Category: Market Action

Astonishing! There is a continued Greek crisis:

In Athens, unions struck for the second time this week and police used tear gas to counter protesters. George Karatzaferis, who heads one of the three parties supporting interim Prime Minister Lucas Papademos, said he wouldn’t support austerity measures worked out for a rescue. He spoke hours after German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece was missing deficit targets.

“What has particularly bothered me is the humiliation of the country,” Karatzaferis, whose Laos party has 16 members in the 300-seat parliament, said in televised comments. “Clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.”
…
“The Greek offer is not sufficient and they have to go away to come up with a revised plan,” Bertrand Benoit, a spokesman for the German Finance Ministry, said by telephone.

Assiduous Readers will be accustomed to my occasional rants about bond market structure and auction design – these are usually triggered by ignorant whining about exchange trading of bonds, but now the Fed has become involved:

The Federal Reserve secretly selected a handful of banks to bid for debt securities acquired by taxpayers in the U.S. bailout of American International Group Inc., and the rest of Wall Street is wondering what happened to the transparency the central bank said it was committed to upholding.

“The exclusivity by which the process has shut out smaller dealers is a little un-American,” said David Castillo, head of sales and trading at broker Further Lane Securities LP in San Francisco, who said he would have liked to participate. “It seems odd that if you want to get the best possible price that it wouldn’t be open to anyone who wants to put in the most competitive bid.”

After inviting more than 40 broker-dealers to take part in a series of auctions last year, the Federal Reserve Bank of New York asked only Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) to bid on the full $13.2 billion of bonds offered in two sales over the past month. The central bank switched to a less open process after traders blamed the regular, more public disposals for damaging prices in 2011. This week, Goldman Sachs bought $6.2 billion of bonds in an auction.
…
“The purpose should be to get the best price for the taxpayer,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors. “Anybody knows the more bidders the better, so it’s a little hard to understand why they would essentially pick potential winners and losers. That smacks of crony capitalism.”
…
The New York Fed was criticized for damaging credit markets with the regular sales, and halted them in June after disposing of about $10 billion in face value of the assets.

It resumed the sales on Jan. 19, when it unloaded about $7 billion of assets in one block to Credit Suisse, after receiving an unsolicited bid for the securities from Goldman Sachs. Only Barclays and Bank of America were invited to also participate in that auction. Goldman Sachs won the auction for $6.2 billion of bonds this week after Credit Suisse placed an unsolicited bid for the assets. Barclays, Morgan Stanley (MS) and RBS Securities Inc. were also included in that sale. Barclays presented the second- highest offer in both auctions this year, according to a person familiar with the process.

The New York Fed didn’t announce either auction until after they closed, and said the broker-dealers it included were chosen based on the strength of previous bids. The Wall Street firms, and their clients who wished to bid on the assets, were required to sign non-disclosure agreements forbidding them from discussing the offerings. At least one investor opted not to participate for that reason.

Now, I’m not going to state that the Fed did things in the best possible way. I’m not even going to state that the auction method they chose is better than a fully public process! But I will state that calling the process “un-American” or stating that “Anybody knows the more bidders the better” is just plain pig-ignorant.

The Canadian preferred share market took a thumping today, as the very attractive GWO 5.40% Straight issue announced – and later upsized – today sucked all the money out of the market. PerpetualPremiums were down 34bp, FixedResets off 10bp and DeemedRetractibles lost 59bp. There is a very lengthy list of losers – and no winners – in the Performance Highlights table, overwhelmingly comprised of insurance DeemedRetractibles. Volume was a little on the light side.

Greece claims to have reached agreement:

“Discussions between the Greek government and the troika were successfully completed this morning,” Greek Prime Minister Lucas Papademos’s office said in an e-mailed statement today in Athens. “Political leaders have agreed with the result of those negotiations. Therefore there is a general agreement in the context of the new program ahead of tonight’s euro group meeting.” The statement didn’t include any details.

But PIMCO notes potential resistance of Greeks:

“It is very unlikely to lead to growth, jobs, financial stability and new investments,” El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This agreement will be very difficult to sell when the principals, those who have agreed, have to go to their constituents.”

