Category: Market Action

IIROC has gotten away with another shake-down, this time of Deutsche Bank. I’m sure every morally upright person will be shocked – shocked! – at their misconduct:

In late July and early August 2007, the Respondent failed to engage Compliance with emerging issues in the ABCP market.

That’s it. That’s the complete section titled “The Respondent’s Misconduct”. One part of the firm didn’t talk to another. No third parties were harmed – or even affected – in any manner whatsoever.

Aquiescing to this parody of justice were The Honourable Patrick Galligan and Mr. Michael Walsh. But there’s another million smackers in IIROC’s slush fund; I’m sure the folks at FAIR Canada will be pleased.

There’s a proposal for made-in-USA DSIBs:

The bill by [U.S. Representative John] Campbell would require banks with at least $50 billion in assets to hold an additional layer of capital in the form of subordinated long-term bonds totaling at least 15 percent of consolidated assets. If an institution were to fail, the long-term bondholders would be guaranteed at no more than 80 percent of the face value of the debt. As a result, banks would face pressure to reduce their balance sheets.

The extra layer of capital would be in addition to higher levels required as part of the Basel III international regulatory accords. The goal is to protect taxpayers from bailouts and equalize the competitiveness between large and small institutions, which face higher costs of capital, Campbell said.

Campbell also proposed using credit default swaps to help gauge when regulators should step in and assess a bank’s
riskiness. Under his bill, if the price of a bank’s credit default swaps increases more than 50 basis points, the Fed would
have to take steps to assess the banks’ soundness.

“We want this layer of debt to effectively be the canary in the coal mine,” Campbell said.

His legislation would also repeal Dodd-Frank’s heightened standards for systemic institutions and its ban on proprietary trading, known as the Volcker rule. Campbell said that with additional capital requirements, a ban on proprietary trading would be unnecessary.

The Governor Jeremy C. Stein gave a speech titled Overheating in Credit Markets: Origins, Measurement, and Policy Responses:

Let me suggest three factors that can contribute to overheating. The first is financial innovation. … The second closely related factor on my list is changes in regulation. …

The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield.”11 An insurance company that has offered guaranteed minimum rates of return on some of its products might find its solvency threatened by a long stretch of low rates and feel compelled to take on added risk. A similar logic applies to a bank whose net interest margins are under pressure because low rates erode the profitability of its deposit-taking franchise.

Moreover, these three factors may interact with one another. For example, if low interest rates increase the demand by agents to engage in below-the-radar forms of risk-taking, this demand may prompt innovations that facilitate this sort of risk-taking.
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One reason is that your view of the underlying mechanism shapes how you think about measurement. Consider this question: Is the high-yield bond market currently overheated, in the sense that it might be expected to offer disappointing returns to investors? What variables might one look at to shape such a forecast? In a primitives-driven world, it would be natural to focus on credit spreads, on the premise that more risk tolerance on the part of households would lead them to bid down credit spreads; these lower spreads would then be the leading indicator of low expected returns.

On the other hand, in an institutions-driven world, where agents are trying to exploit various incentive schemes, it is less obvious that increased risk appetite is as well summarized by reduced credit spreads. Rather, agents may prefer to accept their lowered returns via various subtler nonprice terms and subordination features that allow them to maintain a higher stated yield.
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It is interesting to think about recent work by Robin Greenwood and Sam Hanson through this lens.14 They show that if one is interested in forecasting excess returns on corporate bonds (relative to Treasury securities) over the next few years, credit spreads are indeed helpful, but another powerful predictive variable is a nonprice measure: the high-yield share, defined as issuance by speculative-grade firms divided by total bond issuance. When the high-yield share is elevated, future returns on corporate credit tend to be low, holding fixed the credit spread. Exhibit 1 provides an illustration of their finding. One possible interpretation is that the high-yield share acts as a summary statistic for a variety of nonprice credit terms and structural features.
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As can be seen in exhibit 2, issuance in both of these markets has been very robust of late, with junk bond issuance setting a new record in 2012. In terms of the variables that could be informative about the extent of market overheating, the picture is mixed. On the one hand, credit spreads, though they have tightened in recent months, remain moderate by historical standards. For example, as exhibit 3 shows, the spread on nonfinancial junk bonds, currently at about 400 basis points, is just above the median of the pre-financial-crisis distribution, which would seem to imply that pricing is not particularly aggressive.15

On the other hand, the high-yield share for 2012 was above its historical average, suggesting–based on the results of Greenwood and Hanson–a somewhat more pessimistic picture of prospective credit returns.
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Putting it all together, my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.
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… one lesson from the crisis is that it is not just bad credit decisions that create systemic problems, but bad credit decisions combined with excessive maturity transformation. A badly underwritten subprime loan is one thing, and a badly underwritten subprime loan that serves as the collateral for asset-backed commercial paper (ABCP) held by a money market fund is something else–and more dangerous.

