MAPF

MAPF Performance: March 2013

The fund underperformed in March, due again to strong performance from FixedReset, Floating Rate and junk issues held by ZPR.

For example, of the sixteen BCE issues tracked by HIMIPref™ (which are heavily weighted in the indices, but which are not held at all by the fund):

Performance of BCE Issues
March, 2013
Performance
Range
Number of
Issues
>4% 1
3% – 4% 1
2% – 3% 4
1% – 2% 5
0% – 1% 5
<0% 0

By way of illustration, BCE issues comprise 10.62% of the February 28 BMO-CM 50 Index.

ZPR, is a relatively new ETF comprised of FixedResets and Floating Rate issues, with a very high proportion of junk issues, which returned a stunning +1.34% for the month, and +3.22% over the past three months (according to my calculations from the fund’s NAV data), versus gains for the TXPL index of +1.39% and +3.34%, respectively. The fund has been able to attract assets of about $518.7-million in four and a half months, $240-million of this in March alone, and I feel that has had a great effect on the prices of its targetted preferreds and their close relations.

At time of writing (March 31), the Total Return Index Values for the two S&P/TSX preferred share indices are not available, but TXPR was +0.93% on the month to March 27, while TXPL was +1.22%; there was a jump of as-yet undetermined magnitude on the last day of the month. Approximately 62.4% of TXPR is included in TXPL; a little algebra results in the estimation that the components of TXPR not included in TXPL returned a mere +0.45% in the month to March 27 – a stark illustration of the effect of ZPR and its massive secondary market requirements.

Investment-grade FixedResets as a group continued their unsustainable price appreciation in March, rising 1.18% – quite a feat when the median Yield-to-Worst (YTW) for this segment was 2.86% p.a. at February month-end! The median YTW declined to a mere 2.51% by the end of March. PerpetualPremiums also recorded an unsustainable +0.83% over the month while DeemedRetractibles were the worst performing of the three groups, returning +0.61% – which is also above their YTW expectations, but not by as much!

Malachite Aggressive Preferred Fund’s Net Asset Value per Unit as of the close March 28, 2013, was 10.9033 after a dividend distribution of 0.130357.

Returns to March 28, 2013
Period MAPF BMO-CM “50” Index TXPR
Total Return
CPD – according to Blackrock
One Month +0.78% +0.84% +1.09% +1.08%
Three Months +1.87% +1.80% +2.37% +2.25%
One Year +10.19% +6.02% +6.71% +6.03%
Two Years (annualized) +6.07% +5.99% +5.62% N/A
Three Years (annualized) +11.42% +8.31% +7.50% +6.82%
Four Years (annualized) +19.16% +12.57% +11.01% N/A
Five Years (annualized) +16.77% +6.70% +5.53% +4.86%
Six Years (annualized) +13.49% +4.27%    
Seven Years (annualized) +12.31% +4.27%    
Eight Years (annualized) +11.73% +4.39%    
Nine Years (annualized) +11.08% +4.13%    
Ten Years (annualized) +13.69% +4.79%    
Eleven Years (annualized) +12.01% +4.74%    
Twelve Years (annualized) +12.34% +4.44%    
MAPF returns assume reinvestment of distributions, and are shown after expenses but before fees.
CPD Returns are for the NAV and are after all fees and expenses.
* CPD does not directly report its two- or four-year returns.
Figures for Omega Preferred Equity (which are after all fees and expenses) for 1-, 3- and 12-months are +0.73%, +1.86% and +5.61%, respectively, according to Morningstar after all fees & expenses. Three year performance is +7.18%; five year is +5.62%
Figures for Jov Leon Frazer Preferred Equity Fund Class I Units (which are after all fees and expenses) for 1-, 3- and 12-months are +0.65%, +1.57% and +3.47% respectively, according to Morningstar. Three Year performance is +4.23%
Figures for Manulife Preferred Income Fund (formerly AIC Preferred Income Fund) (which are after all fees and expenses) for 1-, 3- and 12-months are +1.21%, +2.66% & +6.25%, respectively. Three Year performance is +5.68%
Figures for Horizons AlphaPro Preferred Share ETF (which are after all fees and expenses) for 1-, 3- and 12-months are +0.87%, +1.95% & +6.34%, respectively.
Figures for Altamira Preferred Equity Fund are +0.99% and +2.30% for one- and three- months, respectively.
The figure for BMO S&P/TSX Laddered Preferred Share Index ETF is +0.99% and +2.13% for one- and three-months. [calculation by JH]

MAPF returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page. The fund is available either directly from Hymas Investment Management or through a brokerage account at Odlum Brown Limited.

A problem that has bedevilled the market over the past year has been the OSFI decision not to grandfather Straight Perpetuals as Tier 1 bank capital, and their continued foot-dragging regarding a decision on insurer Straight Perpetuals has segmented the market to the point where trading has become much more difficult. The fund has done well by trading between GWO issues, which have a good range of annual coupons (but in which trading is now hampered by the fact that the low-coupon issues are trading near par and are callable at par in the near term), but is “stuck” in the MFC and SLF issues, which have a much narrower range of coupon, while the IAG DeemedRetractibles are quite illiquid. Until the market became so grossly segmented, this was not so much of a problem – but now banks are not available to swap into (because they are so expensive) and non-regulated companies are likewise deprecated (because they are not DeemedRetractibles; they should not participate in the increase in value that will follow the OSFI decision I anticipate and, in addition, are analyzed as perpetuals). The fund’s portfolio is, in effect ‘locked in’ to the MFC & SLF issues due to projected gains from a future OSFI decision, to the detriment of trading gains.

SLF DeemedRetractibles may be compared with PWF and GWO:


Click for Big

It is quite apparent that that the market continues to treat regulated insurance issues (SLF, GWO) no differently from unregulated issues (PWF) – despite the fact that the PWF issues are much more subject to unfavourable calls in the near term and should, logically, be deprecated on those grounds alone without any fancy-pants arguments about imposition of the NVCC rule!

In fact, one can make an argument that the SLF issues are doing better than they should be now, as they were recently downgraded by DBRS, which no longer considers them credit-equivalent to GWO and PWF.

Those of you who have been paying attention will remember that in a “normal” market (which we have not seen in well over a year) the slope of this line is related to the implied volatility of yields in Black-Scholes theory, as discussed in the January, 2010, edition of PrefLetter. The relationship is still far too large to be explained by Implied Volatility – the numbers still indicate an overwhelming degree of directionality in the market’s price expectations.

Sometimes everything works … sometimes it’s 50-50 … sometimes nothing works. The fund seeks to earn incremental return by selling liquidity (that is, taking the other side of trades that other market participants are strongly motivated to execute), which can also be referred to as ‘trading noise’ – although for quite some time, noise trading has taken a distant second place to the sectoral play on insurance DeemedRetractibles. There were a lot of strongly motivated market participants during the Panic of 2007, generating a lot of noise! Unfortunately, the conditions of the Panic may never be repeated in my lifetime … but the fund will simply attempt to make trades when swaps seem profitable, without worrying about the level of monthly turnover.

