June 24, 2011

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

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

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

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

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

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

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

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

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

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

There are mutterings about another domino:

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

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

But the first domino’s quite enough:

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

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

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

Speaking of dominos and zombie banks…:

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

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

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

Nobody is yet seriously worried about US Treasuries:

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

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

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

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

ISS backed the TMX-LSE deal:

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

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

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

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

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

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

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

It must be fun doing business in Illinois:

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

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

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

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

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

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

What happened to Yellow this week?

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

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

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.2105 % 2,470.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2105 % 3,715.0
Floater 2.45 % 2.22 % 42,189 21.73 4 0.2105 % 2,667.1
OpRet 4.87 % 3.17 % 62,945 0.91 9 -0.0086 % 2,437.9
SplitShare 5.25 % -0.28 % 59,446 0.47 6 -0.0003 % 2,505.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0086 % 2,229.3
Perpetual-Premium 5.68 % 5.16 % 143,101 1.38 12 0.0121 % 2,075.0
Perpetual-Discount 5.47 % 5.55 % 123,586 14.60 18 0.0117 % 2,179.1
FixedReset 5.17 % 3.39 % 206,050 2.79 57 0.0151 % 2,307.9
Deemed-Retractible 5.08 % 4.92 % 283,037 8.15 47 -0.0955 % 2,151.8
Performance Highlights
Issue Index Change Notes
PWF.PR.K Perpetual-Discount -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-24
Maturity Price : 23.12
Evaluated at bid price : 23.36
Bid-YTW : 5.37 %
TRI.PR.B Floater 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-24
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.20 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.H Deemed-Retractible 319,454 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-07-24
Maturity Price : 25.75
Evaluated at bid price : 25.71
Bid-YTW : 0.81 %
CM.PR.J Deemed-Retractible 121,194 RBC crossed 50,100 at 24.50; Nesbitt crossed blocks of 35,000 and 14,400 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 4.71 %
BNS.PR.X FixedReset 56,364 Nesbitt crossed 50,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.41
Bid-YTW : 3.17 %
BNS.PR.T FixedReset 53,302 TD crossed 25,000 at 27.40; RBC did the same.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.38
Bid-YTW : 3.18 %
HSE.PR.A FixedReset 34,419 RBC bought 13,100 from CIBC at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.87 %
BMO.PR.J Deemed-Retractible 33,502 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 4.73 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.F Deemed-Retractible Quote: 25.50 – 25.98
Spot Rate : 0.4800
Average : 0.3325

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

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

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

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

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

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

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

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

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

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

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

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