LFE.PR.B: 13H1 Report, Dividend Policy Announced For Capital Units

August 5th, 2013

On July 8, Quadravest announced:

Canadian Life Companies Split Corp. (the “Company”) is providing the following update to its shareholders. The net asset value (NAV) of the Company has grown over the past number of months due to increasing valuations of its underlying portfolio of life insurance companies. The Company invests primarily in the common shares of Manulife Financial, Sun Life Financial, Great-West Lifeco, and Industrial Alliance. The NAV of the Company today is approximately $14.50 ($13.68 fully diluted). This provides an intrinsic value for the Class A shareholder (LFE) of approximately $4.50 ($3.68 fully diluted). The Company would also like to take this opportunity to re-iterate its dividend policy on its Class A shares. The Company is restricted from paying dividends on its Class A shares until the undiluted NAV reaches $15.00. When, and if, the undiluted NAV exceeds $15.00, dividends will be re-instated.

On July 23, Quadravest announced:

– As stated in a previously disseminated press release on July 8, 2013, Canadian Life Companies Split Corp. (“the Company”) intends to reinstate dividends on its Class A share (TSX: LFE) when the undiluted net asset value (NAV) per unit of the Company exceeds $15. The NAV as of July 23, 2013 is above $14.75.

The Board of Directors indicates that the initial dividend, if and when reinstated, will be in the amount of $0.05 per month ($0.60 per annum). This dividend once reinstated will provide a current dividend yield of 17% based on the latest closing price of LFE on the Toronto Stock Exchange. The directors have taken into account the cash flow and sustainability of the dividend in determining the amount of the dividend. Due to the Company’s unique structure, the additional return to fund this payment is equivalent to a 4% return on the underlying portfolio. Future market value increases and cash flow increases will be used to increase this dividend up to $0.10 per month ($1.20 per annum) as circumstances warrant.

The Company invests primarily in the common shares of Manulife Financial, Sun Life Financial, Great-West Lifeco, and Industrial Alliance. As stated above, the current NAV of the Company today exceeds $14.75 ($13.88 fully diluted). This provides an intrinsic value for the Class A shareholder (LFE) of approximately $4.75 ($3.88 fully diluted).

According to the company, the undiluted NAV was 14.33 on July 31, and 13.69 fully diluted.

They have also released the 13H1 Financials for LFE, whence the following information can be extracted:

MER: The “Base Management Expense Ratio”, which excludes issuance costs and dividends paid on preferreds, is 1.05%.

Average Net Assets: Calculation of this figure is complicated by the exercise of warrants. Assets were 148.3-million at May 31 and 103.7-million at November 30. Giving the latter figure double weight (as the big warrant exercise was at the end of March) provides an average of 118.6-million. Considering dividends paid on the preferreds were $3.342-million and the preferreds pay 0.625 p.a., this implies an average of 10.69-million units outstanding, with an average NAVPU of (13.56 + 12.48) / 2 = 13.02, for a total of 13.02 x 10.69-million = 139.2-million. Taking the average of these two estimates provides a guess of Average Net Assets = 128.9-million.

Underlying Portfolio Yield: Dividends received of 2.178-million time 2 (semi-annual) divided by average net assets of 128.9-million is 3.38%. The main holdings of the fund are the Big Four Insurers:

Guess at LFE Portfolio Yield
Issuer Yield (as of 2013-8-2)
IAG 2.29%
MFC 2.80%
GWO 4.05%
SLF 4.32%
Average 3.36%

The agreement is astonishing (there have to be compensating errors in there somewhere) and justifies the use of 3.36% portfolio yield.

Income Coverage: Net Investment Income of 1,424,271 divided by Preferred Share Distributions of 3,342,072 is 42%. This figure is undoubtedly brought down by delays in investing the proceeds of the warrant exercise, and therefore of earning dividend income. If we say that the fully diluted NAV is 13.69 (as at 7/31) and the portfolio earns 3.36% (calculated above), that’s $0.4600 p.a. before about 0.10 expenses to pay 0.625 preferred dividends, is about 58%, which sounds like a better guess.

Given all this computation, we can now take a stab at estimated credit quality:

Credit Quality of LFE.PR.B
Parameter 0.60 Cap Unit Dividend 1.20 Cap Unit Dividend
Returns template SLF
Data Collection Period 2002-12-8 to 2010-12-8
Expected Annualized Return 7.00%
Underlying Dividend Yield 3.36%
Initial NAV 13.69
Pfd Redemption Value 10.00
Pfd Coupon 0.625
MER 1.05%
Cap Unit Div (above test) 0.60 1.20
Cap Unit Div (below test) 0.00
NAV Test 15.00
Whole Unit Par Value 25.00
Months to Redemption 64
 
Probability of Default 27.58% 29.95%
Loss Given Default 27.29% 26.11%
Expected Loss 7.53% 7.82%
 
Yield to Maturity
9.96 bid on 8/2
6.30%
Expected Redemption Price 9.25 9.22
Yield to Expectations 5.07% 5.02%

Note that there are some problems with the above calculation, beyond all the estimates discussed above: Capital Unit dividends will be paid based on the undiluted NAV and hence will generally be more than estimated by the credit quality calculator, which is based on diluted NAV.

Update: Assiduous Reader prefhound asks in the comments about the sensitivity of the Expected Default Loss to the expected total return. Actually it’s surprisingly little:


Click for Big

The above chart is taken from the December, 2010, edition of PrefLetter, in which the model is discussed in detail. This is part of the PrefLetter 2010 Collection, sold on the PrefLetter website for the low, low price of only $50. That’s right, only $50! Click on PrefLetter right now to purchase the 2010 Collection for only $50! My server is standing by!

Since there is a cash drag, the big problem is sensitivity to return distribution assumptions; see Split Share Credit Quality; as might be expected, sensitivity to everything increases as the NAV declines; see It’s All About Sequence.

MAPF Portfolio Composition: July, 2013

August 5th, 2013

Turnover returned to the quiet levels of the past two years in July, to about 4%.

There is extreme segmentation in the marketplace, with OSFI’s NVCC rule changes in February 2011 having had the effect of splitting the formerly relatively homogeneous Straight Perpetual class of preferreds into three parts:

  • Unaffected Straight Perpetuals
  • DeemedRetractibles explicitly subject to the rules (banks)
  • DeemedRetractibles considered by me, but not (yet!) by the market, to be likely to be explicitly subject to the rules in the future (insurers and insurance holding companies)

This segmentation, and the extreme valuation differences between the segments, has cut down markedly on the opportunities for trading. Another trend that hasn’t helped has been the migration of PerpetualDiscounts into PerpetualPremiums (due to price increases) – many of the PerpetualPremiums have negative Yields-to-Worst and those that don’t aren’t particularly thrilling; speaking very generally, PerpetualPremiums are to be avoided, not traded! This effect has caused the first of the three segments noted above to be untradeable for most practical purposes.

