July 28, 2020

DBRS finalized the RBC LRCN rating today:

DBRS, Inc. (DBRS Morningstar) assigned a final rating of A (low) with a Stable trend to Royal Bank of Canada’s (RBC or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of RBC’s NVCC Subordinated Debt.

On July 28, 2020, RBC issued $1.75 billion of Capital Notes that mature on November 24, 2080, and will have an initial five-year fixed rate of 4.5%. DBRS Morningstar notes that the Capital Notes were granted Tier 1 capital treatment by the Office of the Superintendent of Financial Institutions.

RATING DRIVERS
Given RBC’s high rating level and the current economic environment, an upgrade of the ratings is unlikely. Ratings would be downgraded if there is a prolonged adverse impact of the Coronavirus Disease (COVID-19) pandemic resulting in a sustained deterioration in asset quality, especially due to deficiencies in risk management. Additionally, a sustained weakening of profitability metrics would also result in a downgrade of ratings.

There was something of a peculiar Staff Note published by the Bank of Canada today, Will exchange-traded funds shape the future of bond dealing?, by Rohan Arora, Jean-Sébastien Fontaine, Corey Garriott and Guillaume Ouellet Leblanc:

The rise of exchange-traded funds (ETFs) makes JIT possible in bond markets. ETFs are securities traded on an exchange, just like stocks, that entitle the bearer to a share in a pool of assets (such as stocks or bonds). For example, a fixed-income ETF might entitle its bearers to a share of a pool of 100 bonds. We find that a dealer can use bond ETFs as a warehouse to meet investor demand to buy and sell bonds. Similar to a car maker using JIT production, the dealer can reduce its inventories of “parts” and order them from its “suppliers” through a JIT approach.

Admittedly, ETFs make up only a small share of the Canadian asset management industry. Our analysis shows that ETFs in Canada are not yet used as warehouses to a large extent. But the practice is growing in the United States. These changes to the way dealers handle bonds can transform the market by:

  • improving prices
  • reducing the costs of large trades
  • making it easier for issuers themselves to borrow funds


ETF warehousing is when dealers use bond ETFs to deposit and withdraw—or push and pull—bonds instead of using inventory. Figure 1 compares the ETF warehousing model with the traditional bond dealer model:

  • Typically, a dealer distributes bonds by keeping them in inventory until it finds a client that wants them. If the dealer does not hold bond inventory, it cannot fulfill client orders promptly. As a result, it might lose a trade to another dealer.
  • The ETF warehousing model works differently. Instead of holding individual bonds in inventory, a dealer relies on a pool of bonds held within an ETF—an outside warehouse. Using a JIT approach, the dealer could pull bonds from the ETF to fulfill client orders or push bonds acquired from clients to the ETF.


The 2019 US Securities and Exchange Commission ETF rule, which allows all ETFs to conduct custom exchanges, could make ETF warehousing more common. In addition, bond ETFs may become more willing to engage in custom exchanges as they grow their assets under management

The SEC rule is explained in part with:

Rule 6c-11 will provide certain exemptions from the Act and also impose certain conditions. The conditions include the following:
  • Transparency. Under rule 6c-11, an ETF will be required to provide daily portfolio transparency on its website.
  • Custom basket policies and procedures. An ETF relying on rule 6c-11 will be permitted to use baskets that do not reflect a pro-rata representation of the fund’s portfolio or that differ from the initial basket used in transactions on the same business day (“custom baskets”) if the ETF adopts written policies and procedures setting forth detailed parameters for the construction and acceptance of custom baskets that are in the best interests of the ETF and its shareholders. The rule also will require an ETF to comply with certain recordkeeping requirements.
  • Website disclosure. The rule will require an ETF to disclose certain information on its website, including historical information regarding premiums and discounts and bid-ask spread information. These disclosures are intended to inform investors about the costs of investing in ETFs and the efficiency of an ETF’s arbitrage process.

