Category: Market Action

European politicians are talking about a Greek exit:

From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro.

Post-election tumult in Athens has put the once-taboo subject of an exit from the 17-country currency union on the agenda, lifting the veil on possible scenario planning afoot behind the scenes.

“If Greece decides not to stay in the euro zone, we cannot force Greece,” German Finance Minister Wolfgang Schaeuble said at a conference sponsored by German broadcaster WDR in Brussels today. “They will decide whether to stay in the euro zone or not.”

But until that happens, they’re happy to throw good money after bad:

The European Financial Stability Facility’s Board of Directors confirmed the release of 5.2 billion euros ($6.7 billion) from a first installment of 39.4 billion euros by the end of June, the EFSF said in an e-mailed statement today.

An amount of 4.2 billion euros will be disbursed May 10 and the remaining 1 billion euros aren’t needed before June and will be disbursed depending on Greece’s financing needs, according to the statement.

However, this attitude is not shared globally:

China Investment Corp. has stopped buying European government debt because of an economic crisis on the continent, though it continues to look for new investments there, said CIC President Gao Xiqing.

“What is happening in Europe right now is of course of concern,” Gao said yesterday in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”

There has been a victory for shareholder rights:

Telus Corp. … has withdrawn its share-consolidation proposal, conceding its plan faces certain defeat due to the staunch opposition of an activist U.S. hedge fund.

The Vancouver-based telecommunications giant announced that it was nixing its proposal well after midnight (ET) on Wednesday, just hours before it was scheduled to be put to a shareholder vote at the company’s annual general meeting in Edmonton.

This is all the more noteworthy because the Telus proposal was so beloved of the Precious Purveyors of Pusillanimous Punditry.

Julie Dickson, Superintendent of OSFI, gave a speech today titled Being Lulled into a False Sense of Security filled with the usual platitudes. I was, however, interested in the mention of centralized clearing:

Work is underway to achieve centralized derivatives clearing.
…
Many parties advocate that new measures have fixed the problems that led to the global financial crisis. The false sense of security that such a position signifies does not take into account the new vulnerabilities that are likely to arise as a result of the changes we are making to the system today. We must constantly be on our guard to identify these vulnerabilities. An example: Centralized derivatives clearing, which I referenced at the start of my remarks. This is a critical initiative, but also one that poses risks if central counterparties are not appropriately risk proofed. Thus, risk-proofing will be a focus of efforts on all fronts. Another risk is the shadow banking sector. If our focus is only on banks, if we, as regulators, are smug and believe we have everything covered off, we might overlook risks associated with shadow banking. Thus, the Financial Stability Board is also focusing on this important sector.

Canadian banks have an enviable position. It is important we all continue to work hard to maintain that position, recognize the risks to stability in Canada, avoid complacency and not allow ourselves to be lulled into a false sense of security.

I am very pleased that Canadian regulators have discovered a method whereby risk can be eliminated. Hurrah!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 3bp and DeemedRetractibles up 1bp. The Performance Highlights table is comprised entirely of Floaters, which got nailed. Volume was well below average.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.45%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 210bp, a slight widening from the 200bp reported April 30.

The CMHC Annual Report is out. Of particular interest is the table of 5-year financial highlights on page 98 of the PDF … in 2007, there was $345-billion of insurance in force; at the end of fiscal 2011, there is $567-billion. Thanks for inflating the bubble and subsidizing your pals at the banks, guys! To put the figure in perspective, consider this factoid from the Canadian Housing Observer 2011, Chapter 4:

With a contribution of about $330 billion to the Canadian economy, housing-related spending accounted for 20.3% of GDP in 2010, up from 20.1% in 2009.

Gee, it sure is a good thing we’re so much better regulated than those dumb old Americans, eh?

Meanwhile an unfootnoted citation by the G&M states:

CMHC estimates that roughly 25 per cent of condominiums in the Greater Toronto Area are sold but sitting vacant — shades of Miami at the height of its collapsed condo bubble in 2007. Other analysts say the 25 per cent figure may be too low.

Nope, no bubble at all, no sir! Not with Spend-Every-Penny keeping a firm hand at the tiller! For anecdotal support for the phenomenon, try driving along the Gardiner and looking at all the see-through condominiums that now line it. However, if you are driving, DO NOT make notes while discussing your findings on your cell ‘phone! Remember, Smokey the Bear says “Only you can prevent forest fires!”

Meanwhile, the political theatre in Greece continues:

Greece’s Syriza party leader Alexis Tsipras, charged with forming a government, told his pro-bailout counterparts they must renounce support for the European Union- led rescue if there is to be any chance of forging a coalition.

Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their pledges to implement austerity measures by the time he meets with them tomorrow to discuss forming a coalition. Samaras said he would not do so, and would support a minority government if necessary.
…
If Tsipras fails to build a working majority, the onus on forming a government will pass to Pasok. Each mandate can last for three days. If the process still fails to yield a coalition, President Papoulias must try to broker a government of national unity, the constitution says. If that fails, new elections will be held.

