PrefBlog

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 6bp and DeemedRetractibles off 1bp. Volatility was minimal. Volume was lousy, albeit with one very bright spot.

PerpetualDiscounts (all three of them!) now yield 4.97%, equivalent to 6.46% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, a slight (and quite possibly spurious) narrowing from the the 210bp reported August 9.

The latest regulatory extortion attempt worked:

A New York regulator settled a money laundering probe of Standard Chartered Plc (STAN) for $340 million a day before the U.K.-based bank was to appear at a hearing to defend its right to continue operating in the state.

Do I see the beginnings of a backlash?

Add it all up and it’s hard to avoid the impression Mr. Lawsky just carried out an effective old-fashioned shakedown, and one that also happens to be good politics in a bank-bashing era. Either way, he has just served notice that yet another regulator has its eye on Wall Street – and that banking in New York may now carry even more frictional costs than the industry bargained for.

William C. Dudley, president of the Federal Reserve Bank of New York, writes an excellent piece on Money Market Fund reform:

Contrary to what some in the industry suggest, run risk didn’t end when the SEC sensibly tightened rules on money-fund holdings in 2010. Analysis by the U.S. Treasury’s Office of Financial Research showed that, as of April this year, no fewer than 105 money-market funds with more than $1 trillion in assets were at risk of breaking the buck if any one of their top 20 borrowers were to default.

The SEC’s Schapiro would address run risk by requiring money funds to move to floating net-asset values (like most other mutual funds) or to adopt capital buffers, possibly along with redemption restrictions.

Floating net-asset values would be a significant improvement over stable net-asset values. It would reduce the incentive for shareholders to get out early in times of stress. But it wouldn’t eliminate the incentive to run altogether. Fund managers faced with large redemption requests typically sell their most liquid assets first, leaving the remaining investors with a riskier, less-liquid portfolio and a greater risk of loss.

As explained in a recent paper by Federal Reserve economists, combining small capital buffers with a requirement that investors who withdraw funds must maintain a small balance for a short period to absorb near-term losses would make the system safer by creating a disincentive to run. The modest withdrawal restrictions, which create a “minimum balance at risk,” might be set at 5 cents on the dollar, based on the high- water mark of recent holdings.

Crucially, the minimum balance retained by those who had pulled money out would be put in the first-loss position for about 30 days. This would protect those who remain in the fund from losses caused by others’ redemptions. Exemptions for small investors, who are least likely to run, could be considered. For instance, the first $50,000 of an investor’s redemptions could be exempt from first loss. Small investors would share proportionately in any fund losses instead.

He references the Treasury’s Office of Financial Research Annual Report (didn’t know there was one of those):

Chart 3.3.11 illustrates counterparty concentration among money market funds. The chart shows the vulnerability of funds to a default of their counterparties. The most vulnerable funds would break the buck—fall below the $1 net asset value by more than half a cent—if any one of 30 or more counterparties defaulted; the less vulnerable funds would break the buck if any one of 10 to 19 counterparties defaulted. The analysis assumes 40 percent recovery on all unsecured lending by the funds and full recovery on all repo transactions.

Click for Big

The other paper highlighted is by Patrick E. McCabe, Marco Cipriani, Michael Holscher, and Antoine Martin, titled The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds:

This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor’s recent balances, called the “minimum balance at risk” (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor’s MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises.

Wells Fargo issued some preferreds in the States (no dividend tax credit!) rated A by DBRS:

DBRS has today assigned a rating of ‘A’ with a Stable trend to Wells Fargo & Company’s (Wells Fargo or the Company) $675 million issuance (with a $75 million over-allotment option) of Non-cumulative Perpetual Preferred Stock. The ratings are positioned three notches below Wells Fargo’s Issuer & Senior Debt rating of AA, which also carries a Stable trend. This notching is consistent with DBRS’s base notching policy for preferred shares issued for AA rated entities.

They’re financing at 5.25% to redeem at 8.25%.

State Street Corporation (NYSE: STT) today announced the pricing of its previously announced offering of 20,000,000 depositary shares each representing a 1/4,000th ownership interest in a share of Non-Cumulative Perpetual Preferred Stock, Series C, without par value per share, with a liquidation preference of $100,000 per share (equivalent to $25 per depositary share). The aggregate dollar amount of the depositary shares offered is $500,000,000. The offering is being conducted pursuant to an effective registration statement under the Securities Act of 1933.

