PrefBlog

European politicians are talking about a Greek exit:

From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro.

Post-election tumult in Athens has put the once-taboo subject of an exit from the 17-country currency union on the agenda, lifting the veil on possible scenario planning afoot behind the scenes.

“If Greece decides not to stay in the euro zone, we cannot force Greece,” German Finance Minister Wolfgang Schaeuble said at a conference sponsored by German broadcaster WDR in Brussels today. “They will decide whether to stay in the euro zone or not.”

But until that happens, they’re happy to throw good money after bad:

The European Financial Stability Facility’s Board of Directors confirmed the release of 5.2 billion euros ($6.7 billion) from a first installment of 39.4 billion euros by the end of June, the EFSF said in an e-mailed statement today.

An amount of 4.2 billion euros will be disbursed May 10 and the remaining 1 billion euros aren’t needed before June and will be disbursed depending on Greece’s financing needs, according to the statement.

However, this attitude is not shared globally:

China Investment Corp. has stopped buying European government debt because of an economic crisis on the continent, though it continues to look for new investments there, said CIC President Gao Xiqing.

“What is happening in Europe right now is of course of concern,” Gao said yesterday in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”

There has been a victory for shareholder rights:

Telus Corp. … has withdrawn its share-consolidation proposal, conceding its plan faces certain defeat due to the staunch opposition of an activist U.S. hedge fund.

The Vancouver-based telecommunications giant announced that it was nixing its proposal well after midnight (ET) on Wednesday, just hours before it was scheduled to be put to a shareholder vote at the company’s annual general meeting in Edmonton.

This is all the more noteworthy because the Telus proposal was so beloved of the Precious Purveyors of Pusillanimous Punditry.

Julie Dickson, Superintendent of OSFI, gave a speech today titled Being Lulled into a False Sense of Security filled with the usual platitudes. I was, however, interested in the mention of centralized clearing:

Work is underway to achieve centralized derivatives clearing.
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Many parties advocate that new measures have fixed the problems that led to the global financial crisis. The false sense of security that such a position signifies does not take into account the new vulnerabilities that are likely to arise as a result of the changes we are making to the system today. We must constantly be on our guard to identify these vulnerabilities. An example: Centralized derivatives clearing, which I referenced at the start of my remarks. This is a critical initiative, but also one that poses risks if central counterparties are not appropriately risk proofed. Thus, risk-proofing will be a focus of efforts on all fronts. Another risk is the shadow banking sector. If our focus is only on banks, if we, as regulators, are smug and believe we have everything covered off, we might overlook risks associated with shadow banking. Thus, the Financial Stability Board is also focusing on this important sector.

Canadian banks have an enviable position. It is important we all continue to work hard to maintain that position, recognize the risks to stability in Canada, avoid complacency and not allow ourselves to be lulled into a false sense of security.

I am very pleased that Canadian regulators have discovered a method whereby risk can be eliminated. Hurrah!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 3bp and DeemedRetractibles up 1bp. The Performance Highlights table is comprised entirely of Floaters, which got nailed. Volume was well below average.

PerpetualDiscounts now yield 5.04%, equivalent to 6.55% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.45%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 210bp, a slight widening from the 200bp reported April 30.

The CMHC Annual Report is out. Of particular interest is the table of 5-year financial highlights on page 98 of the PDF … in 2007, there was $345-billion of insurance in force; at the end of fiscal 2011, there is $567-billion. Thanks for inflating the bubble and subsidizing your pals at the banks, guys! To put the figure in perspective, consider this factoid from the Canadian Housing Observer 2011, Chapter 4:

With a contribution of about $330 billion to the Canadian economy, housing-related spending accounted for 20.3% of GDP in 2010, up from 20.1% in 2009.

Gee, it sure is a good thing we’re so much better regulated than those dumb old Americans, eh?

Meanwhile an unfootnoted citation by the G&M states:

CMHC estimates that roughly 25 per cent of condominiums in the Greater Toronto Area are sold but sitting vacant — shades of Miami at the height of its collapsed condo bubble in 2007. Other analysts say the 25 per cent figure may be too low.

Nope, no bubble at all, no sir! Not with Spend-Every-Penny keeping a firm hand at the tiller! For anecdotal support for the phenomenon, try driving along the Gardiner and looking at all the see-through condominiums that now line it. However, if you are driving, DO NOT make notes while discussing your findings on your cell ‘phone! Remember, Smokey the Bear says “Only you can prevent forest fires!”

