Category: Market Action

Enbridge Inc., proud issuer of many preferred shares, is issuing equity:

Enbridge Inc. (TSX:ENB) (NYSE:ENB) today announced that it has entered into an agreement with RBC Capital Markets and Scotiabank (“the Underwriters”) to sell 10,850,000 treasury common shares, on a bought deal basis, at $46.11 per common share for distribution to the public. Closing of the offering is expected on or about April 16, 2013.

Enbridge has granted the Underwriters an option, exercisable at any time up to 48 hours prior to closing of the offering, to purchase up to an additional 2,170,000 treasury common shares at $46.11 per common share.

“Since the long-term funding plan discussed at our investor conference last fall we have achieved greater than expected progress in the development of attractive new growth opportunities, including those already announced and those yet to be” said J. Richard Bird, Enbridge Executive Vice President, Chief Financial Officer & Corporate Development. “An update to our funding plan now indicates an incremental equity requirement over the 2012-2016 period. The common share offering today continues our practice of maintaining a very manageable forward funding requirement. After the common share offering, and our recent preferred share issue, our net forward equity requirement stands at $1.9 billion through 2016, which we expect to accommodate through additional preferred share issues and asset monetizations. The additional growth investments will contribute to sustaining Enbridge’s industry-leading EPS growth rate through 2016 and well beyond.”

Today’s prize for precious handwringing goes to The Chartered Institute for Securities & Investment:

Thousands of financial sector workers risk being frozen out of the industry unless they pass mandatory tests measuring their personal ethics and integrity.

The Chartered Institute for Securities & Investment (CISI), a London-based professional body for individuals working, or seeking careers in wealth management and capital markets around the world, wants all of its members to undergo integrity screening or face losing their membership, as it battles to restore public faith in finance.

Until now, only individuals offering financial advice had to take such a test as a condition of their CISI status and to comply with U.K. rules on how investment funds are sold to savers.

Bankers working in areas like corporate finance and mergers and acquisitions, and traders in bonds, shares and derivatives have no such regulatory requirements imposed upon them.

But CISI said on Tuesday that systematic checks on the ethics and integrity of workers across the entire financial services industry were long overdue.

Sadly, it is impossible to determine integrity through a test. Ten percent of any population will cheat as soon as they think they can get away with it. Ten percent will not cheat, no matter what happens. The rest might cheat, given the right combination and severity of circumstances. And you cannot tell in advance who is who. The instigators of this paperwork exercise recognize this, but are doing it anyway:

Martin Wheatley, head of Britain’s Financial Conduct Authority, welcomed the CISI initiative but skeptics said the test would only prove that bankers know how they should act, not whether they actually would apply those ethics on a daily basis.

“No test can guarantee how someone will behave subsequently. But our aim is to make people aware of how they should behave when faced with difficult situations,” Mr. Culhane said.

There was a wide disparity among type in the Canadian preferred share market today, with PerpetualPremiums up 7bp, FixedResets winning 20bp and DeemedRetractibles flat. Volatility was on the low side, but comprised entirely of winning FixedResets. Volume was high and all top-six places were held by FixedResets.

Europeans are encountering Money Market angst:

Investors in Europe risk losing a haven as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley break a taboo that’s stopped 88 billion euros ($113 billion) of money-market funds from ever losing principal.

The banks are preparing to abandon the policy that investors get one euro back for every one they put in as government bond yields near record lows make it harder for the funds to generate returns.

A money-market fund failing to repay investors in full is said to “break the buck” and is forced to shut down. To avoid this, banks propose to change rules governing the investment vehicles so they can pass on losses to investors by reducing the number of shares outstanding in a fund, without closing.
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Benchmark German bond yields are close to record lows, with the rate on Germany’s two-year bond at minus 0.001 percent, up from minus 0.023 on March 28, data compiled by Bloomberg show. France’s two-year security is yielding 0.145 percent, up from a record-low 0.03 percent in December.

Since the ECB cut the deposit rate to zero in July, money- market funds that are restricted to buying short-term debt generated almost no extra cash, putting pressure on their goal to provide a sanctuary for investors. The seven-day yield on funds that buy euro government securities was zero percent for the week ended March 22, according to research firm iMoneyNet Inc.

Prime funds, which take more risk and can also invest in bonds issued by the highest-rated banks and companies, made 0.02 percent. Since Jan. 4, euro money funds have seen assets under management fall by 7.1 billion euros to 87.9 billion euros, Westborough, Massachusetts-based iMoneyNet data show.

Here’s some good energy business news, amidst all the unhappy headlines:

Canada is pulling ahead of the U.S. in a contest to be the first exporter of liquefied natural gas from the North American shale bonanza to Asia’s $150 billion LNG market.