“A Greek return to the polls in mid-June looks increasingly likely,” Malcolm Barr, an economist at JPMorgan Chase & Co, wrote in a note. “There is little doubt that the drop in support for New Democracy, Pasok has raised the probability of an eventual euro exit.”

Venizelos has also refused to sign:

Venizelos said Pasok’s proposal for a national unity government with the participation of all parties with a pro- European orientation was the only solution. Greece must remain “safely” within the euro while pursuing changes to the bailout accord to boost growth, he said.

The movement of talent from the banks to hedge funds continues:

The rest, earned by betting on companies from American International Group Inc. to MBIA Inc., was locked up in deferred stock and euros, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to discuss compensation. In September, Silvetz, 37, jumped to hedge fund BlueCrest Capital Management LLP. He was the last of a trio of New York debt traders who departed after making $1 billion for the German lender in two years, the people said.

Wall Street’s biggest banks have lost almost two dozen of their most-profitable credit traders in the past 13 months as regulators limit the kind of risk-taking that amplified the housing crisis four years ago. As banks slash or defer pay and reduce the amount they’re willing to wager, the traders are seeing better opportunities at hedge funds and investment firms that seek to profit in markets lenders are retreating from.

Note that by “talent”, I mean the ability to make deals, which is not the same thing as asset management. Different business. This trend may be a good thing … it may be a bad thing. Nobody knows, nobody cares. The world’s regulators have decided to encourage the change without getting too fussed by details.

The downside? Hedge funds are intrinsically less stable than banks – investors are a lot more willing to redeem. The implication is that it may become easier for a market panic to lead to a lock-up in trading.

Husky Energy, proud issuer of HSE.PR.A, was confirmed at Pfd-2(low) by DBRS:

DBRS has today confirmed the Senior Unsecured Notes and Debentures and the Preferred Shares of Husky Energy Inc. (Husky or the Company) at A (low) and Pfd-2 (low), respectively, both with Stable trends. The rating actions are based on DBRS’s review of Husky’s progress to date on its long-term plans, which incorporate its major strategic growth initiatives, upstream operational targets and financial targets through 2015.
…
Husky maintains a conservative financial profile. Its debt-to-capital and debt-to-cash flow ratios improved to 19% and 0.85 times, respectively, at March 31, 2012 from 22% and 1.39 times, respectively, at year-end 2010. Common and preferred share issuance totaling $2.2 billion (including dividends paid in shares) strengthened its key credit metrics and liquidity position, with $3.3 billion of bank facility availability and $2.7 billion of cash at March 31, 2012.

DBRS expects Husky to maintain its conservative financial profile, with only modest weakening of its key credit metrics relative to year-end 2010 levels during the high capex period through 2015, as well as making significant progress on its upstream operational targets over the period in order to maintain the current ratings.

There was a slight downdraft in the Canadian preferred share market today, with PerpetualPremiums losing 6bp, while both FixedResets and DeemedRetractibles were off 3bp. Volatility was very low. Volume was well below average.

France has a new president:

Francois Hollande defeated French President Nicolas Sarkozy as voters handed control of the second-biggest European economy to the Socialists for the first time in 17 years.

The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by four pollsters. The campaign isn’t over. France elects its lower house of parliament in five weeks, prompting calls from backers of both candidates to keep fighting.
…
While Socialists stand ready to dominate policy making for the first time since 1993 — holding both the presidency and the Cabinet — bond yields suggest Hollande may maintain market confidence. Ten-year French debt yields 124 basis points more than comparable German securities. That’s down from 145 basis points after he won the first round April 22 and lower than the 133 basis points at the start of the year.

Concern of a Franco-German cleavage undermining economic policy making in the euro region is “exaggerated,” Morgan Stanley chief economist Joachim Fels wrote in a note today.

Greek politics is a Gordian knot – and that’s scary!

New Democracy leader Antonis Samaras began trying to put together a government after a Greek election that raised fresh questions about the country’s euro membership and triggered the biggest stock-market rout in four years.

Samaras was given three days from today to put together a coalition from an assembly split down the middle on whether to renege on the terms of bailout agreements negotiated since May 2010. New Democracy and the socialist Pasok party, rivals until the country’s crisis threw them into a national government together this year, are two seats short of the 151 seats needed for a parliamentary majority.
…
New Democracy led in the election, receiving 19 percent of the vote and 108 seats in the 300-seat Parliament. Syriza got 17 percent to score 52 seats; Pasok came third with 13 percent and 41 seats.
…
Should Samaras fail to get the necessary number of seats, the onus on forming a government will fall to bailout opponent Syriza, a coalition of left parties, which has vowed to cancel the bailout terms. After that, Pasok takes the baton.

