Via Dealbreaker comes news that CME and Citadel will be starting a CDS exchange. The follows reports yesterday that the Fed was pushing the principals of a proposed clearinghouse to get moving; the report noted:
CNBC reported earlier that the Fed was meeting with officials from Chicago-based futures exchange operator CME Group and the Intercontinental Exchange Inc., the second-largest U.S. futures market, to create a marketplace for credit-default swaps.
Kelly Loeffler, a spokeswoman for Intercontinental Exchange, and CME spokeswoman Mary Haffenberg declined to comment on the meeting. Both companies have announced plans to offer clearing services for the market and ICE earlier this year bought credit swap broker Creditex Group Inc., which is one of the owners of Clearing Corp.
CME last year started offering futures contracts that were similar to credit-default swaps in an effort to tap into the over-the-counter market, which had swelled more than 100-fold the past seven years.
For background, see the post Exchange Traded CDSs and Accrued Interest.
I’ve updated the post SEC and BSC with some juicy de-redactions.
There is a cheery note from Bloomberg:
The Standard & Poor’s 500 Index lost 18 percent since the start of 2000 after sinking 11 percent this month, total return data compiled by Bloomberg show. The decline would be the first for a decade in 70 years and exceeds the 8.9 percent plunge in the 1930s, following the stock market crash of 1929, data compiled by New York University’s Stern School of Business show.
Econbrowser‘s Menzie Chinn paraphrases an IMF report on historical experience with finance-led recessions and provides a cheery chart:
The risk weight of Fannie/Freddie debt is being cut to 10%:
The Federal Deposit Insurance Corp. today tentatively approved a rule, proposed by all four federal bank regulators, that eases capital requirements for federally insured depository institutions that hold large amounts of Fannie and Freddie corporate debt, subordinated debt, mortgage guarantees and derivatives. The so-called risk weighting for banks on Fannie and Freddie’s credit claims was cut to 10 percent from 20 percent.
Sub-debt, too? Let’s hope they’ve got some really good signatures on the government guarantee!
At the same time, the banks are putting the screws to any borrower who breaches covenants. It’s every man for himself!
Brookfield issues were killed today. Annihilated. There has been a significant increase in options activity but the most recent actual news I can find is that Brookfield Residential Property Services has bought GMAC Home Services LLC. GMAC Home Services Mortgage and GMAC Real Estate were also included in the deal. But that was September 23. Are there any options mavens out there (you know who you are!) who want to take a stab at estimating default probabilities and times for the BAM retractibles, perps and BNA split-shares?
As at October 6, BMO-CM calls Brookfield a market-performer; it was down significantly today, but given that it outperformed slightly yesterday that’s not all too much surprising. If anybody can explain this, let me know!
What can I say? At 6.63%, PerpetualDiscount yields are now equal to their July 16 peak. This time around, though, long corporates are at about 6.70, so the interest-equivalent yield of 9.28% is a spread of “only” 258bp. Hell, we were there in June.
What gets me, though, and what has people who know me crossing the street so I won’t complain to them about it again, is just how sloppy the market is. It’s outrageous! If it keeps up, you won’t need any fancy software to outperform the market … just the ability to calculate current yields for similar issues with the same ex-Date.
| 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. The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index. |
|||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | N/A | N/A | N/A | N/A | 0 | N/A | N/A |
| Fixed-Floater | 5.07% | 5.26% | 78,171 | 15.23 | 6 | -3.2842% | 1,016.10 |
