PrefBlog

There is a new data point for the collection of Seniority Spreads by Issuer! ELF came out with a new 30-year note (on June 17):

E-L Financial Corporation Limited (TSX :ELF) (TSX: ELF.PR.F) (TSX: ELF.PR.G) (TSX: ELF.PR.H) (the “Company”) announced today that it intends to issue in Canada, by way of private placement, $200 million principal amount of 4.000% senior unsecured notes due June 22, 2050 (the “Notes”).

The offering is expected to close June 22, 2020. The net proceeds of the issue will be used for general corporate purposes.

The Notes will mature on June 22, 2050 and will bear interest at an annual rate of 4.000% calculated and payable semi-annually in arrears on June 22 and December 22 of each year commencing December 22, 2020 and ending June 22, 2050. It is a condition of the closing of the offering that the Notes be assigned a rating of at least “A” by S&P Global Ratings.

The issue will be offered on an agency basis by a syndicate of dealers, co-led by Scotia Capital Inc. and CIBC World Markets Inc., and which includes BMO Nesbitt Burns Inc., National Bank Financial Inc., RBC Dominion Securities Inc. and TD Securities Inc.

ELF has three series of PerpetualDiscounts trading to yield about 5.85% as of the close June 17; equivalent to 7.60% interest, implying a Seniority Spread for this issuer of 360bp, significantly narrower than the overall average of 435bp reported June 17.

Assiduous Reader JD writes in and suggests that I write something about the PACE Savings and Credit Union preferred share scandal:

PACE Savings and Credit Union is launching an investigation into whether a subsidiary improperly sold risky investment products that lost up to 86 per cent of their value when the coronavirus pandemic upended financial markets.

The credit union, based north of Toronto, is trying to rebuild its battered reputation after allegations of fraud and self-dealing involving former top executives who have since been fired. A provincial regulator seized control of PACE in the fall of 2018 to protect its members and deposits, and has overhauled the management and board of directors.
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The new issue became apparent when some clients received letters dated April 28, saying the value of preferred shares purchased through Pace Securities, which paid generous annual dividends of 5 per cent to 7 per cent annually, had fallen from $10 a piece to $1.62 and $1.44, respectively. Individual investments that were initially worth tens or hundreds of thousands of dollars each had been mostly wiped out, and any hope that they might recover was lost with the decision to shut down Pace Securities.
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The preferred shares – which have characteristics of both stocks and bonds – were in two companies and sold through advisers at Pace Securities. One firm was Pace Financial Ltd., a subsidiary of the dealer, and the other was First Hamilton Holdings Inc. The CEO of Pace Securities, Joseph Thomson, was also CEO of First Hamilton, which lists former Ontario premier Ernie Eves as its chairman.
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Pace Financial and First Hamilton both sold preferred shares to investors to raise funds, borrowed more against those funds, and invested in corporate debt to generate returns. As the pandemic crisis unfolded, and share prices plunged, the bank that had allowed Pace Financial and First Hamilton to borrow money to leverage investments through a margin account, Laurentian Bank Securities, pulled its support. That meant Pace Securities needed to raise alternate funds, but it wasn’t able to.
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A 2018 offering memorandum describes First Hamilton’s preferred shares as “a risky investment” that is “suitable for investors … who can afford a total loss of their investment.” According to financial statements from February, 2019, obtained by The Globe, all of the bonds First Hamilton invested in were rated below investment grade. Of those, 71 per cent carried ratings that qualify them as “highly speculative,” and another 18 per cent were rated lower still.
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Retired Toronto transit worker Elaine Gurney, 63, visited a PACE branch in Etobicoke, Ont., to reinvest $100,000 after a guaranteed investment certificate (GIC) expired. After being directed to speak with an adviser, she walked out with preferred shares in Pace Financial Ltd.

IIROC’s finally gotten involved, scheduling a disciplinary hearing:

The discipline hearing concerns allegations that:

(a) Between June 2017 and June 2019, Mr. Thomson, the Ultimate Designated Person (the “UDP”) of PSC, failed to identify and address existing and potential material conflicts of interest in a fair, equitable and transparent manner, and consistent with the best interests of PSC’s clients, contrary to Dealer Member Rule 42;

(b) Between June 2017 and June 2019, Mr. Thomson failed to ensure that investments in two proprietary products, Pace Financial Ltd. and First Hamilton Holdings Inc., for which he was the portfolio manager, were made in accordance with the objectives set out in the applicable Offering Memorandum, contrary to Consolidated Rule 1400;

(c) Between June 2017 and June 2019, Mr. Thomson, as UDP, failed to supervise the activities of PSC to ensure compliance with IIROC requirements and failed to use due diligence to ensure that orders accepted and recommendations made were suitable for clients and within the bounds of good business practice, contrary to Dealer Member Rules 38.5(c), 1300.1(a), (o), (p), (q) and (s); and

(d) Between June 2017 and June 2019, Mr. McRae, as the Chief Compliance Officer failed to monitor and assess compliance by PSC with the Dealer Member Rules and failed to adequately supervise Mr. Thomson’s securities-related activities, contrary to Dealer Member Rule 38.7.

The whole thing stinks. PACE exploited the trust that customers will normally have in their credit unions – which, I venture to speculate, will normally be even greater than that held for banks – to provide referrals to their securities subsidiary. Nothing wrong with that, or at least not much; but I am firmly in favour of total separation of deposit-taking institutions from securities dealers; and, yes, Big Banks, that includes you.

