PrefBlog

There has been an interesting paper published by John (Xuefeng) Jiang, Mary Harris Stanford and Yuan Xie titled Does it Matter Who Pays for Bond Ratings? Historical Evidence:

We test whether Standard and Poor’s (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody’s rating for the same bond as a benchmark, we find that when S&P charges investors and Moody’s charges issuers, S&P’s ratings are lower than Moody’s. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody’s. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.

It was a mildly good day for the Canadian preferred share market, with PerpetualDiscounts up 2bp, FixedResets gaining 4bp and DeemedRetractibles winning 10bp. There were only four entries on the Performance Highlights table, but they were all winners. Volume was extremely low.

Another synthetic ETF has closed:

Scotia Managed Companies Administration Inc. is pleased to announce that Moneda LatAm Corporate Bond Fund (the “Fund”) has completed an initial public offering (the “Offering”) of 4,559,824 Class A Units and 440,890 Class U Units (collectively, the “Units”) of the Fund at a price of Cdn.$10.00 per Class A Unit and U.S.$10.00 per Class U Unit for gross proceeds of Cdn.$45,598,240 and U.S.$4,408,900, respectively. The Class A Units of the Fund are listed and posted for trading on the Toronto Stock Exchange under the symbol “MLD.UN.” The Class U Units will not be listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes.

The Fund is a closed-end investment fund established as a trust under the laws of the Province of Ontario. The Fund has been established to provide holders of Units (the ‘‘Unitholders’’) with investment exposure to a diversified portfolio of fixed income securities of companies located in, or with significant operations in, Latin America, primarily denominated in U.S. dollars. The Fund’s investment objectives are to: (i) preserve and enhance the net asset value of the Fund; and (ii) provide Unitholders with quarterly tax-advantaged distributions consisting primarily of returns of capital, in each case through exposure to the total return performance of the Moneda Deuda Latinoamericana Fondo de Inversion, a U.S.$856 million (as at June 30, 2011) Chilean listed investment fund established in 2000 which is actively managed by Moneda S.A. Administradora de Fondos de Inversion (the “Portfolio Manager”). Moneda Asset Management S.A., the parent company of the Portfolio Manager, was established in 1993 and is a leading independent asset manager headquartered in Santiago, Chile.

Sorry about the lateness, folks! My schedule on the 16th and 17th is a little peculiar.

PerpetualDiscounts now yield 5.23%, equivalent to 6.80% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.75%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 205bp.

There was lots of fun with European bonds today:

German two-year rates dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10- year bonds from France, Belgium, Spain and Austria instead of bunds all climbed to euro-era records. Italy’s 10-year yield rose above 7 percent as prime minister-in-waiting Mario Monti wrapped up talks on forming a new government. Spain and Belgium sold less than the maximum target of bills at auctions today as financing costs increased.

Italy’s 10-year yield climbed 37 basis points, or 0.37 percentage point, to 7.07 percent at 5 p.m. in London. It rose to a euro-era record 7.48 percent on Nov. 9. The 4.75 percent bond due September 2021 slid 2.285, or 22.85 euros per 1,000- euro face amount ($1,351), to 84.57.

The spread investors demand to hold 10-year French debt instead of German bunds widened 26 basis points, the most since the euro started in 1999, based on closing-market rates, to 190 basis points. It touched 191 basis points, also the most since the common currency was introduced. The yield on the 10-year bund fell one basis point to 1.77 percent, less than half France’s 3.67 percent rate.

Meanwhile, here’s a little colour to support my support for a Greek referendum:

One of the biggest uncertainties for Greek-Canadian business owners has been the disruption brought on by a series of strikes. Panagiotis Tsiriotakis imports olive oil from his family’s land in Crete, bottles it and sells it to Canadian retailers. He notes that every day, a different group goes on strike in Greece, from trucking to customs to the ports. “Then the ships don’t even go into port to collect it,” he said. “Nothing is stable right now.”

What used to take a few weeks to cross the oceans can now be up to two months. Inventories in his Toronto warehouse have dwindled and he’s worried he won’t be able to keep up with demand.

The travel business is also seeing disruptions. Aris Sideratos, founder and owner of Skyway Tours Ltd. in Toronto’s Greektown, said that demand for vacation packages in Greece has slid 30 per cent from last year and that some non-Greek tourists have avoided the country because they’re afraid of strikes and riots.

It will be just lovely if the Greek government organizes acceptance of the bail-out funds. But will the Greek populace be willing to aquiesce to the terms of repayment?

Sino-Forest got some good news:

The committee said in an interim report that it obtained information from Chinese forestry bureaus verifying 77 percent of Sino-Forest’s reported timber assets. It also said it confirmed the Mississauga, Ontario- and Hong Kong-based company’s cash balance.

While Sino-Forest has been suspended from trading since August, shares of its Greenheart Group Ltd. unit soared 93 percent yesterday in Hong Kong after publication of the report. Sino-Forest’s 10.25 percent bonds, which mature in 2014, gained 24.75 cents on the dollar to 62 cents as of 4:30 p.m. in Toronto yesterday, according to Trace, the bond price reporting system of the Financial Industry Regulatory. The 6.25 percent bonds due October 2017 rose as much as 27.45 cents to 60 cents.