Meanwhile, the political theatre in Greece continues:

Greece’s Syriza party leader Alexis Tsipras, charged with forming a government, told his pro-bailout counterparts they must renounce support for the European Union- led rescue if there is to be any chance of forging a coalition.

Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their pledges to implement austerity measures by the time he meets with them tomorrow to discuss forming a coalition. Samaras said he would not do so, and would support a minority government if necessary.
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If Tsipras fails to build a working majority, the onus on forming a government will pass to Pasok. Each mandate can last for three days. If the process still fails to yield a coalition, President Papoulias must try to broker a government of national unity, the constitution says. If that fails, new elections will be held.

“A Greek return to the polls in mid-June looks increasingly likely,” Malcolm Barr, an economist at JPMorgan Chase & Co, wrote in a note. “There is little doubt that the drop in support for New Democracy, Pasok has raised the probability of an eventual euro exit.”

Venizelos has also refused to sign:

Venizelos said Pasok’s proposal for a national unity government with the participation of all parties with a pro- European orientation was the only solution. Greece must remain “safely” within the euro while pursuing changes to the bailout accord to boost growth, he said.

The movement of talent from the banks to hedge funds continues:

The rest, earned by betting on companies from American International Group Inc. to MBIA Inc., was locked up in deferred stock and euros, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to discuss compensation. In September, Silvetz, 37, jumped to hedge fund BlueCrest Capital Management LLP. He was the last of a trio of New York debt traders who departed after making $1 billion for the German lender in two years, the people said.

Wall Street’s biggest banks have lost almost two dozen of their most-profitable credit traders in the past 13 months as regulators limit the kind of risk-taking that amplified the housing crisis four years ago. As banks slash or defer pay and reduce the amount they’re willing to wager, the traders are seeing better opportunities at hedge funds and investment firms that seek to profit in markets lenders are retreating from.

Note that by “talent”, I mean the ability to make deals, which is not the same thing as asset management. Different business. This trend may be a good thing … it may be a bad thing. Nobody knows, nobody cares. The world’s regulators have decided to encourage the change without getting too fussed by details.

The downside? Hedge funds are intrinsically less stable than banks – investors are a lot more willing to redeem. The implication is that it may become easier for a market panic to lead to a lock-up in trading.

Husky Energy, proud issuer of HSE.PR.A, was confirmed at Pfd-2(low) by DBRS:

DBRS has today confirmed the Senior Unsecured Notes and Debentures and the Preferred Shares of Husky Energy Inc. (Husky or the Company) at A (low) and Pfd-2 (low), respectively, both with Stable trends. The rating actions are based on DBRS’s review of Husky’s progress to date on its long-term plans, which incorporate its major strategic growth initiatives, upstream operational targets and financial targets through 2015.
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Husky maintains a conservative financial profile. Its debt-to-capital and debt-to-cash flow ratios improved to 19% and 0.85 times, respectively, at March 31, 2012 from 22% and 1.39 times, respectively, at year-end 2010. Common and preferred share issuance totaling $2.2 billion (including dividends paid in shares) strengthened its key credit metrics and liquidity position, with $3.3 billion of bank facility availability and $2.7 billion of cash at March 31, 2012.

DBRS expects Husky to maintain its conservative financial profile, with only modest weakening of its key credit metrics relative to year-end 2010 levels during the high capex period through 2015, as well as making significant progress on its upstream operational targets over the period in order to maintain the current ratings.

There was a slight downdraft in the Canadian preferred share market today, with PerpetualPremiums losing 6bp, while both FixedResets and DeemedRetractibles were off 3bp. Volatility was very low. Volume was well below average.

France has a new president:

Francois Hollande defeated French President Nicolas Sarkozy as voters handed control of the second-biggest European economy to the Socialists for the first time in 17 years.

The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by four pollsters. The campaign isn’t over. France elects its lower house of parliament in five weeks, prompting calls from backers of both candidates to keep fighting.
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While Socialists stand ready to dominate policy making for the first time since 1993 — holding both the presidency and the Cabinet — bond yields suggest Hollande may maintain market confidence. Ten-year French debt yields 124 basis points more than comparable German securities. That’s down from 145 basis points after he won the first round April 22 and lower than the 133 basis points at the start of the year.

