Category: Market Action

Spain’s in trouble again:

European Central Bank Executive Board member Benoit Coeure triggered speculation that the bank will revive its bond-purchase program to lower Spain’s borrowing costs as the region’s debt crisis threatens to boil over again.

Spanish “market conditions are not justified,” Coeure, who heads the ECB’s market operations division, said at an event in Paris today. “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”
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The yield on Spanish 10-year bonds, which climbed to a four-month high of 5.99 percent this morning, slid to 5.82 percent after Coeure spoke. The euro gained more than a quarter of a cent to $1.3134 at 2 p.m. in Frankfurt and European stocks rose, with the Stoxx Europe 600 Index (SXXP) up 1 percent.

Spain’s 10-year borrowing costs have jumped more than 1 percentage point since March 2, when Prime Minister Mariano Rajoy said the country will miss a 2012 deficit goal approved by the European Union. The euro area’s fourth largest economy is in recession and unemployment is nearing 24 percent.

It will be interesting to see how this plays out. ECB intervention may lower the probability of default, but its super-senior creditor status (seen in the Greek default) will increase the severity of default.

The Canadian preferred share market drifted slightly upward today, with PerpetualPremiums winning 5bp, FixedResets gaining 2bp and DeemedRetractibles up 4bp. Volatility was good, with Floaters notable amongst the losers. Volume was a little below average.

PerpetualDiscounts now yield 5.07%, equivalent to 6.59% 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 about 215bp, unchanged from the report of April 4.

A mention in the Globe & Mail led me to an IMF publication (Chapter 3 of of the April, 2012, World Economic Outlook) titled Dealing with Household Debt:

Does household debt amplify downturns and weaken recoveries? Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted. These patterns are
consistent with the predictions of recent theoretical models. Based on case studies, we find that government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt. In particular, bold household debt restructuring programs such as those implemented in the United States in the 1930s and in Iceland today can significantly reduce debt repayment burdens and the number of household defaults and foreclosures. Such policies can therefore help avert self-reinforcing cycles of household defaults, further house price declines, and additional contractions in output.
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Macroeconomic policies are a crucial element of forestalling excessive contractions in economic activity during episodes of household deleveraging. For example, monetary easing in economies in which mortgages typically have variable interest rates, as in the Scandinavian countries,
can quickly reduce mortgage payments and avert household defaults. Similarly, fiscal transfers to households through social safety nets can boost households’ incomes and improve their ability to service debt, as in the Scandinavian countries.

Clearly, it is better to avoid such a situation in the first place, but there is only ineffective policy in place in Canada to do so at this time. Buying a larger house (or a small house or condominium instead of renting) is a means of capital formation, which is encouraged by low interest rates. That’s what lower interest rates are supposed to do, for heaven’s sake! However, housing is non-productive capital; so much so that it can almost be considered consumption.

So the question really is: in times of economic downturns, how should policy act to promote “good” capital formation as opposed to “bad” capital formation?

I suggest that both monetary and fiscal policy are very blunt tools – too blunt to address the issue. Instead, a regulatory response is required:

• Don’t be so damn eager to raise the limits on explicitly (Canada) or implicitly (US) government guarantees of mortgage debt. Set a limit, based on historical experience and rising with nominal GDP, of the amount of such guarantees. In 2006, CMHC insurance outstanding was $291-billion. In 2010 the plan was to have total outstanding of $533-billion. Why? Why do What-debt? and Spend-Every-Penny want to create a housing bubble? I can only assume that it is because this will give them more opportunity to micro-manage the economy, with credit-rationing and rule changes by government fiat, rather than the unexciting process of raising insurance prices when a reasonable limit is approached.
• Impose a capital surcharge the banks when their loan books get distorted. Mortgages are now 40% of the balance sheets; they used to be 30% not so very long ago. Such a sudden change indicates to me a strong possibility that this is simply regulatory arbitrage (why lend to Jimmy’s Barber Shop, with a risk-weighting of 100%, when you can lend to Jimmy himself as a mortgage, with a 35% risk-weight or maybe even a government guarantee with an even lower risk-weight?). So, in this case of distortion, and in every other case of material distortion, impose a surcharge. An extra 10% risk-weight (to 45% on mortgags) on loan book elements in material excess of their historical norms is my prescription.

