Archive for June, 2011

June 29, 2011

Wednesday, June 29th, 2011

Yellow Media has announced:

that the Federal Minister of Industry, under the Investment Canada Act, has approved the sale of Trader Corporation to funds advised by Apax Partners. Completion of the sale remains subject to satisfaction of other customary conditions. Yellow Media Inc. currently expects the transaction to close by the end of July 2011.

This release – or perhaps some encouragement from the company – provoked DBRS to comment:

DBRS notes that the Trader sale is expected to accelerate the Company’s de-leveraging efforts. The decision to sell Trader remains a critical component in achieving improved leverage – to around 2.0 times debt-to-EBITDA from 2.74 times currently. As stated in our March 25, 2011, press release, DBRS believes that a stronger financial profile remains prudent given the uncertainty that the Company’s business risk profile faces with its multi-year transition from print to digital.

Despite Yellow Media’s leading position in the directories business, its principal segment following the sale of Trader, DBRS notes that this division continues to face significant risks as it transforms from a print-placement and listing organization into an online/digital media and marketing service provider.

While DBRS notes that the Company has achieved reasonable results through the early stages of this transition (as of Q1 2011, more than 25% of Directories revenue is digital) including relatively steady normalized EBITDA and cash flow from operations, DBRS is increasingly concerned (and will continue to monitor) the potential for weakening in Yellow Media’s future business risk profile as the digital transition continues. As such, as the digital component becomes an ever-larger portion of the Directories segment’s business profile, more meaningful evidence that additional challenges are being dealt with successfully will be required in order to maintain the present ratings.

For some reason known only to the elect, Yellow preferreds had an excellent day, returning from +6.76% (YLO.PR.A) to +9.96% (YLO.PR.C).

They also downgraded Anglo-Irish due to the government’s ursurpation of the proper role of bankruptcy court:

DBRS Inc. (DBRS) has today downgraded the non-guaranteed senior debt and deposit ratings of Anglo Irish Bank Corporation Limited (Anglo Irish or the Bank), including its Issuer Rating, to CCC from B (low). All non-government guaranteed ratings remain Under Review with Negative Implications, where they were placed on 10 September 2010. Today’s rating action does not impact the various Government guaranteed debt and deposits rating of Anglo Irish which remain at ‘A’ with a Negative trend.

As noted in DBRS’s press release on 4 April 2011, DBRS viewed non-guaranteed senior bondholders of Anglo Irish at an increased risk of adverse actions given the state of the Irish banking system and the wind-down mode of Anglo Irish. Today’s rating action reflects the recent statements by the Minister for Finance which, in DBRS’s opinion, firmly underline the Government’s intent to pursue burden sharing by senior bondholders of what the Irish Government defines as ‘non-going concern’ banks, such as Anglo Irish. As such, DBRS sees the probability of adverse actions towards senior bondholders as significantly increased.

DBRS notes that the Irish Government has stated that it will only pursue such actions should it receive approval from the European Central Bank (ECB). However, at this time the ECB and other E.U. members have been firm in their position that no such actions be taken towards senior bondholders of banks.

The Greek austerity plan passed:

Greek Prime Minister George Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt-laden nation.

Papandreou won by 155 votes to 138, a wider margin than last week’s confidence ballot, as some opposition lawmakers abstained rather than oppose a package that is the condition for further rescue funds.

The yield on Greece’s two-year government bond dropped to 26.94 percent today from 28.54 percent yesterday. The euro traded at $1.4359 at 5:15 p.m. in Athens, compared with $1.4421 when the vote started.

Clouds of gas engulfed the square outside parliament as lawmakers voted on a package whose defeat could have led to the euro area’s first sovereign default. Greece needs to cover 6.6 billion euros of maturing bonds in August and government officials have said they may lack the money to pay wages and pensions by mid-July.

German banks are cooperating with the Greek plans:

German and French lenders are the biggest foreign holders of Greek debt and their participation is key to the European Union goal of getting banks to roll over at least 30 billion euros ($43 billion) of bonds. German firms and the finance ministry are discussing the idea of rolling over bonds maturing until 2020, and not just those running through 2014, as had been first envisaged, said the people, who declined to be identified because the talks are confidential.

“If Greece goes into default, then we would have a disruption in Europe that could more quickly impact other countries in a way that goes far beyond what Lehman Brothers meant for us,” said [Deutsche Bank CEO Josef] Ackermann, 63.

Ackermann, who is also chairman of the Institute of International Finance, which represents more than 400 financial companies, said they are “working around the clock” with special teams, rating companies and bodies overseeing credit- default swaps to test whether any agreement would trigger a credit event. He warned that any agreement is “highly complex” and could force investors to write down their Greek holdings by an estimated 30 percent to 45 percent if done incorrectly.

It’s a black day for Canadian capital market participants:

The proposed merger of TMX Group Inc. (X-T44.611.052.41%) with London Stock Exchange Group PLC is dead.

TMX said a majority of the votes cast by proxy before Wednesday’s deadline in fact supported the deal, but it was clear the two exchange operators wouldn’t get the two-thirds required in a vote scheduled for Thursday.

TMX Group chief executive officer Tom Kloet said the company will now focus on other alternatives, including a rival bid from Maple Group Acquisition Corp., a collection of Canadian financial institutions and pension funds. The bid by Maple, worth about $50 a share, had been conditional on the defeat of the TMX-LSE merger.

The oligarchs are again triumphant; I had been hoping for a little bit of competition in Canada. However, I can still cling to the hope that the Competition Bureau will take the obvious step of killing the Maple bid, leaving the TMX to have to scramble for a partner.

We learnt during the Panic of 2007 just how important US-domiciled Money Market Funds were to European bank financing. So this is interesting:

Institutions pulled out of U.S. prime money-market funds at the fastest pace in 15 months, shifting to funds that invest only in U.S. government-backed securities out of concern the European debt crisis would worsen.

Institutional funds eligible to buy corporate debt lost $39 billion to net withdrawals in the week ended June 28 and $75 billion in the past two weeks, falling to $1.04 trillion, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits, rising to $599 billion.

Dan Hallett has a nice piece in the Globe titled Distribution rate does not equal yield.

Canadian inflation popped up:

Canadian inflation gave economists an unpleasant surprise Wednesday when data from May showed it shot up to its highest level in more than eight years, putting all eyes on the Bank of Canada ahead of its July interest-rate decision.

