies tendered for $30.5 billion of bonds last month, the most since April, and are on pace to buy an additional $24.3 billion this month, according to data compiled by Bloomberg.

A measure of company bond yields that takes into account the risk that the debt will be redeemed — the so-called yield- to-worst — has dropped to an average 3.44 percent from 4.49 percent a year ago, according to Bank of America Merrill Lynch index data. During that time, the average bond coupon has declined to 5.25 percent from 5.46 percent. The difference between yields and coupons reached as much as 191 basis points on Oct. 11.

“There’s quite an incentive to retire outstanding debt and replace it with lower-coupon newly issued bonds to reduce the cost of debt capital,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “The effect of refinancing has been overwhelmingly positive for corporate credit.”

A bit more discussion of the flash crash:

More importantly, in the case of the fateful trade it was not actually Waddell’s own algorithm that executed the trade, as implied by the SEC-CFTC report, but that of its broker, Barclay’s Capital. Further complicating matters, researchers and people close to the trade are disagreeing with the report’s characterization of the algorithm that executed the trade, pointing out that it has been many times for much larger trades with no similar fallout.

“Based on our data, this was actually a very good algorithm,” says Nanex founder Eric Hunsader, who has analyzed the trade data. “It’s portrayed [in the report] as a very simple algorithm, but you can clearly see that it did take into account things like price—if it hadn’t, you could have really seen a market collapse…What really caused the collapse was firms re-selling these contracts incredibly quickly and just drying up all the liquidity.”

There are a number of things wrong with this analysis. First, the fact that the algorithm has been used before is not really a defense. If I’ve managed to cross the street with my eyes closed three times in succession, should this become an acceptable practice? Additionally, the fact that Barclays was the executing broker and algorithm supplier muddies the waters, but is not strictly relevant. Waddell Reed gave the instructions to use it and must have been – or should have been – comfortable with the embedded logic. Finally, it does not make much sense to exonerate Waddell Reed on the basis that their initial counterparties sold off the contracts “incredibly quickly”, although again that complicates matters. How was the stream of orders from WR to the ultimate (or, at least, end of day) buyers affected by passing through this layer? Did the presence of the “HFT Layer” accentuate or attenuate the price effect, or did it have no meaningful impact at all? Some might say it accentuated the effect due to the volume increase due to the “hot potato” trading, and that’s the end of the story … but is it? Nanex clearly considers the effect to be an accellerator:

The algorithm was very well behaved; it was careful not to impact the market by selling at the bid, for example. And when prices moved down sharply, it would stop completely.

The buyer of those contracts, however, was not so careful when it came to selling what they had accumulated. Rather than making sure the sale would not impact the market, they did quite the opposite: they slammed the market with 2,000 or more contracts as fast as they could. The sale was so furious, it would often clear out the entire 10 levels of depth before the offer price could adjust downward. As time passed, the aggressiveness only increased, with these violent selling events occurring more often, until finally the e-Mini circuit breaker kicked in and paused trading for 5 seconds, ending the market slide.

Assuming that we may accept Nanex’ analysis, it may be useful to consider the HFT effect to be – at least in this instance – as of an electrical capacitator, storing up contracts until the limit was reached, then discharging violently.

There was a very interesting TIPS auction today:

The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation.

The securities drew a yield of negative 0.55 percent, the same as the average forecast in a Bloomberg News survey of 7 of the Fed’s 18 primary dealers. The sale was a reopening of an $11 billion offering in April. Conventional Treasury notes erased gains amid speculation on the amount of debt the Fed may buy to spur the economy in a tactic called quantitative easing.

The US mortgage market gets more interesting by the day:

Home lenders are making it tougher to get loans as investors step up demands for refunds on defective mortgages, damaging the housing market, executives said today at an industry conference.

Already beset by billions of dollars in forced buybacks, originators have imposed standards on new loans that are stricter than those set by mortgage buyers and insurers, according to Todd Chamberlain, an executive vice president who oversees mortgage lending at Birmingham, Alabama-based Regions Financial Corp.

Fannie Mae, Freddie Mac and bond insurers such as MBIA Inc. are pressing lenders including Bank of America Corp. to honor promises to buy back mortgages if they’re later found to be based on inaccurate data. Known as representations and warranties, the promises cover defects such as inflated appraisals or inaccurate data about a borrower’s job or income. Bank of America said last week it will resist paying claims.

The industry needs to be “more united” in dealing with the demands, said William C. Emerson, Chief Executive Officer of Detroit-based Quicken Loans Inc., ranked as the 10th-largest lender in the first half of this year by newsletter Inside Mortgage Finance. Bankers have attributed mortgage defaults to the poor economy rather than defects in the loans.

“We all know we signed up for reps and warranties, but I don’t know if we thought we signed up to be an insurance company,” he said, speaking on the panel with Chamberlain and McCord.

Sorry Charlie! Finance is NOT A COOPERATIVE KIDDIE GAME. There is nothing unethical about jingle mail; there is nothing wrong with ultimate buyers exercising their put option. Next time, try reading the fine print on your own contract, rather than crying that the rules of the game are unfair halfway through.

Rob Ford was elected Toronto Mayor, which I attribute largely to PrefBlog’s endorsement (emphasis added):

Get set for a shakeup at City Hall that includes a tilt to the political right after seven years of Miller’s left-leaning reign, presuming the new mayor is able to heal campaign wounds and convince his council, rich with fresh faces, to approve key elements of his election blueprint.

Even better a good swath of incumbents got cut down, including my guy Saundercook, aka “Mr. Invisible”.