This article on plastic bag bans deserves wide distribution – particularly in Toronto:

Warning of disease may seem like an over-the-top scare tactic, but research suggests there’s more than anecdote behind this industry talking point. In a 2011 study, four researchers examined reusable bags in California and Arizona and found that 51 percent of them contained coliform bacteria. The problem appears to be the habits of the reusers. Seventy-five percent said they keep meat and vegetables in the same bag. When bags were stored in hot car trunks for two hours, the bacteria grew tenfold.

That study also found, happily, that washing the bags eliminated 99.9 percent of the bacteria. It undercut even that good news, though, by finding that 97 percent of people reported that they never wash their bags.

Jonathan Klick and Joshua Wright, who are law professors at the University of Pennsylvania and George Mason University, respectively, have done a more recent study on the public-health impact of plastic-bag bans. They find that emergency-room admissions related to E. coli infections increased in San Francisco after the ban. (Nearby counties did not show this increase.) And this effect showed up as soon as the ban was implemented. (“There is a clear discontinuity at the time of adoption.”) The San Francisco ban was also associated with increases in salmonella and other bacterial infections. Similar effects were found in other California towns that adopted such laws.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets up 14bp and DeemedRetractibles off 6bp. Volatility was normal. Volume was low, with a notable presence of ENB FixedResets, which go ex-Dividend on Wednesday.

Some pension notes from the States:

Scituate, Rhode Island, population 10,329, operates a pension plan for its police department. The plan is underfunded to the tune of $8.4 million, a liability that has quadrupled since 1999. That doesn’t sound like a big shortfall until you realize that Scituate’s pension plan has only 33 participants, meaning that it is short by more than a quarter million dollars per employee.

Worse, Scituate isn’t alone. Rhode Island, with just 41 cities and towns, has 36 separate municipal pension systems, and their unfunded liabilities total more than $2.3 billion. Most, like Scituate’s, are less than 50 percent funded. Cranston, Rhode Island’s third-largest city, has funded just 17 percent of its $330 million pension liability. All but one of these plans have fewer than a thousand members.
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The more promising long-term fix, floated by some Rhode Island lawmakers including State Treasurer Gina Raimondo, is to close municipal pension plans and have one pension system for municipal workers overseen by the state government. This would build on the progress Rhode Island has made in improving its statewide pension systems, which already cover some local employees. A 2011 reform improved the largest system’s funding ratio from 48 percent to 61 percent. Benefits were restructured so that some of the risk of investment returns is shifted from taxpayers to employees.

What a great way to balance the books! Just renege on your promises!

It was a positive day for the Canadian preferred share market, with PerpetualPremiums winning 12bp (as the median YTW dipped below zero again), FixedResets gaining 1bp and DeemedRetractibles up 3bp. Volatility was normal. Volume was above average.

Pension underfunding is becoming socially acceptable:

Some of Ontario’s largest companies, facing massive deficits in their pension plans, are turning to their employees in a bid to help solve a deepening funding crisis.

Chrysler Canada Inc., ArcelorMittal Dofasco Inc. and other companies – large and small – have asked their employees to let them take advantage of a special Ontario government rule that allows companies to stretch contributions to underfunded defined-benefit pension funds to 10 years from five.
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FSCO forecast that the average fund would have assets that would cover just 72 per cent of liabilities at the end of 2011, compared with 87 per cent at the end of 2010.

ArcelorMittal Dofasco shows a typical decline. As of Dec. 31, 2011, assets in the plan for non-unionized employees of the steel maker covered 52 per cent of liabilities, versus 65 per cent a year earlier.

In 2004, Don Pether, then chief executive officer of Dofasco Inc., (before it was taken over by ArcelorMittal) pointed to its fully funded pension plan as offering “a strategic advantage.” But in recent years, record low interest rates and lower returns on investments have caused the deficit, spokeswoman Marie Verdun said Wednesday.

Members of the ArcelorMittal Dofasco plan recently turned down the steel maker’s proposal to stretch out the funding.

It’s a difficult question for workers. On the one hand, crippling the company’s ability to operate doesn’t make a lot of sense. But on the other hand, making such a concession without getting something pretty solid in return doesn’t make a lot of sense either.

And what will the lenders think? It will be most interesting to see what happens as a result of the Indalex ruling:

But insolvency lawyers say this “deemed trust” issue simply creates more headaches for companies with big defined-benefit pension plans and those who lend them money.

This part of the ruling means lenders to thousands of companies with large defined-benefit pension plans just saw themselves pushed back in the line of creditors, behind potentially massive pension shortfalls, said D.J. Miller, an insolvency lawyer with Thornton Grout Finnigan in Toronto.

“All of those lenders that have money advanced right now, thinking they are in first position on inventories and accounts receivable, are sitting behind what can be a deficit that can be in the tens or hundreds of millions of dollars,” said Ms. Miller, who acted for the Insolvency Institute of Canada, which intervened in the case before the Supreme Court.