Annual inflation hit a higher-than-expected 3.7% for the month, and while gasoline was the main culprit, core inflation also jumped, from 1.6% in April to 1.8% in May. The core figure, which factors out volatile items like food and gas, came in well above the Bank of Canada’s 1.4% target for the second quarter.

There’s some criticism of Mayor Ford over his refusal to walk over and say hello at the Pride ceremonies … at the same time, Mayor Bloomberg is rubbing his hands with glee at the business that’s going to come with New York’s gay marriage law. Mayor Bloomberg seems to understand that cities are all about doing business – and is gunning for New York to grab market share away from Toronto.

It was a downish day in the Canadian preferred share market, with PerpetualDiscounts losing 19bp, FixedResets up 1bp and DeemedRetractibles down 5bp. Volatility picked up, all to the downside. Volume was fair-to-good.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.35%, having had a rough couple of days, and so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 185bp, a narrowing from the 195bp reported June 22 due to the move in long-term corporate yields.

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 -0.4479 % 2,434.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4479 % 3,661.7
Floater 2.49 % 2.23 % 42,854 21.70 4 -0.4479 % 2,628.8
OpRet 4.87 % 2.78 % 63,030 0.25 9 -0.0944 % 2,434.2
SplitShare 5.25 % 1.97 % 58,121 0.66 6 -0.0959 % 2,503.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0944 % 2,225.8
Perpetual-Premium 5.69 % 5.34 % 151,538 1.29 12 0.0397 % 2,077.3
Perpetual-Discount 5.47 % 5.52 % 121,225 14.59 18 -0.1943 % 2,183.0
FixedReset 5.18 % 3.31 % 211,247 2.71 57 0.0093 % 2,305.6
Deemed-Retractible 5.09 % 4.90 % 284,776 8.15 47 -0.0457 % 2,148.3
Performance Highlights
Issue Index Change Notes
ELF.PR.F Perpetual-Discount -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 22.37
Evaluated at bid price : 22.75
Bid-YTW : 5.93 %
HSB.PR.C Deemed-Retractible -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.69
Bid-YTW : 5.28 %
GWO.PR.N FixedReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 3.76 %
HSB.PR.D Deemed-Retractible -1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 5.28 %
BAM.PR.O OpRet -1.07 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 3.11 %
BAM.PR.K Floater -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 2.77 %
ELF.PR.G Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 20.93
Evaluated at bid price : 20.93
Bid-YTW : 5.79 %
BMO.PR.H Deemed-Retractible 1.06 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 3.69 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.A Deemed-Retractible 151,474 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 5.70 %
TD.PR.O Deemed-Retractible 94,848 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.90 %
PWF.PR.I Perpetual-Premium 62,250 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.75 %
BMO.PR.M FixedReset 57,470 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-25
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 3.22 %
BMO.PR.P FixedReset 46,400 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.87
Bid-YTW : 3.38 %
TD.PR.Y FixedReset 44,375 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-31
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 3.38 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BMO.PR.K Deemed-Retractible Quote: 25.76 – 26.47
Spot Rate : 0.7100
Average : 0.4344

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 4.74 %

BAM.PR.K Floater Quote: 18.91 – 19.50
Spot Rate : 0.5900
Average : 0.3746

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 2.77 %

GWO.PR.N FixedReset Quote: 24.31 – 24.73
Spot Rate : 0.4200
Average : 0.2850

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 3.76 %

NA.PR.L Deemed-Retractible Quote: 25.15 – 25.48
Spot Rate : 0.3300
Average : 0.2264

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.88 %

BNS.PR.Q FixedReset Quote: 26.20 – 26.49
Spot Rate : 0.2900
Average : 0.1870

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-25
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.24 %

MFC.PR.E FixedReset Quote: 26.31 – 26.59
Spot Rate : 0.2800
Average : 0.1798

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.31
Bid-YTW : 3.93 %

June 28, 2011

Tuesday, June 28th, 2011

Singapore is trying to use bank capitalization as a competitive tool:

Singapore said it will set capital levels for local lenders above the global minimum to solidify the city’s reputation as a financial hub after regulators tightened norms for the world’s largest banks.

Lenders incorporated in Singapore will need to meet a minimum common equity Tier 1 capital adequacy ratio of 6.5 percent from Jan. 1, 2015, the Monetary Authority of Singapore said in a statement yesterday. That’s 2 percentage points more than the so-called Basel III rules announced last year.

The more stringent standard “underlines Singapore’s status as a very solid and prudently managed financial center,” Gupta said. “Nevertheless, we hope the global regulators will continue to monitor transition arrangements across countries to ensure a level playing field and avoid regulatory arbitrage.”

Singapore plans to raise the Tier 1 capital adequacy ratio to 8 percent from 6 percent and introduce a capital conservation buffer of 2.5 percentage points.

“Each of the Singapore-incorporated banks is systemically important in Singapore and has a substantial retail presence,” the city-state’s central bank said in the statement. “The higher capital requirements will further strengthen their ability to operate under stress conditions.”

One wonders whether OSFI will deem the Canadian-incorporated banks to be systemically important in Canada.

Morgan Stanley has, apparently, lost some change on a TIPS / nominals box trade:

The bank’s interest-rates trading group lost at least tens of millions of dollars on the trade, which the firm has been unwinding, two of the people said, declining to be identified because the transaction isn’t public. Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment.

Traders at the bank bet that inflation expectations for the next five years would rise in Treasury markets, while forecasts for the next 30 years would fall, according to two of the people. Such wagers on so-called breakeven rates involve paired purchases and short sales of Treasuries and Treasury Inflation Protected Securities, or TIPS, in both maturities.

Declining crude oil prices disproportionately hurt the value of TIPS maturing within five years because they have fewer remaining interest payments that can benefit from a rebound in prices. The five-year breakeven rate dropped to 1.88 percent yesterday from 2.04 percent at the end of May, indicating underperformance by five-year TIPS relative to nominals.

The 30-year breakeven rate climbed to 2.57 percent yesterday from 2.42 percent at the end of May, indicating outperformance by the 30-year TIPS relative to nominals.

Another unpleasant day for the Yellow preferreds, with the worst, YLO.PR.D, down 8.56% and the best, YLO.PR.A, down a mere 1.66%.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 23bp, FixedResets down 10bp and DeemedRetractibles losing 13bp. Volatility picked up – but it was all on the downside. Volume was average.

