PrefBlog

Moody’s will be making adjustments to some debt ratings:

A landmark Ontario court ruling bolstering the rights of pension plan members in bankruptcy cases could have an impact on credit ratings for companies with underfunded pension plans, according to a new report by debt rating agency Moody’s Investors Services Inc.

Moody’s said a review of 84 Canadian industrial companies it rates found two companies — Air Canada (AC.B-T2.250.073.21%) and Essar Steel Algoma Inc. — whose debt might be vulnerable to downgrade if the Ontario court decision is upheld by the Supreme Court of Canada. The report said the impact would likely be limited and would affect ratings of specific debt instruments rather than a company’s overall credit rating.
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“The ruling does not change how we measure debt and other liabilities, but it does change the priority of claim and the relative ranking of liabilities, which is relevant when assessing individual debt-instrument ratings,” said Bill Wolfe, Moody’s vice-president and senior credit officer.

“On this basis, we expect that only instrument-level ratings will be affected by the ruling.”
…
Moody’s said it will not change any ratings until there is a decision from the Supreme Court and it is clear there is a final ruling in the case.

Presumably it is Loss Given Default that will be affected more than Probability of Default. The effect of the ruling appears to be similar to the intent of Bill C-501.

Allied Irish has defaulted in the view of DBRS:

DBRS Inc. (DBRS) today has downgraded the ratings of certain subordinated debt issued by Allied Irish Banks p.l.c. (AIB or the Group) to “D” from “C”. Today’s downgrade follows the execution of the Group’s note purchase offer.

Almost all of these instruments have been extinguished. The default status for the purchased and now-extinguished notes reflect DBRS’s view that bondholders were offered limited options, which is considered a default under DBRS policy, as discussed in DBRS’s press release dated 19 May 2011.

For AIB’s GBP 500 million Dated Subordinated Debt due 2025 and its EUR 500 million Dated Subordinated Debt due 2017, which are still outstanding due to the lack of consent for a clean up call, DBRS has downgraded their ratings to ‘D’. The downgrade reflects DBRS’s expectations that the interest payments of these outstanding subordinated instruments will be halted on the next payment date, as allowed by the Irish High Court. Further, the downgrade considers the extension of the final maturity dates, which are now extended to 2035. Given that bondholders are unlikely to receive interest as agreed upon and that the expected maturity has been extended, DBRS views these actions as disadvantageous to bondholders, which is considered a default under DBRS policy.

However, the rating of AIB’s GBP 368.253 million Dated Subordinated Debt due 2019, which is still outstanding, is unchanged at ‘C’, Under Review with Negative Implications. This rating considers that these notes have not yet been amended by AIB pursuant to the Subordinated Liabilities Order from the Irish High Court as a challenge in respect to these notes is ongoing before this Court.

S&P put Encana on Outlook-Negative:

• •On June 21, 2011, Encana Corp. announced that it had ended its C$5.4 billion Cutbank Ridge joint venture negotiations with PetroChina International Investment Co.
• •As a result, Standard & Poor’s is revising its outlook on Encana to negative from stable, and affirming its ‘BBB+’ long-term corporate credit and senior unsecured debt ratings on the company.
• •We are also lowering our Canada scale commercial paper rating on Encana to ‘A-2’ from ‘A-1(Low)’.
• •The negative outlook reflects our view that Encana’s adjusted debt to EBITDAX will remain above 2x through 2012, given weak natural gas prices and the company’s high capital expenditure plans, which we expect to outspend operating cash flow generated.

It was a mixed down day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets of 11bp and DeemedRetractibles up 1bp. Volatility was muted; volume was quite good. Scotia had a good day..

Jim Kelsoe, proud portfolio manager of the worst bond fund in the history of the universe (so far), was last mentioned on PrefBlog on April 7, 2010. Now he’s been barred from the industry:

According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.

Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.

The Fed is going to maintain an easy monetary policy:

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The TMX-LSE deal has been sweetened:

A week before the London Stock Exchange and TMX Group Inc. ask shareholders to bless their planned marriage, the pair sweetened the pot Wednesday with a $4 per share special dividend for TMX shareholders.

London exchange shareholders will also receive a special dividend of 84.1 pence per ordinary share, payable on closing.

In the face of a rival hostile bid from Maple Group, a consortium of Canadian financial firms, the exchange partners said they also intend to increase the regular post-merger dividend “to be consistent with the [higher] current regular dividend of TMX Group.”

Here’s an interesting legal point – I know that some will misconstrue my interest and I’ll get into all kinds of trouble about this, but what the hell – regarding Galliano’s anti-semitic rant:

Under sentencing rules for hate speech, Galliano faces a maximum 22,500-euro ($32,500) fine and six months in prison if found guilty. His lawyer, Aurelien Hamelle, has said similar cases “most often” result in fines rather than jail time.

Geraldine Bloch, who filed a complaint over the February incident, testified that Jewish “was one of the terms said the most” in Galliano’s slurs against her. “I don’t know if he was drunk. He was a bit bizarre. He sweated a lot.”