There’s plenty of room for new money left in the fund. I have shown in recent issues of PrefLetter that market pricing for FixedResets is demonstrably stupid and I have lots of confidence – backed up by my bond portfolio management experience in the markets for Canadas and Treasuries, and equity trading on the NYSE & TSX – that there is enough demand for liquidity in any market to make the effort of providing it worthwhile (although the definition of “worthwhile” in terms of basis points of outperformance changes considerably from market to market!) I will continue to exert utmost efforts to outperform but it should be borne in mind that there will almost inevitably be periods of underperformance in the future.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Capital
Gains
Multiplier
Sustainable
Income
per
current
Unit
June, 2007 9.3114 5.16% 1.03 5.01% 1.3240 0.3524
September 9.1489 5.35% 0.98 5.46% 1.3240 0.3773
December, 2007 9.0070 5.53% 0.942 5.87% 1.3240 0.3993
March, 2008 8.8512 6.17% 1.047 5.89% 1.3240 0.3938
June 8.3419 6.034% 0.952 6.338% 1.3240 $0.3993
September 8.1886 7.108% 0.969 7.335% 1.3240 $0.4537
December, 2008 8.0464 9.24% 1.008 9.166% 1.3240 $0.5571
March 2009 $8.8317 8.60% 0.995 8.802% 1.3240 $0.5872
June 10.9846 7.05% 0.999 7.057% 1.3240 $0.5855
September 12.3462 6.03% 0.998 6.042% 1.3240 $0.5634
December 2009 10.5662 5.74% 0.981 5.851% 1.1141 $0.5549
March 2010 10.2497 6.03% 0.992 6.079% 1.1141 $0.5593
June 10.5770 5.96% 0.996 5.984% 1.1141 $0.5681
September 11.3901 5.43% 0.980 5.540% 1.1141 $0.5664
December 2010 10.7659 5.37% 0.993 5.408% 1.0298 $0.5654
March, 2011 11.0560 6.00% 0.994 5.964% 1.0298 $0.6403
June 11.1194 5.87% 1.018 5.976% 1.0298 $0.6453
September 10.2709 6.10%
Note
1.001 6.106% 1.0298 $0.6090
December, 2011 10.0793 5.63%
Note
1.031 5.805% 1.0000 $0.5851
March, 2012 10.3944 5.13%
Note
0.996 5.109% 1.0000 $0.5310
June 10.2151 5.32%
Note
1.012 5.384% 1.0000 $0.5500
September 10.6703 4.61%
Note
0.997 4.624% 1.0000 $0.4934
December, 2012 10.8307 4.24% 0.989 4.287% 1.0000 $0.4643
March, 2013 10.9033 3.87% 0.996 3.886% 1.0000 $0.4237
NAVPU is shown after quarterly distributions of dividend income and annual distribution of capital gains.
Portfolio YTW includes cash (or margin borrowing), with an assumed interest rate of 0.00%
The Leverage Divisor indicates the level of cash in the account: if the portfolio is 1% in cash, the Leverage Divisor will be 0.99
Securities YTW divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
The Capital Gains Multiplier adjusts for the effects of Capital Gains Dividends. On 2009-12-31, there was a capital gains distribution of $1.989262 which is assumed for this purpose to have been reinvested at the final price of $10.5662. Thus, a holder of one unit pre-distribution would have held 1.1883 units post-distribution; the CG Multiplier reflects this to make the time-series comparable. Note that Dividend Distributions are not assumed to be reinvested.
Sustainable Income is the resultant estimate of the fund’s dividend income per current unit, before fees and expenses. Note that a “current unit” includes reinvestment of prior capital gains; a unitholder would have had the calculated sustainable income with only, say, 0.9 units in the past which, with reinvestment of capital gains, would become 1.0 current units.
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 (definition refined in May, 2011). These issues are analyzed as if their prospectuses included a requirement to redeem at par on or prior to 2022-1-31, 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: Seeking NVCC Status and the January, February, March and June, 2011, editions of PrefLetter for the rationale behind this analysis.
Yields for September, 2011, to January, 2012, were calculated by imposing a cap of 10% on the yields of YLO issues held, in order to avoid their extremely high calculated yields distorting the calculation and to reflect the uncertainty in the marketplace that these yields will be realized. From February to September 2012, yields on these issues have been set to zero. All YLO issues held were sold in October 2012.

Significant positions were held in DeemedRetractible and FixedReset issues on March 28; all of these currently have their yields calculated with the presumption that they will be called by the issuers at par prior to 2022-1-31. This presents another complication in the calculation of sustainable yield. The fund also holds a position various SplitShare issues which also have their yields calculated with the expectation of a maturity at par.

I will no longer show calculations that assume the conversion of the entire portfolio into PerpetualDiscounts, as there are currently only four such issues of investment grade, from only two issuers. Additionally, the fund has no holdings of these issues.

I will also note that the sustainable yield calculated above is not directly comparable with any yield calculation currently reported by any other preferred share fund as far as I am aware. The Sustainable Yield depends on:
i) Calculating Yield-to-Worst for each instrument and using this yield for reporting purposes;
ii) Using the contemporary value of Five-Year Canadas (set at 1.23% for the March 28 calculation) to estimate dividends after reset for FixedResets.

Most funds report Current Yield. For instance, ZPR reports a “Portfolio Yield” of 4.68% as of March 22, 2013 and notes:

Portfolio yield is calculated as the most recent income received by the ETF in the form of dividends interest and other income annualized based on the payment frequently divided by the current market value of ETFs investments.

In other words – it’s the Current Yield, a meaningless number. The Current Yield of MAPF is 5.06%, but I will neither report that with any degree of prominence nor take any great pleasure in the fact that it’s higher than the ZPR number. It’s meaningless; to accord it any prominence in portfolio reporting is misleading.

It should be noted that the concept of this Sustainable Income calculation was developed when the fund’s holdings were overwhelmingly PerpetualDiscounts – see, for instance, the bottom of the market in November 2008. It is easy to understand that for a PerpetualDiscount, the technique of multiplying yield by price will indeed result in the coupon – a PerpetualDiscount paying $1 annually will show a Sustainable Income of $1, regardless of whether the price is $24 or $17.

Things are not quite so neat when maturity dates and maturity prices that are different from the current price are thrown into the mix. If we take a notional Straight Perpetual paying $5 annually, the price is $100 when the yield is 5% (all this ignores option effects). As the yield increases to 6%, the price declines to 83.33; and 83.33 x 6% is the same $5. Good enough.

But a ten year bond, priced at 100 when the yield is equal to its coupon of 5%, will decline in price to 92.56; and 92.56 x 6% is 5.55; thus, the calculated Sustainable Income has increased as the price has declined as shown in the graph:


Click for Big

The difference is because the bond’s yield calculation includes the amortization of the discount; therefore, so does the Sustainable Income estimate.

Thus, the decline in the MAPF Sustainable Income from $0.5500 per unit in June, 2012, to $0.4237 per unit in March should be looked at as a simple consequence of the fund’s holdings; virtually all of which have their yields calculated in a manner closer to bonds than to Perpetual Annuities.

Different assumptions lead to different results from the calculation, but the overall positive trend is apparent. I’m very pleased with the long-term results! It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to exploitation of trading anomalies.

Again, there are no predictions for the future! The fund will continue to trade between issues in an attempt to exploit market gaps in liquidity, in an effort to outperform the index and keep the sustainable income per unit – however calculated! – growing.

MAPF

MAPF Portfolio Composition: March 2013

Turnover returned to more normal levels in March, at about 7%.

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, since I’ve been asked the question recently, 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.

However, there have been some hopeful signs: trading picked up a little in December and remained at this elevated level in January; there was some frenzied trading on January 14, although February’s turnover was very low. The long promised OSFI Draft Definition of Capital for Insurers may clarify the status of the Insurer-issued DeemedRetractibles and make them homogeneous with Bank-issued DeemedRetractibles (as I expect) or with unregulated Straight Perpetuals (which would surprise me … but a lot of things happen that surprise me).

Sectoral distribution of the MAPF portfolio on March 28 was as follows:

MAPF Sectoral Analysis 2013-3-28
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 9.6% (-0.2) 4.54% 5.07
Interest Rearing 0% N/A N/A
PerpetualPremium 0.0% (0) N/A N/A
PerpetualDiscount 0.0% (0) N/A N/A
Fixed-Reset 29.7% (+3.9) 1.90% 1.58
Deemed-Retractible 54.7% (-2.8) 4.55% 6.61
Scraps (Various) 5.6% (-0.7) 6.74% 9.09
Cash 0.4% (-0.3) 0.00% 0.00
Total 100% 3.87% 5.08
Totals and changes will not add precisely due to rounding. Bracketted figures represent change from February 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, 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)

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 2013-3-28
DBRS Rating Weighting
Pfd-1 0 (0)
Pfd-1(low) 36.6% (-18.4)
Pfd-2(high) 39.6% (+20.1)
Pfd-2 8.1% (-0.4)
Pfd-2(low) 9.6% (-0.5)
Pfd-3(high) 1.0% (0)
Pfd-3 1.5% (-0.1)
Pfd-3(low) 0.3% (0)
Pfd-4(high) 0.4% (0)
Pfd-4 1.3% (-0.3)
Pfd-4(low) 1.1% (-0.1)
Cash 0.4% (-0.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from February month-end.

