Archive for November, 2012

November 22, 2012

Thursday, November 22nd, 2012

The intermediators are being disintermediated!

When PPR SA, the French owner of Gucci, sold a stake in its African distributor CFAO in August, it didn’t use an investment bank to handle the transaction.

Instead, the company turned to an in-house mergers and acquisitions team led by Charles de Fleurieu, 39, a former France Telecom SA M&A executive. “When we can, we do it on our own,” said group managing director Jean-Francois Palus, 51.

Almost a third of completed European and U.S. M&A transactions this year were done in-house, according to data provided by Freeman Consulting, a New York-based research firm. For the U.S., that represents the largest adviser-free proportion of deals since 2003; for Europe, it’s the most since 2004.

Big global investment banks have seen their revenue from advisory work fall 48 percent, to $6.48 billion, in the first nine months of 2012, compared with the same period in 2007, according to data compiled by Bloomberg.

Distrust may be a factor as companies grow increasingly skeptical about banks, said John Longworth, director general of the British Chambers of Commerce, which in an October report found that half of U.K. companies are leery of doing business with financial institutions.

Siemens, Germany’s most acquisitive company during the past decade, used its own M&A staff for an agreement in July 2011 to acquire NEM and Nem Energy Services, Dutch makers of gas and steam power-plant parts, for 170 million euros ($218 million).

Banks might have earned almost 3 million euros in fees to advise Siemens on the deal, estimates Freeman based on transactions roughly that size. They may have missed out on as much as $55.5 million when BP, Europe’s second-largest oil company, used its 30-member in-house advisory team to sell Gulf of Mexico oil and gas properties to Plains Exploration & Production for $5.55 billion, announced in September.

DBRS confirmed BRN.PR.A at Pfd-2(low) – an issue which is not followed by HIMIPref™:

DBRS has today confirmed the rating of Pfd-2 (low) with a Stable trend for the Senior Preferred Shares of Brookfield Investments Corporation (Brookfield Investments or the Company).

As a result of higher market values and the aforementioned new investments, the Company’s exposure to real estate investments decreased to 69.6% (on a market value basis as at September 30, 2012) from 83.5% in Q1 2011. Specifically, Brookfield Office Properties Inc. represents 41% of the Company’s investment portfolio on a market value basis.

The rating also continues to be supported by the fact that: (1) Brookfield Investments’ senior debt does not exceed 10% of the market value of its portfolio, and (2) no dividends are paid to Brookfield Investments common shareholders, unless, after giving effect to such dividend, the asset coverage for the Brookfield Investments Senior Preferred Shares would be at least three times. Excess cash flows beyond the Senior Preferred Shares are available to Brookfield Investments as sole holder of the Junior Preferred Shares and as sole common shareholder. The Junior Preferred Shares rank subordinate to the Senior Preferred Shares with respect to the payment of dividends.

The rating also reflects the following challenges: (a) The principal amount of the Senior Preferred Shares may be repaid by liquidating the assets upon retraction by the holder. Since 29.9% of investments are in shares that are not publicly listed, the illiquidity of such investments could have negative implications for the value realized by the preferred shareholders. (b) As there are no restrictions on the contents of the underlying portfolio, volatile market conditions could cause significant reductions in the net asset value of the Portfolio Shares (especially common shares).

DBRS confirmed TRP and TCA at Pfd-2(low):

DBRS has today confirmed the ratings of TransCanada PipeLines Limited (TCPL or the Company) as listed below. DBRS has also confirmed the rating of the Preferred Shares of TransCanada Corporation (TCC) at Pfd-2 (low). The rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL.

The ratings and trends reflect the following DBRS expectations: (1) The decision with respect to the Company’s Canadian Mainline 2012 Tolls Application and Restructuring Proposal (the Restructuring Proposal) that is currently before the National Energy Board (NEB) will be such that the Company is allowed to continue to recover, and earn a reasonable rate of return on, all of the costs that were incurred in the construction of the Canadian Mainline. A decision is currently expected in late Q1 2013. (2) The Keystone XL Pipeline, approval of which has been repeatedly delayed, is approved by the United States Department of State in 2013 and construction is allowed to proceed, with an expected in-service date in late 2014 or early 2015. A decision is currently expected in Q1 2013. Should a negative decision result, DBRS expects TCC to mitigate the result with incremental projects of similar quality to support its overall business risk profile. (3) Despite an expected moderate weakening in 2013, TCPL maintains reasonably strong credit metrics in line with its targeted cash flow-to-debt ratio of at least 15% and cash flow-to-interest of at least three times (15.8% and 3.6 times on a DBRS-adjusted basis at September 30, 2012). DBRS expects increased diversification and reduced proportional exposure to the currently challenging natural gas pipeline segment, with major capital projects placed in service by 2015 as expected.

It was another day of gains for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles both up 6bp, with FixedResets winning 15bp. Volatility was minimal, with two IAG issues bouncing back after going ex-dividend yesterday. Volume was low.

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 0.3479 % 2,466.8
FixedFloater 4.19 % 3.53 % 28,637 18.25 1 -0.2636 % 3,844.9
Floater 2.80 % 3.01 % 57,770 19.65 4 0.3479 % 2,663.4
OpRet 4.60 % 1.24 % 36,352 0.59 4 -0.0095 % 2,593.8
SplitShare 5.43 % 4.78 % 59,804 4.46 3 0.3579 % 2,863.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0095 % 2,371.8
Perpetual-Premium 5.26 % 2.19 % 73,024 0.87 30 0.0556 % 2,316.7
Perpetual-Discount 4.85 % 4.89 % 97,292 15.59 3 0.0953 % 2,625.6
FixedReset 4.98 % 3.00 % 199,225 4.19 75 0.1514 % 2,451.1
Deemed-Retractible 4.90 % 3.07 % 125,346 0.50 46 0.0642 % 2,405.9
Performance Highlights
Issue Index Change Notes
IAG.PR.A Deemed-Retractible 1.39 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 4.64 %
IAG.PR.C FixedReset 1.56 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 1.94 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.R Deemed-Retractible 107,505 Scotia crossed 100,000 at 25.10.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.83 %
SLF.PR.C Deemed-Retractible 103,675 Desjardins crossed 100,000 at 24.35.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 4.94 %
NA.PR.Q FixedReset 58,580 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.28 %
CU.PR.C FixedReset 51,540 National crossed 40,000 at 26.02.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.02 %
FTS.PR.J Perpetual-Premium 48,045 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 4.65 %
TD.PR.S FixedReset 47,010 RBC bought 10,000 from Scotia at 24.90; National bought 16,700 from Nesbitt at 24.94.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.94
Bid-YTW : 3.12 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.G Perpetual-Discount Quote: 24.46 – 24.74
Spot Rate : 0.2800
Average : 0.1915