To make this more clear, it used to be that there were 70-odd Straight Perpetuals and I was more or less indifferent as to which ones I owned (subject, of course, to issuer concentration concerns and other risk management factors). Thus, if any one of these 70 were to go down in price by – say – $0.25, I would quite often have something in inventory that I’d be willing to swap for it. The segmentation means that I am no longer indifferent; in addition to checking the valuation of a potential buy to its peers, I also have to check its peer group. This cuts down on the potential for trading.

There is no real hope that this situation will be corrected in the near-term. OSFI has indicated that the long-promised “Draft Definition of Capital” for insurers will not be issued “for public consultation in late 2012 or early 2013”, as they fear that it might encourage speculation in the marketplace. It is not clear why OSFI is so afraid of informed speculation, since the constant speculation in the marketplace is currently less informed than it would be with a little bit of regulatory clarity.

As a result of this delay, I have extended the Deemed Maturity date for insurers and insurance holding companies by three years (to 2025-1-31), in the expectation that when OSFI finally does provide clarity, they will allow the same degree of lead-in time for these companies as they did for banks. This has obviously had a major effect on the durations of preferred shares subject to the change but, fortunately, not much on their calculated yields as most of these issues are either trading near par or were trading at sufficient premium that a par call was expected on economic grounds. However, with the declines in the market over the past two months, the expected capital gain on redemption of the insurance-issued DeemedRetractibles has become an important component of the calculated yield.

Sectoral distribution of the MAPF portfolio on July 31 was as follows:

MAPF Sectoral Analysis 2013-7-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 18.7% (-0.6) 4.39% 6.39
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (0) N/A N/A
PerpetualDiscount 1.2% (+0.5) 5.15% 15.12
Fixed-Reset 20.3% (-2.8) 3.20% 0.89
Deemed-Retractible 52.0% (-0.5) 5.93% 8.62
Scraps (Various) 7.7% (+3.1) 6.61% 11.49
Cash 0% (+0.2) 0.00% 0.00
Total 100% 5.13% 6.93
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from June month-end. Cash is included in totals with duration and yield both equal to zero.
DeemedRetractibles are comprised of all Straight Perpetuals (both PerpetualDiscount and PerpetualPremium) issued by BMO, BNS, CM, ELF, GWO, HSB, IAG, MFC, NA, RY, SLF and TD, which are not exchangable into common at the option of the company. These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31 (banks) or 2025-1-3 (insurers and insurance holding companies), in addition to the call schedule explicitly defined. See OSFI Does Not Grandfather Extant Tier 1 Capital, CM.PR.D, CM.PR.E, CM.PR.G: NVCC Status Confirmed and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis. (all recent editions have a short summary of the argument included in the “DeemedRetractible” section)

Note that the estimate for the time this will become effective for insurers and insurance holding companies was extended by three years in April 2013, due to the delays in OSFI’s providing clarity on the issue.

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2013-7-31
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 40.5% (-2.5)
Pfd-2(high) 33.4% (-0.3)
Pfd-2 8.6% (+0.2)
Pfd-2(low) 9.8% (-0.8)
Pfd-3(high) 0.0% (-1.0)
Pfd-3 3.8% (+2.1)
Pfd-3(low) 1.7% (+1.1)
Pfd-4(high) 0.4% (0)
Pfd-4 1.0% (-0.1)
Pfd-4(low) 0.8% (0)
Cash 0% (+0.2)
Totals will not add precisely due to rounding. Bracketted figures represent change from June month-end.

The increase in lower quality issues was due to the fund’s taking small positions in several lower quality, low spread FixedResets that plunged in value during the month, notably (month’s performance in brackets): FFH.PR.E (-7.31%), CPX.PR.E (-6.68%), TA.PR.D (-8.24%) and TA.PR.F (-10.42%).

Liquidity Distribution is:

MAPF Liquidity Analysis 2013-7-31
Average Daily Trading Weighting
<$50,000 0.4% (-0.2)
$50,000 – $100,000 8.0% (+1.3)
$100,000 – $200,000 21.6% (+10.4)
$200,000 – $300,000 47.1% (+10.9)
>$300,000 23.0% (-1.8)
Cash 0% (+0.2)
Totals will not add precisely due to rounding. Bracketted figures represent change from June month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available the fund’s web page. The fund may be purchased either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) or those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

A similar portfolio composition analysis has been performed on the Claymore Preferred Share ETF (symbol CPD) (and other funds) as of August 31, 2012, and published in the October (mainly methodology), November (most funds), and December (ZPR) 2012, PrefLetter. While direct comparisons are difficult due to the introduction of the DeemedRetractible class of preferred share (see above) it is fair to say:

  • MAPF credit quality is better
  • MAPF liquidity is a lower
  • MAPF Yield is higher
  • Weightings in
    • MAPF is much more exposed to DeemedRetractibles
    • MAPF is much less exposed to Operating Retractibles
    • MAPF is much more exposed to SplitShares
    • MAPF is less exposed to FixFloat / Floater / Ratchet
    • MAPF weighting in FixedResets is much lower

August 2, 2013

August 2nd, 2013

The US jobs number was no great shakes:

“This number isn’t an earth-shaker,” John Manley, who helps oversee $222.7 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “It is debatable if it was good or bad. It was OK. The number still indicates the Fed is going to be there for a while, that is not bad.”

The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed today in Washington. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 gain. Workers spent fewer hours on the job and hourly earnings fell for the first time since October.
The unemployment rate was forecast to drop to 7.5 percent from 7.6 percent, according to the Bloomberg survey median.

Matthew Klein of Bloomberg points out:

The BLS report also tells us what kinds of jobs were added. Here again, the news is not particularly encouraging. More than half of the jobs added last month were either in retail trade or “food services and drinking places.” People employed in those sectors tend to have much shorter work weeks and much lower hourly wages than everyone else.

Even worse, a recent paper by Canadian researchers suggests that many of the people taking these jobs are relatively over-educated. The authors argue that, since 2000, globalization and technological advancement have reduced the demand for “high-skilled” workers. Desperate for employment, these workers ended up pushing the “lower-skilled” out of the job market entirely. This may help explain why the share of people aged 25 to 54 counted as being in the labor force has plunged by 3.5 percentage points since 2000.