An LNG terminal being built at a cove north of Vancouver financed by a Houston private-equity firm is scheduled to begin shipping the fuel across the Pacific Ocean in mid-2015, eight months before the first continental U.S. plant is slated to start. Canada’s government has approved twice as much LNG export capacity as its southerly neighbor, evincing a friendlier attitude toward selling domestic gas to the highest bidder and positioning the nation as the go-to source of gas in North America for overseas buyers.
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After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the federal government suspended reviews of all other applications so it could study the potential impacts of overseas sales on domestic energy prices. There are now 19 proposed U.S. LNG projects awaiting export permits, with the longest on hold for 28 months.

In contrast, Canada, which has seen a similar surge in gas production, issued its third LNG export license in February for a project led by Royal Dutch Shell Plc (RDSA) in British Columbia. All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S., according to data compiled by Bloomberg.

This is better than the usual story:

Canada stands to lose out on more than $50-billion over a three-year period because of oil pipeline constraints, one of the country’s major banks projected today as it urged President Barack Obama to approve the controversial Keystone XL project.

That figure from CIBC World Markets represents lost opportunities, in terms of producer revenues and government royalties.

Economist Peter Buchanan forecasts that this “money left on the table” will be about $20-billion this year, $15.2-billion in 2014 and $16.5-billion a year later.

DBRS updated its report on Husky, proud issuer of HSE.PR.A:

DBRS has today updated its report on Husky Energy Inc. (Husky or the Company). Husky’s credit quality is supported by its: (1) conservative financial profile, (2) integrated operations and (3) medium- to long-term exploration and production (E&P) growth potential.

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term, with minimal impact on credit metrics.
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DBRS also notes that the Company has updated its financial and operational targets from those initially set out in December 2010. DBRS believes that these targets are largely achievable, contingent upon Husky’s ability to execute its medium- to longer-term growth projects. DBRS expects that the Company will continue to manage its financial profile conservatively, in order to achieve the stated targets.

It was a slow drift upwards for the Canadian preferred share market, with both PerpetualPremiums and FixedResets gaining 3bp and DeemedRetractibles up 4bp. Volatility was low. Volume was a hair below average, with low-Issue Reset Spread BNS FixedResets seeing a fair bit of shuffling.

PerpetualDiscounts now yield 4.86%, equivalent to 6.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a bit below 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) increase from the 205bp reported March 27.

This may sound like a joke, but it’s actually a big deal:

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
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Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Previously, you had to issue a press release; in Canada, that generally (maybe always?) means you have to go through MarketWire or NewsWire, the two major agencies that distribute press releases.

Those two companies – the list is probably a little longer in the States! – have a history: if you issue through these places, you know you’re not going to get in trouble with the regulators for selective disclosure, whereas if you go to Honest Jimmy’s Press Release Distribution Service … you might. So what the established companies are really selling is safe harbor …. and boy-oh-boy, do they ever charge through the nose for it!

Now there are more safe harbours … FREE safe harbours! In the great scheme of things, potential savings from reduced press release costs probably won’t boost Royal Bank’s stock price much … but for smaller companies, every penny counts!

The feds have clarified the budget’s bail-in musings that were mentioned here yesterday:

“The bail-in scenario described in the Budget has nothing to do with depositors’ accounts and they will in no way be used here,” Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk said in a statement Tuesday. “Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.”
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“The [Canadian] bail-in regime is to protect both taxpayers from having to bail out banks and depositors from having to take a financial hit like we’ve seen in Cyprus,” Ms. Perchaluk said. “If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.”

It’s a pity that the Globe’s reporter, Grant Robertson, has no idea of what bank regulation is all about and didn’t speak to anybody who does – he perpetuates the following confusion:

Under the proposed Canadian plan, banks would set aside contingent capital, such as shares, which could be quickly converted to cash to provide liquidity and stabilize their operations should a crisis hit.

However, it is charming that Spend-Every-Penny’s mouthpiece, Kathleen Perchaluk, has such faith in the CDIC. As mentioned on March 27 (and on other occasions!) the CDIC’s reserves are far too small to even begin to cope with the collapse of a major bank.

John Greenwood of the Financial Post not only knows more about bank regulation, but actually talked to people who knew more than him:

According to one senior fixed-income analyst, Ottawa has its eye on senior unsecured debt issued by banks. Popular with institutional fixed-income investors, the product is widely traded and makes up a big chunk of the domestic bond market.

So far it’s only a proposal in the budget and a vaguely worded one at that, but “everyone is taking the government at their word and hence the market is coming to terms with whether or not to buy it and at what price,” said the analyst, who asked not to be named.
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Critics worried that investors may not buy it at a price that the banks consider affordable and the banks themselves have said they have reservations. In any case, the banks haven’t issued any yet. One interpretation of the budget is that Ottawa is looking to nudge the process forward.

The last one probably won’t be a big worry. The bank-owned TMX will be “encouraged” by the bank regulator to include the so-called bonds in the index which will virtually guarantee a market.