| Floater | 6.23% | 6.29% | 49,274 | 13.51 | 2 | -10.1215% | 646.5 |
| Op. Retract | 5.28% | 5.98% | 124,524 | 3.82 | 14 | -1.7919% | 995.2 |
| Split-Share | 6.14% | 9.81% | 57,458 | 4.06 | 12 | -1.3550% | 919.8 |
| Interest Bearing | 6.82% | 8.83% | 42,864 | 3.64 | 3 | -0.8202% | 1,013.7 |
| Perpetual-Premium | 6.36% | 6.41% | 54,973 | 13.30 | 1 | +1.1537% | 975.1 |
| Perpetual-Discount | 6.56% | 6.63% | 176,835 | 13.06 | 70 | -0.9966% | 819.2 |
| Fixed-Reset | 5.21% | 5.07% | 1,082.323 | 15.26 | 10 | +0.6686% | 1,096.7 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| BAM.PR.I | OpRet | -12.9565% (!!!) | Unbelievable. Now with a pre-tax bid-YTW of 10.67% based on a bid of 20.02 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (9.22% to 2012-3-30), BAM.PR.J (10.68% to 2018-3-30) and BAM.PR.O (10.27% to 2013-6-30); and with the perpetuals at 8.58% and 9.03%. |
| BNA.PR.A | SplitShare | -12.2414% | Asset coverage of 3.2+:1 as of August 31 according to the company. Coverage now of 2.3+:1 based on BAM.A at 24.05 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 18.31% (!) based on a bid of 20.36 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (11.33% to 2016-3-25) and BNA.PR.C (12.07% to 2019-1-10). Unlike yesterday and the BNA.PR.B, the closing quote of 20.36-21.60, 2×2, is actually realistic on the bid side. After a trade at 21.04 at 1:14pm, some guy sold 1900 shares at 20.03 at 1:40pm, and the closing trade at 3:45pm was at 20.15. Incredible. I thought – still! even after all the horrors of 2008 – that you had to be on the brink of bankruptcy, with high leverage funded by short-term paper, to trade like this. |
| BAM.PR.B | Floater | -12.2000% | Well, the floaters have to get in on the action too, don’t they? |
| W.PR.H | PerpetualDiscount | -8.8557% | Commodities are going out of style! Now with a pre-tax bid-YTW of 7.56% based on a bid of 18.32 and a limitMaturity. Several smallish trades below the closing bid in the last two hours of trading. |
| BAM.PR.K | Floater | -8.0952% | |
| BAM.PR.J | OpRet | -8.0423% | See BAM.PR.I, above. |
| BAM.PR.N | PerpetualDiscount | -7.9530% | Now with a pre-tax bid-YTW of 9.04% based on a bid of 13.31 and a limitMaturity. |
| BCE.PR.I | FixFloat | -7.7021% | |
| GWO.PR.G | PerpetualDiscount | -6.6421% | Now with a pre-tax bid-YTW of 7.42% based on a bid of 17.71 and a limitMaturity. |
| LBS.PR.A | SplitShare | -6.0674% | Asset coverage of just under 2.0:1 as of October 2, according to Brompton Group. Now with a pre-tax bid-YTW of 9.37% based on a bid of 8.36 and a hardMaturity 2013-11-29. The capital units are at a premium, making a monthly retraction a speculative proposition, but the annual retraction is at the end of November. |
| BCE.PR.Z | FixFloat | -5.4759% | |
| FIG.PR.A | InterestBearing | -5.4054% | Asset coverage of 1.6+:1 as of October 3, according to Faircourt. Now with a pre-tax bid-YTW of 9.01% based on a bid of 8.75 and a hardMaturity 2014-12-31 at 10.00. |
| BAM.PR.M | PerpetualDiscount | -5.0169% | Now with a pre-tax bid-YTW of 8.58% based on a bid of 14.01 and a limitMaturity. |
| BMO.PR.H | PerpetualDiscount | -4.6190% | Now with a pre-tax bid-YTW of 6.73% based on a bid of 20.03 and a limitMaturity. |
| BAM.PR.H | OpRet | -4.4492% | See BAM.PR.I, above. |
| POW.PR.B | PerpetualDiscount | -4.0701% | Now with a pre-tax bid-YTW of 7.23% based on a bid of 18.62 and a limitMaturity. |
| BAM.PR.O | OpRet | -3.5714% | Now with a pre-tax bid-YTW of 10.2660% based on a bid of 20.25 and a limitMaturity. |
| CU.PR.A | PerpetualDiscount | -3.4869% | Now with a pre-tax bid-YTW of 6.32% based on a bid of 23.25 and a limitMaturity. |
| BCE.PR.C | FixFloat | -3.2609% | |
| PWF.PR.F | PerpetualDiscount | -3.2379% | Now with a pre-tax bid-YTW of 6.51% based on a bid of 20.62 and a limitMaturity. |
| BCE.PR.A | FixFloat | -3.1250% | |
| CM.PR.J | PerpetualDiscount | -3.1250% | Now with a pre-tax bid-YTW of 7.29% based on a bid of 15.50 and a limitMaturity. |
| CM.PR.P | PerpetualDiscount | -3.1008% | Now with a pre-tax bid-YTW of 7.36% based on a bid of 18.75 and a limitMaturity. |
