PrefBlog

There was a decent US jobs number:

Hiring increased in January after accelerating more than previously estimated at the end of 2012, evidence the U.S. labor market was making progress even as lawmakers quarreled over the federal budget.

Payrolls rose 157,000 following a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed today in Washington. The revisions added a total of 127,000 jobs to the employment count in November and December. The jobless rate increased to 7.9 percent from 7.8 percent.

The BooHooHoo brigade is in full cry, as MBIA sues Credit Suisse for facilitating MBIA’s incompetence:

Credit Suisse Group AG (CS) bundled hundreds of mortgages into a single set of securities sold to investors in 2007 even after it had found flaws with the loans and asked the lenders to repurchase the debt, bond insurer MBIA Inc. (MBI) said in a court filing.

That practice was one way Zurich-based Credit Suisse maximized profit as the U.S. mortgage market melted down, while exposing investors and guarantors to losses, MBIA said in an amended complaint filed Jan. 30 in New York State Supreme Court as part of its 2009 suit against the bank. The filing cites documents obtained through the pretrial exchange of evidence.
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Even while Credit Suisse maintained a “watch list” of problem loan sellers, it never stopped including their loans in securitizations, MBIA said. More than 2,600 of the loans securitized in the transaction MBIA insured, or 15 percent, were from originators on the watch list, according to the amended complaint.

I mentioned Indalex briefly on June 23, 2011, when Moody’s expressed concern regarding an apparent shuffling of creditor priorities in bankruptcy.

Moody’s said a review of 84 Canadian industrial companies it rates found two companies — Air Canada 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.

Now the Supreme Court has ruled for a much smaller shuffling:

The Supreme Court of Canada has ruled that the U.S. parent of an insolvent Toronto company is entitled to the Canadian entity’s last $6.75-million, instead of a group of the firm’s retirees, whose pensions were cut after their employer went under.

The court’s ruling in the case of Indalex Ltd., which plunged into bankruptcy protection in 2009, was is expected to have broad implications for other companies and pension plans across the country.
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While many cheered that Ontario ruling as a breakthrough victory for pensioners, bankruptcy law experts warned the decision would radically reorder Canada’s insolvency regime. They said it could make it more difficult for struggling companies with large defined-benefit pension plans to borrow the money they need to weather financial storms.

Normally, in the scramble for money after a company has filed for bankruptcy protection under the federal Companies’ Creditors Arrangements Act, pension plans rank far below the banks and hedge funds that lend last-ditch money to distressed companies. These “debtor-in-possession” or DIP loans usually come on the condition of a court-ordered guarantee they will be repaid first.

Indalex, an aluminum processor, had a $6.75-million pension shortfall when it entered bankruptcy protection. But all of the cash from the sale of its assets was bound for the company’s U.S. parent, Sun Indalex Finance LLC, to cover some of its costs for paying back DIP loans made to Indalex by a group of banks.

It seems entirely reasonable to me that DIP loans should have priority. Who would make DIP loans otherwise?

Although it ultimately determined that the DIP lenders rank first because the court orders that grant them priority come under a federal law, the court also surprised observers by ruling the full amount of a pension shortfall at a plan’s windup should be considered a “deemed trust” under Ontario’s pension law. That could push pensioners’ demands further ahead in the line of creditors, but still second to DIP lenders.

I got a little curious – it seems that at least one of the two plans was underfunded back in 2007:

On December 31, 2006, Indalex Limited, an aluminum extrusions manufacturer, wound up the retirement plan for its salaried employees (the “Salaried Plan”). Seven members of the Salaried Plan were members of the United Steelworkers. At the time of the plan windup, the Plan was underfunded. Indalex made special payments in 2007, 2008 and 2009 to partially pay down the deficiency, but at the end of 2008, the deficiency in the Salaried Plan was $1,795,600.

But here’s the thing that interests me: The 2004 Collective Agreement negotiated by Steelworkers only mentions the pension plan in terms of current contributions; there is no language that addresses the underfunded status of the plan (I’m not sure if it was, in fact, underfunded in 2004). Further, a 2007 Steelworkers press release trumpets the 2007 negotiations in terms of wage increases and call-out times, but again there is no mention of the underfunded status of the plan.

So I’m curious: do the unhappy pensioners have cause to be angry with their union? The Steelworkers have issued a press release calling for legislation to put pensions ahead of even DIP financers (so who would ever make a DIP loan?) but what did the union do or what could the union have done to be more proactive?

It was a day of uneven gains for the Canadian preferred share market, with PerpetualPremiums up 2bp, FixedResets winning 27bp and DeemedRetractibles gaining 3bp. The Performance Highlights table, though short, was suitably skewed towards winning FixedResets. Volume was average.

ZeroHedge squared its rot for a good booHooHoo about the Litvak charges mentioned on January 28:

Since for the most part, the buyside traders operated with other people’s money, they were largely indiscriminate on the fine pricing nuances of the acquisition (or disposition) of the securities at hand, and while to the “other people’s money” under management whether a given bond was bought for 55 or 55.75, or a given MBS was sold for 72-6 or 72-16 meant little (after all the trade was driven by a big picture view that the security would go up or down much more and certainly enough to cover the bid/ask spread, resulting in much larger profits upon unwind), the transaction price had a huge impact for the bank traders-cum-salesmen arranging said deals. Because when one is selling a $40 million MBS block, a 1 point price swing equals a difference of $400,000. Make 15 such deals per year, and one’s $1,000,000 bonus (assuming a ~15% cut on the profits) is in the bag.

Golly! Whoever would have thought that the sell-side exists to make money?

I once had a buy-side trader tell me he didn’t care much about the pennies – if he got the direction right, he’d do just fine. His intention was to impress me with how much of a gun he was – and to sneer at my scrabbling in the dirt for pennies – but it didn’t work out that way.

Sadly, we have not yet been informed regarding the identities grossly incompetent (or negligent. One of the two.) buy-side traders in the Litvak case; nor does it appear that action will be taken against them for their dereliction of duty. Performance, schmerformance.

The Canadian preferred share market ended the month on a downbeat, with PerpetualPremiums dipping 2bp, FixedResets down 8bp and DeemedRetractibles off 1bp. Volatility was low. Volume was very heavy.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 2bp, FixedResets up 11bp and DeemedRetractibles off 1bp. Volatility was low. Volume was well above average.

Everything you ever suspected about municipal employees is true:

The City of Hamilton fired 29 public-works employees Monday for time theft, breach of trust and neglect of duties.

The employees, frontline road-maintenance workers whose main duties involve filling potholes, used company time and vehicles to “go to shopping malls, go to coffee shops, go have a snooze in the park,” according to Councillor Lloyd Ferguson, chair of the public-works committee.
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On one work day, the private investigators found one crew only worked for 30 minutes, Mr. Ferguson said.
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he investigation isn’t over yet; now the city’s public-works managers and internal auditing staff are interviewing supervisors and doing a full forensic of work records to understand how this alleged deception took place. Supervisors could face discipline, too.

“The supervisors should know what they assign in the morning and what’s done at the end of the day. They should be going around to these job sites and checking on their crews,” Mr. Ferguson said.

But that still leaves the question of what happened to the asphalt the crews were to use to repair roads. “If they took 10 tons of asphalt in the morning and brought back nine and a half at the end of the day, it would draw attention to them,” Mr. Ferguson said. “So that’s one of the other things we’re investigating is the dumping of asphalt.”

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets off 5bp and DeemedRetractibles gaining 4bp. Volatility was above average and skewed to the upside, but there was no clear pattern. Volume was quite heavy.