It was a day of modest losses for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 1bp and DeemedRetractibles down 3bp. There was no volatility – none. Volume was below average.

Assiduous Reader KL was intrigued by my note on OSFI’s target for depositor recovery on March 27 and passed along a few links.

A US stockbroker pointed out (with assistance from a goldbug) that the federal budget contained (pages 154-155 of the PDF) the following:

The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

• Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.
• The Government proposes to implement a ―bail-in‖ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
• Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail”.

Both commentators assumed that the word “liabilities” in the second point means “deposits”, which could ultimately be the case, of course (particularly for uninsured deposits), but for now can be taken to mean “contingent capital” – Garth Turner has it right, just as a change of pace.

While there is no clarity yet, the budget announcement is probably a signal that the feds have bought into the Ban the Bond Movement and that soon all bank bonds will be contingent capital; hey, who needs bankruptcy law anyway?

The first and third points of the three-part process refers to OSFI’s inadequate provision for D-SIBs.

Speaking of totally inadequate government agencies, the Toronto Transit Commission’s CEO Report for 12Q4 just came to my attention, with the following commentary regarding streetcar service:

The last two weeks of Period 12 (December Board) saw high levels of insufficient workforce due to vacation, resulting in numerous cancellations due to no Operator. The resulting cancelled service contributed to delays, longer trip times, and ragged headways.

Is there any doubt but that the TTC is grossly mismanaged? Is there anybody employed at the TTC who could run a three-house paper route?

DBRS confirmed CU at Pfd-2(high) [Stable]:

DBRS has today confirmed the Issuer Rating and the ratings of the Unsecured Debentures, Cum. Preferred Shares and Commercial Paper of Canadian Utilities Limited (CU or the Company) at “A,” “A,” Pfd-2 (high) and R-1 (low), respectively, all with Stable trends. The confirmations reflect CU’s relatively stable business risk profile, strong financial profile and the credit quality of its primary subsidiary, CU Inc. (CUI; rated A (high)). The one-notch differential in the ratings of CU and CUI reflects structural subordination at CU.
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DBRS assesses CU’s financial profile based on a non-consolidated basis. CU is expected to continue to support the significant capital expenditure program at CUI (approximately $2 billion annually from 2013 to 2015) with debt and preferred shares issuances over the medium term. As of March 25, 2013, the Company has approximately $900 million of preferred shares outstanding (including a $175 million issuance in March 2013). Pro forma the $175 million issuance, $145 million of CU’s outstanding preferred shares are treated as debt by DBRS in the adjusted debt-to-capital calculation (with a pro forma adjusted debt-to-capital ratio of approximately 9%). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferred) is treated as debt. DBRS expects the Company to continue to maintain its non-consolidated adjusted debt-to-capital ratio in line with the 20% threshold on a non-consolidated basis. Should CU exceed the 20% threshold, this could result in negative rating implications

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets down 23bp and DeemedRetractibles off 1bp. Volatility was average. Volume was low.

A bit of good news on the regulatory extortion front – a US judge is questioning the SEC / SAC Capital settlement:

SAC Capital Advisors LP will have to wait to learn if its $602 million insider trading settlement with the Securities and Exchange Commission can go forward, after a Manhattan judge raised questions over a provision that allows SAC to avoid admitting it did anything wrong.

SAC and the agency asked Marrero today to approve the agreement, which is the SEC’s biggest insider trading settlement in history. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.

U.S. District Judge Victor Marrero today expressed concern about the SEC’s use of the provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. (C) in 2011. Marrero said today he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. appeals court in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.

There’s some new progress on atmospheric carbon dioxide extraction:

“What this discovery means is that we can remove plants as the middleman,” said Adams, who is co-author of the study detailing their results published March 25 in the early online edition of the Proceedings of the National Academies of Sciences. “We can take carbon dioxide directly from the atmosphere and turn it into useful products like fuels and chemicals without having to go through the inefficient process of growing plants and extracting sugars from biomass.”

The process is made possible by a unique microorganism called Pyrococcus furiosus, or “rushing fireball,” which thrives by feeding on carbohydrates in the super-heated ocean waters near geothermal vents. By manipulating the organism’s genetic material, Adams and his colleagues created a kind of P. furiosus that is capable of feeding at much lower temperatures on carbon dioxide.

The research team then used hydrogen gas to create a chemical reaction in the microorganism that incorporates carbon dioxide into 3-hydroxypropionic acid, a common industrial chemical used to make acrylics and many other products.

It’s tough to get ahead in the investment business. Talent isn’t enough. Hard work isn’t enough. You’ve got to have that little extra something:

Wells Fargo & Co. (WFC), the most valuable U.S. bank, paid a board member’s son about $1.4 million last year for his work in a unit responsible for investing deposits.