Plans that could be close to being wound up, or plans that have large shortfalls, will attract special attention, she said: “I think all of the lenders right now are doing a very careful assessment of their portfolios to determine what their potential exposure is.”

She warned that lenders might require extra guarantees and higher rates from companies with big pension plans. Other creditors might be tempted to push a company right into full-blown bankruptcy, which would nullify the pensioners’ new rights.

Jonathan Weil of Bloomberg publicizes an interesting tidbit about the S&P lawsuit:

The U.S. Justice Department made some peculiar allegations in its lawsuit this week against S&P and its parent, McGraw-Hill Cos. According to the government, Citigroup was defrauded by S&P credit ratings on subprime mortgage bonds that Citigroup itself created and sold. Bank of America, too, allegedly was defrauded by S&P in the same way.

If this doesn’t make sense, that’s the point. The notion is far-fetched. No wonder S&P wouldn’t agree to a settlement and told the government to see it in court.

Here’s the gist. Near the end of its 119-page complaint, the Justice Department listed about two-dozen collateralized- debt obligations issued in 2007 as examples where S&P allegedly defrauded banks and credit unions. It was important that the Justice Department be able to identify such lenders as investors, because it’s suing S&P under a 1989 statute that covers frauds against federally insured financial institutions.

Under the government’s theory, Citigroup and Bank of America paid S&P for ratings that convinced the banks their own CDO offal was rock-solid. And because S&P deceived them into thinking the best of their own rubbish, these banks and other lenders suffered more than $5 billion of investment losses, according to the suit.

There’s some concern that retail could stampede out of bonds:

Falling interest rates over the past decade has meant rising bond prices, delivering dazzling returns for bond mutual funds. Investors have responded by jumping in. Mutual, closed end and exchange-traded funds now own close to 20 per cent of all investment and high-yield corporate debt in the U.S.

In Canada, investors bought a net $19-billion worth of bond funds in 2012 (compared with total investment fund net sales of $30-billion), more than two and a half times larger than sales a year earlier, as they continued to trade out of equity funds. Investors in Canada now hold $132-billion worth of bond funds, according to the Investment Funds Institute of Canada – up from just $53.5-billion at the end of 2008.

The concern now is that interest rates rise too much, too fast. Rates on 10-year U.S. Treasury bonds have climbed markedly in recent months after hitting an all-time low last July. The rate hit 2 per cent last week for the first time since April (remember, when rates rise, bond prices fall). If they continue to rise to 3 per cent, there would be a “disorderly rotation out of bonds – characterized by higher interest rates and wider credit spreads,” warned Bank of America Merrill Lynch credit strategist Hans Mikkelsen in a research note this week.

But for now…

But a Canadian debt issue this week is a reminder that the bond market remains frothy by historical standards.

On Wednesday, Corus Entertainment Inc. priced a seven-year, $550-million bond deal at a yield of 4.25 per cent. The big news: That’s 3 percentage points lower than a similar offering in 2010 ($500-million, seven years), when its credit rating was the same BBB low from DBRS that it is today. (Its rating from Standard and Poor’s is one notch higher than it was in 2010, but still below investment grade.)

Better yet, sources in the Canadian bond market say there were 85 buyers, 50 per cent more than the 2010 offering.

There’s a term extension on Irish debt:

Ireland clinched a long-awaited deal on Thursday to ease the burden of its bank debts, sending its borrowing costs falling to pre-crisis levels and bolstering its chances of ending its reliance on EU-IMF loans this year.

After nearly 18 months of negotiation, Prime Minister Enda Kenny won European Central Bank (ECB) approval to stretch out the cost of bailing out Anglo Irish Bank, slicing billions off the country’s borrowing needs and cutting its budget deficit.
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>Under the terms of the deal, first reported on Wednesday, Anglo’s promissory notes, with an average maturity of between seven and eight years, will be exchanged for government bonds with an average maturity of over 34 years. The first principal repayment will be made in 2038 and the last in 2053.

The finance spokesman for the opposition Sinn Fein party said the agreement would burden future generations.

“This week my youngest son began to crawl. He wasn’t even born at the time the promissory note was issued, yet he’ll be 40 years of age and this state will be paying back the toxic debts of Anglo Irish Bank,” Pearse Doherty told parliament.

Anglo Irish’s near-collapse in 2008 pressured the government into guaranteeing the entire financial sector, sucking it into a downward spiral and in late 2010, a €67.5-billion loan from the EU and IMF.

Don’t worry Mr. Doherty! It’s government debt – it will be refunded, not redeemed! Bloomberg points out approvingly:

At issue is an obligation the Irish government took on in 2010, during the rescue of the now-defunct Anglo Irish Bank. At the urging of the European Union, and in return for emergency loans from the European Central Bank, the government issued an IOU that allowed Anglo Irish to pay its bondholders. The IOU has since been a heavy burden on Irish taxpayers, requiring annual payments of more than $4 billion.