Concern of a Franco-German cleavage undermining economic policy making in the euro region is “exaggerated,” Morgan Stanley chief economist Joachim Fels wrote in a note today.

Greek politics is a Gordian knot – and that’s scary!

New Democracy leader Antonis Samaras began trying to put together a government after a Greek election that raised fresh questions about the country’s euro membership and triggered the biggest stock-market rout in four years.

Samaras was given three days from today to put together a coalition from an assembly split down the middle on whether to renege on the terms of bailout agreements negotiated since May 2010. New Democracy and the socialist Pasok party, rivals until the country’s crisis threw them into a national government together this year, are two seats short of the 151 seats needed for a parliamentary majority.
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New Democracy led in the election, receiving 19 percent of the vote and 108 seats in the 300-seat Parliament. Syriza got 17 percent to score 52 seats; Pasok came third with 13 percent and 41 seats.
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Should Samaras fail to get the necessary number of seats, the onus on forming a government will fall to bailout opponent Syriza, a coalition of left parties, which has vowed to cancel the bailout terms. After that, Pasok takes the baton.

If the nine-day process fails to yield a coalition, President Papoulias may then try to broker a government of national unity. Should that process fail, new elections may be a possibility.

And, in fact, there is now a report that the baton has passed to the anti-austerity Syriza party:

Greek political leaders will meet for a second day today in a bid to form a government, with the mandate for the task being handed to the second-biggest party after New Democracy leader Antonis Samaras said he failed to forge agreement after an election that raised questions about the country’s euro membership.

Samaras gave up his bid after nearly six hours of talks in Athens yesterday. The attempt to form a government will pass to Alexis Tsipras, the head of Syriza, the second biggest party, which has vowed to cancel the bailout terms. Tsipras will see President Karolos Papoulias today at 2 p.m. Athens time.
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As voters across Europe rebel against austerity measures imposed to stamp out the debt crisis, Citigroup Inc. said yesterday the risk of Greece leaving the euro by the end of 2013 has risen as high as 75 percent. The election on May 6 propelled into Parliament a party that wants to put land mines on the border with Turkey and another that wants Germany, the country’s biggest donor, to pay World War II reparations. The benchmark ASE Stock index plunged 6.7 percent in Athens yesterday, its biggest drop in six months.

YLO released its results a day early:

Yellow Media Inc. (YLO-T0.100.0111.11%) reported a first-quarter loss of $2.9-billion as the struggling directory publisher wrote down the value of its assets.

The company also cancelled its annual meeting planned for Tuesday in Montreal after it said the number of shareholder votes received would not be enough to reach quorum.

Farcical, but more to the point is that print revenues declined more than expected and digital substitution was lower than expected.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums losing 12bp, FixedResets up 3bp and DeemedRetractibles gaining 6bp. Volatility was minimal, with no themes apparent. Volume was quite low.

There are tentative advances in exchange trading for corporate bonds:

Goldman Sachs Group Inc. (GS) will start an electronic trading system for corporate bonds this month as the fifth-biggest U.S. bank adapts to regulatory changes and competition, according to a person familiar with the plans.

The platform, called GSessions, has been under development for a year, said the person, who declined to be identified because the New York-based firm isn’t making details public yet. The Wall Street Journal reported the initiative late yesterday on its website.

The move comes three weeks after BlackRock Inc. (BLK), the world’s largest money manager, said it was planning its own bond-trading platform called Aladdin Trading Network that would allow clients to bypass Wall Street firms such as Goldman Sachs.
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The profitability of Wall Street firms is being challenged by regulations requiring that they hold more capital as a buffer against potential losses from assets such as corporate debt. A U.S. law that seeks to prohibit federally insured banks from making bets with their own money may also hinder lenders’ ability to commit money to buy securities from clients, according to analysts including Brad Hintz at Sanford C. Bernstein & Co.
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GSessions will start by offering two five-minute trading sessions a day, one in an investment-grade bond and another in a high-yield, high-risk security, the person said. Speculative- grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

At the start of each session, Goldman Sachs will post a bid and offer price and notify clients of the maximum amount of liquidity the firm is willing to provide to fill orders, according to the person.

Rather than matching trades between clients, Goldman Sachs will act as the counterparty to all trades and collect the spread, or difference, between the bid and offer prices, the person said. That gap will be lower than what Goldman Sachs earns on non-computerized trades, the person said.