The quality of jobs being created is probably connected to the depressing performance of incomes and the decline in the work week. Hourly pay has grown by just 1.9 percent over the past 12 months — basically unchanged since the end of 2009. The data from the BEA tell a similar story. Real after-tax incomes fell in June. Americans still have less purchasing power than they did in November 2012. Our standard of living has barely improved over the past year.

There’s some good, if politically motivated discussion at hotair.com.

Assiduous Reader nervousone begs me to point out:

James, if you’re going to mention the July number in an upcoming comment, show them you’re ahead of the game and make me proud . . . please include this [final paragraph] from todays release,

“The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000.”

No one else will mention it . . . or trade on it (well almost no one else).

The twenty minutes bracketting the jobs announcement is entertaining. Every cowboy in the world is placing a bet on what the number will be and how the market will react to it, then reversing the trade a few minutes afterwards, taking whatever P&L there might be – so there’s lots of volume and the dealers jack up their spreads.

Of perhaps more importance than the revisions is the quality of the jobs. Lots of times they’re part-time, or all government, or (as in the current case) largely crummy jobs … there’s a lot more to the number than the headline.

I’m sure that somebody, somewhere, has a proper econometric model that incorporates the data – all the data – in a sensible manner (possibly feeding into a Taylor Rule based system) whereby a sensible person could actually trade at prices that made sense, once the spreads returned to normal; but in such a rational system, the jobs number would (a) be only one of many inputs, and (b) be foreshadowed by the ADP number anyway. I have, however, never seen such a system.

In Canada, those with jobs are buying houses:

Sales of existing homes in both Toronto and Vancouver, the country’s two most precarious housing markets, hit their highest level for the month of July since 2009 last month.

Greater Vancouver saw a 40.4 per cent year-over-year increase in sales over the Multiple Listing Service, while the Greater Toronto Area saw a 16-per-cent increase.

The Toronto Real Estate Board, meanwhile, noted that last month was the third highest July on record for the city, and pointed to an eight per cent year-over-year increase in the average selling price, to $513,246, as evidence that market conditions are tightening (though averages can be skewed by the types of homes that are selling).

There’s a little reaction to the politicization of the next Fed appointment:

Since the president in an interview with Charlie Rose June 16 indicated he wouldn’t reappoint Federal Reserve Chairman Ben Bernanke, intrigue over his successor has grown to a level where Fed experts and former administration officials are concerned that the selection process is so political it could have long-lasting ramifications for the markets, the eventual nominee’s confirmation hearings and the Fed as an institution.

“What’s really unfortunate is how public and polarized this debate has gotten,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest mutual fund, said in an interview on Bloomberg Television. “This has an impact for the market going forward.”

The president and White House officials have spent the last week trying to defuse an escalating public contest between Lawrence Summers, Obama’s former top economic adviser, and Janet Yellen, the Fed’s current Vice Chair.

Confronted by a chorus of concerns about Summers — and letters from House and Senate Democrats voicing support for Yellen — Obama on Capitol Hill told his party’s lawmakers on July 31 that he has interviewed “lots” of candidates. He threw a new name into the mix, former Fed Vice Chair Donald Kohn, as he and his aides tried to buy some time, saying the choice was weeks away and not until autumn.

The post-mortems on the Fabulous Fab verdict are coming in:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president found liable for his role in a failed $1 billion investment, may have lost his case because jurors rejected his defense that as a junior employee he wasn’t primarily responsible for the transaction.

“Being 28 years old and one of several employees of Goldman Sachs isn’t a defense,” Tom Gorman, a former lawyer with the Securities and Exchange Commission’s Enforcement Division, who is now in private practice, said in an interview.

Tourre was a highly paid specialist working in a particular area who asked people to invest billions of dollars in a product he created, Gorman said.

I think the part “asked people to invest” part is a bit overstated, although technically true. He was a salesman. He had a product. Sold it. Big deal. It is the role of a Portfolio Manager to select good stuff from oodles and oodles of bad they are offered every single day.

Megan McArdle of Bloomberg has a good perspective:

The picture you get from reading about the testimony in the Fabrice “Fabulous Fab” Tourre case is of a bunch of people behaving like idiots. Tourre appears willing to say anything to potential buyers to close the deal. The people buying his mortgage bonds don’t inquire as to whether hedge-funder John Paulson’s “equity perspective” is equivalent to an “equity investment”; they just assume it is, and give Fab Tourre a bunch of money.

But was all this illegal? My impression from watching coverage of the case was that the Securities and Exchange Commission’s case against Tourre was pretty weak. That’s why his lawyers rested without calling any witnesses. And these defenders aren’t arrogant idiots; one securities lawyer I know says they’re “top notch.”

So why did the jury find against him? It’s not exactly clear. “At the end of the day, he probably could have done the right thing,” one, a 61-year-old school principal, said. “But he chose to play the game.”

One hears it over and over, in writing about the financial crisis: “Why isn’t someone in jail?” Fab Tourre is someone. To be sure, he isn’t a very important someone. And he’s not actually going to jail, because this was a civil trial. But we can’t indict “the game.” Fab Tourre may have been the closest substitute we could find.

It was a day of modest declines in the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 5bp and DeemedRetractibles losing 6bp. Volatility was relatively high, but with no clear pattern. Volume was very low, since many hard-working participants in the highest paid profession on earth took the afternoon off ahead of the long weekend; this provides more time to complain about the appalling work ethic prevalent among bar and restaurant staff.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.4811 % 2,622.0
FixedFloater 4.10 % 3.40 % 32,085 18.57 1 0.0000 % 4,046.5
Floater 2.56 % 2.85 % 78,504 20.10 5 0.4811 % 2,831.0
OpRet 4.60 % 2.28 % 79,200 0.65 3 -0.2296 % 2,620.7
SplitShare 4.69 % 4.94 % 59,110 4.16 6 0.0799 % 2,954.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2296 % 2,396.4
Perpetual-Premium 5.67 % 5.16 % 90,720 0.73 12 0.0579 % 2,281.7
Perpetual-Discount 5.41 % 5.50 % 151,332 14.60 25 -0.0427 % 2,377.9
FixedReset 4.95 % 3.65 % 230,146 3.75 85 -0.0549 % 2,464.9
Deemed-Retractible 5.12 % 4.91 % 184,633 7.01 43 -0.0590 % 2,361.1
Performance Highlights
Issue Index Change Notes
CU.PR.F Perpetual-Discount -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 21.51
Evaluated at bid price : 21.81
Bid-YTW : 5.23 %
BAM.PF.A FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.15
Evaluated at bid price : 25.01
Bid-YTW : 4.53 %
CU.PR.E Perpetual-Discount -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.49
Evaluated at bid price : 23.83
Bid-YTW : 5.21 %
FTS.PR.G FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 22.64
Evaluated at bid price : 23.71
Bid-YTW : 4.07 %
TRP.PR.D FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 3.99 %
MFC.PR.F FixedReset 1.26 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 3.86 %
BAM.PR.B Floater 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 18.54
Evaluated at bid price : 18.54
Bid-YTW : 2.85 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Q FixedReset 36,135 RBC sold 24,000 to Anonymous at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 3.55 %
BNS.PR.Z FixedReset 29,833 National crossed 20,000 at 23.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.89
Bid-YTW : 3.92 %
TD.PR.Q Deemed-Retractible 28,620 TD crossed 25,000 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.63 %
ENB.PR.B FixedReset 26,986 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.25
Evaluated at bid price : 24.95
Bid-YTW : 4.06 %
RY.PR.P FixedReset 26,340 RBC bought 10,000 from CIBC at 25.37.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 3.27 %
ENB.PR.Y FixedReset 25,550 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 22.93
Evaluated at bid price : 24.51
Bid-YTW : 4.11 %
There were 14 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRI.PR.B Floater Quote: 23.31 – 24.50
Spot Rate : 1.1900
Average : 0.9570