The question on my mind is still: will Greek politicians sell the deal to Greek voters? I supported the idea of a referendum when the idea was floated – very briefly! – last fall. We continue to live in interesting times.

Meanwhile, the guys with the money say “Show me!”:

European finance chiefs are set to defer ratifying a 130 billion-euro ($173 billion) rescue for Greece, pressing the government in Athens to put a newly struck austerity plan into action.

“It’s up to the Greek government by concrete actions — through legislation, other actions — to convince its European partners that the second program can be made to work,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said today as he arrived for an emergency meeting of euro-area finance ministers in Brussels.

And how many stories like this are we going to see?

Greek doctors are fighting a new invisible foe every day at their hospitals: a pneumonia-causing superbug that most existing antibiotics can’t kill.

The culprit is spreading through health centers already weighed down by a shortage of nurses. The hospital-acquired germ killed as many as half of people with blood cancers infected at Laiko General Hospital, a 500-bed facility in central Athens.

The drug-resistant K. pneumoniae bacteria have a genetic mutation that allows them to evade such powerful drugs as AstraZeneca Plc (AZN)’s Merrem and Johnson & Johnson’s Doribax. A 2010 survey found 49 percent of K. pneumoniae samples in Greece aren’t killed by the antibiotics of last resort, known as carbapenems, according to the European Antimicrobial Resistance Surveillance Network. Many doctors have even tried colistin, a 50-year-old drug so potent that it can damage kidneys.

“We’re not used to seeing people die of an untreatable infection,” said John Rex, vice president for clinical infection at London-based AstraZeneca, which is developing a new generation of antibiotics. “That’s like something in a novel of 200 years ago.”

The Bank of Canada has provided another nail in the coffin of Efficient Market Theory:

This paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’ Trading frictions, also known as search frictions, have been argued to affect asset prices, so that asset markets are constrained efficient, with shocks to liquidity causing prices to temporarily deviate from long run fundamentals. In this paper a model is proposed and estimated that combines search frictions with a behavioural assumption where market participants incorrectly believe that the efficient market theory holds. In other words, households are ‘Fooled by Search.’ Such a model is potentially fruitful because it can replicate the observation that real price growth and turnover are highly correlated at an annual frequency in the United States housing market. A linearized version of the model is estimated using standard OLS and annual data. In addition to explaining over 70% of the housing bubble in the United States, the model also predicts and estimation confirms that in regions with a low elasticity of supply, price growth should be more sensitive to turnover. Using the lens of turnover, a supply shock is identified and estimated that has been responsible for over 80% of the fall in real house prices from the peak in 2006 to 2010.

Search costs are important!

This paper examines the impact of bank consolidation on mortgage rates in order to evaluate the extent to which mortgage markets are competitive. Mortgage markets are decentralized and so rates are determined through a search and negotiation process. The primary effect of a merger therefore is to reduce the number of partners available with whom to negotiate, although it can also change the characteristics of the product, and impact the search effort of consumers. Using a Canadian merger as a case study, we find that, overall, consolidation had little effect on rates suggesting that, on average, the mortgage market is fairly competitive. However, a decomposition of the aggregate treatment effect reveals important heterogeneity in the impact of the merger. We find that consumers gathering multiple quotes are affected by the merger, while those who do not search are not. These results suggest that market power originates in large part from the presence of asymmetric search costs.

Woo-Hoo, we’re saved! The CSA is bringing in new Money Market Fund regulations:

Canadian securities regulators have slapped new rules on money market funds in a move that could push already puny yields on these investments even lower.

Under the new regulations, these funds, which typically pay investors around 1 per cent a year, will need to hold at least five per cent of their assets in cash or in securities that can easily be converted into cash within a day. In addition, they must hold at least another 15 per cent of their assets in securities that can be converted within a week.

As I have pointed out until I’m sick to bloody death of saying it, the problem is not liquidity (although that can become a factor in an extreme case, just like any other extreme case) the problem is credit quality – and these rules do absolutely nothing to improve credit quality, which requires mandatory support from the sponsor. But why would a regulator worry about what might actually work?

It was a weak day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 12bp and DeemedRetractibles losing 20bp. Volatility was average, skewed to the downside. Volume was average.

