Interesting External Papers

BoC Releases December 2011 Financial Stability Review

The Bank of Canada has released the Financial Stability Review for December 2011 with articles:

  • Risk Assessment
    • Macrofinancial Conditions
    • Key Risks
      • Global Sovereign Debt
      • Economic Downturn in Advanced Economies
      • Global Imbalances
      • Low Interest Rate Environment in Major Advanced Economies
      • Canadian Household Finances
    • Safeguarding Financial Stability
  • Strengthening Bank Management of Liquidity Risk:
    The Basel III Liquidity Standards

  • A Fundamental Review of Capital Charges Associated
    with Trading Activities

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Market-making activity has decreased, with U.S. primary-dealer inventories of corporate bonds falling in recent months (Chart 4).

It remains to be seen whether this is a normal reaction to the ebb and flow of trading activity, or whether the Volcker Rule – and all the other rules that have been introduced in the past few years – have permanently damaged corporate bond market liquidity.


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European banks’ access to U.S.-dollar funding has again come under mounting pressure, motivating the ECB to enhance its program to provide U.S.-dollar liquidity. Since European banks hold large amounts of assets denominated in that currency, they have a significant and persistent need for U.S.-dollar funding. This was heightened in recent months as U.S. money market mutual funds reduced their positions in European bank debt (Chart 10), shortened the maturities of their loans to euro-area banks and placed limits on overall counterparty credit exposure. In September, the ECB announced three 3-month U.S.-dollar liquidity operations, allowing financial institutions to secure financing in U.S. dollars beyond the year-end, which is typically a period when funding needs rise owing to seasonal factors. In addition, 1-week U.S.-dollar liquidity operations, which were set to expire in August 2011, have been extended until August 2012.


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With tensions in U.S.-dollar funding markets particularly acute as a result of rising counterparty concerns in Europe (Chart 11), a group of six central banks, including the Bank of Canada, took action on 30 November to extend U.S.-dollar swap lines with the U.S. Federal Reserve to 1 February 2013. The rate was lowered by 50 basis points, and the network of swap lines was expanded to include bilateral swaps among all pairs of currencies to provide financing if needed. For a number of the central banks involved, including
the Bank of Canada, the U.S.-dollar swap lines have been precautionary in nature, but the ECB has made use of its swap facility to provide U.S.-dollar financing to European banks.

So, obviously, if your requirements are killing you, the best thing to do is reduce your requirements, right? That’s what has the Canadian banks salivating:

This deleveraging is likely to be accelerated by the requirement to boost core Tier 1 capital to 9 per cent of risk-weighted assets by mid-2012, which was announced as part of the 26 October package of measures. Given market conditions, it seems likely that the higher capital ratios will be achieved at least in part through asset sales, as well as retained earnings and capital issuance. In an extreme scenario where only asset sales are used, up to €2.5 trillion of disposals would be required to raise core Tier 1 capital ratios to 9 per cent by next June as agreed to by euro-area leaders. Based on last year’s earnings, and assuming that no dividends are paid, the lower bound for asset sales would be €1.4 trillion.

Asset sales are likely to be concentrated in non-core business lines. For instance, there are reports that European banks have been selling assets in emerging-market economies.

Some European banks are also selling U.S.-dollar assets, which has the advantage of reducing the funding-currency
mismatch that has plagued them for the past several years.

With recent quarterly results, banks have also announced a number of cost-cutting measures, including downsizing trading desks and other capital market operations. This raises the possibility of a marked decrease in their market-making activities, especially since this appears to be a strategy being used by many banks in Europe and abroad.

Somewhat surprisingly, the FSR points out that the Europeans might have shot themselves in the foot:

Positions in credit default swap (CDS) markets are used to hedge sovereign risk exposures. Since a credit event triggering payments on sovereign CDSs would entail losses for institutions that have sold credit protection, there is a risk that this could be an important channel of contagion to other markets and institutions. At the same time, the usefulness of such protection is called into question by recent proposals for voluntary writedowns of Greek sovereign debt by 50 per cent without triggering a credit event. The resulting inability to hedge exposures to sovereign credit risk could further reduce investor demand for these securities.