So what I’m not entirely clear on about all this is: why ETFs? The only reason I can think of is because ETFs are so big … Blackrock Canada has seven corporate bond funds on offer, with a total of about 4.6-billion under management. That’s a lot of inventory and makes it very likely that Blackrock could meet an order for just about anything in any kind of reasonable size.

But there are plenty of other corporate bond portfolios under management in Canada. The Canada Pension Plan, for instance, has $40-billion in credit investments (see the 2020 Annual Report, page 14) or possibly 50.8-billion (see page 67). Why aren’t they doing this, using either extant staff or hiring an ‘overlay’ manager with a mandate to be market neutral, borrowing their short positions from the main fund?

Teachers’ has $93-billion in Fixed Income (see page 11 of the 2019 Annual Report. Where are they at?

When I was with Greydanus Boeckh so many years ago, I used to explain our basic strategy as providing month-to-month liquidity (in Canada bonds) to the dealers, who provided day-to-day liquidity to the market; much to the consternation of the smart guys who would explain to me that it’s impossible to outperform a market. I have predicted – so far unsuccessfully, I think – that US restrictions on proprietary trading by the Big Banks would bring an increase in market making by hedge funds.

Liquidity provision is fundamental to the market and there’s a lot of money to be made. I simply don’t understand why this ‘warehousing’ (I always used a car dealership analogy) concept is considered such a new idea.