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-22
Maturity Price : 23.99
Evaluated at bid price : 24.46
Bid-YTW : 4.89 %

HSB.PR.D Deemed-Retractible Quote: 26.11 – 26.49
Spot Rate : 0.3800
Average : 0.2983

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-31
Maturity Price : 25.50
Evaluated at bid price : 26.11
Bid-YTW : -10.34 %

PWF.PR.H Perpetual-Premium Quote: 25.38 – 25.60
Spot Rate : 0.2200
Average : 0.1391

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-22
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : -8.27 %

BAM.PR.M Perpetual-Discount Quote: 24.50 – 24.72
Spot Rate : 0.2200
Average : 0.1502

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-22
Maturity Price : 24.21
Evaluated at bid price : 24.50
Bid-YTW : 4.90 %

BNA.PR.D SplitShare Quote: 26.40 – 26.64
Spot Rate : 0.2400
Average : 0.1880

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-22
Maturity Price : 26.00
Evaluated at bid price : 26.40
Bid-YTW : -14.55 %

ELF.PR.H Perpetual-Premium Quote: 25.61 – 25.90
Spot Rate : 0.2900
Average : 0.2382

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 5.25 %

November 21, 2012

Wednesday, November 21st, 2012

Olam is fighting back against Muddy Waters:

Olam International Ltd. (OLMIF), the world’s second-largest rice trader, filed a lawsuit against investment firm Muddy Waters LLC and its founder Carson Block after he questioned the commodity trader’s accounting methods.

The legal action was initiated in the High Court of Singapore following Block’s statements against the company at a conference in London on Nov. 19, Olam said yesterday in a regulatory filing. The suit, which couldn’t immediately be confirmed in the court, is for slander, libel and/or malicious falsehood, Olam’s spokesman Aditya Renjen said. He declined to comment on the size of the damages sought.

A war of words between Olam and Block began when the Muddy Waters research director accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Olam Chief Executive Officer Sunny Verghese said on Nov. 20 the statements were designed to panic shareholders of the company.

I see that Joe Fontana has been charged with fraud:

Mayor Joe Fontana is facing three criminal charges relating to a federal cheque that paid the deposit on the 2005 wedding reception for his son Michael, his lawyer says.

The charges of fraud, breach of trust by a public official and uttering forged documents were filed against him Wednesday by the Royal Canadian Mounted Police following an investigation of more than two months.

They relate to a $1,700 cheque issued by Public Works Canada that was used to pay the Marconi Club — a London social club. A copy of the stub from that cheque was obtained by QMI Agency and published five weeks ago. The invoice number on the cheque stub, dated April 6, 2005, matched that of the Marconi Club invoice issued about six months earlier.

A former Marconi Club manager told QMI Agency Fontana later produced a similar cheque for the $18,900 balance owing. He said he remembered the payment clearly because he had to chase Fontana six months to get it.

At the time, Fontana was a Liberal mMember of Parliament for London North Centre and federal minister of labour and housing. He was elected mayor here in late 2010 and is midway through his four-year term.

Fontana was my MP when I lived in London. I called him once to express my irritation with a call received from a federal agency that was trying to track down some other Hymas (not even a relation. They had no reason other than my name to call me) … I told him that I resented being considered an informer by government agencies on fishing expeditions. He got angry with me – perhaps he’d just returned from a ‘Bring the STASI to Canada’ meeting – and told me that I had a duty to help out my government.

Have a nice time with your defence, Joe! Remember your duty to help out your government!

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 9bp and DeemedRetractibles winning 27bp. Volatility was average. Volume was quite good and all the highlighted issues are FixedResets.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little over 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a narrowing from the 220bp reported November 14 and equal to the spread paid by CIU with their recent 40-year deal.

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 0.1072 % 2,458.2
FixedFloater 4.17 % 3.52 % 28,660 18.27 1 0.2643 % 3,855.0
Floater 2.81 % 3.01 % 53,471 19.66 4 0.1072 % 2,654.2
OpRet 4.60 % 2.55 % 57,713 0.59 4 0.1236 % 2,594.1
SplitShare 5.45 % 4.80 % 58,759 4.47 3 -0.2908 % 2,852.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1236 % 2,372.0
Perpetual-Premium 5.26 % 2.43 % 72,831 0.87 30 0.0226 % 2,315.4
Perpetual-Discount 4.85 % 4.89 % 100,560 15.59 3 0.1227 % 2,623.1
FixedReset 4.99 % 3.01 % 199,670 4.19 75 0.0934 % 2,447.4
Deemed-Retractible 4.90 % 3.31 % 123,659 0.50 46 0.2742 % 2,404.3
Performance Highlights
Issue Index Change Notes
BNA.PR.C SplitShare -1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.03 %
GWO.PR.J FixedReset 1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.26
Bid-YTW : 2.18 %
MFC.PR.F FixedReset 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 3.54 %
HSB.PR.D Deemed-Retractible 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-31
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : -2.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.F FixedReset 214,270 TD crossed three blocks: 70,000 and 100,000 at 26.45 and 39,400 at 26.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 2.84 %
BNS.PR.R FixedReset 182,667 Nesbitt crossed blocks of 85,000 and 50,000, both at 25.25; RBC crossed 19,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 3.34 %
TD.PR.A FixedReset 148,648 TD crossed 147,000 at 25.60.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 3.25 %
BMO.PR.Q FixedReset 125,048 National crossed 100,000 at 25.15.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 3.01 %
BMO.PR.M FixedReset 111,810 TD crossed 85,900 at 25.01.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 3.13 %
CIU.PR.B FixedReset 94,826 National crossed three blocks: 40,400 shares, 35,000 and 15,400, all at 26.72.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.67
Bid-YTW : 2.14 %
There were 37 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.C FixedReset Quote: 25.60 – 26.05
Spot Rate : 0.4500
Average : 0.2664