Cheery news for pensioners:


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… and for those (ahem!) with high exposure to insurers:

Recent market developments have had a similar negative impact on the life insurance sector. Some large Canadian insurers reported sizable losses in
the third quarter, reflecting the impact of lower interest rates, the decline in equity markets and revisions to actuarial assumptions. The recent market turmoil has also intensified sensitivities to market risk. Equity hedging strategies designed to help mitigate the impact on profit and loss will be less effective under very stressful financial market conditions to the extent that these strategies may be subject to basis and counterparty risk. These issues are especially challenging for firms that have been more aggressive in providing guarantees on investment products and in operating with greater asset-liability mismatches.

To my disappointment, the article by Grahame Johnson on capital charges in the trading book glosses over what I consider to have been the most egregious, and most easily fixed, element of regulatory failure in the run-up to the Panic of 2007: the fact that regulators do not impose a surcharge on trading book positions based on the age of those positions:

Drawing the boundary between the trading book and the banking book on the basis of intent has proven to be vulnerable to misuse. Trading intent is extremely difficult
either to define or to enforce; as such, there is a risk that some assets that might not be readily tradable (or hedgeable) will be held in the trading book. As well, there is a potential for regulatory arbitrage, where firms move positions into whatever classification provides the most favourable capital treatment.

This incentive to move positions can work in both directions. For example, credit exposures generally require a lower amount of capital if held in the trading book (given the use of internal models that allow for the benefits of hedging). This provides a strong motivation to securitize credit and hold it in the trading book, even if it is ultimately impossible to sell the exposure. The banking book, on the other hand, does not require assets to be marked to market, which would allow institutions to avoid recognizing (temporary) losses. For securities that have seen sharp declines in market price (which the bank views as temporary), there is an incentive to move these positions to the banking book, where the short-term loss would not have to be recognized. Highly rated sovereign government bonds present an example of this second arbitrage opportunity. In a volatile market, a portfolio of high-grade sovereign bonds could require a significant capital charge in the trading book (based on movements in the market price of the bonds); yet if the holding was moved to the banking book, the securities would have a risk weight of zero and would therefore require no capital.

In addition, long term readers will remember that I also advocate a certain separation of function: banks should declare whether they are primarily traders or primarily bankers, and face a surcharge on their capital requirements for their secondary function.

Market Action

December 7, 2011

FortisBC Energy (formerly Terasen; now owned by Fortis, proud issuer of FTS.PR.C & FTS.PR.E (OperatingRetractible), FTS.PR.F (PerpetualPremium), and FTS.PR.G & FTS.PR.H (FixedReset)) has issued 30-year paper at 4.25%.

DBRS has confirmed BIG.PR.B and BIG.PR.C at Pfd-2:

On December 9, 2010, DBRS confirmed the ratings on the Preferred Shares at Pfd-2. However since that time, the net asset value and downside protection available to the Preferred Shares has declined due to general market instability. This decline has affected several sectors, including the financial services industry, which is the primary investment sector for Big 8 Split Inc. Downside protection has decreased to 56.7% from 62.6% since December 2010 (the S&P/TSX Composite Bank Index declined 5.9% and the S&P/TSX Composite Insurance Index declined 18.8% over the same period). In addition, based on the current dividend yield on the Portfolio, the current Preferred Share dividend coverage ratio is approximately 1.5 times. Despite the recent downturn, DBRS remains comfortable confirming the current Pfd-2 ratings of the Preferred Shares, primarily because of the sufficient level of downside protection and dividend coverage available in the transaction, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The BoC maintained the overnight rate:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.

On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October. Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar.

Although total CPI inflation has been slightly higher than projected, the Bank continues to expect the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy. Core inflation has also been slightly firmer than projected and is expected to ease as the output gap persists well into 2013.

Floaters didn’t do very well today – maybe a little bit of capitulation by the prophets of the inflation apocalypse?

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 15bp, FixedResets up 7bp and DeemedRetractibles gaining 9bp. Volatility was OK; volume was average.

PerpetualDiscounts now yield 5.19%, equivalent to 6.75% at the standard equivalency factor of 1.3x. Long corporates are now a little under 4.80%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 195bp, a significant tightening from the 210bp reported November 30 as PerpetualDiscounts have come in.