This week, the ECB effectively accepted an Irish proposal to reschedule the debt — a move that the country’s extraordinary efforts to fulfill its EU-mandated austerity program thoroughly justify. The government will exchange the IOU, which consists of 10-year promissory notes paying an 8 percent interest rate, for longer-term bonds paying about 3 percent.

And who owned the promissory notes? The Financial Times untangles it:

For Anglo, the only asset it had left that was really worth anything and could be used as collateral was the sovereign promise from the Dublin government: the promissory note.

However, the Irish central bank is now part of the eurosystem, which means the ECB must sign off on any ELA assistance for Anglo and its successors. Since the promissory note is, in essence, the one thing the ECB has as collateral for its loans, it has to make sure whatever replaces them is still legitimate collateral. That gives it a veto in any attempt to restructure the notes.

OK – so Europe has had its 10-year 8% proms forcibly converted into 30-year 3% bonds. There’s a good deal!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets up 10bp and DeemedRetractibles flat. Volatility picked up a little, with Straights on the low side. Volume was above average.

Bloomberg has an the regulatory realities of ratings:

The U.S. lawsuit against Standard & Poor’s raises pressure to accelerate competition in the ratings industry while the government itself has adopted rules that left the business dominated by the same companies whose flawed grades sparked the worst financial crisis since the Great Depression.
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Ann Rutledge, a structured finance specialist, has watched her application to become an NRSRO languish at the SEC for 20 months. Her company, R&R Consulting, has yet to be granted a license because some of the eight client letters don’t meet the requirements of a credit rating as defined by the 2006 law. The statute specifies that only written testimonials that are notarized from institutional buyers attesting to its ratings may be used. R&R’s clients include pension funds, hedge funds and governments.

Rapid Ratings International Inc., a New York-based firm that uses quantitative models to grade securities, hasn’t applied for the NRSRO designation, which would allow investors to buy securities rated by the company to meet regulatory requirements, because its costs would increase by 40 percent to hire compliance staff, James Gellert, chief executive officer, said in a Jan. 7 telephone interview.
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Meredith Whitney Advisory Group LLC, headed by the former Citigroup Inc. analyst, made a presentation to the SEC in November 2010 seeking NRSRO status and has yet to be approved, according to the SEC website. A woman who answered the phone in the company’s New York office Feb. 4 declined to comment on its application.

Costs have also kept PF2 Securities Evaluations Inc., a New York company that values structured products, from applying for the designation, according to Gene Phillips, a director.

Danish banks are having regulatory problems:

The Basel Committee on Banking Supervision, which brings together regulators from 27 nations including the U.S and China, last month expanded the range of easily sold assets banks must have on hand to weather a month of market turmoil. While policy makers approved company debt and equities, they kept limits on covered bonds, mortgage-backed securities that fund almost all Danish home purchases, and are rated higher than the sovereign debt of Japan, Italy and Spain.

Denmark, which doesn’t have a representative on the committee, has more of the securities outstanding per capita than any other nation, with its banks holding more than half of the 3.3 trillion-krone ($600 billion) market. Unless revised, lenders will have to find alternatives to fulfill the liquidity requirements at the same time Denmark is shrinking its issuance of government debt. Interest rates for Danish homeowners, the world’s most indebted, may also climb, creating reverberations throughout the economy, said Steen Bocian, chief economist for Danske Bank A/S, the country’s largest lender.
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Household debt is about three times disposable income, and most of it is in mortgages financed by covered bonds, a form of bank financing backed by mortgages, creating Europe’s second- largest residential covered bond market after Spain. Danish banks held mortgage bonds valued at 1.52 trillion kroner, or 46 percent of the 3.3 trillion kroner outstanding, in December, the central bank said Jan. 25.
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Basel has categorized government debt as level 1, allowing banks to fulfill 100 percent of their liquidity requirements with the assets. Mortgage-based debt is considered level 2, so there are caps on their use as liquid assets. Covered bonds will have a 40 percent ceiling, while securitizations can’t count for more than 15 percent of a lender’s liquidity buffer.

A major objective of Basel III is to force banks to own European government debt, since otherwise it might not get sold.

There’s another smoking gun in the LIBOR rigging scandal:

A Royal Bank of Scotland Group Plc trader colluded with a counterpart at UBS AG to pay almost 211,000 pounds ($330,000) in bribes to brokers willing to help them manipulate global interest rates, regulators said.

Neil Danziger, a London-based derivatives specialist at RBS, helped Tom Hayes, the former UBS employee at the center of the global investigation into rate-rigging, to bribe at least two brokers into persuading other banks to submit rates in line with their own, according to transcripts released by regulators that didn’t identify the traders by name. Two people with direct knowledge of the talks confirmed the traders’ identities. The regulators didn’t identify the brokers involved.
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“Can you do me a favor,” an unidentified broker asked Danziger on Sept. 19, 2008, according to a transcript of the conversation released yesterday by the U.S. Commodity Futures Trading Commission. “You’re not going to get paid any bro for this and we’ll send you lunch around for the whole desk.” As the broker outlined the trade, he said “Take it from UBS, give it back to UBS. He wants to pay some bro,” referring to fees.