It was a good solid day on the Canadian preferred share market, with PerpetualDiscounts up 9bp and FixedResets gaining 3bp, with continued heavy volume.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.3285 % 2,172.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3285 % 3,290.8
Floater 2.88 % 3.19 % 87,265 19.25 3 -0.3285 % 2,345.5
OpRet 4.93 % 3.92 % 96,092 0.10 9 -0.1037 % 2,363.6
SplitShare 5.88 % -25.31 % 68,654 0.09 2 0.3255 % 2,394.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1037 % 2,161.3
Perpetual-Premium 5.69 % 5.15 % 139,918 5.34 19 0.1422 % 2,016.3
Perpetual-Discount 5.42 % 5.44 % 244,221 14.69 58 0.0927 % 2,016.7
FixedReset 5.27 % 3.04 % 342,197 3.25 47 0.0345 % 2,275.7
Performance Highlights
Issue Index Change Notes
PWF.PR.K Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 22.56
Evaluated at bid price : 22.74
Bid-YTW : 5.46 %
GWO.PR.M Perpetual-Discount -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 24.88
Evaluated at bid price : 25.10
Bid-YTW : 5.84 %
MFC.PR.E FixedReset 1.02 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.82
Bid-YTW : 3.76 %
MFC.PR.C Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 5.76 %
BMO.PR.J Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 23.07
Evaluated at bid price : 23.26
Bid-YTW : 4.90 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.K Floater 71,900 Nesbitt crossed 50,000 at 16.65; Desjardins crossed 15,000 at 16.57.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 16.56
Evaluated at bid price : 16.56
Bid-YTW : 3.19 %
TRP.PR.C FixedReset 63,725 RBC crossed blocks of 15,000 and 25,000, both at 25.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 25.50
Evaluated at bid price : 25.55
Bid-YTW : 3.54 %
BAM.PR.B Floater 58,814 Nesbitt crossed 50,000 at 16.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 16.46
Evaluated at bid price : 16.46
Bid-YTW : 3.21 %
BNS.PR.L Perpetual-Discount 50,159 Desjardins crossed 25,000 at 22.42.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-25
Maturity Price : 22.24
Evaluated at bid price : 22.38
Bid-YTW : 5.05 %
CM.PR.A OpRet 42,254 Called for redemption. Desjardins bought 40,000 from Nesbitt at 24.98.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.29 %
RY.PR.N FixedReset 38,263 TD crossed 25,000 at 27.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.56
Bid-YTW : 2.88 %
There were 44 other index-included issues trading in excess of 10,000 shares.

October 22, 2010

Friday, October 22nd, 2010

The exodus of prop traders to hedge funds continues:

KKR & Co., the buyout firm founded by Henry Kravis and George Roberts, is close to hiring nine members of Goldman Sachs Group Inc.’s U.S. principal-strategies group for a new hedge fund.

Bob Howard, who heads the Goldman Sachs group in the U.S., will join as managing director and report to William Sonneborn, who heads KKR’s asset-management division, Kristi Huller, a spokeswoman for the New York-based firm, said today in a telephone interview. The hedge fund, which will be able to bet on rising and falling stock prices, is scheduled to start raising money next year.

I discussed the Public/Private Investment Plan (PPIP) about a year ago … a year later, it certainly looks as if liquidity, not value, was the toxin in toxic assets:

A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year.

The eight funds created under the Public-Private Investment Program, or PPIP, reported net internal rates of return averaging 36 percent through Sept. 30, the Treasury Department said in a report this week.

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program. The government has gotten $215 million of interest, dividend and other payments, and the funds have more than $1.5 billion in unrealized gains. Under the wider Troubled Asset Relief Program, or TARP, the government has earned $25.2 billion on its investment of $309 billion in banks and insurers, an 8.2 percent return over two years, according to data compiled by Bloomberg.

The OSC has released its 2010 Compliance and Registrant Regulation Branch Annual Report and its 2010 Investment Funds Branch Annual Report.

The Kansas City Fed has released the October 2010 edition of Economic Trends.

There are rumours of a Canadian bank making a US acquisition:

Wilmington Trust Corp., the Delaware bank founded by the du Pont family, has been contacting bigger lenders in recent weeks to gauge their interest in buying the company, said people with knowledge of the matter.

The bank has told potential buyers it is aiming to reach a deal by the end of the month, said the people, who spoke on condition of anonymity because the talks are private. Canada’s Bank of Montreal is among banks that have held talks with Wilmington Trust, and Toronto-Dominion Bank has also been approached, these people said. Lazard Ltd. is advising Wilmington Trust, the people said.

The company has plunged 75 percent in the past three years, giving the bank a market value of $834.9 million. The 107-year- old lender has reported five straight quarterly losses, driven in part by soured commercial real estate loans and investments in pools of trust-preferred securities.

Meanwhile, RY is taking a loss to get out of US life & health insurance:

Royal Bank of Canada agreed to sell its U.S. life insurance business to an entity with ties to Apollo Global Management LLC for $628.1 million, taking a loss on a purchase the Canadian lender made a decade ago.

Royal Bank, Canada’s biggest bank, is exiting the U.S. life and health business by selling Liberty Life Insurance to Athene Holding Ltd., the Toronto-based bank said today in a statement. Royal Bank expects to complete the sale by early 2011 and record a loss of about $115 million under Canadian accounting rules, or $405 million under U.S. rules.

Ontario’s Eggfare bums are running a new advertising campaign, which appears aimed at the naifs who place “Farmers Feed Cities” posters in their windows. No purpose in sight at the moment, but when over a third of your gross revenue is a welfare cheque, you have to keep the feel-good drums working.


Click for big

It feeds into retail prices, too:

For eggs, the difference between prices in Montreal and prices in the United States for Grade A large eggs is 55%.

Toronto will be electing a new mayor on Monday as well as the usual crowd of non-entities. We are face with the dreary choice between an incompetent and a buffoon. Smitherman is incompetent: as health minister for over four years, he wears a great deal of the eHealth fiasco; perhaps not as much as Ford tries to make out, but he was responsible for the Health Ministry’s culture. Then, as energy minister, he decided that paying ten times market rate for solar power was a fine idea. What’s more, he wants to throw some city money down that rathole. He is now talking about tax freezes and cuts – but only since Ford made it fashionable to do so. His words would have more credibility if he had said them while he was the clear front-runner … but now? It’s mere fashion. Vote for Smitherman and you’re voting for whatever tomorrow’s fashion is, irrespective of what it might be.

