Archive for June, 2011

US Covered Bond Legislation Passes Another Milestone

Thursday, June 23rd, 2011

The House Financial Services Committee has approved draft Covered Bond legislation:

The committee voted 44-7 today to approve the bill, which would provide a regulatory framework for covered bonds by giving the Treasury Department oversight of the market and creating a separate resolution process in order to bolster investor interest.

“The FDIC’s concerns, I believe, continue to be legitimate,” said Representative Barney Frank, the senior Democrat on the committee, who unsuccessfully offered two amendments drafted with the agency to change the measure. “The FDIC believes, I think correctly, there will be problems in some of these cases and the FDIC will not be fully protected.”

In an effort to alleviate some of the agency’s concerns, Representative Carolyn Maloney, a New York Democrat, offered a successful amendment that extended to one year, from 180 days, the amount of time the FDIC would have in event of a bank failure to hold the exclusive right to transfer the covered pool to another eligible issuer.

The panel also agreed, by voice vote, to a requirement that the Treasury write rules to cap the maximum amount outstanding, as a percentage of total assets, that any one issuer can hold.

Andrew Gray, the FDIC’s spokesman, said in an e-mailed statement that the bill would subsidize covered bond investors with the deposit insurance fund and “will add to the funding advantage” of large banks.

The FDIC’s Deputy Chairman, Michael H. Krimminger, testified in September 2010 regarding FDIC concerns regarding super-priority:

Unfortunately, H.R. 5823 would restrict the FDIC’s current receivership authorities used to maximize the value of the failed bank’s covered bonds. The bill leaves the FDIC with only two options: continue to perform until the covered bond program is transferred to another institution within a certain timeframe; or hand over the collateral to a separate trustee for the covered bond estate, in return for a residual certificate of questionable value. The FDIC would not have the authority – which it can use for any other asset class – to repudiate covered bonds, pay repudiation damages and take control of the collateral. This restriction would impair the FDIC’s ability to accomplish the “least costly” resolution and could increase losses to the DIF by providing covered bond investors with a super-priority that exceeds that provided to other secured creditors. These increased losses to the DIF would be borne by all of the more than 8,000 FDIC-insured institutions, whether or not they issued covered bonds.

Limiting the time in which the FDIC could market a covered bond program to other banks will constrain the FDIC’s ability to achieve maximum value for a program through such a transfer. Similarly, preventing the FDIC from using its normal repudiation power will prevent the FDIC from recapturing the over-collateralization in the covered bond program. The ‘residual certificate’ proposed in H.R. 5823 is likely to be virtually valueless. More importantly, the legislation would provide the investors with control over the collateral until the term of the program ends, even though the FDIC (and any party obligated on a secured debt) normally has the ability to recover over-collateralization by paying the amount of the claims and recovering the collateral free of all liens. Providing the FDIC a residual certificate instead of the ability to liquidate the collateral itself would reduce the value to the receivership estate and would not result in the least costly resolution.

So long as investors are paid the full principal amount of the covered bonds and interest to the date of payment, there is no policy reason to protect investment returns of covered bond investors through an indirect subsidy from the DIF

The FDIC issued a Covered Bond Policy Statement in 2008.

There is an excellent discussion of the legislation available by Barton Winokur, Chairman and Chief Executive Officer of Dechert LLP, and is based on a Dechert publication by Patrick D. Dolan, Robert H. Ledig, Gordon L. Miller and Kira N. Brereton, titled Reform for the Covered Bond Industry on the Horizon.

US Covered Bond legislation was last mentioned on PrefBlog when it passed the Capital Markets Subcommittee. Consultations in Canada are taking place behind closed doors, as is only right and decent.

Update, 2011-6-24: I note from Chart 3.15 of the BoE June 2011 Financial Stability Report that covered bonds comprise 5% of 2011-13 maturities, but 16% of planned 2011-13 issuance in the UK.

June 22, 2011

Thursday, June 23rd, 2011

Jim Kelsoe, proud portfolio manager of the worst bond fund in the history of the universe (so far), was last mentioned on PrefBlog on April 7, 2010. Now he’s been barred from the industry:

According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.

Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.

The Fed is going to maintain an easy monetary policy:

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The TMX-LSE deal has been sweetened:

A week before the London Stock Exchange and TMX Group Inc. ask shareholders to bless their planned marriage, the pair sweetened the pot Wednesday with a $4 per share special dividend for TMX shareholders.

London exchange shareholders will also receive a special dividend of 84.1 pence per ordinary share, payable on closing.

In the face of a rival hostile bid from Maple Group, a consortium of Canadian financial firms, the exchange partners said they also intend to increase the regular post-merger dividend “to be consistent with the [higher] current regular dividend of TMX Group.”

Here’s an interesting legal point – I know that some will misconstrue my interest and I’ll get into all kinds of trouble about this, but what the hell – regarding Galliano’s anti-semitic rant:

Under sentencing rules for hate speech, Galliano faces a maximum 22,500-euro ($32,500) fine and six months in prison if found guilty. His lawyer, Aurelien Hamelle, has said similar cases “most often” result in fines rather than jail time.

Geraldine Bloch, who filed a complaint over the February incident, testified that Jewish “was one of the terms said the most” in Galliano’s slurs against her. “I don’t know if he was drunk. He was a bit bizarre. He sweated a lot.”

Galliano’s addictions can’t excuse his statements, Eric Zerbib, a lawyer for LICRA, an international organization opposed to racism and anti-Semitism, said before today’s testimony.

It doesn’t explain and it doesn’t excuse anything,” said Zerbib. “In vino, veritas. In wine, the truth. Wine has a liberating effect which allows one to know an individual’s real personality, and given that the deeds were repeated several times, thus we know John Galliano’s personality.”

OK, so I don’t know the law here, but it’s rather an interesting point: Will Galliano be in trouble for having a shitty personality (which is exposed by drunkenness, yay! Or he may simply have reached in to the bag of tricks for the most offensive things he could think of.) or for expressing his personality (in which case drunkenness may be considered a mitigating factor)?

It was a good day on the Canadian preferred share market with PerpetualDiscounts up 15bp, FixedResets winning 11bp and DeemedRetractibles gaining 13bp. Volatility was up a bit. Volume was very good.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.25% (!) so the pre-tax interest equivalent spread is now about 195bp, a significant widening from the 185bp reported on June 15 as yields have gone in opposite directions.

