Category: Market Action

DBRS reports that the ABCP Clean-up Vehicle is underpaying its first interest payment:

notice delivered by BlackRock (Institutional) Canada Ltd. (the Administrator) regarding the first payment date for Master Asset Vehicle I and Master Asset Vehicle II (collectively, the MAVs).

The notice advised that insufficient proceeds would be available to pay accrued interest in its entirety on the Class A-1 Notes and Class A-2 Notes (collectively, the Class A Notes). The Administrator identified the following three factors that it believes contributed to the interest shortfall:

(1) The MAVs were required to pay certain expenses related to the closing of the transaction.

(2) There was an abbreviated first interest period and a mismatch in the payment dates for certain underlying assets.

(3) A fixed-floating interest rate mismatch exists between the margin funding facility fees and the return generated by the underlying assets.

As outlined in the MAV rating reports published on January 21, 2009, the rating of the Class A Notes addresses the payment of interest as set out in the terms of the transaction documents. According to their respective Trust Indentures, the MAVs have no legal obligation to pay interest before January 22, 2019. Therefore, no negative rating action will result from the failure to pay the full amount of accrued interest on the Class A Notes on any given payment date. However, if after reviewing the first payment date report, DBRS determines that expenses and/or proceeds from the underlying assets are materially different from what was originally modelled, negative rating action may be required.

The saga just never ends, does it?

The Globe & Mail reports more pressure for captive pension managers to become commercial asset managers:

Michael Nobrega, chief executive officer of the Ontario Municipal Employees Retirement System (OMERS), said yesterday that his fund is now open for business and is actively seeking mandates to manage other pension funds’ assets.
…
And while Mr. Nobrega said OMERS should become a superfund manager, he insisted his vision is not motivated by a personal desire to build an empire.

“This is not about Michael Nobrega trying to be president of a superfund,” he told reporters yesterday. “This is about what’s right for plan members. You need resources to manage these [plans]. These are very complex areas.”

There are a number of things that are massively wrong – well, suspicious, anyway – about this idea:

• Regardless of Mr. Nobrega’s personal motivations, concious and unconcious, turning a captive asset manager into just another asset management firm will change the culture. Sales is anti-thetical to performance; and once third-party run-awayable assets become important to the organization, then it’s bang, game over.
• I still see no evidence that large managers outperform small managers, or even medium-size managers. Take a look at all the biggest firms you can think of: they will tell you their headcount, they tout their Assets-under-management, they wax ecstatic about their multiplicity of offices that ensures that clients can be taken out to lunch no matter where they are …. but don’t spend too much time looking for audited performance reports, compliant with what are rather hopefully described as industry standards, unless you want to get as cynical as I am
• Private equity is – at least to some extent – a shell game. The reason you take something private is so that you can discount the expected cash flows from the private entity in your own way rather than marking to market; a bit like the infamous Level 3 Assets that people get so upset about. I will not suggest that private equity is not a good idea; I’ll just say that I suspect returns are subject to inherent smoothing
• Superfunds? Am I lekniW naV piR, the only guy in town who’s been awake for the past twenty years? One of the great scandal-shock-horrors of the recent credit crisis has been the discovery that some banks are too big to fail and that the cost of bail-outs represents an unprecedented strain on public finances. Willem Buiter, particularly, has been scornful of financial systems in which the banking system is not only concentrated, but large relative to GDP. What happens if a superfund gets into trouble? McGuinty is already wetting his pants about the prospect of having to bail-out (or take the political heat for not bailing out) a little rinky-dink plan like GM Canada. Do we really want to take the chance that half (at least) of all Ontario plans are going to make the same Big Bad Mistake?
• And there’s market influence. A certain teflon-coated regional superfund recently took investment action that had the effect of rigging the market in Canadian ABCP (whatever its intentions may have been; and it with some help from its allies) and remember? When it went bust it went bust big-time and in a hurry. Who is prepared to guarantee to me that that won’t happen again? Don’t waste my time snivelling that Bad People will be Frowned At. Guarantee that it won’t happen.