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 -2.0200 % 2,019.7
FixedFloater 4.86 % 4.59 % 35,716 17.13 1 0.3077 % 3,172.9
Floater 3.28 % 3.56 % 67,090 18.30 3 -2.0200 % 2,180.8
OpRet 4.89 % 0.99 % 59,091 1.44 6 0.2240 % 2,482.8
SplitShare 5.79 % 6.73 % 61,103 5.12 3 0.2823 % 2,535.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2240 % 2,270.3
Perpetual-Premium 5.51 % 3.02 % 94,346 0.87 18 0.1731 % 2,161.0
Perpetual-Discount 5.24 % 5.19 % 106,632 15.01 12 0.1452 % 2,308.1
FixedReset 5.10 % 3.14 % 228,010 2.46 64 0.0709 % 2,339.8
Deemed-Retractible 5.04 % 4.39 % 195,066 3.82 46 0.0915 % 2,226.3
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -5.24 % Not to be taken seriously. It’s simply a matter of the bid disappearing after the issue traded 8,225 shares in a range of 14.76-90, last trade at 14.81.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.77 %
BAM.PR.B Floater -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 14.90
Evaluated at bid price : 14.90
Bid-YTW : 3.56 %
MFC.PR.F FixedReset 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.96
Bid-YTW : 3.96 %
ENB.PR.A Perpetual-Premium 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-01-06
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : -40.97 %
BAM.PR.O OpRet 1.72 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 2.85 %
IAG.PR.A Deemed-Retractible 1.81 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.55
Bid-YTW : 5.89 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.E Perpetual-Premium 71,556 Desjardins bought two blocks from Nesbitt, 10,000 and 13,900 shares, both at 25.25.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.23
Bid-YTW : 5.21 %
TD.PR.E FixedReset 57,145 RBC crossed 50,000 at 27.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 27.06
Bid-YTW : 2.94 %
BNS.PR.O Deemed-Retractible 56,300 Scotia crossed 50,000 at 26.82.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-26
Maturity Price : 26.00
Evaluated at bid price : 26.82
Bid-YTW : 3.44 %
ENB.PR.D FixedReset 55,330 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 23.15
Evaluated at bid price : 25.14
Bid-YTW : 3.67 %
RY.PR.H Deemed-Retractible 46,878 Nesbitt crossed 40,000 at 26.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-24
Maturity Price : 26.00
Evaluated at bid price : 26.68
Bid-YTW : 3.73 %
TD.PR.R Deemed-Retractible 46,006 Scotia crossed 40,000 at 26.87.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-30
Maturity Price : 26.00
Evaluated at bid price : 26.87
Bid-YTW : 3.31 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.K Floater Quote: 14.10 – 14.99
Spot Rate : 0.8900
Average : 0.5471

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.77 %

RY.PR.G Deemed-Retractible Quote: 25.25 – 25.61
Spot Rate : 0.3600
Average : 0.2408

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.25
Bid-YTW : 4.31 %

BAM.PR.G FixedFloater Quote: 19.56 – 19.99
Spot Rate : 0.4300
Average : 0.3392

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 25.00
Evaluated at bid price : 19.56
Bid-YTW : 4.59 %

BAM.PR.H OpRet Quote: 25.40 – 25.71
Spot Rate : 0.3100
Average : 0.2239

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-01-06
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : -0.82 %

TCA.PR.X Perpetual-Premium Quote: 52.61 – 52.89
Spot Rate : 0.2800
Average : 0.2014

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 52.61
Bid-YTW : 3.02 %

RY.PR.T FixedReset Quote: 27.15 – 27.44
Spot Rate : 0.2900
Average : 0.2142

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 27.15
Bid-YTW : 3.04 %

Issue Comments

BAF.PR.C Firm on Reasonable Volume

Bell Aliant has announced:

that its subsidiary, Bell Aliant Preferred Equity Inc. (the “Company”), has closed the sale of 4,600,000 4.55% Cumulative 5-Year Rate Reset Series C Preferred Shares (the “Series C Preferred Shares”) at a price of $25.00 per Series C Preferred Share for total gross proceeds of $115 million. This follows the Company’s previously announced bought deal public offering led by RBC Capital Markets, Scotia Capital and BMO Capital Markets, and includes the exercise in full by the syndicate of underwriters of their over-allotment option. The Series C Preferred Shares begin trading on the TSX under the symbol “BAF.PR.C” today.