Richard Fisher of the Dallas Fed made an important speech titled Taming the Too-Big-to-Fails: Will Dodd–Frank Be the Ticket or Is Lap-Band Surgery Required? (With Reference to Vinny Guadagnino, Andrew Haldane, Paul Volcker, John Milton, Tom Hoenig and Churchill’s ‘Terminological Inexactitude’) (clearly, Mr. Fisher takes great pleasure in titling his speeches):

return to Andrew Haldane of the Bank of England. Haldane makes an intriguing parallel between the financial system and epidemiological networks. Conventional capital requirements seek to equalize failure probabilities across institutions to a certain threshold, say 0.1 percent. But using a systemwide approach would result in a different calibration, if the objective were to set a firm’s capital requirements equal to the marginal cost of its failure to the system as a whole. Regulatory capital requirements would then be higher for banks posing the greatest risk to the system, which is what Dodd–Frank proposes, and what the current Basel III requirements are also considering.

To Haldane, this is a new approach in banking, but not in epidemiology where “focusing preventive action on ‘super-spreaders’ within the network to limit the potential for systemwide spread” is the norm. As Haldane emphasizes, “If anything, this same logic applies with even greater force in banking.”[17] To me, treating too-big-to-fail institutions as potential “super-spreaders” of financial germs has a great deal of appeal.
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Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.[26] As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.

Am I too radical? I think not. I find myself in good company―Paul Volcker, for example, advocates “reducing their size, curtailing their interconnectedness, or limiting their activities.”[27]

In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.

We shouldn’t just pay lip service to letting the discipline of the market work. Ideally, we should rely on market forces to work not only in good times, but also in times of difficulties. Ultimately, we should move to end too big to fail and the apparatus of bailouts and do so well before bankers lose their memory of the recent crisis and embark on another round of excessive risk taking. Only then will we have a financial system fit and proper for servicing an economy as dynamic as that of the United States.

Premier Charest stated today that single mums seeking to buy milk for their children are not represented by any government he has anything to do with:

There is now speculation the Canadian government might come under pressure to dismantle the system in negotiations for a trans-Pacific trade zone.

Not so fast, Mr. Charest said Tuesday.

He says supply management has not been on the table during ongoing Canada-European Union trade talks, nor should it be during the upcoming Trans Pacific Partnership negotiations.

He says the place to have a broad conversation about agriculture programs is at the global level, at the World Trade Organization. He said the same applies to other countries’ agriculture subsidies.

“The supply-management system is non-negotiable,” he told reporters, speaking about the trans-Pacific trade talks.
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Canadians pay two to three times more than world market prices for products like milk, butter, cheese and eggs, according to the Organization for Economic Co-operation and Development.

Let them drink Coke!

I think there must be something going on behind the scenes at Atlantic Power / CPI Preferred Equity with respect to the ratings on CZP.PR.A & CZP.PR.B. The takeover closed two weeks ago, after DBRS had warned of a massive downgrade … and nothing’s happening. Perhaps ATP is frantically trying to put some kind of deal together? We shall see!

It was a mildly downish day for the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets down 7bp and DeemedRetractibles losing 8bp. Volatility was mild. Volume was average.

Hungary may become a junk credit:

Hungary’s sovereign credit grade may be cut to junk this month after Standard & Poor’s Ratings Services placed the country’s lowest investment grade on “CreditWatch with negative implications.”

S&P is likely to make a decision this month on Hungary’s credit grade, currently at BBB-, the rating company said in a statement today. Fitch Ratings yesterday cut the outlook on Hungary’s lowest investment grade to negative from stable, joining S&P and Moody’s Investors

Milkfare has cost us yet another trade agreement:

“The [Trans Pacific Partnership] will boost our economies, lowering barriers to trade and investment, increasing exports, and creating more jobs for our people,” U.S. President Barack Obama said in announcing the new framework ahead of the start of the formal APEC leader summit in Hawaii on Saturday.

But that won’t be the case for Canada.

While Canada would like to be part of the Trans Pacific Partnership, it doesn’t agree with the cost of membership, particularly the suggestion that it needs to signal a willingness to abandon supply management policies, International Trade Minister Ed Fast said Saturday.

Yellow Media sold some assets:

Yellow Media Inc. (TSX: YLO) announces that it has sold the assets of LesPAC Inc. to Mediagrif Interactive Technologies Inc. for a purchase price of $72.5 million. The transaction is effective immediately.
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For the year ended December 31, 2010, LesPAC Inc. reported revenues of $12.7M.

Be nice if they could sell the whole damn company for six times revenue!

According to their credit agreement with the banks:

“Prepayment Trigger Event” means any disposition or dispositions of assets of the Restricted Entities in any fiscal year of the Borrower, the aggregate proceeds for which exceed $25,000,000 during such fiscal year.
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5.2 Mandatory Prepayments

On each occasion that a Prepayment Trigger Event occurs, the Borrower shall give written notice thereof to the Administrative Agent and shall, contemporaneously with the occurrence of such Prepayment Trigger Event, prepay outstanding credit granted to the Borrower under the Facilities in an amount equal to 100% of the Net Cash Proceeds. Section 2.11 shall be complied with in connection with any such prepayment. Other than any payments required pursuant to Section 2.11, there are no premiums, penalties or other additional payments associated with any mandatory prepayments under this Section 5.2. Amounts which are prepaid as aforesaid shall be applied firstly to the scheduled instalments under the NRT Facility (including the instalment due and payable on the Maturity Date) in inverse order of maturity and secondly to the Revolving Facility. In each case, any amounts which are prepaid as aforesaid may not be reborrowed.

It was a solid day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets up 10bp and DeemedRetractibles winning 15bp. Volatility was good. Volume was light, despite a few issues showing some big trades.