November 19, 2010

Allied Irish is on central bank life-support:

Allied Irish Banks Plc, Ireland’s second-biggest bank, has tripled its reliance on funding from central banks since the end of June as companies and customers pulled money amid the country’s debt crisis.

The bank’s dependence on “monetary authorities” rose to 27 billion euros ($37 billion) from a “high single-digit” billion-euro amount on June 30, Alan Kelly, general manager of group corporate services at Allied Irish, said in a telephone interview today. Funding conditions were “increasingly challenging,” the Dublin-based lender said in a statement.

Irish lenders have become more reliant on European Central Bank funding after being frozen out of wholesale markets. The amount of ECB loans to the country’s banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s Central Bank said on Nov. 1. The data include both international and domestic banks operating in Ireland.

Deposits dropped by about 13 billion euros since the start of the year, Allied Irish said in the statement. That equates to about a 17 percent decline, Kelly said. Allied Irish said it will increase the amount it’s seeking to raise in a share sale by the end of the year to 6.6 billion euros from 5.4 billion euros.

More specifically, their interim management statement says:

Customer accounts have been affected by current adverse international sentiment towards the Irish sovereign and banking sector and are down by c.€13bn from the beginning of 2010 to the close of business on 16 November. This reduction was primarily due to lower institutional and corporate balances.

General funding market conditions in recent months have become increasingly challenging. This has had a negative impact on AIB’s funding position which has seen a reduction on maturity of debt securities in issue and customer accounts. This reduction has been offset by an increase in secured deposits by banks, in particular by monetary authorities. While AIB had issued term funding of €6.7bn during 2010 in anticipation of term funding maturing in September 2010, current market conditions are limiting funding access to shorter durations, mainly on a secured basis.

Geithner’s upset about the Fed’s politicization:

U.S. Treasury Secretary Timothy F. Geithner warned Republicans against politicizing the Federal Reserve and said the Obama administration would oppose any effort to strip the central bank of its mandate to pursue full employment.

“It is very important to keep politics out of monetary policy,” Geithner said in an interview airing on Bloomberg Television’s “Political Capital with Al Hunt” this weekend. “You want to be very careful not to take steps that hurt our credibility.”

The Republican congressional leadership, including John Boehner, nominated as the next House speaker, has criticized the Fed’s plan to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said he favors confining the Fed’s mandate to promoting price stability.

“It is very important that we respect and honor what the Congress did when it set up our independent central bank with a mandate to keep prices low and stable over time and to make sure” it promotes “sustainable economic growth,” said Geithner, who was president of the Federal Reserve Bank of New York before taking over as Treasury secretary last year.

FortisBC has issued 40-year MTNs at 5%.

The Canadian preferred share market continued to recover from the damage done earlier in the week on continued heavy volume, with PerpetualDiscounts up 23bp, while FixedResets lost 2bp.