Three cheers for offshore wind power!

Offshore wind costs about $232 a megawatt-hour of power generated, according to data from Bloomberg New Energy Finance. That compares with about $80 for onshore wind, $62 for gas-fired plants and $77 for coal. The government supports the industry with incentives for power produced by renewable energy sources.

It’s not clear if the price figures include provisions for back-up power and demand-timing differences (the wind tends to blow at night, when demand is relatively low, can sometimes die at highly inconvenient moments and electricity can’t be stored very well. This has a huge effect on honest cost assessment, and no effect on – shall we say – other assessments).

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums losing 4bp, FixedResets gaining 2bp and DeemedRetractibles down 2bp. Volatility was low. Volume was a little below average.

The US jobs number was disappointing:

Employers in the U.S. added fewer jobs than forecast in March, underscoring Federal Reserve Chairman Ben S. Bernanke’s concern that recent gains may not be sustained without a pickup in growth.

The 120,000 increase in payrolls, the fewest in five months, followed a revised 240,000 gain in February that was bigger than first estimated, Labor Department figures showed today in Washington. The March increase was less than the most pessimistic forecast in a Bloomberg News survey in which the median estimate called for a 205,000 rise. Unemployment fell to 8.2 percent, the lowest since January 2009, from 8.3 percent.

Stock lending can be profitable!

The other day on Bloomberg (the paid version), I came across several ETFs with incredibly rich dividends. One of them — Guggenheim’s Solar ETF (TAN/NYSE) — far outshined the others. TAN holds about 30 solar energy companies. Its dividend yield is 9.2%, reports Bloomberg and others. Indeed, its dividend of US$2.11, adjusted for a 1:10 reverse split, divided by its price of US$23.02 works out to 9.2%. But is that possible in what should be a high-growth sector?

Digging deeper, only seven of the companies in the ETF, representing about 28% of the total allocation, have ever paid a dividend. Two have postponed dividends for 2012 and another has cut its dividend by more than half. The weighted average yield on the seven companies is under 1%.

Since holdings can change every quarter, I also checked the holdings as of February 2011. The picture was the same: seven dividend payers with an average yield of below 1%.

Where then did most of TAN’s dividend come from? The answer, as revealed by the fund’s prospectus, is securities lending. Nearly 90% of TAN’s investment income for the 12 months ending last August came from lending about half its shares to short sellers.

Who needs retirement in Florida, when you can retire to sunny Spain?

Banks trying to offload billions of euros of property left on their hands by bankrupt developers are selling new apartments at rock-bottom prices with bargain-basement mortgage deals.

Santander, the eurozone’s largest bank, was responsible for the frenzy in Sesena. It offered two-bedroom apartments around a communal swimming pool for 65,000 euros (US$86,100), with 100% mortgages over 40 years, costing as little as 242 euros a month to service, about a sixth of the average Spaniard’s monthly income.

At the peak of the decade-long property boom that preceded the crash, similar apartments would have sold for at least twice that, and for properties it isn’t selling, a Santander mortgage would cover 80% of the property price over 25 years.

Those with an interest in YLO will be happy to learn there is a market for the assets:

AT&T Inc. (T) agreed to sell a majority stake in its Yellow Pages directory division to Cerberus Capital Management LP for about $950 million as part of an effort to dispose of units that are holding back revenue growth.

AT&T will receive $750 million in cash and a $200 million note, according to a statement from the Dallas-based phone carrier today. AT&T will keep a 47 percent stake in the business, which had about $3.3 billion in revenue in 2011.
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Sales at the Yellow Pages business declined 16 percent last year, compared with revenue growth of about 2 percent for AT&T as a whole.