The depositary shares will be offered to the public at a price of $25 per depositary share and with a dividend rate of 5.25% per annum on the liquidation preference of $100,000 per Series C share.
…
Subject to approval by the Federal Reserve, State Street intends to use the net proceeds of the offering to redeem all of the outstanding shares of State Street’s Non-Cumulative Perpetual Preferred Stock, Series A, all of which are held by State Street Capital Trust III, at a cash redemption price of $100,000 per share, together with an amount equal to any dividends that have been declared but not paid prior to the redemption date, on such redemption date as may be established by State Street in accordance with the Certificate of Designation of the Series A Preferred Stock. Upon the completion of the redemption of the Series A Preferred Stock, State Street Capital Trust III will redeem all of State Street’s outstanding 8.250% Fixed-to-Floating Rate Normal Automatic Preferred Enhanced Capital Securities and all of the outstanding common securities issued by State Street Capital Trust III. If State Street is not permitted to redeem the Series A Preferred Stock, then State Street expects to use the net proceeds for general corporate purposes.

Redemption provisions aren’t all that good according to the prospectus:

The Series N Preferred Stock may be redeemed by us at our option in whole, or in part, on September 15, 2017, or any dividend payment date thereafter, at a redemption price equal to $25,000 per share of Series N Preferred Stock (equivalent to $25 per depositary share), plus an amount equal to any declared and unpaid dividends, without accumulation of any undeclared dividends. The Series N Preferred Stock may also be redeemed by us at our option in whole, but not in part, prior to September 15, 2017, upon the occurrence of a “regulatory capital treatment event,” as described herein, at a redemption price equal to $25,000 per share of Series N Preferred Stock (equivalent to $25 per depositary share), plus an amount equal to any declared and unpaid dividends, without accumulation of any undeclared dividends.

I do like linking to public documents on public file as filed with the regulator of record! So much better than what we have here in Canada.

Atlantic Power, proud ultimate parent of AZP.PR.A and AZP.PR.B, was confirmed at Pfd-4 by DBRS:

DBRS has today confirmed the ratings of Senior Unsecured Debt and Medium-Term Notes (the Notes) of Atlantic Power Limited Partnership (APLP; formerly Capital Power Income L.P.) and the Cumulative Preferred Shares of Atlantic Power Preferred Equity Ltd. (formerly CPI Preferred Equity Ltd.) at BB and Pdf-4, respectively, both with Stable trends. The rating of APLP is based on the credit quality of Atlantic Power Corporation (ATP or the Company; not rated by DBRS) given that APLP guarantees the majority of ATP’s debt at the holding company level (total holding company debt at ATP accounted for 36% of consolidated debt, June 30, 2012). The recovery rating of the Notes is RR4 (indicating an expected recovery of 30% to 50%).

The credit profile of ATP reflects its moderate business risk profile, which benefits from a diversified portfolio of generation assets (2,141 megawatts of net generating capacity) located in 11 states in the U.S. and two provinces in Canada. Over 95% of its net generating capacity is under power contracts (PPAs), with a significant portion of contracted capacity having capacity payments and fuel cost pass-through. PPAs substantially reduce ATP’s exposure to wholesale power price volatility and support cash flow stability. In addition, ATP has above-average operational efficiency with a capacity factor of over 90% (five-year average), which is key to maintaining steady capacity payments.

Following the acquisition of APLP, ATP’s financial profile weakened significantly, predominately due to higher leverage and weaker cash flow ratios. ATP’s balance sheet is expected to continue to be pressured by the ongoing high level of capex associated with the Canadian Hills and Piedmont Green Power projects in 2012. In the medium to long term, APT’s financing strategy is to reduce the consolidated debt-to-capital ratio (currently at 67%) to 50%. Should the Company successfully execute its deleveraging strategy and build a strong track record of maintaining a good financial profile, this will have a positive credit implication.

It was a good, if uneven, day for the Canadian preferred share market, as PerpetualPremiums won 11bp, FixedResets were flat and DeemedRetractibles gained 8bp. Volatility was negligible. Volume continued to be awful.

Here’s some corporate activism that doesn’t induce nausea:

Caterpillar Inc. (CAT) Chief Executive Officer Doug Oberhelman said he will campaign later this year for a cut in U.S. government debt because the issue affects customers of the largest maker of construction and mining machinery.

