April 15, 2008

There are reports that Citigroup’s sale of LBO debt is not going as planned, with investors picking off debt from the deals they know best, rather than buying the complete package holus-bolus.

And the SIV-unwinding proceeds apace. Bloomberg reports that State Street bought $850-million in assets from its sponsored conduits; Assiduous Readers will remember that PrefBlog reported on August 28 that State Street had the highest exposure to conduits of its American and European peers. However, they’ve experienced a strong first quarter:

“During the first quarter, we strengthened our regulatory capital position with strong net income of more than $500 million and the issuance of $500 million of tier-1 qualified regulatory capital.”

Their 8-K filed today discloses (page 32 of the PDF) that their Tier 1 Capital Ratio of 12.35% would decline to 10.15% if all their ABCP conduits were to be consolidated. They have a considerable investment portfolio devoted to AAA tranches of sub-prime – fortunately, mostly well seasoned, with a high degree of credit enhancement.

Credit enhancement is a good thing, with bank repossessions of houses doubling over 2007 levels! Meanwhile, Naked Capitalism highlights a story about increased corporate bankruptcies … some firms were dancing pretty close to the edge even in those halcyon days of easy money and have now been pushed off, as I suggested September 20.

Derivative indices have come in for some heavy criticism:

“The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that’s ceased to exist,” Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.

“The last thing the securitization market needs is another no-cash-upfront instrument that people can use to knock the markets about with,” said Andrew Dennis, the London-based head of the asset-backed debt syndication group for UBS AG of Zurich.

The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.

The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.

“ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market,” Swiss Re’s Aigrain said at the Dubai conference.

Indices without an option of forcing delivery (of something! anything!) are evil. Assiduous Readers will remember that I pointed out the discrepency between the cash market and the index-marked market in my review of the IMF report as well as the earlier Goldman Sachs paper.

There was finally a day of decent volume for preferreds, but price moves were pretty insignificant.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.12% 5.17% 27,663 15.20 2 +0.0000% 1,088.4
Fixed-Floater 4.77% 5.20% 63,560 15.27 8 +0.3722% 1,048.1
Floater 5.01% 5.05% 67,669 15.44 2 +1.1311% 832.3
Op. Retract 4.85% 3.41% 85,355 3.32 15 -0.0150% 1,047.2
Split-Share 5.38% 6.00% 86,859 4.08 14 +0.0710% 1,029.8
Interest Bearing 6.16% 6.12% 64,909 3.89 3 +0.3055% 1,100.1
Perpetual-Premium 5.91% 5.59% 201,602 4.81 7 -0.0562% 1,017.7
Perpetual-Discount 5.65% 5.67% 286,676 13.65 63 -0.0703% 922.1
Major Price Changes
Issue Index Change Notes
RY.PR.A PerpetualDiscount -1.5370% Now with a pre-tax bid-YTW of 5.52% based on a bid of 20.50 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.0989% Now with a pre-tax bid-YTW of 5.60% based on a bid of 22.50 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.0204% Now with a pre-tax bid-YTW of 5.78% based on a bid of 22.77 and a limitMaturity.
BNA.PR.C SplitShare +1.0698% Asset coverage of just under 2.7:1 as of March 31, according to the company. Now with a pre-tax bid-YTW of 7.25% based on a bid of 19.84 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.57% to 2010-9-30) and BNA.PR.B (8.45% to 2016-3-25).
LFE.PR.A SplitShare +1.1707% Asset coverage of 2.4+:1 as of March 31, according to the company. Now with a pre-tax bid-YTW of 4.42% based on a bid of 10.37 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.G FixFloat +1.4174%  
BAM.PR.B Floater +1.5385%  
Volume Highlights
Issue Index Volume Notes
BNS.PR.J PerpetualDiscount 115,900 Now with a pre-tax bid-YTW of 5.44% based on a bid of 23.93 and a limitMaturity.
BCE.PR.A FixFloat 74,550 Nesbitt crossed 18,000 at 23.90, then 50,000 at 24.05.
RY.PR.K OpRet 71,625 Anonymous bought 10,000 from Nesbitt at 25.30, then 10,000, then 19,900 at the same price, but not necessarily the same anonymous! Then, anonymous bought 12,000 from RBC at 25.30. Now with a pre-tax bid-YTW of 0.34% based on a bid of 25.26 and a call 2008-5-15 at 25.00.
BMO.PR.K PerpetualDiscount 59,300 Scotia crossed 50,000 at 22.90. Now with a pre-tax bid-YTW of 5.82% based on a bid of 22.90 and a limitMaturity.
CM.PR.A OpRet 58,315 Now with a pre-tax bid-YTW of -1.63% based on a bid of 25.85 and a call 2008-5-15 at 25.75.

There were twenty-six other index-included $25-pv-equivalent issues trading over 10,000 shares today.

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