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 -0.1634 % 2,465.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1634 % 3,708.1
Floater 2.46 % 2.22 % 38,190 21.74 4 -0.1634 % 2,662.1
OpRet 4.88 % 3.22 % 65,062 0.91 9 -0.2057 % 2,433.4
SplitShare 5.25 % -0.48 % 62,674 0.48 6 0.0833 % 2,505.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2057 % 2,225.2
Perpetual-Premium 5.66 % 5.20 % 143,364 1.37 12 0.0016 % 2,076.2
Perpetual-Discount 5.47 % 5.53 % 121,211 14.58 18 0.1455 % 2,182.1
FixedReset 5.16 % 3.34 % 209,697 2.79 57 0.1148 % 2,310.0
Deemed-Retractible 5.08 % 4.89 % 287,247 8.18 47 0.1299 % 2,153.6
Performance Highlights
Issue Index Change Notes
IAG.PR.E Deemed-Retractible -1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 5.66 %
BMO.PR.H Deemed-Retractible 1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-03-27
Maturity Price : 25.00
Evaluated at bid price : 25.81
Bid-YTW : 3.63 %
GWO.PR.G Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.57
Bid-YTW : 5.44 %
ELF.PR.F Perpetual-Discount 2.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-22
Maturity Price : 22.76
Evaluated at bid price : 23.01
Bid-YTW : 5.86 %
GWO.PR.J FixedReset 2.59 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.52
Bid-YTW : 3.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.E Perpetual-Premium 134,455 Nesbitt crossed 100,000 at 25.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 5.20 %
NEW.PR.C SplitShare 106,500 Nesbitt sold two blocks of 10,000 each to TD at 14.20, and six blocks of 10,000 each to anonymous, all at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-26
Maturity Price : 13.70
Evaluated at bid price : 14.14
Bid-YTW : -26.56 %
RY.PR.B Deemed-Retractible 68,825 Desjardins bought two blocks of 10,000 each from anonymous, both at 24.77.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.75
Bid-YTW : 4.89 %
BNS.PR.L Deemed-Retractible 60,305 TD crossed 25,000 at 24.54.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 4.80 %
GWO.PR.N FixedReset 52,534 Desjardins crossed 41,200 at 24.45.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 3.78 %
BNS.PR.P FixedReset 50,892 RBC crossed blocks of 25,000 and 20,000, both at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 2.94 %
There were 48 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PR.P Deemed-Retractible Quote: 25.91 – 26.33
Spot Rate : 0.4200
Average : 0.2624

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 4.67 %

GWO.PR.M Deemed-Retractible Quote: 25.30 – 25.75
Spot Rate : 0.4500
Average : 0.3058

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.63 %

PWF.PR.A Floater Quote: 23.51 – 23.99
Spot Rate : 0.4800
Average : 0.3592

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-22
Maturity Price : 23.21
Evaluated at bid price : 23.51
Bid-YTW : 2.21 %

TD.PR.R Deemed-Retractible Quote: 26.33 – 26.68
Spot Rate : 0.3500
Average : 0.2307

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-05-30
Maturity Price : 25.00
Evaluated at bid price : 26.33
Bid-YTW : 4.75 %

PWF.PR.O Perpetual-Premium Quote: 25.35 – 25.66
Spot Rate : 0.3100
Average : 0.2277

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-11-30
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 5.75 %

SLF.PR.G FixedReset Quote: 25.33 – 25.60
Spot Rate : 0.2700
Average : 0.1882

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 3.70 %

New Issue: IFC FixedReset 4.20%+172

Wednesday, June 22nd, 2011

Intact Financial Corporation has announced:

that it has entered into an agreement to issue and sell 9,000,000 Non-cumulative Rate Reset Class A Shares Series 1 (the “Series 1 Preferred Shares”), at a price of $25.00 per Series 1 Preferred Share, for aggregate gross proceeds of $225 million on a bought deal basis to a syndicate of underwriters led by CIBC, RBC Capital Markets, Scotia Capital Inc. and TD Securities Inc. IFC has granted the underwriters the option to purchase up to an additional 1,000,000 Series 1 Preferred Shares, at a price of $25.00, at any point prior to 30 days following closing of the offering.

IFC intends to use the net proceeds of the offering, together with borrowings under acquisition credit facilities previously arranged by IFC, the proceeds of a previously announced subscription receipt offering and a portion of IFC’s existing cash resources, to fund the purchase price for its previously announced acquisition of all of the issued and outstanding shares of AXA Canada (the “Acquisition”). The closing of the Acquisition is expected to occur in the fall of 2011 subject to receipt of required competition and insurance regulatory approvals and the satisfaction of certain closing conditions. The offering is not conditional upon closing of the Acquisition; if the Acquisition is not completed, the net proceeds will be used for general corporate purposes.

The holders of Series 1 Preferred Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Intact, on a quarterly basis (with the first quarterly dividend to be paid on September 30, 2011), for the initial fixed rate period ending on December 31, 2017, based on an annual rate of 4.20%. The dividend rate will be reset on December 31, 2017 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 1.72%.

Holders of the Series 1 Preferred Shares will have the right, at their option, to convert their Series 1 Preferred Shares into Non-cumulative Floating Rate Class A Shares Series 2 (the “Series 2 Preferred Shares”), subject to certain conditions, on December 31, 2017 and on December 31 every five years thereafter. The holders of Series 2 Preferred Shares will be entitled to receive floating rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Intact, at a rate equal to the 90-day Canadian Treasury Bill rate plus 1.72%.

DBRS Limited has assigned a provisional rating of Pfd-2 (low) for the Series 1 Preferred Shares.

The Series 1 Preferred Shares will be offered for sale to the public in each of the provinces and territories of Canada pursuant to a short form prospectus to be filed with the Canadian securities regulatory authorities. The offering is scheduled to close on or about July 12, 2011.

Nice to see another insurance holding company on the board!

Update: DBRS assigns provisional Pfd-2(low) rating.

It is interesting to note the initial fixed dividend period of 6.5 years; this does not appear to be a mechanism to lower the Issue Reset Spread so much (since GOC 5-Years are at 2.10%, while sevens are at 2.18%) as it is to lock in the 4.2% for as long as possible.

June 21, 2011

Tuesday, June 21st, 2011

More Sino-Forest news:

Mr. Paulson and his firm, Paulson & Co., best known for prescient calls on the global financial crisis and the price of gold, controlled 14 per cent of Sino-Forest’s stock or about 34.7 million shares until recently. Paulson & Co. sold all of those shares by last Friday, according to a filing late yesterday with Canadian securities regulators.

“Due to the uncertainty over Sino-Forest’s public disclosures and financial statements, we have sold our stock and await the results of the independent committee’s investigation,” the firm said in a statement released through a public relations agency.

Fitch downgraded Sino-Forest:

The “complexities” of Sino-Forest’s corporate structure prompted Fitch Ratings to downgrade its long-term foreign- currency issuer default rating and senior unsecured debt rating to BB- from BB+, Fitch said yesterday in a statement. Ratings may be cut further if the “issues” aren’t resolved, it said.

