PrefBlog

The Competition Bureau is leaning against TMX / Maple:

Dealing a major blow to the proposed acquisition of TMX Group, Canada’s Competition Bureau has informed the 13 financial institutions behind the takeover that it has “serious concerns” with their plan.

On Tuesday competition commissioner Melanie Aitken privately informed the consortium, named Maple Group Acquisition Corp., that she has concerns “about the likely competitive effects of the proposed transactions in the current environment, primarily in connection with equities trading and clearing and settlement services in Canada,” according to a statement from Maple Group.

The central banks are mitigating market discipline:

Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis.

Stocks rallied worldwide, commodities surged and yields on most European debt fell on the show of force from central banks aimed at easing strains in financial markets. The cost for European banks to borrow dollars dropped from the highest in three years, tempering concerns about the euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned.
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The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

I won’t go so far as to say I don’t like it, but I will say that I’m deeply suspicious. Central Bank financing should be available, certainly, for solvent but illiquid banks, but these loans should be at punitive, not concessionary rates.

With overnight money so cheap, the cost of failing a trade is derisory, so the Fed’s Treasury Market Practice Group has suggested a surcharge that effectively puts a floor of 3% on fail money. It is strictly voluntary, of course, BUT THE FED WOULD REALLY, REALLY LIKE YOU TO DO THIS!

It was a modestly down day for the Canadian preferred share market, with PerpetualDiscounts losing 12bp, FixedResets off 3bp and DeemedRetractibles down 8bp. Volatility was good. Volume was above average.

PerpetualDiscounts now yield 5.32%, equivalent to 6.92% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.8% so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 210bp, a significant widening from the 195bp reported November 23 as PerpetualDiscounts got smacked for 17bp dividend yield on the week, while long corporates edged up only 5bp.

S&P had an exciting day, downgrading HSB preferreds as well as a few other important names:

Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.

S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd. (1398), giving all three lenders higher grades than most big U.S. banks.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 21bp, FixedResets down 9bp and DeemedRetractibles off 9bp. Volatility was good, volume was average.

Europe is considering another step towards effective nationalization of the banking system:

Banks in states roiled by Europe’s sovereign-debt crisis may be partly shielded from extra costs when they seek government guarantees, according to two people familiar with the situation.

The European Commission will publish rules on state aid for lenders that may dilute the effect of turmoil in the euro area on the fees that banks have to pay for guarantees on their loans and bonds, said the people who couldn’t be identified because the discussions aren’t public. Under the plans, the formula for setting the fees would reduce the impact of soaring debt- insurance costs for the country giving the backstops, one of the people said.

“Renewed tensions” in financial markets are forcing European Union regulators to extend into 2012 special state aid rules for banks that have allowed governments to inject billions of euros into the industry, said EU Competition Commissioner Joaquin Almunia this month. He said he was planning to “clarify and update the rules on pricing and other conditions.”

I’m not saying that’s necessarily the wrong response – I’m just saying that if it is the right response then banks are just another arm of government.

BRF.PR.A was confirmed at Pfd-3(high) by DBRS:

DBRS has today assigned an Issuer Rating of BBB (high) with a Stable trend to Brookfield Renewable Energy Partners L.P. (BREP) and a rating of BBB (high) with a Stable trend to the Senior Unsecured Debentures and Notes (the Notes) of BRP Finance ULC (BRPF). DBRS has also confirmed the Pfd-3 (high) rating with a Stable trend of Class A Preference Shares, Series 1 (the Prefs) of Brookfield Renewable Power Preferred Equity Inc. (BRPP). The ratings of the Notes of BRPF and the Prefs of BRPP are based on guarantees of the parent company, BREP, and its operating subsidiaries. In addition, the rating on the Senior Unsecured Debentures and Notes of Brookfield Renewable Power Inc. (BRPI) and the Issuer Rating and Income Fund rating of Brookfield Renewable Power Fund (the Fund) have been discontinued. These actions resolve the Under Review with Developing Implications assigned to the ratings of BRPI and the Fund on September 13, 2011.

These rating actions follow the closing of the anticipated business combination (the Transaction) today in which in BREP acquired all of the units of the Fund and the equity interests in all of BRPI’s U.S., Brazilian and Canadian power assets not already owned by the Fund. The Transaction and the expected rating outcomes were described in more detail in the DBRS press release dated September 13, 2011.

It was a mixed, uneventful day for the Canadian preferred share market, with PerpetualDiscounts losing 8bp, FixedResets down 5bp and DeemedRetractibles gaining 4bp. Volatility was negligible; volume was average.

In today’s cheerful European news, Italy got whacked at a bill auction:

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The euro fell to a seven-week low.

The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the debt, almost twice the 3.535 percent a month ago and the highest since August 1997. Italy’s two-year bonds yielded a euro-era record 7.83 percent, almost 50 basis points more than 10-year notes.

The euro extended declines, shedding 0.9 percent to $1.3213, the lowest since Oct. 3. Italy’s FTSE MIB index was the biggest decliner among European benchmarks, shedding 1.3 percent at 3 p.m. in Rome. Banks tumbled with Banca Monte Paschi di Siena SpA (BMPS) dropping 3.9 percent.