Ford is simply a buffoon. Railing away at councillors’ expense budgets … it’s a trivial non-issue, considering Toronto’s spending mess. I don’t want them to steal the money, obviously, but the budgets are, if anything, skimpy considering the ideal work-load of a councillor and in any case cost me about a buck. I’m also worried about his oft-expressed unconditional support for the police – nobody ever deserves unconditional support, least of all the police after the G-20 abomination. Vote for Ford and you’re voting for a term of chaos, with contracting out garbage likely to be an extremely divisive flashpoint.

But maybe we need chaos. My girlfriend is a nurse who was seriously considering applying for a job driving a school bus – not out of any work satisfaction issues, but because the pay is so much better. Is there anybody other than city council members and school bus drivers who thinks this makes any sense at all? The city’s infrastructure is crumbling and gridlock … well, I won’t say it costs a whole pile of money because those calculations assume that time spent getting to work is paid and otherwise productive. I will say that gridlock is significantly detrimental to the quality of life in Toronto. Meanwhile the TTC can’t even figure out how to run a string of vending machines.

Incompetence costs a lot more money than any ideology. Vote Ford.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts gaining 16bp and FixedResets up 20bp. Volume was off its peak, but still quite high.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1094 % 2,179.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1094 % 3,301.7
Floater 2.87 % 3.19 % 80,700 19.25 3 -0.1094 % 2,353.3
OpRet 4.92 % 3.78 % 90,443 0.59 9 0.0562 % 2,366.0
SplitShare 5.90 % -19.08 % 71,476 0.09 2 -0.8671 % 2,386.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0562 % 2,163.5
Perpetual-Premium 5.70 % 5.12 % 141,647 5.35 19 0.1719 % 2,013.5
Perpetual-Discount 5.42 % 5.44 % 244,537 14.70 58 0.1632 % 2,014.8
FixedReset 5.27 % 3.02 % 341,852 3.26 47 0.1955 % 2,275.0
Performance Highlights
Issue Index Change Notes
MFC.PR.E FixedReset -1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 4.04 %
IAG.PR.A Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 21.50
Evaluated at bid price : 21.78
Bid-YTW : 5.32 %
MFC.PR.D FixedReset 1.62 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 28.19
Bid-YTW : 3.15 %
BAM.PR.R FixedReset 1.90 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 4.35 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.D Perpetual-Discount 133,866 RBC crossed 10,000 at 20.50; Desjardins crossed 30,000 at 20.45. Nesbitt crossed 30,000 at 20.45 and Desjardins crossed 50,000 at 20.49.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 20.45
Evaluated at bid price : 20.45
Bid-YTW : 5.50 %
MFC.PR.C Perpetual-Discount 112,379 RBC crossed blocks of 45,000 and 46,300, both at 19.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 19.55
Evaluated at bid price : 19.55
Bid-YTW : 5.83 %
CM.PR.G Perpetual-Discount 46,150 RBC crossed blocks of 17,300 and 13,900, both at 24.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 24.42
Evaluated at bid price : 24.70
Bid-YTW : 5.48 %
RY.PR.X FixedReset 42,207 Desjardins crossed 30,000 at 27.86.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.85
Bid-YTW : 3.02 %
PWF.PR.D OpRet 39,800 Called for redemptions. Nesbitt bought 31,200 from TD at 25.37.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 4.38 %
BAM.PR.H OpRet 38,834 RBC crossed 35,000 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-21
Maturity Price : 25.25
Evaluated at bid price : 25.70
Bid-YTW : -11.34 %
There were 43 other index-included issues trading in excess of 10,000 shares.

PIC.PR.A: DBRS Downgrades to Pfd-5

Friday, October 22nd, 2010

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Mulvihill Premium Canadian Bank (the Company) to Pfd-5 from Pfd-4 (high).

The Company is a split share corporation that initially raised gross proceeds of $100 million in 1996 by issuing Preferred Shares and Class A Shares. The Company invests in a portfolio of common shares (the Portfolio) issued by Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank.

The Preferred Shares and Class A Shares that are currently outstanding were issued in September 2003 and September 2004, and were scheduled to terminate on November 1, 2010. On August 20, 2010, the Company announced a proposal to extend the term of the Company for an additional seven years. On September 29, 2010, the Company announced that its shareholders had approved a reorganization to extend the term of the Company.

DBRS has completed its review of the Company’s reorganization. The rating of the Preferred Shares has been downgraded to Pfd-5, based on a number of factors:

– The income earned on the Portfolio, net of Company management fees and expenses, does not fully cover the distribution paid to the Preferred Shares. Furthermore, the Company intends to continue to pay quarterly cash distributions on the Class A Shares of $0.15 per share. As a result, there is an annual grind on the net asset value (NAV) of the Portfolio of more than 4%, absent share price appreciation (if any).

– The downside protection available to the Preferred Shares is approximately 27% (as of October 14, 2010). When adjusted to reflect the annual grind on the Portfolio, the downside protection is significantly lower than protection levels commensurate with preferred share ratings in the Pfd-4 rating category.

– There is not a NAV test that suspends distributions to the Class A Shares if the NAV drops below a specified value. Canadian split share companies generally include a NAV test if they pay regular distributions to the Class A Shares (or capital shares) greater than the excess income of the split share company.

The factors above existed prior to the reorganization of the Company; however, the extension of the term of the Company by seven years has increased the length of time for which holders of the Preferred Shares are exposed to grind on the NAV as well as common share price volatility.

PIC.PR.A was last mentioned on PrefBlog when the term extension was approved. There is a retraction right exercisable November 1, but I’m not sure what the notice period is and in any case it will vary according to dealer. However, those wishing to unload will note that the issue closed today at 14.94-99, 5×6, so if you missed it you haven’t missed much.

PIC.PR.A is tracked by HIMIPref™ but is relegate to the Scraps index on credit concerns.