ITG claims that high frequency trading in Canada is becoming less frequent:

“This quarter’s analysis of message traffic data reveals changes in trading behaviour that may signal the begginings of a new regime,” ITG’s analysts wrote. “Improvements in our metric for the quality of order flow, combined with a decline in fleeting orders points to a structural change amongst HFT participants.”

Why are HFTs backing away? Money.

Study author Doug Clark, a managing director at ITG, said that other markets are showing similar trends. That suggests that the business of high-frequency trading is so competitive that some players weren’t making money.

Also, brokerage houses are doing a better job of offering clients algorithms and routers that handle trading in ways that combat high frequency traders and cut their profits.

Zerohedge continues to whine about HFT. Institutional Investor breathlessly tells us of how some “real money” investors’ agents have attempted to remain competitive by the unheard of strategy of getting better at their jobs:

The electronic-trading team at RBC decided to fight back against the problem of “phantom” or “disappearing liquidity,” which they blamed on a subset of high frequency traders using “predatory” tactics. That is how they came up with THOR, a system to help clients such as institutional money managers combat predatory HFT strategies and complete trades at the desired price.

The system has been in use for a year, and Steiner says it has greatly improved liquidity for RBC and its clients — allowing them to execute orders at the desired price.

The real reason behind the fashionability of deprecating HFT can be found in the recent IIAC publication Securities Industry Performance 11Q3:

Even though trading revenue only accounts for about 10% of overall revenue, the severe collapse in net trading revenue of nearly 50% in the year, reflecting substantial losses for equity market-makers, put a significant dent in overall earnings.

The industry’s prop-traders are having their lunch eaten by HFT practitioners who didn’t even go to the right schools! The horror!

Lucas van Praag, world’s greatest corporate spokesman, is leaving Goldman Sachs:

Lucas van Praag, who became one of the public faces of the U.S. financial industry as Goldman Sachs Group Inc.’s global head of corporate communications, is leaving the firm after 12 years.

Van Praag, a 62-year-old British citizen, will retire at the end of March and continue to provide strategic advice as a consultant to the company, according to an internal memo signed by Chief Executive Officer Lloyd C. Blankfein and President Gary D. Cohn. The memo’s contents were confirmed by Michael DuVally, a spokesman. Van Praag was promoted to partner, the highest rank in the New York-based company, in 2006.

The Canadian preferred share market resumed its winning ways today, with PerpetualPremiums winning 18bp, FixedResets gaining 9bp and DeemedRetractibles up 18bp. Volatility was good and highly skewed to the upside, with SLF notable among the winners. Volume was average.

PerpetualDiscounts (those few that are left; only four issues from two issuers) now yield 4.80%, equivalent to 6.24% interest at the standard 1.3x equivalency factor. Long corporates now yield a hair under 4.6%, so the pre-tax interest equivalent spread is now about 165bp, a sharp decline from the 190bp reported on February 1.

This looks better than a government programme as a way to address delinquent underwater mortgages:

Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

What’s more, it seems like there is a direct connection with auto loans:

Three years ago, credit was so tight that the owner of a legal firm with a $400,000 salary and a very good credit score of more than 700 couldn’t get financed to buy the car he wanted from Michael Mosser’s dealership.

“The world is upside-down compared to then,” said Mosser, general manager of Chevrolet and Cadillac stores in Ann Arbor, Michigan. “Today, somebody with a 500 credit score, I can get approved and in a Malibu,” which starts at $22,110.

Lenders resisted extending credit to car buyers when the mortgage market collapsed in 2008, helping push General Motors Corp. and Chrysler LLC into bankruptcy and sending U.S. sales to the lowest point in almost three decades. Amid a slow housing market, auto demand is rebounding, spurring lenders from Bank of America Corp. to Capital One Financial Corp. to approve buyers faster and at better rates to compete for a piece of an expanding market.

Amazingly, another Greek deadline has been missed:

Greek political parties delayed yet again on Tuesday making the tough choice of accepting painful reforms in return for a new international bailout to avoid a chaotic default, seemingly deaf to EU warnings that the eurozone can live without Athens.