Sino-Forest shares fell C$1.19, or 44 percent, to C$1.54 at 11:08 a.m. in Toronto trading.

Paulson, the biggest shareholder in Hong Kong-based Sino- Forest until the selloff, probably reduced losses by paring the stake before the Muddy Waters report. The hedge fund told clients in a June 3 letter that its total investment in Sino- Forest represented about 2 percent of the Advantage and Advantage Plus funds as of June 2. The funds have $18 billion in assets, a person with knowledge of the firm said at the time. The letter suggests the firm had cut its stake by about 30 percent by June 2, when Sino-Forest shares lost 64 percent.

The intellectual bankruptcy of the market was illustrated in the fact that a transparent hoax affected the market:

Shares of forestry company Sino-Forest Corp. tumbled another 17 per cent in early trading Tuesday as one of its largest stakeholders reportedly sold its holdings in the company and social media sites were aflutter with an apparent SEC news release hoax.

The company’s stock was down 48 cents to $2.25 in morning trading on the Toronto Stock Exchange.

The shift came as a representative for the U.S. Securities and Exchange Commission denied issuing a news release accusing research and investment firm Muddy Waters of being involved in a “stock manipulation ring.”

“We have issued no such litigation release,” said SEC spokeswoman Judith Burns in a phone interview with The Canadian Press.

Whenever I read anything of interest published by anybody regarding a SEC release, I check it. Not usually so much to check its existence, but to check the actual words used and their context. http://www.sec.gov. What’s hard about that? Anybody who took market action influenced by this rumour deserves to go bankrupt immediately – monetarily, that is, in addition to their pre-existing intellectual bankruptcy. (More here. Say what you like about the SEC, I can’t remember ever faulting them on grammar. Carson Block and his associates approaches several large hedge funds, indeed!)

The SEC has achieved another milestone in its programme of regulatory extortion, nailing JPMorgan for acting as a broker. However, they did helpfully publish a list of buy-side firms that may now be suspected of incompetence:

  • Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
  • Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
  • General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
  • Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd

Investors considering placing funds with these firms are urged to exercise caution, gain a complete view of historical performance and demand to learn the rationale for the investment.

On a more uplifting note, Fabulous Fab is gaining some popular support:

Those hoping for a measure of justice for the Wall Street executives who brought us the financial crisis won’t be finding it anytime soon in the downtown Manhattan federal courtroom of Judge Barbara S. Jones.

What you’ll find there instead is the continuation of the Securities and Exchange Commission’s ridiculous civil lawsuit against Fabrice Tourre, the Goldman Sachs Group Inc. (GS) executive director who, at 28, shepherded to market in April 2007 Goldman’s infamous Abacus 2007-AC1 synthetic collateralized debt obligation. The deal was done at the behest of hedge fund manager John Paulson (who made a bundle) and a pair of foolish European banks (who lost one).

Jones should have thrown out the case against “Fabulous Fab” when she had the chance last week, because it is beyond absurd to single out for punishment one member of the Goldman team for putting together a deal for several highly sophisticated investors on the grounds that they weren’t sufficiently informed that some of them would make money while others would lose money. In every trade, there is a winner and a loser. That is the very nature of a market.

Is real-estate becoming a portable asset?

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

The Bank of Canada has released a supplement to its latest Review, titled Paying with Polymer, about the new plastic bills.

PrefBlog has strenuously opposed the Maple bid for the TMX on general grounds. Rowland Fleming has specifics:

As the TSE CEO during the Bre-X crisis, I look with horror at the prospect that less than two decades later, successors at some of the same firms whose own conflicts helped to push the old Toronto Stock Exchange so close to the edge are proposing a return to those same bad old days. During my time, approximately 16 member-firm committees dictated on most operating and policy decisions. To be fair, most committee activities and decisions were quite appropriate, but the processes to placate and find consensus-driven decisions on the matters at hand were cumbersome, time consuming and certainly not sensitive to domestic or global competition from other exchanges and alternative trading systems.

I see The Maple Group, the elite consortium that includes TD Bank, CIBC, Scotiabank, National Bank, CPPIB and the Caisse de Dépôt, among others, as little more than a modern version of the old boys’ club that controlled the TSE before demutualization.

Julie Dickson of OSFI gave a speech titled A Canadian Perspective on the Global Insurance Industry. Nothing of import was said, but she did mention longevity insurance, a topic I find fascinating.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets down 8bp and DeemedRetractibles gaining 7bp. Volatility was muted. Volume was good.

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 -0.0350 % 2,469.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0350 % 3,714.1
Floater 2.45 % 2.22 % 39,756 21.74 4 -0.0350 % 2,666.4
OpRet 4.86 % 2.72 % 65,702 0.35 9 0.3139 % 2,438.5
SplitShare 5.25 % -0.47 % 61,981 0.48 6 0.0465 % 2,502.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3139 % 2,229.7
Perpetual-Premium 5.66 % 5.25 % 141,960 1.37 12 -0.0558 % 2,076.1
Perpetual-Discount 5.48 % 5.53 % 122,362 14.56 18 0.1849 % 2,178.9
FixedReset 5.17 % 3.35 % 197,726 2.80 57 -0.0776 % 2,307.4
Deemed-Retractible 5.08 % 4.89 % 288,974 8.18 47 0.0698 % 2,150.8
Performance Highlights
Issue Index Change Notes
GWO.PR.J FixedReset -3.54 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 4.57 %
GWO.PR.G Deemed-Retractible -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 5.60 %
FTS.PR.E OpRet 1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-07-01
Maturity Price : 25.75
Evaluated at bid price : 26.85
Bid-YTW : 2.72 %
NEW.PR.C SplitShare 1.67 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-26
Maturity Price : 13.70
Evaluated at bid price : 14.11
Bid-YTW : -23.92 %
Volume Highlights
Issue Index Shares
Traded
Notes
CIU.PR.B FixedReset 144,700 Nesbitt crossed blocks of 48,700 and 59,100, both at 27.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 27.70
Bid-YTW : 3.10 %
BNS.PR.P FixedReset 97,548 Nesbitt crossed 59,600 at 26.14.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 3.06 %
BMO.PR.M FixedReset 88,956 RBC crossed 19,700 at 26.24; Nesbitt crossed 50,000 at 26.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 2.87 %
HSB.PR.E FixedReset 86,290 RBC crossed 79,100 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.45
Bid-YTW : 3.26 %
TD.PR.Q Deemed-Retractible 56,101 RBC crossed 28,000 at 26.08.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.19
Bid-YTW : 4.83 %
BMO.PR.O FixedReset 51,094 Nesbitt crossed 24,000 at 27.74; RBC crossed two blocks of 10,000 each at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.66
Bid-YTW : 2.98 %
There were 42 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.J FixedReset Quote: 25.85 – 26.95
Spot Rate : 1.1000
Average : 0.8735