October 21, 2010

Thursday, October 21st, 2010

OSFI’s Jean-Claude Ménard, Chief Actuary, has given a presentation titled Actuarial Valuation of the Canada Pension Plan – Modeling Uncertainty and Properly Disclosing the Results. They’re estimating a real rate of return of 4.2%, but I would have liked to have seen more discussion of the valuation of private equity.

The BoC has released a working paper by Ali Dib titled Banks, Credit Market Frictions, and Business Cycles:

The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profit maximizing banks that offer different banking services and transact in an interbank market. Loans are produced using interbank borrowing and bank capital subject to a regulatory capital requirement. Banks have monopoly power, set nominal deposit and prime lending rates, choose their leverage ratio and their portfolio composition, and can endogenously default on a fraction of their interbank borrowing. Because it is costly to raise capital to satisfy the regulatory capital requirement, the banking sector attenuates the real effects of financial shocks, reduces macroeconomic volatilities, and helps stabilize the economy. The model also includes two unconventional monetary policies (quantitative and qualitative easing) that reduce the negative impacts of financial crises

Instinet has joined the crowd of SEC Flash Crash conclusion skeptics:

In our opinion, given the facts stated by both the SEC report and the CME, the sell order could not be the singular cause of the crash. However, the interconnection among markets, the order and the method with which it was executed likely served as a catalyst for the reduction in liquidity and the “erroneous” stock trades experienced seconds later.

Had the market been less fragile or the futures algorithm less aggressive, the HFT method of transferring risk into stocks by offsetting futures purchases with SPY sales would have helped absorb this E-mini futures sale and moved liquidity between asset classes.

Without circuit breakers in individual stocks and because the lateness of the day prevented market- wide circuit breakers from triggering, there was nothing to stem the tide of falling equity prices in these order-driven markets.

While we don’t think that the initial E-mini order should be attributed as the singular force creating the sell-off, it is worth noting that the first “lesson learned” cited by the report could be read as a warning against using algorithms that send orders based only on volume without price controls. An algorithm that adjusts its aggressiveness based on price level and/or has a price limit provides an important layer of intelligence and protection. More advanced logic to address message traffic and short term price movements may have allowed detection of the “hot potato” volume situation referenced in the report, where HFTs traded more volume than usual with each other and could have signalled abnormal market conditions. If the algorithms contributing to the problem on May 6th had been more sensitive to market conditions and aware of the type of volume being traded, they would likely not have been so aggressive.

There was a good piece in the Globe by former HSBC economist Dr. David E. Bond titled How dairy farmers milk Canada’s taxpayers:

Canada’s government sanctioned National Dairy Policy offers just such a deal, and results in a wealth transfer of more than $2.4-billion annually from consumers and food processors to diary farmers. That’s more than $175,000 for each dairy farmer.

Because of this policy, consumers pay 60 cents more in Canada than in the United States for a one-litre carton of whole milk and 94 cents more for a pound of butter.

A farmer once started railing against welfare recipients in my hearing … I told him that each farmer costs me as much as half a dozen welfare bums, but my number might have been a little low. I eagerly await the next baffled speech from Spend-Every-Penny (or his lap-dog), wondering why Canadian productivity isn’t any higher.

It was a day of mixed results on continued heavy volume in the Canadian preferred share market today, with PerpetualDiscounts gaining 12bp, while FixedResets lost 12bp. Volatility continued to be relatively low, with only two entries on the performance highlights table.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0946 % 2,181.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0946 % 3,305.3
Floater 2.87 % 3.19 % 83,594 19.26 3 0.0946 % 2,355.8
OpRet 4.92 % 3.94 % 83,753 0.11 9 -0.1166 % 2,364.7
SplitShare 5.85 % -28.44 % 69,325 0.09 2 0.6086 % 2,407.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1166 % 2,162.3
Perpetual-Premium 5.71 % 5.11 % 143,522 4.82 19 0.0805 % 2,010.0
Perpetual-Discount 5.42 % 5.43 % 243,744 14.70 58 0.1246 % 2,011.5
FixedReset 5.27 % 3.10 % 345,842 3.26 47 -0.1243 % 2,270.5
Performance Highlights
Issue Index Change Notes
BAM.PR.P FixedReset -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.41
Bid-YTW : 4.47 %
POW.PR.D Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.94
Evaluated at bid price : 23.15
Bid-YTW : 5.43 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.A FixedReset 84,500 TD crossed 17,600 at 26.25; RBC crossed 20,000 at the same price. Then RBC crossed 26,900 at 26.25, while TD crossed 15,000 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 3.30 %
BMO.PR.P FixedReset 66,153 Scotia crossed 32,200 at 27.72, then sold 15,500 to RBC at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.70
Bid-YTW : 2.94 %
RY.PR.E Perpetual-Discount 61,410 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.01
Evaluated at bid price : 22.13
Bid-YTW : 5.16 %
TD.PR.E FixedReset 46,535 TD crossed 37,600 at 27.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.78
Bid-YTW : 2.95 %
CM.PR.I Perpetual-Discount 42,866 TD crossed 11,000 at 22.38.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.21
Evaluated at bid price : 22.35
Bid-YTW : 5.27 %
BAM.PR.N Perpetual-Discount 42,415 CIBC crossed 25,000 at 20.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 20.39
Evaluated at bid price : 20.39
Bid-YTW : 5.89 %
There were 45 other index-included issues trading in excess of 10,000 shares.

BPO.PR.P Steady on Heavy Volume

Thursday, October 21st, 2010

Brookfield Office Properties has announced:

the completion of its previously announced Preferred Shares, Series P issue in the amount of C$300 million. The offering was underwritten by a syndicate led by RBC Capital Markets, CIBC, Scotia Capital Inc. and TD Securities Inc.

Brookfield Office Properties issued 12.0 million Preferred Shares, Series P at a price of C$25.00 per share yielding 5.15% per annum for the initial 6 ½-year period ending March 31, 2017. Net proceeds from the issue will be added to the general funds of Brookfield Office Properties and be used for general corporate purposes, including the possible redemption or repayment of corporate or other obligations. The Preferred Shares, Series P will commence trading on the Toronto Stock Exchange on October 21, 2010 under the ticker symbol BPO.PR.P.