As I have said many, many times on this blog, exchange trading for corporate bonds will lead to tighter, more brittle markets and be bad for capital formation – to the extent that instruments are listed. In the States, especially, the action has moved into the private-placement and CDS markets, to avoid regulatory bullshit and get on with the job. However, the regulator who cares about the actual purpose of capital markets has not yet been born.

I have often criticized the entire concept of a B.Comm. degree (a guy with a B.Comm. is a guy who wanted to learn about business, so he went to school. Strike one.). Seems that others share my disdain:

Yahoo! Inc. (YHOO) is under pressure from Third Point LLC, one of its largest investors, to dismiss Chief Executive Officer Scott Thompson after his academic computer science credentials were misrepresented.
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Martin McGovern, a spokesman for Stonehill in Easton, Massachusetts, said that Thompson received a bachelor’s of science in business administration, with a major in accounting on May 20, 1979. He declined to comment further.
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Loeb said that Patti Hart, a Yahoo board member who chairs the search committee, inflated her degree too. Hart, who also serves as CEO of International Game Technology (IGT), is listed in filings as holding a “bachelor’s degree in marketing and economics” from Illinois State University, Loeb said. “However, we understand that Ms. Hart’s degree is in business administration. She received a degree in neither marketing nor economics.”

Today’s PrefBlog Precious Little Do-Gooder Zinger is about donating eye-glasses:

In a paper published in March in the journal Optometry and Vision Science, four researchers compare the full costs of delivering used glasses to the costs of instead delivering ready-made glasses in standard powers (like my drugstore readers, but for myopia as well). The authors find that recycled glasses cost nearly twice as much per usable pair.

Rob Carrick has a piece up titled Preferred shares: How to navigate rising rates, but I’m not quoted.

There was a slight pullback in the Canadian preferred share market today, with PerpetualDiscounts off 1bp, FixedResets down 7bp and DeemedRetractibles losing 8bp. Volatility was minimal. Volume was extremely low.

What a great solution for the TMX / Maple deal! More rules!

The Ontario Securities Commission will impose share ownership restrictions and require an independent board of directors as conditions of its approval of the takeover of the Toronto Stock Exchange.
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Among its proposed conditions for approving the bid, the OSC rules would prohibit any person or company from owning more than 10 per cent of the voting shares of Maple Group without OSC prior approval.

The original shareholders of Maple Group are also required to certify annually to the OSC that they are not acting “jointly or in concert with any other investor” in respect to Maple’s voting shares.

The rules also require Maple’s board to have at least 50 per cent of its directors unrelated to the original Maple shareholders and unrelated to management of the company. One director must represent an independent, non-bank owned investment dealer, and the chairman of the board must be both independent and unrelated to the original Maple shareholders.

Maple’s shareholders are a group of 13 major Canadian financial institutions and pension funds.

Why would the banks bother to act in concert? Their interests are identical anyway. There is some oohing and ahhing over the cost recovery model:

Even if Maple succeeds in buying TMX and CDS, it will still be forced to continue paying rebates. What’s more, Maple will have to share some of the synergies it expects to get from the transaction with market users, according to the pricing model, which is now being made public for the first time by the OSC.

Starting on Nov. 1, a Maple-owned CDS will split any annual revenue gains on the current suite of CDS clearing services 50-50 with users. That continues indefinitely.

On top of that, the so-called “integration rebate” to market users starts at $2.75-million and rises to $4-million by 2016. The fee will be capped at that level after 2016, but it will continue in future years.

It’s supposed to reflect the cost-savings Maple extracts. But interestingly, it’s not conditional on Maple actually saving money. So CDS users get paid no matter whether Maple manages to find synergies or not.

All of this means Maple will have to really deliver on its original promise — to make money from CDS not by raising fees for existing services but by creating new services that it can charge for. Those new services won’t be subject to the revenue sharing. However, even there, regulators are not making it easy on Maple.

Buddy, what it probably means is that fees will be charged so that fixed costs for participants are higher and marginal costs are lower. This will enlarge the moat that protects the oligopoly.

I often feel like Cassandra when worrying about the risks of the Canadian financial system, so it’s nice to know that somebody shares my views:

Canada’s biggest banks likely are “too big to fail,” and therefore pose a risk to the country’s financial system, says Malcolm Knight, a former No. 2 at the Bank of Canada.
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Canada’s five biggest banks hold combined assets worth $2.8-trillion, twice the size of the country’s gross domestic product.

