PrefBlog

Nothing happened today.

It was a steady day for the Canadian preferred share market, with PerpetualPremiums and FixedResets both up 3bp, while DeemedRetractibles gained 2bp. Volatility was muted. Volume was average – but the top two traders were issues that rarely see any play at all! Nice tickets for RBC, if they were able to get full commission on them!

Today’s FOMC statement was accomodative:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.

The Globe published a nice essay on What-Debt’s muscleheaded nationalism:

State-owned enterprises have been active participants in the global economy for decades. In fact, they drive 70 per cent of activity in the global energy sector.

Canada knows a thing or two about so-called SOEs. Not so very long ago we had Petro-Canada, Canadian National and Air Canada. We still have Canada Post, which acquired Purolator Courier to compete with UPS and FedEx. We own “Crown corporations,” such as Ridley Terminals (for which I used to be chairman), which fulfills no discernible public policy purpose other than to generate profits for their owners, the taxpayer.

The apparent indigestion being caused by the CNOOC-Nexen and Petronas-Progress deals has nothing to do with their size or even the “strategic” nature of their industries. There is nothing strategic to Canada in either Nexen or Progress. The real issue is who the investors are and where they come from.

And in other Ottawa news:

The Conservative government no longer has targets for erasing Canada’s federal debt, which grew by $125-billion since the recession.

Finance Minister Jim Flaherty confirmed Wednesday that the recession has derailed Ottawa’s long-term debt plans and new targets won’t be set until the government starts posting yearly surpluses again – which is not forecasted to happen for three more years.

Too bad we don’t have a structural surplus of $10-billion p.a. any more. Oh, well…

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 2bp, FixedResets up 6bp and DeemedRetractibles gaining 3bp. Volatility was almost non-existent. Volume was quite heavy.

PerpetualDiscounts now yield 4.92%, equivalent to 6.40% interest at the standard equivalency factor of 1.3x. Long corporates are at about 4.35% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now at about 205bp, slightly (and perhaps spuriously) wider than the 200bp reported October 17.

The BoC rate statement was dovish:

Core inflation has been lower than expected in recent months, reflecting somewhat softer prices across a wide range of goods and services. Core inflation is expected to increase gradually over coming quarters, reaching 2 per cent by the middle of 2013 as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored. Total CPI inflation has fallen noticeably below the 2 per cent target, as expected, and is projected to return to target by the end of 2013, somewhat later than previously anticipated.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.

RBC & TD announced major acquisitions:

Royal Bank of Canada and Toronto- Dominion Bank (TD) announced purchases today of almost $20 billion in combined assets from U.S. companies to bolster profit ahead of a slowdown in domestic consumer lending.

Royal Bank, the nation’s largest lender, plans to buy Ally Financial Inc. (ALLY)’s Canadian auto-finance and deposit business in a deal that Ally said will generate $4.1 billion for the Detroit- based lender. Toronto-Dominion agreed to acquire Target Corp. (TGT)’s $5.9 billion U.S. credit-card portfolio for an amount equal to the gross value of the outstanding loans at the time the deal is completed, the firms said.

DBRS commented on the TD / Target deal:

The acquired credit card portfolio is stated to have credit quality in line with industry benchmarks. The quality of credit card clients is believed to be above average in regards to credit risk characteristics. The acquisition will have a moderate impact on capital, with the Bank expecting to see a 20 basis point decrease in its Tier 1 capital ratio and a 14 basis point drop in its Basel III common equity Tier 1 (CET1) ratio upon closing of the transaction. The drop in capital metrics still positions TD comfortably in regards to regulatory limits, with the Bank reporting a CET1 ratio of 7.7% at July 30, 2012, well above the regulatory requirement of 7% targeted for the first quarter of 2013.

… and on the RBC / Ally deal:

The net investment for RBC is $1.4 billion after deducting excess capital.Including the excess capital, and subject to certain closing adjustments, will result in total consideration of approximately $3.1 to $3.8 billion, depending on the dividend taken out by the seller prior to closing. The transaction is expected to generate earnings in the first 12 months after closing of $120 million after tax (excluding integration costs, amortization of intangibles and transaction costs, which are expected to be approximately $50 million). The Basel III common equity Tier 1 ratio is estimated to decrease by approximately 30 to 40 bps immediately following the close of the acquisition, but to remain in excess of 8%. The deal is subject to closing conditions, including regulatory approvals, and is expected to close in the first calendar quarter of 2013.