BAF.PR.C is a FixedReset, 4.55%+309, announced November 21. BAF.PR.C will be tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

The issue traded 151,545 shares today in a range of 24.75-00 before closing at 25.00-06, 8×24.

Vital statistics are:

BAF.PR.C FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-07
Maturity Price : 23.14
Evaluated at bid price : 25.00
Bid-YTW : 4.38 %
Issue Comments

BIG.PR.B, BIG.PR.C: Partial Call for Redemption

TD Securities’ Big 8 Split Inc. has announced:

that it has called a total of 368,040 Preferred Shares, comprised of 174,186 Class B Preferred Shares and 193,854 Class C Preferred Shares, for cash redemption on December 15, 2011 representing approximately 20.0% of all outstanding Preferred Shares as a result of holders of 368,040 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 14, 2011 will have approximately 20.0% of their Preferred Shares redeemed.

The redemption price for the Preferred Shares will be $12.00 per share. Holders of Preferred Shares that have been called for redemption will only be entitled to receive dividends on those which have been declared but remain unpaid up to and including December 15, 2011.

As a result, a total of 368,040 Preferred and Capital Shares, or approximately 20.0% of both classes of shares currently outstanding will be redeemed.

Payments and delivery of cash and common shares owing as a result of shareholders having exercised their retraction privilege and the above notice of call, will be made by the Company on December 15, 2011.

Big 8 Split was established to generate dividend income for holders of the Preferred Shares while providing holders of the Capital Shares, with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc.

Information concerning Big 8 Split Inc. is available on our website at www.tdsponsoredcompanies.com.
The Capital Shares and Preferred Shares of Big 8 Split are listed on the Toronto Stock Exchange under the symbols BIG.A, BIG.pr.B and BIG.pr.C respectively.

BIG.PR.B & BIG.PR.C were last mentioned when there was a partial redemption call in 2010. Neither BIG.PR.B nor BIG.PR.C are tracked by HIMIPref™.

Market Action

December 6, 2011

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets up 5bp and DeemedRetractibles gaining 8bp. Volatility was quite good, with five winners and two losers. Volume was below 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 -0.8898 % 2,061.4
FixedFloater 4.87 % 4.61 % 35,654 17.11 1 1.5096 % 3,163.2
Floater 3.21 % 3.51 % 66,033 18.43 3 -0.8898 % 2,225.7
OpRet 4.90 % 0.99 % 54,722 1.44 6 -0.0640 % 2,477.3
SplitShare 5.80 % 6.71 % 60,355 5.12 3 0.7107 % 2,528.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0640 % 2,265.2
Perpetual-Premium 5.52 % 3.12 % 95,837 0.87 18 -0.0620 % 2,157.2
Perpetual-Discount 5.25 % 5.20 % 108,186 15.04 12 0.1315 % 2,304.8
FixedReset 5.11 % 3.10 % 229,740 2.47 64 0.0458 % 2,338.1
Deemed-Retractible 5.04 % 4.37 % 193,929 3.82 46 0.0812 % 2,224.3
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -2.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 2.78 %
IGM.PR.B Perpetual-Premium -1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.84
Bid-YTW : 5.46 %
SLF.PR.G FixedReset 1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.14
Bid-YTW : 4.26 %
PWF.PR.M FixedReset 1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.60
Bid-YTW : 3.20 %
TD.PR.O Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-31
Maturity Price : 25.50
Evaluated at bid price : 25.85
Bid-YTW : 3.73 %
BNA.PR.D SplitShare 1.42 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-01-05
Maturity Price : 26.00
Evaluated at bid price : 26.51
Bid-YTW : -16.23 %
BAM.PR.G FixedFloater 1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 25.00
Evaluated at bid price : 19.50
Bid-YTW : 4.61 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.B Perpetual-Premium 93,346 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-01-05
Maturity Price : 25.25
Evaluated at bid price : 25.59
Bid-YTW : -9.16 %
MFC.PR.G FixedReset 93,042 New issue settled today.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 4.81 %
BNS.PR.O Deemed-Retractible 64,604 Scotia crossed 50,000 at 26.82.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-04-26
Maturity Price : 26.00
Evaluated at bid price : 26.75
Bid-YTW : 3.63 %
ENB.PR.D FixedReset 54,128 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 23.14
Evaluated at bid price : 25.11
Bid-YTW : 3.67 %
IFC.PR.C FixedReset 30,000 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.12 %
CM.PR.G Perpetual-Discount 27,820 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-01
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 5.34 %
There were 26 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: 19.00 – 20.47
Spot Rate : 1.4700
Average : 1.1413