Scott P. Quigley, 44, received the compensation as a manager in the principal investments group, according to the San Francisco-based lender’s most recent proxy filing. His father, Philip J. Quigley, a Wells Fargo director since 1994, is retiring from the board in April. Scott Quigley declined to comment, and his father didn’t respond to messages seeking comment. The bank declined to make them available.

Canadian inflation remains low:

The country’s consumer price index rose 1.2 per cent in February from a year earlier, quickening from a 0.5-per-cent increase in January, Statistics Canada said Wednesday. It also climbed 1.2 per cent from a month earlier, the fastest monthly pace of inflation since 1991.
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Transportation costs led the annual increase, advancing 2 per cent, spurred by higher costs at the pump, and as rebates disappeared at car dealerships. Food prices accelerated to 1.9 per cent after a 1.1-per-cent gain in January as consumers paid more for meat and fresh fruit. The cost of fuel oil also rose.

OSFI has come out with another Planning Report Produced Because It’s Expected Of Us Because Of Some Kind Of Governance Thingy. Of great interest is their targetted depositor recovery on default:

I wonder if anybody’s told the CDIC that OSFI will give itself a pat on the back if depositor recoveries in the event of the failure of a major bank exceed 90%? Hmm … CDIC has about 2.4-billion in cash and investments on the books … the smallest of the Big Six Banks, National Bank, has about 93-billion in deposits on its books … well, let’s just hope that none of the big six fail, that’s all!

Regulatory lawyers are continuing their campaign to destroy the corporate bond market:

Are there steps that can or should be taken to facilitate exchange trading of corporate bonds and other fixed income securities? Were ATSs required to disseminate pre-trade pricing information, would there be an impact on exchange trading of corporate bonds? If so, what would be the impact?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues, such as exchanges or ATSs that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in these markets?
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Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined for corporate bond or other fixed income transactions? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their fixed income security transaction?

All the questions assume that corporate bond financing exists in some kind of bubble world, unaffected by competition from other venues and private placements.

Lauren Lambie-Hanson at the Boston Fed asks the question When Does Delinquency Result in Neglect? Mortgage Delinquency and Property Maintenance:

Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures.

“Disamenities”?

Nice perspective on Cyprus:

For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than 4-billion euros, a huge amount in a country with a gross domestic product of just 18-billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

[Kikis] Kazamias, the finance minister at the time of the Greek bond write-down, said he had little idea of just how badly the move would hurt his country’s banks.

“We worried but we never received any information that this was a red line” that should not have been crossed, he said. The Cypriot government, he added, initially calculated that “we were in a position to cover the losses,” and it was only later, after depositors began to flee and the Cyprus economy stalled, that “we found out that this was impossible.”

Spend-Every-Penny’s going to start choosing his new lap-dog next week:

Finance Minister Jim Flaherty should receive a short list of candidates to replace Bank of Canada Governor Mark Carney after a meeting of the central bank’s board of directors next week, said two people familiar with the plans.

Flaherty will get the list after the two-day meeting in Ottawa, said the people, who asked not to be identified because the discussions are private. Flaherty, who has said that the announcement could be made in April, will then interview the people on the short list, with the appointment to be approved by Prime Minister Stephen Harper and his cabinet.

The bank’s outside directors have been reviewing candidates after posting the job Jan. 7, following Carney’s surprise November announcement he would leave his job June 1 to take over the Bank of England. Analysts at JPMorgan Chase & Co. have said the most likely replacements are Senior Deputy Governor Tiff Macklem and Export Development Canada Chief Executive Officer Stephen Poloz.

Want the job, boys? Roll over! Beg! Copy the highlights from my next speech into your next speech!

It was a modestly positive day for the Canadian preferred share market, with PerpetualPremiums winning 6bp, FixedResets gaining 2bp and DeemedRetractibles up 5bp. Volatility was reasonably good. Volume was heavy.

And that’s it for another month! Malachite Aggressive Preferred Fund is now 12 years old – Happy Birthday!

Nothing happened today.

It was another positive day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets roaring ahead by 17bp and DeemedRetractibles up 4bp. Volatility was average, but comprised entirely of FixeReset winners. Volume was well above average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, unchanged from the figure reported March 20.

In a move sure to be applauded by crypto-Stalinists everywhere BMO will not advertise its prices:

Bank of Montreal will not extend its 2.99 per cent five-year fixed mortgage rate offer past its expiry on March 28, with the country’s lenders under pressure from Finance Minister Jim Flaherty not to engage in a mortgage price war.

Consumers can still obtain lower rates than this from a variety of mortgage lenders, including other large banks, which routinely offer discounts from their posted or advertised rates. But Bank of Montreal was the only one of the big five banks to cut its posted rate on five-year fixed mortgages below 3 per cent, a move that it advertised heavily.

The bank has long lagged rivals when it comes to market share in the mortgage arena, and has been seeking to get ahead. Mr. Flaherty appeared to be concerned that borrowers would be persuaded to take on more debt than they can chew, potentially heating up the housing market, which he has been seeking to cool.