“Yeah, yeah,” Danziger replied.

Later that day, the broker asked Danziger if he could “do another 100 yards” or 100 billion, increasing the size of the transaction. “Flat switch,” the broker said. “I know I’m pushing my luck.”

RBS then entered into a wash trade with UBS that enabled the Zurich-based lender to pay about $31,000 in fees to the broker for its help in rigging Libor, the CFTC said.

Cash Store Financial Services is fighting to retain its payday loan business:

Cash Store Financial Services Inc. says it will request a hearing before Ontario’s Licence Appeal Tribunal in response to government pressure on its lending businesses.

The company says Ontario’s registrar for payday loans wants to revoke the payday lending licences of its Cash Store Inc. and Instaloans Inc. businesses.
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Cash Store Financial says Ontario’s Ministry of Consumer Affairs has attempted since September, 2011, to force it to deliver payday loans in cash, rather than the electronic methods they now use.

The company says it’s unwilling to place employees and customers at risk by having them handling cash.

I cannot for the life of me determine why the Ministry wants to force them to use cash – what business is it of the Ministry? Naturally enough, I can’t find anything on the web to answer this question, as the media does nothing but re-write press releases.

This is just another example of creeping regulation. They don’t want to pass a law forbidding X, because that would expose the politicians for what they are. Instead, they install a licensing requirement and simply refuse to issue a license to those deemed unworthy. It’s pretty sleazy.

Anyway, it resulted in a downgrade by S&P:

• •The registrar for payday loans in Ontario issued a proposal to revoke The Cash Store Financial Services Inc.’s (CSF) payday lending licenses, and
  CSF announced that it has discontinued its payday loan product in the territory.

• •We are lowering our ratings on CSF and its senior secured notes to ‘CCC+’ from ‘B-‘.
• •The negative outlook reflects our view that a material portion of CSF’s business is being discontinued in Ontario and that the cash flows from its new credit product may not be able to replace those lost cash flows.

It was a fairly quiet, mixed day for the Canadian preferred share market, with PerpetualPremiums down 5bp, FixedResets gaining 1bp and DeemedRetractibles off 1bp. Volatility was low. Volume continued to be quite high.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard conversion rate of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 195bp, a significant narrowing from the 210bp reported January 23.

There are a few more details on the persecution of S&P:

The U.S. is seeking as much as $5 billion in penalties from McGraw-Hill Cos. (MHP) and its Standard & Poor’s unit as punishment for inflated credit ratings that Attorney General Eric Holder said were central to the worst financial crisis since the Great Depression.
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The Justice Department probe, code-named “Alchemy,” began in November, 2009. The suit marked the culmination of a “massive, multiyear investigation” by a team of almost two dozen lawyers, Stuart Delery, principal deputy assistant attorney general said.

Over the course of the investigation, the company turned over more than 20 million pages of documents, which included e- mail between the firm’s employees, said a person familiar with the probe, who asked for anonymity to discuss details. Those e- mails, along with questions about the models used by the company to rate bonds, have become the basis for the department’s lawsuit.
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According to the U.S. complaint, S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests.

The company bent rating models to suit its business needs to the extent that one CDO analyst commented that loosening the measure of default risk for a certain security in 2006 “resulted in a loophole in S&P’s rating model big enough to drive a Mack truck through,” the U.S. said.
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The Justice Department cited e-mail from S&P employees discussing the need to modify ratings criteria to win business after the company’s grades were more conservative than competitors.

“Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact on future deals,” one analyst said in a May 2004 e-mail cited in the lawsuit. “There’s no way we can get back on this one but we need to address this now in preparation for future deals.”

So now the word will go out from Legal – if it hasn’t already – that any dissent or commentary running contrary to the corporate line on default models will be grounds for dismissal. This will improve credit ratings significantly!

As S&P says:

“There was robust internal debate within S&P about how a rapidly deteriorating housing market might affect the CDOs — and we applied the collective judgment of our committee-based system in good faith. The email excerpts cherry picked by DOJ have been taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business.

“The DOJ omits important context about the emails it cites. For example, the email that says deals ‘could be structured by cows’ and be rated by S&P had nothing to do with RMBS or CDO ratings or any S&P model, and the analyst had her concerns addressed with the issuer before S&P issued any rating. The DOJ also cites the fact that S&P personnel discussed proposed rating criteria with market participants as evidence of wrongdoing although under certain recent regulations, S&P is required to do just that. When the full facts are revealed in court, it will be clear the emails and anecdotes being cited do not prove any wrongdoing.