| POW.PR.A | PerpetualDiscount | -2.9907% | Now with a pre-tax bid-YTW of 6.79% based on a bid of 20.76 and a limitMaturity. |
| CM.PR.I | PerpetualDiscount | -2.9500% | Now with a pre-tax bid-YTW of 7.32% based on a bid of 16.12 and a limitMaturity. |
| NA.PR.L | PerpetualDiscount | -2.9255% | Now with a pre-tax bid-YTW of 6.77% based on a bid of 18.25 and a limitMaturity. |
| BNS.PR.L | PerpetualDiscount | -2.8571% | Now with a pre-tax bid-YTW of 6.14% based on a bid of 18.36 and a limitMaturity. |
| W.PR.J | PerpetualDiscount | -2.7490% | Now with a pre-tax bid-YTW of 7.52% based on a bid of 18.75 and a limitMaturity. |
| BNS.PR.K | PerpetualDiscount | -2.6290% | Now with a pre-tax bid-YTW of 6.02% based on a bid of 20.00 and a limitMaturity. |
| HSB.PR.C | PerpetualDiscount | -2.5974% | Now with a pre-tax bid-YTW of 6.87% based on a bid of 18.75 and a limitMaturity. |
| FBS.PR.B | SplitShare | -2.2198% | Asset coverage of 1.5+:1 as of October 2, according to TD Securities. Now with a pre-tax bid-YTW of 9.31% based on a bid of 8.81 and a hardMaturity 2011-12-15 at 10.00. Perhaps in an effort to halt the carnage, the fund announced a dividend increase for the capital units today; let’s see … FBS.B closed at 4.90; FBS.PR.B closed at 8.80; NAV $15.07 as of October 2; Special Annual Retraction in December …. hmmm …. |
| TD.PR.R | PerpetualDiscount | -2.1268% | Now with a pre-tax bid-YTW of 6.09% based on a bid of 23.01 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | -2.0219% | Now with a pre-tax bid-YTW of 7.02% based on a bid of 17.93 and a limitMaturity. |
| NA.PR.K | PerpetualDiscount | -1.9956% | Now with a pre-tax bid-YTW of 6.73% based on a bid of 22.10 and a limitMaturity. |
| GWO.PR.I | PerpetualDiscount | -1.8282% | Now with a pre-tax bid-YTW of 7.06% based on a bid of 16.11 and a limitMaturity. |
| DFN.PR.A | SplitShare | -1.7281% | Asset coverage of just under 2.2:1 as of September 30, according to the company. Now with a pre-tax bid-YTW of 8.45% based on a bid of 8.53 and a hardMaturity 2014-12-1 at 10.00. |
| CM.PR.H | PerpetualDiscount | -1.7178% | Now with a pre-tax bid-YTW of 7.52% based on a bid of 16.02 and a limitMaturity. |
| PWF.PR.E | PerpetualDiscount | -1.5549% | Now with a pre-tax bid-YTW of 6.32% based on a bid of 22.16 and a limitMaturity. |
| BNS.PR.O | PerpetualDiscount | -1.4799% | Now with a pre-tax bid-YTW of 6.02% based on a bid of 23.30 and a limitMaturity. |
| RY.PR.F | PerpetualDiscount | -1.3514% | Now with a pre-tax bid-YTW of 6.46% based on a bid of 17.25 and a limitMaturity. |
| PWF.PR.K | PerpetualDiscount | -1.2880% | Now with a pre-tax bid-YTW of 6.60% based on a bid of 19.16 and a limitMaturity. |
| CM.PR.D | PerpetualDiscount | -1.2500% | Now with a pre-tax bid-YTW of 7.31% based on a bid of 19.75 and a limitMaturity. |
| BNS.PR.N | PerpetualDiscount | -1.1807% | Now with a pre-tax bid-YTW of 6.04% based on a bid of 21.76 and a limitMaturity. |
| BNS.PR.J | PerpetualDiscount | -1.1358% | Now with a pre-tax bid-YTW of 6.03% based on a bid of 21.76 and a limitMaturity. |
| BCE.PR.R | FixFloat | -1.0753% | |
| BNS.PR.Q | FixedReset | -1.0717% | |
| BCE.PR.Y | FixFloat | -1.0638% | |
| PWF.PR.L | PerpetualDiscount | +1.0842% | Now with a pre-tax bid-YTW of 6.66% based on a bid of 19.58 and a limitMaturity. |
| CL.PR.B | PerpetualPremium (for now!) | +1.1537% | Now with a pre-tax bid-YTW of 6.41% based on a bid of 24.55 and a limitMaturity. |
| CM.PR.E | PerpetualDiscount | +1.1873% | Now with a pre-tax bid-YTW of 7.50% based on a bid of 18.75 and a limitMaturity. |
| BSD.PR.A | InterestBearing | +1.2346% | Asset coverage of just under 1.3:1 as of October 3, according to Brookfield Funds. The asset coverage implies no more distributions to capital units. Now with a pre-tax bid-YTW of 10.00% based on a bid of 8.20 and a hardMaturity 2015-3-31 at 10.00. |
| PWF.PR.G | PerpetualDiscount | +1.3130% | Now with a pre-tax bid-YTW of 6.28% based on a bid of 23.92 and a limitMaturity. |