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.38 %

IAG.PR.G FixedReset Quote: 25.70 – 25.96
Spot Rate : 0.2600
Average : 0.1452

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.54 %

MFC.PR.D FixedReset Quote: 26.48 – 26.79
Spot Rate : 0.3100
Average : 0.2090

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.48
Bid-YTW : 2.45 %

BMO.PR.L Deemed-Retractible Quote: 26.66 – 26.88
Spot Rate : 0.2200
Average : 0.1333

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 26.00
Evaluated at bid price : 26.66
Bid-YTW : 0.42 %

BAM.PR.K Floater Quote: 17.45 – 17.71
Spot Rate : 0.2600
Average : 0.1800

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-21
Maturity Price : 17.45
Evaluated at bid price : 17.45
Bid-YTW : 3.03 %

MFC.PR.C Deemed-Retractible Quote: 23.94 – 24.20
Spot Rate : 0.2600
Average : 0.1846

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.94
Bid-YTW : 5.07 %

TXPL: Changes Made to Methodology

Wednesday, November 21st, 2012

The clowns at S&P have made some changes to their index methodology without issuing a press release; not only that, but the rush-job typographical errors on the TXPL methodology now appear to have been fixed, but the TXPL documentation is now linked on the web page for TXPR as well as the web page for TXPL.

However, some changes have substance.

The changes are (bolding added by JH):

Market Capitalization. Preferred shares with total market capitalization of less than C$ 75 million as of the rebalancing reference date are excluded from the index, based on the volume weighted average price (VWAP) over the last three trading days of the month-end prior to the Quarterly Review.

Used to be CAD 100-million

A preferred share deleted from the index is not eligible for re-inclusion in the index until 6-month after the effective date of the exclusion.
Note: While the inclusion criteria explicitly excludes issues that have a mandatory conversion or scheduled maturity within 12 months of the rebalancing effective date, no such rule exists for continued membership.

New Issue: INE Straight Perpetual 5.75%

Wednesday, November 21st, 2012

Innergex Renewable Energy has announced:

that it has entered into an agreement to issue, on a bought deal basis, to a syndicate of underwriters co-led by TD Securities Inc., National Bank Financial Inc. and BMO Capital Markets for distribution to the public, 2,000,000 Cumulative Redeemable Fixed-Rate Preferred Shares Series C (the “Series C Shares”). The Series C Shares will be issued at a price of $25.00 per Series C Share, for aggregate gross proceeds of $50,000,000. The underwriters will have an option to purchase up to an additional 300,000 Series C Shares from Innergex at a price of $25.00 per Series C Share, exercisable in whole or in part at any time for a period of up to 30 days following closing of the offering, which, if exercised in full, would increase the gross offering size to $57,500,000.

These funds will be used to repay a portion of the Corporation’s revolving term credit facility and for general corporate purposes.

Holders of the Series C Shares will be entitled to receive, as and when declared by the Board of Directors of Innergex, a cumulative quarterly fixed dividend yielding 5.75% annually. The Series C Shares will not be redeemable prior to January 15, 2018. On and after January 15, 2018 on not more than 60 nor less than 30 days’ notice, Innergex may, at its option, redeem all or from time to time any of the then outstanding Series C Shares upon payment in cash for each share so redeemed of an amount equal to $26.00 per share if redeemed on or prior to January 15, 2019; at $25.75 if redeemed thereafter and on or prior to January 15, 2020; at $25.50 if redeemed thereafter and on or prior to January 15, 2021; at $25.25 if redeemed thereafter and on or prior to January 15, 2022; and at $25.00 per share if redeemed thereafter; together, in each case, with all accrued and unpaid dividends to the date fixed for redemption. The Series C Shares will rank pari passu with all other series of preferred shares and in priority to common shares as to the payment of dividends and the distribution of assets on dissolution, liquidation, or wind-up.

The Series C 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. The offering of Series C Shares is expected to close on December 11, 2012, subject to regulatory approvals and other customary closing conditions.

Interestingly, the headline on the Innergex media page refers to an issue size of $75-million. Random mistake or last minute downsizing?

Update: DBRS calls it Pfd-3(low), Negative Trend.

November 20, 2012

Wednesday, November 21st, 2012

Bernanke upped the stakes in the fiscal cliff negotiations:

Federal Reserve Chairman Ben S. Bernanke said that an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery.

“Cooperation and creativity to deliver fiscal clarity — in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery — could help make the new year a very good one for the American economy,” Bernanke said today in a speech in New York. “The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery.”

One of the guys caught up in the SEC’s war against capital markets has come out OK:

Brian Stoker, who fended off regulators’ claims that he helped Citigroup Inc. (C) mislead investors in a $1 billion deal, has joined StormHarbour Securities LP in a sales position.

Stoker, 41, will focus on the sale of structured products such as collateralized debt obligations, or CDOs, and mortgage- backed securities, according to Sohail Khan, a StormHarbour managing principal and former Citigroup executive. Stoker started yesterday as a managing director and will have more responsibilities “over time,” Khan said.

The hire comes three months after a jury cleared Stoker of any wrongdoing in a $1 billion CDO offering Citigroup sold in 2007. The U.S. Securities and Exchanges Commission alleged that the New York-based bank failed to tell investors that it had picked about half of the CDO’s underlying assets and was betting they’d decline. Stoker, who helped to structure the deal, argued that he wasn’t responsible for the way the deal was pitched to investors.

As I have noted several times before, perhaps it would help if all future prospectuses contained twenty pages of legalese to the effect that all of a fund’s assets have been sold to it by somebody else.