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.04
Evaluated at bid price : 23.31
Bid-YTW : 2.24 %

BAM.PR.J OpRet Quote: 26.64 – 27.18
Spot Rate : 0.5400
Average : 0.3445

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.64
Bid-YTW : 2.17 %

HSB.PR.C Deemed-Retractible Quote: 25.02 – 25.45
Spot Rate : 0.4300
Average : 0.2915

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 5.19 %

GWO.PR.Q Deemed-Retractible Quote: 24.53 – 24.87
Spot Rate : 0.3400
Average : 0.2350

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.53
Bid-YTW : 5.46 %

CU.PR.C FixedReset Quote: 25.55 – 25.90
Spot Rate : 0.3500
Average : 0.2458

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.59 %

ENB.PR.D FixedReset Quote: 24.61 – 24.85
Spot Rate : 0.2400
Average : 0.1443

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-02
Maturity Price : 23.05
Evaluated at bid price : 24.61
Bid-YTW : 4.10 %

SLF Completes Sale of US Annuities Unit

August 2nd, 2013

Sun Life Financial has announced:

that it has completed the sale of its domestic U.S. annuity business and certain life insurance businesses to Delaware Life Holdings, LLC, which was announced last December.

Updated information regarding the financial impact of the sale and Sun Life Financial’s 2015 financial objectives will be included in the Company’s second quarter financial disclosure, which is scheduled to be released after markets close on Wednesday, August 7, 2013.

“The completion of this transformational transaction significantly reduces Sun Life Financial’s risk profile and earnings volatility,” said Dean Connor, President and CEO. “Our U.S. operations are now focused on our successful employee benefits business and our voluntary benefits business, which have achieved substantial growth during the past two years. We are also continuing to support growth in MFS Investment Management, our highly successful U.S.-based asset manager, which has more than US$350 billion of assets under management globally.”

“We are pleased to transfer this business to a buyer who is committed to customers and the approximately 500 outstanding employees who will continue to support them,” he said.

The transaction includes the sale of 100% of the shares of Sun Life Assurance Company of Canada (U.S.), which includes Sun Life Financial’s domestic U.S. variable annuity, fixed annuity and fixed index annuity products, corporate and bank-owned life insurance products and variable life insurance products.

DBRS comments:

There are no rating implications as DBRS’s ratings of Sun Life already incorporate the completion of this sale.

This continues a trend in the US insurance business:

Investment firms are pursuing annuity deals to add assets, betting they can manage the funds more skillfully. Philip Falcone’s publicly traded Harbinger Group Inc. (HRG), which bought a life and annuity business in 2011, and Apollo Global Management LLC (APO)’s Athene arm, which agreed in December to buy Aviva Plc (AV/)’s U.S. life and annuity unit, were also being reviewed by Lawsky’s office, a person with knowledge of the matter said in May.

Guggenheim Partners, run by Chief Executive Officer Mark Walter, has expanded from a family office with a handful of employees into a $180 billion global asset manager through deals including the acquisitions of Claymore Group and Rydex ETF owner Security Benefit Corp.

Walter, who shot to prominence as the man behind the $2 billion purchase of the Los Angeles Dodgers, has hired investing veterans including Henry Silverman, the former chief operating officer of Apollo, to advise on expansion.

The DFS honcho highlighted the trend in April:

If you look at the deals completed or announced to date, private equity-controlled insurers now account for nearly 30 percent of the indexed annuity market (up from 7 percent a year ago) and 15 percent of the total fixed annuity market (up from 4 percent a year ago).

There can be exceptions, but generally private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments. If just a few of these investments work out, then the firm can be very successful – and the failed ventures are just viewed as a cost of doing business.

This type of business model isn’t necessarily a natural fit for the insurance business, where a failure can put policyholders at sigifnicant risk.

Private equity firms typically manage their investments with a much shorter time horizon — for example, 3-5 years — than is typically required for prudent insurance company management. They may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.

Now, at DFS, we regulate both banks and insurance companies. And the differences between these two industries are quite striking when it comes to private equity investments.

Private equity firms rarely acquire control of banks, not because they are prohibited from doing so, but because the regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like. These regulatory requirements in the banking industry are designed – in part – to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game.

The long term nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank.

We need to ask ourselves whether we need to modernize our regulations to deal with this emerging trend to protect retirees and to protect the financial system.

Approval from the New York Department of Financial Services did not come without a price:

The key heightened policyholder protections to which Guggenheim agreed include:

  • Heightened Capital Standards. Guggenheim will maintain Sun Life New York’s Risk-Based Capital Levels (RBC Levels) at an amount not less than 450 percent. (Capital serves as a buffer that insurers use to absorb unexpected losses and financial shocks – better protecting policyholders.)
  • Backstop Trust Account. Guggenheim will establish a separate backstop trust account totaling $200 million to provide additional protections to policyholders above and beyond the heightened capital levels. If Sun Life New York’s RBC levels fall below 450 percent, the funds in the backstop trust account will be used to replenish (“top up”) Sun Life New York’s RBC levels to at least 450 percent. The $200 million in the trust account will be held separately from other Sun Life New York funds for at least seven years and dedicated to the sole purpose of protecting policyholders.
  • Enhanced Regulatory Scrutiny of Operations, Dividends, Investments, Reinsurance. Any material changes to Guggenheim’s plans of operations of Sun Life New York, including investments, dividends, or reinsurance transactions will require the prior written approval of DFS.
  • Stronger Disclosure and Transparency Requirements. Sun Life New York will file quarterly RBC level reports to DFS – rather than just the annual reports required under New York Insurance Law. Additionally, the insurer will disclose to DFS necessary information concerning corporate structures, control persons, and other information regarding the operations of the company.