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 2.78 %

ELF.PR.G Perpetual-Discount Quote: 21.20 – 21.95
Spot Rate : 0.7500
Average : 0.4863

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.69 %

HSB.PR.D Deemed-Retractible Quote: 25.15 – 25.58
Spot Rate : 0.4300
Average : 0.2684

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 5.07 %

PWF.PR.H Perpetual-Premium Quote: 25.22 – 25.59
Spot Rate : 0.3700
Average : 0.2839

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-01-09
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 2.37 %

PWF.PR.F Perpetual-Discount Quote: 24.84 – 25.08
Spot Rate : 0.2400
Average : 0.1623

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-12-06
Maturity Price : 24.59
Evaluated at bid price : 24.84
Bid-YTW : 5.34 %

GWO.PR.M Deemed-Retractible Quote: 25.62 – 25.95
Spot Rate : 0.3300
Average : 0.2551

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 5.47 %

Issue Comments

CSE.PR.A Dives on Common Dividend Warning

Capstone Infrastructure Corporation has announced that it:

updated its outlook for 2012 for Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) and payout ratio, which is based on Adjusted Funds From Operations (“AFFO”), to reflect the impact of certain external events and internal initiatives subsequent to the Corporation’s previous outlook.

The Corporation currently expects 2012 Adjusted EBITDA to be approximately $120 million compared with previous estimates of approximately $140 million. The 2012 payout ratio is expected to be approximately 120% to 130% compared with the previously provided outlook of approximately 85% to 90%

Based on the Corporation’s existing portfolio, outlook and current dividend level, management expects the payout ratio in 2013 and 2014 to return to the 100% or below range. Notwithstanding this view, at the current dividend level the Corporation’s 2012 payout ratio is now expected to be higher than previously anticipated. Based on the assumptions underlying the 2012 outlook, as identified above and which are subject to change, it is unlikely that the Corporation will continue to pay the current dividend through 2014 as previously expected. The Corporation expects to gain clarity on Cardinal’s future cash flow profile in the first half of 2012. As a result, the Board of Directors and management intend to re-evaluate the Corporation’s dividend policy in 2012.

Outlook for 2011
The Corporation also updated its outlook for 2011 to reflect the impact of IFRS adjustments related to the accounting for Bristol Water. Excluding the one-time costs related to the internalization of management in April 2011, Adjusted EBITDA is expected to be approximately $70 to $75 million, which is generally consistent with the previously provided outlook of approximately $75 million. The payout ratio in 2011, which is based on AFFO and excludes internalization costs, is expected to be approximately 130% compared with approximately 120% previously. The 2011 outlook remains subject to the final purchase price accounting treatment and final transaction costs (such as stamping fees) for Bristol Water, which will be finalized in early 2012.

The common dived:

Stock in utility owner Capstone Infrastructure Corp. (TSX:CSE) dropped by more than a third on Tuesday as the company indicated it would likely be forced to lower its dividend next year.

On the Toronto Stock Exchange, shares in the owner of power plants, a water utility and an interest in a heating business in Sweden closed down $2.06, or 37 per cent at $3.54.

Roughly six million shares traded hands, making it one of the most active issues on the Toronto market.

Capstone said it would review the dividend in the first half of next year, but gave no indication of the size of any cut it might make.