| SLF.PR.D | PerpetualDiscount | +1.3629% | Now with a pre-tax bid-YTW of 6.29% based on a bid of 17.85 and a limitMaturity. |
| ELF.PR.F | PerpetualDiscount | +1.4320% | Now with a pre-tax bid-YTW of 7.85% based on a bid of 17.00 and a limitMaturity. |
| BNA.PR.C | SplitShare | +1.4493% | See BNA.PR.A, above. |
| ELF.PR.G | PerpetualDiscount | +1.5303% | Now with a pre-tax bid-YTW of 7.83% based on a bid of 15.26 and a limitMaturity. |
| STW.PR.A | InterestBearing | +1.5544% | Asset coverage of just under 1.7:1 as of September 25, according to Middlefield. Now with a pre-tax bid-YTW of 7.68% (mostly as interest) based on a bid of 9.80 and a hardMaturity 2009-12-31. |
| MFC.PR.C | PerpetualDiscount | +1.6375% | Now with a pre-tax bid-YTW of 6.32% based on a bid of 18.00 and a limitMaturity. |
| CIU.PR.A | PerpetualDiscount | +1.9553% | Now with a pre-tax bid-YTW of 6.40% based on a bid of 18.25 and a limitMaturity. |
| PWF.PR.H | PerpetualDiscount | +2.0316% | Now with a pre-tax bid-YTW of 6.49% based on a bid of 22.60 and a limitMaturity. |
| CM.PR.R | OpRet | +2.0408% | Now with a pre-tax bid-YTW of 5.03% based on a bid of 25.00 and a softMaturity 2013-4-29 at 25.00. |
| PWF.PR.I | PerpetualDiscount | +2.4086% | Now with a pre-tax bid-YTW of 6.43% based on a bid of 23.81 and a limitMaturity. |
| IAG.PR.A | PerpetualDiscount | +2.8807% | Now with a pre-tax bid-YTW of 6.64% based on a bid of 17.50 and a limitMaturity. |
| BNA.PR.B | SplitShare | +4.6582% | See BNA.PR.A, above. |
| NA.PR.N | FixedReset | +8.8405% | Mostly reverses yesterday’s nonsense. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| GWO.PR.F | PerpetualDiscount | 72,155 | Anonymous crossed 67,300 at 25.00 … unless they were different anonymice! Now with a pre-tax bid-YTW of 6.00% based on a bid of 24.76 and a limitMaturity. |
| CM.PR.A | OpRet | 39,090 | Nesbitt crossed 36,000 at 25.25. Now with a pre-tax bid-YTW of 5.22% based on a bid of 25.00 and a softMaturity 2011-7-30 at 25.00. |
| CM.PR.E | PerpetualDiscount | 34,500 | TD crossed 25,000 at 18.95. Now with a pre-tax bid-YTW of 7.50% based on a bid of 18.75 and a limitMaturity. |
| BNS.PR.R | FixedReset | 34,325 | RBC bought 10,000 at 24.45 from Scotia. |
| CM.PR.H | PerpetualDiscount | 29,735 | Now with a pre-tax bid-YTW of 7.52% based on a bid of 16.02 and a limitMaturity. |
There were twenty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today
Re: your comments about BNA.PR.A
I had a stink bid of 500 shares at $20.02 and got a partial fill of 300 shares yesterday.
Adrian
Two points:
The BNA prefs are short a put option on BAM. With BAM falling and implied volatility skyrocketing, this put value is soaring. I may get quantitative when I have more time, but all split shares have the same problem. Of course, BNA.PR.A gets paid out sooner than .PR.B or .C, so it could be argued that .C could end up holding the bag for the others (but I doubt it since this accelerating crisis will either end melt everything soon).
It will be interesting to see if the British rescue results in major dividend cuts on common and prefs. They are pursuing the model we’ve discussed before — penal pref ownership rather than buying dud loans. The concern here has to be whether this will be required in Canada — not impossible given Canadian banks 20-25X leverage and souring of every financial asset in a global “run on the banks”
One more point peculiar to split share and BNA prefs is that, unlike direct pref obligations of BAM or BPO whose dividends are in priority to common dividends, the BAM common dividend is (in a way) in priority to BNA pref dividends.
BAM split pays pref dividends on BNA prefs from BAM common dividends it receives. If BAM had to reduce its dividend by more than 10% (2007 Year end financials), then BAM split could not pay the full BNA pref dividend (without selling BAM common shares — for a return of capital). Thus, BNA pref dividends could be seen as effectively ranking similar to BAM common dividends.