Fabulous Fab is still awaiting vindication:

U.S. District Judge Katherine Forrest in Manhattan, who took over the case from her colleague Barbara Jones last month, rejected the SEC’s argument that a recent court decision made a $150 million note sale to Germany’s IKB Deutsche Industriebank AG sufficiently “domestic” to give her jurisdiction.

Monday’s decision does not affect the rest of the SEC’s lawsuit against Tourre, which arose from charges filed against him and Goldman in April 2010.

In an astonishing developement, it appears Greece will need more debt write-offs before it stabilizes:

Greece’s debt cannot be cut to 120 per cent of GDP by 2020, the level deemed sustainable by the IMF, unless euro-zone member states write off a portion of their loans to Greece, a document prepared for finance ministers shows.

The 15-page document, circulated among ministers, the European Central Bank and the International Monetary Fund for a meeting that began on Tuesday and took more than 10 hours, sets out in black-and-white how far off-track Greece is in reducing its debt to the IMF-imposed target, from the current level of around 170 per cent of GDP.

Even more surprisingly, this resulted in the scheduling of an emergency meeting:

European finance ministers failed to agree on a debt-reduction package for Greece after battling with the International Monetary Fund over how to nurse the recession- wracked country back to fiscal health.

With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrounge together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190 percent of gross domestic product in 2014.

More than 11 hours of talks broke up early today in Brussels with praise for the Athens government’s economic overhaul and a declaration that an accord on the financing package will wait at least until a hastily arranged meeting of the ministers on Nov. 26.

In today’s laugh from Ottawa, the Junior Republicans are accusing the Dippers of having sound economic policy, which they deny:

The Conservatives have a new line of attack when it comes to the NDP, using television panels and Question Period exchanges to claim the Official Opposition is advocating a GST hike.

The NDP say the Conservatives are lying.

It was a suddenly negative day for the Canadian preferred share market as it welcomed the new ETF (ZPR), with PerpetualPremiums losing 26bp, FixedResets down 21bp and DeemedRetractibles off 16bp. Volatility was average. Volume was a little above 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 0.1073 % 2,455.6
FixedFloater 4.19 % 3.53 % 29,610 18.25 1 -0.2198 % 3,844.9
Floater 2.81 % 3.02 % 54,324 19.64 4 0.1073 % 2,651.4
OpRet 4.61 % 0.71 % 36,719 0.60 4 -0.0475 % 2,590.9
SplitShare 5.44 % 4.82 % 59,086 4.47 3 0.4429 % 2,861.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0475 % 2,369.1
Perpetual-Premium 5.26 % 2.74 % 73,204 0.44 30 -0.2659 % 2,314.9
Perpetual-Discount 4.86 % 4.90 % 100,939 15.58 3 0.1912 % 2,619.9
FixedReset 4.99 % 3.06 % 199,707 4.15 75 -0.2131 % 2,445.1
Deemed-Retractible 4.91 % 3.57 % 123,211 1.07 46 -0.1571 % 2,397.8
Performance Highlights
Issue Index Change Notes
BAM.PF.B FixedReset -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-20
Maturity Price : 23.12
Evaluated at bid price : 25.06
Bid-YTW : 3.92 %
MFC.PR.F FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 3.67 %
BMO.PR.J Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.75
Evaluated at bid price : 26.06
Bid-YTW : -0.38 %
BNA.PR.C SplitShare 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.35
Bid-YTW : 4.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.Q FixedReset 156,985 RBC crossed 20,000 at 25.15; National crossed 75,000 at the same price; Desjardins crossed 20,000 at the same price again.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 3.01 %
RY.PR.B Deemed-Retractible 79,324 RBC crossed 75,000 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-24
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : 3.53 %
TD.PR.S FixedReset 63,562 Desjardins crossed 47,400 at 24.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.81
Bid-YTW : 3.19 %
FTS.PR.J Perpetual-Premium 51,533 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 4.68 %
SLF.PR.I FixedReset 43,189 TD crossed 25,000 at 26.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.93
Bid-YTW : 3.45 %
SLF.PR.H FixedReset 30,775 Scotia crossed 25,000 at 25.05.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 3.71 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.A FixedReset Quote: 25.33 – 25.65
Spot Rate : 0.3200
Average : 0.1968

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-20
Maturity Price : 23.67
Evaluated at bid price : 25.33
Bid-YTW : 3.22 %

GWO.PR.N FixedReset Quote: 24.06 – 24.39
Spot Rate : 0.3300
Average : 0.2240

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.06
Bid-YTW : 3.55 %

MFC.PR.F FixedReset Quote: 24.25 – 24.60
Spot Rate : 0.3500
Average : 0.2584

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 3.67 %

CM.PR.D Perpetual-Premium Quote: 25.88 – 26.06
Spot Rate : 0.1800
Average : 0.1042

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-20
Maturity Price : 25.00
Evaluated at bid price : 25.88
Bid-YTW : -29.90 %

NA.PR.P FixedReset Quote: 26.25 – 26.60
Spot Rate : 0.3500
Average : 0.2742

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-15
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 2.57 %

RY.PR.T FixedReset Quote: 26.66 – 26.94
Spot Rate : 0.2800
Average : 0.2060

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.66
Bid-YTW : 2.37 %

BBD Junk Issue Withdrawn; S&P Downgrade Remains

Wednesday, November 21st, 2012

Standard & Poor’s has announced:

  • •We are withdrawing our ‘BB’ issue-level rating, and ‘4’ recovery rating, on Bombardier Inc.’s proposed US$1 billion of unsecured notes. The company has decided to not issue these notes.
  • •We are also affirming our ‘BB’ long-term corporate rating on Bombardier.
  • •While Bombardier’s decision to not issue debt at this time will mean a somewhat better leverage ratio, with an adjusted debt-to-EBITDA ratio of about 6.3x compared with 7.0x for 2012, the company will not benefit from
    US$1 billion in additional liquidity.
  • •We continue to view Bombardier’s current liquidity position, with a US$2.1 billion cash balance, as adequate, but there is less cushion if capital expenditures were to increase due to delays in the CSeries programs.
  • •The stable outlook reflects our expectations that the company will continue to generate strong cash flows and credit metrics will improve over the next two years.