450% is a huge level of RBC compared to the standard:

There are five outcomes to the RBC calculation which are determined by comparing a company’s Total Adjusted Capital to its Authorized Control Level Risk-Based Capital. The level of required risk-based capital is calculated and reported annually. Depending upon the level of the reported risk-based capital, a number of remedial actions, if necessary, are available as
follows:

  • 1. No action: Total Adjusted Capital of 200% or more of Authorized Control Level results in “no action.”

Sun Life’s 2012 Annual Report states:

Our principal operating life insurance subsidiary in the United States, Sun Life (U.S.) is part of our Discontinued Operations. Sun Life U.S. is subject to the risk-based capital (“RBC”) rules issued by the National Association of Insurance Commissioners, which measures the ratio of the company’s total adjusted capital to the minimum capital required by the RBC formula. The RBC formula for life insurance companies measures exposures to investment risk, insurance risk, interest rate risk and other market risks and general business risk. A company’s RBC is normally expressed in terms of the CAL. If a life insurance company’s total adjusted capital is less than or equal to the CAL (100% of CAL or less), a comprehensive financial plan must be submitted to its state regulator. Sun Life (U.S.) has established an internal target range for its RBC ratio of 300% to 400% of the CAL.

I am not opposed in principle to higher capital requirements for companies that have less skin in the game than a regular insurer (in which all the sales profits will disappear if the investment side blows up) … but 450% plus a trust-fund buffer? One wonders how the DFS arrived at that figure.

SLF has the following preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and assigned to their respective indices.

S&P Takes WN & L off Watch Negative

August 2nd, 2013

Standard & Poor’s has announced:

  • We are removing our ratings on Loblaw Cos. Ltd., George Weston Ltd. (GWL), and Choice Properties Real Estate Investment Trust from CreditWatch, where they were placed with negative implications July 16, 2013.
  • At the same time, we are affirming our ‘BBB’ ratings on all three companies. GWL and Choice Properties are Loblaw’s parent and subsidiary, respectively.
  • We are also keeping our ratings on Shoppers Drug Mart Corp. on CreditWatch with negative implications (where they were placed July 16), as we expect to equalize our ‘BBB+’ rating on Shoppers with our ‘BBB’ rating on Loblaw upon completion of Loblaw’s acquisition of Shoppers and remove Shoppers from CreditWatch.
  • The stable outlook on Loblaw and its parent and subsidiary reflects our expectation that stronger profitability from synergies and debt reduction from free cash flow should enable the company to lower its leverage to about 3x in the next two years, which we view as consistent with the ‘BBB’ rating.

On Aug. 2, 2013, Standard & Poor’s Ratings Services removed its ratings on Loblaw Cos. Ltd., George Weston Ltd. (GWL), and Choice Properties Real Estate Investment Trust from CreditWatch, where they were placed with negative implications July 16, 2013. At the same time, Standard & Poor’s affirmed its ‘BBB’ ratings on all three companies. GWL and Choice Properties REIT are Loblaw’s parent and subsidiary, respectively. The outlook on all three companies is stable.

At the same time, Standard & Poor’s kept its ratings on Shoppers Drug Mart Corp. on CreditWatch with negative implications (where they were placed July 16), as we expect to equalize our ‘BBB+’ rating on Shoppers with our ‘BBB’ rating on Loblaw upon completion of Loblaw’s acquisition of Shoppers and remove Shoppers from CreditWatch. Should alternative acquisition proposals emerge, we would reassess all our ratings after considering each company’s response.

Giving effect to the acquisition, Loblaw’s financial risk profile weakens somewhat, with leverage that is very high for the rating and is exposed to earnings risk amid the Shoppers integration, reduced cash flow protection because of higher debt service, and adequate liquidity to support a heavy debt repayment schedule. We estimate that Loblaw’s pro forma fully adjusted debt to EBITDA will be 3.8x at closing, which is consistent with the ‘BB’ median for industrials, but we expect this would improve gradually to about 3.5x in 2014 and approach 3.0x in 2015.

We could lower the ratings if leverage remains above 3.5x with poor prospects for improvement, which we expect could occur if intense competition or integration disruptions stagnate revenues and margin improvements, or if unexpected increases in restructuring costs or capital expenditures reduce cash flow for debt reduction.

The placement of these companies on Watch Negative was reported on PrefBlog.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

August 1, 2013

August 1st, 2013

Here’s an amusing – and perhaps inevitable – consequence of preferential ballotting:

The number of parties registered to contest an upper house election due by Nov. 30 has more than doubled to 54 since 2010, with the electoral commission ordering magnifying glasses for voters to read ballot papers more than 1 meter (3 feet, 3 inches) long. A preferential voting system means results may be splintered, raising the prospect small, single interest parties will have final say over what laws pass in the world’s 12th-largest economy.

The influx of new parties has led the Australian Electoral Commission to order 100,000 magnifying glasses to help voters read ballot papers that will be printed in a tiny 6-point font to cram in all the contenders’ names. The total number of candidates won’t be known until after the election is called.

Given a voting system that lets voters indicate an order of preference for candidates, contestants with negligible first-choice selections can be elected. That happened in 2004 when creationist Steve Fielding, who went on to cast decisive votes on laws regarding media ownership, won a Senate seat after his Family First Party snared just 2 percent of the vote in Victoria state. In 1984, Jo Vallentine won a seat while campaigning for the now defunct Nuclear Disarmament Party.

I hadn’t realized there was this money laundering wrinkle in the SAC Capital charges:

The money-laundering complaint U.S. Attorney Preet Bharara filed against Steven Cohen’s SAC Capital Advisors LP raised the prospect that the hedge fund’s $14 billion in assets may be subject to forfeiture.

In announcing the lawsuit and SAC’s parallel indictment for insider trading, Bharara wouldn’t specify the dollar amount he was seeking. His money-laundering complaint just says he wants “all right, title and interest” in SAC’s assets, should he prove his case.

The law underlying the civil case states that any property “involved in” money-laundering activities, or traceable to them, can be forfeited. That sweeping language has proved more limited than it sounds.

Judges have approved forfeiture of illegal profits from a crime plus money derived from those profits, including appropriate interest, according to lawyers who have dealt with the money-laundering law. Bharara said that criminal conduct at the fund had resulted in “hundreds of millions of dollars of illegal profits.”