If the nine-day process fails to yield a coalition, President Papoulias may then try to broker a government of national unity. Should that process fail, new elections may be a possibility.

And, in fact, there is now a report that the baton has passed to the anti-austerity Syriza party:

Greek political leaders will meet for a second day today in a bid to form a government, with the mandate for the task being handed to the second-biggest party after New Democracy leader Antonis Samaras said he failed to forge agreement after an election that raised questions about the country’s euro membership.

Samaras gave up his bid after nearly six hours of talks in Athens yesterday. The attempt to form a government will pass to Alexis Tsipras, the head of Syriza, the second biggest party, which has vowed to cancel the bailout terms. Tsipras will see President Karolos Papoulias today at 2 p.m. Athens time.
…
As voters across Europe rebel against austerity measures imposed to stamp out the debt crisis, Citigroup Inc. said yesterday the risk of Greece leaving the euro by the end of 2013 has risen as high as 75 percent. The election on May 6 propelled into Parliament a party that wants to put land mines on the border with Turkey and another that wants Germany, the country’s biggest donor, to pay World War II reparations. The benchmark ASE Stock index plunged 6.7 percent in Athens yesterday, its biggest drop in six months.

YLO released its results a day early:

Yellow Media Inc. (YLO-T0.100.0111.11%) reported a first-quarter loss of $2.9-billion as the struggling directory publisher wrote down the value of its assets.

The company also cancelled its annual meeting planned for Tuesday in Montreal after it said the number of shareholder votes received would not be enough to reach quorum.

Farcical, but more to the point is that print revenues declined more than expected and digital substitution was lower than expected.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums losing 12bp, FixedResets up 3bp and DeemedRetractibles gaining 6bp. Volatility was minimal, with no themes apparent. Volume was quite low.

There are tentative advances in exchange trading for corporate bonds:

Goldman Sachs Group Inc. (GS) will start an electronic trading system for corporate bonds this month as the fifth-biggest U.S. bank adapts to regulatory changes and competition, according to a person familiar with the plans.

The platform, called GSessions, has been under development for a year, said the person, who declined to be identified because the New York-based firm isn’t making details public yet. The Wall Street Journal reported the initiative late yesterday on its website.

The move comes three weeks after BlackRock Inc. (BLK), the world’s largest money manager, said it was planning its own bond-trading platform called Aladdin Trading Network that would allow clients to bypass Wall Street firms such as Goldman Sachs.
…
The profitability of Wall Street firms is being challenged by regulations requiring that they hold more capital as a buffer against potential losses from assets such as corporate debt. A U.S. law that seeks to prohibit federally insured banks from making bets with their own money may also hinder lenders’ ability to commit money to buy securities from clients, according to analysts including Brad Hintz at Sanford C. Bernstein & Co.
…
GSessions will start by offering two five-minute trading sessions a day, one in an investment-grade bond and another in a high-yield, high-risk security, the person said. Speculative- grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

At the start of each session, Goldman Sachs will post a bid and offer price and notify clients of the maximum amount of liquidity the firm is willing to provide to fill orders, according to the person.

Rather than matching trades between clients, Goldman Sachs will act as the counterparty to all trades and collect the spread, or difference, between the bid and offer prices, the person said. That gap will be lower than what Goldman Sachs earns on non-computerized trades, the person said.

As I have said many, many times on this blog, exchange trading for corporate bonds will lead to tighter, more brittle markets and be bad for capital formation – to the extent that instruments are listed. In the States, especially, the action has moved into the private-placement and CDS markets, to avoid regulatory bullshit and get on with the job. However, the regulator who cares about the actual purpose of capital markets has not yet been born.

I have often criticized the entire concept of a B.Comm. degree (a guy with a B.Comm. is a guy who wanted to learn about business, so he went to school. Strike one.). Seems that others share my disdain:

Yahoo! Inc. (YHOO) is under pressure from Third Point LLC, one of its largest investors, to dismiss Chief Executive Officer Scott Thompson after his academic computer science credentials were misrepresented.
…
Martin McGovern, a spokesman for Stonehill in Easton, Massachusetts, said that Thompson received a bachelor’s of science in business administration, with a major in accounting on May 20, 1979. He declined to comment further.
…
Loeb said that Patti Hart, a Yahoo board member who chairs the search committee, inflated her degree too. Hart, who also serves as CEO of International Game Technology (IGT), is listed in filings as holding a “bachelor’s degree in marketing and economics” from Illinois State University, Loeb said. “However, we understand that Ms. Hart’s degree is in business administration. She received a degree in neither marketing nor economics.”

Today’s PrefBlog Precious Little Do-Gooder Zinger is about donating eye-glasses:

In a paper published in March in the journal Optometry and Vision Science, four researchers compare the full costs of delivering used glasses to the costs of instead delivering ready-made glasses in standard powers (like my drugstore readers, but for myopia as well). The authors find that recycled glasses cost nearly twice as much per usable pair.

