July 10, 2014

Looks like Canadian shadow banking is picking up:

Canada’s banks developed their commercial banking arms over decades by lending to companies that typically generate annual revenue of $50-million or less, nurturing scores of client relationships. Since the financial crisis, however, private equity firms have been scooping up smaller companies, shaking up their historical banking relationships.

Anatol von Hahn, Bank of Nova Scotia’s head of personal and commercial banking, said he would be “be very surprised if we don’t have double, triple” the number of small Canadian companies that are owned by private equity firms twenty years from now. Because they are flush with cash that they simply can’t sit on, private equity firms are often willing to pay big multiples to buy small businesses. “They’re playing a huge role,” he said.

To adapt to the changing dynamics, Scotiabank has gone so far as to invest in certain private equity funds in order to get access to the companies they acquire, according to Mr. von Hahn, allowing the bank to pitch itself as a potential banking partner.

The trend isn’t playing out in Canada alone. U.S. firms are looking for mid-market acquisitions north of the border. In May, New Jersey-based private equity player Swander Pace Capital acquired Montreal’s Recochem, marking its 10th acquisition north of the border in the past decade. More acquisitions could come because the firm recently raised a brand new $350-million fund.

Could we be heading towards European banking crisis redux?

Shares in Banco Espírito Santo SA … were suspended from trading Thursday after falling an additional 17%. Shares of the lender’s controlling shareholder, Espírito Santo Financial Group SA, were also suspended because, it said, of “ongoing material difficulties” at its parent company, Espírito Santo International. “ESFG is currently assessing the financial impact of its exposure to ESI.”

A spokesman for Espírito Santo International declined to comment.

This week’s downward spiral has knocked 32% off the bank’s market value and has dragged down Portugal’s main stock index with it.

On Thursday, the turmoil spread elsewhere in Southern Europe, illustrating how investors remain nervous about the fragility of the continent’s financial system. In Spain, a bank and a construction company each called off planned bond sales. In Italy, a drug company pulled its stock offering. In Greece, a government-bond sale came in smaller than expected. And stock markets across the continent fell, along with the euro.

It has been more than a year since fears about the health of a European bank rattled markets. Lately, after years of crisis, investors, bankers and regulators have been growing more confident about the stability of the continent’s financial system. Regulators hoped the banking industry’s improving health would be on display in coming months as they conduct so-called stress tests on more than 120 large banks.

Instead, Espírito Santo’s rapid descent, and the collateral damage in other European markets, suggests that conditions remain precarious.

Critics of Espírito Santo’s complex corporate structure have worried for years about the linkages among companies within the conglomerate. Among the concerns: whether the group’s nonfinancial companies—including a hotel chain and a hospital operator—were using the bank and its customers to raise funds.

Here in Ontario, our wise masters are protecting us from lower prices:

Ontario’s governing Liberals say they want to remove barriers to interprovincial trade, but suggest they’re reluctant to lift some restrictions that give Ontario companies an advantage.

Finance Minister Charles Sousa says there are a number of sectors within Ontario’s economy that are strong because they’re protected.

Sousa says he’s open to talks on how to grow the economy, but he doesn’t want to jeopardize the livelihood of Ontario companies.

Sousa’s comments come after the leaders of three western provinces called for the removal of trade barriers to reduce the cost of doing business and help provincial economies grow.

As far as I can tell, Mr. Sousa did not explain why strong companies need protection.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets gaining 14bp and DeemedRetractibles off 3bp. Volatility was average, but uniformly positive. Volume was below average overall, and concentrated in a handful of issues.

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 3.14 % 3.13 % 22,179 19.40 1 0.0000 % 2,531.9
FixedFloater 4.15 % 3.43 % 28,342 18.45 1 -0.2179 % 4,138.9
Floater 2.87 % 2.95 % 46,425 19.86 4 0.1367 % 2,760.5
OpRet 4.02 % -5.05 % 86,525 0.08 1 0.0785 % 2,720.0
SplitShare 4.26 % 3.99 % 54,773 4.05 6 -0.0333 % 3,115.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0785 % 2,487.2
Perpetual-Premium 5.53 % -4.30 % 85,467 0.09 17 0.0417 % 2,425.6
Perpetual-Discount 5.25 % 5.18 % 110,158 15.23 20 -0.0449 % 2,571.2
FixedReset 4.39 % 3.59 % 200,106 4.61 76 0.1436 % 2,562.2
Deemed-Retractible 4.98 % 1.94 % 131,236 0.12 43 -0.0278 % 2,547.2
FloatingReset 2.66 % 2.15 % 109,597 3.89 6 -0.0723 % 2,514.5
Performance Highlights
Issue Index Change Notes
CU.PR.C FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 2.65 %
RY.PR.L FixedReset 1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 2.77 %
CIU.PR.C FixedReset 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.24
Evaluated at bid price : 22.55
Bid-YTW : 3.38 %
BAM.PR.C Floater 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 17.85
Evaluated at bid price : 17.85
Bid-YTW : 2.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.A FixedReset 318,878 Nesbitt crossed 100,000 at 25.50. TD crossed blocks of 14,700 and 84,900 at the same price. Desjardins crossed 100,000 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.57 %
BMO.PR.T FixedReset 212,720 Nesbitt crossed two blocks of 50,000 each, both at 25.45. Scotia crossed blocks of 32,000 and 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 3.61 %
BMO.PR.S FixedReset 192,599 RBC crossed blocks of 10,000 and 11,600 at 25.60. TD crossed 25,000 at 25.70. Nesbitt crossed blocks of 50,000 and 69,300, both at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 3.55 %
CM.PR.M FixedReset 184,573 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 4.86 %
CM.PR.K FixedReset 181,858 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.79 %
CM.PR.O FixedReset 176,412 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.55 %
TD.PR.K FixedReset 144,299 Called for redemption July 31..
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.29 %
NA.PR.S FixedReset 135,592 Scotia crossed blocks of 35,400 and 25,000, both at 25.56. National sold 28,400 to anonymous at 25.60. TD crossed 24,700 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-15
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 3.46 %
RY.PR.H FixedReset 126,715 Desjardins crossed 26,500 at 25.50 and blocks of 25,000 and 15,000 at 25.55. Scotia crossed 30,000 at 25.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.57 %
BNS.PR.Q FixedReset 125,406 RBC crossed 75,000 at 25.43; Desjardins crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.44
Bid-YTW : 3.13 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.O Perpetual-Premium Quote: 26.15 – 26.45
Spot Rate : 0.3000
Average : 0.2062

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 26.00
Evaluated at bid price : 26.15
Bid-YTW : 2.67 %

PWF.PR.A Floater Quote: 20.00 – 20.30
Spot Rate : 0.3000
Average : 0.2133

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.64 %

HSB.PR.D Deemed-Retractible Quote: 25.33 – 25.60
Spot Rate : 0.2700
Average : 0.1942

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 2.49 %

SLF.PR.I FixedReset Quote: 26.13 – 26.40
Spot Rate : 0.2700
Average : 0.2059

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.13
Bid-YTW : 2.42 %

PWF.PR.P FixedReset Quote: 23.16 – 23.38
Spot Rate : 0.2200
Average : 0.1769

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.75
Evaluated at bid price : 23.16
Bid-YTW : 3.52 %

HSE.PR.A FixedReset Quote: 23.10 – 23.22
Spot Rate : 0.1200
Average : 0.0805

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.72
Evaluated at bid price : 23.10
Bid-YTW : 3.72 %

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