The increase in holdings of Pfd-2(high) issues at the expense of Pfd-1(low) is due to the downgrade of SLF by DBRS, not to any trading.

Liquidity Distribution is:

MAPF Liquidity Analysis 2013-3-28
Average Daily Trading Weighting
<$50,000 0.7% (-0.1)
$50,000 – $100,000 9.0% (-2.6)
$100,000 – $200,000 23.7% (-0.4)
$200,000 – $300,000 45.0% (-0.4)
>$300,000 21.1% (+3.8)
Cash 0.4% (-0.3)
Totals will not add precisely due to rounding. Bracketted figures represent change from February 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
Market Action

March 28, 2013

A bit of good news on the regulatory extortion front – a US judge is questioning the SEC / SAC Capital settlement:

SAC Capital Advisors LP will have to wait to learn if its $602 million insider trading settlement with the Securities and Exchange Commission can go forward, after a Manhattan judge raised questions over a provision that allows SAC to avoid admitting it did anything wrong.

SAC and the agency asked Marrero today to approve the agreement, which is the SEC’s biggest insider trading settlement in history. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.

U.S. District Judge Victor Marrero today expressed concern about the SEC’s use of the provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. (C) in 2011. Marrero said today he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. appeals court in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.

There’s some new progress on atmospheric carbon dioxide extraction:

“What this discovery means is that we can remove plants as the middleman,” said Adams, who is co-author of the study detailing their results published March 25 in the early online edition of the Proceedings of the National Academies of Sciences. “We can take carbon dioxide directly from the atmosphere and turn it into useful products like fuels and chemicals without having to go through the inefficient process of growing plants and extracting sugars from biomass.”

The process is made possible by a unique microorganism called Pyrococcus furiosus, or “rushing fireball,” which thrives by feeding on carbohydrates in the super-heated ocean waters near geothermal vents. By manipulating the organism’s genetic material, Adams and his colleagues created a kind of P. furiosus that is capable of feeding at much lower temperatures on carbon dioxide.

The research team then used hydrogen gas to create a chemical reaction in the microorganism that incorporates carbon dioxide into 3-hydroxypropionic acid, a common industrial chemical used to make acrylics and many other products.

It’s tough to get ahead in the investment business. Talent isn’t enough. Hard work isn’t enough. You’ve got to have that little extra something:

Wells Fargo & Co. (WFC), the most valuable U.S. bank, paid a board member’s son about $1.4 million last year for his work in a unit responsible for investing deposits.

Scott P. Quigley, 44, received the compensation as a manager in the principal investments group, according to the San Francisco-based lender’s most recent proxy filing. His father, Philip J. Quigley, a Wells Fargo director since 1994, is retiring from the board in April. Scott Quigley declined to comment, and his father didn’t respond to messages seeking comment. The bank declined to make them available.

Canadian inflation remains low:

The country’s consumer price index rose 1.2 per cent in February from a year earlier, quickening from a 0.5-per-cent increase in January, Statistics Canada said Wednesday. It also climbed 1.2 per cent from a month earlier, the fastest monthly pace of inflation since 1991.

Transportation costs led the annual increase, advancing 2 per cent, spurred by higher costs at the pump, and as rebates disappeared at car dealerships. Food prices accelerated to 1.9 per cent after a 1.1-per-cent gain in January as consumers paid more for meat and fresh fruit. The cost of fuel oil also rose.

OSFI has come out with another Planning Report Produced Because It’s Expected Of Us Because Of Some Kind Of Governance Thingy. Of great interest is their targetted depositor recovery on default:

Program Expected Results Performance Indicators Targets
Protect depositors and policy holders while recognizing that all failures cannot be prevented. Percentage of estimated recoveries on failed institutions. (amount recovered per dollar of claim) 90%

I wonder if anybody’s told the CDIC that OSFI will give itself a pat on the back if depositor recoveries in the event of the failure of a major bank exceed 90%? Hmm … CDIC has about 2.4-billion in cash and investments on the books … the smallest of the Big Six Banks, National Bank, has about 93-billion in deposits on its books … well, let’s just hope that none of the big six fail, that’s all!

Regulatory lawyers are continuing their campaign to destroy the corporate bond market:

Are there steps that can or should be taken to facilitate exchange trading of corporate bonds and other fixed income securities? Were ATSs required to disseminate pre-trade pricing information, would there be an impact on exchange trading of corporate bonds? If so, what would be the impact?

Should the Commission consider regulatory initiatives that would encourage the use of transparent execution venues, such as exchanges or ATSs that publicly disseminate trading interest on their systems? For example, what would be the benefits and drawbacks of requiring brokers to affirmatively offer retail customers the option of exposing their orders on one or more of these transparent execution venues? Are there better ways to foster price transparency in these markets?

Better Investor Information

Should investors be provided more information about the compensation of broker-dealers trading in a principal capacity? What would be the benefits and burdens of requiring the disclosure of dealer markups to customers? Are certain types of transactions more suited for markup disclosure, such as riskless principal transactions? How should a riskless principal transaction be defined for corporate bond or other fixed income transactions? What would be the most effective way to provide markup disclosures to customers?

Do steps need to be taken to help assure that investors know about the various execution options available to them and the potential advantages and disadvantages of each? What would be the relative merits of requiring broker disclosure of those options at the time of the transaction, as compared with periodic disclosure (e.g., at account opening and annually thereafter), or general investor education efforts?

Do steps need to be taken to help assure that investors have pricing information relevant to their fixed income security transaction?

All the questions assume that corporate bond financing exists in some kind of bubble world, unaffected by competition from other venues and private placements.

Lauren Lambie-Hanson at the Boston Fed asks the question When Does Delinquency Result in Neglect? Mortgage Delinquency and Property Maintenance:

Studies of foreclosure externalities have overwhelmingly focused on the impact of forced sales on the value of nearby properties, typically finding modest evidence of foreclosure spillovers. However, many quality-of-life issues posed by foreclosures may not be reflected in nearby sale prices. This paper uses new data from Boston on constituent complaints and requests for public services made to City government departments, matched with loan-level data, to examine the timing of foreclosure externalities. I find evidence that property conditions suffer most while homes are bank owned, although reduced maintenance is also common earlier in the foreclosure process. Since short sales prevent bank ownership, they should result in fewer neighborhood disamenities than foreclosures.

“Disamenities”?

Nice perspective on Cyprus:

For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than 4-billion euros, a huge amount in a country with a gross domestic product of just 18-billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

[Kikis] Kazamias, the finance minister at the time of the Greek bond write-down, said he had little idea of just how badly the move would hurt his country’s banks.

“We worried but we never received any information that this was a red line” that should not have been crossed, he said. The Cypriot government, he added, initially calculated that “we were in a position to cover the losses,” and it was only later, after depositors began to flee and the Cyprus economy stalled, that “we found out that this was impossible.”

Spend-Every-Penny’s going to start choosing his new lap-dog next week:

Finance Minister Jim Flaherty should receive a short list of candidates to replace Bank of Canada Governor Mark Carney after a meeting of the central bank’s board of directors next week, said two people familiar with the plans.

Flaherty will get the list after the two-day meeting in Ottawa, said the people, who asked not to be identified because the discussions are private. Flaherty, who has said that the announcement could be made in April, will then interview the people on the short list, with the appointment to be approved by Prime Minister Stephen Harper and his cabinet.

The bank’s outside directors have been reviewing candidates after posting the job Jan. 7, following Carney’s surprise November announcement he would leave his job June 1 to take over the Bank of England. Analysts at JPMorgan Chase & Co. have said the most likely replacements are Senior Deputy Governor Tiff Macklem and Export Development Canada Chief Executive Officer Stephen Poloz.