With a series of deadlines come and gone, leaders of the three parties in the coalition of Prime Minister Lucas Papademos postponed what was supposed to be a crunch meeting until Wednesday.

S&P affirmed AltaGas, proud issuer of ALA.PR.A:

• AltaGas Ltd. has announced it is acquiring SEMCO Holding Corp., the sole shareholder of SEMCO Holding Corp. from Continental Energy Systems LLC for about C$1.1 billion.
• We are affirming our ratings, including our ‘BBB’ long-term corporate credit rating, on AltaGas.
• In our view, SEMCO has an excellent business risk profile and a highly leveraged financial risk profile.
• We have revised AltaGas’ business risk profile to strong from satisfactory and financial risk profile to significant from aggressive, assuming the transaction closes as expected. The stable outlook reflects our assessment of the company’s business mix, which is increasingly diverse with a greater contribution from fee-based and regulated utility cash flows.

It was another down day for the Canadian preferred share market, with PerpetualPremiums off 16bp, FixedResets down 14bp and DeemedRetractibles losing 18bp. Volatility was minor. Volume was a little below average.

Bloomberg has an interesting story about the legal snarl of an effective Greek default:

Hedge funds seeking to wring profits from a Greek debt restructuring are underestimating the will of policy makers to impose losses on them, according to investors who say trying to beat the politicians is too risky.
…
European banks own most of the 200 billion euros ($263 billion) of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other “non- regulated investors,” own a further 60 billion euros, according to estimates by Pavan Wadhwa, JPMorgan Chase & Co.’s head of global interest-rate strategy.
…
Because hedge funds and other holders could collectively keep the participation rate below that level, Greece has said it may approve legislation that imposes losses on investors who don’t support the voluntary swap by adding a retroactive collective action clause into its bond documentation. Such a provision would give a majority of bondholders the ability to force holdouts to accept the same terms as everyone else.
…
It will be difficult for holdouts to assemble enough votes to block any collective action clause, because European banks have an incentive to support the provision, fund managers said.

A lawsuit against a collective-action clause legislated by the Greek government may also be difficult to win, because it would probably have to be filed in Greece, said a hedge-fund executive whose firm holds the country’s debt and has examined the legal options.

Never play poker with somebody who can change the rules! The question is: will anybody in their right minds ever buy Greek debt again? Or any European’s?

DBRS confirmed GMP.PR.B at Pfd-3(low):

DBRS has confirmed the Pfd-3 (low) rating on the Preferred Share obligations of GMP Capital Inc. (GMP or the Company) with a Stable trend. The rating reflects the strength of the Company’s business franchise as a premier provider of investment banking and capital markets products and services to its targeted market of mid-sized Canadian companies, most of whom operate in the resource and energy sectors. Following the issue of preferred shares in early 2011, the Company’s capitalization has become relatively more aggressive as a result of $66 million in share buybacks completed during the first nine months of 2011. At current levels of financial leverage, the Company’s financial flexibility is somewhat impaired. A continued slump in underwriting and trading activities, which DBRS does not expect to recover in the short to medium term given the weak global economic outlook and continued absence of investor confidence, will prevent a material improvement in this condition in the medium term. Nevertheless, DBRS remains comfortable with the Pfd-3 (low) rating, given the Company’s flexible cost base and its excess regulatory capital at its operating subsidiaries.

The recent run-up in the Canadian preferred share market took a pause today, with PerpetualPremiums down 7bp, FixedResets off 2bp and DeemedRetractibles losing 13bp. Volatility was significant and fairly evenly distributed between asset classes, winners and losers. Volume was average.

Very nice US jobs number today:

The U.S. jobless rate unexpectedly fell in January to the lowest in three years as payrolls climbed more than forecast, casting doubt on the Federal Reserve’s plan to keep interest rates low until late 2014.

The unemployment rate dropped to 8.3 percent, the lowest since February 2009, Labor Department figures showed today in Washington. The 243,000 increase in jobs was the biggest in nine months and exceeded the most optimistic forecast in a Bloomberg News survey. Service industries grew by the most in a year, according to a separate report.
…
The Standard & Poor’s 500 Index rose 1.5 percent to 1,344.90 at the close of trading in New York, extending the best start to a year since 1987. The index is up 6.9 percent in 2012. The yield on the benchmark 10-year Treasury note climbed to 1.92 percent from 1.82 percent late yesterday.