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 -0.4342 % 2,445.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4342 % 3,678.2
Floater 2.48 % 2.23 % 42,181 21.70 4 -0.4342 % 2,640.6
OpRet 4.87 % 2.53 % 62,618 0.25 9 -0.0386 % 2,436.5
SplitShare 5.25 % 1.96 % 56,478 0.66 6 0.1236 % 2,505.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0386 % 2,227.9
Perpetual-Premium 5.69 % 5.21 % 140,346 0.90 12 -0.0037 % 2,076.5
Perpetual-Discount 5.46 % 5.52 % 121,641 14.61 18 0.2328 % 2,187.2
FixedReset 5.18 % 3.33 % 208,451 2.71 57 -0.0993 % 2,305.4
Deemed-Retractible 5.09 % 4.91 % 279,230 8.16 47 -0.1309 % 2,149.3
Performance Highlights
Issue Index Change Notes
GWO.PR.I Deemed-Retractible -1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.40
Bid-YTW : 5.86 %
BMO.PR.H Deemed-Retractible -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 4.36 %
TRI.PR.B Floater -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-28
Maturity Price : 22.98
Evaluated at bid price : 23.25
Bid-YTW : 2.22 %
TD.PR.O Deemed-Retractible -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.91 %
CIU.PR.C FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-28
Maturity Price : 23.06
Evaluated at bid price : 24.70
Bid-YTW : 3.34 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.C FixedReset 51,356 TD.PR.C crossed 40,000 at 26.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.73
Bid-YTW : 3.18 %
TD.PR.I FixedReset 39,550 TD crossed 35,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.43
Bid-YTW : 3.29 %
HSB.PR.D Deemed-Retractible 39,279 RBC crossed 24,500 at 24.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.79
Bid-YTW : 5.13 %
SLF.PR.B Deemed-Retractible 30,964 Desjardins crossed 25,000 at 23.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.45
Bid-YTW : 5.61 %
TD.PR.Q Deemed-Retractible 28,918 TD crossed 26,500 at 26.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-31
Maturity Price : 25.50
Evaluated at bid price : 26.24
Bid-YTW : 4.90 %
HSE.PR.A FixedReset 27,019 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-28
Maturity Price : 23.36
Evaluated at bid price : 25.60
Bid-YTW : 3.61 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.Z FixedReset Quote: 25.00 – 25.50
Spot Rate : 0.5000
Average : 0.3390

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.00
Bid-YTW : 3.56 %

BMO.PR.H Deemed-Retractible Quote: 25.50 – 25.86
Spot Rate : 0.3600
Average : 0.2151

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 4.36 %

TD.PR.O Deemed-Retractible Quote: 25.13 – 25.44
Spot Rate : 0.3100
Average : 0.1858

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.91 %

NA.PR.N FixedReset Quote: 26.35 – 26.65
Spot Rate : 0.3000
Average : 0.1964

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-15
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.07 %

GWO.PR.I Deemed-Retractible Quote: 22.40 – 22.75
Spot Rate : 0.3500
Average : 0.2479

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.40
Bid-YTW : 5.86 %

POW.PR.B Perpetual-Discount Quote: 24.21 – 24.48
Spot Rate : 0.2700
Average : 0.1879

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-28
Maturity Price : 23.96
Evaluated at bid price : 24.21
Bid-YTW : 5.53 %

June 27, 2011

Monday, June 27th, 2011

A deal on Greece may have been reached:

Greek creditors may be headed toward an agreement to roll over 70 percent of their bonds into longer maturity debt to prevent a default and meet politicians’ calls that they contribute to Greece’s second rescue in as many years.

Under the French plan, 50 percent of the Greek debt held would be rolled over into 30-year bonds. The remaining 20 percent would go into a special purpose vehicle used to guarantee the 30-year debt, a person familiar with the plan said yesterday.

Thirty years will allow banks to slowly take reserves against their inevitable losses, while the current crop of politicians will have all retired by the time the bill comes due. Win-win!

A bit of good news on the TMX-LSE front:

TMX Group (X-T44.46-0.74-1.64%) and London Stock Exchange Group PLC got a big endorsement for their merger plan as a group of senior Canadian financial executives gave their support, saying the rival Maple Group plan to buy TMX would leave the capital markets too concentrated.

The 11-member group includes representatives of some large TMX shareholders, including Bill Holland, chairman of mutual fund company CI Financial Corp., as well as the heads of independent brokerages including Raymond James’ Canadian operations and Haywood Securities.

How ’bout that Yellow Media, eh?:

Yellow Media Inc. (YLO-T2.30-0.69-23.08%) was again being lambasted in trading, falling nearly 19 per cent in late morning trading on Monday. The stock has been suffering a lot recently, and this recent downturn seems connected to a change of opinion by Credit Suisse. Analysts there cut their recommendation to “underperform” from “neutral”, with a $2 price target, down from $5 previously.

18.2-million shares as of 2pm! Wow! Further details came available later:

“Our analysis suggests that print declines are accelerating while print conversion to digital remains gradual,” [Credit Suisse Canada analyst] Mr. [Colin] Moore wrote in the Monday note, titled “Raising a Yellow Flag”.

“We believe investors want to see a ‘de-risking’ of the story with respect to debt repayment and levels of [free cash flow] available after dividends,” analyst Drew McReynolds of RBC Dominion Securities said in a June 26 note to clients.

“We would not disagree, and we believe a more conservative capital structure and payout policy that provides greater financial flexibility and more certainty during the business transformation would go a long way toward achieving this end and ‘reflating’ both equity and debt values.”

The YLO prefs got hammmered again; losing between 8.21% at best (YLO.PR.B) and 14.21% at worst (YLO.PR.C).

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 14bp, FixedResets down 1bp and DeemedRetractibles up 2bp. Not much volatility (surprisingly, confined to bad days for BAM and related issues) and volume was average.