Want the job, boys? Roll over! Beg! Copy the highlights from my next speech into your next speech!

It was a modestly positive day for the Canadian preferred share market, with PerpetualPremiums winning 6bp, FixedResets gaining 2bp and DeemedRetractibles up 5bp. Volatility was reasonably good. Volume was heavy.

And that’s it for another month! Malachite Aggressive Preferred Fund is now 12 years old – Happy Birthday!

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 -0.3849 % 2,634.8
FixedFloater 4.10 % 3.45 % 28,537 18.36 1 0.4338 % 3,963.1
Floater 2.54 % 2.83 % 80,468 20.16 5 -0.3849 % 2,844.9
OpRet 4.80 % 0.96 % 55,746 0.18 5 0.2635 % 2,609.0
SplitShare 4.26 % 4.32 % 138,933 4.18 4 0.2584 % 2,954.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2635 % 2,385.7
Perpetual-Premium 5.21 % -0.90 % 92,241 0.10 31 0.0649 % 2,372.3
Perpetual-Discount 4.75 % 4.82 % 164,620 15.72 5 -0.0081 % 2,677.4
FixedReset 4.88 % 2.51 % 292,054 3.28 80 0.0192 % 2,522.7
Deemed-Retractible 4.85 % 2.19 % 126,019 0.16 44 0.0517 % 2,456.8
Performance Highlights
Issue Index Change Notes
BNS.PR.Z FixedReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 2.85 %
BNS.PR.P FixedReset 1.00 % Will not be called. Yields 3.15% to Hard Maturity 2022-01-31
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : -2.60 %
VNR.PR.A FixedReset 1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 27.20
Bid-YTW : 2.51 %
MFC.PR.A OpRet 1.09 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-27
Maturity Price : 25.75
Evaluated at bid price : 25.96
Bid-YTW : -4.67 %
HSB.PR.D Deemed-Retractible 1.23 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-27
Maturity Price : 25.50
Evaluated at bid price : 25.56
Bid-YTW : 1.38 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.P FixedReset 424,325 Recent extension announcement. Yields 3.15% to Hard Maturity 2022-01-31
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : -2.60 %
TRP.PR.D FixedReset 130,159 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.96
Bid-YTW : 3.36 %
BNS.PR.Z FixedReset 76,223 Scotia sold 10,900 to RBC at 25.17.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 2.85 %
BNS.PR.R FixedReset 74,836 Nesbitt bought blocks of 10,000 and 12,300 from Scotia, both at 25.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 2.51 %
SLF.PR.G FixedReset 64,969 Nesbitt crossed 25,000 at 25.65.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 2.80 %
TRP.PR.A FixedReset 63,394 National crossed two blocks of 20,000 each, the first at 25.57, the second at 25.61.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-28
Maturity Price : 23.87
Evaluated at bid price : 25.64
Bid-YTW : 3.05 %
There were 58 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.H FixedReset Quote: 27.15 – 27.49
Spot Rate : 0.3400
Average : 0.1949

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 27.15
Bid-YTW : 2.36 %

ENB.PR.F FixedReset Quote: 26.14 – 26.49
Spot Rate : 0.3500
Average : 0.2120

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.14
Bid-YTW : 3.12 %

MFC.PR.F FixedReset Quote: 25.65 – 25.90
Spot Rate : 0.2500
Average : 0.1419

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 2.92 %

TRI.PR.B Floater Quote: 24.09 – 24.44
Spot Rate : 0.3500
Average : 0.2669

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-28
Maturity Price : 23.84
Evaluated at bid price : 24.09
Bid-YTW : 2.15 %

PWF.PR.R Perpetual-Premium Quote: 26.96 – 27.25
Spot Rate : 0.2900
Average : 0.2080

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-30
Maturity Price : 25.25
Evaluated at bid price : 26.96
Bid-YTW : 4.49 %

W.PR.H Perpetual-Premium Quote: 25.65 – 26.00
Spot Rate : 0.3500
Average : 0.2742

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : -27.04 %

Issue Comments

DBRS Places TRP and TCA on Review-Negative

DBRS has announced that it:

has today placed Under Review with Negative Implications the Issuer Rating, long-term debt and preferred share ratings of TransCanada Pipelines Limited (TCPL), the preferred share rating of TransCanada Corporation (TCC) and the long-term debt rating of NOVA Gas Transmission Ltd. (NGTL), a wholly owned subsidiary of TCPL (see table below).

The rating actions follow the announcement that the National Energy Board (NEB) has released its decision (the Decision) on the Canadian Mainline 2012 Tolls Application and Restructuring Proposal (the Restructuring Proposal) submitted by TCPL’s parent, TCC, and reflect DBRS’s preliminary view that the Decision result is a structural change from the previous tolling methodology that is not consistent with the expectations that DBRS outlined in our press release on TCC dated November 22, 2012 (see below for details). DBRS believes that the Decision results in an increase in TCPL’s business risk and is likely to result in lower earnings and cash flow from the Canadian Mainline.

While the Decision does not disallow any Canadian Mainline investment from being recovered in tolls, the NEB introduced the concept that:

“…if larger-than-forecast cost deferrals were to occur, they could represent a materialization of the Mainline’s fundamental risk and costs could be disallowed. If costs were disallowed, it would not mean that TransCanada did not have a reasonable opportunity to recover costs, but rather that events did not turn out as forecast or that this opportunity was not seized by TransCanada. A potential outcome is that the Mainline would suffer a loss – just like any other business that faces competition.”

In addition, the Decision stated that:

“Our decision enables TransCanada to meet market forces with market solutions. It is TransCanada’s responsibility to ensure that the Mainline is economically viable… TransCanada must not look to regulation to shield the Mainline from its fundamental business risk. It must address the underlying competitive reality in which the Mainline operates.”

In our November 22, 2012, press release, DBRS confirmed the ratings noted in the table below (except for the NGTL rating, which was confirmed separately on August 2, 2012) and noted that the ratings and trends reflected a number of factors. Among these factors was the expectation that the impact of the Decision would be “such that the Company is allowed to continue to recover, and earn a reasonable rate of return on, all of the costs that were incurred in the construction of the Canadian Mainline.” As noted above, while full recovery is still possible, the Decision introduced significant uncertainty into the cost recovery concept, which DBRS views as an increase in business risk.

TransCanada Corporation has the following issues outstanding: TRP.PR.A, TRP.PR.B, TRP.PR.C and TRP.PR.D, all FixedResets.

Its subsidiary Transcanada Pipelines Ltd. has the following issues outstanding: TCA.PR.X and TCA.PR.Y, both PerpetualPremiums.

Market Action

March 27, 2013

Nothing happened today.

It was another positive day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets roaring ahead by 17bp and DeemedRetractibles up 4bp. Volatility was average, but comprised entirely of FixeReset winners. Volume was well above average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, unchanged from the figure reported March 20.