The median projection in the Bloomberg survey called for payrolls to rise by 140,000. Estimates of the 89 economists ranged from increases of 95,000 to 225,000. Revisions added a total of 60,000 jobs to payrolls in November and December.

The most left wing PM since Trudeau just can’t stop meddling with the economy:

Prime Minister Stephen Harper drew an apparent line in the sand on foreign takeovers on Friday, saying he wanted to see BlackBerry-maker Research In Motion grow “as a Canadian company” and questioning whether hostile takeovers of key domestic firms are in the country’s best interests.
…
“Takeovers of critical technology that the government’s invested in, or … hostile takeovers of key Canadian businesses, are obviously something that I think is widely understood is not in this country’s interest,” Mr. Harper said.

Well, it’s been a week and I still don’t see OSFI doing the decent thing and releasing the documents obtained by Bloomberg with a Freedom of Information request:

Bank of Canada Governor Mark Carney talks about the potential impact of the so-called Volcker rule on the trading of government bonds, the European Central Bank’s efforts to ease the region’s debt crisis and bank capital regulations. He speaks with Bloomberg’s Erik Schatzker on the sidelines of the World Economic Forum’s annual meeting in Davos, Switzerland. (Source: Bloomberg)
Attachment: Documents Obtained by Bloomberg. .Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.

Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

But then, you don’t often see OSFI doing the decent thing.

Another very strong day for the Canadian preferred share market, with PerpetualPremiums winning 33bp (taking the median YTW down to -8.58%), FixedResets gaining 28bp and DeemedRetractibles up 36bp. All fourteen entries on the Performance Highlights table wer winners. Volume continued to be extremely heavy.

Nothing happened today.

It was a good day for the Canadian preferred share market, helped along by my decision to stop commenting daily on the four issue PerpetualDiscount index. FixedResets were up 14bp and DeemedRetractibles wone 32bp. Volatility was average. Volume was huge.

Greece is a problem. Portugal, not so much:

Portugal doesn’t present the risk of default that Greece does to the rest of the European Union because officials there are seeking to contain the nation’s financial crisis, according to Fitch Ratings.

“The government there is committed and credible. The economy is highly indebted, but they are working on organizing a debt-for-equity swap,” David Riley, head of the sovereign-debt unit at Fitch Ratings, said at a conference in New York today. “That is the right strategy and in the near term we don’t see them as a significant risk to the rest of the euro zone.”

Banks in Germany, France, Belgium and the U.K. have the least periphery exposure to Portugal, excluding Ireland, among the debtor nations at the heart of the region’s financial crisis, according to data provided by Fitch at a presentation today. Riley wasn’t immediately available to elaborate on a possible debt-to-equity exchange.

Here in Soviet Canuckistan, we know what to do when demand exceeds supply – we allocate the supply:

Canada Mortgage & Housing Corp. said it is rationing mortgage insurance for lenders as the country’s housing agency approaches the legal limit of its ability to backstop the loans.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance,” Charles Sauriol, a spokesman for the Ottawa-based agency, said in an e-mailed statement. “To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays.”

The agency said that lenders have increased their demand for insurance of their mortgages amid “liquidity needs” since the 2007 financial crisis.

“This does not affect the availability of CMHC’s mortgage loan insurance for qualified home buyers and will not impact the cost of buying a house,” Sauriol said in the statement.

Portfolio insurance allows lenders to insure mortgages that aren’t already backstopped by the housing agency. Under Canadian law, homebuyers who put down less than 20 percent of the cost must insure the mortgage. Banks also buy insurance for other home loans before securitizing them.

CMHC said it had C$541 billion ($539 billion) of insurance in force as of Sept. 30. The organization’s legislated limit is C$600 billion, it said.

This comes after news of OSFI micro-management of the banking business:

Canada’s banking regulator is stepping up its scrutiny of the housing sector, concerned about speculators in Toronto and Vancouver as well as riskier lending practices.