Rob Carrick has a piece up titled Preferred shares: How to navigate rising rates, but I’m not quoted.

There was a slight pullback in the Canadian preferred share market today, with PerpetualDiscounts off 1bp, FixedResets down 7bp and DeemedRetractibles losing 8bp. Volatility was minimal. Volume was extremely low.

What a great solution for the TMX / Maple deal! More rules!

The Ontario Securities Commission will impose share ownership restrictions and require an independent board of directors as conditions of its approval of the takeover of the Toronto Stock Exchange.
…
Among its proposed conditions for approving the bid, the OSC rules would prohibit any person or company from owning more than 10 per cent of the voting shares of Maple Group without OSC prior approval.

The original shareholders of Maple Group are also required to certify annually to the OSC that they are not acting “jointly or in concert with any other investor” in respect to Maple’s voting shares.

The rules also require Maple’s board to have at least 50 per cent of its directors unrelated to the original Maple shareholders and unrelated to management of the company. One director must represent an independent, non-bank owned investment dealer, and the chairman of the board must be both independent and unrelated to the original Maple shareholders.

Maple’s shareholders are a group of 13 major Canadian financial institutions and pension funds.

Why would the banks bother to act in concert? Their interests are identical anyway. There is some oohing and ahhing over the cost recovery model:

Even if Maple succeeds in buying TMX and CDS, it will still be forced to continue paying rebates. What’s more, Maple will have to share some of the synergies it expects to get from the transaction with market users, according to the pricing model, which is now being made public for the first time by the OSC.

Starting on Nov. 1, a Maple-owned CDS will split any annual revenue gains on the current suite of CDS clearing services 50-50 with users. That continues indefinitely.

On top of that, the so-called “integration rebate” to market users starts at $2.75-million and rises to $4-million by 2016. The fee will be capped at that level after 2016, but it will continue in future years.

It’s supposed to reflect the cost-savings Maple extracts. But interestingly, it’s not conditional on Maple actually saving money. So CDS users get paid no matter whether Maple manages to find synergies or not.

All of this means Maple will have to really deliver on its original promise — to make money from CDS not by raising fees for existing services but by creating new services that it can charge for. Those new services won’t be subject to the revenue sharing. However, even there, regulators are not making it easy on Maple.

Buddy, what it probably means is that fees will be charged so that fixed costs for participants are higher and marginal costs are lower. This will enlarge the moat that protects the oligopoly.

I often feel like Cassandra when worrying about the risks of the Canadian financial system, so it’s nice to know that somebody shares my views:

Canada’s biggest banks likely are “too big to fail,” and therefore pose a risk to the country’s financial system, says Malcolm Knight, a former No. 2 at the Bank of Canada.
…
Canada’s five biggest banks hold combined assets worth $2.8-trillion, twice the size of the country’s gross domestic product.

That outsized economic weight makes them a threat to financial stability because the collapse of any of them would take a toll on hundreds of thousands of customers, on competition in financial services, and on the country’s reputation as a safe place to invest, Mr. Knight says.

Canada’s strict regulatory system makes the banks “less likely to fail,” but failure isn’t impossible, no matter how well the country weathered the financial crisis.

“Canada’s strict regulatory system”. We’re always hearing about that. The main thing is that OSFI simply sticks a little extra onto regulatory capital requirements – there’s nothing clever about that. What would be clever is is there was ever any accounting made for the costs of this – and I don’t mean picayune things like the service fees that help pay for all that capital. There’s things like mortgage spreads, the preponderance of short term mortgages, subsidies of tail risk by the CMHC, the stultifying effect of the oligopoly … there are many costs, none of which are ever examined.

I sent an eMail recently:

Sirs,

The Toronto Star recently published an article titled “Pediatricians in Canada discharging unvaccinated children” (April 25, on-line at http://www.thestar.com/living/article/1167428–pediatricians-in-canada-discharging-unvaccinated-children)

In this article it is alleged that the behaviour highlighted by the headline is indulged in by Dr. Fatima Kamalia and condoned by Dr. Hirotaka Yamashiro, who holds a position with the Ontario Medical Association. The CPSO is stated to take the position that “Doctors have the right to end a relationship with a patient when there is a ‘breakdown of trust and respect'”.

The arrogance shown by these medical personnel shows that they have confused the award of a medical diploma with ascension to divinity. Their interpretation of CPSO policies in a manner that equates the right to refuse medical treatment with a ‘breakdown of trust and respect’ is breathtaking; it makes a mockery of CPSO Policy #4-05 “Consent to Medical Treatment”.

