PrefBlog

Assiduous Reader JP sends in a clipping detailing the interesting defence to the fraud charges against S&P:

Now, lawyers defending the company against the Justice Department’s recent civil lawsuit say that statements about independence and objectivity are “puffery” and were never meant to be taken at face value by investors.
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In its formal defense filed Monday, S&P pointed to two earlier court decisions where judges ruled that such statements by the firm were puffery and therefore can’t form the basis for a fraud claim.
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“Even if it’s a viable legal argument, it’s a pretty unattractive argument for S&P to be putting forward since they’re basically in the business of charging clients for their reputation,” said Samuel Buell, a law professor at Duke University and a former federal prosecutor. “What they’re saying here is, ‘When we’re talking to investors about our own reputation, we’re engaging in meaningless puffery.’ ”

“That’s the whole point of the rating agencies, their seal of approval,” Mr. Buell said.

I disagree with Mr. Buell’s characterization of ‘the whole point of the rating agencies’. They don’t provide a “seal of approval” to anything – they provide an opinion on the credit-worthiness of the firm, or instrument. Since the issuers use this opinion to help sell their product, it can be fairly characterized as puffery, although not entirely meaningless.

The CRAs do not do anything a competent analyst cannot do – except, of course, for using material non-public information in the course of their work, a provision of Canadian and US securities laws I despise. Their value is: at least it’s a reasonably consistent opinion across companies; their 100-year track record is excellent (they are being blamed for the credit crisis – that’s like blaming the weatherman for Hurricane Sandy); and they serve as a public flash-point for concerns about creditworthiness that may spur action when times are tough.

It was an inconsequential day on the Canadian preferred share market, with PerpetualPremiums down 5bp, FixedResets off 4bp and DeemedRetractibles gaining 2bp. Volatility was low. Volume was on the high side of average.

The Globe was enthralled with the new Air Canada equipment financing:

Air Canada said on Wednesday it plans to acquire five new Boeing 777-300ER series aircraft with funds raised through offering two tranches of enhanced equipment trust certificates (EETCs) worth a total of
$606.3 million.

The EETC market has been one of the main sources of funding that U.S. carriers have used to fund aircraft purchases in the
last two decades.

This market has been off limits to airlines in Canada until late last year, when the Canadian government signed an accord that now allows domestic airlines to seek funding from this market, which offers lower interest rates than other forms of
aircraft financing.

My interest was further piqued by S&P’s rating announcement – which noted that the rating was “(sf)” – structured finance:

The pass-through certificates will be issued by pass-through trusts that will hold equipment notes issued by Loxley Aviation Ltd. Loxley Aviation is a newly formed company whose assets will consist of the aircraft to be financed, in part, with the proceeds of this offering and contract rights under its conditional sale agreements for the aircraft with Air Canada. We will assign final ratings after concluding a legal review of the documentation.

We base the preliminary ‘B'(sf) rating on the credit quality of Air Canada (B-/Stable/–); substantial collateral coverage by good-quality aircraft; and the legal and structural protections available to the pass-through certificates. The company will use proceeds of this offering and those of the 2013-1 class A and class B series to finance 2013 and 2014 deliveries of five Boeing B777-300ER aircraft to be acquired by Loxley Aviation and conditionally sold to Air Canada. Each aircraft’s equipment notes are cross-collateralized and cross-defaulted under the indentures, and cross-collateralized and cross-defaulted to the conditional sale agreements, which we believe increases the likelihood that Air Canada would cure any defaults and agree to perform its future obligations, including its payment obligations, under the conditional sale agreements in an insolvency-related event of the airline.

So, I wonder, what’s the deal with these things? How are they different from a normal mortgage bond, which is to say, debt secured by a physical asset?

Nothing on SEDAR.

A little digging and I learn that it’s a private placement:

The certificates are being offered and sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States in reliance on Regulation S under the Securities Act. The certificates have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and state securities laws. The certificates have not been and will not be qualified for sale to the public under applicable Canadian securities laws and, accordingly, any offer and sale of the certificates in Canada will be made on a basis that is exempt from the prospectus requirement of such securities laws.