So $950-million for 53% of a print company with $3.3-billion revenue …. YLO had revenue of $1.3-billion in 2011, but a buyer will have to assume the debt …

Boyd Erman opines in the Globe:

But giving Cerberus the benefit of the assumption that its people have some idea of what they’re doing, the purchase has set a bar for what Yellow Media bondholders, who are now mobilizing, will expect to receive in a restructuring. While the valuation is not enough to create any real recoveries for stockholders, or even preferred shareholders, it is enough to suggest there are gains in store for bondholders gutsy enough to buy Yellow Media paper at distressed levels.

Broadly speaking, Yellow Media has about $1.5-billion of debt that has been trading at about 50 cents on the dollar. If there’s $1-billion of value, that suggests the bonds should be closer to 67 cents on the dollar.

Some bondholders argue there’s more. Applying market multiples to the free cash flow generated from Yellow Media’s old-line and online operations, some bondholders argue you can get to a range of $1.4-billion to $2.2-billion.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets down 1bp and DeemedRetractibles losing 15bp. Volatility was negligible. Volume was ridiculously low.

Julie Dickson’s speech was not very interesting – just a shopping list of aspirations for a board. Of passing interest was:

This leads me to explain why OSFI’s draft guideline (B-20) on Sound Residential Mortgage Underwriting Practices and Procedures, which we made public on March 19th, begins with the statement that boards must establish real estate underwriting policies. In fact, most boards have already established such policies. This makes sense; housing is the largest asset class exposure of banks – almost 42 per cent of total bank assets.

While these policies will have to be updated to reflect the new guidance, going forward senior management will have to provide a declaration to the board that the financial institution is in compliance with the OSFI guideline. This was added because we had noticed cases where board approved polices were not being followed.

Seems to me that if I was on a board that set a policy and that policy was not followed, I’d simply ensure that somebody senior got fired at every board meeting until it did get followed. But perhaps that’s just another reason why I’m not on a big-shot board.

Another, related, reason is my antiquated idea that boards are in place to set policies and hire staff to carry them out. The modern view is that boards exist to provide jobs to unqualified women – despite that fact that it does not work:

A recent study released by the German central bank found that risk taking within the banking industry increases with more women on an executive board. The same goes for younger executives. In contrast, men who are graying at the temples and executives with Ph.D. degrees reduce the level of risk.

Tomorrow’s US jobs number is expected to be encouraging:

Employers probably added more than 200,000 workers to payrolls in March for a fourth straight month as U.S. companies gained confidence sales will keep improving, economists said before a government report today.

Hiring increased by 205,000 after rising by 227,000 in February, according to the median projection of 80 economists surveyed by Bloomberg News. The last time employment advanced at a similar pace for as many months was late 1999 into 2000. The jobless rate probably held at a three-year low of 8.3 percent.

Cowboys will have 45 minutes to settle their bets:

While stock markets around the world are shut for Good Friday, the Labor Department will publish its monthly employment report at 8:30 a.m. New York time. Equity traders will have 45 minutes to react, as trading of futures linked to the Standard & Poor’s 500 Index and Dow Jones Industrial Average will continue until 9:15 a.m. on CME Group Inc. (CME)’s Chicago Mercantile Exchange.

The Canadian jobs number was good:

Canada’s labour market has finally perked up after half a year in the doldrums as a commodities boom and a firmer U.S. economy give employers the confidence to hire.

The economy churned out 82,300 jobs last month, the most since 2008, with many of the positions created in full-time work. The hiring spree sent the country’s jobless rate down two notches to 7.2 per cent in March, matching the lowest rate seen in the recovery.

First National, proud issuer of FN.PR.A, was confirmed at Pfd-3 by DBRS:

DBRS has today confirmed the Senior Secured – Guaranteed Debt and Class A Preference Shares ratings of First National Financial Corporation (FNFC) at BBB and Pfd-3, respectively, and the Issuer Rating of First National Financial LP (FNFLP) at BBB; all trends remain Stable.

The ratings and trends reflect FNFC’s status as Canada’s largest non-bank mortgage originator, with just under $60 billion in mortgages under administration (MUA) as of December 31, 2011; its strong asset quality profile, with all assets secured by real estate and a substantial portion insured; and its high-quality, low-cost servicing capabilities.