But these horrible securities that were advised! Numbers are lacking in the story, as are details of the holdings of Pace Financial, but basically at least one of the ultimate investment companies was levered up to hell ‘n’ gone to buy … junk bonds. And, I will note that I take issue with the Globe’s characterization of the dividends paid on the preferreds:

preferred shares purchased through Pace Securities, which paid generous annual dividends of 5 per cent to 7 per cent annually

As of June 30, 2017, I reported a median YTW of 5.08% on PerpetualDiscounts and 5.28% on December 29, 2017. As of June 29, 2018 I reported a median YTW of 5.48% on PerpetualDiscounts and 5.88% on December 31, 2018. The June 28, 2019 figure was 5.62%, while December 31, 2019 came in at 5.37%. And these figures are for exchange-traded issues with prospectuses; rated investment-grade by DBRS and with a (modest) minimum liquidity.

Five to seven percent, with no further upside (since they are preferred shares, not actual equity) in what appears to be an extremely aggressive and undiversified hedge fund, sold to unsophisticated grannies who wanted a GIC … well, I don’t want to make (too many!) judgments in advance of the facts. But it stinks, it stinks to high heaven.

There is a very long, very angry thread on the Canadian High Interest Savings Forum about this mess. To my surprise, Financial Wisdom Forum has only a a single bewildered and unanswered query about the matter – which to me simply supports the idea that the investors were even less sophisticated than usual.

Some of the sleazier types in this business don’t even try to look honest:

An Ontario judge has ordered a receiver to oversee Toronto’s StableView Asset Management Inc. after a regulatory probe found investors’ money had been overconcentrated in a penny stock that paid cash consulting fees of more than $100,000 to the wealth manager.

StableView, which was founded and is solely owned by Colin Fisher, manages about $30-million on behalf of 135 clients and states on its website that its “primary concern is capital preservation.” A review by the Ontario Securities Commission found that StableView poured money into a Clarocity Corp., a thinly traded real estate valuation technology company, putting StableView in breach of diversification and liquidity requirements for its funds, court records allege.

The OSC alleges that, from late 2017 to late 2018, one of the company’s funds, StableView Yield and Growth Fund, increased the concentration of its investment in Clarocity from 45 per cent of the fund’s assets to 83 per cent. Over the same period, Clarocity went from 43 per cent of the holdings in StableView’s Progressive Growth Fund to 72 per cent, court records show.

The OSC also found that StableView received fees from Clarocity in the form of cash, common shares and debentures as part of a consulting agreement. StableView received cash payments totalling $105,000 from Clarocity, which Mr. Fisher withdrew from StableView “for his own personal use,” Sherry Brown, an OSC senior forensic accountant, said in an affidavit. The OSC has alleged the fees created a conflict of interest that was not sufficiently disclosed to StableView investors.
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In its application for the receivership, the OSC also raised doubts about how StableView valued its stake in Clarocity, much of which was in debentures. In 2018, StableView recorded the debentures at cost, despite disclosures from Clarocity that its financial position was “substantially deteriorating” – something Mr. Fisher was aware of, the OSC alleges.

But on the other hand, I don’t understand how the big guys run their businesses:

The survey of 300 global asset management firms, which was carried out by WBR Insights in the first quarter of 2020, found that controlling costs was the top priority for 87% of respondents over the next two years.
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To that end, the survey also found that firms are looking to outsourcing and technology to help meet their goals.

For instance, Norther Trust reported that 85% of respondents have outsourced their trading desk or are considering doing so.

I don’t get it, I don’t get it at all. Trading is an absolutely integral part of portfolio management; even separating the function within the firm is a crazy thing to do. I have contempt for firms that use particular brokers in order to use their algorithms – what’s the matter, are margins on investment management so skinny you can’t afford to develop your own algorithms? Outsourcing the desk completely is totally crazy.

Fortunately, however, a firm doesn’t need too many “1%” clients to stay afloat:

The concentration of wealth among Canada’s richest 1 per cent is deeper than previously believed, according to a federal government report based on a new modelling approach.

The top one per cent of Canada’s families hold about 25.6 per cent of the wealth – roughly $3-trillion – up from 13.7 per cent estimated under previous methodology, says the report from the Office of the Parliamentary Budget Officer.
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The amount of money held by Canadian families would total $11.7-trillion if they liquidated all assets and paid off all liabilities, about five times larger than Canada’s annual gross domestic product, the report notes.

Real estate at $5.8-trillion and mortgages at $1.5-trillion are the single largest asset and liabilities categories.

The report adds that the top 0.5 per cent of Canadian families hold 20.5 per cent or $2.4-trillion of the wealth, up from the previous estimate of 9.2 per cent.

I’ve often wondered just how stable the constitution of the “1%” (by income) is. Sure, it seems clear that the 0.5% who hold 20.5% of all Canadian wealth are always going to be part of the 1%, at least in terms of income alone before any horrifying capital losses that might get realized every now and then. But it also seems clear that since the threshold of 1% status (by employment income) was “merely” $225,409 in 2015, it seems to me that there will be plenty of people who bounce in and out of the group on a regular basis, depending on the size of their bonuses.

But yeah, these figures suggest to me that I’m on the right track when suggesting that favourable tax treatment for dividend and interest income be capped; for one thing, valuing real-estate for wealth-tax purposes is too hard; for another, somebody with $6.1-million in the kitty (according to Table 4-2 of the PBO report used as a source by the article) doesn’t really need to be incentivized to save for retirement.

PerpetualDiscounts now yield 5.74%, equivalent to 7.46% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.09%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened significantly to 435bp from the 415bp reported June 10.

Click for Big

TXPR closed at 533.62, up 1.14% on the day. Volume today was 2.27-million, near the median of the past thirty days.

CPD closed at 10.655, up 0.52% on the day. Volume was 70,852, very low in the context of the past 30 trading days.

ZPR closed at 8.31, up 0.97% on the day. Volume of 208,882 was about at the median of the past 30 trading days.

Five-year Canada yields were up 2bp at 0.38% today.