Let us all thank the bureaucracy for protecting us from the debt markets!

It was another modestly good day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets winning 9bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume continued high.

PerpetualDiscounts now yield 4.84%, equivalent to 6.29% interest at the standard conversion factor of 1.3x. Long corporates now yield a little under 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, unchanged from April 17.

Well, that was interesting:

The S&P 500 was up about 1 percent at about 1,578 at 1:07 p.m. New York time today when a posting on the Associated Press Twitter account said there had been explosions at the White House and President Barack Obama had been injured. The benchmark gauge for American stocks erased almost the entire gain, falling as low as 1,563.03 by 1:10 p.m. The index recovered from the plunge within three minutes as the news service said its Twitter account had been hacked and there were no explosions. The S&P 500 ended the session up 1 percent at 1,578.78.

Who says Asian financial markets are backward? When yields are horribly low, the vendors raise commissions:

Borrowers in Asia have stepped up the use of rebates to get wealthy individual investors to buy their dollar-denominated bonds, underscoring weakness in the market as returns dwindle to an 18-month low.

At least 24 percent of the deals in the region last quarter provided a monetary incentive for private banks whose clients bought the offerings, more than double the same period of 2011, according to FIL Ltd., a global fund manager known as Fidelity Worldwide Investment that oversees $248.2 billion. While the practice is legal, it’s only common in Asia, lawyers say.
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Billionaire Mukesh Ambani’s Reliance Industries Ltd. (RIL) sold 53 percent of its $800 million offering to private banks, according to a company statement on Jan. 29. The Mumbai-based issuer offered a 50 cent discount to private banks per $100 of bonds purchased, said a person with knowledge of the matter, who asked not to be identified without authorization to speak publicly.

Singapore-based CapitaLand Ltd. (CAPL) sold $400 million of 10- year bonds in September in part by offering a 25-cent rebate to private banks for every $100 of bonds they bought, said Arthur Lang, the group chief financial officer at Southeast Asia’s biggest property developer.

Maybe Canadian bond salesmen can learn from Asia:

“Since the beginning of the year, most institutional clients have been net buyers of credit,” said credit trader Julian Pope at Desjardins Securities. “What we’ve noticed in the past 10 to 12 trading sessions has been a reversal of that trend.” In a recent report, he referred to the trend as the possibility of an emerging “buyers strike.”

No doubt, deals are still selling. However, the word on Bay Street is that there are a lot more “full fills” for many new issues, which means institutional buyers are often getting the full amounts that they request. For a hot deal, they may only get a fraction of what they request because the order book is oversubscribed.

You can also see a cool down of sorts in the spreads for investment grade Canadian issuers over their government benchmarks, because these spreads are starting to widen. For now it amounts to just a few basis points on average, but even that has caught some people offside because the spreads only moved tighter for so long.

Because the trend is so nascent, the voracious appetites for new debt could very well roar back. But the current pause is at least forcing people to bonder if fixed-income supply truly has the legs to stay hot for another full year.

Toronto take note! Casinos in Macau are generating ancillary investment:

Casino companies in Macau, the world’s biggest gambling hub, will gain from expanding family entertainment as the city seeks to become China’s top leisure spot, said Templeton Emerging Markets Group’s Mark Mobius.

The Macau gaming industry is growing at a “fast rate,” said Mobius, the group’s executive chairman, after a visit to the Chinese city. Templeton will continue to hold and buy Macau gambling stocks, he said in an e-mail response to questions, declining to give specific recommendations.

So much for civil rights …:

A vote on Harper government legislation that would curb civil rights in the fight against terrorism is being delayed until Wednesday.
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The bill would also allow authorities to imprison a Canadian for up to 12 months if the person refuses to testify in front of a judge at an investigative hearing.

The legislation would also make it a federal crime to leave or try to leave Canada for the purpose of committing terrorism or attending a terrorist training camp.

Replace “terrorism” with “the Opposition” in the first sentence and the story would be more accurate.