GWO is still looking for cheap assets:

Great-West Lifeco Inc. won’t let efforts to mesh its recent $1.75-billion acquisition of Irish Life Group with its existing Irish business stand in the way of future mergers.

“Clearly corporate teams will be working with Irish Life Group, but that is in no way going to constrain us from continuing to look for opportunities to grow, whether its additional growth in Europe or the U.S.,” said Paul Mahon, chief executive of Great-West, on a conference call. While other major Canadian life insurers have looked to Asia for growth, Great-West has intensified its focus on Europe. Mr. Mahon noted that further growth within Ireland itself would be unlikely, though.

Does the US want to find the best possible person for the role of Fed chair? Or does it want a woman?

[Former Fed Governor Susan] Phillips said the focus on gender in speculation over who will succeed Ben S. Bernanke as chairman — Fed Vice Chair Janet Yellen, former Treasury Secretary Lawrence Summers or former Vice ChairDonald Kohn — has reminded her that women remain scarce as central-bank heads.

Yellen, 66, would be the first female leader in the central bank’s 100-year history and, while women have populated its senior ranks, there is a “big difference” in the authority and visibility wielded by the chairmen, Phillips said. They speak for the entire institution, set the agenda and often “preserve to themselves” relationships with the administration and Congress.

It is “the second most-powerful position in the country after the president — it’s a very influential position,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former Senate Banking Committee aide. “There is a glass-ceiling element to this that does make this different than being vice chair.”

This follows on the heels of the OSC expanding from policeman to social activist:

Canadian companies will be asked to disclose the proportion of women they have on their boards and in senior management as part of a new policy being proposed by Canada’s largest securities market regulator.

The Ontario Securities Commission will unveil a consultation paper Tuesday suggesting that companies be required to develop and disclose policies to improve their boardroom gender diversity, or else explain why they have opted not to have a policy.

Keystone, Schmeystone! TransCanada’s got a big project in the works!

TransCanada Corp., the country’s second-biggest pipeline operator, plans to go ahead with a C$12 billion ($11.7 billion) pipeline that will ship oil from Western Canada to the East Coast.

The Energy East project would have a capacity of 1.1 million barrels a day and be in service by the end of 2017 for deliveries to Quebec and to New Brunswick in 2018, the Calgary-based company said today in a statement.

The project to supply East Coast refineries and export terminals involves converting a portion of 3,000 kilometers (1,864 miles) of existing 42-inch natural gas pipeline and building 1,400 kilometers of new pipeline, the company said.

Travesty.:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president on trial for his role in a failed $1 billion investment, was found liable on six of seven claims by a jury in Manhattan.

The verdict is a victory for the government in one of the most high-profile trials to come out of the financial crisis of 2007-2008. The U.S. Securities and Exchange Commission accused Tourre, 34, of intentionally misleading participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund of billionaire John Paulson.

Tourre was found liable on three claims of intending to defraud, two claims of negligence and one count of aiding and abetting. He was found not liable on the claim of misrepresentations and omissions.

National Bank has acquired TD Waterhouse Institutional Services:

National Bank of Canada (“National Bank”) and The Toronto-Dominion Bank (“TD”), through subsidiaries, have entered into an agreement providing for the acquisition by National Bank of TD’s institutional services business known as TD Waterhouse Institutional Services.

Like National Bank’s Correspondent Network (“NBCN”), TD Waterhouse Institutional Services is a leader in the provision of back-office solutions, including custody, trading, clearing, settlement and record keeping, for independent Canadian based registered portfolio managers and introducing brokers.

The purchase price for the acquisition is $250 million, subject to a price adjustment mechanism based on asset retention. The transaction is expected to increase National Bank’s 2014 and 2015 recurring EPS by $0.12 and $0.14, respectively, assuming full benefit of the acquisition in fiscal year 2014. National Bank estimates the transaction will reduce its Common Equity Tier 1 ratio under Basel III rules by approximately 40 basis points. National Bank expects its Common Equity Tier 1 ratio to remain above 8% following closing of the transaction. Closing is expected to occur later this year, subject to receipt of required regulatory approvals and other transaction terms and conditions.

I’m glad to see the end of TDWIS – their service policies were an arrogant joke. DBRS notes:

The combination of the Bank’s Correspondent Network and TD Waterhouse Institutional Services will make National a leader in the institutional services business with 408 market intermediaries overseeing over $84 billion in assets under administration.

It would have been nice to see this business pass out of banks’ hands, though. And I find it hard to forget National’s reprehensible conduct regarding playing both sides of the ABCP market prior to the Credit Crunch.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 35bp, FixedResets off 9bp and DeemedRetractibles down 28bp. There is yet another very lengthy Performance Highlights table, heavily skewed towards losers. Volume was on the low side of average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.5953 % 2,609.5
FixedFloater 4.10 % 3.40 % 33,404 18.58 1 0.0000 % 4,046.5
Floater 2.58 % 2.89 % 81,130 20.00 5 -0.5953 % 2,817.5
OpRet 4.59 % 3.35 % 79,542 0.86 3 -0.2037 % 2,626.8
SplitShare 4.70 % 4.84 % 61,584 4.16 6 -0.1942 % 2,952.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2037 % 2,401.9
Perpetual-Premium 5.68 % 5.14 % 94,475 0.58 12 -0.1817 % 2,280.4
Perpetual-Discount 5.41 % 5.52 % 153,147 14.59 25 -0.3465 % 2,378.9
FixedReset 4.94 % 3.65 % 232,427 3.75 85 -0.0863 % 2,466.3
Deemed-Retractible 5.12 % 4.92 % 192,368 7.02 43 -0.2818 % 2,362.5
Performance Highlights
Issue Index Change Notes
TRP.PR.A FixedReset -1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.57
Evaluated at bid price : 24.00
Bid-YTW : 3.90 %
TRI.PR.B Floater -1.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.01
Evaluated at bid price : 23.28
Bid-YTW : 2.24 %
PWF.PR.F Perpetual-Discount -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.45
Evaluated at bid price : 23.74
Bid-YTW : 5.55 %
TRP.PR.D FixedReset -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.02
Evaluated at bid price : 24.70
Bid-YTW : 4.04 %
CU.PR.G Perpetual-Discount -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 21.68
Evaluated at bid price : 21.96
Bid-YTW : 5.21 %
SLF.PR.B Deemed-Retractible -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.35
Bid-YTW : 6.19 %
IAG.PR.A Deemed-Retractible -1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.03
Bid-YTW : 5.62 %
BNS.PR.K Deemed-Retractible -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 5.03 %
SLF.PR.C Deemed-Retractible -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.36
Bid-YTW : 6.33 %
HSE.PR.A FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 22.93
Evaluated at bid price : 23.80
Bid-YTW : 3.76 %
SLF.PR.G FixedReset 1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.47
Bid-YTW : 3.65 %
FTS.PR.J Perpetual-Discount 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 22.89
Evaluated at bid price : 23.30
Bid-YTW : 5.16 %
MFC.PR.C Deemed-Retractible 1.89 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.51
Bid-YTW : 6.33 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.P FixedReset 109,436 Nesbitt crossed 100,000 at 24.57.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.48
Bid-YTW : 3.83 %
CM.PR.E Perpetual-Premium 59,873 RBC crossed 50,000 at 25.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 24.68
Evaluated at bid price : 24.99
Bid-YTW : 5.63 %
HSB.PR.E FixedReset 57,600 RBC crossed 16,300 at 25.86; Desjardins crossed 22,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.84
Bid-YTW : 3.52 %
BMO.PR.M FixedReset 51,733 There may be some buying for conversion purposes with this one.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 2.24 %
RY.PR.T FixedReset 37,274 Nesbitt crossed 35,000 at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 2.45 %
TD.PR.C FixedReset 31,574 TD crossed 25,000 at 25.34.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.32
Bid-YTW : 3.04 %
There were 29 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.I Deemed-Retractible Quote: 22.00 – 22.79
Spot Rate : 0.7900
Average : 0.4996