Gaz Metro secured some long term USD financing:

Gaz Métro inc. (“GMi”) announced today that it has entered into an agreement to sell to certain institutional investors in the United States on a private placement basis U.S.$200 million aggregate principal amount of 4.04% senior secured notes due 2043 and 4.19% senior secured notes due 2048 (together, the “Notes”). The Notes will be secured by a guarantee as to payment of principal and interest by Gaz Métro Limited Partnership (“Gaz Métro”), together with collateral security backed by the assets of GMi and Gaz Métro.

Not bad! and only 85-90bp over Treasuries! That’s the equivalent of financing at 3.50% in Canada!

There might be some adjustments to milkfare:

The Canadian government is prepared to knock holes in the hefty tariff walls shielding dairy producers from foreign competition and admit more European cheese into this country in return for greater access to EU markets for Canada’s beef and pork.
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About 20,400 tonnes of foreign cheese currently enter Canada tariff-free annually under special arrangements with jurisdictions such as the European Union. The EU, which already has the lion’s share of this tariff-free access, is allowed to import about 13,400 tonnes of cheese annually under this deal. That’s more than 3 per cent of Canada’s current annual cheese consumption.

The EU is looking for as much as 10,000 tonnes more of annual tariff-free access for cheese, Canadian dairy industry sources say, adding they do not believe Ottawa would agree to this size of this concession. The Canadian government declined to confirm this number or how much it’s prepared to offer up as part of negotiations.

This would be wonderful news for Canadian consumers if true. Remember the 30-million consumers? They’re rather more numerous than the 30,000 (?) producers.

It was a good day for the Canadian preferred share market, with PerpetualPremiums winning 20bp, FixedResets gaining 9bp and DeemedRetractibles up 13bp. Volatility was minimal. Volume was high.

Looks like the market rally is over:

Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds.

Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data goes back to 1984.

Signs of improvement in the U.S. economy and a rising stock market that pushed the Dow Jones Industrial Average above 14,000 today for the first time since 2007 have prompted Americans to step up their investments. Equity mutual funds gathered $29.9 billion in January’s first three weeks, more than for any full month since 2006.

There’s some talk in the US of an exchange dedicated to the exempt market and restricted to accredited investors:

A panel that advises the Securities and Exchange Commission on Friday recommended an exclusive exchange be created for micro- and small-capitalization public companies that would only be available for only high-net-worth investors.

The panel, the advisory committee on small and emerging companies, voted to urge the SEC to support the setting up of an exchange for small publicly traded companies that would only be accessible for high-income individuals such as so-called accredited investors, who must have net worths, excluding their homes, of $1 million or more or income of $200,000 or more for at least two years.

Companies listing on an exchange set up for high-net-worth investors may not be required to provide costly prospectuses and other disclosures that are necessary when retail investors are involved. Backers contend that this would drive down costs associated with public offerings and could encourage private companies to take the plunge into becoming almost-public companies. However, retail investor advocates worry that small investors would be blocked from making desired investments.

This is in addition to other speculative ideas like large ticks for small caps:

Twelve years after the U.S. switched to 1-cent increments for stock trading to save investors money, regulators and broker-dealers are considering a test of larger tick sizes.

A pilot study of bigger quoting increments to improve liquidity in less-active stocks will be debated by executives from exchanges and brokers, market makers and academics at a Securities and Exchange Commission meeting tomorrow, according to an agenda posted online. The U.S. moved to minimum ticks of a penny from sixteenths of $1 in 2001. Panelists will also discuss the effect of 1-cent price moves on capital raising and trading.

Proponents say larger increments will spur market makers to supply more buying and selling volume, particularly for less- active stocks, while skeptics say it will cause people to pay more when they trade.

Other, less dramatic, ideas were reported by the SEC:

• Rationalize the disclosure framework for small cap companies by raising the market capitalization threshold for small reporting companies (SRCs) and extending to SRCs the benefits granted to emerging growth companies under the JOBS Act.
• Further ease the compliance burden on SRCs by exempting SRCs from other requirements that result in significant costs for SRCs without generating information necessary to making an informed investment decision

Amidst these encouraging signs for less-fettered capital markets comes a lawsuit against S&P:

Standard & Poor’s on Monday said it expects to be the target of a U.S. Department of Justice civil lawsuit over its ratings of mortgage bonds before the recent financial crisis.

The lawsuit against the McGraw-Hill Cos. unit focuses on its ratings in 2007 of various U.S. collateralized debt obligations (CDO), S&P said.
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In its statement, S&P said it “deeply regrets” how its CDO ratings failed to anticipate the fast-deteriorating mortgage market conditions, and that it has since spent $400-million to help bolster the quality of its ratings.

And instead of raising capital as they’re supposed to naughty bankers are dumping assets:

The big banks can’t get rid of their riskiest assets fast enough.

