PrefBlog

Aristocrats have fallen on hard times:

Companies across a range of industries are slashing or suspending dividends to cope with the economic fallout from the coronavirus outbreak, complicating the stock selection process for money managers eager to buttress their portfolios with a steady stream of income.
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The S&P 500 dividend aristocrats index, which tracks companies that have increased dividends annually for the past 25 years and includes Exxon and Chevron, has fallen about 19% so far in 2020 as of Thursday, greater than the 12.9% drop over that time for the S&P 500 total return index.
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The S&P 500’s dividend yield recently exceeded the yield on the benchmark 10-year U.S. Treasury by its highest margin in nearly five decades.
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Goldman Sachs expects S&P 500 aggregate dividends to fall 23% to $398 billion in 2020 after rising each year over the past decade.

Amidst frequent reports of commercial evictions, there is talk of a new federal program to pay the rent:

Ottawa is proposing to offer commercial rent relief in the form of loans for landlords of small and medium-sized businesses that would cover up to three-quarters of tenants’ payments for three months, according to sources familiar with the negotiations.

A portion of the loans – as much as two-thirds, according to three sources – is expected to be forgivable. Discussions with provinces and territories were continuing as next month’s rent payments loom, said the sources.
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Three of the sources said the current proposal would require tenants to cover the remaining 25 per cent of their rent, and that the program would initially cover April, May and June rent, with further months subject to a later decision.

Significant questions remained over measures that would guarantee landlords use the money to relieve their tenants, two sources said.

I must say, I’m getting more than a little tired of the continuing execrable quality of the quotes provided by the Exchange.

PerpetualDiscounts now yield 6.15%, equivalent to 8.00% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed significantly, to 425bp from the 445bp reported April 15.

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TXPR closed at 500.86, down 0.57% on the day. Volume today was 3.01-million, about average in the context of the past thirty days.

CPD closed at 9.93, down 0.50% on the day. Volume was 101,126, on the low side in the context of the past 30 trading days.

ZPR closed at 7.66, down 1.16% on the day. Volume of 240,784 was below average in the context of the past 30 trading days.

Five-year Canada yields were down 2bp to 0.42% today.

Alberta Investment Management Corp., known as AIMCo, has had a nasty accident:

Alberta’s government-owned money manager has lost more than $4-billion on what clients are calling a wrong-way bet against sharp swings in stock prices, dealing a heavy financial blow to a province already reeling from falling oil prices and the COVID-19 pandemic.

Alberta Investment Management Corp., known as AIMCo, suffered far larger losses than comparable funds after investing in contracts that pay off only if stock markets remain stable. It lost billions of dollars when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller coaster ride, putting it on the losing end of the trades, according to several senior pension plan officials and other sources who are familiar with the situation.
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AIMCo’s hit on volatility-based investment strategies came on top of a sharp drop in the value of its traditional equity, bond and real estate investments in March, when virtually every investor lost money. The average Canadian pension plan lost 8.7 per cent of its value in the first three months of this year, according to consulting firm Mercer. When it formally reports quarterly results to clients later this month, AIMCo is expected to be down far more than this.

In the five years to December 31, 2018, AIMCo reported total performance of 7.2% vs. benchmark 6.5%, while each of the five years prior to that were above benchmark. On April 8, 2020, they announced:

For the one-year period ending December 31, 2019, AIMCo’s total fund return is 0.5% below that of its benchmark. On a four- and ten-year basis, AIMCo continues to demonstrate strong value add, outperforming its benchmark by 0.5% and 0.8% for each period respectively.

AIMCo has been publicly criticized by LAPP, the Local Authorities Pension Plan:

LAPP’s Statement of Investment Policies and Procedures (SIPP) specifies that AIMCo is expected to deliver a return of 0.85% (net of fees) above the return generated by the Plan’s policy benchmark asset mix over a four-year, annualized time horizon.