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 -0.5602 % 2,456.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.5602 % 3,694.2
Floater 2.46 % 2.23 % 42,127 21.70 4 -0.5602 % 2,652.1
OpRet 4.87 % 2.43 % 64,964 0.26 9 -0.0214 % 2,437.4
SplitShare 5.25 % 1.95 % 58,484 0.66 6 -0.1189 % 2,502.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0214 % 2,228.8
Perpetual-Premium 5.67 % 5.18 % 140,340 1.30 12 0.0742 % 2,076.5
Perpetual-Discount 5.47 % 5.53 % 123,263 14.62 18 0.1408 % 2,182.1
FixedReset 5.17 % 3.29 % 208,028 2.71 57 -0.0080 % 2,307.7
Deemed-Retractible 5.08 % 4.93 % 279,818 8.17 47 0.0181 % 2,152.1
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-27
Maturity Price : 19.11
Evaluated at bid price : 19.11
Bid-YTW : 2.74 %
BAM.PR.J OpRet -1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.78
Bid-YTW : 4.04 %
BNA.PR.E SplitShare -1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.12
Bid-YTW : 5.59 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.M FixedReset 107,020 Nesbitt crossed 100,000 at 26.24.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-25
Maturity Price : 25.00
Evaluated at bid price : 26.13
Bid-YTW : 3.06 %
CM.PR.K FixedReset 59,303 RBC crossed 49,900 at 26.44.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.36
Bid-YTW : 3.33 %
TD.PR.C FixedReset 41,650 RBC crossed 25,000 at 26.70, then bought 12,200 from National at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.70
Bid-YTW : 3.22 %
RY.PR.Y FixedReset 41,234 RBC crossed 22,000 at 27.27.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-24
Maturity Price : 25.00
Evaluated at bid price : 27.27
Bid-YTW : 3.45 %
TD.PR.M OpRet 40,600 RBC crossed 39,500 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-27
Maturity Price : 25.50
Evaluated at bid price : 25.75
Bid-YTW : 1.57 %
RY.PR.T FixedReset 39,320 RBC crossed 15,000 at 27.30; Desjardins crossed 10,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 27.30
Bid-YTW : 3.38 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNA.PR.E SplitShare Quote: 24.12 – 24.58
Spot Rate : 0.4600
Average : 0.3138

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 24.12
Bid-YTW : 5.59 %

BAM.PR.J OpRet Quote: 26.78 – 27.10
Spot Rate : 0.3200
Average : 0.2185

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.78
Bid-YTW : 4.04 %

BAM.PR.R FixedReset Quote: 25.30 – 25.55
Spot Rate : 0.2500
Average : 0.1587

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-27
Maturity Price : 23.26
Evaluated at bid price : 25.30
Bid-YTW : 4.36 %

FTS.PR.F Perpetual-Discount Quote: 23.89 – 24.20
Spot Rate : 0.3100
Average : 0.2495

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-27
Maturity Price : 23.42
Evaluated at bid price : 23.89
Bid-YTW : 5.16 %

BMO.PR.K Deemed-Retractible Quote: 25.79 – 25.97
Spot Rate : 0.1800
Average : 0.1236

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.79
Bid-YTW : 4.71 %

BAM.PR.K Floater Quote: 19.11 – 19.35
Spot Rate : 0.2400
Average : 0.1915

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-27
Maturity Price : 19.11
Evaluated at bid price : 19.11
Bid-YTW : 2.74 %

Capital Surcharges for Globally Important Investment Banks

Monday, June 27th, 2011

The Bank for International Settlements has announced:

the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), agreed on a consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in. These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time.

The GHOS is submitting this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. This package of measures will be issued for consultation around the end of July 2011.

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank’s systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.

The GHOS and BCBS will continue to review contingent capital, and support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis.

I have mixed views on this. I reported last August that the push towards surcharges was gaining ground and have been advocating surcharges based on size since (at least!) March 2009.

However, I am unfavourably disposed towards the narrow focus of the plan, which affects only “global systemically important banks” as defined by the regulators and then uses an as-yet untested formula “based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity” to assess the surcharge imposed. There’s a lot of room for error there, and a lot of room for lobbying. There’s also a lot of cliff effect: what will be the effect on the markets when a bank’s G-SIB status is changed? What if it changes during the height of a crisis? What if a well capitalized medium sized bank is interested in purchasing a failing medium sized bank during a crisis? We saw that during the crisis, a lot of the American banks bulked up – will they be willing to bid next time? And finally, of course, the subjective nature of the G-SIB status determination opens up the door for a lot of lobbying and corruption.

I would be much happier with a system that was formula-based and applied to all banks on a progressive basis.

I was very pleased to see that the committees “support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis”. The critical part of that phrase is high-trigger contingent capital, which is really one in the eye for those morons at OSFI, who have decided that the lowest possible trigger is the best. However, the “low-trigger” policy was enacted during the reign of the Assistant Croupier; now that he has departed for a greener pastures with a company he used to regulate (see June 14), the new incumbent may have different ideas.

HIMIPref™ Yield Calculation Change

Sunday, June 26th, 2011

In the comments to the June 22 report, Assiduous Reader drap1 asked:

Hi…quick question about last prefletter. I’ve seen this other times, but here is a clear example:

With respect to TRP.PR.B and TRP.PR.C, TRP.PR.C has a higher dividend, higher reset price and higher market price (both are above $25); however, your model evaluates TRP.PR.C to perpetuity, but TRP.PR.B, to its reset date. What am I missing? Why doesn’t TRP.PR.C get evaluated to its reset date?

TRP.PR.C does resets a year later which could create a small difference depending on the yld curve, but I don’t think that’s the answer.

Good question! For a quick answer, here are the summaries of the two optionCalculationLists on the pseudoPortfolioReportBox:

Report Box
Instrument•:•TRP.PR.B (Security A51015)
PseudoPortfolioElement: Pricing Modification – Base Option ID: Undefined
Reporting: YTM (Port Method) at Bid
*****
Evaluated at bid price : 25.4000
Call 2015-07-30 YTM: 3.51 % [Restricted: 3.51 %] (Prob: 45.09 %)
Call 2020-07-30 YTM: 3.46 % [Restricted: 3.46 %] (Prob: 0.30 %)
Limit Maturity 2041-06-10 YTM: 3.47 % [Restricted: 3.47 %] (Prob: 54.61 %)
YTM (Port Method) : 3.4865 %

and

Report Box
Instrument•:•TRP.PR.C (Security A51016)
PseudoPortfolioElement: Pricing Modification – Base Option ID: Undefined
Reporting: YTM (Port Method) at Bid
*****
Evaluated at bid price : 25.9000
Call 2016-02-29 YTM: 3.65 % [Restricted: 3.65 %] (Prob: 52.02 %)
Limit Maturity 2041-06-10 YTM: 3.56 % [Restricted: 3.56 %] (Prob: 47.98 %)
YTM (Port Method) : 3.6095 %

So part of the problem is a stenographical error: I should have specified that the call on TRP.PR.B was calculated to the second reset date but, frankly, missed that when transcribing the table.