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 0.2701 % 2,645.0
FixedFloater 4.12 % 3.47 % 28,964 18.32 1 -0.6466 % 3,946.0
Floater 2.53 % 2.82 % 81,385 20.18 5 0.2701 % 2,855.9
OpRet 4.81 % 1.80 % 57,983 0.23 5 -0.1007 % 2,602.2
SplitShare 4.27 % 3.98 % 613,342 4.18 4 0.4046 % 2,947.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1007 % 2,379.4
Perpetual-Premium 5.21 % -3.10 % 92,638 0.10 31 0.0321 % 2,370.7
Perpetual-Discount 4.75 % 4.82 % 163,708 15.76 5 0.1023 % 2,677.7
FixedReset 4.88 % 2.53 % 288,169 2.66 80 0.1669 % 2,522.2
Deemed-Retractible 4.85 % 2.50 % 126,076 0.33 44 0.0422 % 2,455.5
Performance Highlights
Issue Index Change Notes
BNS.PR.Z FixedReset 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 2.72 %
BAM.PR.X FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-27
Maturity Price : 23.61
Evaluated at bid price : 26.36
Bid-YTW : 2.95 %
IFC.PR.C FixedReset 1.29 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.64
Bid-YTW : 2.24 %
IFC.PR.A FixedReset 1.41 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.54
Bid-YTW : 2.81 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.F Perpetual-Discount 157,198 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-27
Maturity Price : 24.69
Evaluated at bid price : 25.09
Bid-YTW : 4.49 %
ENB.PR.P FixedReset 147,765 Nesbitt crossed 40,000 at 25.80. Scotia crossed blocks of 46,500 and 50,000, both at 25.77.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.86
Bid-YTW : 3.42 %
TRP.PR.D FixedReset 90,570 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 3.34 %
FTS.PR.J Perpetual-Premium 79,360 RBC crossed 74,600 at 25.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.97
Bid-YTW : 4.28 %
RY.PR.N FixedReset 44,646 TD crossed 40,000 at 26.16.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 1.90 %
TD.PR.A FixedReset 43,950 TD crossed 40,000 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 1.85 %
There were 40 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.J OpRet Quote: 26.86 – 27.86
Spot Rate : 1.0000
Average : 0.5721

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.86
Bid-YTW : 1.80 %

BAM.PR.R FixedReset Quote: 26.95 – 27.95
Spot Rate : 1.0000
Average : 0.5762

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.87 %

IAG.PR.F Deemed-Retractible Quote: 26.90 – 27.47
Spot Rate : 0.5700
Average : 0.3480

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.90
Bid-YTW : 3.85 %

BNS.PR.Y FixedReset Quote: 25.35 – 25.79
Spot Rate : 0.4400
Average : 0.2621

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 2.50 %

TD.PR.Y FixedReset Quote: 25.47 – 25.76
Spot Rate : 0.2900
Average : 0.1750

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : 2.93 %

GWO.PR.M Deemed-Retractible Quote: 26.56 – 26.80
Spot Rate : 0.2400
Average : 0.1550

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.56
Bid-YTW : 4.43 %

Issue Comments

BNS.PR.P To Reset To 3.35%

Scotiabank has announced:

that it does not intend to exercise its right to redeem the currently outstanding Non-cumulative 5-Year Rate Reset Preferred Shares Series 18 of Scotiabank (the “Preferred Shares Series 18′) on April 26, 2013 and, as a result, subject to certain conditions, the holders of Preferred Shares Series 18 have the right to convert all or part of their Preferred Shares Series 18 on a one-for-one basis into Non-cumulative Floating Rate Preferred Shares Series 19 of Scotiabank (the “Preferred Shares Series 19”) on April 26, 2013. Holders who do not exercise their right to convert their Preferred Shares Series 18 into Preferred Shares Series 19 on such date will retain their Preferred Shares Series 18.

The foregoing conversions are subject to the conditions that: (i) if, after April 15, 2013, Scotiabank determines that there would be less than one million Preferred Shares Series 18 outstanding after April 26, 2013, then all remaining Preferred Shares Series 18 will automatically be converted into Preferred Shares Series 19 on a one-for-one basis on April 26, 2013, and (ii) alternatively, if Scotiabank determines that there would be less than one million Preferred Share Series 19 outstanding after April 26, 2013, no Preferred Shares Series 18 will be converted into Preferred Shares Series 19. In either case, Scotiabank shall give a written notice to that effect to holders of Series 18 Preferred Shares no later than April 19, 2013.

With respect to any Preferred Shares Series 18 that remain outstanding after April 26, 2013, commencing as of such date, holders thereof will be entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada). The dividend rate for the five-year period commencing on April 26, 2013 and ending on April 25, 2018 will be 3.350%, being equal to the 5-Year Government of Canada bond yield determined as at March 27, 2013 plus 2.05%, as determined in accordance with the terms of the Preferred Shares Series 18.

With respect to any Preferred Shares Series 19 that may be issued on April 26, 2013, holders thereof will be entitled to receive floating rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Scotiabank and subject to the Bank Act (Canada), based on a dividend rate equal the 90-day Canadian Treasury Bill plus 2.05%, on an actual/365 day count basis, subject to certain adjustments in accordance with the terms of the Preferred Shares Series 19. The dividend rate for the period commencing on April 26, 2013 and ending on July 25, 2013 will be equal to 3.028%, as determined in accordance with the terms of the Preferred Shares Series 19.

Beneficial owners of Preferred Shares Series 18 who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (Toronto time) on April 11, 2013.

The initial rate on this issue (BNS.PR.P) was 5.00%, so the reset will come as quite a shock to those who haven’t been paying attention.

Update: Assiduous Reader PL writes in and says:

I checked the level 2 quotes on BNS.PR.P and it looks like there are only a handful of bids. I wonder what type of stink bid you would put on it? I mean with an interest rate of just above 3.3 percent I wonder if the price will drop into the teens ? even at 20 the yield will be less then 4 percent? Will these be even mentioned in the Globe or Financial Post ?

The market seems to tolerate Current Yields in the 3.75% range for the low-coupon, high-quality FixedResets; given a reset to $0.8375, this implies a price of 22.33.

Another way of looking at is to focus on the FloatingReset issue that will arise from conversion (which I assume will attract enough interest to be allowed). The issue will pay Bills + 205, which is pretty close to Canada Prime given historic relationships; BCE RatchetRate issues that currently pay 100% of Canada Prime trade at about 23.25 now. BNS.PR.P should trade higher than this because (a) there’s no risk of the dividend ratcheting down to only 50% of Canada prime, and (b) BNS is a better name than BCE. Presumably the FixedReset issue will not trade too far from wherever its Strong Pair trades.

A wild card is the effect of dealer inventories. IIROC Rule 100.2 states:

100.2. For the purpose of Rule 17.13 and this Rule 100 the following margin requirements are hereby prescribed:

(f) Stocks
(i) Listed on an exchange in Canada or the United States
For positions in securities listed (other than bonds and debentures but including rights and warrants other than Canadian bank warrants) on any recognized stock exchange in Canada or the United States:
Long Positions – Margin Required
Securities selling at $2.00 or more – 50% of market value …

and Rule 100.12 states:

Notwithstanding Rule 100.2, margin on securities owned or sold short by a Dealer Member shall be provided at the following rates:

(c) Floating rate preferred shares
(i) 50% of the margin rate that applies to the related junior security of the issuer multiplied by the market value of the floating rate preferred shares;
(ii) If the floating rate preferred shares are selling over par and are convertible into other securities of the issuer, the margin required shall be the lesser of:
(A) the sum of:
(I) the effective rate determined in Rule 100.12(c)(i) multiplied by par value; and
(II) the excess of market value over par value;
and
(B) the maximum margin requirement for a convertible security calculated pursuant to Rule 100.21.
(iii) 50%, if the issuer of the shares is in default of the payment of any dividend on the shares, in which case the foregoing clauses shall not apply.

For the purposes of this Rule 100.12(c), the term “floating rate preferred share” means a special or preferred share described in paragraphs (i), (ii) and (iii) of Rule 100.2(f), by the terms of which the rate of dividend fluctuates at least quarterly in tandem with a prescribed short term interest rate.

… and Rule 100.12 earlier states:

100.12. Notwithstanding Rule 100.2, margin on securities owned or sold short by a Dealer Member shall be provided at the following rates:
(a) Securities eligible for reduced margin
25% of the market value if such securities are:


(v) securities whose original issuance generated Tier 1 capital for a financial institution any of whose securities qualify under item (i) and the financial institution is under the regulatory oversight of the Office of the Superintendent of Financial Institutions of Canada.

I believe that this means that a position in the FloatingReset counterpart to BNS.PR.P (whatever its ticker symbol turns out to be) can be margined at only 12.5%. So for a dealer to finance $100 worth of BNS.PR.?, he’s got to put up $12.50 capital, for which we will assume he pays 15%, or $1.875 p.a., but may borrow the remainder, $87.50, at the overnight rate, which we will assume is 1%, for a payment of $0.875 p.a.. Total financing charge is 2.75%, implying that there’s a positive carry even if BNS.PR.? is trading at par.