The stock currently pays a monthly dividend of 5.5 cents per share, representing an annual yield of almost 11.8 per cent based on the company’s share price Monday and nearly 19 per cent based on the stock price Tuesday.

Capstone’s portfolio includes gas cogeneration, wind, hydro, biomass and solar power facilities with an installed capacity of some 370 megawatts, a 33.3 per cent interest in a district heating business in Sweden and a 70 per cent interest in a regulated water utility in the United Kingdom.

… and the preferred share price went along for the ride, closing at 15.71-99, down about 20% from Monday’s close of 19.62-20, on volume of 80,845 shares (a little under 3% of the 3-million shares outstanding).

The company is not rated by DBRS; S&P has them at P-3 and did not take any action today.

Issue Comments

S&P Revises ENB Outlook to Stable

Standard and Poor’s has announced:

  • We are revising our outlook on Enbridge Inc. (EI), Enbridge Pipelines Inc., and Enbridge Gas Distribution Inc. to stable from negative
  • We are also affirming our ratings, including our ‘A-‘ long-term corporate credit ratings, on the three.
  • The outlook revision reflects our view of the lower probability of funds from operations-to-debt falling below 13% in the next two years.
  • Nevertheless, we expect forecast credit metrics to remain weak for the ratings, primarily as a result of EI’s ongoing large capital program that could exceed C$6 billion in 2012.
  • We expect Enbridge and its subsidiaries to manage their balance sheets and credit metrics in part through issuing preferred shares, asset dropdowns, and a reduction of its ownership stake in its sponsored
    investments, consistent with recent actions.

  • We have not changed our view that the competitive toll settlement, which went into affect July 1, 2011, has marginally increased EI’s business risk.


The stable outlook on EI reflects our view that credit metrics, while weak for the ratings are expected to remain above established thresholds. A deterioration in adjusted last-12-month FFO-to-debt below 13% would likely result in a downgrade. In addition, deterioration in the business risk profile, either through a single event or a more gradual shift, could lead us to lower the ratings. Without a material reduction in leverage, an upgrade is unlikely.

The company was affirmed by DBRS today:

The improvement in ENB’s credit metrics since the year-end 2008 trough reflects rising earnings and cash flow from projects placed in service combined with lower capex and investments that have led to smaller free cash flow deficits and financing requirements over the subsequent 33-month period. Net proceeds from the issuance of preferred shares in late Q3 2011 ($0.5 billion) and of common equity in the form of reinvested dividends ($0.6 billion since year-end 2008) reduced the Company’s incremental debt financing needs relative to previous levels. ENB’s credit metrics in the nine months ending September 30, 2011 (9M 2011) were stronger than in 9M 2010, reflecting higher net income (before extraordinary items) and the full period benefit of cash earnings from two major projects placed into service in 2010 (the Alberta Clipper Project (Alberta Clipper) on April 1, 2010, and Southern Lights Diluent Import Pipeline (Southern Lights) on July 1, 2010) compared with cash earnings since the in-service dates and non-cash allowance for equity funds used during construction (AEDC) and all of the associated debt in 9M 2010.

Enbridge has three issues of preferred shares outstanding: ENB.PR.A (5.5% PerpetualPremium, currently callable at par), and the FixedResets ENB.PR.B (4.00%+240) & ENB.PR.D (4.00%+237).

Issue Comments

MFC.PR.G Settles at Steep Discount on Low Volume

Manulife Financial Corporation has announced:

that it has completed its offering of 8 million Non-cumulative Rate Reset Class 1 Shares Series 5 (the “Series 5 Preferred Shares”) at a price of $25 per share to raise gross proceeds of $200 million.

The offering was underwritten by a syndicate of investment dealers co-led by RBC Capital Markets and Scotia Capital Inc. The Series 5 Preferred Shares commence trading on the Toronto Stock Exchange today under the ticker symbol MFC.PR.G.

The Series 5 Preferred Shares were issued under a prospectus supplement dated November 29, 2011 to Manulife’s short form base shelf prospectus dated September 3, 2010.

The $200-million issue size implies that not a single dollar of the $50-million greenshoe was exercised.

MFC.PR.G is a 4.40%+290 FixedReset announced November 29. This issue will be tracked by HIMIPref™ and is assigned to the FixedReset index.