Very good volume today, with the market slightly off; FixedResets might have been adversely affected by news of $300-million+ new supply from RY.

Julia Dickson of OSFI gave a speech to the ABA clearly demonstrating her contempt for investors, the despised third pillar of the banking system. The role of investors – and their reliance on mandated disclosures – was, basically, ignored.

Bloomberg has reported on the Fed’s response to the controversy regarding the size and nature of its emergency actions:

Former Fed Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following the expansion in its assets.

“I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,” Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said in remarks to the conference at Vanderbilt University.

U.S. lawmakers from both political parties, including House Financial Services Committee Chairman Barney Frank, have expressed concern in recent months that the central bank has overstepped its authority by providing emergency credit.

In his speech, Vice Chairman Donald L. Kohn said:

For the credit facilities that we make available to multiple firms, we are not taking significant credit risk that might end up being absorbed by the taxpayer. For almost all the loans made by the Federal Reserve, we look first to sound borrowers for repayment and then to underlying collateral. Moreover, we lend less than the value of the collateral, with the size of the “haircuts” depending on the riskiness of the collateral and on the availability of market prices for the collateral. Some of our lending programs involve nonrecourse loans that look primarily to the collateral rather than to the borrower for repayment in the event that the value of the collateral falls below the amount loaned. In these circumstances, we insist on taking only the very highest quality collateral, lend less than the face amount of the collateral, and typically have other sources to absorb any losses that might nonetheless occur–for example, Treasury capital for our lending against securitized loans.
…
Will These Policies Lead to a Future Surge in Inflation?
No, and the key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion. Our balance sheet has grown rapidly, the amount of reserves has skyrocketed, and announced plans imply further huge increases in Federal Reserve assets and bank reserves. Nonetheless, the size of our balance sheet will not preclude our raising interest rates when that becomes appropriate for macroeconomic stability. Many of the liquidity programs are authorized only while circumstances in the economy and financial markets are “unusual and exigent,” and such programs will be terminated when conditions are no longer so adverse. Those programs and others have been designed to be unattractive in normal market conditions and will naturally wind down as markets improve.

All this is Central Banking 101; we have to rely on the Fed to execute the theory correctly – and this will be fodder for academic arguments for the next century.

Bloomberg notes that inflation concerns are driving down bill yields:

Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13 percent on April 17.

Demand for bills is rising again because investors including foreign central banks are snapping up the shortest- term U.S. securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest U.S. creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.

“There’s a group of investors out there who are looking at what the Fed is doing and the policy action they’ve taken and the asset purchases, and saying ultimately this is inflationary,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock Inc., which manages $483 billion in debt. “You’re going to invest in very short-term bills because you absolutely need not just the quality but also the absolute liquidity.”

An alleged leak of the US bank stress tests has been touted on the Web but frankly, it doesn’t look too credible. We shall see!

Today’s excitement was the DBRS Mass Review-Negative of bank prefs; this was not released in time to have an effect on the market, but we will see what tomorrow brings.

The PerpetualDiscount winning-streak came to an end today; sorry folks, that was my fault. I shouldn’t have posted about it after Friday’s gain. The market was well behaved, with few individual issues showing price changes of much note, on continued good volume.

The first round of the Abitibi CDS auction showed extremely low recovery:

Credit-default swaps traders set an initial value of 3.75 cents on the dollar for bonds of an AbitibiBowater Inc. unit to settle derivatives linked to the newsprint maker that’s now in bankruptcy protection.

Royal Bank has announced:

that it expects to record a goodwill impairment charge (on both a pre and after tax basis) of approximately US$850 million for the second quarter ending April 30, 2009. While the charge will reduce second quarter reported earnings by approximately US$850 million, it is a non-cash item and an accounting adjustment, and will not affect our ongoing operations, or our Tier 1 and Total capital ratios.

It does not affect the capital ratios because goodwill is already deducted from capital. The market yawned. What a difference six months makes, eh? If this announcement had been made at the height of the panic, Royal Bank stock … might have felt some effects.

Yet another strong day on elevated volume.

OSFI has announced:

the results of its latest solvency testing of federally regulated private pension plans.