Note that this possibility embodies what I think was one of the great regulatory failings that led to the credit crunch: traders’ inventories were not subjected to a surcharge for aging. I claim that as the age of the inventory increases, it’s becomes a lot less like a trading position and a lot more like a corporate loan and should attract a capital charge according to that book.

On the other hand, there are now charges against bank Tier 1 capital based on ownership of Tier 1 capital investments. So maybe the bank will charge its traders more than 15% for the capital required for the position; maybe significant ownership will simply be prohibited. And the bank owned dealers, of course, comprise a very hefty chunk of the market. So maybe dealer inventories will not have a great effect.

So …

Take your choice! I suggest that somewhere in the $24.00-99 range is most likely.

Regulation

OSFI: Ineffectual, Uninformed Grandstanding on D-SIBs

The Office of the Superintendent of Financial Institutions has announced:

Canada’s six largest banks have been identified as being of domestic systemic importance, and will be subject to continued supervisory intensity, enhanced disclosure, and a one per cent risk weighted capital surcharge by January 1, 2016.

Grant Robertson of the Globe claims:

The move is designed to avert a liquidity crisis in the sector, and comes on top of the 7 per cent of capital that the Office of the Superintendent of Financial Institutions (OSFI) requires them to hold, which can be easily liquidated by the banks during a time of financial pressure to stabilize operations.

This shows a common confusion between “liquidity” and “solvency”. If you own a house worth a million with no mortgage, but can’t pay for groceries, you are solvent, but illiquid. If you pay for the groceries with all that’s left of the 1.5-million mortage you took on the place five years ago, you are liquid, but insolvent. There was a time when reporters were familiar with their subjects and had the names and ‘phone numbers of experts available to explain arcane elements of business news. Imagine that!

The adjustment to the capital rules under discussion here addresses expectations of solvency but do nothing directly to address liquidity.

Be that as it may, OSFI provided some charts with its cover letter to the banks:


Click for Big

As is OSFI’s habit, the Advisory giving effect to the decision, Domestic Systemic Importance and Capital Targets – DTIs, makes only the slightest possible effort to explain the decision:

The common equity surcharge associated with D-SIB status in Canada will be 1% Risk Weighted Assets (RWA).This surcharge takes into account the structure of the Canadian financial system, the importance of large banks to this financial architecture, and the expanded regulatory toolkit to resolve a troubled financial institution. This means that banks designated as a D-SIB will be required to meet an all-in Pillar 1 target common equity Tier 1 (CET1) of 8% RWA commencing January 1, 2016. The 1% capital surcharge will be periodically reviewed in light of national and international developments. This is consistent with the levels and timing set out in the BCBS D-SIB framework.

The BCBS D-SIB framework provides for national discretion to accommodate characteristics of the domestic financial system, and other local features, including the domestic policy framework. The additional capital surcharge for banks designated as systemically important provides credible additional loss absorbency given:

  • Extreme loss events as a percentage of RWA among this peer group over the past 25 years would be less than the combination of the CET1 (2.5%) capital conservation buffer and an additional 1%; and
  • Current business models of the six largest banks are generally less exposed to the fat tailed risks associated with investment banking than some international peers, and the six largest banks have a greater reliance on retail funding models compared to wholesale funding than some international peers – features that proved beneficial in light of the experience of the last financial crisis.
  • From a forward looking perspective:
    • o Canadian banks that hold capital at current targets plus a 1% surcharge (i.e. 8%) should be able to weather a wide range of severe but plausible shocks without becoming non-viable; and
    • o The higher loss absorbency in a crisis scenario (conversion to common equity or permanent write downs) of the 2% to 3% non-common equity capital in Tier 1 and subordinated debt in total capital required by Basel III also adds to the resiliency of banks.

It gives me a warm feeling inside knowing that OSFI has looked at the past twenty-five years of history to gauge extreme loss events; the Basel II guidelines supposedly calibrated more stringently:

The confidence level is fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years.

OSFI’s document has a few references, but only to other OSFI documents and a few Basel Committee on Banking Supervision hymn books; nothing of any meat, nothing that would provide any comfort that these guys have thought things through and know what they’re doing – but OSFI’s institutional intellectual dishonesty is well known.

Their efforts may be compared – just for starters – with a paper titled Australia: Addressing Systemic Risk Through Higher Loss Absorbency—Technical Note, published by the IMF and reposted by the Australian Prudential Regulation Authority. One of the useful features of this report is “Table 4. Cross-Country Comparison of Approaches to D-SIBs”, which – although one can hardly credit it – looks at what other countries are doing! Here’s an extract:

Country HLA
Singapore 2 percent additional by 2015
Sweden Accelerated adoption of Basel III; plus 3 percent by 2013; 5 percent by 2015
Switzerland 19 percent of RWA total capital, of which up to 9 percent cocos, by 2016
United Kingdom Proposal: 3 percent additional to Basel III and up to 17 percent of RWA loss absorbency for the largest institutions and ring-fenced entities
United States Supplementary Tier 1 of 3 percent of RWA for complex institutions

Now it may very well be that OSFI is taking a prudent route in being so much more lenient with the banks than their international counterparts – but you’d never know it from reading OSFI material. Canadians are forced to take it on trust that the banking regulator knows what it’s doing; and OSFI’s arrogance makes such trust an awfully scarce commodity.

One highly recommended example of how a prudential regulator should operate is the UK’s Independent Commission on Banking – Final Report Recommendations – September 2011:

The Independent Commission on Banking (the Commission) was established by the Government in June 2010 to consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. The Commission was asked to report to the Cabinet Committee on Banking Reform by the end of September 2011. Its members are Sir John Vickers (Chair), Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf.

This report has one of its recommendations highlighted in the table extracted above:

As to that, the Commission recommends that the retail and other activities of large UK banking groups should both have primary loss-absorbing capacity of at least 17%-20%. Equity and other capital would be part of that (or all if a bank so wished). Primary loss absorbing capacity also includes long-term unsecured debt that regulators could require to bear losses in resolution (bail-in bonds). If market participants chose, and regulators were satisfied that the instruments were appropriate, primary loss-absorbing capacity could also include contingent capital (‘cocos’) that (like equity) takes losses before resolution. Including properly loss-absorbing debt alongside equity in this way offers the benefit that debt holders have a particular interest, in a way that equity holders do not, in guarding against downside risk. If primary loss-absorbing capacity is wiped out, regulators should also have the power to impose losses on other creditors in resolution, if necessary.

Assiduous Readers will recognize that I have a fundamental distaste for the trashing of five hundred years of bankruptcy law implied by the last sentence, but at least the rationale is spelt out in credible format – far different from the Canadian model.

Market Action

March 26, 2013

In a move sure to be applauded by crypto-Stalinists everywhere BMO will not advertise its prices:

Bank of Montreal will not extend its 2.99 per cent five-year fixed mortgage rate offer past its expiry on March 28, with the country’s lenders under pressure from Finance Minister Jim Flaherty not to engage in a mortgage price war.

Consumers can still obtain lower rates than this from a variety of mortgage lenders, including other large banks, which routinely offer discounts from their posted or advertised rates. But Bank of Montreal was the only one of the big five banks to cut its posted rate on five-year fixed mortgages below 3 per cent, a move that it advertised heavily.

The bank has long lagged rivals when it comes to market share in the mortgage arena, and has been seeking to get ahead. Mr. Flaherty appeared to be concerned that borrowers would be persuaded to take on more debt than they can chew, potentially heating up the housing market, which he has been seeking to cool.

Some might argue that posted rates affect everybody, including those who are in the twentieth year of their twenty-five year amortization and have loan-to-value ratios of 10% and that seeking to avoid heating up the housing market might best be done through broad-brush monetary, economic and regulatory levers (such as reducing the immense supply of mortgage insurance; such as imposing capital surcharges on bank asset proportions that are widely divergent from historical norms) is preferable to micromanaging; but those people are probably just old poops who don’t appreciate the awesome toughness of our beloved federal finance minister.