$300-million! Boy, I haven’t seen such an appetite for junk since high-school!

This issue is a FixedReset, 5.15%+300, announced October 13 with an original issue size of $200-million with a $50-million greenshoe; it was biggie-sized to $300-million on the day of announcement.

BPO.PR.P traded 421,226 shares in a range of 24.90-04 before closing at 25.00-01, 15×9.

Vital statistics are:

BPO.PR.P FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 23.09
Evaluated at bid price : 25.00
Bid-YTW : 4.88 %

New Issue: BAM FixedReset 4.5%+231

Thursday, October 21st, 2010

Brookfield Asset Management has announced:

that it has agreed to issue to a syndicate of underwriters led by CIBC, RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. for distribution to the public 8,000,000 Preferred Shares, Series 26. The Preferred Shares, Series 26 will be issued at a price of $25.00 per share, for aggregate gross proceeds of CDN$200,000,000. Holders of the Preferred Shares, Series 26 will be entitled to receive a cumulative quarterly fixed dividend yielding 4.50% annually for the initial period ending March 31, 2017. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.31%.

Holders of Preferred Shares, Series 26 will have the right, at their option, to convert their shares into cumulative Preferred Shares, Series 27, subject to certain conditions, on March 31, 2017 and on March 31 every five years thereafter. Holders of the Preferred Shares, Series 26 will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.31%.

Brookfield Asset Management Inc. has granted the underwriters an option, exercisable in whole or in part prior to closing, to purchase an additional 2,000,000 Preferred Shares, Series 26 at the same offering price. The Preferred Shares will be offered by way of prospectus supplement under the short form base shelf prospectus of Brookfield Asset Management Inc. dated January 12, 2009, as amended. The prospectus supplement will be filed with securities regulatory authorities in all provinces of Canada.

The net proceeds of the issue will be added to the general funds of Brookfield Asset Management Inc. and be used for general corporate purposes.

Yesterday, BAM issued 10-year notes:

an offering of C$350 million of senior notes (unsecured) (“notes”) with a March 1, 2021 maturity and a yield of 5.3%.

The notes have been assigned a credit rating of Baa2 (stable outlook) by Moody’s; A- (negative outlook) by Standard & Poor’s; BBB (stable outlook) by Fitch; and A low (stable outlook) by DBRS.

The notes are being offered through a syndicate of agents led by CIBC World Markets Inc., RBC Capital Markets and TD Securities Inc.

The net proceeds of the issue will be used to refinance existing indebtedness and for general corporate purposes.

This comes on top of the recent BPO 5.15%+300 FixedReset and news that the group is selling a chunk of Brookfield Renewable Power Fund. So they’ve been active! I wonder if something is in the wind?

We can take a stab at valuing these things with the BreakEven Rate Shock Calculator … using values of 5.85% as the yield on BAM’s PerpetualDiscounts and a yield spread of -1.35% to the FixedReset initial rate, with a term to reset of 6.5 years we get a Break Even Rate Shock of 224bp … pretty hefty, but by no means recordbreaking.

Additionally, we can look at the BAM.PR.R 5.40%+230 FixedReset, which has its first reset date 2016-6-30, nine months before the new issue’s. Interestingly, the Issue Reset Spreads are virtually identical for these two issues, although the initial fixed rate is lower for the new issue. BAM.PR.R will pay 90bp p.a. less than the new issue until reset, or $0.225 p.a., and is trading at around 25.80. The new issue looks a little rich.

Update, 2010-11-15: BAM did an almost simultaneous bond deal:

Following a bunch of debt and equity financings by its some of its subsidiaries, Brookfield Asset Management Inc. (BAM.A-T30.350.130.43%) came to market this morning with a $200-million preferred share offering. The deal comes a day after BAM tapped debt markets for $350-million of 10-year senior unsecured notes that pay 5.3 per cent.

October 20, 2010

Wednesday, October 20th, 2010

The offshore yuan market seems to be a success:

Banks are paying about 30 percent less interest on yuan-denominated debt sold in Hong Kong than they pay in Shanghai as faster currency appreciation fuels overseas demand for the securities.

The average yield in the city is 1.77 percent, according to data from the Treasury Markets Association, which tracks 19 outstanding issues that have maturities of no more than four years. That includes bonds sold by state-controlled lenders including China Development Bank and Bank of China Ltd. The average rate in China for one- to three-year bonds issued by government-linked companies is 2.60 percent, according to Bank of America Merrill Lynch’s China Quasi-Government Index.

China is encouraging domestic lenders to sell debt in Hong Kong to broaden the appeal of holding its currency overseas as it seeks to reduce reliance on the dollar for international trade and finance. Yuan deposits in the city more than doubled to a record 130 billion yuan ($20 billion) in the first eight months of 2010.

In the same way that yuan bonds command a premium in Hong Kong, so too does the currency. The spot rate in the city’s offshore market was 6.4745 yesterday, 2.6 percent more than the onshore rate. That’s the biggest gap since Bloomberg began tracking the rate two months ago. Overseas entities can only buy yuan on the mainland if they have investment proposals or trade transactions approved by Chinese regulators.

There’s a draconian budget in the UK:

“Today’s the day when Britain steps back from the brink,” Osborne told lawmakers in the House of Commons in London today as he outlined plans to virtually eliminate a 156 billion-pound ($245 billion) budget deficit with average cuts in government departments of 19 percent.

Total spending would fall by 0.7 percent a year after inflation, according to a June outline. Under Margaret Thatcher, 85, who was known as the Iron Lady during her 11 years as premier that ended in 1990, spending rose by an annual 1.2 percent.

Legislation to impose a permanent levy on banks will be published tomorrow, Osborne said.

“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad,” he said. “Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be — not just in one year, but over a period of years.”

Now that simplified prospectuses have been bloated to the point where they are no longer read, and the summary of terms at the beginning of the simplified prospectus has become so detailed that it’s no longer read either, the Canadian Securities Administrators have taken the next logical step and released the 145 page Notice of Amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, Form 81-101F1 and 81-101F2 and Companion Policy 81-101CP Mutual Fund Prospectus Disclosure and Related Amendments:

We have not carried forward the requirement that the Fund Facts be written at a grade level of 6.0 or less on the Flesch-Kincaid grade level scale because we were told there is no French language equivalent to the scale. However, the Fund Facts is still required to be prepared using plain language and in a format that assists in readability and comprehension.

We have added guidance in the Companion Policy that the CSA will generally consider a grade level of 6.0 or less on the Flesch-Kincaid grade level scale to demonstrate that the Fund Facts is written in plain language.

Should I ever start a public bond index-plus fund, I may require some help explaining convexity-matching at the grade 6 level in under four pages. Note, however, that the document specifies only the number of double-sided pages; it does not specify font size, so I may use a 1-point font. One way or another, if you consider yourself gifted at technical writing and are looking for work, watch this space! I’m considering making book on how long it will be until it becomes a requirement to prepare and distribute the “Simplified Fund Facts” … do you think this works better if I allow betting by individual year in a parimutual system, or an over/under setup? Maybe both?

Those of an academic bent might be interested to learn that this post so far, when analyzed by MS-Office 2003 from the beginning to “Maybe both?” in the paragraph above, with HTML formatting removed, has a Flesch Reading Ease of 36.3 and a Flesch-Kincaid Grade Level of 15.0. This will be gratifying news for any hard-core indexers out there … when you reach the point in your sermon at which you claim that “People who buy mutual funds are retarded!”, you may now also note that the Canadian Securities Administrators agree with you.

The Canadian preferred share market bounced back today on continued heavy volume with PerpetualDiscounts gaining 25bp and FixedResets winning 9bp. The market was very well-behaved, with only one entry in the performance highlights.

PerpetualDiscounts now yield 5.45%, equivalent to 7.63% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.2% – maybe a hair over – so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now at about 240bp, about the same as reported October 13.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.1459 % 2,179.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.1459 % 3,302.1
Floater 2.87 % 3.19 % 83,372 19.26 3 0.1459 % 2,353.6
OpRet 4.92 % 3.85 % 83,666 0.11 9 0.2208 % 2,367.5
SplitShare 5.88 % -20.72 % 69,706 0.09 2 -0.2832 % 2,392.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2208 % 2,164.8
Perpetual-Premium 5.71 % 5.10 % 145,024 5.35 19 0.0165 % 2,008.4
Perpetual-Discount 5.43 % 5.45 % 240,824 14.69 58 0.2495 % 2,009.0
FixedReset 5.26 % 3.07 % 345,038 3.26 47 0.0869 % 2,273.3
Performance Highlights
Issue Index Change Notes
RY.PR.A Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 22.16
Evaluated at bid price : 22.30
Bid-YTW : 5.06 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.L FixedReset 228,920 Dundee sold four blocks to anonymous, three of 25,000 shares each and one of 12,400 shares, all at 27.31. Dejsardins crossed 61,000 at 27.30. RBC crossed three blocks, of 10,000 shares, 15,000 and 70,000, all at 27.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.28
Bid-YTW : 2.99 %
CM.PR.A OpRet 199,340 Called for redemption. Desjardins bought three blocks from Nesbitt, one of 90,600 and two of 50,000 each, all at 24.98.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.63 %
CM.PR.I Perpetual-Discount 185,784 RBC crossed blocks of 45,000 and 107,800, both at 22.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 22.18
Evaluated at bid price : 22.32
Bid-YTW : 5.28 %
RY.PR.E Perpetual-Discount 75,745 Scotia sold 28,900 to anonymous at 22.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-20
Maturity Price : 21.96
Evaluated at bid price : 22.08
Bid-YTW : 5.17 %
BNS.PR.T FixedReset 66,095 RBC crossed 58,000 at 27.92.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.90
Bid-YTW : 2.80 %
TD.PR.K FixedReset 49,570 Nesbitt crossed 20,000 at 27.87; Desjardins crossed 11,300 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.88
Bid-YTW : 3.03 %
There were 55 other index-included issues trading in excess of 10,000 shares.

October 19, 2010

Tuesday, October 19th, 2010

The BoC left the overnight rate unchanged:

The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012. This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending. With housing activity declining markedly as anticipated and household debt considerations becoming more important, the Bank expects household expenditures to decelerate to a pace closer to the rate of income growth over the projection horizon.

The recent moderation in core inflation is consistent with the persistence of significant excess supply and a deceleration in the growth of unit labour costs. The Bank judges that the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that year, as had been anticipated in July.

At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.

The Basel Committee has released its The Basel Committee’s response to the financial crisis: report to the G20:

Several of the capital requirements introduced by the Committee to mitigate the risks arising from firm-level exposures among global financial institutions will also help to address systemic risk and interconnectedness. These include:
  • capital incentives for banks to use central counterparties for over-the-counter derivatives;
  • higher capital requirements for trading and derivative activities, as well as complex securitisations and off-balance sheet exposures (eg structured investment vehicles);
  • higher capital requirements for inter-financial sector exposures; and
  • the introduction of liquidity requirements that penalise excessive reliance on short term, interbank funding to support longer dated assets.

For the third point, I believe they mean intra- rather than inter-, but never mind. While such a step is long overdue, I’m not sure what the specifics of this point has been; I don’t think there has been any change in the absurd risk-weighting of bank paper according to the sovereign.

The use of “gone concern” contingent capital would increase the contribution of the private sector to resolving future banking crises and thereby reduce moral hazard. The Committee recently published a proposal that would require the contractual terms of capital instruments to include a clause that will allow them – at the discretion of the relevant authority – to be written off or converted to common shares if the bank is judged to be non-viable by the relevant authority or if it received a public sector capital injection (or equivalent support) without which it would have become non-viable.