It was a modestly good day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets winning 8bp and DeemedRetractibles up 6bp. Volatility was average. Volume continued to be at high levels.

I am convinced that Toronto will have a major global competitive advantage in the next century – access to Lake Ontario:

India, the world’s second-most populous nation, is doubling spending on water management to a record as conglomerates from the Tatas to Adani face shortages that the United Nations calls an impending crisis.
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Disputes with farmers demanding rights to their irrigated land have stalled about $80 billion of investment by companies including Posco and ArcelorMittal (MT) as Prime Minister Manmohan Singh seeks to revive an economy growing at the slowest pace in a decade. Tata Steel Ltd. (TATA), India’s biggest maker of the alloy, is setting annual targets to cut water usage as two-thirds of the country faces a scarcity, H.M. Nerurkar, managing director said in an April 11 interview.

“Water availability is a very big issue and in the coming days this will be a far bigger issue,” A.P. Choudhary, chairman of Rashtriya Ispat Nigam Ltd., India’s second-biggest state-run steelmaker, said in an interview. “Water is critical for the steel industry’s growth and no company is comfortably placed.”

Toronto area real-estate is already pretty expensive, but if I were a speculating kind of guy, I’d be thinking seriously about buying land in places like Cleveland and Detroit, and just trying to get enough current revenue to break even for the next thirty years.

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

Donald R. Mullen Jr., who helped Goldman Sachs Group Inc. (GS) profit from the U.S. housing crash, is giving the firm and its clients a way to gain from the recovery.

Mullen, 54, has raised almost $1 billion to buy single- family houses to rent since leaving Goldman Sachs last year as head of global credit and mortgages, five years after overseeing the bank’s bet against the imploding subprime home-loan market. His Fundamental REO LLC has already purchased or is close to acquiring almost 2,500 properties through foreclosure auctions, government agencies and even an Arizona non-profit that promotes affordable-home ownership, property records show.

Spend-Every-Penny is explaining why he has to extend his control over, and micromanagement of, the country’s financial system:

he federal budget, released in March, plans to prohibit lenders from selling insured mortgages to investors through any securitization method that is not managed by federally-run Canada Mortgage and Housing Corp . (CMHC).

That bombshell came “without any warning and without any consultation,” said Stephen Smith, president of the largest non-bank lender, First National. Speaking at the National Bank Canadian Financial Services Conference, Mr. Smith said the “collateral damage” to ABCP and smaller lenders “was not fully considered” by government officials.
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In a statement, a Department of Finance official explained the government’s reasoning as follows:

“The Government is making these changes to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector. Funding channels that use taxpayer-backed insured mortgages should be subject to minimum standards and Canadian oversight in order to promote financial stability.”
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What the new rules really do is force lenders to sell their mortgages in the specific method dictated by Ottawa, as opposed to potentially lower cost private securitization.

The Central Planners have learnt the lessons of the Credit Crunch well – you can justify any idiocy you like, as long as you chant the magic words: “Hocus Pocus, Financial Stability, Abracadabra!”

Stop the presses! Gensler of the CFTC said something sensible!

Two interest rate benchmarks that banks were fined for rigging should be scrapped and replaced by indicators based on market transactions, a top U.S. regulator said on Monday.

The changes should also include benchmarks linked to gold, oil and other commodities, said Gary Gensler, chairman of the Commodity Futures Trading Commission.

Regrettably, he did not explain how such a ban would be enforced. But doubtless there are lots of levers to use – call it terrorism, for instance. That’s what the Brits do.

We now know why the feds introduced covered bond legislation: it was to give a regulatory advantage to their future employers:

DBRS notes that there appear to be two unintended consequences of the legislation and the Guide, based on discussions with several Canadian issuers over the past few months.

First, as the requirements for continuous disclosure and data compliance required by the Guide are broad, extensive and, at times, onerous, the amount of time and effort required to comply with the mandated standard is substantial, which is also expected to be costly. Therefore, DBRS is of the opinion that lenders other than domestic systemically important banks (DSIBs) are not likely to pursue registration as a covered bond issuer under the legislation, and would therefore be at a disadvantage without the benefit of covered bond funding.

Second, as the legislation explicitly prohibits the issuance of covered bonds without registration, DBRS does not expect to see any coexistence of registered covered bonds and non-registered covered bonds in Canada, except for existing grandfathered covered bond programs.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets winning 32bp and DeemedRetractibles gaining 14bp. Volatility was very good, dominated by winning FixedResets. Volume was quite high.

Civility trumps justice:

Mr. Groia has spoken scathingly about his profession’s “civility movement” and has painted the discipline proceedings as a worrying attack on the ability of all lawyers to mount vigorous defences in high-stakes cases. He has received support from prominent voices in the legal community, including former Conrad Black lawyer Edward Greenspan, who warned of a chill that could see defence lawyers second-guess tough arguments for fear they will be face discipline years later.

DBRS has confirmed Brookfield Canada Office Properties at BBB:

The confirmation is based primarily on BCOP’s steady operating performance and stable financial profile within the context of a relatively inactive year for new investment. The Stable trend reflects DBRS’s expectation that operating performance will remain consistent in the near to medium term, incorporating the potential for moderately higher financial leverage that may be incurred with the refinancing of upcoming debt maturities.
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BCOP’s operating income increased significantly to $239 million in 2012 from $204 million in 2011, primarily due to a full year of contribution from the 25% interest in the Canadian Office Fund, which was acquired in late 2011. BCOP achieved same-property net operating income growth of 4.8% in 2012, mainly due to higher average rental rates on renewals and a slight improvement in overall occupancy rate (96.9% as at December 31, 2012). The higher rental rates and solid occupancy levels reached by BCOP are reflective of favourable office leasing conditions in its core markets. That said, there has been a lack of suitable supply with attractive valuations in these markets, which contributed to the fact that BCOP did not make any significant new investments or require any material capital raises in 2012.

As such, BCOP’s debt balance and EBITDA interest coverage remained relatively steady in 2012 at 2.19 times (x), versus 2.22x in 2011. DBRS notes that debt-to-capital decreased to 39.9% at December 31, 2012, from 43.1% at the end of 2011, based on higher asset valuations.

This is relevant to BAM investors because:

The Trust is a subsidiary of BPO Properties Ltd. (“BPP”), which owns an aggregate equity interest in the Trust of 83.3% as of December 31, 2012 consisting of 40.5% of the issued and outstanding units of BOX (“Trust Units”) and 100% of the issued and outstanding Class B limited partnership units (“Class B LP Units”) of Brookfield Office Properties Canada LP (“BOPC LP”), a subsidiary of BOX that owns direct interests in the Trust’s investment properties.

… and BPO Properties has proposed to exchange its preferreds for preferreds in it its owner, Brookfield Office Properties, and:

Brookfield Office Properties Inc. (“Brookfield Office Properties” or “the company”) is incorporated under the laws of Canada. The company owns, develops and operates commercial office properties in select cities in North America, Australia and the United Kingdom. The company is a subsidiary of Brookfield Asset Management Inc. (“BAM”), which owns approximately 51% of the company’s voting shares.

DBRS also confirmed Thomson Reuters at A (low), R-1 (low) and Pfd-2 (low), Stable, proud issuer of TRI.PR.B:

The ratings confirmation reflects positive expectations regarding the Company’s enhanced product offerings, particularly in the Financial & Risk segment, along with its stable free cash flow generation over the past year. The ratings continue to be supported by the Company’s entrenched market position, predominantly subscription-based revenue model and the diverse nature of its customer base. The ratings also reflect intensifying competition in key segments as well as risks associated with the Company’s acquisition and divestiture program.

It was another poor day for the Canadian preferred share market, with PerpetualPremiums off 11bp, FixedResets losing 31bp and DeemedRetractibles down 14bp. A relatively lengthy list of Performance Highlights is dominated by losing FixedResets – highly skewed towards those with low Issue Reset Spreads. Volume was extremely high; perhaps related to Monday’s index changes.