Some might argue that posted rates affect everybody, including those who are in the twentieth year of their twenty-five year amortization and have loan-to-value ratios of 10% and that seeking to avoid heating up the housing market might best be done through broad-brush monetary, economic and regulatory levers (such as reducing the immense supply of mortgage insurance; such as imposing capital surcharges on bank asset proportions that are widely divergent from historical norms) is preferable to micromanaging; but those people are probably just old poops who don’t appreciate the awesome toughness of our beloved federal finance minister.

The BRICS are going ahead with their own bank:

With just a couple of small gestures at their annual summit, the world’s biggest emerging economies have made the West seem a little less indispensable.

On the summit’s first day, the BRICS bloc of nations has approved a new development bank to compete with Western-dominated institutions such as the World Bank. And on the sidelines, China and Brazil announced a currency-swap agreement worth $30-billion (U.S.) that will allow them to conduct trade in each other’s currencies without needing the U.S. dollar.
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The new BRICS-led bank, designed to lend money for infrastructure projects across the developing world, is the biggest step that BRICS have taken to challenge the global financial system since the bloc’s first formal summit in 2009. Another key step could be an agreement on a currency crisis fund, based on pooled foreign-exchange reserves of up to $240-billion, which the BRICS nations are negotiating.

The new BRICS bank is seen as a potentially crucial source of funds for African infrastructure projects. It is often touted, for example, as a likely financier for a massive expansion of nuclear energy in South Africa, a goal of many politicians here. And it could be useful for cross-border projects, which tend to be neglected by traditional creditors.

This is good news. It is clearly better engineering to have a variety of relatively small points of failure, rather than just one.

Taxing depositors was a novel idea and has given the Egyptians the idea of taxing takeovers:

gypt rattled investors on the Cairo stock market on Tuesday by unexpectedly announcing that a takeover of its second biggest private bank would be subject to a new capital markets tax.

Shares in the bank, National Société Générale Bank, which is being taken over by Qatar National Bank, tumbled by their legal limit of 10 per cent and helped pushed Cairo’s benchmark index down to its lowest level since December.

Is it any wonder that Egypt’s in trouble?

Moody’s Investors Service Inc. cut Egypt’s credit rating on Thursday, citing unsettled political conditions and public finances, which it said raised the chance of a default within five years to nearly 40 per cent.

The Egyptian economy has been in crisis since the overthrow of Hosni Mubarak in 2011, with Islamist President Mohamed Mursi’s cash-strapped government grappling with sliding currency reserves, dwindling tourism, a soaring budget deficit and a wave of often violent street protests.

DBRS commented on the Cypriot deposit tax:

However, the announcement that insured Cypriot depositors would be taxed was new and wholly unexpected. (Senior bondholders were also written down, representing a significant shift in ECB policy.) If the proposal had targeted only uninsured depositors holding accounts of over EUR100,000 – the proposal was to tax them at 9.9% – it may still have led to deposit flight. But targeting both large and small depositors represented the first time that depositors in the Euro zone would take losses to shore up failing banks. The taxation of depositors in a Euro zone country is not a credit event, since Cyprus continues to honor its debt payments. However, the surprise announcement of the imposition of losses on legislation that was considered safe recalls the losses imposed on sovereign bondholders during last year’s Greek restructuring, the first default of a Euro zone country.

The rapid spread of bank runs, bankruptcies and systemic crisis that culminated in the failure of Lehman Brothers in the fall of 2008 led to the introduction of extraordinary deposit insurance in Europe. Insurance provided the protection to small depositors needed to reestablish calm following the panic of 2008 and 2009. The notion that small Cypriot depositors could be taxed implied that Cyprus was viewed by the troika as being not systemic, and therefore that a run on Cypriot deposits was unlikely to spread to other Euro zone countries. Nothing could be further from the truth. During the current period of low to no growth in Europe, it is certainly possible that a run on Cypriot deposits could spread, in spite of existing or future controls on capital.

It was a good day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets winning 16bp and DeemedRetractibles gaining 7bp. Volatility was minor. Volume was above average.

In the wake of yesterday’s DBRS downgrade to Pfd-4(high), INE.PR.A, a FixedReset, was down 5.56% (total return – it went ex-dividend) and INE.PR.C, a PerpetualDiscount, was down 4.05%.

Cyprus has reached an agreement for an orderly bank default:

Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.
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With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the Mediterranean island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second largest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

So yet again governments are finding that 500 years of bankruptcy law has become inconvenient and are rewriting it on the back of a napkin.

It is interesting to compare the current plan with past assurances:

Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers.

An earlier WSJ blog post about the previous deal noted:

The euro zone has to far carefully avoided burning senior bondholders during a bank restructuring. Doing so was seen as too destabilizing for the bloc’s credit-starved financial system. On top of that, in many countries senior bondholders have the same status as bank depositors when it comes to getting repaid.