As part of its regular monitoring activities, OSFI tracks the ratio of plan assets to plan liabilities for the 400 defined benefit plans it regulates. The results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at December 31, 2008 was 0.85, a decrease from 0.98 as reported in June 2008.

One of my favourite examples of boneheaded compensation schemes has always been the Soviet system for evaluating tractor factories’ meeting of goals set in five year plans. They weren’t evaluated on quality of tractors. They weren’t evaluated on quantity of tractors. They were evaluated on weight of tractors. Guess which world economy had the heaviest tractors?

But maybe now I have a new favourite: the SEC system for evaluation of case officers:

The SEC and Finra receive thousands of complaints each year. SEC enforcement offices were evaluated on the number of cases, or “stats,” they brought in, rather than on the seriousness or difficulty of action, said Walter Ricciardi, the agency’s deputy chief of enforcement from 2005 through 2008, in a speech April 1 in New York.

“So if you brought an Enron, that’s one,” Ricciardi said. “If you brought a WorldCom, that’s two.” Delisting 135 defunct companies in a week for failing to file annual reports gave an enforcer 135 cases to count, he said.

But there’s some good news in the bond world, anyway:

JPMorgan Chase & Co., the second- largest U.S. bank by assets, plans to sell dollar-denominated debt without the backing of the U.S. government for the first time since August, according to a person familiar with the transaction.

The New York-based bank plans to sell 10-year notes in a benchmark offering, said the person, who declined to be identified because terms aren’t set. Benchmark typically means at least $500 million.

There are rumours about that the objective of this issue is not so much as to get the money as to establish a market clearing price.

But naturally, recessions mean there are some losers: General Growth and Abitibi have filed for creditor protection.

Yet another solidly positive day for preferred shares on continued relatively heavy volume. PerpetualDiscounts outperformed – as might be expected, given that their duration is now officially well in excess of the FixedResets.

Amidst all the shock and horror about American lending practices, the Boston Fed has published an examination of credit availability to recent bankrupts by Ethan Cohen-Cole, Burcu Duygan-Bump, and Judit Montoriol-Garriga: Forgive and Forget: Who Gets Credit after Bankruptcy and Why?:

Conventional wisdom about individuals who have gone bankrupt is that they find it very difficult to get credit for at least some time after their bankruptcy. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy. This paper makes two contributions using data from one of the largest credit bureaus in the US. First, we show that individuals who file for bankruptcy can indeed get credit very quickly after they file. Indeed, 90% of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 66% have unsecured credit. Second, we show that those individuals who are effectively the least punished and can get the easiest access to credit after bankruptcy tend to be the ones who have shown the least ability and propensity to repay their debt prior to declaring bankruptcy. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing than before. We interpret the widespread credit access and the difference in credit provision across borrower types as evidence that lenders target at-risk borrowers. By means of a simple stylized model we show that this observation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status and that offers credit contracts to each group. This interpretation is also in line with survey evidence that shows that lenders repeatedly solicit debtors to borrow after bankruptcy, with unsecured credit card being the easiest one to obtain.

Holy smokes, the preferred share market is on fire! Up strongly again today, continuing the two week rally highlighted yesterday, with volume still above normal levels.

PerpetualDiscounts now yield 6.87%, equivalent to 9.62% interest at the standard equivalency factor of 1.4x, compared to Long Corporates which continue mired in their range of 7.50% … this time, maybe a hair below, but no more than a hair. The pre-tax interest-equivalent spread has thus narrowed to about 212bp, which is starting to look normal … normal, at least, by Credit Crunch standards, still well above the un-stressedl range of 100-150bp.

It is noteworthy that the Median Duration (YTW) of the HIMIPref™ Fixed-Reset index is now a mere 4.59 Years.

The Globe & Mail reports that new rules for retail bond desks are coming:

Many investors would for the first time find out exactly how much commission they are paying to buy and sell bonds. Industry convention is to hide the commission in the purchase or sale price of the bond, but the new rules would force it to be broken out.

The rules would also require better disclosure of the bond’s yield – the real interest rate based on the price.