The BRICS are going ahead with their own bank:

With just a couple of small gestures at their annual summit, the world’s biggest emerging economies have made the West seem a little less indispensable.

On the summit’s first day, the BRICS bloc of nations has approved a new development bank to compete with Western-dominated institutions such as the World Bank. And on the sidelines, China and Brazil announced a currency-swap agreement worth $30-billion (U.S.) that will allow them to conduct trade in each other’s currencies without needing the U.S. dollar.

The new BRICS-led bank, designed to lend money for infrastructure projects across the developing world, is the biggest step that BRICS have taken to challenge the global financial system since the bloc’s first formal summit in 2009. Another key step could be an agreement on a currency crisis fund, based on pooled foreign-exchange reserves of up to $240-billion, which the BRICS nations are negotiating.

The new BRICS bank is seen as a potentially crucial source of funds for African infrastructure projects. It is often touted, for example, as a likely financier for a massive expansion of nuclear energy in South Africa, a goal of many politicians here. And it could be useful for cross-border projects, which tend to be neglected by traditional creditors.

This is good news. It is clearly better engineering to have a variety of relatively small points of failure, rather than just one.

Taxing depositors was a novel idea and has given the Egyptians the idea of taxing takeovers:

gypt rattled investors on the Cairo stock market on Tuesday by unexpectedly announcing that a takeover of its second biggest private bank would be subject to a new capital markets tax.

Shares in the bank, National Société Générale Bank, which is being taken over by Qatar National Bank, tumbled by their legal limit of 10 per cent and helped pushed Cairo’s benchmark index down to its lowest level since December.

Is it any wonder that Egypt’s in trouble?

Moody’s Investors Service Inc. cut Egypt’s credit rating on Thursday, citing unsettled political conditions and public finances, which it said raised the chance of a default within five years to nearly 40 per cent.

The Egyptian economy has been in crisis since the overthrow of Hosni Mubarak in 2011, with Islamist President Mohamed Mursi’s cash-strapped government grappling with sliding currency reserves, dwindling tourism, a soaring budget deficit and a wave of often violent street protests.

DBRS commented on the Cypriot deposit tax:

However, the announcement that insured Cypriot depositors would be taxed was new and wholly unexpected. (Senior bondholders were also written down, representing a significant shift in ECB policy.) If the proposal had targeted only uninsured depositors holding accounts of over EUR100,000 – the proposal was to tax them at 9.9% – it may still have led to deposit flight. But targeting both large and small depositors represented the first time that depositors in the Euro zone would take losses to shore up failing banks. The taxation of depositors in a Euro zone country is not a credit event, since Cyprus continues to honor its debt payments. However, the surprise announcement of the imposition of losses on legislation that was considered safe recalls the losses imposed on sovereign bondholders during last year’s Greek restructuring, the first default of a Euro zone country.

The rapid spread of bank runs, bankruptcies and systemic crisis that culminated in the failure of Lehman Brothers in the fall of 2008 led to the introduction of extraordinary deposit insurance in Europe. Insurance provided the protection to small depositors needed to reestablish calm following the panic of 2008 and 2009. The notion that small Cypriot depositors could be taxed implied that Cyprus was viewed by the troika as being not systemic, and therefore that a run on Cypriot deposits was unlikely to spread to other Euro zone countries. Nothing could be further from the truth. During the current period of low to no growth in Europe, it is certainly possible that a run on Cypriot deposits could spread, in spite of existing or future controls on capital.

It was a good day for the Canadian preferred share market, with PerpetualPremiums up 10bp, FixedResets winning 16bp and DeemedRetractibles gaining 7bp. Volatility was minor. Volume was above average.

In the wake of yesterday’s DBRS downgrade to Pfd-4(high), INE.PR.A, a FixedReset, was down 5.56% (total return – it went ex-dividend) and INE.PR.C, a PerpetualDiscount, was down 4.05%.

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 0.0096 % 2,637.9
FixedFloater 4.09 % 3.44 % 28,085 18.38 1 0.8696 % 3,971.7
Floater 2.53 % 2.82 % 82,530 20.17 5 0.0096 % 2,848.2
OpRet 4.81 % 0.81 % 57,597 0.23 5 0.0620 % 2,604.8
SplitShare 4.29 % 4.03 % 633,856 4.18 4 -0.1216 % 2,935.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0620 % 2,381.8
Perpetual-Premium 5.20 % -2.32 % 93,761 0.10 31 0.0992 % 2,370.0
Perpetual-Discount 4.75 % 4.83 % 164,270 15.54 5 0.1211 % 2,674.9
FixedReset 4.88 % 2.58 % 288,452 3.28 80 0.1585 % 2,518.0
Deemed-Retractible 4.85 % 2.69 % 131,285 0.51 44 0.0659 % 2,454.5
Performance Highlights
Issue Index Change Notes
RY.PR.C Deemed-Retractible 1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-25
Maturity Price : 25.75
Evaluated at bid price : 26.10
Bid-YTW : -7.40 %
IFC.PR.C FixedReset 1.15 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.30
Bid-YTW : 2.63 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.S Perpetual-Discount 160,983 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.24
Bid-YTW : 4.74 %
TRP.PR.D FixedReset 132,310 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.98
Bid-YTW : 3.34 %
CU.PR.F Perpetual-Discount 66,287 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.14
Bid-YTW : 4.46 %
BMO.PR.J Deemed-Retractible 61,995 RBC crossed 47,400 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-25
Maturity Price : 25.75
Evaluated at bid price : 25.95
Bid-YTW : -0.86 %
ENB.PR.P FixedReset 61,350 National crossed 49,400 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.78
Bid-YTW : 3.48 %
ENB.PR.H FixedReset 60,820 TD sold 13,900 to anonymous at 25.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-26
Maturity Price : 23.38
Evaluated at bid price : 25.80
Bid-YTW : 3.24 %
There were 37 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TCA.PR.X Perpetual-Premium Quote: 50.76 – 51.29
Spot Rate : 0.5300
Average : 0.3445

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 50.76
Bid-YTW : 1.89 %

CIU.PR.A Perpetual-Premium Quote: 25.05 – 25.34
Spot Rate : 0.2900
Average : 0.1871

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-26
Maturity Price : 24.77
Evaluated at bid price : 25.05
Bid-YTW : 4.62 %

W.PR.J Perpetual-Premium Quote: 25.55 – 25.92
Spot Rate : 0.3700
Average : 0.2695

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : -7.62 %

GWO.PR.J FixedReset Quote: 25.71 – 26.00
Spot Rate : 0.2900
Average : 0.1949

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.71
Bid-YTW : 2.12 %

POW.PR.G Perpetual-Premium Quote: 26.95 – 27.24
Spot Rate : 0.2900
Average : 0.2036

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-04-15
Maturity Price : 26.00
Evaluated at bid price : 26.95
Bid-YTW : 4.34 %

W.PR.H Perpetual-Premium Quote: 25.95 – 26.19
Spot Rate : 0.2400
Average : 0.1704

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.95
Bid-YTW : -25.34 %

Market Action

March 25, 2013

Cyprus has reached an agreement for an orderly bank default:

Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the Mediterranean island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second largest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

So yet again governments are finding that 500 years of bankruptcy law has become inconvenient and are rewriting it on the back of a napkin.

It is interesting to compare the current plan with past assurances:

Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers.

An earlier WSJ blog post about the previous deal noted:

The euro zone has to far carefully avoided burning senior bondholders during a bank restructuring. Doing so was seen as too destabilizing for the bloc’s credit-starved financial system. On top of that, in many countries senior bondholders have the same status as bank depositors when it comes to getting repaid.

However, the thinking on senior bondholders has become to change. In July, when the euro zone negotiated a bailout for Spain’s banks, the European Central Bank argued that they should be “bailed in” in cases where a bank is so sick it needs to be closed. At the time, the European Commission insisted senior bondholders would remain protected and the euro zone’s commitment to do so wasn’t tested, since none of the Spanish cajas were ultimately wound down.