However, the thinking on senior bondholders has become to change. In July, when the euro zone negotiated a bailout for Spain’s banks, the European Central Bank argued that they should be “bailed in” in cases where a bank is so sick it needs to be closed. At the time, the European Commission insisted senior bondholders would remain protected and the euro zone’s commitment to do so wasn’t tested, since none of the Spanish cajas were ultimately wound down.

With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital.

With relatively little money to gain, officials decided that breaking two taboos — taxing depositors and burning senior bondholders — in one go, didn’t seems like a good idea.

Over the next few weeks, we’ll start to understand how this will affect investor confidence:

The European Union’s decision to recapitalize Cypriot banks by inflicting losses on depositors and senior bondholders is triggering investor concern that bank funding across the region will be hurt.
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With the exception of Denmark in 2011, senior bank bondholders, like depositors, have avoided losses in the financial crisis. In February 2011, Amagerbanken A/S collapsed and senior creditors initially lost about 40 percent. It was the first time senior bank bondholders in the EU underwent a so-called haircut in an orderly resolution and the event left most Danish lenders shut out of wholesale funding markets.

The cost of insuring against losses on financial debt surged last week amid concern senior bondholders will be included in future bank bailouts. The Markit iTraxx Financial Index of credit-default swaps jumped 34 basis points to 176, the highest in four months. The gauge was at 174.5 basis points at 2:40 p.m. in London.

There’s a lot of concern:

“We’re in an environment where in both North America and Europe we have some serious policy decisions that have to take place,” Ron Florance, the Scottsdale, Arizona-based managing director of investment strategy at Wells Fargo Private Bank, which has $169 billion assets under management, said in a phone interview. “When a policy misstep is bad it’s real bad, and the discussions last week were really bad decisions. That’s been resolved, but it always puts people on edge.”
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Stocks turned lower as Dutch Finance Minister Jeroen Dijsselbloem said troubled lenders in the euro area must now fend for themselves as part of future euro rescues. German advisers cut the nation’s 2013 economic growth forecast to 0.3 percent, from its previous estimate of 0.8 percent, citing “the sharp decline” of gross domestic product in the fourth quarter of 2012.

It’s an ill wind that blows nobody any good:

U.S. hedge funds Pine River Capital Management LP, Millennium Management LLC and SAC Capital Advisors LLC are taking advantage of the struggle of European startup funds to grab their pick of the region’s traders.

The three firms, which manage a combined $46 billion, have over the past year all hired employees from hedge funds started by former European bankers, according to regulatory records and people with knowledge of the matter. They joined from firms including Edoma Partners LLP, Occitan Capital Partners LLP and Portman Square Capital LLP, London hedge funds that have either shut down, posted losses or failed to meet their fundraising goals, said the people, who declined to be identified because the companies are private.

Rather than betting that Europe’s sovereign debt crisis is over, the U.S. funds are selectively hiring top traders, some who quit their jobs at banks last year as their employers cut back on risk-taking and bonuses. The search has been made easier as the crisis forced lenders to cut jobs, pushed funds into losses and prompted investors to pull money from unprofitable managers, recruiters and executives said.

Meanwhile the BRICS are discussing a long-overdue global governance change:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility was basically non-existent; volume was average.

Forty! Forty! Forty!:

In its Budget 2013, the government says it’s ready to pounce on “continued low historic rates” and is now assessing the potential of issuing bonds for 40 years  – or  even longer.

“As long-term interest rates remain near historic lows, it remains advantageous and product for the government to continue to lock in additional longer-term funding,” the government says in the document.

Up until now the longest term for a government debt issue has been 30 years but the provinces have been pushing the envelope with longer terms and now Ottawa is considering follow their lead.
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But Ottawa itself seems to like what it sees in the long-term debt market. Just this month New Brunswick issued $225-million in debt at a 3.5% rate that doesn’t mature until June 3, 2065. Quebec issued debt last year that doesn’t mature until 2075.

Looks like I was right yesterday in my musing regarding the end of synthetic tax conversion funds:

This week’s federal budget set the stage to eliminate the tax advantages enjoyed by mutual funds and exchange-traded funds that use derivatives to convert interest income into capital gains.
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Prominent examples of mutual funds that employ these types of strategies include the $3.2-billion Renaissance Corporate Bond Capital Yield , the $1.1-billion Fidelity Canadian Bond Capital Yield and the $843-million TD Corporate Bond Capital Yield .

Also affected by the proposed changes are funds in the small Canadian Synthetic Money Market category. One of the largest of these funds is Mackenzie Sentinel Canadian Short Term Yield Class .
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The budget provision will have a minimal impact on the Canadian ETF industry, said Howard Atkinson, chair of the Canadian ETF Association and CEO of Horizons Exchange Traded Funds Inc. The largest Horizons ETF affected is Horizons Active Advantage Yield HAF , with assets of about $9 million.