The rating on FNFC’s Senior Secured – Guaranteed Debt is based on a senior guarantee from FNFLP and an Intercreditor Agreement between Computershare Trust Company of Canada as the debenture trustee and the lenders under a credit facility. The Intercreditor Agreement ranks the indebtedness created under the debentures equally and ratably with the indebtedness created under FNFLP’s credit facility.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets off 2bp and DeemedRetractibles gaining 11bp. Only one issue made it to the Performance Highlights table. Volume was pathetic.

There are rumours about Rona, too:

In corporate news, Rona Inc. (TSX:RON) has denied that the company is up for sale after stock in the home renovation retailer jumped more than 12 per cent in heavy trading Tuesday on the Toronto Stock Exchange.

The Quebec-based retailer issued the denial in response to movement in its stock after Robert Hull, chief financial officer of Lowe’s Companies Inc., said his U.S.-based rival might be interested if Rona put itself up for sale. On Wednesday, Rona shares lost 42 cents, or four per cent, to $10.06.

The pain in Spain is starting to gain:

Prime Minister Mariano Rajoy said Spain’s situation is one of “extreme difficulty” and signaled that his budget cuts are less painful than a bailout would be, as demand for the nation’s debt slumped at an auction.
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Spain sold 2.59 billion euros ($3.4 billion) of bonds today, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319 percent from 3.376 percent at last month’s sale. Secondary-market yields rose to 4.48 percent.

Spain’s 10-year borrowing costs are approaching the levels seen in December, before the European Central Bank said it would make unlimited three-year loans to bank.

The BoC has published a paper by Bruno Feunou, Jean-Sébastien Fontaine, Abderrahim Taamouti and Roméo Tédongap titled Risk Premium, Variance Premium and the Maturity Structure of Uncertainty:

Expected returns vary when investors face time-varying investment opportunities. Longrun risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician. We show that, for both classes of models, the term structure of risk
implicit in option prices can reveal these risk factors ex-ante. Empirically, we construct the variance term structure implied in SP500 option prices. The variance term structure reveal two important drivers of the bond premium, the equity premium, and the variance premium, jointly. We also consider the term structure of higher-order risks as measured by skewness and kurtosis and still find that two factors are sufficient to summarize the information content from the term structure of risks. Overall, our results bode well for the ability of structural models to explain risk-returns trade-offs across different markets using only very few sources of risk.

Somebody complained to me today that they were getting spam from my company domain, himivest.com. So I found a good article about eMail spoofing:

When this simplistic method is used, you can tell where the mail originated (for example, that it did not come from thewhitehouse.com) by checking the actual mail headers. Many e-mail clients don’t show these by default. In Outlook, open the message and then click View | Options to see the headers, as shown in Figure 3.
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In this example, you can see that the message actually originated from a computer named XDREAM and was sent from the mail.augustmail.com SMTP server.

Unfortunately, even the headers don’t always tell you the truth about where the message came from. Spammers and other spoofers often use open relays to send their bogus or malicious messages. An open relay is an SMTP server that is not correctly configured and so allows third-parties to send e-mail through it that is not sent from nor to a local user. In that case, the “Received from” field in the header only points you to the SMTP server that was victimized.

BAM issued ten year CAD notes at 3.95% to pay off a maturing USD obligation.

Enbridge Gas Distribution, proud issuer of ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F and ENB.PR.H, was confirmed at Pfd-2(low) by DBRS:

DBRS has today confirmed the Unsecured Debentures & Medium-Term Notes, Commercial Paper, and Cumulative & Cumulative Redeemable Convertible Preferred Share ratings of Enbridge Gas Distribution Inc. (EGD or the Company) at “A”, R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The rating confirmation is based on EGD’s low business risk operations, stable regulatory environment in Ontario, strong franchise area and stable financial profile.
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EGD’s financial profile remained stable in 2011, with all credit metrics being commensurate with DBRS’s “A” rating guidelines. DBRS notes that the Company requires significant liquidity to finance working capital (mostly gas inventory for winter distributions). Given the low gas price environment, EGD’s liquidity remains adequate to meet its operational needs. Over the medium term, moderate cash flow deficits are expected, due to a large capex program. However, EGD’s current debt leverage is well below the regulatory capital structure of 36% equity, providing EGD with significant financial flexibility. DBRS expects the Company to remain prudent in funding its cash shortfalls and maintaining its credit metrics within the “A” rating category. In August 2011, the Company financed its $66 million acquisition of 15-megawatt (MW) solar power assets from its parent, Enbridge Inc., with equity, which was viewed as positive to the financial profile.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets gaining 9bp and DeemedRetractibles down 3bp. Volatility was low. Volume was slightly below average.

PerpetualDiscounts now yield 5.17%, equivalent to 6.72% interest at the current conversion factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a dramatic drop from the 230bp reported March 30.

The David Berry saga continues to drag on:

A hearing was originally scheduled before a Hearing Panel of the Investment Industry Regulatory Organization of Canada (IIROC), in the matter of David Berry for April 10 to April 23, 2012. The hearing was adjourned to June 13, 2012.

The hearing concerns allegations that Mr. Berry solicited client orders during the distribution of new issues by Scotia Capital contrary to UMIR 7.7(5) (as it existed prior to May 2005), and conducted off-marketplace trades that were not printed on a marketplace or recognized exchange as required by UMIR 6.4.

Assiduous Readers will remember that David Berry was a superb trader of preferred shares, who was assigned significant capital by Scotia at a time when the market was starved for liquidity. He made ridiculous potfulls of money for the bank and in so doing, a pretty good pile for himself. The bank’s executives got upset that a mere peon was making so much and, when he wouldn’t accept a voluntary pay cut, unleashed an army of accountants and lawyers on his trading to uncover instances where a rule had been broken – I have also heard that clients were swept up in this witchhunt and required to cooperate voluntarily with the investigation as a condition of doing business with Scotia.

Naturally, they found a few picayune transgressions, pretended to be shocked and fired him. He’s suing for $100-million. IIROC is an eager participant in this charade.

Royal Bank is scooping up full control of RBC-Dexia:

Royal Bank of Canada (RY-T57.04-1.70-2.89%) is buying the 50-per-cent stake in RBC Dexia Investor Services that it doesn’t already own from its struggling European partner.

Canada’s largest bank said Tuesday morning it will purchase the 50 per cent stake of RBC Dexia partnership from Banque Internationale à Luxembourg SA for $1.1-billion in cash.

The deal will give RBC full control of the European business, which advises institutional investors and administers large pensions and investment funds. The assets went on the block last year when Banque Internationale à Luxembourg, formerly known as Dexia Banque Internationale, was hit hard by the European banking crisis and forced to jettison assets to stabilize its operations.

DBRS comments:

RBC will take an after-tax charge of approximately $200 million, with $170 million (after tax) of that owing primarily to a write-down of intangibles as a result of revaluing the 50% of RBC Dexia that is already owns. The other $30 million (after tax) represents RBC’s share of a loss related to an exchange of securities at RBC Dexia.

Courtesy of the US housing market, here’s another illustration of the law of unintended consequences:

As many as 1.25 million of America’s least cared for homes are headed for auction after a year-long probe into foreclosure practices kept them off the market.

Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.
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Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent.

The Fed’s confidence in the US economy is increasing:

The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.

“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”

There are many pairs of words that, when seen in the same sentence, alert the reader that some insane logic based on infantile assumptions is about to result in nonsensical verbiage. One such pair is “Privacy” and “Commissioner”. Another is “Internet” and “Regulators”:

Google Inc. (GOOG), owner of the world’s most-popular search engine, misled Australian consumers in 2007 by including paid advertisements from competitors in search results for businesses, an appeal court ruled.

The Federal Court of Appeal in Sydney today overturned a lower court decision and ordered the Mountain View, California- based company to set up a protocol to avoid repeating the practice.
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The ACCC appealed, citing four advertisements, including those that showed up in a search for the Australian company Harvey World Travel, that it said Google should have known would contravene the law.