However, the interesting question is the appearance of second reset date in the TRP.PR.B table but not in the TRP.PR.C table, particularly given that the probability of exercise of this option is less than half a percent.

Possible options are added to the calculation list only if the probability of exercise, when initially calculated, is greater than the value OPTION_EXERCISE_CALCULATION_INCREMENT_PROBABILITY, which is currently set to 5%. However, subsequent normalizations did not enforce this constraint.

Additionally, as can be seen from the cashFlowDiscountingAnalysisBox, the cash flows to 2020 for TRP.PR.B extend one month further than the actual call date, as has been previously discussed on PrefBlog in the post What is the Yield of RY.PR.Y? due to the influence of the maturityNoticePeriod.

“Cliff Effects” are a bugaboo in all analysis and have been blamed, at least in part, for the Panic of 2007 (since a credit rating downgrade raised the capital requirements for all regulated holders, who therefore all had a strong prediliction to sell at the same time). By its nature, YTW is subject to cliff effects, at least insofar as it comes to reporting the duration of the YTW scenario (the amount of change in duration for relatively small changes in price is measured by the attribute pseudoConvexityWorst).

Two changes in programming have been made that should make the calculations at least little easier to explain, although cliff effects will still be present:
i) The constraint OPTION_EXERCISE_CALCULATION_INCREMENT_PROBABILITY is enforced during the normalization of option exercise probabilities
ii) maturityNoticePeriod is only accounted for when the exercise date is less than MATURITY_NOTICE_PERIOD days from the calculation date.

I have been toying with the second idea for quite some time and the change will save me a lot of explanations regarding yield calculation. I’ve resisted the idea because (a) as far as I can tell, it won’t make much difference and (b) a complex analytical programme is a chaotic system, meaning that small changes to some parts can cause huge differences in output under certain conditions. But now seems as good a time as any to proceed.

The effect of these changes on the YTW calculation is displayed in the following reports:

WFS.PR.A Term Extension Approved

Friday, June 24th, 2011

This is late, but Mulvihill Capital Management has announced:

that holders of Class A Shares and holders of Preferred Shares of the Fund have approved a proposal to extend the term of the Fund for seven years beyond its scheduled termination date of June 30, 2011, and for automatic successive seven-year terms after June 30, 2018.

As a result, holders of Class A Shares will benefit from ongoing leveraged exposure to a high-quality portfolio consisting principally of common equity securities selected from the ten largest (by market capitalization) financial services companies in each of Canada, the United States and the rest of the world. Holders of Preferred Shares will continue to benefit from fixed cumulative preferential quarterly cash dividends in the amount of $0.13125 per Preferred Share representing a yield of 5.25% per annum on the original issue price of $10.00 per Preferred Share and an attractive seven-year term.

As part of the extension of the term of the Fund, the Fund will also make other changes, including: (i) provide a special redemption right to enable holders of Class A Shares and Preferred Shares to retract their shares on June 30, 2011 on the same terms that would have applied had the Fund redeemed all Class A Shares and Preferred Shares in accordance with the existing terms of such shares; (ii) change the monthly retraction prices for the Class A Shares and the Preferred Shares such that monthly retraction prices are calculated by reference to market price in addition to net asset value and to change the notice period and payment period for the exercise of such rights and the payment of the retraction amount relating thereto; and (iii) consolidate the Class A Shares or redeem the Preferred Shares on a pro rata basis, as the case may be, in order to maintain the same number of Class A Shares and Preferred Shares outstanding.

Shareholders who exercise the special redemption right will receive the amount which they would have received had the June 30, 2011 termination date not been extended. Payments for shares tendered pursuant to the Special Retraction Right will be made no later than 10 business days after June 30, 2011, provided that such shares have been surrendered for redemption on or prior to 5:00 p.m. (Toronto time) on June 17, 2011. The retraction price per Class A Share to be received by a holder of Class A Shares under the Special Retraction Right will be equal to the greater of (a) the NAV per Unit on the Special Retraction Date minus $10.00 and (b) nil. The retraction price per Preferred Share to be received by a holder of Preferred Shares under the Special Retraction Right will be equal to the lesser of: (a) $10.00; and (b) the NAV of the Fund divided by the number of Preferred Shares outstanding on the Special Retraction Date. Any declared and unpaid distributions payable on or before the Special Retraction Date in respect of Class A Shares or Preferred Shares tendered for retraction on the Special Retraction Date will also be paid on the retraction payment date.

This follows publication of the notice of meeting and information circular

The proposal to extend term was discussed on PrefBlog. WFS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

June 24, 2011

Friday, June 24th, 2011

The Europeans are tying themselves in knots while hairsplitting over Greece:

European Union leaders pledged to stabilize the euro-area economy, vowing to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week.

Leaders of Europe’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.

An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.

To make the rollover voluntary, talks with Greek bondholders must be held on a country-by-country basis, not organized from Brussels, an EU official told reporters yesterday. The EU wants national central banks and finance ministries to speak to financial institutions in their countries, the official said.

“We don’t see any way that investors are going to come out being paid on time and in full,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania.

Voluntarily agree to an exchange or there will be a coercive exchange! It would be laughable if it wasn’t so disgusting. Moral suasion from the central banks and finance ministries, eh? I bet that helps a lot when you call your bond guy looking for a bid; I bet that’s a really thin market.

Surprise! The banks don’t like being the voluntary piggy-banks of the state:

German Finance Ministry officials rebuffed a bid by bondholders for a state guarantee of new Greek securities as Chancellor Angela Merkel’s government jostled with creditors over their share of a second rescue for Greece.

German banks and insurers including Deutsche Bank AG (DBK) and Allianz SE (ALV) signaled a willingness to roll over maturing Greek debt if governments offer incentives such as guarantees, said five people with knowledge of the talks. The Finance Ministry sees guarantees as a non-starter because they would undermine the aim of relieving the burden on taxpayers, a government official said.

There are mutterings about another domino:

Russia may face a debt crisis similar to the one gripping Greece by 2030 unless the government reduces spending, said Sergei Ulatov, the resident World Bank economist in Moscow.

“By 2030 the debt level would be unsustainable like in Greece” if nothing changes, Ulatov said in an interview during the Russia and CIS Capital Markets Forum organized by Euromoney in London today. “Right now, we are mostly helped by oil prices and not by a very prudent macroeconomic policy.”