Atkinson noted that the budget does not affect total-return swaps, such as those employed by the $1.2-billion Horizons S&P/TSX 60 Index HXT , a derivatives-based fund whose current management fee of 0.05% makes it the cheapest fund in the country. Though Finance Minister Jim Flaherty has taken away one type of derivatives strategy from the managers’ toolkits, derivatives remain very much a part of the investment-funds scene in Canada.

The Spanish bank Bankia has recapitalized:

Spain cut the nominal value of Bankia SA (BKIA) shares to 1 euro-cent from 2 euros in a debt swap that will practically wipe out existing stockholders in the nationalized lender.

The holding company BFA will own about 70 percent of Bankia following a 15.5 billion-euro ($20.1 billion) recapitalization approved by the Frob rescue fund today, an official from the fund said at a briefing in Madrid. Investors who bought subordinated debt or preferred shares will end up with about 30 percent of the bank’s stock.

Spain’s bank rescue fund fixed the price as the basis for converting 4.8 billion euros of hybrid securities including preferred shares and 10.7 billion euros of so-called contingent convertible bonds into stock as part of a 15.5 billion-euro recapitalization of the lender, the fund, known as Frob, said in an e-mailed statement today. Bankia has about 2 billion outstanding shares, which closed today at 25 euro cents.

Cyprus has turned to capital controls – the last refuge of failed states:

Cypriot lawmakers approved capital controls and legislation to wind down banks as they scrambled to secure a European bailout and avert a financial collapse of the Mediterranean island.

The parliament passed nine bills late yesterday after a day locked in talks between Cypriot and international officials in Nicosia. Lawmakers may vote later today on what sort of levy to impose on bank deposits above 100,000 euros ($130,000), four days after rejecting an initial proposal to tax all accounts. Banks have been shut all week and are due to reopen on March 26.

Never let it be said that I never say anything nice on this blog! For instance, on March 25, 2009 and again on April 17, 2012, I said nice things about the Hospitals of Ontario Pension Plan (HOOPP). And now there are more nice things to say:

The Healthcare of Ontario Pension Plan (HOOPP) has posted returns for 2012 of 17.1 per cent, which boosted the pension plan for Ontario healthcare workers to a record $47.4 billion in assets, compared to $40.3 billion at the end of 2011. This strong double-digit return increased HOOPP’s 10-year average rate of return to more than 10 per cent, one of the best long-term records among pension plans worldwide.

At the end of 2012, HOOPP was 104 per cent funded – this fully funded status means the Plan has sufficient assets to pay for every promised member’s pension benefit, with no shortfall.

“HOOPP had a very strong year in 2012 – with our best investment results in more than a decade,” says HOOPP President & CEO Jim Keohane. “This was a year when all of our investment strategies worked. We were firing on all cylinders, with positive returns from every type of investment,” he said. HOOPP’s liability driven investment (LDI) strategy continues to contribute to HOOPP’s success, Keohane added.

“Liability Driven Investment” is the cool way of saying “paying attention to your client’s needs”. HOOPP is in a good position to do this, because they have exactly one client and aren’t looking for new ones, despite idiotic initiatives from Premier Dad’s office that would encourage large plans to stock up on salesmen and get rid of those dreary nerds. That’s the real secret – a focus on return made possible by a complete absence of pressure for sales. Then you can fire the moron whose sole useful attribute is being buddies with a large client; then you can do all kinds of things. In an interview with the Star, though, president and CEO Jim Keohane emphasized scale, which is probably more diplomatic.

It was an unevenly positive day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets winning 14bp and DeemedRetractibles gaining 8bp. Volatility was minor. Volume was average.

Assiduous Reader KL sends me a link to a critique titled The Paper World of Brookfield Asset Management. which highlights and illuminates many of the issues surrounding the earnings quality of the company. The piece has been published by something called the Southern Investigative Reporting Foundation, which as far as I can tell is Roddy Boyd’s version of self-employment.

Brookfield recently realized $250-million through the sale of some of its BEP.UN Units and is positioning itself for more secondary offerings with an initial spin-off of $900-million of BPY, which is Brookfield Property Partners. Brookfield has not announced any particular plans for spending the proceeds of the BEP.UN position.

Marc Tellier, son of Canadian business legend Paul Tellier, has parted ways with Yellow Media:

Who needs a phone book when you can Google a company’s phone number?

Some might argue there’s nothing Marc Tellier, Yellow Media’s former chief executive officer who left the company Thursday, could do about this. There’s some truth to that. The journalism industry, for one, has been disrupted by the Internet, too.

However, had Yellow Media been more debt-averse, it would have had time to re-tool its business strategy. Remember that when the company reworked its capital structure last year, its cash flows were still relatively strong – so strong that some shareholders argued the debtholders were forcing a restructuring simply to get a better stake in Yellow Media.