There was a downdraft in the Canadian preferred share market today, with PerpetualPremiums and FixedReset both off 9bp and DeemedRetractibles losing 14bp. Volatility was negligible. Volume was well above average and only of the highlighted issues (ENB.PR.N) was affected by the recent TXPR rebalancing.

There is some long overdue musing that CMHC might be privatized:

Ottawa has made a series of quiet changes to bolster the oversight of CMHC in recent years: adding to its board of directors the deputy minister of finance and the deputy minister of human resources and skills development, as well as putting the Crown corporation under the official eye of the country’s banking regulator.

“This is all about financial stability, because [CMHC is] a very important part of the market and of the financial stability picture in Canada, and it’s kind of been off on its own track,” Mr. Flaherty said.

Ultimately, he would like to see the government get out of the mortgage insurance business. “The history of CMHC has to do with providing adequate housing for veterans after the Second World War, and it’s become something rather grander,” he said.

‪“I think in the next five or ten years the government needs to look at getting out of some businesses that we’re in that we don’t need to be in.”

There’s a good opportunity for hedge funds and brokers:

The Volcker rule could cut profit at the biggest U.S. banks twice as much as earlier estimates if regulators take a strict stance on limiting proprietary trading, Standard & Poor’s said.

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.
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“The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”

What-Debt?’s seeming intention to fight the next election on muscleheaded nationalism is causing some concern:

The federal government’s surprise move to block the $6-billion takeover of Progress Energy Resources Corp. is adding to growing concerns about a “Canadian discount” that weighs on share prices and frustrates companies’ ability to raise capital and do deals.

Investors reacted swiftly on Monday to the rejection of the bid for Progress by Malaysia’s Petronas . Progress shares dropped more than 9 per cent, while other energy shares sank sharply.

The government’s decision immediately reminded investors of previous high-profile deals in Canada that fell apart amid government or regulatory scrutiny, and has created uncertainty about the bid for Calgary’s Nexen Inc. by China’s CNOOC Ltd. The Conservative government created waves two years ago when it blocked BHP Billiton’s $38.6-billion (U.S.) attempt to acquire Potash Corp. of Saskatchewan. And just last week, the federal telecommunications regulator rejected BCE Inc.’s bid to acquire Astral Media Inc. in a shocking decision.

There are rumours that the oligarchy will extend its control over the Canadian economy:

Royal Bank of Canada is on the verge of buying Ally Financial’s Canadian arm.

The sale is part of a global restructuring that Ally first announced in May. Early in the auction process General Motors Co. described itself as the “natural buyer”, as Ally was previously owned by GM and was once known as General Motors Acceptance Corp.

However, GM said it would only go so far to bring the assets back under its belt, and despite its attempts, RBC is now the lead bidder, according to someone familiar with the auction. Talks are now in advanced stages.

There are also opportunities for private equity:

KKR & Co. (KKR), TPG Capital and Goldman Sachs Capital Partners (GS), which took the former TXU Corp. private five years ago in the largest leveraged buyout in history, have paid themselves $528.3 million in fees, even as the electricity provider teeters toward a near-term bankruptcy or restructuring.

The payments consist of a $300 million charge for advising on the buyout, annual management fees totaling $171 million and as much as $57.3 million for consulting on debt deals, the Dallas-based company now called Energy Future Holdings Corp. said in regulatory filings. The private-equity firms’ fees are as much as 25 times greater than average, based on data from law firm Dechert LLP and researcher Preqin Ltd.
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The fees from Energy Future may allow KKR, TPG and Goldman Sachs to extract cash without infringing on the Delaware Limited Liability Company Act, which limits distributions from a firm if all its liabilities exceed the fair value of its assets, according to Chapter 18 of the law.

The Globe and Mail’s education series has climbed on the most asinine bandwagon
yet – molly-coddling university students:

For Grade 12 students preparing university or college applications, getting into the right school is the only goal. Few 17-year-olds have thought much about how they will manage the demands of postsecondary courses, or about dropout rates that show one in seven students won’t finish their studies.