A search for a business name would include results from competitors who paid to have their ads placed in a column beside the search results.
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A user who sought information about Harvey World Travel was instead given the web address of one of its competitors, the panel said.

“Google tells the user that the URL provided below is the contact information about Harvey World Travel,” the panel wrote. “The enquiry is made of Google and it is Google’s response which is misleading.”

So my question is: why does it matter whether Google’s respons is misleading, assuming that a rational person would consider it misleading, which is by no means obvious? The user isn’t paying Google anything for the service, zip, zero, zilch! How does Google owe some kind of duty to the user? As far as I’m concerned, Google can answer queries of any type with pictures of naked women without breaching any duty; if they aren’t pretty enough, I’ll use a different search engine.

If any user of the Internet can run crying boo-hoo-hoo to the courts to get something fixed – and, doubtless, to get some kind of pecuniary benefit out of the whimpering – I’ve got a long list of websites that I know contain demonstrably false statements about preferred shares …

It was another positive day for the Canadian preferred share market, with PerpetualPremiums up 10bp, and both FixedResets and DeemedRetractibles gaining 12bp. Volatility was good, but surprisingly skewed to the downside. Volume was low.

OSFI has announced:

The Superintendent of Financial Institutions, Julie Dickson, will deliver remarks on the topic of boards and risk governance at the Toronto Board of Trade on Thursday, April 5th.

The Superintendent will address the role of corporate governance in managing risk and elements that make for strong, transparent and accountable boards of directors.

The Superintendent will be available to respond to questions from the news media following her remarks.

I can’t remember anything like this before – it’s a great departure from OSFI’s tradition of secrecy. It could be a major announcement, for all the preciousness of the topic. Who knows? Maybe they will announce that regulated companies can no longer hire senior civil servants within five years of their leaving government service – but knowing OSFI, it’s more likely to be the other way around.

This is the future of retail:

A new front in virtual retailing has emerged on a wall at a busy subway station in downtown Toronto.

An online health and beauty retailer on Monday launched a pop-up store at a key commuter hub that features images of Pampers diapers and Tide detergent, rather than the products themselves. Using a smartphone app, shoppers place their orders by scanning quick response codes – QR codes, for short – on pictures of products, which are then shipped, often as quickly as the next day, to customers free of charge.

My quibble is that displaying images only makes it no different from shopping on-line. I think this kind of thing needs samples to look at and touch – and as soon as those store move in, the big box is dead:

After 50 years of putting mom and pops out of business, big-box retail is having a mid-life crisis. A slow economy has hurt same-store sales, narrowing margins at big stores. Meanwhile, consumers, armed with price-comparison technology, are visiting more stores seeking deals or exclusive merchandise rather than making one-stop, fill-the-cart excursions.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 22bp, FixedResets up 22bp and DeemedRetractibles winning 26bp. The Performance Highlights table is well populated and uniformly positive. Volume was very light.

Sino-Forest is for sale! Who wants to buy … er … something?

Sino-Forest Corp., the embattled timber firm facing fraud allegations is filing for court protection from creditors as it tries to find a buyer for what was once the largest publicly traded forestry firm on the Toronto Stock Exchange.
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While under court protection from its creditors, Sino-Forest hopes to sell its assets to a third party. It has launched a process to consider offers. If the company is unable to find a buyer its assets will be transferred to its debtholders, Sino-Forest said in a statement.

The Canadian preferred share market had a strong day to close the quarter, with PerpetualPremiums up 14bp, FixedResets winning 20bp and DeemedRetractibles gaining 12bp. Volatility was low. Volume was very light.

PerpetualDiscounts now yield 5.26%, equivalent to 6.84% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5% (maybe just a little bit over) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 230bp, a significant narrowing over two days from the 240bp reported March 28.

The Canada budget today continued to reward paperwork and subsidize marginal industry.

Canadian Finance MinisterJim Flaherty is aiming to boost flagging job growth and investment with C$3 billion ($3 billion) over two years for research and job subsidies.