But the first domino’s quite enough:

With default looking ever more likely, the great fear is that a major Greek credit event could imperil some large European banks, given the substantial cross-border sovereign debt held in the eurozone’s biggest economies.

“If there were a failure to resolve that situation it would pose threats to the European financial system, the global financial system, and to European political unity I would conjecture as well,” Federal Reserve chairman Ben Bernanke said Wednesday, underlining the exposure of European money market funds to Greek debt.

I suspect that the Europeans will treat their zombie banks the same way they treated their zombie countries: not by ignoring the problem, but by changing the rules so that there is no problem.

Speaking of dominos and zombie banks…:

Italian banks slumped in Milan trading amid concern the European debt crisis may spread just as lenders face scrutiny from regulators over capital levels.

UniCredit SpA (UCG), Italy’s biggest bank, and Intesa Sanpaolo SpA (ISP), the second-largest, led lenders lower, tumbling as much as 8.9 percent and 7.2 percent respectively. Both stocks were briefly suspended after breaching limits on intraday swings. Italian 10-year bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999.

Moody’s Investors Service said yesterday it may downgrade 13 Italian banks because they are vulnerable to a cut in the government’s credit rating. The firm had said last week it may cut the sovereign rating because the turmoil in Europe could drive the country’s borrowing costs higher.

Nobody is yet seriously worried about US Treasuries:

Two-year yields slipped one basis point to 0.33 percent today compared with a low of 0.31 percent in November. Ten-year yields lost 4 basis points to 2.87 percent today, the lowest since November.

Asssiduous Reader GL brought to my attention a speech by Mike Lazaridis titled The Killam Annual Lecture 2010:

I just want to ask people in the audience to answer a question for me. What would you say is your most prized possession? Have you ever thought about this? [someone in the audience yells out Blackberry] Yes, the Blackberry definitely could be up on that list but I would put something even higher . . . your education! How many people in this room could honestly say that if they thought about it their most prized possession would be their education?

On a slightly more paranoid note, I’ve always liked the point that an education is the one thing that “they” can never take away from you.

ISS backed the TMX-LSE deal:

Institutional Shareholder Services (ISS) instead threw its support behind TMX Group Inc. (X-T45.16-0.14-0.31%)’s proposed merger with London Stock Exchange Group Plc. The recommendation is important because ISS recommendations influence the votes of a number of institutional investors – though on it own, it will not likely be enough to tilt to balance in the LSE’s favour.

But much of the cash to finance the Maple offer would be borrowed, using TMX’s balance sheet, a fact that both ISS and Glass Lewis, a smaller advisory firm, identified as a drawback. The two also found common ground on the risks that Maple’s proposal would not get past the Competition Bureau. Because ISS believes the barriers to getting this approval are higher than those that TSX-LSE must cross, it suggests shareholders support the LSE deal because it is a “bird in hand.”

In any other country, of course, a proposal to merge the #1 exchange with the #2 wouldn’t even get the time of day at the Competition Bureau – particularly given that places #3 through #37 are not awarded due to the small size of the also-rans. But this is Canada; bureaucrats and politicians have to think about where their next job’s going to come from, so it just means ‘higher barriers’.

However, the ISS endorsement is, I believe, more important that the Globe story makes out: there will be a lot of firms, particularly those with index funds, who will be very heavily influenced by these third party recommendations.

How much did Paulson lose on Sino-Forest? It depends on how you count:

Paulson & Co. held 31 million shares of Sino-Forest in May, or 12.5 percent of outstanding stock, the firm said in a letter to clients. It had sold the entire stake as of June 17. The net realized loss on the investment since Paulson started buying Sino-Forest in 2007 was C$106 million, according to the letter.

Sino-Forest’s shares have dropped 82 percent since June 2, when Carson Block’s Muddy Waters LLC said the company overstated its timber holdings. Sino-Forest has denied the allegations. Paulson’s fund had C$562 million in mark-to-market losses since Dec. 31 on the investment, the firm said in the letter.

It must be fun doing business in Illinois:

In Illinois, you’re never too big or too small to get stiffed by the state, which is $4 billion behind in its bills.

While states periodically fall behind in paying Medicaid providers or, in the case of California, rely on bank loans and IOUs, the Illinois backlog has been growing for three years. It’s forcing some vendors to fire workers, cut services and, if they can, obtain loans and lines of credit to keep their businesses going while the state takes months to pay.

“These are small businesses owed $1,100 to $1,500 and waiting six to nine months to get paid,” said Duane Marsh, executive director of the Illinois Funeral Directors Association. “It isn’t chump change.”

Delayed payments are also affecting hospitals, universities and public-school districts.

S&P has put Gaz Metro on watch-negative:

  • •Quebec energy company Gaz Metro Inc. (GMI) has announced an offer to acquire Central Vermont Public Service Corp. (CVPS) for nearly US$500 million.
  • •As a result, Standard & Poor’s is placing its ratings on GMI and subsidiary Gaz Metro L.P., including its ‘A-‘ long-term corporate credit and ‘A’ secured debt ratings, on CreditWatch with negative implications.
  • •GMI’s offer includes the assumption of US$230 million of CVPS’s debt.•We plan to resolve the CreditWatch in a timely manner after further assessment of this deal and discussions with the company.

What happened to Yellow this week?

YLO Issues, 2011-6-24
Ticker Quote
6/17
Quote
6/24
Bid YTW
6/24
YTW
Scenario
6/24
Performance
6/17 – 6/24
(bid/bid)
YLO.PR.A 23.46-59 23.03-20 9.96% Soft Maturity
2012-12-30
-1.83%
YLO.PR.B 15.70-75 15.60-00 14.70% Soft Maturity
2017-06-29
-0.64%
YLO.PR.C 14.80-90 16.05-27 10.06% Limit Maturity +8.45%
YLO.PR.D 15.01-26 16.42-60 10.05% Limit Maturity +9.39%

It was a relatively quiet day on the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets gaining 2bp and DeemedRetractibles losing 10bp. Volatility was minimal. Volume was anemic.

