PrefBlog

Sino-Forest is for sale! Who wants to buy … er … something?

Sino-Forest Corp., the embattled timber firm facing fraud allegations is filing for court protection from creditors as it tries to find a buyer for what was once the largest publicly traded forestry firm on the Toronto Stock Exchange.
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While under court protection from its creditors, Sino-Forest hopes to sell its assets to a third party. It has launched a process to consider offers. If the company is unable to find a buyer its assets will be transferred to its debtholders, Sino-Forest said in a statement.

The Canadian preferred share market had a strong day to close the quarter, with PerpetualPremiums up 14bp, FixedResets winning 20bp and DeemedRetractibles gaining 12bp. Volatility was low. Volume was very light.

PerpetualDiscounts now yield 5.26%, equivalent to 6.84% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.5% (maybe just a little bit over) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 230bp, a significant narrowing over two days from the 240bp reported March 28.

The Canada budget today continued to reward paperwork and subsidize marginal industry.

Canadian Finance MinisterJim Flaherty is aiming to boost flagging job growth and investment with C$3 billion ($3 billion) over two years for research and job subsidies.

The federal budget set aside C$1.1 billion over five years to support research and development and offered another C$500 million for venture capital.
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The budget also proposed extending a 15 percent mineral exploration tax credit for another year through the end of March 2013 at a cost of about C$100 million.

The penny’s gone:

Canada is scrapping the penny, ending production of the country’s smallest unit of currency this spring.
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The last one-cent coin will be minted this April, ending close to 150 years of the issuance of Canadian pennies. This unit of currency was first produced in 1858 although Canadian-based minting of the coin only began in 1908.

However, the most poignant part of the budget is this:

The budget also announced that the government would conduct a study, including consultation with taxpayers, to better understand why companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims. The result of this study will determine whether any action is required.

It’s no wonder that What-Debt? and Spend-Every-Penny are confused, seeing as how neither of them has much actual work experience, so out of the kindness of my heart, I’ll explain it to them:

Companies that do actual research do not, as a rule, have Suck-Arse Departments. Sucking government arse is a highly specialized field and requires years of brown-nosing (and, usually, a few more years in Cabinet) before proficiency is acquired. Therefore, a company interested in getting government money will hire an outside consultant. Since actually getting the money is a matter of random chance, contingency fees make more sense than anything else. Thank you. That will be $200-million, please.

If they were really interested in promoting research and development, they would create more centres of excellence in academia (by which I mean science and engineering, not sociology. Also, some may associate “Centres of Excellence” with applied research, which is not what I mean – it’s perfectly fine to fund the occasional one-man band to ‘think about smart stuff’. It pays off, in the end). They would evaluate potential hires solely on merit, rather than whether they’re Canadian or not. And they’d recruit grad students on a full ride according to the same criteria. But that’s not going to happen:

R&D is a long-acknowledged driver of economic prosperity and competitiveness, and the prevalent view is that more private investment in R&D will yield significant social benefit. A key driver to the government’s overall innovation strategy is to create new knowledge and a highly skilled workforce. The budget announced that the government will continue to support advanced research at universities and other leading research institutions by providing direct support to granting councils, genomics research, international research and infrastructure investment for Canadian universities, colleges, research hospitals and other not-for-profit research institutes across Canada.

Notice the word “continue”, and no new funding? See that bit about “highly skilled workforce”? That’s code for “undergraduates in sociology, political science, economics and business”, all the little talky-talky pseudo-disciplines.

Canadian Utilities, proud issuer of CU.PR.A, CU.PR.B and CU.PR.C, was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings of the Commercial Paper, Unsecured Debentures and Cumulative Preferred Shares of Canadian Utilities Limited (CU or the Company) at R-1 (low), “A” and Pfd-2 (high), respectively, all with Stable trends. The ratings reflect the Company’s stable portfolio of regulated, low-risk utilities, strong cash flows from its diversified non-regulated operations and its strong financial profile.

The diversity of CU’s asset base provides stability to overall earnings and cash flow, with earnings split approximately 58/42 between CUI’s regulated operations and CU’s non-regulated businesses (including ATCO Gas Australia). DBRS notes that dividends flowing up from CUI has significantly declined over the past two years as CU continues to provide support to CUI during the build-out phase and to preserve the utility’s credit profile. The decline is offset by strong dividends coming from its regulated generation business and non-regulated operations and by CU’s significant cash balance compared with its modest debt and preferred obligations. CU is expected to issue more long-term debt/preferred shares to fund its equity requirement at CUI over the next two years, however, the Company’s non-consolidated debt to capital will remain below 20%.