The federal budget set aside C$1.1 billion over five years to support research and development and offered another C$500 million for venture capital.
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The budget also proposed extending a 15 percent mineral exploration tax credit for another year through the end of March 2013 at a cost of about C$100 million.

The penny’s gone:

Canada is scrapping the penny, ending production of the country’s smallest unit of currency this spring.
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The last one-cent coin will be minted this April, ending close to 150 years of the issuance of Canadian pennies. This unit of currency was first produced in 1858 although Canadian-based minting of the coin only began in 1908.

However, the most poignant part of the budget is this:

The budget also announced that the government would conduct a study, including consultation with taxpayers, to better understand why companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims. The result of this study will determine whether any action is required.

It’s no wonder that What-Debt? and Spend-Every-Penny are confused, seeing as how neither of them has much actual work experience, so out of the kindness of my heart, I’ll explain it to them:

Companies that do actual research do not, as a rule, have Suck-Arse Departments. Sucking government arse is a highly specialized field and requires years of brown-nosing (and, usually, a few more years in Cabinet) before proficiency is acquired. Therefore, a company interested in getting government money will hire an outside consultant. Since actually getting the money is a matter of random chance, contingency fees make more sense than anything else. Thank you. That will be $200-million, please.

If they were really interested in promoting research and development, they would create more centres of excellence in academia (by which I mean science and engineering, not sociology. Also, some may associate “Centres of Excellence” with applied research, which is not what I mean – it’s perfectly fine to fund the occasional one-man band to ‘think about smart stuff’. It pays off, in the end). They would evaluate potential hires solely on merit, rather than whether they’re Canadian or not. And they’d recruit grad students on a full ride according to the same criteria. But that’s not going to happen:

R&D is a long-acknowledged driver of economic prosperity and competitiveness, and the prevalent view is that more private investment in R&D will yield significant social benefit. A key driver to the government’s overall innovation strategy is to create new knowledge and a highly skilled workforce. The budget announced that the government will continue to support advanced research at universities and other leading research institutions by providing direct support to granting councils, genomics research, international research and infrastructure investment for Canadian universities, colleges, research hospitals and other not-for-profit research institutes across Canada.

Notice the word “continue”, and no new funding? See that bit about “highly skilled workforce”? That’s code for “undergraduates in sociology, political science, economics and business”, all the little talky-talky pseudo-disciplines.

Canadian Utilities, proud issuer of CU.PR.A, CU.PR.B and CU.PR.C, was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings of the Commercial Paper, Unsecured Debentures and Cumulative Preferred Shares of Canadian Utilities Limited (CU or the Company) at R-1 (low), “A” and Pfd-2 (high), respectively, all with Stable trends. The ratings reflect the Company’s stable portfolio of regulated, low-risk utilities, strong cash flows from its diversified non-regulated operations and its strong financial profile.

The diversity of CU’s asset base provides stability to overall earnings and cash flow, with earnings split approximately 58/42 between CUI’s regulated operations and CU’s non-regulated businesses (including ATCO Gas Australia). DBRS notes that dividends flowing up from CUI has significantly declined over the past two years as CU continues to provide support to CUI during the build-out phase and to preserve the utility’s credit profile. The decline is offset by strong dividends coming from its regulated generation business and non-regulated operations and by CU’s significant cash balance compared with its modest debt and preferred obligations. CU is expected to issue more long-term debt/preferred shares to fund its equity requirement at CUI over the next two years, however, the Company’s non-consolidated debt to capital will remain below 20%.

CU Inc., proud issuer of CIU.PR.A, CUI.PR.B and CIU.PR.C, was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Cumulative Preferred Shares and Commercial Paper of CU Inc. (CUI or the Company) at A (high), Pfd-2 (high) and R-1 (low) respectively, all with Stable trends. The rating confirmations are based on CUI’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, its strong portfolio of diversified regulated businesses and its strong and stable financial profile.