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.00
Bid-YTW : 6.04 %

GWO.PR.N FixedReset Quote: 23.29 – 23.75
Spot Rate : 0.4600
Average : 0.3147

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.29
Bid-YTW : 3.99 %

TD.PR.R Deemed-Retractible Quote: 25.88 – 26.23
Spot Rate : 0.3500
Average : 0.2092

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.88
Bid-YTW : 4.59 %

BNS.PR.K Deemed-Retractible Quote: 24.66 – 25.07
Spot Rate : 0.4100
Average : 0.2797

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.66
Bid-YTW : 5.03 %

ELF.PR.H Perpetual-Discount Quote: 24.32 – 24.85
Spot Rate : 0.5300
Average : 0.4017

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.94
Evaluated at bid price : 24.32
Bid-YTW : 5.69 %

PWF.PR.F Perpetual-Discount Quote: 23.74 – 24.12
Spot Rate : 0.3800
Average : 0.2530

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-08-01
Maturity Price : 23.45
Evaluated at bid price : 23.74
Bid-YTW : 5.55 %

July 31, 2013

August 1st, 2013

The FOMC statement was released and had no surprises:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Market reaction was favourable:

U.S. stocks extended gains after the Federal Reserve said it will maintain its $85 billion in monthly bond purchases and persistently low inflation could hamper the expansion.

The Standard & Poor’s 500 Index climbed 0.4 percent to 1,692.89 at 2:06 p.m. in New York.

The jury is deliberating on the Fabulous Fab case:

The jurors listened to more than two weeks’ worth of sometimes combative testimony, including from Mr. Tourre himself. Much of the trial was laden with complex jargon that both the S.E.C. and the defense team acknowledged was likely to make the jury’s eyes glaze over. Several jurors appeared to doze off during the financially denser portions of the trial.

The WSJ has a good round-up of the issues:

—Did Mr. Tourre intentionally or recklessly engage in a scheme to defraud investors? This is similar to a conspiracy charge in a criminal case.

— Did Mr. Tourre obtain money or property as a result of material misstatements or omissions? This includes statements in marketing materials for the deal. The jury can decide he was negligent, rather than intentionally committing fraud, in relation to these statements.

—Did Mr. Tourre engage in a deceptive course of conduct related to the offer or sale of securities? Again, the jury can decide he acted in negligence, rather than with intent, in this claim.

Brazil, recently reviled for financial mismanagement is kicking against the pricks:

Brazil’s executive director at the IMF refused to back the fund’s move this week to keep bankrolling Greece, citing risks of non-repayment, and the fund itself said Athens might need faster debt relief from Europe.

“Recent developments in Greece confirm some of our worst fears,” said Paulo Nogueira Batista, Brazil’s executive director at the IMF, who also represents 10 small nations in Central and South America, the Caribbean, Asia and Africa. Batista clarified on Wednesday that he was speaking only for himself.

“Implementation [of Greece’s reform program] has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be over-optimistic,” said Batista, criticizing the IMF executive board’s decision on Monday to release €1.7-billion ($2.32-billion) of rescue loans to Greece.

It was a poor day overall for the Canadian preferred share market, with both PerpetualDiscounts and DeemedRetractibles losing 23bp, while FixedResets gained 6bp. The Performance Highlights table was again very lengthy considering the overall price movement. Volume was average.

PerpetualDiscounts now yield 5.47%, equivalent to 7.11% interest at the standard 1.3x equivalency factor. Long corporates now yield a little under 4.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 240bp, a slight (and perhaps spurious) widening from the 235bp reported July 24.