Yet the cash flows could only withstand so much debt, which started to become a major problem in early 2011.

I can’t say I’ll be rushing to invest in Paul Tellier’s son’s next venture. However, I continue to be amazed at how quickly YLO’s revenue dropped once the trouble became apparent.

It was the Federal Budget today … some items were:

The lifetime capital gains exemption is increased to $800,000 (from $750,000) on dispositions of qualified property (e.g., qualified small business corporation shares and qualified farm and qualified fishing property) by individuals effective for the 2014 taxation year. The new limit applies to all individuals, even those who previously used the capital gains exemption.

The amount is indexed for inflation for tax years after 2014.
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The budget will phase out the federal tax credit for investments in labour-sponsored venture capital corporations (LSVCC).
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The budget makes the cost to a taxpayer of renting a safety deposit box from a financial institution non-deductible for income tax purposes.
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The International Banking Centre rules exempt certain financial institutions from tax on certain income earned through a branch or office in Montreal and Vancouver.

The budget proposes to repeal these rules. Eliminating the rules is partially in response to the international community having identified these rules as resembling preferential regimes in some tax havens.
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A character conversion transaction generally involves a forward agreement to buy or sell a capital property at a specified future date. The purchase or sale price of the capital property under the forward agreement is not based on the performance of the capital property between the date of the agreement and the future date, but rather is often based on the performance of a portfolio of investments which would generally produce fully taxable ordinary income. If the derivative investment were made separately from the purchase or sale of the capital property (i.e., as a cash settled derivative financial instrument), any income from the derivative investment would be taxed as ordinary income.

The budget proposes to treat the return as being distinct from the disposition of a capital property that is purchased or sold under the derivative forward agreement. This measure will apply to derivative forward agreements that have a duration of more than 180 days.

Any return arising under a derivative forward agreement that is not determined by reference to the performance of the capital property being purchased or sold will be treated as being on income account.

The income (or loss) will be included (or deductible) in computing income at the time of disposition if the capital property is subject to a derivative forward sale agreement and at the time of acquisition if the capital property is subject to a derivative forward purchase agreement.

I think that last one means the end of those silly Mutual Funds that invest in foreign or fixed income securities via a Total Return Swap to call themselves tax-advantaged. But, not having read the budget or the legislation, I’ll wait to see more third party commentary before making that interpretation firm.

Also of interest is The Securities Regulator That Would Not Die:

The Harper government is serving notice that it will impose a federal regulator on Canada’s securities markets if it can’t win sufficient backing from provinces for a jointly-run approach.

The ultimatum, delivered in the 2013 federal budget Thursday, comes after six years of efforts by Finance Minister Jim Flaherty to build support for a common securities regulator among mostly hesitant premiers.

And, wonder of wonders, Genius Boy is doing something useful about mortgage insurance:

In the federal budget tabled Thursday, Ottawa announced further steps to limit taxpayers’ exposure to the mortgage market by cracking down on banks’ ability to use bulk mortgage insurance as a tool to offset their risks and boost their bottom lines.
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Banks started buying more bulk insurance during the financial crisis because it makes it easier for them to package their mortgages into securities, which ultimately helps them to lend more. But they’ve also been upping their purchases because by insuring mortgages they can reduce the amount of capital they’re required to hold.

Ottawa has been concerned about the growth of mortgage insurance for some time. Last year it capped the total amount of mortgage insurance that CMHC can have in force at $600-billion. As a result, CMHC, which was already creeping up toward that level, began rationing its sale of bulk insurance while maintaining sales levels of standard mortgage insurance (that on loans to borrowers with small down-payments).

I’m relieved to learn that access to bulk insurance is being rationed. After all, if it wasn’t rationed it would have to be auctioned, and this would reduce the power of bureaucrats and politicians to influence who gets to make what profits.

Cyprus might sell energy assets to Russia:

The government also submitted a draft law to create an “investment solidarity fund,” state-run CYBC television reported. The fund is intended to help raise the 5.8 billion euros needed to trigger emergency loans, Athens News Agency reported. Finance Minister Michael Sarris said in Moscow that while Russia won’t lend money to Cyprus, it’s looking at investment in the energy industry.

Russia is in talks over its possible role in the fund, the RIA Novosti news agency reported. President Vladimir Putin held talks in Moscow today with Jose Barroso, head of the European Commission, Putin’s spokesman Dmitry Peskov told reporters.

Earlier, Prime Minister Dmitry Medvedev said Cyprus’s financial turmoil may force Russia to review the share of euros in its international currency reserves, the world’s fourth- largest stockpile.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets down 12bp and DeemedRetractibles ahead 2bp. Volatility was average, enlivened by a ridiculous quote on BAM.PR.C which illustrates the careful attention to detail so prevalent among professional Market Makers. Volume was average.