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

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0885 % 2,245.1
FixedFloater 4.94 % 3.58 % 27,440 19.04 1 -1.3004 % 3,404.4
Floater 2.65 % 2.34 % 61,559 21.39 4 0.0885 % 2,424.1
OpRet 4.76 % 2.95 % 60,911 2.43 8 -0.1094 % 2,392.5
SplitShare 5.41 % -0.32 % 121,081 1.05 3 -0.4281 % 2,489.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1094 % 2,187.8
Perpetual-Premium 5.65 % 5.23 % 166,167 5.27 24 0.0786 % 2,018.9
Perpetual-Discount 5.34 % 5.38 % 262,856 14.78 53 0.2339 % 2,044.2
FixedReset 5.22 % 3.01 % 344,910 3.18 50 -0.0207 % 2,283.1
Performance Highlights
Issue Index Change Notes
BAM.PR.R FixedReset -1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.46
Bid-YTW : 4.37 %
FTS.PR.F Perpetual-Discount -1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 23.13
Evaluated at bid price : 23.33
Bid-YTW : 5.26 %
BAM.PR.G FixedFloater -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 25.00
Evaluated at bid price : 22.01
Bid-YTW : 3.58 %
POW.PR.B Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 23.81
Evaluated at bid price : 24.08
Bid-YTW : 5.61 %
PWF.PR.F Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 23.63
Evaluated at bid price : 23.90
Bid-YTW : 5.53 %
Volume Highlights
Issue Index Shares
RY.PR.E Perpetual-Discount 74,083 National crossed 25,000 at 22.33.
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 22.14
Evaluated at bid price : 22.27
Bid-YTW : 5.07 %
RY.PR.A Perpetual-Discount 70,410 RBC crossed 50,000 at 22.45.
Maturity Type : Limit Maturity
Maturity Date : 2040-11-19
Maturity Price : 22.22
Evaluated at bid price : 22.37
Bid-YTW : 4.99 %
BNS.PR.Q FixedReset 69,155 TD crossed 50,000 at 26.45.
Maturity Type : Call
Maturity Date : 2013-11-24
Maturity Price : 25.00
Evaluated at bid price : 26.38
Bid-YTW : 3.10 %
RY.PR.L FixedReset 65,225 RBC crossed 61,900 at 27.00.
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 27.01
Bid-YTW : 2.99 %
TD.PR.M OpRet 60,345 RBC crossed 20,000 at 25.86; Scotia bought 20,000 from anonymous at the same price. Desjardins crossed 15,000 at the same price again.
Maturity Type : Call
Maturity Date : 2011-05-30
Maturity Price : 25.50
Evaluated at bid price : 25.85
Bid-YTW : 2.45 %
RY.PR.T FixedReset 50,300 TD crossed 40,000 at 27.90.
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.84
Bid-YTW : 3.09 %
There were 51 other index-included issues trading in excess of 10,000 shares.

3 Responses to “November 19, 2010”

  1. […] Via James Hymas’ daily report… […]

  2. pugwash says:

    Hello Mr Hymas,

    Based on your volume highlights bid-YTW calculation – TD.PR.M seems a reasonable risk return for a high rate taxpayer to invest some of his short term funds.

    How best can a retail investor find these opportunities?
    Have you considered adding a recommendation to the Prefletter for very short term investments (6mos – 2 years) in preferreds.


  3. jiHymas says:

    How best can a retail investor find these opportunities?

    Well, I like to think that PrefLetter is already the best place for a retail investor to find these opportunities!

    The problem is, of course, that individual investors are each going to have their own motivations for wishing to purchase preferred shares and therefore each will want recommendations reflecting unique categorizations of the risk/return profile.

    I do address the needs of short-term investors with a selection of “Short-Term preferreds” which generally have an expected term of less than five years (there was one exception in the November issue). Additionally, investors can also choose FixedReset premium issues with a very high Issue Reset Spread – these do have a degree of extension risk, higher than that of TD.PR.M, but still, mostly, well within manageable bounds.

    There is some extension risk with TD.PR.M: the yield you quote is for call at 25.50 next May 30; there is no guarantee that TD will exercise that call. The issue becomes retractible 2013-10-31, which is expected to trigger at call at par on 2013-10-30, if the issue has not already been redeemed. But it shoul be noted that there is still extension risk: if TD’s common stock price is less than $2 at time of retraction, the retraction privilege loses value (see the prospectus dated 2003-1-16 on SEDAR). There is a very small probability of this, but non-zero!

    TD.PR.M was thrown into the mix with other potential candidates for recommendation as a Short Term issue and found wanting. There will be many who disagree iwith my judgment on this point; others will disagree with my classifications. All I can suggest is that these critics are at perfect liberty to maintain their own candidate lists and valuation algorithms. I have published the characteristics of preferred shares at PrefInfo to help them get started.

    One thing to note with respect to this issue is its very high negative convexity. On the recommendation date of November 12, TD.PR.M was bid at 25.88 (two cents more than current) with a YTW of 0.32% to an immediate call.

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