Pricing for month-end was enlivened by the TSX’s moronic insistence on selling the “Last” quotations rather than the “Closing” quotations. I’m getting really sick of this idiocy, particularly since MAPF owns a hatfull of MFC.PR.C.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.9251 % 2,625.1
FixedFloater 4.10 % 3.40 % 33,462 18.58 1 0.0000 % 4,046.5
Floater 2.67 % 2.87 % 83,803 20.05 4 0.9251 % 2,834.4
OpRet 4.58 % 0.83 % 82,615 0.65 3 0.1403 % 2,632.1
SplitShare 4.69 % 4.74 % 60,816 4.16 6 0.2546 % 2,957.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1403 % 2,406.8
Perpetual-Premium 5.62 % 4.93 % 106,702 0.09 12 -0.0298 % 2,284.5
Perpetual-Discount 5.40 % 5.47 % 137,156 14.64 26 -0.2334 % 2,387.2
FixedReset 4.94 % 3.60 % 234,523 3.52 85 0.0646 % 2,468.4
Deemed-Retractible 5.11 % 4.67 % 195,538 6.86 43 -0.2348 % 2,369.2
Performance Highlights
Issue Index Change Notes
MFC.PR.C Deemed-Retractible -2.54 % Not a real loss, since the day’s low was 21.73 and the closing price was 21.77. Note that this bid is based on the “Last” quote which is not the same thing as the “Closing” quote. The actual “Closing” quote, recovered at great expense from a separate service of the TMX, was a much more reasonable 21.60-78. Just more idiocy, courtesy of the Toronto Stock Exchange
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.11
Bid-YTW : 6.55 %
BAM.PR.N Perpetual-Discount -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 21.57
Evaluated at bid price : 21.57
Bid-YTW : 5.58 %
GWO.PR.H Deemed-Retractible -1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 5.77 %
BAM.PF.C Perpetual-Discount -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 21.30
Evaluated at bid price : 21.59
Bid-YTW : 5.67 %
GWO.PR.G Deemed-Retractible -1.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 5.67 %
BNS.PR.M Deemed-Retractible -1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.83
Bid-YTW : 4.62 %
GWO.PR.F Deemed-Retractible 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-30
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : -15.36 %
TD.PR.Y FixedReset 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.46 %
GWO.PR.M Deemed-Retractible 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 5.00 %
BAM.PR.K Floater 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 18.30
Evaluated at bid price : 18.30
Bid-YTW : 2.89 %
BAM.PR.X FixedReset 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 22.80
Evaluated at bid price : 23.87
Bid-YTW : 3.88 %
BMO.PR.M FixedReset 1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 1.40 %
MFC.PR.F FixedReset 1.74 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.97
Bid-YTW : 3.96 %
TRI.PR.B Floater 1.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 23.37
Evaluated at bid price : 23.66
Bid-YTW : 2.20 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.T FixedReset 99,696 RBC bought blocks of 15,000 and 20,900 from CIBC at 25.56; then crossed 45,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 3.16 %
BMO.PR.M FixedReset 79,345 Will reset at 3.390% coupon. The volume may be due to sharpies setting up to reap a potential big premium on conversion.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-24
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 1.40 %
TRP.PR.D FixedReset 67,586 National sold 10,000 to RBC at 25.10, then crossed 10,400 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 23.13
Evaluated at bid price : 25.04
Bid-YTW : 3.97 %
RY.PR.N FixedReset 29,330 RBC crossed 23,600 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 2.88 %
TD.PR.C FixedReset 26,447 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 2.86 %
PWF.PR.S Perpetual-Discount 22,284 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 23.21
Evaluated at bid price : 23.51
Bid-YTW : 5.12 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.C Deemed-Retractible Quote: 21.11 – 21.78
Spot Rate : 0.6700
Average : 0.4315

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.11
Bid-YTW : 6.55 %

SLF.PR.I FixedReset Quote: 25.36 – 25.76
Spot Rate : 0.4000
Average : 0.2682

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.93 %

TRP.PR.C FixedReset Quote: 23.30 – 23.69
Spot Rate : 0.3900
Average : 0.2649

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-31
Maturity Price : 22.68
Evaluated at bid price : 23.30
Bid-YTW : 3.63 %

BMO.PR.L Deemed-Retractible Quote: 25.91 – 26.19
Spot Rate : 0.2800
Average : 0.1765

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.75
Evaluated at bid price : 25.91
Bid-YTW : 4.37 %

BNA.PR.E SplitShare Quote: 25.31 – 25.75
Spot Rate : 0.4400
Average : 0.3396

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.31
Bid-YTW : 4.74 %

MFC.PR.I FixedReset Quote: 25.70 – 25.97
Spot Rate : 0.2700
Average : 0.1784

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.82 %

TD.PR.T: Big Premium On Debut

August 1st, 2013

TD.PR.T, the FloatingReset part of the TD.PR.S / TD.PR.T Strong Pair, commenced trading today and closed at a very impressive 25.47-55, 33×2, after trading 9,400 shares in a range of 25.50-65.

This compares with TD.PR.S, the FixedReset, closing at 24.60-74, 70×1, after trading 2,223 shares in a range of 24.53-73.

According to the “Quick Method” of the updated Pair Equivalency Calculator, this implies that the break-even 3-Month Bill rate is 2.59%.

Vital statistics are:

TD.PR.S FixedReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.59 %
TD.PR.T FixedReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-29
Maturity Price : 25.50
Evaluated at bid price : 25.47
Bid-YTW : 0.72 %

Both issues are tracked by HIMIPref™ and both are assigned to the FixedReset subindex; TD.PR.T will be assigned to a new FloatingReset index as soon as enough of these issues are outstanding to make such and index meaningful. As announced by TD Bank and reported on PrefBlog, slightly more TD.PR.S shares are outstanding.

FFH: S&P Revises Outlook to Stable from Positive

July 31st, 2013

Standard & Poor’s has announced:

  • Following a review under our revised insurance criteria, we are affirming our ratings on Fairfax and its core subsidiaries.
  • The ratings predominantly reflect our view of the group’s strong business and financial risk profiles, based on its strong competitive position and very strong capital and earnings.
  • We have revised our outlook to stable from positive based on our view that Fairfax will gradually improve its underwriting results and fixed-charge coverage metrics but not enough to warrant an upgrade in the near term.


We assess Fairfax’s capital and earnings as very strong, which we expect to continue in our base-case economic scenario despite the current low interest rates. Its capital adequacy according to our proprietary capital model is currently at the lower end of the ‘AA’ category, which is somewhat lower than historically mainly because of the reduction in interest rates used to discount loss reserves. The group’s exposure to natural peril and man-made catastrophes and uncertainty related to its substantial casualty reserves (both ongoing and runoff) translate into a moderate risk position score, partially offsetting its very strong capital adequacy. Shareholders’ equity (including preferred shares) totaled $8.9 billion as of year-end 2012, up from $8.4 billion as of year-end 2011. We expect Fairfax to maintain its capital adequacy at an ‘AA’ level.

We regard Fairfax’s risk position as moderate. The group has minimal exposure to employee benefit liabilities. Although its exposure to high risk assets is at 70% of total adjusted capital, Fairfax carries substantial cash and liquid fixed-income securities to counterbalance the volatility of equities. About 75% of the portfolio is invested in cash and fixed-income securities with a weighted average rating of ‘A+’. But we are concerned about potential capital and earnings volatility due to its exposure to property catastrophe losses, its willingness to take significant concentrated investment positions to achieve above-average returns, and its asbestos and environmental exposure.

The now obsolete Positive Outlook was reported on PrefBlog when it came into effect …. nearly two years ago!

Fairfax has the following preferreds outstanding: FFH.PR.C, FFH.PR.E, FFH.PR.G, FFH.PR.I AND FFH.PR.K. All are FixedResets; all are relegated to the Scraps index on credit concerns.

MAPF Semi-Annual Financials (Unaudited) Released

July 31st, 2013

I am pleased to announce that the 13H1 Semi-Annual Financials (Unaudited) for Malachite Aggressive Preferred Fund are now available through the fund’s main web page: