PrefBlog

Kevin Carmichael of the Centre for International Governance Innovation writes a piece in the Globe titled Canada’s monetary authority lacks American commitment to transparency:

The Bank of Canada believes transcripts and minutes would degrade the quality of debate by making policy makers conscious of an external audience. There also is a belief that since the Governing Council exists by convention, and that it is the governor who is responsible for monetary policy under the Bank of Canada Act, an official record of the policy committee’s meetings is unnecessary. “There are no votes; instead, the Governing Council works toward a consensus viewpoint,” Rebeca Ryall, a media relations officer at the Bank of Canada, said in an e-mail. “This process allows for a frank discussion where Governing Council members are free to challenge one another and push the boundaries of the debate in order to arrive at a decision they are all comfortable with.”

In other words, the members of Governing Council are such pathetic little twerps they will burst into tears if they are contradicted in public. Though I will admit there are other possibilities: the meetings either don’t happen at all, or are closely supervised by a few functionaries from the Ministry of Finance casually wielding rubber hoses.

Mr. Carmichael’s article references a paper by Kevin Warsh titled Transparency and the Bank of England’s Monetary Policy Committee which includes the following three charts:

Click For Big

Click For Big

Click For Big

I will be pleased to concede that the scoring is highly subjective and I will also cheerfully admit that it will be very difficult to prove to a determined skeptic that transparency is a good proxy or predictor for quality of the Bank’s decisions or the effectiveness of its implementation of policy.

After all, the main reason for transparency is to improve the public’s confidence in, and ability to predict the future course of, the process. If, for instance, one section of the minutes, released after three weeks, were to include the statement “If housing prices go up any more we’re gonna have to kick some ass (growls of approbation)“, then I suggest that would probably count as pretty good jawboning and result in very good transmission of monetary policy – particularly should housing prices go up, followed by a 50bp hike in policy rates at the next meeting.

And, given that the Bank of Canada is out of step with its peers (ranking just above the bottom on the current scoring, whereas in 1998 it ranked just below the top), I suggest that the onus of explanation for the variance from international trends is now with the Bank. If they’ve got a better reason for secrecy than cowardice and total lack of intellectual talent, let’s hear it.

Anyway, Assiduous Readers will recognize this as a long-term PrefBlog gripe, last voiced October 30, 2014, when the CDHowe Institute advocated the publication of minutes with particular emphasis on disclosure of dissenting views.

A reliable source advises me that 12,501,577 shares (of 22-million outstanding, or 57%) of TRP.PR.A have been converted to TRP.PR.F, its corresponding FloatingReset. I can’t confirm this on the company site, SEDAR, or the TSX site as yet, but will issue a full post when the company decides to let its investors know what’s going on.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 15bp and DeemedRetractibles flat. Volatility continued to be both high and dominated by familiar issues, with ENB issues prominent on the upside, continuing a recovery from the probably credit induced downturn experienced earlier this month. Volume was many adjectives low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.58, is $1.36 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.35 and resetting at +154bp on 2016-1-30 is $0.98 rich.

Click for Big

MFC.PR.F has wandered off into its own little cheap world again, bid at 21.30 to be $0.50 cheap according to the calculation. It resets 2016-6-19 at +141bp. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.99 and appears to be $0.72 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.00 and appears to be $1.10 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.95, looks $1.16 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.40, looks $1.17 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current very wide range of (mostly) 1.50%-1.70%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.16 (at the lower end of the range, 1.50%).

With all the idiotically mandated bonus deferrals, we’re going to see a lot more of this:

Bank of America Corp. maliciously fired a distressed-debt banker to deprive her of a bonus, a Hong Kong judge ruled, awarding Sunny Tadjudin $500,000 after a seven-year legal battle.

Tadjudin’s manager, John Liptak, was determined to fire her despite her improvement in a performance plan, and his malice can be attributed to the bank, High Court Judge Anthony To said in a 141-page ruling issued yesterday. Still, Tadjudin will receive only a fraction of the amount she requested.

Tadjudin, 51, who worked for the bank’s Asian distressed-debt trading group, had sought bonuses totaling $3.7 million after being fired in 2007 following what she said were irrational and arbitrary performance ratings. To ruled against her claims for higher 2005 and 2006 bonuses than she received.

In Canada, of course, we have the example of Scotiabank and David Berry. There is some speculation he will get his due:

How much, if any, of Bank of Nova Scotia’s $55 million legal charge is related to Dave Berry’s $100 million law suit?

Two days back the Bank of Nova Scotia surprised the markets with news that it would be taking a series of charges in the fourth quarter of its recently completed fiscal year. In all there were $451 million of pre-tax charges, which converts to $341 million on an after tax-basis.

One item has attracted particular attention: “Thirdly, the Bank expects to record a legal charge of approximately $55 million related to certain ongoing legal claims in multiple business lines.”

Could that item be related to the $100 million lawsuit filed by David Berry, the bank’s former head of preferred share trading who was terminated more than nine years ago? Berry’s lawsuit – which is slated to trial next year – alleges wrongful dismissal.

The suit also alleges that his termination – at the time he was the highest paid employee at the bank earning a percentage of the profits made by his group – “was the result of blame-shifting, corporate self interest or greed on the part of Scotia Capital and its inadequate internal compliance, training and education procedures.”

It certainly would be nice if those sleaze-bags and ignoramuses at Scotia did the right thing … even ten years later and after umpteen hearings.

The Greek Tragedy is being revived, but there is much less excitement this time:

Investor reaction to the Greek parliament’s failure to pick a president traced the familiar north-south divide. Greek stocks and bonds plunged and markets were buffeted in Italy, Portugal and Spain, while funds flowed into Germany, Europe’s biggest economy and hard-money bastion.

Yet look closer and Italy, the euro zone’s second most-indebted country after Greece, is nowhere near a fiscal calamity. Ten-year borrowing costs are hovering around 2 percent, compared to over 7 percent at the height of the crisis. Bond holders are charging Italy 144 basis points more than Germany to borrow, a far cry from 553 basis points in November 2011.
…
There were echoes of 2012 in Europe’s political reaction. Back then, German Finance Minister Wolfgang Schaeuble said “we cannot force Greece” to press on with the budget cuts needed to stay in the euro zone, while a German then on the ECB board, Joerg Asmussen, said there was “no alternative” to austerity.

Schaeuble reprised that line in a statement yesterday, saying that tough reforms in Greece were bearing fruit and “they are without any alternative.” Germany will support Greece on its path of reform, he said, though “if Greece chooses a different way, it will become difficult.”
…
When Greece hurtled toward bankruptcy in early 2010, the European Union had no way of helping countries in need. When Greece toyed with quitting the euro in late 2011, and held a stalemated election in May 2012 before Samaras put together a unity government after a second election six weeks later, it had only a temporary bailout fund.

Now, it has a full-time aid fund in the 500 billion-euro European Stability Mechanism and a central bank tiptoeing — amid opposition from Germany — toward large-scale bond purchases. It also boasts success stories: Ireland, Portugal and Spain have been weaned off financial aid.

The risk is less a splintering of the 18-nation euro zone – – it will become 19 on Jan. 1 when Lithuania joins — than a protracted phase of subpar economic growth that leaves a generation scarred by unemployment and tempted by political extremism, especially in the south.

The trend in robo-advising is getting a boost:

But Wealthsimple, a Toronto startup, is taking the concept [of on-line investing] in precisely the opposite direction. It’s using the Internet as a way to offer up investing that’s not only cheap to manage, but algorithmically steady, safe, and predictable.
…
The ten-person firm’s idea is to use technology both to cut out the costs of offering traditional investment advice, and to be more agile in automatically managing portfolios. New customers fill out a questionnaire, and are then paired with a certified investment advisor, who works remotely and is available by text, phone, or video chat. (The firm’s one concession to startup trendiness is its insistence on calling its advisors “wealth concierges.”)

The operation is, as far as I can tell, an ETF allocator:

We charge an annual management fee of 0.35-0.50% of assets depending on your account balance. That’s approximately ⅓ the cost of typical advisors in Canada. The only other fee you incur is the very low fee embedded in the investment products in your portfolio (averages is 0.25%) and currency conversion. We have negotiated preferred pricing on both ETF prices and currency of more than 50% and passed along all of those savings to our clients.

Wealthsimple’s management fee covers transactions, rebalancing, advice, and account administration.

Well, it’s bound to come at some point – particularly if trailer fees get banned – but it remains to be seen whether there’s a mass-market comprised of people who don’t mind actually cutting a cheque for their advice. I admit to being a little suspicious of their market timing aspirations:

While we don’t believe in picking stocks or timing the market, we do believe in a thoughtful approach to risks. In the context of the current market environment, there are two primary risks we consider:
•Interest rates
•Market volatility

For the past 30 years, bond investors have been well rewarded as interest rates steadily declined to historic lows (when interest rates go down, bond prices go up). Looking forward, interest rates cannot get much lower. But what will they do?

Interest rate uncertainty carries lots of risk for bond investors. As a result, we use alternatives to bonds wherever possible. For example, we use real estate and dividend stocks which generate income like bonds, but are not as linked to interest rates. We also use a real estate product that is specifically designed to minimize the risk of interest rate uncertainty.

Which brings to mind the question of whether BRICS is actually an asset class or not:

While Chinese and Indian benchmark equity indexes have surged an average 40 percent this year, Russian and Brazilian gauges posted a mean drop of 4.2 percent. The annual divergence is on pace for the biggest since economist Jim O’Neill coined the term in 2001, leaving the combined market capitalization of Chinese and Indian equities $5.2 trillion larger than that of Russia and Brazil, according to data compiled by Bloomberg.
…
At the time BRIC was coined it was useful to describe the broad and increasing importance of the four largest emerging-market economies, but it was never suitable as an investing concept,” Mark Gordon-James, a senior investment manager at Aberdeen Asset Management, which managed $526 billion at the end of September, said in an interview on Dec. 18 from London.

But worry not! The marketers will soon find another bandwagon!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets rocketing up 55bp and DeemedRetractibles off 7bp. The Performance Highlights table is suitably lengthy, notable for a high proportion of FixedReset winners, particularly in the names that were hit hard in the early part of the month – ENB, TRP & HSE. But all this was on volume that was pathetically, horribly, awfully, grossly, incredibly low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.58, is $1.36 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.34 and resetting at +238bp on 2019-4-30 is $0.34 rich and TRP.PR.E, bid at 25.55 and resetting at +235bp on 2019-10-30 (two months prior to the next TRP.PR.A reset), is $0.75 rich.

Click for Big

There is an excellent fit to theory for the MFC issues, but Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.00 and appears to be $0.84 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.25 and appears to be $1.19 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.95, looks $1.15 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.40, looks $1.12 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current very wide range of (mostly) 1.40%-1.80%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.06 (at the lower end of the range, 1.40%).

S&P has Russia on Watch-Negative:

S&P said in its statement that there’s at least a 50 percent chance that Russia’s rating will be lowered to junk within 90 days as it put the country on negative credit watch. Moody’s Investors Service and Fitch Ratings rank Russia one step higher than S&P, which lowered its rating one level in April to BBB-.

The move “stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” S&P said. The ratings company expects to conclude its review in mid-January. The ruble held its gains after the S&P announcement yesterday, suggesting investors have already priced in the possibility of credit downgrades.
…
Gross domestic product may shrink as much as 4.7 percent next year, the most since 2009, should a “stress scenario” eventuate where oil averages $60 a barrel, the central bank said Dec. 15. Net capital outflows may have more than doubled this year to $134 billion.

In October, Moody’s cut Russia’s credit rating by one level to its second-lowest investment grade, citing concerns over the impact of sanctions on the economy. The continued erosion of Russia’s foreign-exchange reserves because of capital flight, low oil prices and borrowers’ lack of access to credit were also cited by Moody’s.

Christmas came early for Canadian preferred share investors, the market rocketed upwards with PerpetualDiscounts winning 70bp, FixedResets gained 37bp and DeemedRetractibles were up 50bp in a session that was foreshortened so that members of the highest paid profession on earth could stand around complaining about the inferior work ethic of minimum wage waiters and shop clerks. The Performance Highlights table is suitably gigantic; volume, however, was quite low.

PerpetualDiscounts now yield 5.05%, equivalent to 6.56% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.1% so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 245bp, a very sharp narrowing from the 270bp reported December 17.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.12, is $1.59 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.11 and resetting at +238bp on 2019-4-30 is $0.43 rich and TRP.PR.E, bid at 25.30 and resetting at +235bp on 2019-10-30 (two months prior to the next TRP.PR.A reset), is $0.82 rich.

Click for Big

There is an excellent fit to theory for the MFC issues, but Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is far too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.83 after another day of excellent performance and appears to be $0.82 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.19 and appears to be $1.24 rich.

It will be noticed that due to price changes in issues other than BAM.PR.X, this issue gained over a point and yet became cheaper to the rest; additionally, it seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.77, looks $1.24 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.15, looks $1.04 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current cluster of (mostly) 1.50%-1.65%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.16 (at the lower end of the range, 1.50%).

On December 19 my attention was drawn to a parallel between the Suez Crisis in 1956 and the current Ukraine Crisis. The Chinese provide a counter-parallel, assuming that’s a word:

China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries.

Chinese officials signaled on the weekend they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments.

By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping is bolstering the country’s influence in the global economy and cutting into the International Monetary Fund’s status as the go-to financier for governments in financial distress. While the IMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in the resource-rich countries.

Today’s PrefBlog Movie Of The Week is:

Ukraine opened a criminal probe after several gold bars at the central bank’s storage in the southern city of Odessa turned to be painted lead.

“The management of the central bank’s branch in Odessa asked us to investigate fraud by their employee,” Volodymyr Shablienko, head of the Odessa police’s press office, said by phone today. “We are conducting a forensic audit now.”

A central bank employee passed lead bars covered with golden paint to the storage unit, registering them as gold, the Vesti newspaper reported today, citing an unidentified person with knowledge of the matter in Odessa’s police department.

Speaking of Russian, how about them banks, eh?:

After arresting a decline in the ruble, Russia is now trying to avert a banking crisis.

Lawmakers rushed legislation through the lower house of parliament today allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable. While the ruble strengthened for a third day as the government told state-run exporters to sell foreign currency, it’s still down 30 percent in three months. Standard & Poor’s said today it may cut Russia’s credit rating to junk in part because of concern about the banking system.
…
The central bank put National Bank Trust, the country’s 15th-biggest based on retail deposits, under the control of the Deposit Insurance Agency yesterday. An investor will soon be selected to carry out the 30 billion-ruble ($550 million) rescue, the Bank of Russia said.

Trust, once part of exiled former oil tycoon Mikhail Khodorkovsky’s business empire, had a capital hole of tens of billions of rubles and lost more than 3 billion rubles in retail deposits last week, central bank Deputy Governor Mikhail Sukhov said yesterday. Bank of Russia’s press service confirmed his comments, earlier reported by the Interfax newswire.

And the Dow Jones Industrial Average is also pretty interesting:

The Dow Jones Industrial Average rose 5.6 percent over the past five days for the biggest rally since 2011, climbing to 18,024.17 yesterday, as the central bank pledged patience in raising interest rates while data showed the economy roared the most in the third quarter since 2003. A measure of expected volatility in the Dow has fallen the most in three years during the recent rally.
…
The Dow closed at a six-month low on Oct. 16 before rallying more than 1,882 points, or 12 percent, to top 18,000. The Chicago Board Options Exchange Dow Jones Industrial Average (INDU) Volatility Index, a measure of demand for options on the blue-chip stocks gauge, has bounced back after two jumps of more than 70 percent since September.

The industrial average has risen about 175 percent during the bull market that began in March 2009, propelled by better-than-estimated corporate results and three rounds of Fed bond purchases. The Standard & Poor’s 500 Index has more than tripled in that time. It rose 0.2 percent yesterday to finish at an all-time high.

The press might get interested in credit ratings again; e.g., Bloomberg:

One large company and four smaller firms didn’t follow their own methodologies in determining ratings, the SEC said in its report on Nationally Recognized Statistical Rating Organizations, or NRSROs.

After reviewing e-mails of one of the larger raters, the regulator determined that business and market-share conditions influenced the substance of its criteria. Employees on the business side of this rater worked in a concerted effort to change the criteria to appease an industry trade group, the SEC said.