In a series of documents made public on Monday, the Office of the Superintendent of Financial Institutions says existing market analysis does not capture the degree of speculation in the condo markets of the two cities. The regulator is also concerned about the long-term risks home equity lines of credit (HELOCs) could pose to the banking sector in a downturn.

As a result, OSFI has told the banks it will now monitor on a quarterly basis what steps the lenders are taking to avoid problems in the HELOC market. It also wants to spend more time compiling data on speculators in the real estate market, and the impact they are having on prices.

The basic problem – such as there is one – is that 40%+ of Canadian banks’ assets are now mortgage related, compared to 30% historically. But it doesn’t occur to the useless twerps at OSFI that they should simply apply a surcharge on the capital required when proportions get massively and quickly out of whack. It’s much more fun to play ‘Let’s pretend we’re bankers!’.

BNS is raising equity capital:

It has long been assumed that Bank of Nova Scotia (BNS-T51.840.310.60%) would need to issue common equity to boost its capital ratios after acquiring abroad. No surprise, then, that the bank is in the market with a new bought deal this afternoon.

But no one was quite sure of when exactly the equity raise would come, and how much it would be worth — especially after it was revealed that the bank is looking to sell its flagship office tower in downtown Toronto for around $1-billion. That money, many believed, could supplant some of the much-needed common equity

For that reason, it is a bit surprising that the bank has gone so big with its capital raise, opting to selling $1.5-billion of new common shares at $50.25 each. And the timing is a little odd considering that the office tower sale is just getting under way.

DBRS confirmed ALA.PR.A at Pfd-3:

DBRS has today confirmed the ratings on the Medium-Term Notes (MTNs) and Preferred Shares – Cumulative of AltaGas Ltd. (AltaGas or the Company) at BBB and Pfd-3, respectively, both with Stable trends.

The rating actions follow the announcement that AltaGas has agreed to acquire SEMCO Holding Corporation (SEMCO). SEMCO is the sole shareholder of SEMCO Energy, Inc., a regulated public utility company with natural gas distribution and storage operations in Michigan and Alaska. The proposed purchase price of approximately US$1.135 billion, including assumed debt of approximately US$355 million, represents about 1.5 times the combined regulated rate base of US$725 million. The transaction value equates to approximately 8.7 times SEMCO’s expected EBITDA of approximately US$130 million in the first full year of ownership in 2013, which is reasonable.

Trading in ALA.PR.A was halted for the last 50 minutes of the day:

TORONTO, Feb. 1, 2012 /CNW/ – The following issues have been halted by IIROC:

Company: AltaGas Ltd.

TSX Symbol: ALA (all issues)

Reason: Pending News

Halt Time (ET): 3:09 PM ET

It was a good strong day for the Canadian preferred share market,with PerpetualDiscounts (all four of them! Both issuers!) up 28bp, FixedResets gaining 22bp and DeemedRetractibles winning 37bp. There was a good long list of Performance Highlights, all winners. Volume was high.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5%, so the pre-tax interest-equivalent spread is now about 190bp, an interesting, but possibly spurious widening from the 180bp reported January 31.

The Greek tragedy continues:

Greece pledged a last-ditch effort to prevent the collapse of a second rescue package from creditors, aiming to complete talks this week on a financial lifeline that’s been in the works for six months.

Greek Premier Lucas Papademos said he would try to meet German-led demands for a bigger debt writedown by investors and deeper budget cuts by his government.
…
Papademos said “some difficulties” beset the debt-swap talks and hinted that donor governments may have to put up more money. Greek Finance Minister Evangelos Venizelos said today in Athens that a formal debt-swap offer must be made by Feb. 13.

Greek Needs
Merkel’s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table. Greece’s initial rescue of 110 billion euros in 2010 was fully taxpayer-funded.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. As recently as Jan. 23, creditors wanted an average coupon of about 4.25 percent, two people familiar with the talks said then.
…
In turn, Greece’s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos’s interim Cabinet.

I suggest they call in Canadian defence minister Peter MacKay for a consultation. He’s good at putting things in writing!

But there’s a fascinating twist to the Greek negotiations:

In discussions late last week in Athens, creditors lowered their demands for an average coupon on the new 30-year securities they would receive to as little as 3.6 percent from 4.25 percent after European officials demanded they take steeper losses, people familiar with the matter said at the time.