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 4.57 %

PWF.PR.M FixedReset Quote: 26.70 – 27.25
Spot Rate : 0.5500
Average : 0.3519

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.70
Bid-YTW : 3.68 %

PWF.PR.A Floater Quote: 23.55 – 23.93
Spot Rate : 0.3800
Average : 0.2267

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-21
Maturity Price : 23.25
Evaluated at bid price : 23.55
Bid-YTW : 2.21 %

ELF.PR.F Perpetual-Discount Quote: 22.46 – 23.09
Spot Rate : 0.6300
Average : 0.4911

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-21
Maturity Price : 22.15
Evaluated at bid price : 22.46
Bid-YTW : 6.00 %

POW.PR.D Perpetual-Discount Quote: 23.45 – 23.78
Spot Rate : 0.3300
Average : 0.2326

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-21
Maturity Price : 23.20
Evaluated at bid price : 23.45
Bid-YTW : 5.33 %

BAM.PR.J OpRet Quote: 27.06 – 27.49
Spot Rate : 0.4300
Average : 0.3364

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 26.00
Evaluated at bid price : 27.06
Bid-YTW : 3.66 %

S&P: BPO Outlook Revised to Stable from Negative

Tuesday, June 21st, 2011

Standard & Poor’s has announced:

  • •Brookfield Office Properties has a high-quality office portfolio located in generally comparatively healthier global office markets that benefits from long-term leases to good-quality tenants.
  • •We have tolerance for the recent dip in Brookfield’s fixed-charge coverage because we believe a recent acquisition bolsters the company’s strong business profile and will generate very stable cash flow.
  • •We revised our outlook on Brookfield and Brookfield Office Properties Canada to stable from negative because we expect Brookfield’s recent high leasing volume and further modest deleveraging will lead to a gradual improvement in currently weak debt coverage measures over the next few years.
  • •We affirmed our ‘BBB’ corporate credit ratings and our ‘BB+/P-3 (High)’ preferred stock ratings on the two companies.

There are quite a few listed issues: BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N and BPO.PR.P. All are tracked by HIMIPref™; all are relegated to the Scraps index on credit concerns.

There was no mention of BPO Properties (BPP) its wholly owned subsidiary.

S&P: CZP.PR.A & CZP.PR.B on Watch-Negative

Tuesday, June 21st, 2011

Standard & Poor’s has announced:

  • •We are placing our ‘BBB’ long-term corporate credit ratings on Capital Power Income L.P. (CPI) and CPI Preferred Equity Ltd. (CPIPE) on
    CreditWatch with negative implications.
  • •At the same time, we are placing our ‘BBB’ issue-level ratings on CPI’s and Curtis Palmer LLC’s senior unsecured debt, and our ‘BB’ global scale and ‘P-3(High)’ Canada scale ratings on CPIPE’s preferred shares on CreditWatch with negative implications.
  • •These rating actions follow the June 20, 2011, joint announcement by CPI and Atlantic Power Corp. (ATP, not rated) of an agreement for ATP to acquire CPI, subject to a favorable vote by CPI’s unitholders and ATP’s shareholders and the necessary regulatory approval. We expect the transaction to be completed in fourth-quarter 2011.
  • •The rating actions reflect our view that, if the transaction occurs, the combined entity operating both ATP’s and CPI’s assets could potentially have a business risk or financial risk profile weaker than that of CPI.
  • •We will resolve the CreditWatch when we are certain of the outcome in the voting and approval processes and upon greater clarity on the combined entity’s capital structure, business strategy, and financial policies.

DBRS maintained CZP.PR.A and CZP.PR.B at Pfd-3, Review-Negative:

DBRS has maintained the Under Review with Negative Implications status on the BBB (high) Senior Unsecured Debt & Medium-Term Notes rating of Capital Power Income L.P. (the Partnership or CPILP) and the Pfd-3 Cumulative Preferred Shares rating of CPI Preferred Equity Ltd., where they were placed on October 5, 2010.

The rating action follows the joint announcement by Atlantic Power Corporation (Atlantic Power; not rated by DBRS) and CPILP that that they have entered into an arrangement agreement (the Agreement) pursuant to which Atlantic Power intends to acquire, directly and indirectly, all of the outstanding limited partnership units of CPILP for $19.40 per limited partnership unit (the Transaction). APC will pay the purchase price of approximately $1.1 billion using a combination of cash and APC shares, with the cash component capped at $507 million. APC has stated that while it has obtained committed debt financing sufficient to pay the cash portion of the acquisition, it intends on raising approximately $423 million of debt and $200 million in equity to fund the cash component, as well as to refinance certain of CPILP’s bank facilities. The Transaction is a result of the strategic review process undertaken by the Partnership, which was publicly announced on October 5, 2010. The agreed-upon price represents a 4% premium to the CPILP closing price on June 17, 2011.

June 20, 2011

Monday, June 20th, 2011

In the best news I’ve heard all month UBS is mandating civilized values:

The Swiss bank now has a dress code.

Apparently a memo went out this morning to equity sales at UBS informing the team that “suits are now mandatory” at the office (“swaps and the quant desk already went to suits and equity trading is switching over in two weeks”). The reason for the rule (which “is coming from Switzerland”)? To “re-establish credibility and a sense of professionalism.”

Pressure on Greece is ramping up:

European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition.

On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.

Of course, Juncker’s a liar anyway, so this could all simply be choreographed theatre.

Remember Richard Kelertas? Analyst at Dundee Securities? On June 7 I reported:

Kelertas said that the Muddy Waters report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.” He recommended buying Sino-Forest shares from September 2007 until June 3, when he put his rating on the company under review.

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.

I haven’t heard such an impassioned defense of company from a dealer since Bre-X!

He went further:

A couple of analysts did come to Sino’s defence, most notably Dundee’s Richard Kelertas. In a remarkable conference call on Tuesday, he jumped way outside his mandate and accused Mr. Block of committing his own fraud, calling his research “a pile of crap.”

But now he’s singing from a different hymnbook:

Richard Kelertas, an analyst at Dundee Securities, has had enough of Sino-Forest Corp. (TRE-T2.75-0.44-13.79%): He suspended coverage of the Chinese forestry company on Monday morning, after putting the stock “under review” on June 3

“Until such time as the company has made public the findings of the board-appointed independent committee together with the assistance of its external advisors, including legal council Osler Hoskin & Harcourt LLP and the accounting firm PricewaterhouseCoopers, and we have had time to review and analyze these findings, we are not in a position to comment on or otherwise speculate on matters as they relate to the business practice or valuation of Sino-Forest,” Mr. Kelertas said in a note.