OK, so let’s look at the relevant section in the actual staff report, titled 2014 SUMMARY REPORT OF COMMISSION STAFF’S EXAMINATIONS OF EACH NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION:

The Staff’s review of one larger NRSRO’s revisions to one of its rating criteria, including extensive review of its emails, suggests that this NRSRO’s business and market-share concerns influenced the substance of the criteria. Some of this NRSRO’s business personnel engaged in a concerted effort to address concerns raised by a trade association about this NRSRO’s contemplated revisions to the criteria report, and this criteria report was changed in a manner that addressed the business personnel’s concerns and was advantageous to the trade group. Also, documentation to support this change was lacking. The Staff recommended that this NRSRO enforce its policies and procedures and internal controls to separate the analytical process from commercial influence and ensure that the analytic justification of its criteria is adequately recorded and maintained. The Staff also recommended that this NRSRO’s Board retain an independent auditor, to be approved by OCR, to conduct a review of the development of the criteria and provide a written report summarizing the review to this NRSRO’s Board and compliance group as well as OCR.

It’s very difficult to see anything to be upset about here. First, the external body being dealt with was a trade group, not an individual company, which alleviates at least some of the automatic concerns right away (to a degree that can only be determined once we know how the trade group functions, for starters). Second, SEC Staff are shocked and horrified that the changes sought by the trade group are advantageous to the trade group. Well, yeah. Does anybody really expect anything else? Third, the criteria were changed in a manner that addressed the business personnel’s concerns … OK. Were the business personnel’s concerns grounded or ungrounded? Fourth, the documentation to support this change was lacking. Well, I can let you guys in on a little secret about regulatory paperwork: it’s always lacking. God and all his angels could not maintain records that would survive a determined fault-finding mission by regulators; not while doing any work of substance, anyway.

So the summary sounds bad, and the raw material hints that maybe something could be bad, but there’s nothing of real substance in this finding. However, look for it to be quoted as unequivocal damnation in debates to come.

Fortis Inc., proud issuer of FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.J, FTS.PR.K and FTS.PR.M, was confirmed at Pfd-2(low) by DBRS and removed from ‘Review-Developing’:

DBRS Limited (DBRS) has today removed the A (low) Issuer Rating, A (low) Unsecured Debentures and Pfd-2 (low) Preferred Shares ratings of Fortis Inc. (Fortis, the Parent or the Company) from Under Review with Developing Implications and has confirmed the ratings as listed above with Stable trends. This action follows the completion of the Company’s acquisition of UNS Energy Corporation (UNS) (the Acquisition) and the conversion of $1.8 billion of convertible debentures into common equity in late October 2014.
…
In DBRS’s view, the overall business risk profile of Fortis’ investment portfolio should remain in the A (low) range following the completion of the Acquisition.

Fortis’ financing of the USD 2.5 billion Acquisition was consistent with DBRS’s expectation. Fortis issued $1.8 billion in convertible debentures, approximately $600 million in preferred shares and the remaining portion in debt. Most of the convertible debentures were converted into common equity in late October 2014. As a result, the financial risk profile on a non-consolidated basis remains consistent with DBRS’s expectation, with all pro forma non-consolidated credit ratios improving from 2013. Fortis’ non-consolidated debt in the capital structure would remain within DBRS’s 20% guideline for holding company notching while all other key credit metrics would solidly remain within the current rating range.

FTS has been on Review-Developing for over a year.

The Canadian preferred share market was on wheels today, with PerpetualDiscounts up 33bp, FixedResets winning 47bp and DeemedRetractibles gaining 18bp. The Performance Highlights table is suitably enormous, with only one loser; led on the upside by the low-reset insurance issues that had the stuffing kicked out of them in the first week of the month. Volume was above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.30, is $1.41 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.11 and resetting at +238bp on 2019-4-30 is $0.43 rich and TRP.PR.E, bid at 25.27 and resetting at +235bp on 2019-10-30, is $0.79 rich.

This particular calculation is fascinating because it is apparent that – disregarding the TRP.PR.A outlier – the slope of the line used to calculate implied volatility is negative. I can’t remember seeing one of those since the Credit Crunch!

Click for Big

The impressive performance of MFC.PR.F brought it back to consistency with the curve defined by the higher reset issues today, but the Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is far too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.60 after superb performance today and appears to be $0.76 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.08 and appears to be $1.36 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.78, looks $1.18 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.94, looks $0.96 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current cluster of (mostly) 1.55%-1.60%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.21 (at the lower end of the range, 1.55%).