Perhaps most importantly, and contentiously, IIROC plans a “fair pricing rule” to enable regulators to punish dealers who trade bonds at prices far from the true market price.

Thoroughly precious and idiotic. There are some fine alternatives available for retail investors who don’t know what they’re doing: funds. I have no idea what this “yield disclosure” thingy might mean; perhaps it simply means that dealers will be required to print the yield on their confirms, as they are for Money Market instruments.

Look for retail bond offerings at brokerages to be even more sharply reduced than they are now. When you buy your GIC, you’ll know you’re getting best execution on the price!

The market continued its rally today with heavy volume. Performance for the past two weeks has been impressive:

Strong performance today on normal volume. Not much news – government holiday!

If Dealbreaker is anything to go by – and I think it is – the latest plan to stimulate an artificial market for highly illiquid and distressed securities will go the way of all the others:

Is it not enough that we are already providing what are effectively failed institutions unbearably low cost capital while the likes of Berkshire Hathaway must wallow in high rates?

It is more than despicable that, now that the PPIP looks like it may be an abject failure even before bids have hit the screens, we should see the attempt to throw the problem onto the “dumb money” of the retail investor, while collecting fees, we might add.

Dealbreaker also brings to my attention an adulatory piece on Bernanke’s management style. Bernanke amazes me. There he was, an academic with experience on the board of the Fed, quietly doing his research on the Depression … normally he could look forward to a life of rewarding work and the the respect of a few dozen of his colleagues who knew and understood what he was talking about. Suddenly, he’s in the hotseat, doing the job he’s been training to do all his life, knowing that every decision he makes will be fodder for academia for the next hundred years … lucky man! And we’re lucky to have him.

Another strong day on the market with increasing volume, particularly among the Fixed-Resets. PerpetualDiscounts are now up 4.26% on the month, while FixedResets are up 2.40%. Average Trading Volume of the former continues its gradual decline, but I see no reason to panic as yet. Who knows, maybe some people simply gave up trading for Lent!

The SEC has announced that facts don’t matter any more:

The U.S. Securities and Exchange Commission will weigh multiple rules to dictate when traders can bet shares will fall, after lawmakers and business groups said short-sellers fueled the financial crisis by targeting banks.
…
[SEC Chairman Mary] Schapiro said the SEC isn’t aware of any “empirical evidence” that shows the elimination of the uptick rule contributed to falling U.S. stock prices. Still, “many members of the public have come to associate short-selling with that volatility and with a loss of investor confidence,” she said.

… but it might simply be some more political grandstanding:

SEC Commissioner Kathleen Casey, a Republican, questioned whether the agency was pushing forward “merely in a political exercise.” If the SEC fails to justify its actions, the agency risked having any rule challenged and shot down by a federal court, she said.

“Empirical evidence must guide regulatory decisions,” said Casey, who said she supported soliciting public comment on the proposals. “If the commission forgets this principle, the D.C. Circuit stands ready to provide a reminder.”

Another day of good solid gains for preferreds, with PerpetualDiscounts gaining 0.35%, just a hairsbreadth better than Fixed Resets. The former asset class now has pre-tax bid-YTW of 7.06%, equivalent to 9.88% interest after application of the standard 1.4x conversion factor. Long corporates remain as near as dammit to 7.5%, so the pre-tax Interest Equivalent spread is now 238bp.

Volume was good today, dominated by the recent FixedReset issues; MFC.PR.D’s volume is picking up. It’s hard to tell what to think about this issue – the issue size was bumped and the underwriters exercised their greenshoe, but the issue has been trading sub-par since its issue with less volume than one might expect from an issue of this size. Could it be that the underwriters took a basketful into inventory?

For the first time in a while, we close a day without any new Fixed-Reset issues being marketted. It is, I suspect, a rather interesting conundrum; the banks – and insurers! – could probably use some more capital with a 5-year call; but market yields now suggest that a new issue should carry a coupon of less than the recent new issues. Who wants to be the first to try selling an issue with a reduced coupon? As far as I can readily recall, it would be a first for the sector.

Again, no commentary! Pretty lazy, huh?