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 0.2105 % 2,470.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2105 % 3,715.0
Floater 2.45 % 2.22 % 42,189 21.73 4 0.2105 % 2,667.1
OpRet 4.87 % 3.17 % 62,945 0.91 9 -0.0086 % 2,437.9
SplitShare 5.25 % -0.28 % 59,446 0.47 6 -0.0003 % 2,505.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0086 % 2,229.3
Perpetual-Premium 5.68 % 5.16 % 143,101 1.38 12 0.0121 % 2,075.0
Perpetual-Discount 5.47 % 5.55 % 123,586 14.60 18 0.0117 % 2,179.1
FixedReset 5.17 % 3.39 % 206,050 2.79 57 0.0151 % 2,307.9
Deemed-Retractible 5.08 % 4.92 % 283,037 8.15 47 -0.0955 % 2,151.8
Performance Highlights
Issue Index Change Notes
PWF.PR.K Perpetual-Discount -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-24
Maturity Price : 23.12
Evaluated at bid price : 23.36
Bid-YTW : 5.37 %
TRI.PR.B Floater 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-24
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.20 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.H Deemed-Retractible 319,454 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-24
Maturity Price : 25.75
Evaluated at bid price : 25.71
Bid-YTW : 0.81 %
CM.PR.J Deemed-Retractible 121,194 RBC crossed 50,100 at 24.50; Nesbitt crossed blocks of 35,000 and 14,400 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.71 %
BNS.PR.X FixedReset 56,364 Nesbitt crossed 50,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.41
Bid-YTW : 3.17 %
BNS.PR.T FixedReset 53,302 TD crossed 25,000 at 27.40; RBC did the same.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.38
Bid-YTW : 3.18 %
HSE.PR.A FixedReset 34,419 RBC bought 13,100 from CIBC at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.87 %
BMO.PR.J Deemed-Retractible 33,502 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 4.73 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.F Deemed-Retractible Quote: 25.50 – 25.98
Spot Rate : 0.4800
Average : 0.3325

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 5.61 %

CM.PR.L FixedReset Quote: 27.09 – 27.49
Spot Rate : 0.4000
Average : 0.2789

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.09
Bid-YTW : 3.28 %

CM.PR.P Deemed-Retractible Quote: 24.97 – 25.30
Spot Rate : 0.3300
Average : 0.2116

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-28
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 5.19 %

TCA.PR.Y Perpetual-Premium Quote: 50.52 – 50.90
Spot Rate : 0.3800
Average : 0.2719

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-04
Maturity Price : 50.00
Evaluated at bid price : 50.52
Bid-YTW : 5.54 %

FTS.PR.E OpRet Quote: 26.63 – 26.99
Spot Rate : 0.3600
Average : 0.2681

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-07-01
Maturity Price : 25.75
Evaluated at bid price : 26.63
Bid-YTW : 3.17 %

PWF.PR.K Perpetual-Discount Quote: 23.36 – 23.65
Spot Rate : 0.2900
Average : 0.2085

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-24
Maturity Price : 23.12
Evaluated at bid price : 23.36
Bid-YTW : 5.37 %

BoE Financial Stability Report, June 2011

Friday, June 24th, 2011

The Bank of England has released its Financial Stability Report, June 2011.

Unfortunately, the Bank has taken action to ensure that the information published in this report does not fall into the wrong hands. The PDF document is secured (at the 128 bit level, no less!) in a manner which prohibits copying of extracts. Hah! That will teach Al Qaeda to quote from the Bank of England Financial Stability Report!

My attention was immediately caught by the fact that BIS concerns regarding synthetic ETFs have been given a prominent place in the threat list. Box 1 (on pages 16-17 of the PDF) points out that:

Because the collateral does not need to match the assets of the index being tracked, the bank might have incentives to use the synthetic ETF structure as a source of collateralised borrowing to fund illiquid portfolios

I’m not going to report on this any more because, quite frankly, I’m too pissed off at the moronic at worst and picayune at best restrictions on fair use imposed by the Bank’s encryption of the document. But read it; the research is quite good, which is presumably why it is being kept secret.

Update: Chart 1.4 has an interesting reference to Panigirtzoglou, N and Scammell, R (2002) ‘Analysts’ earnings forecasts and equity valuations’, Bank of England Quarterly Bulletin, Spring, pages 59-66

June 23, 2011

Thursday, June 23rd, 2011

Moody’s will be making adjustments to some debt ratings:

A landmark Ontario court ruling bolstering the rights of pension plan members in bankruptcy cases could have an impact on credit ratings for companies with underfunded pension plans, according to a new report by debt rating agency Moody’s Investors Services Inc.

Moody’s said a review of 84 Canadian industrial companies it rates found two companies — Air Canada (AC.B-T2.250.073.21%) and Essar Steel Algoma Inc. — whose debt might be vulnerable to downgrade if the Ontario court decision is upheld by the Supreme Court of Canada. The report said the impact would likely be limited and would affect ratings of specific debt instruments rather than a company’s overall credit rating.

“The ruling does not change how we measure debt and other liabilities, but it does change the priority of claim and the relative ranking of liabilities, which is relevant when assessing individual debt-instrument ratings,” said Bill Wolfe, Moody’s vice-president and senior credit officer.

“On this basis, we expect that only instrument-level ratings will be affected by the ruling.”

Moody’s said it will not change any ratings until there is a decision from the Supreme Court and it is clear there is a final ruling in the case.

Presumably it is Loss Given Default that will be affected more than Probability of Default. The effect of the ruling appears to be similar to the intent of Bill C-501.

Allied Irish has defaulted in the view of DBRS:

DBRS Inc. (DBRS) today has downgraded the ratings of certain subordinated debt issued by Allied Irish Banks p.l.c. (AIB or the Group) to “D” from “C”. Today’s downgrade follows the execution of the Group’s note purchase offer.

Almost all of these instruments have been extinguished. The default status for the purchased and now-extinguished notes reflect DBRS’s view that bondholders were offered limited options, which is considered a default under DBRS policy, as discussed in DBRS’s press release dated 19 May 2011.

For AIB’s GBP 500 million Dated Subordinated Debt due 2025 and its EUR 500 million Dated Subordinated Debt due 2017, which are still outstanding due to the lack of consent for a clean up call, DBRS has downgraded their ratings to ‘D’. The downgrade reflects DBRS’s expectations that the interest payments of these outstanding subordinated instruments will be halted on the next payment date, as allowed by the Irish High Court. Further, the downgrade considers the extension of the final maturity dates, which are now extended to 2035. Given that bondholders are unlikely to receive interest as agreed upon and that the expected maturity has been extended, DBRS views these actions as disadvantageous to bondholders, which is considered a default under DBRS policy.

However, the rating of AIB’s GBP 368.253 million Dated Subordinated Debt due 2019, which is still outstanding, is unchanged at ‘C’, Under Review with Negative Implications. This rating considers that these notes have not yet been amended by AIB pursuant to the Subordinated Liabilities Order from the Irish High Court as a challenge in respect to these notes is ongoing before this Court.

S&P put Encana on Outlook-Negative:

  • •On June 21, 2011, Encana Corp. announced that it had ended its C$5.4 billion Cutbank Ridge joint venture negotiations with PetroChina International Investment Co.
  • •As a result, Standard & Poor’s is revising its outlook on Encana to negative from stable, and affirming its ‘BBB+’ long-term corporate credit and senior unsecured debt ratings on the company.
  • •We are also lowering our Canada scale commercial paper rating on Encana to ‘A-2’ from ‘A-1(Low)’.
  • •The negative outlook reflects our view that Encana’s adjusted debt to EBITDAX will remain above 2x through 2012, given weak natural gas prices and the company’s high capital expenditure plans, which we expect to outspend operating cash flow generated.

It was a mixed down day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets of 11bp and DeemedRetractibles up 1bp. Volatility was muted; volume was quite good. Scotia had a good day..

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 -0.0234 % 2,464.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0234 % 3,707.2
Floater 2.46 % 2.22 % 39,133 21.73 4 -0.0234 % 2,661.5
OpRet 4.87 % 3.02 % 65,082 0.91 9 0.1933 % 2,438.1
SplitShare 5.25 % -0.28 % 61,806 0.47 6 0.0190 % 2,505.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1933 % 2,229.5
Perpetual-Premium 5.66 % 5.24 % 145,064 1.36 12 -0.0674 % 2,074.8
Perpetual-Discount 5.48 % 5.54 % 121,904 14.55 18 -0.1499 % 2,178.8
FixedReset 5.17 % 3.37 % 209,058 2.79 57 -0.1067 % 2,307.5
Deemed-Retractible 5.07 % 4.90 % 286,044 8.16 47 0.0095 % 2,153.8
Performance Highlights
Issue Index Change Notes
BMO.PR.Q FixedReset -1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 3.70 %
BAM.PR.O OpRet 1.31 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 2.42 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.C Deemed-Retractible 189,106 Scotia crossed blocks of 102,400 and 55,200 at 22.35; then another 20,000 at 22.37.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.32
Bid-YTW : 5.84 %
SLF.PR.A Deemed-Retractible 83,247 Scotia crossed blocks of 33,000 and 42,000, both at 23.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.30
Bid-YTW : 5.63 %
MFC.PR.D FixedReset 78,213 Nesbitt crossed 50,000 at 27.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.11
Bid-YTW : 3.72 %
TD.PR.Q Deemed-Retractible 49,779 RBC crossed blocks of 19,500 and 11,000, both at 26.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 4.77 %
CU.PR.A Perpetual-Premium 47,225 TD crossed 26,100 at 25.24.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 5.13 %
TD.PR.K FixedReset 43,568 TD crossed 22,900 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 : 3.19 %
There were 46 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.N Perpetual-Discount Quote: 21.28 – 21.85
Spot Rate : 0.5700
Average : 0.3178

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-23
Maturity Price : 21.28
Evaluated at bid price : 21.28
Bid-YTW : 5.61 %

IGM.PR.B Perpetual-Premium Quote: 25.57 – 25.94
Spot Rate : 0.3700
Average : 0.2234

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.57
Bid-YTW : 5.71 %

ELF.PR.G Perpetual-Discount Quote: 21.12 – 21.46
Spot Rate : 0.3400
Average : 0.2209

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-23
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 5.74 %

NA.PR.N FixedReset Quote: 26.40 – 26.75
Spot Rate : 0.3500
Average : 0.2389

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-14
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 2.91 %

FTS.PR.F Perpetual-Discount Quote: 23.83 – 24.17
Spot Rate : 0.3400
Average : 0.2416

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-23
Maturity Price : 23.59
Evaluated at bid price : 23.83
Bid-YTW : 5.18 %

FTS.PR.G FixedReset Quote: 26.04 – 26.35
Spot Rate : 0.3100
Average : 0.2177

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-01
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 3.38 %

CF.PR.A Settles Firm on Reasonable Volume

Thursday, June 23rd, 2011

Canaccord Financial Inc has announced:

the completion of its previously announced offering of 4,000,000 Cumulative 5-Year Rate Reset First Preferred Shares, Series A ( the “Series A Preferred Shares”) at a purchase price of $25.00 per Series A Preferred Share, for aggregate gross proceeds of $100 million. The Series A Preferred Shares are expected to commence trading on the Toronto Stock Exchange on June 23, 2011 under the trading symbol “CF.PR.A”.

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

Canaccord has granted the underwriters an over-allotment option, exercisable, in whole or in part, for a period of 30 days following today’s closing, to purchase up to an additional 600,000 Series A Preferred Shares which, if exercised in full, would increase the gross proceeds of the offering to $115 million.

Canaccord intends to use the net proceeds from the offering for general corporate purposes and may use all or a portion of such net proceeds with a view to growing or expanding its businesses.

CF.PR.A is a 5.50%+321 FixedReset announced June 6. CF.PR.A traded 187,001 shares today in a range of 24.75-98 before closing at 24.88-90, 2×12.

Vital statistics are:

CF.PR.A FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-23
Maturity Price : 24.83
Evaluated at bid price : 24.88
Bid-YTW : 5.42 %

CF.PR.A is tracked by HIMIPref™. It is assigned to the Scraps index on credit concerns.

Update, 2011-7-7:Greenshoe exercised:

Canaccord Financial Inc. (“Canaccord”, TSX: CF, AIM: CF.) announced today that it has closed the over-allotment option granted to the underwriters in connection with Canaccord’s bought deal public offering of Cumulative 5-Year Rate Reset First Preferred Shares, Series A (the “Series A Preferred Shares”), which closed on June 23, 2011. As a result of the exercise of the over-allotment option, Canaccord sold an additional 540,000 Series A Preferred Shares at a purchase price of $25.00 per Series A Preferred Share for additional gross proceeds of $13,500,000. In total, Canaccord has issued 4,540,000 Series A Preferred Shares for aggregate gross proceeds of $113,500,000. The Series A Preferred Shares trade on the Toronto Stock Exchange under the trading symbol “CF.PR.A”.

Canaccord intends to use the net proceeds from the offering for general corporate purposes and may use all or a portion of such net proceeds with a view to growing or expanding its businesses.

It will be most interesting to see how they choose between growing or expanding their business!