Additionally, the attitude of these so-called professionals that they are infallible on pediatric care may well be misplaced, although the consensus is currently in their favour. As one who was born in England in June, 1961, I am keenly aware that consensus can be incorrect even with respect to something so straightforward as morning sickness; I remain grateful that my mother ignored doctor’s advice regarding remediation for the condition. I am pleased to pursue an occupation and lifestyle that, astonishingly, does not increase my risk of contracting peptic ulcer disease.

The desire of Drs. Kamalia & Yamashiro to restrict their practice to include only those individuals who show proper reverence for their pronouncements ex cathedra is understandable; if they wish to pick and choose their clientele, I suggest they make a living in a competitive environment – not in Ontario, where rationing effectively provides them with a very nice job for life on the taxpayers’ nickel.

I strongly urge the CPSO to initiate an investigation of the abuse of privilege endorsed or indulged in by these doctors, to condemn in the strongest possible manner the bizarre interpretation of the ‘breakdown in trust and respect’ guideline and to uphold the right to refuse treatment.

Sincerely,

I also see that there is an unsigned opinion piece in The Star:

While the College of Physicians and Surgeons of Ontario has no specific policy on the immunization issue, it does have one on severing ties. “In general, a physician should not end the physician-patient relationship because the patient chooses not to follow the physician’s advice,” it says. That’s the patient’s right.
…
The American Academy of Pediatrics and its bioethics committee have developed guidelines on dealing with these vexing cases.

“In general, pediatricians should avoid discharging patients from their practices solely because a parent refuses to immunize his or her child,” the guideline states.

“Families with doubts about immunization should still have access to good medical care, and maintaining the relationship in the face of disagreement conveys respect and at the same time allows the child access to medical care. Furthermore, a continuing relationship allows additional opportunity to discuss the issue of immunization over time.”

Veresen, proud issuer of VSN.PR.A, was confirmed at Pfd-3(high) / Stable by DBRS:

DBRS has today confirmed the Senior Unsecured Notes and the Preferred Shares of Veresen Inc. (Veresen or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects (1) relatively stable cash flow from the Company’s regulated pipeline businesses, which accounted for approximately 56% of Veresen’s 2011 cash distributions received from its subsidiaries; (2) diversification benefits from its midstream (35% of cash distributions) and power generation businesses (9% of cash distributions), supported by long-term contracts with mostly investment-grade counterparts; and (3) solid non-consolidated cash flow ratios – albeit high non-consolidated leverage – at the parent level following the closing of the $920 million acquisition of the Hythe/Steeprock complex (the Acquisition) from Encana Corporation (Encana) in February 2012, which DBRS viewed as a credit neutral event for Veresen.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 6bp, FixedResets down 6bp and DeemedRetractibles up 2bp. Volatility was non-existent. Volume was quite low.

Nothing happened today.

There were solid gains in the Canadian preferred share market today, with both PerpetualPremiums and FixedResets up 10bp and DeemedRetractibles winning 21bp. Volatility, as reported by the Performance Highlights table, was virtually non-existent. Volume was comfortably above average.

There’s some sabre rattling from the Fed:

Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank needs to be ready to raise interest rates even if joblessness exceeds 7 percent.

Speaking in an interview today at the Bloomberg Washington Summit hosted by Bloomberg Link, he said the Fed will probably have to raise rates in mid-2013. Adding more monetary stimulus now would raise inflation risks without doing much to boost growth, he said.

Unemployment “could well be above 7 percent, and I think we have to prepare for that,” Lacker said. “I think it’s a misconception to think we have to get unemployment all the way down to five or some number like that before we raise rates.”

Lacker has cast the only dissenting vote at each of the Federal Open Market Committee’s policy meetings this year. He has opposed the Fed’s statement that economic conditions will probably warrant “exceptionally low” levels of the federal funds rate at least through late-2014.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 23bp, FixedResets gaining 8bp and DeemedRetractibles winning 39bp. The Performance Highlights table is comprised entirely of winners, with a preponderance of insurance DeemedRetractibles. Volume was high.

The TMX / Maple deal is still alive:

The group of 13 financial institutions that’s seeking to buy the TMX Group Inc. … plans to extend its offer today, according to sources.

All 13 members of the so-called Maple Group are expected to remain in the consortium at this time, these sources said.

The decision follows on the heels of weeks of uncertainty, during which some members of the group were considering abandoning the effort. The group had become increasingly discouraged by its long quest to win over the Competition Bureau, and until late last week a number of members said it looked like there was a good chance the deal would not succeed.

But the group subsequently received an update from the Bureau that was interpreted as a signal that the deal once again has a better chance of success.

The Bureau said last year that it had “serious concerns” with the offer. Late last week it suggested that its concerns could be “substantially mitigated” by rules that the Ontario Securities Commission is considering applying to the merged company if the deal goes through.

Isn’t that great? An enormous, bank-controlled, tightly-regulated company that will perforce employ a large number of ex-regulators. A perfect solution … for some.