The Committee also is reviewing the potential role of “going concern” contingent capital and bail-in debt as a further way to strengthen the loss absorbency of systemic banks. The objective here is to decrease the probability of banks reaching the point of non-viability and, if they do reach that point, to help ensure that there are additional resources that would be available to manage the resolution or restructuring of banking institutions.

Note that the minimal conditions for BIS-compliant contingent capital will do nothing to avert a crisis – at best, they will merely mitigate a crisis once it has arisen. Additionally, the emphasis on regulatory triggers will probably make it harder, not easier, for a troubled bank to raise capital, while the “bail-in debt” (which I take to mean senior debt that will be written down on the regulators’ say-so) simply represents bureaucratic ursurpation of the role of bankruptcy courts.

Bloomberg picked up on the story that introduction of the bank liquidity rules will not be as stringent as previously thought:

Banks will have until 2015 to fully implement rules on how much cash and liquid securities they must hold to gird against a funding shortage in a crisis, the Basel Committee on Banking Supervision said.

The rules are part an overhaul of bank capital requirements the Basel Committee is working on to prevent another financial crisis. Banks rallied in European trading after the committee, the global financial standard setter, also said it would review the rules to make sure they aren’t too onerous.

“The committee is confirming that it’s backing away from implementing a stringent liquidity rule in the foreseeable future,” said Carlos Egea, a banking analyst at Morgan Stanley in London. “If the initial proposals had been adopted, it would have been very difficult for many European banks to sustain the size of their balance sheets and therefore their current business models.”

The issue of repo financing is back on the front burner:

A Standard & Poor’s plan to change the way it rates the credit risk of counterparties in repurchase agreements will boost costs for broker-dealers who draw cash through the arrangements and shrink the pool of liquid assets for money funds, according to industry participants.

Today is the final day in a one-month public comment period on S&P’s proposal to view unrated broker-dealers serving as counterparties in repos to rated money funds as having “high credit risk.” S&P now assigns to an unrated counterparty that’s at least half-owned by a rated entity the parent company’s risk level.

“There are a lot of issues that go on if something goes wrong with the counterparty,” said Peter Rizzo, senior director of fund services at S&P in New York, in an interview. “That is not a risk we want to see in our rated funds. While we are not ignorant to the fact that our criteria may change behavior, we need to apply and develop criteria that we feel is best suited for AAA standard.”

There is certainly a lot of sloppiness in the repo market. The Task Force on Tri‐Party Repo Infrastructure, part of the New York Fed’s Payments Risk Committee, reported in May:

In many cases, Cash Investors were unprepared to cope with the consequences of a Dealer default, in particular the potential need to manage and liquidate collateral securing a defaulted repo position. In some cases, Cash Investors financed assets that they would not normally hold outright.

… which shows a degree of dumbness breathtaking in its implications.

CIBC had done an AUD Covered Bonds.

Westcoast Energy (W.PR.H, W.PR.J) was confirmed at Pfd-2(low) by DBRS.

Barry Critchley of the Post writes a column on Canadian mortgage bonds:

The latest example plays out on Friday when Royal Bank of Canada closes its inaugural $600-million issue, the sale of National Housing Act mortgage-backed securities to institutional buyer.

On this deal, the coupon was 2.17%, the yield to maturity was 2.29% and the spread was 51 basis points above comparable Canada bonds.

But the securities sold in the six issues so far differ from Canada Mortgage Bonds in one major way: They amortize over the term of the issue. Accordingly, investors receive a combination of principal and interest on a monthly basis. (The exact mix of principal and interest is not known ahead of time.)

And because of the amortizing nature of the securities, and in a low interest-rate world, holders need a higher yield as a compensation. (The reason: The yield to maturity calculation assumes the interest payments are reinvested at the original yield.)

“Investors need a higher spread because of the prepayment risk and the pain factor [of not being able to reinvest at the original yield],” said one participant.

The explanation of the need for higher yield doesn’t make a whole lot of sense, but never mind.

The Canadian Civil Liberties Association has urged PC Adam Josephs to withdraw his childish lawsuit, fearing libel chill. Frankly, I don’t think the lawsuit stands a chance in court; it’s simply needless aggravation, just like so many of the G-20 arrests. The next time the press or the Toronto Police Service wants to bleat about the public’s lack of cooperation with, and distrust of, the police – I suggest the writer look at the video of Officer Bubbles’ conduct during the G-20 protests linked yesterday.

There are, of course, the usual chorus of ignorant opinions regarding privacy rights – sorry, Bubbly-poo has every right to find out who posted the comments. That is the first step, but by no means a guarantee, to collecting on a defamation suit. You post – you’re liable. If you don’t want to be liable, don’t say it, because freedom of speech does not mean freedom to defame. If I should tell my girlfriend that XYZ is a pederast … that’s fine, if we’re in private. If I shout it to her across a crowded restaurant … guess what? I’m liable. What makes this so interesting is the privacy commissioner running amok:

Google Inc. violated Canadian privacy law by collecting personal information from unsecured wireless networks across the country for its Street View service, Canada’s Privacy Commissioner said Tuesday.

For the life of me, I don’t understand how this can be construed as an invasion of privacy. They were BROADCASTING the damn stuff! Over unsecured networks! They could have chosen to secure their networks, they could have chosen not to use an unsecured network … but they didn’t. They chose to broadcast their eMails, etc., over an unsecured network. Does the privacy commissioner’s stance mean that I can shout across a crowded restaurant that XYZ is a pederast, free from all liability provided I claim that I was having a private conversation? It’s going to take a while for the laws to become clear on this.