Galliano’s addictions can’t excuse his statements, Eric Zerbib, a lawyer for LICRA, an international organization opposed to racism and anti-Semitism, said before today’s testimony.

It doesn’t explain and it doesn’t excuse anything,” said Zerbib. “In vino, veritas. In wine, the truth. Wine has a liberating effect which allows one to know an individual’s real personality, and given that the deeds were repeated several times, thus we know John Galliano’s personality.”

OK, so I don’t know the law here, but it’s rather an interesting point: Will Galliano be in trouble for having a shitty personality (which is exposed by drunkenness, yay! Or he may simply have reached in to the bag of tricks for the most offensive things he could think of.) or for expressing his personality (in which case drunkenness may be considered a mitigating factor)?

It was a good day on the Canadian preferred share market with PerpetualDiscounts up 15bp, FixedResets winning 11bp and DeemedRetractibles gaining 13bp. Volatility was up a bit. Volume was very good.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.25% (!) so the pre-tax interest equivalent spread is now about 195bp, a significant widening from the 185bp reported on June 15 as yields have gone in opposite directions.

More Sino-Forest news:

Mr. Paulson and his firm, Paulson & Co., best known for prescient calls on the global financial crisis and the price of gold, controlled 14 per cent of Sino-Forest’s stock or about 34.7 million shares until recently. Paulson & Co. sold all of those shares by last Friday, according to a filing late yesterday with Canadian securities regulators.

“Due to the uncertainty over Sino-Forest’s public disclosures and financial statements, we have sold our stock and await the results of the independent committee’s investigation,” the firm said in a statement released through a public relations agency.

Fitch downgraded Sino-Forest:

The “complexities” of Sino-Forest’s corporate structure prompted Fitch Ratings to downgrade its long-term foreign- currency issuer default rating and senior unsecured debt rating to BB- from BB+, Fitch said yesterday in a statement. Ratings may be cut further if the “issues” aren’t resolved, it said.

Sino-Forest shares fell C$1.19, or 44 percent, to C$1.54 at 11:08 a.m. in Toronto trading.

Paulson, the biggest shareholder in Hong Kong-based Sino- Forest until the selloff, probably reduced losses by paring the stake before the Muddy Waters report. The hedge fund told clients in a June 3 letter that its total investment in Sino- Forest represented about 2 percent of the Advantage and Advantage Plus funds as of June 2. The funds have $18 billion in assets, a person with knowledge of the firm said at the time. The letter suggests the firm had cut its stake by about 30 percent by June 2, when Sino-Forest shares lost 64 percent.

The intellectual bankruptcy of the market was illustrated in the fact that a transparent hoax affected the market:

Shares of forestry company Sino-Forest Corp. tumbled another 17 per cent in early trading Tuesday as one of its largest stakeholders reportedly sold its holdings in the company and social media sites were aflutter with an apparent SEC news release hoax.

The company’s stock was down 48 cents to $2.25 in morning trading on the Toronto Stock Exchange.

The shift came as a representative for the U.S. Securities and Exchange Commission denied issuing a news release accusing research and investment firm Muddy Waters of being involved in a “stock manipulation ring.”

“We have issued no such litigation release,” said SEC spokeswoman Judith Burns in a phone interview with The Canadian Press.

Whenever I read anything of interest published by anybody regarding a SEC release, I check it. Not usually so much to check its existence, but to check the actual words used and their context. http://www.sec.gov. What’s hard about that? Anybody who took market action influenced by this rumour deserves to go bankrupt immediately – monetarily, that is, in addition to their pre-existing intellectual bankruptcy. (More here. Say what you like about the SEC, I can’t remember ever faulting them on grammar. Carson Block and his associates approaches several large hedge funds, indeed!)

The SEC has achieved another milestone in its programme of regulatory extortion, nailing JPMorgan for acting as a broker. However, they did helpfully publish a list of buy-side firms that may now be suspected of incompetence:

• Thrivent Financial for Lutherans, a faith-based non-profit membership organization in Minneapolis.
• Security Benefit Corporation, a Topeka, Kan.-based company that provides insurance and retirement products.
• General Motors Asset Management, a New York-based asset manager for General Motors pension plans.
• Financial institutions in East Asia including Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd

Investors considering placing funds with these firms are urged to exercise caution, gain a complete view of historical performance and demand to learn the rationale for the investment.

On a more uplifting note, Fabulous Fab is gaining some popular support:

Those hoping for a measure of justice for the Wall Street executives who brought us the financial crisis won’t be finding it anytime soon in the downtown Manhattan federal courtroom of Judge Barbara S. Jones.

What you’ll find there instead is the continuation of the Securities and Exchange Commission’s ridiculous civil lawsuit against Fabrice Tourre, the Goldman Sachs Group Inc. (GS) executive director who, at 28, shepherded to market in April 2007 Goldman’s infamous Abacus 2007-AC1 synthetic collateralized debt obligation. The deal was done at the behest of hedge fund manager John Paulson (who made a bundle) and a pair of foolish European banks (who lost one).

Jones should have thrown out the case against “Fabulous Fab” when she had the chance last week, because it is beyond absurd to single out for punishment one member of the Goldman team for putting together a deal for several highly sophisticated investors on the grounds that they weren’t sufficiently informed that some of them would make money while others would lose money. In every trade, there is a winner and a loser. That is the very nature of a market.

Is real-estate becoming a portable asset?

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, “anecdotal evidence certainly points to a significant increase,” said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

The Bank of Canada has released a supplement to its latest Review, titled Paying with Polymer, about the new plastic bills.

PrefBlog has strenuously opposed the Maple bid for the TMX on general grounds. Rowland Fleming has specifics:

As the TSE CEO during the Bre-X crisis, I look with horror at the prospect that less than two decades later, successors at some of the same firms whose own conflicts helped to push the old Toronto Stock Exchange so close to the edge are proposing a return to those same bad old days. During my time, approximately 16 member-firm committees dictated on most operating and policy decisions. To be fair, most committee activities and decisions were quite appropriate, but the processes to placate and find consensus-driven decisions on the matters at hand were cumbersome, time consuming and certainly not sensitive to domestic or global competition from other exchanges and alternative trading systems.

I see The Maple Group, the elite consortium that includes TD Bank, CIBC, Scotiabank, National Bank, CPPIB and the Caisse de Dépôt, among others, as little more than a modern version of the old boys’ club that controlled the TSE before demutualization.

Julie Dickson of OSFI gave a speech titled A Canadian Perspective on the Global Insurance Industry. Nothing of import was said, but she did mention longevity insurance, a topic I find fascinating.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets down 8bp and DeemedRetractibles gaining 7bp. Volatility was muted. Volume was good.

In the best news I’ve heard all month UBS is mandating civilized values:

The Swiss bank now has a dress code.

Apparently a memo went out this morning to equity sales at UBS informing the team that “suits are now mandatory” at the office (“swaps and the quant desk already went to suits and equity trading is switching over in two weeks”). The reason for the rule (which “is coming from Switzerland”)? To “re-establish credibility and a sense of professionalism.”

Pressure on Greece is ramping up:

European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition.

On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.

Of course, Juncker’s a liar anyway, so this could all simply be choreographed theatre.

Remember Richard Kelertas? Analyst at Dundee Securities? On June 7 I reported:

Kelertas said that the Muddy Waters report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.” He recommended buying Sino-Forest shares from September 2007 until June 3, when he put his rating on the company under review.

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.
…

I haven’t heard such an impassioned defense of company from a dealer since Bre-X!

He went further:

A couple of analysts did come to Sino’s defence, most notably Dundee’s Richard Kelertas. In a remarkable conference call on Tuesday, he jumped way outside his mandate and accused Mr. Block of committing his own fraud, calling his research “a pile of crap.”

But now he’s singing from a different hymnbook:

Richard Kelertas, an analyst at Dundee Securities, has had enough of Sino-Forest Corp. (TRE-T2.75-0.44-13.79%): He suspended coverage of the Chinese forestry company on Monday morning, after putting the stock “under review” on June 3
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“Until such time as the company has made public the findings of the board-appointed independent committee together with the assistance of its external advisors, including legal council Osler Hoskin & Harcourt LLP and the accounting firm PricewaterhouseCoopers, and we have had time to review and analyze these findings, we are not in a position to comment on or otherwise speculate on matters as they relate to the business practice or valuation of Sino-Forest,” Mr. Kelertas said in a note.

Gee … I wonder what changed?

I continue to hold my view – held since I became sophisticated enough to read analyst reports closely – that sell side analysis should be viewed as being for entertainment purposes only. And I have to admit, Kelertas’ tergiversations are highly entertaining.

Today’s factoid:

On Monday, Canadian 30-year yields started the day below 3.4 per cent. Other than a few weeks last fall, these rates are the lowest Ottawa has seen since the mid-1950s, noted Bank of Montreal deputy chief economist Doug Porter.

Richard Fisher of the Dallas Fed reprised a funny line in his speech titled Containing (or restraining) systemic risk – the need to
not fail on “too big to fail”:

For example, some of you may recall the public letter written by 364 eminent economists predicting disastrous consequences that would result from Thatcher’s policy initiatives. That letter was published in the Times of London on March 30, 1981.[Footnote] The British economy began a recovery almost immediately afterward, in 1982; by 1983, inflation and mortgage rates were at their lowest levels in over a decade, while economic growth accelerated. The failure of the consensus view led Chancellor of the Exchequer Geoffrey Howe to define an economist as “a man who knows 364 ways of making love, but doesn’t know any women.”[Footnote]

YLO issues weren’t all that interesting today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 3bp, FixedResets gaining 4bp and DeemedRetractibles down 10bp. Volatility picked up. Volume was a bit above average, with all highlighted issues being FixedResets. Nesbitt owned the board today.