Deutsche Bank is selling €16-billion ($21.6-billion) of risk-weighted assets stuffed in a credit portfolio, according to International Financing Review.

The sale is part of a €100-billion endeavour by the German bank to unload some of its riskiest assets and get capital levels up to snuff. Under Basel III, global banks must have tangible common equity that amounts to at least 7 per cent of their risk-weighted assets, and Deutsche was one of the worst capitalized banks at the height of the financial crisis.

And the European financial transaction tax is having the expected effect:

Half a century after a U.S. tax on bond purchases spawned the $3.7 trillion-a-year Eurobond market, Europe’s plan to impose a levy on financial transactions risks triggering a similar flight.

Against the objections of nations including the U.K. and Luxembourg, European Union finance ministers agreed Jan. 22 that interested member states may design a broad-based tax that would cover trades in stocks, bonds, derivatives and other securities. The EU estimates the proposal would allow France, Germany and nine other countries to raise as much as $47 billion a year.
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The Eurobond market, now the largest forum for corporate fixed-income transactions, came into being after President John F. Kennedy imposed a so-called interest-equalization tax in 1963 to make investing in foreign securities less alluring to U.S. investors and ease a balance of payments deficit.

Italy’s Autostrade per l’Italia SpA issued the first Eurobond in July 1963, a $15 million issue managed by S.G. Warburg, according to “The Eurobond Diaries,” a market history published in 1994. The U.S. move drove bond trading to London, where an unregulated market arose. So-called Belgian dentists, shorthand for wealthy entrepreneurs whose customers paid in cash, bought corporate debt and rode the “coupon train” to Luxembourg to collect interest, according to Mint Partners Ltd. bond broker Bill Blain, who joined Morgan Stanley in 1985.

“It was all driven by tax,” he said. “Who would have thought Europe would be so stupid as to actually do this now?”

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets down 7bp and DeemedRetractibles gaining 2bp. Volatility was low. Volume was high.

There was a decent US jobs number:

Hiring increased in January after accelerating more than previously estimated at the end of 2012, evidence the U.S. labor market was making progress even as lawmakers quarreled over the federal budget.

Payrolls rose 157,000 following a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed today in Washington. The revisions added a total of 127,000 jobs to the employment count in November and December. The jobless rate increased to 7.9 percent from 7.8 percent.

The BooHooHoo brigade is in full cry, as MBIA sues Credit Suisse for facilitating MBIA’s incompetence:

Credit Suisse Group AG (CS) bundled hundreds of mortgages into a single set of securities sold to investors in 2007 even after it had found flaws with the loans and asked the lenders to repurchase the debt, bond insurer MBIA Inc. (MBI) said in a court filing.

That practice was one way Zurich-based Credit Suisse maximized profit as the U.S. mortgage market melted down, while exposing investors and guarantors to losses, MBIA said in an amended complaint filed Jan. 30 in New York State Supreme Court as part of its 2009 suit against the bank. The filing cites documents obtained through the pretrial exchange of evidence.
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Even while Credit Suisse maintained a “watch list” of problem loan sellers, it never stopped including their loans in securitizations, MBIA said. More than 2,600 of the loans securitized in the transaction MBIA insured, or 15 percent, were from originators on the watch list, according to the amended complaint.

I mentioned Indalex briefly on June 23, 2011, when Moody’s expressed concern regarding an apparent shuffling of creditor priorities in bankruptcy.

Moody’s said a review of 84 Canadian industrial companies it rates found two companies — Air Canada and Essar Steel Algoma Inc. — whose debt might be vulnerable to downgrade if the Ontario court decision is upheld by the Supreme Court of Canada. The report said the impact would likely be limited and would affect ratings of specific debt instruments rather than a company’s overall credit rating.

Now the Supreme Court has ruled for a much smaller shuffling:

The Supreme Court of Canada has ruled that the U.S. parent of an insolvent Toronto company is entitled to the Canadian entity’s last $6.75-million, instead of a group of the firm’s retirees, whose pensions were cut after their employer went under.

The court’s ruling in the case of Indalex Ltd., which plunged into bankruptcy protection in 2009, was is expected to have broad implications for other companies and pension plans across the country.
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While many cheered that Ontario ruling as a breakthrough victory for pensioners, bankruptcy law experts warned the decision would radically reorder Canada’s insolvency regime. They said it could make it more difficult for struggling companies with large defined-benefit pension plans to borrow the money they need to weather financial storms.

Normally, in the scramble for money after a company has filed for bankruptcy protection under the federal Companies’ Creditors Arrangements Act, pension plans rank far below the banks and hedge funds that lend last-ditch money to distressed companies. These “debtor-in-possession” or DIP loans usually come on the condition of a court-ordered guarantee they will be repaid first.

Indalex, an aluminum processor, had a $6.75-million pension shortfall when it entered bankruptcy protection. But all of the cash from the sale of its assets was bound for the company’s U.S. parent, Sun Indalex Finance LLC, to cover some of its costs for paying back DIP loans made to Indalex by a group of banks.