Under the current business conditions, we believe an upgrade is unlikely in the near term. Nevertheless, when what we view as more normal and stable market conditions return and the company successfully launches the CSeries, we could consider revising the outlook to positive or raising the rating on Bombardier if in turn the company improves its financial measures, with adjusted debt to EBITDA falling below 4x or adjusted FFO to debt reaching 20% on a sustained basis.

Last week’s S&P downgrade was discussed on PrefBlog. Neither of these announcements had any direct effect on preferreds, but market effect was very negative, with BBD.PR.C down about 10% at the lows.

BBD has three series of preferred outstanding: BBD.PR.B, BBD.PR.C and BBD.PR.D.

New Issue: BAM 4.85% Straight Perpetual

Tuesday, November 20th, 2012

Brookfield Asset Management has announced:

that it has agreed to issue 6,000,000 4.85% perpetual Class A Preferred Shares, Series 36 (“Preferred Shares”) on a bought deal basis to a syndicate of underwriters led by Scotiabank, CIBC, RBC Capital Markets and TD Securities Inc. for distribution to the public. The Preferred Shares will be issued at a price of CDN$25.00 per share, for aggregate gross proceeds of CDN$150,000,000.

Brookfield has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Preferred Shares which, if exercised, would increase the gross offering size to CDN$200,000,000. The Preferred Shares will be offered in all provinces of Canada by way of a supplement to Brookfield Asset Management’s existing short form base shelf prospectus dated June 7, 2011 as amended on June 13, 2012. The Preferred Shares may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

The net proceeds of the issue will be used for general corporate purposes. The offering of Preferred Shares is expected to close on or about November 27, 2012.

It’s nice to see another Straight Perpetual coming out – too bad it’s from BAM! They’ve got so many issues outstanding already … and their investment grade credit rating has been the subject of nervous announcements from DBRS and S&P.

November 19, 2012

Tuesday, November 20th, 2012

Location, location, location!

Prices in the U.K. capital increased 1.2 percent to an average 483,709 pounds ($766,500), the operator of Britain’s biggest property website said in a report today. Properties in the city’s nine most expensive districts — where average prices exceed 600,000 pounds — surged 3.4 percent. Nationally, values fell 2.6 percent.

London’s most expensive districts are attracting investors looking for safer investments and luxury-home values are now 16 percent higher than their previous peak in March 2008, according to property consultant firm Knight Frank LLP. International buyers accounted for 41 percent of London houses bought for at least 1 million pounds in September.

London continues to buck the trend nationally, according to Rightmove’s data. The decline in asking prices in England and Wales this month was the biggest in almost a year and left the average at 236,761 pounds. From a year earlier, national prices were up 2 percent versus an 8.8 percent gain in London.

Muddy Waters has blown another whistle:

Olam International Ltd. (OLMIF), the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years in U.S. trading after short-seller Carson Block questioned the company’s accounting methods.

The supplier of 20 agricultural goods from cocoa to rubber halted its shares from trading in Singapore today, after it fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg. The company is booking profits on transactions before it’s clear how the deals will work out over time, Block said.

Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

Equities did well:

U.S. stocks rose, giving the Standard & Poor’s 500 Index its biggest advance in two months, amid better-than-forecast housing data and as President Barack Obama expressed confidence on a budget agreement with Congress.

The S&P 500 rose 2 percent to 1,386.89 at 4 p.m. in New York. The benchmark gauge for U.S. equities gained 2.5 percent in two days, the most since July. The Dow Jones Industrial Average added 207.65 points, or 1.7 percent, to 12,795.96. Volume for exchange-listed stocks in the U.S. was 6.2 billion shares, about in line with the three-month daily average.

The Euro, not so much:

The euro slid versus most of its 16 major counterparts after Moody’s Investors Service stripped France of its top government bond rating, renewing concern the currency bloc’s debt crisis is deepening.

The 17-nation euro fell against the dollar and yen after Moody’s cut France by one grade to Aa1 and said its outlook remains negative.

“France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects,” Moody’s said in a statement dated yesterday. Moody’s downgrade of the nation follows similar action by Standard & Poor’s in January.

A preliminary reading of a gauge of French manufacturing will probably indicate contraction for a ninth-straight month in November, according to the median estimate of economists surveyed by Bloomberg News before the figures are released on Nov. 22. A similar index for services may indicate shrinkage for a fourth consecutive period, a separate poll showed.

The perennial national security regulator revival is going through another whirl:

Three of Canada’s largest provinces are leading a revived effort to create a single agency to oversee the country’s securities markets, an initiative that comes nearly one year after the Supreme Court’s rejection of a national regulator.

I’ve been saying for at least ten years that a truly national securities regulator will not happen. So what? Create a voluntary, opt-in, national regulator. Even if it’s just Ontario and Prince Edward Island, I’m still better off – marginally, to be sure, but measurably – than I am now.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets off 1bp and DeemedRetractibles gaining 14bp. Volatility was very low. Volume was below 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 0.0671 % 2,452.9
FixedFloater 4.18 % 3.52 % 29,274 18.27 1 0.0000 % 3,853.3
Floater 2.82 % 3.02 % 54,860 19.62 4 0.0671 % 2,648.5
OpRet 4.61 % 0.90 % 36,187 0.60 4 0.0190 % 2,592.1
SplitShare 5.39 % 4.78 % 55,579 4.42 3 0.1311 % 2,848.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0190 % 2,370.2
Perpetual-Premium 5.25 % 2.41 % 72,780 0.27 30 0.0846 % 2,321.1
Perpetual-Discount 4.87 % 4.91 % 101,601 15.56 3 0.1368 % 2,614.9
FixedReset 4.98 % 2.90 % 198,133 3.94 75 -0.0124 % 2,450.4
Deemed-Retractible 4.90 % 3.36 % 120,793 0.75 46 0.1413 % 2,401.5
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset 1.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 3.54 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.Q FixedReset 148,529 Scotia crossed 50,000 at 25.15; RBC crossed 50,000 at the same price; TD crossed 10,000 at the same price again.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 3.01 %
FTS.PR.J Perpetual-Premium 109,342 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.67 %
BMO.PR.M FixedReset 59,800 Scotia crossed 30,000 at 25.01; TD crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 3.12 %
MFC.PR.B Deemed-Retractible 55,386 Nesbitt crossed 50,000 at 24.10.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 5.10 %
CU.PR.C FixedReset 49,010 RBC crossed blocks of 28,200 and 15,000, both at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.02 %
ENB.PR.N FixedReset 37,085 RBC crossed 14,600 at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 3.69 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.B Floater Quote: 17.50 – 18.00
Spot Rate : 0.5000
Average : 0.3267