The Canadian preferred share market was dealt a setback today on exploding volume, with PerpetualDiscounts down 16bp and FixedResets losing 6bp.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.2910 % 2,176.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.2910 % 3,297.3
Floater 2.87 % 3.20 % 83,545 19.24 3 -0.2910 % 2,350.2
OpRet 4.93 % 4.11 % 83,462 0.76 9 0.0173 % 2,362.3
SplitShare 5.87 % -27.67 % 64,541 0.09 2 0.2027 % 2,399.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0173 % 2,160.1
Perpetual-Premium 5.71 % 5.13 % 144,384 5.36 19 -0.2678 % 2,008.0
Perpetual-Discount 5.44 % 5.46 % 237,282 14.70 58 -0.1551 % 2,004.0
FixedReset 5.27 % 3.08 % 343,358 3.26 47 -0.0602 % 2,271.4
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset -2.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 23.32
Evaluated at bid price : 25.66
Bid-YTW : 4.30 %
HSB.PR.C Perpetual-Discount -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 23.27
Evaluated at bid price : 23.51
Bid-YTW : 5.47 %
MFC.PR.C Perpetual-Discount -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 19.51
Evaluated at bid price : 19.51
Bid-YTW : 5.84 %
PWF.PR.K Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.51
Evaluated at bid price : 22.69
Bid-YTW : 5.47 %
MFC.PR.D FixedReset -1.04 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.53
Bid-YTW : 3.86 %
BAM.PR.I OpRet 1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-30
Maturity Price : 25.25
Evaluated at bid price : 25.55
Bid-YTW : 4.30 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.J Perpetual-Discount 141,238 Scotia crossed 29,400 at 22.34; Nesbitt crossed blocks of 30,000 and 50,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.21
Evaluated at bid price : 22.35
Bid-YTW : 5.11 %
RY.PR.E Perpetual-Discount 76,725 Nesbitt crossed 50,000 at 22.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 21.88
Evaluated at bid price : 21.99
Bid-YTW : 5.19 %
CM.PR.I Perpetual-Discount 59,929 TD crossed blocks of 14,700 and 11,100 at 22.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 22.09
Evaluated at bid price : 22.22
Bid-YTW : 5.30 %
BNS.PR.P FixedReset 59,026 Nesbitt crossed 45,000 at 26.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.48
Bid-YTW : 2.50 %
RY.PR.A Perpetual-Discount 55,655 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-19
Maturity Price : 21.65
Evaluated at bid price : 22.00
Bid-YTW : 5.12 %
TD.PR.M OpRet 52,842 Desjardins crosse 49,500 at 25.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-18
Maturity Price : 25.75
Evaluated at bid price : 25.88
Bid-YTW : -3.37 %
There were 78 other index-included issues trading in excess of 10,000 shares.

Tranche Retention: One Size Doesn't Fit All

Tuesday, October 19th, 2010

The Federal Reserve Board has released, as required by the Dodd-Frank Act, a study titled Report to the Congress on Risk Retention:

The study defines and focuses on eight loan categories and on asset-backed commercial paper (ABCP). ABCP can be backed by a variety of collateral types but represents a sufficiently distinct structure that it warrants separate consideration. These nine categories, which together account for a significant amount of securitization activity, are
1. Nonconforming residential mortgages (RMBS)
2. Commercial mortgages (CMBS)
3. Credit cards
4. Auto loans and leases
5. Student loans (both federally guaranteed and privately issued)
6. Commercial and industrial bank loans (collateralized loan obligations, or CLOs)
7. Equipment loans and leases
8. Dealer floorplan loans
9. ABCP

The study also addresses the interaction of credit risk retention and accounting standards, including FAS 166 and 167. Depending on the type and amount of risk retention required, a securitizer could become exposed to potentially significant losses of the issuance entity, which could require accounting consolidation when considered with the securitizer’s decision making power over the issuance entity. Given the earnings and regulatory capital consequences of maintaining assets on–balance sheet, companies may be encouraged to structure securitization to again achieve off-balance-sheet treatment. For example, institutions may cede the power over ABS issuance entities by selling servicing rights or distancing themselves from their customers primarily to avoid consolidating the assets and liabilities of the issuance entities. Alternatively, the potential interaction of accounting treatment, regulatory capital requirements and new credit risk retention standards may make securitization a less attractive form of financing and may result in lower credit availability.

Overall, the study documents considerable heterogeneity across asset classes in securitization chains, deal structure, and incentive alignment mechanisms in place before or after the financial crisis. Thus, this study concludes that simple credit risk retention rules, applied uniformly across assets of all types, are unlikely to achieve the stated objective of the Act—namely, to improve the asset-backed securitization process and protect investors from losses associated with poorly underwritten loans.

Moreover, the Board recommends that that the following considerations should be taken into account by the agencies responsible for implementing the credit risk retention requirements of the Act in order to help ensure that the regulations promote the purposes of the Act without unnecessarily reducing the supply of credit. Specifically, the rulemaking agencies should:
1. Consider the specific incentive alignment problems to be addressed by each credit risk retention requirement established under the jointly prescribed rules.

2. Consider the economics of asset classes and securitization structure in designing credit risk retention requirements.

3. Consider the potential effect of credit risk retention requirements on the capacity of smaller market participants to comply and remain active in the securitization market.

4. Consider the potential for other incentive alignment mechanisms to function as either an alternative or a complement to mandated credit risk retention.

5. Consider the interaction of credit risk retention with both accounting treatment and regulatory capital requirements.

6. Consider credit risk retention requirements in the context of all the rulemakings required under the Dodd–Frank Act, some of which might magnify the effect of, or influence, the optimal form of credit risk retention requirements.

7. Consider that investors may appropriately demand that originators and securitizers hold alternate forms of risk retention beyond that required by the credit risk retention regulations.

8. Consider that capital markets are, and should remain, dynamic, and thus periodic adjustments to any credit risk retention requirement may be necessary to ensure that the requirements remain effective over the longer term, and do not provide undue incentives to move intermediation into other venues where such requirements are less stringent or may not apply.

Gee, it sounds like tranche-retention isn’t a magic bullet after all, eh?

Tranche retention is a silly idea. It is, after all,tranche retention that exacerbated the crisis, since the big banks kept a significant portion of their toxic assets on the books anyway; in addition, it seeks to diminish the role of due diligence on the part of the buyers of these things.

Tranche retention was last discussed on PrefBlog in the post SEC Proposes ABS Tranche Retention Requirement