In fact, I suspect that the group has got a nod-and-wink go-ahead:

The bidding consortium, known as Maple Group Acquisition Corp., has struck agreements to acquire the competing Alpha trading system, TMX’s largest rival, as well as the trade clearing institution CDS Group. Those deals came together over the weekend, according to sources.

Just as importantly, Maple has also received assurances that regulators, including the Competition Bureau, will finish considering its offer within a reasonable time frame.

The Europeans aren’t the only ones facing higher borrowing costs:

Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent.

The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.

The Bank of Canada has released a working paper by Eleonora Granziera & Sharon Kozicki titled House Price Dynamics: Fundamentals and Expectations:

We investigate whether expectations that are not fully rational have the potential to explain the evolution of house prices and the price-to-rent ratio in the United States. First, a Lucas type asset-pricing model solved under rational expectations is used to derive a fundamental value for house prices and the price-rent ratio. Although the model can explain the sample average of the price-rent ratio, it does not generate the volatility and persistence observed in the data. Then, we consider an intrinsic bubble model and two models of extrapolative expectations developed by Lansing (2006, 2010) in applications to stock prices: one that features a constant extrapolation parameter and one in which the extrapolation coefficient depends on the dividend growth process. We show that these last two models are equally good at matching sample moments of the data. However, a counterfactual experiment shows that only the extrapolative expectation model with time-varying extrapolation coefficient is consistent with the run up in house prices observed over the 2000-2006 period and the subsequent sharp downturn.

Mr Vítor Constâncio, Vice-President of the European Central Bank, gave a speech titled “Towards better regulation of the shadow banking system” at the European Commission Conference in Brussels, 27 April 2012, which lauded central clearing:

During the crisis, the volume of repos declined with the exception of a few market segments. The reduction in outstanding repo values was however less pronounced for CCP-cleared repos than for other repo segments. It is well known that some CCPs actually saw an increase in their business at a time when counterparty-risk adverse market participants turned to safer avenues.

The good performance of CCPs could be explained by the fact that it addresses effectively most of the vulnerabilities which affected repo markets during the 2008 crisis. When cash lenders withdrew from the market due to misperceptions of the credit and liquidity risk, CCP-cleared repos were significantly less affected. Amidst a general decline of repo market trading at the peak of the crisis, some euro area CCPs actually saw an increase of volumes.

This happened because CCPs provide effective protection against counterparty risk by interposing themselves between the original repo parties. From a financial stability perspective, properly supervised and overseen CCPs act as a firewall against the propagation of default shocks and can mitigate counterparty credit risk, enhance market transparency, facilitate collateral liquidation, and foster standardisation of repo terms and eligible collateral. There is also the advantage that policy makers can monitor the cleared repo markets since CCPs are regulated institutions.

Therefore, moving repo clearing to CCP seems to be the appropriate solution which by the way is already gaining ground in Europe, having already attained half of the market.

He did not address the question of single-point failure.

Spain is in a double-dip:

Stocks and commodities fell, while the euro weakened for a third day against the yen, as reports showed Spain entered its second recession since 2009 and U.S. business activity cooled. Treasuries and German bunds advanced.
…
Spain’s gross domestic product fell 0.3 percent in the first quarter, the government said today as it struggles to narrow a budget deficit by 3.2 percentage points of GDP. U.S. consumer spending rose 0.3 percent in March, according to Commerce Department data, while an Institute for Supply Management-Chicago Inc. report showed business activity expanded in April (SPX) at the slowest pace since 2009.

The Canadian preferred share market ended the month on a strong note, with PerpetualPremiums up 13bp, FixedResets gaining 3bp and DeemedRetractibles winning 17bp. Volatility picked up a little, with PerpetualDiscounts dominating the winners. Volume was average.

PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.6% – oh, all right, maybe a hairsbreadth under – so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 200bp, a sharp tightening from the 220bp reported April 25.

Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, had some words of interest regarding MMFs at the European Commission High Level Conference, Brussels, 27 April 2012:

Money funds do not use committed lines of credit from banks. Claims on money funds have, in effect, become monetary assets in the hands of savers. In parts of the world, especially the US, they are treated like current accounts. Given the restrictions on their asset holdings, they resemble narrow banks, in mutual-fund clothing. But for a normal mutual fund, as an open-ended investment vehicle, the value of investments in it fluctuates with the value of the vehicle’s asset portfolio. By contrast, most money funds hold themselves out as offering par under any circumstances; when they “break the buck”, they must unwind. Their investors run at that prospect; and so the funds themselves are flighty investors. Compared to most types of shadow banking, money funds do not borrow – in the usual sense. But by promising par, they are in effect incurring debt-like obligations. And they can be exposed to leverage. At least in the run up to the crisis, some invested in levered paper, some of it in what amounted to Russian Doll shadow banking – a money fund buys short-term ABCP backed by CDOs, etc.
What I suggest here is that:

• Money Market Funds should be required to choose between being
  • Variable Net Asset Value (NAV) funds or Constant NAV funds
  • Any remaining CNAV funds should be subject to capital requirements of some kind
  • All should be subject to “gates” or other measures that can be used to delay withdrawals, to make runs less likely

That package would not completely prevent runs; regular mutual funds can suffer runs. But it would make them somewhat less brittle.