While the lower coupon would lead to an estimated loss of 70 percent or more for investors, adding a so-called gross domestic product warrant — which would pay bondholders more if the Greek economy rebounds — would trim the loss in net present value terms by an estimated 0.5 to 3 percentage points, said two people, who declined to be identified because the talks are confidential.

I bet some people are watching the negotiations with keen interest:

California (STOCA1)’s cash may be exhausted by March, Controller John Chiang said in a letter to lawmakers.

The nation’s most-populous state needs $3.3 billion to deal with liquidity needs for March and the first two weeks of April, Chiang said in the letter to state Senator Mark Leno and Assemblyman Bob Blumenfield, who leads the Joint Legislative Budget Committee
…
State receipts were $2.6 billion lower than forecast through Dec. 31, while expenditures were an equal amount higher, Chiang said.

BRF.PR.A was affirmed at P-3(high) by S&P:

• We are assigning our ‘BBB’ long-term corporate credit rating and ‘A-2’ short-term rating to the newly formed Brookfield Renewable Energy Partners L.P. (BREP).
• We are also affirming our ‘BBB’ issue-level rating on the approximately C$1.1 billion rated unsecured debt at BRP Finance ULC and ‘BB+’ global scale and ‘P-3(High)’ Canada scale ratings on Brookfield Renewable Power Preferred Equity Inc.’s preferred stock that BREP assumed as part of the combination.
• In addition, we are withdrawing our ratings, including our ‘BBB’
  long-term corporate credit rating, on both Brookfield Renewable Power Inc. (BRPI) and Brookfield Renewable Power Fund (BRPF) at the companies’ request as a consequence of combination of the two companies.

• We base the rating on our view that the combined credit risk profile of BREP’s portfolio being at least as good as BRPI’s portfolio combined with BRPF.
• The stable outlook reflects our view of the company’s satisfactory business risk profile, which reflects its diversified electricity generation asset portfolio.

The DBRS report on CZP.PR.A’s parent has been updated:

DBRS has today updated its report on Capital Power Income L.P. (the Partnership or CPILP). CPILP’s ratings were downgraded on November 16, 2011, following the close of the acquisition of CPILP by Atlantic Power Corporation (ATP, not rated by DBRS) (the Transaction) on November 7, 2011. At that time, an Issuer Rating of BB was assigned based on the assessment of the new combined entity and a recovery rating of RR4 (indicating an expected recovery of 30% to 50%) was assigned to the Senior Unsecured & Medium-Term Notes.

Post acquisition, CPILP is expected to generate reasonable cash flows from its diverse long-term power contracts. However, the overall credit quality of CPILP has deteriorated due to its weakened financial profile, complex financial structure and subordination implications. These factors have offset increases in the average power purchase agreement (PPA) term, asset base and market capitalization as well as benefits from the greater diversification of fuel source, geography and counterparty risk of the combined entity.

In the medium to long term, CPILP’s cash flow stability will be largely dependent upon its ability to continue to improve operating performance, enhance revenue by ensuring it renegotiates and renews PPAs expiring in the near term at economically acceptable terms and secure long-term energy supply and operating contracts. DBRS estimates cash flow-to-debt and EBITDA interest coverage ratios to average approximately 11% and 2.7 times respectively in the near to medium term. These metrics remain adequate for the current BB rating. DBRS expects that existing outstanding CPILP debt will be refinanced at the ATP level as they mature.

It was a calm day for the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets gaining 9bp and DeemedRetractibles winning 13bp. All entries on the Performance Highlights table were winners. Volume was above average.

PerpetualDiscounts now yield 4.90%, equivalent to 6.37% interest at the standard equivalency factor of 1.3x; note that this measure is plagued by the fact that there are only seven PerpetualDiscounts left in the index and that after the month-end index rebalacing there will only be four! The figures should be taken with a grain of salt – or perhaps a truckload. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread (in this context it is referred to as the Seniority Spread) is now aout 180bp, slightly narrower than the 185bp reported on January 18.