CU Inc., proud issuer of CIU.PR.A, CUI.PR.B and CIU.PR.C, was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Cumulative Preferred Shares and Commercial Paper of CU Inc. (CUI or the Company) at A (high), Pfd-2 (high) and R-1 (low) respectively, all with Stable trends. The rating confirmations are based on CUI’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment, its strong portfolio of diversified regulated businesses and its strong and stable financial profile.

The Company’s business risk profile is viewed as strong, as all of its earnings are generated from regulated electricity and gas businesses, which operate under a reasonably stable regulatory framework. The Company is allowed to earn an adequate return on equity on a reasonable deemed equity ratio for all of its diversified regulated businesses. In addition, the decision of the Alberta Utilities Commission to approve significant credit relief measures to help support the CUI’s credit metrics during construction remains credit positive.

It was a down day for the Canadian preferred share market, with PerpetualPremiums losing 12bp, FixedResets down 8bp and DeemedRetractibles off 9bp. Volatility was fair. Volume was average. ENB issues figured prominently in the volume table, presumably due to the new issue.

Boyd Erman’s piece in the Globe today, Risk factors weaken attraction of Ontario’s bonds (in the print edition, the headline was “Budget-challenged Ontario pays the price with its bonds) does a disservice to those investors who wish to understand the bond market:

Ontario is being treated more and more like the increasingly risky borrower that it is.

As the Ontario government focuses on finding ways in Tuesday’s budget to eliminate the persistent annual deficit, the bond market is exacting a steadily bigger toll for financing the government’s growing debt.
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But stand back and look at a chart of the spreads over five years and there’s no doubt the general move is to wider spreads. Ontario is simply paying more, relative to Ottawa, than in the past.
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When the bull market in government bonds ends and yields start to rise, as some observers believe is already happening, what will happen to Ontario then?

He attaches the requisite Cool Chart:

Click for Big

Without saying so in so many words, Mr. Erman appears to be ascribing the entire widening of the spread to credit risk – and the world is a lot more complicated than that. There is a liquidity premium – the Canada bond market is a lot bigger than the Ontario bond market, as are issue sizes and idiosyncratic measures of tradeability and hedgeability with futures. There is also a segmentation issue: many international investors will buy only sovereigns and not even consider subnationals. I am not sure, but there may be pledging issues with the Bank of Canada – if I had more time I would check, but I’m not sure if there are any eligibility or haircut differences between Canadas and Ontarios.

And … if we just glance at the chart, we can see that the shape seems to be reasonably well correlated with corporate spreads – which widened during the crisis not so much out of credit fears, but out of liquidity issues.

How much is liquidity and how much is credit? I don’t know. You could spend your lifetime studying provincial spreads and still have to guess! But to ascribe the entire widening to credit risk is a bold and audacious analysis that is treated in the column as a matter of basic fact.

Be that as it may, Ontarios are basically steady today:

Ontario bond yields didn’t make any drastic moves the morning after Canada’s largest province released its annual budget, but there was enough activity to suggest investors were a bit surprised by the provincial government’s steps to rein in spending.

Although yields for Ontario’s 5-year and 10-year bonds haven’t moved much, there was enough of a dip in early morning trading to make observers speculate that some investors are covering their short positions. These bets were initially made because investors assumed the budget wouldn’t be bold enough to tackle the province’s massive debt load.

Back in the old days at Greydanus Boeckh, I was notorious for refusing to allow staff to install any software beyond the bare-bones system we needed – we continued to use DOS, for instance, until Windows NT came out, skipping the whole Windows Crash-dot-Incompatible mess. Staff would tell me how wonderful and cheap the software was, and I would carefully explain to them that taking the software out of the shrink-wrap was when your costs started. I believe opinion was divided as to whetherr I was just saying no to demonstrate my awesome power and be mean to them, or whether I was just an idiotic technophobe.

However, we have now reached a new level of cost calculation. I bought a new laptop on the weekend for $565 (it’s incredible how cheap these things are!) and have now spent about two hours alone and about two hours on the ‘phone with tech support just trying to get the internet connection to work. So never mind the labour cost of new software – the labour cost of tranferring programmes and data to a new machine now outweighs the cost of the machine itself!

To make things worse, the new machine would not work with the old modem, and in attempting to jam the square machine into the round modem, my ISP eliminated internet access for the old machine, which is why this report is so late Ain’t life grand! But things seem to be back to normal now – and I have a shiny new modem!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets down 11bp and DeemedRetractibles losing 17bp. Volatility was quite good. Volume was below average.

PerpetualDiscounts (all seven of them!) now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 240bp, a sharp widening from the 205bp reported March 21.