As at December 31, 2019, AIMCo generated a four-year, annualized return of 7.40% for LAPP. As at the same date, LAPP’s policy benchmark asset mix generated a 7.02% return over the same four-year, annualized time horizon. Therefore, the value added by AIMCo for the time period was 0.38%, which is short of LAPP’s SIPP-specified value added expectation of 0.85%. As measured by quarter ends, AIMCo has been short of LAPP’s SIPP-specified value added expectations for 46 consecutive quarters, or 11 years and 6 months.

Missing from this statement, however, is an indication of how meeting such an expectation over the past 11 years and 6 months would rank the fund’s performance against its peers. In the ten years to December 31, 2019, Ontario Teachers’ outperformed by 1.4% with a 9.8% return, while OMERS had a 10-year return of 8.2%. HOOPP, for which I have a deep respect, achieved a 10-year return of 11.38%, outperforming their benchmark by 253bp.

Of course, I haven’t delved into the composition of the benchmarks of these funds or how outperformance was achieved; important considerations before taking a view.

As if negative interest rates weren’t bad enough. We now have negative oil prices:

The spot price for West Texas Intermediate plunged deep into negative pricing Monday, closing at minus US$37.63 over fears of rapidly filling storage and sinking demand.

Global demand destruction due to the COVID-19 pandemic and a supply glut that has crude lapping the top of storage tanks means futures traders are finding very few buyers for their soon-to-expire May contracts, throwing into doubt who will take actual delivery of barrels.
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Available storage space is dropping fast at the Cushing, Oklahoma hub, where physical delivery of U.S. oil barrels bought in the futures market takes place. Four weeks ago, the storage hub was half full – now it is 69% full, according to U.S. Energy Department data. Cushing is a key hub for Canada because a lack of coastal access means the bulk of crude ends up there.

The New York Times adds:

The problem isn’t limited to the United States. Out of an estimated 6.8 billion barrels of storage in the world, nearly 60 percent is filled, according to data assembled by various energy consultancies. Storage is almost complete filled in the Caribbean and South Africa, and Angola, Brazil and Nigeria may run out of warehousing capacity within days.

And there was another rare event:

The World Bank’s pandemic bonds triggered on Friday, The Financial Times reported, unleashing roughly $133 million in aid to the poorest nations hit by the coronavirus.

The vehicles, which offered investors highly attractive yields at the risk of losing their principal payment, reached their key threshold after the exponential growth rate of coronavirus in payment-eligible nations turned positive. When the triggers were met, the bondholders’ payments were transferred to the relief pool.

Nations with coronavirus deaths and membership in the World Bank’s International Development Association can now tap most of the $196 million sum created by the bonds’ issuance.

Investors who bought the organization’s riskier Class B bonds lost all of their money, while those who purchased Class A bonds will lose 16.7 cents on the dollar, the FT reported.

The World Bank has highlighted the news release in which these bonds were touted nearly three years ago, as part of their capital-at-risk programme.

I got notice today of imminent price increases for the Exchange quotes I use … ah, well, quality costs money! So here’s today’s round-up of the action, as indicated by the quality quotes provided by the protected monopoly:

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TXPR closed at 501.84, up 0.97% on the day, which was about 172bp higher than the day’s low, with a late recovery commencing at 3:30 that put even the last two day’s late rallies to shame. Volume today was superb at 7.21-million, behind only March 18 in the past thirty days.

CPD closed at 9.88, down 0.30% on the day. Volume was 147,035, near the median of the past 30 trading days.

ZPR closed at 7.73, up 0.91% on the day. Volume of 138,961 was the lowest of the past 30 trading days, behind even April 15.

Five-year Canada yields were up 3bp to 0.46% today.

S&P downgraded First Quantum Minerals one notch to CCC+:

• We see increased risks across Canada-headquartered copper miner First Quantum Minerals’ (FQM’s) countries of operation, which could negatively affect production and operating costs.
• Given our lower EBITDA forecast for 2020, we now expect a material deterioration in the company’s liquidity position and a covenant breach at the June testing date.
• We are therefore lowering to ‘CCC+’ from ‘B-‘ our long-term issuer credit rating on FQM and its senior unsecured bonds.
• The stable outlook factors in our expectation that the company would be able to secure an amendment to its coming financial covenants testing in June 2020, as well as no further deterioration in production or copper prices beyond our current EBITDA forecast.