Greece is kicking against the pricks:

European leaders sparred with Greece over a second rescue program, clouding progress toward a permanent aid fund and tougher budget rules designed to stabilize the euro.

Greece faced criticism that its economic makeover is faltering, and it fended off German and Dutch calls for a European overseer to take command of its budget after its deficits surpassed targets for two years.
…
Greece is making progress on one component of the package, nearing an agreement for bondholders to accept deeper losses on a 50 percent cut in the face value of more than 200 billion euros of debt.

European concerns that Greece can deliver budget cuts and economic reforms are holding up other parts of the package, which Greece needs to meet a 14.5 billion-euro bond payment due on March 20.

However, it is beginning to dawn on the Europeans that when the party’s over, somebody has to pay the bills:

Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover.

“Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”

DBRS downgraded Portugal:

DBRS, Inc. (DBRS) has downgraded the Republic of Portugal’s long-term foreign and local currency debt to BBB (low) from BBB. The trend on both ratings remains Negative. The downgrade reflects weaker growth prospects in Portugal, which are likely to make achieving ambitious deficit-reduction targets very challenging. Moreover, the unstable economic environment in Europe, uncertainty over the Greek debt exchange, and ongoing tensions in financial markets intensify downside risks to Portugal’s growth outlook and prospects for debt stabilisation.

The Negative trends reflect our assessment that the ratings have yet to stabilise and that further deterioration in the growth or fiscal outlook could result in a further ratings downgrade. Growth prospects are particularly important to debt stabilisation in Portugal, given the size of the fiscal consolidation programme and the high and rising public debt burden.

The outlook for the Portuguese economy has deteriorated since DBRS’s last review in October 2011. The Bank of Portugal estimates that the economy will contract by 3.1% in 2012 – the second consecutive year of recession – and expand by just 0.3% in 2013.
…
It is not clear when Portugal will be able to reenter the long-term debt markets. According to the EU-IMF programme, Portugal is expected to return to the markets in time to cover a EUR 9.7 billion bond redemption in September 2013.

Sarkozy had some good news for the City:

France plans to unilaterally impose a 0.1 percent tax on financial transactions starting in August, President Nicolas Sarkozy said, brushing aside opposition from the nation’s banks.

“What we want to do is provoke a shock, to set an example,” Sarkozy said late yesterday on French television from Paris. “There’s no reason why deregulated finance, which brought us to the current situation, can’t participate in the restoration of our accounts.”

A France-only levy is opposed by the country’s financial community and its feasibility has been questioned by the Bank of France.
…
The financial transactions tax is among measures Sarkozy unveiled to shrink the French budget deficit and spur growth. He’s also increasing sales taxes and levies on financial incomes to fund a 13 billion-euro cut in payroll charges aimed at reducing labor costs and making France more competitive.

S&P downgraded Encana, which has no preferreds outstanding:

• On Jan. 18, 2012, Standard & Poor’s revised its natural gas price assumptions following a decline in spot and forward North American natural gas prices. Notably, we lowered our long-term price assumptions based on our view that although prices will likely stabilize or modestly
  improve in 2012 due to production curtailment, fundamental supply characteristics will constrain pricing.

• As a result, we are lowering our long-term corporate credit and senior unsecured debt ratings on Calgary, Alta.-based Encana Corp. to ‘BBB’ from ‘BBB+’.
• We are also lowering our senior unsecured debt rating on subsidiary Encana Holdings Finance Corp. to ‘BBB’ from ‘BBB+’.
• We are affirming our ‘A-2’ Canada scale commercial paper rating on Encana.
• The ratings reflect our assessment of the company’s strong internal growth prospects from its large reserve base and undeveloped land holdings, low operating-cost structure, and strong liquidity.
• The stable outlook reflects our view that Encana’s cash flow from asset sales combined with its increasing liquids production while maintaining competitive operating costs will allow the company to maintain its funds from operations-to-debt at more than 30% through 2013.

It was another mixed day for the Canadian preferred share market as PerpetualDiscounts – those few that are left – continue to bounce around like mad. PerpetualDiscounts won 66bp, FixedResets gained 8bp and DeemedRetractibles were down 3bp. Volatility was skewed to the upside. Volume was average.