But what if schools could pinpoint which students were most likely to run into trouble and offer them extra support before their experiences turned sour?

At the University of Ottawa, researcher Ross Finnie has been experimenting with a custom-tailored, low-cost statistical model that can identify the students most likely to abandon their studies and offer them help as soon as possible.

As a once and future employer, I don’t want to hire little babies who need help and support. This is the real world. I want graduates who have prospered in an environment where nobody is getting paid to be nice to them.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets winning 16bp and DeemedRetractibles up 13bp. Volatility was minor. Volume was very heavy.

Canadian inflation is quiescent:

Canada’s annual inflation rate stayed at 1.2 per cent, matching the previous month and May for the lowest level in more than two years.
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For the annual inflation rate, the agency said an increase in prices for gasoline and electricity were the main contributors, but they were offset by declines in the cost of purchasing motor vehicles and women’s clothing.
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The Bank of Canada’s core rate, which measures underlying price pressures by excluding volatile items such as gasoline, declined three-tenths of a point to 1.3 per cent.

This has led to calls for a rate cut:

There could be several causes of these low bond yields – and none of them are pleasant. It may be that bond markets expect the Bank of Canada to undershoot its 2 per cent inflation target for the foreseeable future. It may be that alternative investments in Canada are such losing propositions that people are willing to accept low or even negative real returns. Finally, there may be a flight to quality here, with Canada being seen as a safe haven in a world full of economic turmoil. It is likely a combination of all three.

Bond markets are screaming loud and clear that worldwide demand remains low, and, in the medium-term, inflation is likely to stay under the Bank of Canada’s target. On Tuesday, the Bank of Canada will be giving its interest rate announcement. Given the current economic data and low inflation, the prudent move for Mark Carney is to lower the overnight rate by 25 basis points.

Top-producing brokers in the US are dancing as fast as they can:

Many senior advisers at brokerage arms of major banks say they are considering jumping ship for the first time, frustrated by problems plaguing their parent companies, from credit rating downgrades to staff cutbacks to bothersome technology changes.
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So far in 2012, advisers who managed nearly $50-billion (U.S.) in client assets have left top U.S. brokerages Morgan Stanley Wealth Management and Bank of America Merrill Lynch, an already high figure that is expected to grow, industry experts say.

Twelve teams that each managed more than $1-billion in client assets have moved in 2012. In a typical year, fewer than a handful of teams that size switch firms, experts said.
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Late last year, when Bank of America’s stock price plunged, UBS Wealth Management Americas offered Merrill advisers signing bonuses that were about 30 per cent higher than normal, said financial services recruiter Alan Reed. UBS added at least 24 veteran Merrill Lynch advisers who managed roughly $4.4-billion in client assets..

Meanwhile, these super-brokers may have a wonderful fourth quarter:

Sell.

That’s the message from some financial advisers, who are telling wealthy clients that the remainder of 2012 amounts to a last-chance sale on federal tax rates. Taxes are set to rise in January in the U.S., pushing the top rate on dividends to 43.4 percent from 15 percent and the top rate on capital gains to 23.8 percent from 15 percent.
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Federal taxes on ordinary income will rise to as much as 39.6 percent from 35 percent. Long-term capital gains rates will increase to a maximum 20 percent from 15 percent, plus an additional 3.8 percent for high-income earners as a result of the 2010 health-care law.

The opportunity for individuals to transfer up to $5.12 million — or $10.24 million for couples — free of estate taxes and gift taxes also is set to expire at the end of the year and drop to $1 million. Legislation enacted in 2010 raised the lifetime estate-and-gift-tax exclusion for 2011 and 2012.

IIROC has found another opportunity for expansion:

Canada’s securities industry regulator is calling for tougher oversight of the Canadian version of Libor.

In an emailed statement, a spokesperson for the Investment Industry Regulatory Organization of Canada (IIROC) said that while it isn’t aware of any problems with the Canadian Dealer Offered Rate, or Cdor, “[r]ecent experiences with LIBOR have pointed to a need for increased scrutiny of such survey-based reference rates.”
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[IIROC vice president of public affairs] Ms. [Lucy] Becker said that when IIROC’s review is complete — she did not say when that might happen — the results will be submitted to “relevant stakeholders” including Canadian regulators and government agencies.