Gee … I wonder what changed?

I continue to hold my view – held since I became sophisticated enough to read analyst reports closely – that sell side analysis should be viewed as being for entertainment purposes only. And I have to admit, Kelertas’ tergiversations are highly entertaining.

Today’s factoid:

On Monday, Canadian 30-year yields started the day below 3.4 per cent. Other than a few weeks last fall, these rates are the lowest Ottawa has seen since the mid-1950s, noted Bank of Montreal deputy chief economist Doug Porter.

Richard Fisher of the Dallas Fed reprised a funny line in his speech titled Containing (or restraining) systemic risk – the need to
not fail on “too big to fail”
:

For example, some of you may recall the public letter written by 364 eminent economists predicting disastrous consequences that would result from Thatcher’s policy initiatives. That letter was published in the Times of London on March 30, 1981.[Footnote] The British economy began a recovery almost immediately afterward, in 1982; by 1983, inflation and mortgage rates were at their lowest levels in over a decade, while economic growth accelerated. The failure of the consensus view led Chancellor of the Exchequer Geoffrey Howe to define an economist as “a man who knows 364 ways of making love, but doesn’t know any women.”[Footnote]

YLO issues weren’t all that interesting today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 3bp, FixedResets gaining 4bp and DeemedRetractibles down 10bp. Volatility picked up. Volume was a bit above average, with all highlighted issues being FixedResets. Nesbitt owned the board today.

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 0.0934 % 2,470.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0934 % 3,715.4
Floater 2.45 % 2.22 % 39,290 21.74 4 0.0934 % 2,667.4
OpRet 4.88 % 3.35 % 66,336 0.92 9 -0.0430 % 2,430.8
SplitShare 5.24 % -2.46 % 62,172 0.49 6 0.1760 % 2,501.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0430 % 2,222.8
Perpetual-Premium 5.65 % 5.24 % 142,345 0.91 12 0.1052 % 2,077.3
Perpetual-Discount 5.47 % 5.57 % 117,741 14.45 18 0.0281 % 2,174.9
FixedReset 5.16 % 3.33 % 198,528 2.80 57 0.0391 % 2,309.2
Deemed-Retractible 5.09 % 4.91 % 293,183 8.18 47 -0.1041 % 2,149.3
Performance Highlights
Issue Index Change Notes
ELF.PR.F Perpetual-Discount -1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-20
Maturity Price : 22.23
Evaluated at bid price : 22.58
Bid-YTW : 5.97 %
GWO.PR.N FixedReset -1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 3.75 %
BNS.PR.Y FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 3.39 %
FTS.PR.F Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-20
Maturity Price : 23.37
Evaluated at bid price : 23.60
Bid-YTW : 5.23 %
TDS.PR.C SplitShare 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.40
Bid-YTW : -2.46 %
GWO.PR.J FixedReset 6.69 % Meaningless bounce-back from June 17.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 3.07 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.H FixedReset 127,043 Nesbitt crossed two blocks of 60,000 each at 25.40.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-20
Maturity Price : 25.30
Evaluated at bid price : 25.35
Bid-YTW : 3.65 %
BMO.PR.M FixedReset 112,563 Nesbitt crossed 100,000 at 26.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 2.87 %
BMO.PR.O FixedReset 105,652 Nesbitt crossed 100,000 at 27.74.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.00
Evaluated at bid price : 27.74
Bid-YTW : 2.87 %
SLF.PR.G FixedReset 63,738 Nesbitt crossed 47,500 at 25.15.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.10
Bid-YTW : 3.81 %
BNS.PR.P FixedReset 57,523 Nesbitt crossed 50,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.08
Bid-YTW : 2.98 %
TD.PR.Y FixedReset 52,298 Nesbitt crossed 50,000 at 26.26.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-30
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.36 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.F Perpetual-Discount Quote: 22.58 – 23.05
Spot Rate : 0.4700
Average : 0.3388

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-20
Maturity Price : 22.23
Evaluated at bid price : 22.58
Bid-YTW : 5.97 %

TD.PR.O Deemed-Retractible Quote: 25.11 – 25.45
Spot Rate : 0.3400
Average : 0.2230

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 4.91 %

SLF.PR.F FixedReset Quote: 27.05 – 27.35
Spot Rate : 0.3000
Average : 0.2067

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-30
Maturity Price : 25.00
Evaluated at bid price : 27.05
Bid-YTW : 3.17 %

TD.PR.Q Deemed-Retractible Quote: 26.09 – 26.39
Spot Rate : 0.3000
Average : 0.2267

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.09
Bid-YTW : 4.90 %

BMO.PR.L Deemed-Retractible Quote: 26.59 – 26.86
Spot Rate : 0.2700
Average : 0.1973

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-24
Maturity Price : 25.75
Evaluated at bid price : 26.59
Bid-YTW : 4.63 %

TCA.PR.X Perpetual-Premium Quote: 50.49 – 50.72
Spot Rate : 0.2300
Average : 0.1607

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-14
Maturity Price : 50.00
Evaluated at bid price : 50.49
Bid-YTW : 5.54 %

New Issue: BCE FixedReset 4.15%+188

Monday, June 20th, 2011

BCE Inc. has announced:

that it has entered into an agreement to issue and sell 12,000,000 Cumulative Redeemable First Preferred Shares, Series AK (series AK preferred shares), at a price of $25.00 per share, for aggregate gross proceeds of $300 million on a bought deal basis to a syndicate of underwriters led by CIBC World Markets Inc., RBC Dominion Securities Inc. and Scotia Capital Inc.

The underwriters have been granted an over-allotment option to purchase at the offering price an additional 1,800,000 series AK preferred shares exercisable until the date that is 30 days following the closing. Should the over-allotment option be fully exercised, the total gross proceeds of the series AK preferred share offering will be $345 million.

The series AK preferred shares will pay on a quarterly basis (with the first quarterly dividend to be paid September 30, 2011), for the initial fixed rate period ending December 30, 2016, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual fixed dividend rate of 4.15%. The dividend rate will be reset on December 31, 2016 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 1.88%. The series AK preferred shares will be redeemable by the issuer on or after December 31, 2016, in accordance with their terms.

Holders of the series AK preferred shares will have the right, at their option, to convert their shares into Cumulative Redeemable First Preferred Shares, Series AL, (series AL preferred shares) subject to certain conditions, on December 31, 2016 and on December 31 every five years thereafter. Holders of the series AL preferred shares will be entitled to receive quarterly floating adjustable cash dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 1.88%.