S&P downgraded Belgium to AA:

Belgium’s credit rating was cut one step to AA by Standard & Poor’s, which said bank guarantees, lack of policy consensus and slowing growth will make it difficult to reduce the euro region’s fifth-highest debt load.

The rating was lowered from AA+, with a negative outlook, London-based S&P said yesterday in a statement. The action by S&P is the first downgrade for Belgium in almost 13 years and puts its credit ranking on a par with the S&P local-currency ratings of the Czech Republic, Kuwait and Chile.

Belgium’s borrowing costs have surged to the highest level in 11 years in the past two months after the nation’s government agreed to buy Dexia SA’s Belgian bank unit and guarantee part of the crisis-hit lender’s liabilities for 10 years. Investors continued a selloff in Belgian bonds after six-party coalition talks ran aground this week as Liberals and Socialists clashed over how to cut the budget deficit.

TransCanada Corporation and its subsidiary TransCanada Pipelines Ltd., issuers of TRP.PR.A, TRP.PR.B, TRP.PR.C, TCA.PR.X and TCA.PR.Y were confirmed at Pfd-2(low) by DBRS:

DBRS has confirmed the ratings of TransCanada PipeLines Limited (TCPL or the Company) as listed below. DBRS has also confirmed the rating of the Preferred Shares of TransCanada Corporation (TCC) at Pfd-2 (low). The rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL.
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The confirmation reflects the Company’s continued predictable cash flow from its regulated pipelines, which accounted for over 70% of consolidated EBITDA (for the first nine months (9M) of 2011). Pipeline EBITDA is supported by stable earnings that are mostly on a cost-of-service basis and/or contracted, and by incremental earnings contributed by newly constructed pipelines The remaining 30% of EBITDA is mostly contributed by power generation assets (60% in Canada and 40% in the United States). Although EBITDA from power generation is less predictable than the pipeline business, a sizable share of the power output is protected by long-term contracts with creditworthy parties.
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Capex over the next two years (excluding the Keystone XL project) is likely to be much lower than the $3.6 billion level of the 12 months ending September 30, 2011. DBRS expects free cash flow to be relatively neutral until the significant capex on Keystone XL or another large project is well underway. As a result, debt levels are expected to remain stable or decrease slightly over the medium term. Combined with higher cash flow expected from newly completed pipeline projects, DBRS expects TCPL’s credit metrics to improve modestly and remain well within the current rating category.

EMA.PR.A was confirmed at Pfd-3(high) by DBRS:

DBRS has today confirmed the Medium-Term Notes and Preferred Shares – Cumulative ratings of Emera Inc. (Emera or the Company) at BBB (high) and Pfd-3 (high), respectively, with Stable trends, based on the strong earnings and cash flows generated by its regulated operations and on Emera’s, reasonable non-consolidated financial profile. The ratings also reflect increasing diversification through the ownership of regulated utilities in different jurisdictions, which reduces dependence on earnings and cash flows from any one entity and reduces volatility of earnings. However, Nova Scotia Power Inc. (NSPI) continues to account for the majority (approximately 70%) of Emera’s consolidated EBIT.

NSI.PR.D was confirmed at Pfd-2(low) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of Nova Scotia Power Inc. (NSPI or the Company) at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The ratings reflect stable and predictable regulated cash flows generated by the Company’s regulated monopolistic operations, diverse customer base and a supportive regulatory environment.

INE.PR.A was confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed the Issuer Rating of BBB (low) and the Preferred Shares rating of Pfd-3 (low) of Innergex Renewable Energy Inc. (Innergex or the Company). Both ratings have Stable trends. The ratings reflect the strength of the Company’s high-quality, low-cost renewable power generating assets, operating under long-term off-take contracts with highly-rated counterparties, and its consistent execution in developing and constructing new generating assets.
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Consolidated credit metrics are expected to remain weak for the rating category through the medium term, with EBITDA-to-interest in the 2.3 times (x) to 2.5x range and cash flow-to-debt in the 5% to 8% range. DBRS expects future modest improvement in coverage metrics as assets under construction are completed and enter service. Consolidated debt-to-capital, currently 63%, is expected to increase modestly over the next several years and peak in 2013 to 2014 until new construction assets begin to operate. Most of the consolidated debt (82%) is project-level debt and non-recourse to the Company.
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Business risk factors are low for the rating category. Innergex’s competitive position, asset composition and contractual position are all strong for the BBB (low) rating. Asset diversification and operational expertise also support the investment-grade quality assessment. In addition, the focus on renewable assets minimizes exposure to environmental regulation and is positive for the rating. The Company’s low business risk profile mitigates weaker financial credit metrics. Renewable resources are variable, reducing energy production stability and related cash flows. However, this risk is mainly offset by the geographic diversity of the generating portfolio. Also, the Company has cash-funded reserves at the project level (typically six months of debt service) to smooth variability in cash flows from wind/hydrology resources.