It’s a big market:

Essentially a Canadian version of Libor, the Canadian Dealer Offered Rate is the rate at which Canadian banks lend to one another based on bid prices for bankers’ acceptances.

The bankers’ acceptance market itself is relatively small, but Cdor is used as a benchmark for a whole raft of loans, floating rate notes, interest rate swaps and derivatives that are the life-blood of this country’s financial market. In total we’re talking about $6-trillion dollars worth on any given day, according to Louis Gagnon, a finance professor at Queen’s University’s School of Business and a former risk manager at Royal Bank of Canada.

DBRS confirmed Weston at Pfd-3:

DBRS has today confirmed the ratings of the Notes & Debentures of George Weston Limited (Weston or the Company) and the Issuer Rating at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high), all with Stable trends. The confirmation of the ratings is based on the stable operating performance of Weston Bakery, the stable ratings of Loblaw Companies Limited (Loblaw; see separate press release), in which Weston holds a 63% stake, and the Company’s significant cash resources, which are expected to be used toward growth opportunities. The ratings continue to be supported by the Company’s strong brands and above-average operating efficiency, while reflecting the volatile input cost environment and the mature nature of the bakery industry.
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DBRS believes that Weston has the ability to maintain its current BBB rating and a financial profile commensurate with the current rating category (i.e., ultimate gross debt-to-EBITDA of up to 2.5 times (x) or net debt-to-EBITDA of up to 2.0x).

DBRS will continue to monitor Weston’s decisions on the deployment of its remaining cash, cash equivalents and short-term investments, and will assess the potential impact on the Company’s credit risk profile at such time.

As for the short-term rating, Weston’s liquidity profile remains commensurate with the R-2 (high) rating category, based on its long-term rating, positive free cash flow generating capacity, high level of cash and marketable investments, and manageable debt and maturity schedule.

The credit risk profile of Loblaw remains relatively stable, with a long-term rating of BBB and short-term rating of R-2 (middle). The ratings for Weston at BBB and R-2 (high) reflect its operating businesses and financial risk profile, both on a stand-alone basis, as well as consolidated with its ownership interest in Loblaw. As such, if there is any change in Loblaw’s ratings, it will not necessarily affect the ratings of Weston.

DBRS confirmed Loblaw at Pfd-3, proud issuer of L.PR.A:

DBRS has today confirmed Loblaw Companies Limited’s (Loblaw or the Company) Issuer Rating, Medium-Term Notes and Debentures ratings at BBB, its Cumulative Redeemable Second Preferred Shares, Series A rating at Pfd-3, and its Commercial Paper rating at R-2 (middle). All trends remain Stable. The confirmation of the ratings is based on Loblaw’s stable financial profile, while recognizing that the Company’s earnings profile will remain under pressure in the near to medium term due to intensifying competition combined with a difficult consumer environment. The ratings continue to be supported by Loblaw’s strong market position, large scale, national diversification, and industry-leading private labels. The ratings also reflect the high level of and intensifying competition in food retailing, particularly with the emergence of new non-traditional players (i.e., Wal-Mart Stores, Inc. (Wal-Mart) and Target Corporation (Target)), and high levels of union penetration.
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DBRS believes that Loblaw will maintain a financial profile commensurate with the current rating based on the Company’s free cash flow generating capacity and moderate debt levels. Cash flow from operations should continue to track operating income and decline modestly to the $1.3 billion to $1.4 billion range in 2012 and 2013, while capex requirements should remain at elevated levels through 2013 and begin to moderate somewhat thereafter. Dividend policy is expected to remain consistent with recent practice, which DBRS expects should result in free cash flow before changes in working capital in the range of breakeven to $150 million. Therefore, while the Company has the potential to improve its credit metrics by applying free cash flow and cash-on-hand to debt reduction, DBRS believes that Loblaw may use these sources of cash to invest in growth and/or return value to shareholders over the longer term. As such, DBRS expects that balance sheet-debt levels and key credit metrics should remain in a range acceptable for the current rating category.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets gaining 2bp and DeemedRetractibles flat. Volatility was non-existent. Volume was heavy, with the TXPR Revision effective at Monday’s opening.