The Company’s business risk profile is viewed as strong, as all of its earnings are generated from regulated electricity and gas businesses, which operate under a reasonably stable regulatory framework. The Company is allowed to earn an adequate return on equity on a reasonable deemed equity ratio for all of its diversified regulated businesses. In addition, the decision of the Alberta Utilities Commission to approve significant credit relief measures to help support the CUI’s credit metrics during construction remains credit positive.

It was a down day for the Canadian preferred share market, with PerpetualPremiums losing 12bp, FixedResets down 8bp and DeemedRetractibles off 9bp. Volatility was fair. Volume was average. ENB issues figured prominently in the volume table, presumably due to the new issue.

Boyd Erman’s piece in the Globe today, Risk factors weaken attraction of Ontario’s bonds (in the print edition, the headline was “Budget-challenged Ontario pays the price with its bonds) does a disservice to those investors who wish to understand the bond market:

Ontario is being treated more and more like the increasingly risky borrower that it is.

As the Ontario government focuses on finding ways in Tuesday’s budget to eliminate the persistent annual deficit, the bond market is exacting a steadily bigger toll for financing the government’s growing debt.
…
But stand back and look at a chart of the spreads over five years and there’s no doubt the general move is to wider spreads. Ontario is simply paying more, relative to Ottawa, than in the past.
…
When the bull market in government bonds ends and yields start to rise, as some observers believe is already happening, what will happen to Ontario then?

He attaches the requisite Cool Chart:

Click for Big

Without saying so in so many words, Mr. Erman appears to be ascribing the entire widening of the spread to credit risk – and the world is a lot more complicated than that. There is a liquidity premium – the Canada bond market is a lot bigger than the Ontario bond market, as are issue sizes and idiosyncratic measures of tradeability and hedgeability with futures. There is also a segmentation issue: many international investors will buy only sovereigns and not even consider subnationals. I am not sure, but there may be pledging issues with the Bank of Canada – if I had more time I would check, but I’m not sure if there are any eligibility or haircut differences between Canadas and Ontarios.

And … if we just glance at the chart, we can see that the shape seems to be reasonably well correlated with corporate spreads – which widened during the crisis not so much out of credit fears, but out of liquidity issues.

How much is liquidity and how much is credit? I don’t know. You could spend your lifetime studying provincial spreads and still have to guess! But to ascribe the entire widening to credit risk is a bold and audacious analysis that is treated in the column as a matter of basic fact.

Be that as it may, Ontarios are basically steady today:

Ontario bond yields didn’t make any drastic moves the morning after Canada’s largest province released its annual budget, but there was enough activity to suggest investors were a bit surprised by the provincial government’s steps to rein in spending.

Although yields for Ontario’s 5-year and 10-year bonds haven’t moved much, there was enough of a dip in early morning trading to make observers speculate that some investors are covering their short positions. These bets were initially made because investors assumed the budget wouldn’t be bold enough to tackle the province’s massive debt load.

Back in the old days at Greydanus Boeckh, I was notorious for refusing to allow staff to install any software beyond the bare-bones system we needed – we continued to use DOS, for instance, until Windows NT came out, skipping the whole Windows Crash-dot-Incompatible mess. Staff would tell me how wonderful and cheap the software was, and I would carefully explain to them that taking the software out of the shrink-wrap was when your costs started. I believe opinion was divided as to whetherr I was just saying no to demonstrate my awesome power and be mean to them, or whether I was just an idiotic technophobe.

However, we have now reached a new level of cost calculation. I bought a new laptop on the weekend for $565 (it’s incredible how cheap these things are!) and have now spent about two hours alone and about two hours on the ‘phone with tech support just trying to get the internet connection to work. So never mind the labour cost of new software – the labour cost of tranferring programmes and data to a new machine now outweighs the cost of the machine itself!

To make things worse, the new machine would not work with the old modem, and in attempting to jam the square machine into the round modem, my ISP eliminated internet access for the old machine, which is why this report is so late Ain’t life grand! But things seem to be back to normal now – and I have a shiny new modem!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets down 11bp and DeemedRetractibles losing 17bp. Volatility was quite good. Volume was below average.

PerpetualDiscounts (all seven of them!) now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 240bp, a sharp widening from the 205bp reported March 21.