The series AK preferred shares will be offered for sale to the public in each of the provinces of Canada pursuant to a short form prospectus to be filed with Canadian securities regulatory authorities in all Canadian provinces. The offering is scheduled to close on or about July 5, 2011, subject to certain conditions, including obtaining all necessary regulatory approvals.

The net proceeds of this offering will be used for general corporate purposes.

Update: DBRS rates Pfd-3(high).

June 17, 2011

Friday, June 17th, 2011

The IMF has released the Global Financial Stability Report for June 2011. To the disappointment of many, it did not include a centrefold, but I found one chart particularly interesting:


Click for Big

Ireland is going to allow some banks’ senior debt to default:

Irish Finance Minister Michael Noonan said Wednesday he has sought the support of the International Monetary Fund in Washington to bring a radical new plan to the European Union to impose significant losses on senior bond holders in Anglo Irish Bank Corp. and Irish Nationwide Building Society–the country’s two most troubled lenders.

Noonan told the IMF that Anglo Irish and Irish Nationwide are not “real” banks because the lenders are in the process of being wound down, and that senior bondholders should have to share in the losses of “speculative” investments with Irish taxpayers.

According to Irish central bank figures, at the end of March there were EUR3.15 billion unguaranteed senior bonds outstanding in Anglo Irish and only EUR601 million left in Irish Nationwide.

Analysts say savings from the proposed burden-sharing will therefore go nowhere near offsetting the EUR34.5 billion the Irish authorities have injected into Anglo Irish and Irish Nationwide, the two lenders at the heart of Ireland’s inter-linked banking and sovereign-debt crises. The cost of rescuing all six broken Irish lenders will likely top EUR70 billion when capitalizations are completed this year.

Noonan, appointed finance minister to the new coalition government in March, has in the past said he was prevented by the ECB from pushing burden sharing on senior bond holders in any of the broken Irish banks.

This puts Ireland on a collision course with the ECB:

For Mr. Noonan to get his way, he needs to persuade European Union leaders and the European Central Bank to break the great commandant since the onset of Europe’s debt crisis in 2008: thou shalt not burn senior bond holders in European banks.

The ECB has been particularly trenchant on the point. It told the new Irish government soon after it swept to power in mid-March (Thursday marked the administration’s first one hundred days) not to ever consider under any circumstance forcing losses on senior bond holders for fear of worsening Europe’s debt crisis.

This politicization of the bankruptcy process is going to be very harmful in the end. How? I don’t know how. It might be something subtle, like increasing European bank funding costs by X bp for the next thirty years. Or it could be more exciting. I don’t know. But I do know that 300 years of bankruptcy law exists for a reason and when you throw it out for reasons of temporary expediency, you’re almost certainly going to make matters worse.

Meanwhile:

Moody’s Investors Service Friday said it may cut Italy’s sovereign credit rating from Aa2, citing such challenges as reforming a rigid labour market while also facing the likelihood of rising interest rates.

It looks like the Canadian financial oligopoly may be losing influence! Glass-Lewis prefers the LSE-TMX deal over the boys’ club bid:

Influential shareholder-advisory firm Glass Lewis is advising TMX Group Inc.(X-T43.300.310.72%) shareholders to vote in favour of a plan to combine with London Stock Exchange Group Inc., saying it’s less risky than a competing takeover for TMX put forward by a consortium of Canadian financial institutions calling themselves Maple Group.

Glass Lewis’s opinion matters in takeovers because many investment firms rely on the firm’s research to aid in making decisions on shareholder votes. For that reason, the recommendation may sway some votes in LSE’s favour.

It’s a little odd – Glass Lewis is an international firm, lowering the chance that their recommendation is influenced by the Canadian requirement to cooperate with the bank/regulatory complex. On the other hand, they’re owned by Ontario Teachers, which is a member of the club in good standing.

More angst over capital rules:

Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihan said excessive capital surcharges on the largest banks could limit lending and discourage investors from funding the industry.

The Basel Committee on Banking Supervision is considering a capital surcharge of as much as 3.5 percentage points on the largest banks if they get bigger, according to two people familiar with the talks.

Draft plans circulated before a meeting next week would subject banks to a sliding scale depending on their size and links to other lenders, said the people, who declined to be identified because the proposals aren’t public.

Interesting piece about the Sino-Forest takedown:

Four days after attacking Canada’s largest forestry firm, Carson Block finally faced investors and analysts on a conference call Monday.

One caller, who sounded very upset, asked an obvious question: In preparing his infamous report on Sino-Forest Corp., how much time did he spend speaking with the company?

Mr. Block wasn’t rattled. He calmly stated that he spoke with Sino’s investor relations executive for a maximum of two and a half hours, and that she seemed knowledgeable on the company.

If the line had been open to all callers, the gasp would have been audible as everyone absorbed the same information: This guy wiped out more than $3-billion of shareholder value from a company he spoke to for only a couple of hours.

Shocking. He actually went out and did field research instead of copying down what the company’s IR staff told him! Such things should not be allowed! The story is highly deficient in at least one respect:

According to experts, investors trusted Mr. Block for two reasons: Sino-Forest’s history of poor transparency that lent credibility to his claims, and the fact that whistle blowers are so often right in these situations. From Enron to Bernie Madoff (famously cited in the first line of Mr. Block’s report), the lone wolf in the wilderness is often correct.

It looks like the writer belongs to the Sell Side School of Analysis – but some people have been digging:

Muddy Waters Research, a firm specializing in finding Chinese companies it believes are frauds, shorts the firms’ shares and publicizes the charges on its website.

So far it has made money on its first five bets.

Muddy Waters’ track record is based on a Reuters analysis of the published research that is available on the firm’s website. It is not clear whether Muddy Waters or its director of research Carson Block have made other research calls or taken other positions.

Of the five companies Muddy Waters is known to have advised investors to sell, with all asserting some level of accounting irregularities, two have been delisted from the Nasdaq and one has not traded since April.

Of the two that continue to trade, neither has come anywhere close to approaching the levels they changed hands at before the reports.

I suggest that another reason some investors are considering the Muddy Waters analysis credible is because of his track record (which may be selective; but five take-downs is a pretty good career). But I’m not an expert.

Whether the Sino-Forest call is correct or not is something on which I have zero expertise (and, frankly, not really a lot of interest). But Mr. Block said it best:

Mr. Block, for his part, has no trouble explaining potential cracks in the financial system. He describes the capital markets as a “hot potato” where the various groups (auditors, bankers, lawyers, etc.) pass the blame to each other when the system suddenly fails. “The gatekeepers whom investors think are providing protection against fraudulent listings don’t function as they should,” he says.

Rob Carrick has a good article on fee-based accounts:

Investors are going to have to become familiar with fee-based accounts because they’re gradually taking over in the advice business. The analysis firm Investor Economics reports that the share of fee-based assets had grown to 48 per cent in the full-service brokerage business as of March 31 from 36 per cent five years ago.

I think fee-based accounts are a great thing, provided:

  • The account manager is a fiduciary
  • The account manager handles only fee based accounts and doesn’t get a dime from anybody for transactions
  • The track record is published
  • The advisor’s company accepts only fee-based accounts

Union Gas issued 30-year notes at 4.88%.

It was a yellow-letter day for some investors!

YLO Issues, 2011-6-17
Ticker Quote
6/16
Quote
6/17
Bid YTW
6/17
YTW
Scenario
6/17
Performance
6/17
(bid/bid)
YLO.PR.A 23.10-15 23.46-59 8.53% Soft Maturity
2012-12-30
+1.56%
YLO.PR.B 15.51-68 15.70-75 14.50% Soft Maturity
2017-06-29
+1.22%
YLO.PR.C 13.36-45 14.80-90 10.96% Limit Maturity +10.78%
YLO.PR.D 13.61-65 15.01-26 11.04% Limit Maturity +10.29%

There’s a lot of weeping and wailing about the Vancouver riot, with questions being asked about what went wrong. I’ll answer them – society has gone wrong. We impose so ridiculous constraints on public conduct nowadays – right, Anthony Weiner? – that occasionally things blow up. A kid who has gotten into trouble at school – fairly serious trouble – for throwing a snowball at a wall (as has one kid I know) is going to long for a day of no rules. It’s exactly the same process that makes the Internet such a troll zone.

It was a poor day on the Canadian preferred share market, with PerpetualDiscounts down 15bp, FixedResets losing 13bp and DeemedRetractibles off 1bp. Volume was good.

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 -0.1516 % 2,468.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1516 % 3,712.0
Floater 2.45 % 2.22 % 39,732 21.75 4 -0.1516 % 2,664.9
OpRet 4.88 % 2.88 % 67,102 0.92 9 0.1119 % 2,431.9
SplitShare 5.25 % -0.07 % 62,040 0.49 6 0.0444 % 2,497.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1119 % 2,223.7
Perpetual-Premium 5.66 % 5.12 % 144,213 1.38 12 0.0674 % 2,075.1
Perpetual-Discount 5.47 % 5.60 % 119,218 14.40 18 -0.1544 % 2,174.3
FixedReset 5.16 % 3.31 % 198,584 2.84 57 -0.1325 % 2,308.3
Deemed-Retractible 5.08 % 4.89 % 297,058 8.17 47 -0.0120 % 2,151.6
Performance Highlights
Issue Index Change Notes
GWO.PR.J FixedReset -5.78 % Meaningless. The issue traded 132,519 shares in a range of 26.81-00 before “lasting” at 25.12-27.00. Remember that given the shoddy data dissemination of the TMX, “lasting” is not necessarily the same as “closing” … but I haven’t checked, since “Trades & Quotes” isn’t updated ’till midnight.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.39 %
MFC.PR.C Deemed-Retractible -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.04
Bid-YTW : 6.06 %
IAG.PR.E Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 5.35 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.J FixedReset 132,519 Nesbitt crossed blocks of 30,000 and 100,000, both at 26.94.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.39 %
BNS.PR.P FixedReset 104,360 Nesbitt crossed 90,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.14
Bid-YTW : 2.84 %
RY.PR.T FixedReset 84,569 RBC crossed three blocks of 25,000 each, all at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.30
Bid-YTW : 3.40 %
RY.PR.C Deemed-Retractible 77,590 Nesbitt crossed 30,000 at 24.42. RBC crossed blocks of 13,300 and 25,000, both at 24.50.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.44
Bid-YTW : 4.94 %
TRP.PR.B FixedReset 66,360 National crossed blcoks of 20,000 and 35,000, both at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-17
Maturity Price : 25.11
Evaluated at bid price : 25.16
Bid-YTW : 3.51 %
BNS.PR.Y FixedReset 63,158 National crossed 45,000 at 25.45.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 3.29 %
There were 37 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.J FixedReset Quote: 25.12 – 27.00
Spot Rate : 1.8800
Average : 1.1461

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 5.39 %

POW.PR.A Perpetual-Discount Quote: 24.80 – 25.10
Spot Rate : 0.3000
Average : 0.1890

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-17
Maturity Price : 24.55
Evaluated at bid price : 24.80
Bid-YTW : 5.74 %

ALB.PR.B SplitShare Quote: 22.30 – 22.69
Spot Rate : 0.3900
Average : 0.2852

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-03-29
Maturity Price : 21.80
Evaluated at bid price : 22.30
Bid-YTW : 1.54 %

BAM.PR.O OpRet Quote: 25.91 – 26.33
Spot Rate : 0.4200
Average : 0.3165

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 3.07 %

CM.PR.I Deemed-Retractible Quote: 25.01 – 25.20
Spot Rate : 0.1900
Average : 0.1131

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 4.80 %

GWO.PR.M Deemed-Retractible Quote: 25.32 – 25.55
Spot Rate : 0.2300
Average : 0.1589

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 5.61 %

June 16, 2011

Thursday, June 16th, 2011

Greek spreads are getting ridiculous:

The yield on Greece’s 2-year bond topped 30 percent for the first time and the cost of protecting Greece against default climbed 280 basis points to a record 2,050 basis points, according to prices compiled by CMA.

The US Senate did something sensible!:

The U.S. Senate voted to eliminate a tax credit and a tariff for ethanol production, providing the strongest signal yet that Congress will curtail subsidies for corn-based biofuel.

The 73-27 vote exceeded the 60-vote threshold needed to advance the measure as part of an economic development bill. Still, the legislation isn’t likely to become law, and the vote indicated that it will be difficult for ethanol supporters to extend the 45-cent-a-gallon tax break and the 54-cent-a-gallon tariff beyond their scheduled Dec. 31 expiration.

There must have been a blue moon recently because the House did something sensible, too:

The budget of the Commodity Futures Trading Commission would be cut by 15 percent, or $30 million, under a measure passed by the U.S. House.

The Republican spending bill approved today would reduce the agency’s budget to $172 million from its current level of $202 million. The CFTC is responsible for writing most of the new rules to govern derivatives trades made by banks including Goldman Sachs Group Inc. (GS) and Morgan Stanley. (MS)

Bank of Canada Governor Mark “Ban the Bond” Carney continued his crusade for Central Planning yesterday, with a speech titled Housing in Canada:

Since 2008, the federal government has taken a series of prudent and timely measures to tighten mortgage insurance requirements in order to support the long-term stability of the Canadian housing market. These will reduce the possibility that prices are further driven up simply through higher leverage.

No broad-brush policy making for Mr. Carney! Rationing is much preferable to the free market, since it makes the rationers more important. As the Globe noted:

Mr. Carney strongly suggested that the central bank continues to see narrow financial regulation, like steps taken by the Finance Department to make it harder for some Canadians to get a mortgage, as a more appropriate tool than rate hikes for taming the domestic side of the equation.

What should be done, if anything? I am fully prepared to concede that housing prices in Canada have the potential to become harmful; and, for the sake of an argument, am prepared to listen to anybody who cares to argue that we have now reached that point. Well, let’s take a look at another snippet from the speech:

A home purchase triggers the biggest liability most families will ever take on. The value of housing-related debt in Canada has nearly tripled over the past decade to $1.3 trillion. This debt is also the single largest exposure for Canadian financial institutions, with real estate loans making up more than 40 per cent of the assets of Canadian banks, up from about 30 per cent a decade ago (Chart 2).


Click for Big

The obvious answer to this problem – assuming that careful study confirms that this is a problem, which I rather suspect it would – is not to ration credit to those using it for proper purposes, but to introduce counter-cyclical capital requirements on banks. Currently, a mortgage attracts a 35% Risk-Weight for bank capital calculation purposes. OK, keep that, but then say … ‘if your bank has more than 35% real-estate exposure, the Risk-Weight on the amount over 35% is 40%. And the Risk-Weight on the amount over 40% is 45%. This is infinitely preferable to micro-managing banks’ credit decisions and creating a morrass of complex rules to be applied (or ignored, if you’re good friends with the loan officer) at the retail level.

BIS has often warned about the tsunami of maturities soon to be experienced by global banks. So is Moody’s:

Of the the roughly US$11-trillion in long-term bank debt outstanding globally, nearly half will come due between now and the end of 2014, according to Moody’s.

The sudden rise in maturing debt “leaves the banking system exposed to refinancing risk” as the current low-interest rate environment is not expected to continue indefinitely, the rating agency said in a report on Thursday.

According to Moody’s, about US$3.4-trillion, or 33%, will come due by the end of 2012, and $4.9-trillion (45%) by the end of 2013.

Moody’s said the most likely scenario as banks deal with the challenge is higher funding costs and lower profitability.

New book idea: “The Statement of Dorian Yellow”, in which an investor shows the world the statment of most of his invetments, with YLO issues being kept secret.

YLO Issues, 2011-6-16
Ticker Quote
6/15
Quote
6/16
Bid YTW
6/16
YTW
Scenario
6/16
Performance
6/16
(bid/bid)
YLO.PR.A 23.23-29 23.10-15 9.60% Soft Maturity
2012-12-30
-0.55%
YLO.PR.B 15.57-90 15.51-68 14.76% Soft Maturity
2017-06-29
-0.39%
YLO.PR.C 13.75-90 13.36-45 12.17% Limit Maturity -2.83%
YLO.PR.D 13.94-19 13.61-65 12.21% Limit Maturity -2.37%

It was a downish day on the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets flat and DeemedRetractibles down 7bp. There were no performance highlights, but volume was really good, with quite a few issues trading in good size.

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 -0.0816 % 2,471.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0816 % 3,717.6
Floater 2.45 % 2.22 % 41,353 21.75 4 -0.0816 % 2,668.9
OpRet 4.88 % 3.07 % 65,537 0.37 9 0.0646 % 2,429.2
SplitShare 5.25 % -0.07 % 64,611 0.49 6 -0.0513 % 2,496.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0646 % 2,221.2
Perpetual-Premium 5.66 % 5.13 % 145,861 0.92 12 -0.0230 % 2,073.7
Perpetual-Discount 5.46 % 5.58 % 118,468 14.44 18 -0.0047 % 2,177.6
FixedReset 5.16 % 3.32 % 204,097 2.81 57 0.0040 % 2,311.3
Deemed-Retractible 5.08 % 4.90 % 294,001 8.19 47 -0.0748 % 2,151.8
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.M OpRet 426,000 Nesbitt crossed 423,000 at 25.70. Nice ticket!
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-16
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : 2.27 %
TD.PR.Y FixedReset 211,600 Nesbitt crossed blocks of 105,000 and 100,000, both at 26.26.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-30
Maturity Price : 25.00
Evaluated at bid price : 26.24
Bid-YTW : 3.28 %
TRI.PR.B Floater 152,985 Nesbitt crossed 150,000 at 23.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-16
Maturity Price : 22.99
Evaluated at bid price : 23.26
Bid-YTW : 2.22 %
TD.PR.I FixedReset 129,300 Nesbitt crossed 120,000 at 27.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.43
Bid-YTW : 3.32 %
BNS.PR.X FixedReset 119,013 Nesbitt crossed 100,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.40
Bid-YTW : 3.16 %
BNS.PR.P FixedReset 115,151 Nesbitt crossed blocks of 20,000 atnd 65,000 at 26.15. RBC crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 2.88 %
TD.PR.K FixedReset 110,885 Nesbitt crossed 100,000 at 27.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.43
Bid-YTW : 3.32 %
TD.PR.E FixedReset 108,020 Nesbitt crossed 100,000 at 27.42.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.32
Bid-YTW : 3.26 %
TRP.PR.A FixedReset 101,276 Nesbitt crossed 80,000 at 25.89.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 3.68 %
There were 48 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.F Perpetual-Discount Quote: 23.30 – 23.95
Spot Rate : 0.6500
Average : 0.4102

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-16
Maturity Price : 23.09
Evaluated at bid price : 23.30
Bid-YTW : 5.29 %

GWO.PR.F Deemed-Retractible Quote: 25.31 – 25.78
Spot Rate : 0.4700
Average : 0.3425

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-10-30
Maturity Price : 25.25
Evaluated at bid price : 25.31
Bid-YTW : 4.59 %

SLF.PR.E Deemed-Retractible Quote: 22.60 – 22.87
Spot Rate : 0.2700
Average : 0.1708

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.60
Bid-YTW : 5.73 %

BAM.PR.J OpRet Quote: 26.60 – 26.97
Spot Rate : 0.3700
Average : 0.2895

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 26.00
Evaluated at bid price : 26.60
Bid-YTW : 4.29 %

RY.PR.I FixedReset Quote: 26.06 – 26.32
Spot Rate : 0.2600
Average : 0.1811

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 3.43 %

BAM.PR.M Perpetual-Discount Quote: 21.30 – 21.53
Spot Rate : 0.2300
Average : 0.1604

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-16
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 5.60 %