S&P also downgraded Ensign Drilling Inc. four notches to CCC+:

• We expect Canada-based Ensign Drilling Inc.’s credit metrics to weaken materially due to significant cuts in capital budgets by exploration and production (E&P) companies, driven by the substantial drop in crude oil prices.
• Although we expect the company to generate positive free cash flows, limited availability on the credit facility and the potential for covenant breaches constrain the rating.
• Accordingly, S&P Global Ratings lowered its long-term issuer credit rating on Ensign and its issue-level rating on the company’s unsecured debt to ‘CCC+’ from ‘BB-‘.
• The negative outlook incorporates our view that credit measures will remain weak over the next 12 months due to reduced drilling activity and that there is potential for liquidity to further deteriorate, if activity levels don’t recover.

OSFI released a statement titled Statement from the Superintendent on Canadian bank capital and dividends:

When there are periods of economic uncertainty or a downturn, releasing capital buffers is the first step in OSFI’s contingency plan, as it enables banks to use the funds that had been set aside. To this end, on March 13, OSFI released 1.25 percentage points, which was about 55% of the Domestic Stability Buffer and at the same time, OSFI prohibited dividend increases and cancelled future share buybacks. OSFI will continue to monitor institutions’ capital and liquidity levels and if conditions warrant, is prepared to release the remaining 1.0 percentage points of the buffer.

OSFI has built other contingency measures into Canada’s capital regime. Specifically, as banks move through capital layers, there are disbursement restrictions. For example, if sustaining a bank’s capital level requires it to access funds that are in the Capital Conservation Buffer, the bank will be automatically required to restrict disbursements, including dividends and share buybacks. Restrictions for larger banks would apply earlier when its capital levels fall within the D-SIB surcharge threshold.

OSFI has long signalled its expectations that banks use their capital buffer in the event of a downturn or period of economic uncertainty. For example in 2016 and 2017, I noted “…of course, a bank that is using up its capital needs to recapitalize. If this goes on long enough, or happens quickly enough, dramatic measures may be required. But for a bank that starts with capital well above its regulatory minimum, we all need to see the idea of using some of the bank’s capital buffer as the normal first step in the process …”

Is this a sign they’re feeling a little bit of political pressure? Bank dividends have been a hot topic lately, as mentioned on April 9 and April 2. For all that the implied reassurance may be welcome, this is a sign of an unhealthy economy: Canada’s financial system is grossly overweighted in banks and retirement portfolios reflect that in spades, given retirees need for income. Having all one’s eggs in one basket is not a good idea – I can only hope, rather forlornly, that the banks will be broken up once this idea becomes more acceptable in polite society. So we can expect a burst of bank hiring of ex-politicians in the near future!

Meanwhile Mutual Funds that own bonds are now allowed increased borrowing to fund redemptions, if they’re having trouble selling bonds:

As a result of the Coronavirus pandemic (“COVID-19”), the Ontario Securities Commission (the “Commission”) is providing to mutual funds temporary exemption from the borrowing limits set out in Ontario securities law, subject to terms and conditions, in order to accommodate requests for the redemption of mutual fund securities under securities legislation.

Description of Order

The order provides a temporary exemption to mutual funds that are subject to National Instrument 81-102 Investment Funds (“NI 81-102”), other than labour sponsored or venture capital funds, and which invest in fixed income securities from the borrowing limit imposed in subparagraph 2.6(1)(a)(i) of NI 81-102 for the period from April 17, 2020 to July 31, 2020 (the “Effective Period”), provided that the outstanding amount of all borrowings made by the mutual fund does not exceed 10 percent of its net asset value at the time of borrowing during the Effective Period.

The relief provided above is subject to the following terms and conditions:

• Any mutual fund relying on the order must use the temporary exemption from the borrowing limit only for the purpose of facilitating an orderly liquidation of fixed income securities to deal with the short-term dislocation in the fixed income securities market due to the COVID-19 pandemic, in order to accommodate requests for the redemption of securities of the mutual fund received during the period from April 17, 2020 to July 30, 2020.

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