These days we don’t see 10% dividend cuts, we see 50%, 90% or 100% once a company gets in trouble. Brookfield is a leveraged real estate firm which depends on rolling over debt and pref shares in order to make money. It has revenue risk from owning buildings serving the financial industry and refinancing risk. It would be interesting to look at the debt maturity schedule to see how sensitive to refinance risk they have become.
Mr. Hymas, I’ve a question I also asked the good folks on the finanical webring in BAC, which of course, no one answered “preferring” to remain as obtuse as possible.”How long before our banks decide to cut dividends?”. BAC makes two inopportune (may be a good time to buy but not if you have to finance) purchases, then promptly halves the dividend and throws out another 10 billion $ in shares in this depressed market to add insult to injury and, seemingly, gets away with it without a murmur. Sets a very bad precedent for our banks I’m thinking. I’d like you to touch on the very real probabilities of our big banks cutting their non cumulative preferred dividends and the impact on their already depressed prices. Thanks eh!
BNA.PR.A … I had a stink bid of 500 shares at $20.02 and got a partial fill of 300 shares yesterday.
Good work! I assume you will be changing your handle to “Mr. 18%” or similar?
penal pref ownership rather than buying dud loans. The concern here has to be whether this will be required in Canada — not impossible given Canadian banks 20-25X leverage and souring of every financial asset in a global “run on the banks”
Not impossible, but not very likely at this point. Note that when you use OSFI’s definition of the Asset-to-Capital Multiple (which includes both sub-debt and off-balance sheet items) the leverage is in the range 15-20X.
If BAM had to reduce its dividend by more than 10% (2007 Year end financials), then BAM split could not pay the full BNA pref dividend (without selling BAM common shares — for a return of capital).
I will point out that (as long as the asset coverage is greater than unity) the preferred shareholders will not be getting a return of their own capital, they’ll be getting a return of the capital shareholders’ capital.
I’d like you to touch on the very real probabilities of our big banks cutting their non cumulative preferred dividends and the impact on their already depressed prices.
At this point, none of the banks has even cut their common dividend and at least one (TD) has actually increased it during the course of the crisis.
Cutting the common dividend would crater the common stock (remember TRP, back in 1999? This would be worse.) and probably have significant pricing effect on the preferred. Again referring to TRP, the common was down over 50%, the preferred was down about 30%, if memory serves, even though I, for one, could not see that the preferred dividend was in any imminent danger.
There is always a possibility of the banks cutting the dividend on their non-cumulative preferreds. At this point, I see the potential for such a course of action as being so remote as to be negligible.
A more reasonable way to state the problem, more susceptible to analysis, would be in terms of credit anticipation.
(a) what needs to happen for Bank A to be cut to Pfd-2?
(b) how likely is it?
(c) what’s the likely effect on price if there’s a cut to Pfd-2?
… all the while noting that Pfd-2 is still eminently respectable investment grade, it’s just not as good as Pfd-1.
To expand on my answer regarding a cut in preferred dividends … I believe that the possibility of getting there from here is sufficiently remote that it’s a “black swan” event, not susceptible to quantitative analysis by definition.
When you analyze the potential for a cut in credit rating by a more reasonable amount, you bring it into the realm where statistics become more meaningful … you can start saying things like … ‘OK, credit card delinquencies DOUBLE, from 1.5% to 3.0%, probability X, effect Y’; whereas in estimating the chances of actual default, you have to start putting numbers on credit card delinquencies up BY A FACTOR OF 10′.
How do you put a rational number on the chance of a ten-fold increase in delinquencies, especially if it has only happened once in the past 100 years? You’re just guessing; and the fact that you’re calculating the implications of your assumptions to six decimal places doesn’t change the fact that your input data is a wild stab in the dark.
At this point, I hold that defaults of the big 6 on their preferred share dividends is a black-swan event, with probabilities for each bank that cannot be meaninfully differentiated, to be addressed with simple diversification.
Chances of a two notch downgrade? OK, that’s a reasonable problem to try to solve.
J Hymas says: “There is always a possibility of the banks cutting the dividend on their non-cumulative preferreds. At this point, I see the potential for such a course of action as being so remote as to be negligible.”
I’m reassured and will become an even more assiduous reader. (if already assiduous can one be more?)
I’m reassured and will become an even more assiduous reader
Well, I’m flattered and I’m glad to hear it … but remember to review each banks financial statements and capital structure every quarter! An ounce of research is worth a pound of opinion.