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 0.2345 % 1,665.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.2345 % 3,055.8
Floater 5.01 % 5.08 % 63,565 15.36 3 0.2345 % 1,761.1
OpRet 0.00 % 0.00 % 0 0.00 0 -0.1474 % 3,482.2
SplitShare 4.82 % 4.82 % 52,014 3.74 7 -0.1474 % 4,158.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1474 % 3,244.6
Perpetual-Premium 5.18 % 4.84 % 74,008 4.07 1 0.1976 % 3,082.0
Perpetual-Discount 5.53 % 5.67 % 76,747 14.40 35 0.1019 % 3,301.9
FixedReset Disc 5.69 % 4.50 % 150,782 16.02 75 0.0819 % 1,990.3
Deemed-Retractible 5.27 % 5.36 % 94,849 14.49 27 0.1084 % 3,256.8
FloatingReset 2.38 % 2.54 % 37,434 1.49 4 -0.5394 % 1,751.5
FixedReset Prem 5.44 % 4.29 % 346,222 0.96 3 0.1321 % 2,601.4
FixedReset Bank Non 1.95 % 2.19 % 99,536 1.48 2 0.3436 % 2,837.0
FixedReset Ins Non 5.86 % 4.64 % 97,017 15.82 22 0.6626 % 2,032.2
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset Disc -4.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 8.39
Evaluated at bid price : 8.39
Bid-YTW : 5.66 %
TRP.PR.F FloatingReset -3.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 9.61
Evaluated at bid price : 9.61
Bid-YTW : 5.50 %
TD.PF.J FixedReset Disc -3.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 4.32 %
BAM.PF.I FixedReset Disc -3.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.48
Evaluated at bid price : 22.85
Bid-YTW : 5.29 %
SLF.PR.I FixedReset Ins Non -2.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 4.66 %
PWF.PR.T FixedReset Disc -2.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 15.80
Evaluated at bid price : 15.80
Bid-YTW : 4.77 %
BAM.PF.J FixedReset Disc -2.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.35
Evaluated at bid price : 22.75
Bid-YTW : 5.26 %
BIP.PR.A FixedReset Disc -2.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 15.70
Evaluated at bid price : 15.70
Bid-YTW : 6.33 %
PVS.PR.H SplitShare -1.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2027-02-28
Maturity Price : 25.00
Evaluated at bid price : 24.36
Bid-YTW : 5.32 %
TRP.PR.B FixedReset Disc -1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 8.25
Evaluated at bid price : 8.25
Bid-YTW : 5.03 %
BAM.PF.H FixedReset Disc -1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 23.23
Evaluated at bid price : 24.05
Bid-YTW : 5.21 %
BIP.PR.D FixedReset Disc -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 5.93 %
CCS.PR.C Deemed-Retractible -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.01
Evaluated at bid price : 22.25
Bid-YTW : 5.67 %
BMO.PR.D FixedReset Disc 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 21.34
Evaluated at bid price : 21.65
Bid-YTW : 4.21 %
BAM.PR.N Perpetual-Discount 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 5.63 %
MFC.PR.G FixedReset Ins Non 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.95
Evaluated at bid price : 17.95
Bid-YTW : 4.64 %
MFC.PR.F FixedReset Ins Non 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 9.76
Evaluated at bid price : 9.76
Bid-YTW : 4.59 %
TD.PF.C FixedReset Disc 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.20
Evaluated at bid price : 17.20
Bid-YTW : 4.22 %
NA.PR.G FixedReset Disc 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 4.40 %
BAM.PF.F FixedReset Disc 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 15.60
Evaluated at bid price : 15.60
Bid-YTW : 5.52 %
CM.PR.Q FixedReset Disc 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.20
Evaluated at bid price : 17.20
Bid-YTW : 4.58 %
TD.PF.L FixedReset Disc 1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.69
Evaluated at bid price : 23.60
Bid-YTW : 4.10 %
W.PR.M FixedReset Disc 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 24.40
Evaluated at bid price : 24.75
Bid-YTW : 5.28 %
TD.PF.E FixedReset Disc 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 19.25
Evaluated at bid price : 19.25
Bid-YTW : 4.19 %
BAM.PR.R FixedReset Disc 2.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 12.35
Evaluated at bid price : 12.35
Bid-YTW : 5.45 %
EML.PR.A FixedReset Ins Non 3.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 24.45
Evaluated at bid price : 24.90
Bid-YTW : 5.39 %
BMO.PR.F FixedReset Disc 4.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.85
Evaluated at bid price : 23.95
Bid-YTW : 4.28 %
MFC.PR.Q FixedReset Ins Non 6.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 4.60 %
MFC.PR.I FixedReset Ins Non 6.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 18.18
Evaluated at bid price : 18.18
Bid-YTW : 4.65 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.K FixedReset Disc 112,550 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 18.97
Evaluated at bid price : 18.97
Bid-YTW : 4.29 %
BNS.PR.F FloatingReset 111,300 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.67
Bid-YTW : 2.40 %
PWF.PR.T FixedReset Disc 84,810 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 15.80
Evaluated at bid price : 15.80
Bid-YTW : 4.77 %
BAM.PF.G FixedReset Disc 66,599 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 14.87
Evaluated at bid price : 14.87
Bid-YTW : 5.45 %
GWO.PR.T Deemed-Retractible 66,300 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 23.00
Evaluated at bid price : 23.36
Bid-YTW : 5.56 %
TRP.PR.K FixedReset Disc 56,671 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 23.08
Evaluated at bid price : 23.45
Bid-YTW : 5.29 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.G SplitShare Quote: 25.20 – 26.89
Spot Rate : 1.6900
Average : 1.0061

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2026-02-28
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.90 %

BAM.PF.I FixedReset Disc Quote: 22.85 – 24.50
Spot Rate : 1.6500
Average : 1.1778

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 22.48
Evaluated at bid price : 22.85
Bid-YTW : 5.29 %

TD.PF.C FixedReset Disc Quote: 17.20 – 18.89
Spot Rate : 1.6900
Average : 1.2239

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.20
Evaluated at bid price : 17.20
Bid-YTW : 4.22 %

SLF.PR.I FixedReset Ins Non Quote: 17.00 – 18.25
Spot Rate : 1.2500
Average : 0.7942

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 4.66 %

MFC.PR.L FixedReset Ins Non Quote: 14.87 – 15.75
Spot Rate : 0.8800
Average : 0.5384

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 14.87
Evaluated at bid price : 14.87
Bid-YTW : 4.72 %

TD.PF.J FixedReset Disc Quote: 19.05 – 19.90
Spot Rate : 0.8500
Average : 0.5186

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2050-07-28
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 4.32 %

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