The issue traded 93,042 shares today in a range of 23.66-56, a very high range for an investment-grade opening day, before closing at 24.10-28, 11×5.

Vital statistics are:

MFC.PR.G FixedReset YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 4.81 %
Issue Comments

YLD.PR.A, YLD.PR.B Redemption Announced; Default Almost Certain

Split Yield Corporation (managed by Quadravest) has announced:

Notice of Final Redemption of all Shares Effective February 1, 2012

Split Yield Corporation (the”Company” hereby provides formal notice that all of its outstanding Class I Preferred shares (YLD.PR.A), Class II Preferred shares (YLD.PR.B) and Capital shares (YLD) will be redeemed effective February 1, 2012. This redemption is required by and will occur in accordance with the provisions of the Company’s articles of incorporation, as amended, and has previously been discussed in the Company’s annual information form, financial statements and other continuous disclosure documents filed earlier this year.

As more fully described in the Company’s annual information form, financial statements and other continuous disclosure documents, the Class I Preferred shares rank in priority to the Class II Preferred shares and the Class II Preferred shares rank in priority to the Capital shares with respect to the payment of dividends and repayment of capital upon the winding up of the Company. The final formula to calculate the termination payment is as follows: Each Class I Preferred share will be valued at the lesser of (i) $20; and (ii) the Net Assets per unit for the Company on the termination date. Each Class II Preferred share will be valued at the amount, if any, of the difference between the Net Assets per unit of the Company and $20 (the original issue price of the Class I Preferred shares) subject to a maximum value of $15 per share. As such, if the net asset value per unit remains below $20 per unit on termination date, this would mean that each Class II Preferred share would receive no payment. Capital shares will receive no payment unless the unit value was in excess of $35 per unit at termination date. The net asset value per unit as at November 30, 2011 was $17.74. Any retractions received under the January 2012 monthly retraction privilege will be calculated in the same manner as the final termination amount for each class of share.

Class I Preferred shareholders have received total dividends of $14.90 per share since inception. The final quarterly dividend of $0.275 to Class I Preferred shareholders will be made on January 31, 2012. Class II Preferred shareholders have received total dividends of $10.54 per share since inception. Any quarterly Class II Preferred share dividends suspended since July 2008 cannot be declared or made payable if the net asset value is below $20 per unit due to the priority ranking of the Class I Preferred shares. Capital shares have received total dividends of $7.25 per share since inception. Overall, a total of $32.69 per unit in distributions was made since inception.

The Manager will begin liquidating the portfolio during the latter half of January 2012 in preparation for the final redemption. A final net asset value will be calculated as at January 31, 2012 and will be used to determine the final redemption prices.

Payment of the redemption prices as applicable are expected to be made no later than February 16, 2012 and will be paid to the beneficial holders of such shares through payment to the CDS participant through which such shares are held.

The Company anticipates that trading in all three classes of shares on the Toronto Stock Exchange will be halted at the opening of trading on February 1, 2012 and that such shares would then be de-listed from the Exchange effective the close of trading on that date. Once all necessary tax clearance certificates are obtained and other corporate formalities observed, it is expected that the Company will then be dissolved.

So in a nutshell, YLD.PR.A gets the first $20, YLD.PR.B gets the next $15 and YLD gets the balance. Trouble is the NAV is currently only 17.74.

YLD.PR.A and YLD.PR.B have both been tracked by HIMIPref™, but have been relegated to the Scraps index on credit concerns. Tracking of YLD.PR.B will cease immediately, but tracking of YLD.PR.A is expected to continue until redemption. YLD.PR.A and YLD.PR.B were last discussed on PrefBlog in connection with the 09H1 Financial Statements.

If we look at the January 2011 Annual Report, we can get a good feel for how this happened:

YLD Unit Performance to 2011-1-31
Measure One
Year
Three
Years
Five
Years
Ten
Years
Total Fund +11.50% -2.89% -1.74% -0.73%
S&P/TSX 60
(Can)
+23.23% +3.11% +5.55% +5.75%
S&P 100
(US)
+12.53% -0.97% -0.23% -3.98%