Bank loan concentration risk is becoming an issue:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.”

The Fed’s proposed rules on single-counterparty credit limits would have a negative impact on banks, their customers and the U.S. economy, according to a letter sent to the central bank today by five banking trade groups, including the Clearing House Association.
…
In December, the Fed proposed tougher standards to supervise the largest banks whose collapse could jeopardize the economy. The central bank set a limit of 10 percent for credit risk between a company considered systemically important and counterparty when each has more than $500 billion in total assets.
…
The 10 percent credit risk limit is more restrictive than that contained in the Dodd-Frank financial overhaul law, which allowed for a 25 percent limit.
…
The Fed did not explain why it changed the credit risk limit to 10 percent for the largest banks. The Dodd-Frank act allows the Fed to make the change if it determines it is necessary to “mitigate risks to the financial stability.” The banks argue the Fed should first try the 25 percent limit and, if it proves inadequate, adopt the 10 percent limit.

It seems to me that this would benefit from a mathematical treatment. The banking rules are calibrated to allow for the chances of insolvency of a bank based on a mathematical model of asset values that assume independence of counterparty default. With a single major counterparty, then the risk becomes a lot chunkier since the correlation of counterparty A defaulting with counterparty A defaulting is, by definition, 1.0.

Spend-Every-Penny will continue to flog a dead horse:

Finance Minister Jim Flaherty has drawn a line in the sand for the first time in his for a national securities regulator, setting a one-year deadline before he walks away.

Mr. Flaherty has long fought for a national regulator, making it one of his signature goals since became finance minister. But he suffered a setback in December when the Supreme Court of Canada ruled such a plan would be unconstitutional by infringing on provincial independence.

Mr. Flaherty vowed to continue his quest for at least some form of a regulator, even if its mandate is not as far-reaching as the first proposal. On Friday, he said there is only a finite amount of time to strike a deal.

Who knows? An opt-in system, like the HST could work. Another plan is for willing provinces to merge their securities commissions. A fully-national regulator has always been a pipe-dream – but today’s Conservatives are a rather contemptible group.

DBRS has confirmed TA at Pfd-3 Stable:

DBRS has today confirmed the ratings of TransAlta Corporation’s (TAC or the Company) Unsecured Debt/Medium-Term Notes and Preferred Shares at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects (1) the Company’s high level of contracted output with reasonable fuel hedging positions and (2) increased geographical and fuel diversification. These strengths have lowered TAC’s business risk level to below the industry average. A well-hedged portfolio and/or contractual position are key to reducing the volatility of earnings and cash flow as power generators generally operate in competitive environments where profitability varies with commodity pricing (both output and inputs) and production volumes. TAC’s contracted output is expected to remain high, at over 65% of net generating capacity, at least until Alberta purchase power arrangements (APPA) expire in 2020.
…
TAC faces a number of other challenges, including aging coal plants in Alberta, which could continue to result in a high level of unplanned outages as evidenced by the Sundance coal-fired generation Unit 1 and Unit 2 shutdown since December 2010. The ultimate outcome of the Sundance arbitration process remains uncertain. An unfavourable resolution of this matter (i.e., accrued penalties and repair costs) could have material financial impacts. The Company has limited financial flexibility to withstand any adverse events due to its high leverage and dividend payout ratio. Any further significant increase in leverage could cause TAC’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating. DBRS expects TAC to fund the majority of any unexpected material costs primarily with equity (including preferred shares and the dividend re-investment program) to maintain its current leverage level.

It was a day of modest gains for the Canadian preferred share market, with PerpetualPremiums gaining 8bp, FixedResets up 6bp and DeemedRetractibles winning 12bp. Volatility picked up, but there is no clear pattern in the Performance Highlights table, beyond a tilt to winners. Volume was very low.

OSFI’s empire has expanded:

Canada’s primary lender of taxpayer-backed mortgages is coming under tighter oversight, as new legislation will require Canada Mortgage and Housing Corp. to report to the national banking regulator.
…
One of the most anticipated aspects relates to the government’s decision to change the oversight structure for CMHC, which is expected to see its portfolio of mortgages grow well beyond $500-billion this year.

Under the current structure, CMHC is primarily overseen by Human Resources Minister Diane Finley. The budget legislation would give the finance minister a greater role in oversight and would make the Office of the Superintendant of Financial Institutions the main watchdog for CMHC.