It seems entirely reasonable to me that DIP loans should have priority. Who would make DIP loans otherwise?

Although it ultimately determined that the DIP lenders rank first because the court orders that grant them priority come under a federal law, the court also surprised observers by ruling the full amount of a pension shortfall at a plan’s windup should be considered a “deemed trust” under Ontario’s pension law. That could push pensioners’ demands further ahead in the line of creditors, but still second to DIP lenders.

I got a little curious – it seems that at least one of the two plans was underfunded back in 2007:

On December 31, 2006, Indalex Limited, an aluminum extrusions manufacturer, wound up the retirement plan for its salaried employees (the “Salaried Plan”). Seven members of the Salaried Plan were members of the United Steelworkers. At the time of the plan windup, the Plan was underfunded. Indalex made special payments in 2007, 2008 and 2009 to partially pay down the deficiency, but at the end of 2008, the deficiency in the Salaried Plan was $1,795,600.

But here’s the thing that interests me: The 2004 Collective Agreement negotiated by Steelworkers only mentions the pension plan in terms of current contributions; there is no language that addresses the underfunded status of the plan (I’m not sure if it was, in fact, underfunded in 2004). Further, a 2007 Steelworkers press release trumpets the 2007 negotiations in terms of wage increases and call-out times, but again there is no mention of the underfunded status of the plan.

So I’m curious: do the unhappy pensioners have cause to be angry with their union? The Steelworkers have issued a press release calling for legislation to put pensions ahead of even DIP financers (so who would ever make a DIP loan?) but what did the union do or what could the union have done to be more proactive?

It was a day of uneven gains for the Canadian preferred share market, with PerpetualPremiums up 2bp, FixedResets winning 27bp and DeemedRetractibles gaining 3bp. The Performance Highlights table, though short, was suitably skewed towards winning FixedResets. Volume was average.

ZeroHedge squared its rot for a good booHooHoo about the Litvak charges mentioned on January 28:

Since for the most part, the buyside traders operated with other people’s money, they were largely indiscriminate on the fine pricing nuances of the acquisition (or disposition) of the securities at hand, and while to the “other people’s money” under management whether a given bond was bought for 55 or 55.75, or a given MBS was sold for 72-6 or 72-16 meant little (after all the trade was driven by a big picture view that the security would go up or down much more and certainly enough to cover the bid/ask spread, resulting in much larger profits upon unwind), the transaction price had a huge impact for the bank traders-cum-salesmen arranging said deals. Because when one is selling a $40 million MBS block, a 1 point price swing equals a difference of $400,000. Make 15 such deals per year, and one’s $1,000,000 bonus (assuming a ~15% cut on the profits) is in the bag.

Golly! Whoever would have thought that the sell-side exists to make money?

I once had a buy-side trader tell me he didn’t care much about the pennies – if he got the direction right, he’d do just fine. His intention was to impress me with how much of a gun he was – and to sneer at my scrabbling in the dirt for pennies – but it didn’t work out that way.

Sadly, we have not yet been informed regarding the identities grossly incompetent (or negligent. One of the two.) buy-side traders in the Litvak case; nor does it appear that action will be taken against them for their dereliction of duty. Performance, schmerformance.

The Canadian preferred share market ended the month on a downbeat, with PerpetualPremiums dipping 2bp, FixedResets down 8bp and DeemedRetractibles off 1bp. Volatility was low. Volume was very heavy.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 2bp, FixedResets up 11bp and DeemedRetractibles off 1bp. Volatility was low. Volume was well above average.

Everything you ever suspected about municipal employees is true:

The City of Hamilton fired 29 public-works employees Monday for time theft, breach of trust and neglect of duties.

The employees, frontline road-maintenance workers whose main duties involve filling potholes, used company time and vehicles to “go to shopping malls, go to coffee shops, go have a snooze in the park,” according to Councillor Lloyd Ferguson, chair of the public-works committee.
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On one work day, the private investigators found one crew only worked for 30 minutes, Mr. Ferguson said.
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he investigation isn’t over yet; now the city’s public-works managers and internal auditing staff are interviewing supervisors and doing a full forensic of work records to understand how this alleged deception took place. Supervisors could face discipline, too.

“The supervisors should know what they assign in the morning and what’s done at the end of the day. They should be going around to these job sites and checking on their crews,” Mr. Ferguson said.

But that still leaves the question of what happened to the asphalt the crews were to use to repair roads. “If they took 10 tons of asphalt in the morning and brought back nine and a half at the end of the day, it would draw attention to them,” Mr. Ferguson said. “So that’s one of the other things we’re investigating is the dumping of asphalt.”

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets off 5bp and DeemedRetractibles gaining 4bp. Volatility was above average and skewed to the upside, but there was no clear pattern. Volume was quite heavy.