That outsized economic weight makes them a threat to financial stability because the collapse of any of them would take a toll on hundreds of thousands of customers, on competition in financial services, and on the country’s reputation as a safe place to invest, Mr. Knight says.

Canada’s strict regulatory system makes the banks “less likely to fail,” but failure isn’t impossible, no matter how well the country weathered the financial crisis.

“Canada’s strict regulatory system”. We’re always hearing about that. The main thing is that OSFI simply sticks a little extra onto regulatory capital requirements – there’s nothing clever about that. What would be clever is is there was ever any accounting made for the costs of this – and I don’t mean picayune things like the service fees that help pay for all that capital. There’s things like mortgage spreads, the preponderance of short term mortgages, subsidies of tail risk by the CMHC, the stultifying effect of the oligopoly … there are many costs, none of which are ever examined.

I sent an eMail recently:

Sirs,

The Toronto Star recently published an article titled “Pediatricians in Canada discharging unvaccinated children” (April 25, on-line at http://www.thestar.com/living/article/1167428–pediatricians-in-canada-discharging-unvaccinated-children)

In this article it is alleged that the behaviour highlighted by the headline is indulged in by Dr. Fatima Kamalia and condoned by Dr. Hirotaka Yamashiro, who holds a position with the Ontario Medical Association. The CPSO is stated to take the position that “Doctors have the right to end a relationship with a patient when there is a ‘breakdown of trust and respect'”.

The arrogance shown by these medical personnel shows that they have confused the award of a medical diploma with ascension to divinity. Their interpretation of CPSO policies in a manner that equates the right to refuse medical treatment with a ‘breakdown of trust and respect’ is breathtaking; it makes a mockery of CPSO Policy #4-05 “Consent to Medical Treatment”.

Additionally, the attitude of these so-called professionals that they are infallible on pediatric care may well be misplaced, although the consensus is currently in their favour. As one who was born in England in June, 1961, I am keenly aware that consensus can be incorrect even with respect to something so straightforward as morning sickness; I remain grateful that my mother ignored doctor’s advice regarding remediation for the condition. I am pleased to pursue an occupation and lifestyle that, astonishingly, does not increase my risk of contracting peptic ulcer disease.

The desire of Drs. Kamalia & Yamashiro to restrict their practice to include only those individuals who show proper reverence for their pronouncements ex cathedra is understandable; if they wish to pick and choose their clientele, I suggest they make a living in a competitive environment – not in Ontario, where rationing effectively provides them with a very nice job for life on the taxpayers’ nickel.

I strongly urge the CPSO to initiate an investigation of the abuse of privilege endorsed or indulged in by these doctors, to condemn in the strongest possible manner the bizarre interpretation of the ‘breakdown in trust and respect’ guideline and to uphold the right to refuse treatment.

Sincerely,

I also see that there is an unsigned opinion piece in The Star:

While the College of Physicians and Surgeons of Ontario has no specific policy on the immunization issue, it does have one on severing ties. “In general, a physician should not end the physician-patient relationship because the patient chooses not to follow the physician’s advice,” it says. That’s the patient’s right.
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The American Academy of Pediatrics and its bioethics committee have developed guidelines on dealing with these vexing cases.

“In general, pediatricians should avoid discharging patients from their practices solely because a parent refuses to immunize his or her child,” the guideline states.

“Families with doubts about immunization should still have access to good medical care, and maintaining the relationship in the face of disagreement conveys respect and at the same time allows the child access to medical care. Furthermore, a continuing relationship allows additional opportunity to discuss the issue of immunization over time.”

Veresen, proud issuer of VSN.PR.A, was confirmed at Pfd-3(high) / Stable by DBRS:

DBRS has today confirmed the Senior Unsecured Notes and the Preferred Shares of Veresen Inc. (Veresen or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects (1) relatively stable cash flow from the Company’s regulated pipeline businesses, which accounted for approximately 56% of Veresen’s 2011 cash distributions received from its subsidiaries; (2) diversification benefits from its midstream (35% of cash distributions) and power generation businesses (9% of cash distributions), supported by long-term contracts with mostly investment-grade counterparts; and (3) solid non-consolidated cash flow ratios – albeit high non-consolidated leverage – at the parent level following the closing of the $920 million acquisition of the Hythe/Steeprock complex (the Acquisition) from Encana Corporation (Encana) in February 2012, which DBRS viewed as a credit neutral event for Veresen.

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