With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital.

With relatively little money to gain, officials decided that breaking two taboos — taxing depositors and burning senior bondholders — in one go, didn’t seems like a good idea.

Over the next few weeks, we’ll start to understand how this will affect investor confidence:

The European Union’s decision to recapitalize Cypriot banks by inflicting losses on depositors and senior bondholders is triggering investor concern that bank funding across the region will be hurt.

With the exception of Denmark in 2011, senior bank bondholders, like depositors, have avoided losses in the financial crisis. In February 2011, Amagerbanken A/S collapsed and senior creditors initially lost about 40 percent. It was the first time senior bank bondholders in the EU underwent a so-called haircut in an orderly resolution and the event left most Danish lenders shut out of wholesale funding markets.

The cost of insuring against losses on financial debt surged last week amid concern senior bondholders will be included in future bank bailouts. The Markit iTraxx Financial Index of credit-default swaps jumped 34 basis points to 176, the highest in four months. The gauge was at 174.5 basis points at 2:40 p.m. in London.

There’s a lot of concern:

“We’re in an environment where in both North America and Europe we have some serious policy decisions that have to take place,” Ron Florance, the Scottsdale, Arizona-based managing director of investment strategy at Wells Fargo Private Bank, which has $169 billion assets under management, said in a phone interview. “When a policy misstep is bad it’s real bad, and the discussions last week were really bad decisions. That’s been resolved, but it always puts people on edge.”

Stocks turned lower as Dutch Finance Minister Jeroen Dijsselbloem said troubled lenders in the euro area must now fend for themselves as part of future euro rescues. German advisers cut the nation’s 2013 economic growth forecast to 0.3 percent, from its previous estimate of 0.8 percent, citing “the sharp decline” of gross domestic product in the fourth quarter of 2012.

It’s an ill wind that blows nobody any good:

U.S. hedge funds Pine River Capital Management LP, Millennium Management LLC and SAC Capital Advisors LLC are taking advantage of the struggle of European startup funds to grab their pick of the region’s traders.

The three firms, which manage a combined $46 billion, have over the past year all hired employees from hedge funds started by former European bankers, according to regulatory records and people with knowledge of the matter. They joined from firms including Edoma Partners LLP, Occitan Capital Partners LLP and Portman Square Capital LLP, London hedge funds that have either shut down, posted losses or failed to meet their fundraising goals, said the people, who declined to be identified because the companies are private.

Rather than betting that Europe’s sovereign debt crisis is over, the U.S. funds are selectively hiring top traders, some who quit their jobs at banks last year as their employers cut back on risk-taking and bonuses. The search has been made easier as the crisis forced lenders to cut jobs, pushed funds into losses and prompted investors to pull money from unprofitable managers, recruiters and executives said.

Meanwhile the BRICS are discussing a long-overdue global governance change:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility was basically non-existent; volume was 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 0.0386 % 2,637.6
FixedFloater 4.13 % 3.48 % 28,276 18.31 1 0.0000 % 3,937.4
Floater 2.53 % 2.83 % 85,296 20.17 5 0.0386 % 2,847.9
OpRet 4.81 % 0.92 % 57,125 0.24 5 0.0465 % 2,603.2
SplitShare 4.28 % 4.03 % 638,858 4.19 4 0.0199 % 2,939.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0465 % 2,380.4
Perpetual-Premium 5.20 % -3.42 % 92,631 0.10 31 0.0592 % 2,367.6
Perpetual-Discount 4.75 % 4.84 % 165,777 15.54 5 0.0727 % 2,671.7
FixedReset 4.89 % 2.57 % 287,959 3.29 80 0.0456 % 2,514.0
Deemed-Retractible 4.85 % 3.25 % 136,138 0.65 44 0.0924 % 2,452.9
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.68
Evaluated at bid price : 23.95
Bid-YTW : 2.18 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.S Perpetual-Discount 191,803 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.76 %
TRP.PR.B FixedReset 126,305 Nesbitt crossed 99,400 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.51
Evaluated at bid price : 24.96
Bid-YTW : 2.54 %
HSB.PR.E FixedReset 82,455 Nesbitt crossed 72,400 at 26.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.36
Bid-YTW : 2.14 %
FTS.PR.H FixedReset 69,580 Nesbitt crossed 62,500 at 25.98.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 2.52 %
POW.PR.G Perpetual-Premium 57,980 TD crossed blocks of 25,000 and 26,500, both at 27.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-04-15
Maturity Price : 26.00
Evaluated at bid price : 27.06
Bid-YTW : 4.22 %
SLF.PR.E Deemed-Retractible 54,680 RBC crossed 48,600 at 25.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.94
Bid-YTW : 4.55 %
There were 32 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.95 – 24.50
Spot Rate : 0.5500
Average : 0.3882

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.68
Evaluated at bid price : 23.95
Bid-YTW : 2.18 %

RY.PR.C Deemed-Retractible Quote: 25.82 – 26.05
Spot Rate : 0.2300
Average : 0.1445

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-24
Maturity Price : 25.50
Evaluated at bid price : 25.82
Bid-YTW : 3.19 %

PWF.PR.F Perpetual-Premium Quote: 25.42 – 25.65
Spot Rate : 0.2300
Average : 0.1586

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-24
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : -5.93 %

IAG.PR.F Deemed-Retractible Quote: 26.88 – 27.05
Spot Rate : 0.1700
Average : 0.0986

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.88
Bid-YTW : 3.88 %

FTS.PR.E OpRet Quote: 26.25 – 26.44
Spot Rate : 0.1900
Average : 0.1283

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.25
Bid-YTW : -3.89 %

PWF.PR.H Perpetual-Premium Quote: 25.85 – 26.05
Spot Rate : 0.2000
Average : 0.1504

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-24
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : -23.58 %

Issue Comments

DBRS Downgrades INE.PR.A, INE.PR.C to Pfd-4(high)

DBRS has announced that it:

has today downgraded the Issuer Rating of Innergex Renewable Energy Inc. (Innergex or the Company) to BB (high) from BBB (low) and the Preferred Shares rating to Pfd-4 (high) from Pfd-3 (low). DBRS has also changed the trends to Stable from Negative. When the trends were changed to Negative from Stable last August, DBRS stated that, considering the business risk profile of Innergex’s contracted renewable power portfolio and the structural protections of a non-recourse, project-financing strategy, deconsolidated leverage (i.e., debt at the holding company level) of over 30% and consolidated leverage of over 60% are viewed as not appropriate for maintaining investment-grade ratings. The ratings downgrade reflects DBRS’s view that Innergex’s aggressive financing strategy will result in weaker balance sheet strength driven by high dividend payouts and ongoing growth plans.

Although Innergex has planned to raise $125 million common equity in the coming months, DBRS expects the Company’s dividend payouts to remain high relative to earnings and to continue eroding the equity base. The high levels of dividends are also unsustainable given the Company’s announced growth plan, including the construction of seven projects with a total of approximately $812 million in spending expected for the next few years. With the debt portion of the funding plan, Innergex’s consolidated leverage ratio is expected to rise. In the absence of substantial corrective measures, DBRS no longer expects Innergex’s financial profile to remain consistent with investment-grade ratings. While the deconsolidated debt-to-capital ratio has improved to 30.4% from 32.3% in 2012, the consolidated total debt-to-capital and cash flow-to-total debt ratios have further weakened to 64.6% and 4.6%, respectively.

It will be most interesting to see what happens tomorrow for these issues, given that RON.PR.A was hammered after its downgrade (although it has since recovered about half of the losses sustained on that tumultuous day). One thing that might mitigate the damage is that the Innergex issues are not included in either ZPR’s holdings or in CPD’s holdings, since INE.PR.A has only 3.4-million shares outstanding (closing today at 24.95-98) and INE.PR.C has only 2-million shares outstanding (closing today at 23.65-74).