“It’s starting to hold us back,” Oberhelman said in an interview yesterday with Bloomberg Television’s “Street Smart” at the company’s demonstration and learning center in Edwards, Illinois. “For the contractor base and customers in this country, it’s worrisome. It has a chill in the air.”

Customers of Caterpillar are “scared to death” that tax rates will rise as public expenditure stalls, he said. Higher taxes and cuts in spending on government programs amounting to $607 billion as measured by the Congressional Budget Office will take effect at year-end without congressional action.

In a continuation of the insane stampede towards central counterparties and single-point failure BIS has proposed:

Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank’s trade exposure to the CCP in respect of OTC derivatives, exchange traded derivative transactions and SFTs. Where the clearing member offers clearing services to clients, the 2% risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults

Capital is charged harshly … but subject to a cap!

Clearing member banks may apply a risk-weight of 1250% to its default fund exposures to the CCP, subject to an overall cap on the risk-weighted assets from all its exposures to the CCP (ie including trade exposures) equal to 20% times the trade exposures to the CCP. More specifically, under this approach, the Risk Weighted Assets (RWA) for both bank i’s trade and default fund exposures to each CCP are equal to:16
Min {(2% * TEi + 1250% * DFi); (20% * TEi)}
where
• TEi is bank i’s trade exposure to the CCP, as measured by the bank according to paragraphs 110 to 112 of this Annex; and
• DFi is bank i’s pre-funded contribution to the CCP’s default fund.

When calculating the required capital of the CCP, its exposures are risk-weighted at 20%, a figure which is far too low. Interconnectedness of banks should be discouraged through the capital rules, not encouraged! Note that under Canadian rules:

• the risk weight of bank exposure is dependent upon the credit quality of the sovereign (i.e., an implicit assumption of cross-border state aid)
• The highest rank for sovereigns is the AA- to AAA category
• The risk weight for exposure banks domiciled in these credit-worthy sovereigns is 20%
• The credit quality scale for these exposures is the same as for corporates

So in other words, if a bank has a choice between lending to a non-financial company or another bank, the risk weighting will generally favour the bank loan, because then they can use the sovereign’s creditworthiness rather than that of the actual borrowing entity. Am I the only person in the world who thinks this is nuts?

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums winning 7bp, FixedResets up 6bp and DeemedRetractibles gaining 4bp. Volatility was minimal. There were a few pockets of volume … but basically? Yech.

No great joy in the Canadian jobs number:

Canadian job creation hit a stumbling block in July after two months of modest gains and following an impressive number of new jobs added earlier in the year.

A hefty 51,600 part-time positions were eliminated over the month, with women over 55 feeling the brunt of the job losses, according to Statistics Canada data released Friday. Employment for all other age groups remained roughly the same as the month before, and full-time employment increased by 21,300 jobs in July, compared with 29,300 new full-time jobs in June.

Some are calling for rate cuts; others aren’t:

“All things considered,” David Madani of Capital Economics told clients in a note, “this jobs report provides further support to our long-held view that the Bank of Canada may eventually be forced to cut interest rates.”

Mr. Madani’s analysis assumes policy makers will focus on the headline number, which suggests that Canada’s economy has slid into a soft patch, as job creation was paltry in May and June. The unemployment rate rose to 7.3 per cent in July from 7.2 per cent the previous. Canada now has lost an average of about 5,000 jobs over the past three months.
…
Policy makers keep an eye on changes in the average hourly wage rate of permanent employees to gauge whether inflation pressure is building. That number jumped 3.9 per cent in July from a year ago, to $24.49, the fastest since April, 2009.

Bigger wages will support consumer demand. But all things equal, any increase in purchases will put upward pressure on prices. “This…could be a source of concerns for the Bank of Canada if it proves persistent,” Nomura’s Charles St-Arnaud, a former Bank of Canada economist, said in his analysis of Friday’s jobs report.

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums down 4bp, FixedResets off 1bp and DeemedRetractibles losing 6bp. Volatility was negligible. Volume was DEAD. You hear me? DEAD! I’ve seen more life in a regulator’s office!

Nothing happened today.

It was a positive day for the Canadian preferred share market, with PerpetualPremiums up 2bp, FixedResets gaining 7bp and DeemedRetractibles winning 11bp. Volatility was almost non-existant. Volume was very low.

PerpetualDiscounts (all three of them!) now yield 4.96%, equivalent to 6.45% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a decent-enough narrowing from the 220bp reported August 1.