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-11-19
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 3.02 %

GWO.PR.L Deemed-Retractible Quote: 26.81 – 27.20
Spot Rate : 0.3900
Average : 0.2546

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.81
Bid-YTW : 4.28 %

TCA.PR.Y Perpetual-Premium Quote: 52.16 – 52.58
Spot Rate : 0.4200
Average : 0.3043

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 52.16
Bid-YTW : 2.41 %

MFC.PR.A OpRet Quote: 25.55 – 25.88
Spot Rate : 0.3300
Average : 0.2262

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-19
Maturity Price : 25.50
Evaluated at bid price : 25.55
Bid-YTW : 3.14 %

GWO.PR.Q Deemed-Retractible Quote: 26.06 – 26.35
Spot Rate : 0.2900
Average : 0.1903

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 4.70 %

HSB.PR.C Deemed-Retractible Quote: 25.80 – 26.48
Spot Rate : 0.6800
Average : 0.5947

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-12-19
Maturity Price : 25.50
Evaluated at bid price : 25.80
Bid-YTW : -0.98 %

TXPL: New Preferred Share Index with ETF (ZPR)

Monday, November 19th, 2012

Standard & Poor’s has announced:

the launch of three new Canadian indices: the S&P/TSX Preferred Share Laddered index, the S&P/TSX Equal Weight Global Gold index and the S&P/TSX Equal Weight Industrials index. Each of the indices has been licensed by S&P Dow Jones Indices to BMO Asset Management for potential exchange traded products to be listed on Toronto Stock Exchange.

The S&P/TSX Preferred Share Laddered index was created in response to investors’ ongoing demand for income producing securities.

“We are excited to announce these three new additions to the S&P/TSX family of Preferred Share and Equal Weight indices,” says Abigail Etches, Director at S&P Dow Jones Indices. “Canadian investors are increasingly looking for industry specific indices that are liquid enough to serve as the basis for investment products and relevant enough to serve as key benchmarks of performance. These indices are unique in that they offer investors an additional means of measuring these segments of the market while potentially offering an additional means for diversifying their portfolio.”

“BMO Asset Management is committed to offering innovative exposure to the leading segments of the market through exchange traded funds,” said Kevin Gopaul, Chief Investment Officer and Senior Vice President, BMO Asset Management Inc. “We’re thrilled to be once again partnering with S&P Dow Jones and TMX Group, global leaders in indexing, to provide investors with more insight and choice.”

The FactSheet and Methodology are available at the TXPL Index Website. According to the FactSheet:

  • Exhchange (sic) Listing. Preferred shares listed on and trading in Canadian dollars on the Toronto Stock Exchange are eligible for inclusion.
  • Type of Issuance. Preferred shares issued by a company to meet its capital or financing requirements are eligible. Split shares and synthetic preferred shares are not included in the index. Issues are eligible for inclusion when their reset dates are five years or less.
  • Market Capitalization. The preferred shares must have a total market capitalization of more than CAD 100 million as of the rebalancing reference date, based on the volume-weighted average price over the last three trading days of the month prior to the quarterly review.
  • Volume. The preferred shares must have a minimum trailing three-month average daily value traded of CAD 100,000 as of the rebalancing reference date.
  • Rating. Preferred shares must have a minimum rating of P-3 or its equivalent from Standard & Poor’s, Dominion Bank (sic) Ratings Service or Moody’s Investor Service. If more than one of the ratings agencies has issued a rating on the stock, the lowest rating is used to determine eligibility.
  • Indicated Yield. Preferred shares for which S&P Dow Jones Indices cannot determine an indicated annual dividend yield are not eligible.
  • Different Lines of the Same Issuer. There is
    no limit to the number of lines of a single company’s preferred share allowed in the index; however, a maximum weight of 10% is set per issuer. All eligible lines for an issuer are included in the index and capped on a pro rata basis to a maximum of 10% by issuer of the index market capitalization.

Each term bucket, as defined by the calendar year of each constituent’s rate reset, is equal weighted at each rebalance. Within each bucket, individual securities are weighted by market capitalization. The weight of each individual bucket may be subject to change depending on the market conditions and the universe of Canadian preferred shares. At the onset of the index, there will be five equally weighted buckets. Should the number of buckets be reduced to four or less in the future, each bucket will be equally weighted at each rebalance.

A term bucket containing an insufficient number of issues may be combined with the nearest term bucket. In order for each term bucket to have a sufficient number of issues, it should have a minimum of four outstanding issues or a combined market cap of at least 5% of the eligible securities total market capitalization. The requirements for a term bucket are subject to change based on market conditions and the universe of the Canadian preferred shares.

According to the Methodology:

The index is rebalanced on a quarterly basis; changes are effective after the close of trading on the third Friday of January, April, July and October.

This is the same effective date as TXPR. Presumably the announcement date will also be the same.

Whenever possible, announcements of additions or deletions of shares or other index adjustments are made five trading days before the adjustments are implemented. In those cases when it is not possible to trade a stock five days after an announcement, the announcement period may be shortened. However, the implementation of an index adjustment is never earlier than the market close of the day following the announcement.

Announcements of additions and deletions for the S&P/TSX Canadian indices are generally made at approximately 05:15 PM. Eastern Time. Press releases are released to major news services.

This looks like a rush job to me. The reference to “Dominion Bank Rating Service” is repeated in the methodology; footnote 1 on page 5 of the PDF states:

The index was launched in April 2007. Prior to that time, the index was back tested using Standard & Poor’s ratings only.

… which is true for TXPR, but not TXPL. On page 7 they give the Index Name and Bloomberg & Reuters Codes for TXPR, but not TXPL.

I couldn’t find an announcement from BMO, but according to Investment Executive:

S&P Dow Jones Indices and TMX Group Inc. Monday announced the launch of three new Canadian indices: S&P/TSX Preferred Share Laddered index, S&P/TSX Equal Weight Global Gold index and S&P/TSX Equal Weight Industrials index.

Each of the indices has been licensed by S&P Dow Jones Indices to BMO Asset Management for potential exchange traded products to be listed on The Toronto Stock Exchange.

S&P/TSX Preferred Share Laddered index was created in response to investors’ ongoing demand for income producing securities.

… and according to Canadian Couch Potato:

The BMO Laddered Preferred Share (ZPR) is unique because all of its holdings are what are called rate reset preferreds. These have a specific call date, usually every five years, on which the holder can choose to lock in a new dividend at current rates, or convert to a floating rate that will change monthly or quarterly based on a reference rate. By contrast, CPD is about one third perpetual preferreds, which have no maturity date and pay the same fixed dividend as long as they are outstanding.

I will note that FixedResets also have no maturity date.

… and according to ETF Insight:

Earlier this week, BMO ETFs filed a preliminary prospectus for 4 additional ETFs:
  • •BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN)
  • •BMO S&P/TSX Equal Weight Global Gold Index ETF (ZGD)
  • •BMO S&P500 Index ETF (ZSP/ZSP.U)
  • •BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR)


S&P/TSX Laddered Preferred Shares Index ETF (ZPR) – Preferred Shares have attracted meaningful inflows in recent years, with the benchmark S&P/TSX Preferred Share Index ETF (CPD) notably seeing its assets rise by a factor of 1.75X year-over-year (from Sept 2011-Sept 2012), to reach over $1.3Bn of AUM, an over 4X increase from the assets it held 3 years prior. To set itself apart, BMO ETF has elected to focus on Preferred Shares featuring rates resets, and applying a laddered approach to their ETF. The metrics (cash yield, weighted YTM, duration, credit quality, etc) for this ETF relative to the other 3 ETFs (CPD / HPR / PPS ) covering the Canadian preferred shares space in our market will be interesting to examine when they become available.

According to the completely useless dummies at SEDAR (who have jobs only because they’ve been granted a regulatory monopoly):

Your request could not be processed. Please, try again later.

Update, 2012-11-20: BMO has announced:

BMO Asset Management Inc. (BMO AM) today introduced four new funds to its Exchange Traded Fund (ETF)* product suite.

“In today’s financial environment where the markets are constantly changing, people are looking for investment products that can keep pace with these changes, and we have had that in mind when expanding and evolving our lineup,” said Kevin Gopaul, Chief Investment Officer and Senior Vice President, BMO Asset Management Inc. “BMO Asset Management is a leader in providing innovative, timely and competitive ETF products. These four new funds are just the latest example of how we strive to anticipate and fulfill critical investor needs.”

The offering of the following new ETFs has closed and they will begin trading on the Toronto Stock Exchange today:

BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR)
•Uniquely designed to reduce interest rate sensitivity compared to the preferred share market by using rate resets, while providing investors with portfolio diversification and tax-efficient dividend income.

According to the web page for ZPR the Portfolio Yield, as defined, is 4.89% and the maximum MER is 45bp (5bp below CPD!). However, the Portfolio Yield definition is:

Portfolio yield is calculated as the most recent income received by the ETF in the form of dividends interest and other income annualized based on the payment frequently divided by the current market value of ETFs investments.

… in other words, the Current Yield, which does not account for expected capital losses due to calls, or for expected changes in dividend income when the dividends of the current holdings are reset (which, given the yield of the Canada 5-year bond, will generally be large and negative). The fund holds 100 issues.

BoC Releases Autumn 2012 Review

Sunday, November 18th, 2012

The Bank of Canada has released the Bank of Canada Review – Autumn 2012 with articles:

The first article attracted some notice from the Globe and Mail, in pieces by David Parkinson and Kevin Carmichael. An earlier working paper by Ms. Pomeranets and Daniel G. Weaver which focussed on the historical experience in New York State was reviewed on PrefBlog. This paper was quoted in support of the conclusion:

On balance, the literature suggests that an FTT is unlikely to reduce volatility and may instead increase it, which is consistent with arguments made by opponents of the tax.

The current paper is introduced with:

ƒƒ

  • The financial transaction tax (FTT) is a policy idea with a long history that, in the wake of the global financial crisis, has attracted renewed interest in some quarters.
  • Historically, there have been two motivating factors for the introduction of the tax. The first is its potential to raise substantial revenues, and the second is its perceived potential to discourage speculative trading and reduce volatility.
  • There is, however, little empirical evidence that an FTT reduces volatility. Numerous studies suggest that an FTT harms market quality and is associated with an increase in volatility and a decrease in both market liquidity and trading volume. When the cost of acquiring a security rises, its required rate of return and cost of capital also increase. As a result, an FTT may reduce the flow of profitable projects, decreasing levels of real production, expansion, capital investment and even employment.
  • There are many unanswered questions regarding the design of FTTs and their ability to raise significant revenues.

The imposition of a 20bp transaction charge in France (which has resulted in a greater interest in derivatives such as Contracts For Difference) was discussed on PrefBlog on November 15.

The authors also see fit to highlight:

Umlauf (1993) examines how financial transaction taxes (FTT s) affect stock market behaviour in Sweden. In 1984, Sweden introduced a 1 per cent tax on equity transactions, which was doubled to 2 per cent in 1986. Umlauf studies the impact of these changes on volatility and finds that volatility did not decline following the increase to the 2 per cent tax rate, but equity prices, on average, did decline.

Furthermore, Umlauf concludes that 60 per cent of the trading volume of the 11 most actively traded Swedish share classes migrated to London to avoid the tax. After the migration, the volatilities of London-traded shares fell relative to their Stockholm-traded counterparts. As trading volumes fell in Stockholm, so did revenues from capital gains taxes, completely offsetting the 4 billion Swedish kronor that the tax had raised in 1988.

Pomeranets also points out:

Critics of the FTT argue that it reduces market liquidity by making each trade more costly, simply because it is a tax and also because market forces react to it by offering fewer and lower-quality trading opportunities. The cost impact is evident in the way the FTT widens the bid-ask spread. Bid-ask spreads compensate traders for three things—order-processing costs, inventory risk and information risk—often called the three components of the bid-ask spread. The FTT will increase the costs of these three components in the following ways:…

And finally, we get the the social function of markets – capital formation:

Another measure of market quality examined in the literature is the cost of capital. Amihud and Mendelson (1992) conclude that a 0.5 per cent FTT would lead to a 1.33 per cent increase in the cost of capital. This result is consistent with their previous work that finds a positive relationship between required rates of return and transaction costs (Amihud and Mendelson 1986). When the cost of acquiring a security increases, its required rate of return and cost of capital also increase. As a result, an FTT would increase the cost of capital, which could have several harmful consequences. It could reduce the flow of profitable projects, shrinking levels of real production, expansion, capital investment and even employment.

Ms. Pomeranets concludes:

This article examines the main arguments regarding the costs and benefits of FTTs and explores some of the significant practical issues surrounding the implementation of an FTT. Little evidence is found to suggest that an FTT would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume. Furthermore, a number of challenges associated with the design and effectiveness of an FTT could limit the revenues that FTTs are intended to raise. For these reasons, countries considering the imposition of FTTs should be aware of their negative consequences and the challenges involved in implementation.

The second article examines a hobby-horse of mine – central clearing for derivatives, a dangerous policy recklessly promoted by the political establishment both directly and through their mouthpiece, Lapdog Carney. The last BoC attempt at justification, in the June 2012 Financial System Review was discussed on PrefBlog.

In this go-round, the authors state:

ƒƒ
  • Central counterparties manage and mitigate counterparty credit risk in order to make markets more resilient and reduce systemic risk. Better management of counterparty risk can also open up markets to new participants, which in turn should reduce concentration and increase competition. These benefits are maximized when access to central counterparties is available to a wide range of market participants.
  • In an over-the-counter market, there is an important trade-off between competition and risk. Concentrated, less competitive markets are more profitable and thus participants are less likely to default. But a central counterparty that provides sufficient access can improve this trade-off, since the gains from diversification—which will become greater as participation grows—can simultaneously reduce risk and increase competition.
  • Regulators have developed, and central counterparties are implementing, new standards for fair, open and risk-based access criteria. Such standards will, among other things, counter any incentives that might exist for members of a central counterparty to limit access in order to protect their market share.

In other words, a major goal of Central Clearing is to provide employment for regulators, who will make fair and open, and, it must be emphasized, entirely corruption-free decisions regarding which smaller and and less creditworthy firms will be admitted to the club.

The crux of the matter is this:

The improved management of counterparty credit risk at a CCP opens markets to greater participation, which can increase competition. In OTC markets that are cleared bilaterally, participants are directly exposed to the risk that their counterparties may default and therefore have an incentive to restrict trading to counterparties that are known to be creditworthy. When a CCP with strong risk controls takes on the management of credit risk, however, participants can feel more secure trading with others—even anonymously— since the CCP guarantees that the terms of the trade will be honoured.

In other words, when the Bank of Downtown Plonksville enters into a trade with central clearing, its counter-party will charge exactly the same risk premium as it charges to the Bank of Canada. Some people consider this to be an advantage of the new regime.

If direct access to a CCP was limited to the largest dealers, their systemic importance would increase, potentially exacerbating the “too-big-to-fail” problem and preventing the CCP from providing the full benefits of diversification. Limited access could also make mid-tier institutions more vulnerable in times of stress and slow the transition to central clearing (Slive, Wilkins and Witmer 2011).

I wonder if the CCP itself is “too-big-to-fail” ….

The authors emphasize the importance of regulators and their awesomely wise, highly informed decisions throughout the process.

The third article is introduced with:

ƒƒ
  • The financial crisis of 2007–09 and the subsequent extended period of historically low real interest rates in a number of major advanced economies have revived the question of whether economic agents are willing to take on more risk when interest rates remain low for a prolonged time period.
  • This type of induced behaviour—an increased appetite for risk that causes economic agents to search for investment assets and strategies that generate higher investment returns—has been called the risk-taking channel of monetary policy.
  • Recent academic research on banks suggests that lending policies in times of low interest rates can be consistent with the existence of a risk taking channel of monetary policy in Europe, South America, the United
    States and Canada. Specifically, studies find that the terms of loans to risky borrowers become less stringent in periods of low interest rates. This risk-taking channel may amplify the effects of traditional transmission mechanisms, resulting in the creation of excessive credit.

This effect is also inherent in the offsetting behaviours of the “expectations” component and the “risk premium” component of long-term rates, discussed in the Summer 2012 review discussed in PrefBlog.

The results suggest that the difference in the all-in-drawn spreads between loans to risky and less-risky borrowers decreases when interest rates are low relative to periods when they are high. Accounting for loan, firm and bank balance-sheet factors, as well as yearly and quarterly factors, the results show that the difference in the all-in-drawn spread between risky and less-risky borrowers is 48 per cent smaller when interest rates are lower than when they are higher (based on the first definition). This result is also economically significant: it implies that the difference in loan rates between risky and less-risky borrowers is 107 basis points smaller when the rates are low than when they are high.

The fourth article, of great interest to those in the field and to the Bank, but of somewhat less importance to other investors, is summarized as:

ƒƒ
  • The share of cash in overall retail payments has decreased continuously
    over the past 20 years.
  • Recent Bank of Canada research on consumers’ choice of payment instruments indicates that cash is frequently used for transactions with low values because of its speed, ease of use and wide acceptance, while debit and credit cards are more commonly used for transactions with higher values because of perceived attributes such as safety and record keeping.
  • While innovations in retail payments currently being introduced into the Canadian marketplace could lead to a further reduction in the use of cash over the longer term, the implications for the use of cash of some of the structural and regulatory developments under way are less clear.
  • The Bank of Canada will continue to monitor various developments in retail payments and study their implications for the demand for cash over the longer term.