The covered bond legislation didn’t get as much attention, but DBRS commented:

The federal government today announced a legislative framework for governing covered bonds in Canada. There are no rating implications as a result of this announcement. As anticipated, the legislation does not allow any insured mortgages to be included as covered bond collateral. The legislation, which will also require Canada Mortgage & Housing Corp. (CMHC) to establish and maintain a registry for covered bonds, better defines who can issue covered bonds (banks and co-operative credit societies), and specifies bankruptcy and insolvency protection for covered bonds. There was also no mention of whether the current 4% regulatory limit on covered bonds will change.

Because many of the principles in the legislative framework were anticipated, there were a significant number of covered bond issuances by Canadian banks since the beginning of calendar 2012. At the end of March 2012, $63 billion was outstanding versus $50 billion at December 2011, with Bank of Nova Scotia being the most active, accounting for $5.5 billion of the change. Given the solid reputation of Canadian banks globally, the increased funding diversification and access to new buyers of debt, almost all of the issuances during this time period were U.S. dollar denominated. Given that several of the banks still have insured mortgages, DBRS believes some of the Canadian banks will continue to fund using these instruments before the bill receives royal assent.

Moody’s cut Ontario:

Moody’s Investors Service has today downgraded the Province of Ontario’s issuer and debt ratings to Aa2 with stable outlook from Aa1 with negative outlook, affecting approximately CAD202 billion in debt securities.

“The downgrade of Ontario’s rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets,” said Moody’s Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario.
…
Expense growth targets appear particularly ambitious in light of growth in expenses averaging 7% annually in the five years to 2011-12 and continued pressures on health expenses, the province’s largest expense item, due to demographic pressures.

DBRS took a more sanguine view:

DBRS has today confirmed the long and short-term debt ratings of the Province of Ontario (Ontario or the Province) at AA (low) and R-1 (middle), both with a Stable trend. Overall, DBRS views the continuation of the fiscal recovery plan and the increasing emphasis on cost containment as an encouraging step in the right direction. However, as demonstrated by the recent budget negotiations, the political environment remains fragile and DBRS believes that implementing the tough measures required to achieve fiscal targets and limit debt growth will be very challenging and will require a significant pickup in fiscal resolve.
…
Ontario’s debt trajectory remains largely consistent with last year’s plan. In 2011-12, DBRS-adjusted debt is estimated to have grown by 9.3%, resulting in a debt-to-GDP ratio of 39.2%, the third-highest among all provinces. Debt growth is expected to slow in 2012-13, with the debt-to-GDP ratio forecast to reach 41.3% before eventually reaching a peak of somewhat below 45% within the next two to three years. However, DBRS cautions that this is dependent on the Province achieving its fiscal targets, which entail considerable execution risk, especially given the constraints of a minority government.

S&P cut Spain:

Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s on concern the nation will have to provide further fiscal support to the banking sector as the economy contracts.
…
“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”

Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83 percent.

Towers Watson produced their Pension Finance Watch for March:

The Towers Watson Pension Index tracks the performance of a hypothetical pension plan invested in a 60% equity/40% fixed income portfolio. This portfolio recorded a 1.3% return for March. We also track two other investment portfolios with different levels of equity exposure. Monthly returns on the 80% and 40% equity portfolios were 1.9% and 0.7%.
…
Similar to bond prices, values for pension obligations move in the opposite direction of interest rates. Our liability index (based on projected benefit obligations) decreased 2.3% for March, reflecting the offsetting impacts of interest accumulation and the increase in the discount rate.

The changes in asset and liability values resulted in a 3.6% increase in the Towers Watson Pension Index to 66.2.
…
The index reflects the PBO funded ratio (market value of assets/projected benefit obligation) for a benchmark pension plan. The asset value changes from month to month based on the investment performance of the 60% equity portfolio, assumed contributions and benefit payments. Liability values increase with benefit accruals and interest cost, offset by benefit payments, and are adjusted to reflect changes in financial assumptions.

The index was hovering around 90% as recently as mid-2008.

Telus has squared its rot for a good boo-hoo-hoo:

Telus Corp. … is weighing whether to use a legal tactic to prevent a U.S. hedge fund from exercising its voting power to defeat the company’s share-consolidation plan.
…
Telus is trying to eliminate its dual-share structure and give non-voting shareholders a vote. But New York-based Mason, which has amassed roughly 18.7 per cent of Telus’s common voting shares, is trying to defeat the plan – a stance that has fuelled an escalating fight between the money manager and the company.
…
But while the fund purports to champion the interests of the voting class, Telus has accused it of being an opportunistic investor out to earn a quick buck by using a trading strategy that exploits the historical price gap between the two classes of shares.

I think that it’s scandalous that the securities of a Canadian company be used as a vehicle to earn a quick buck! This is Canada, for heaven’s sake! Our country, where we play cooperative games with our dollies!

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets up 5bp and DeemedRetractibles winning 10bp. Volatility remained low. Volume was quite low.