PrefBlog

Europeans want a rating agency that follows political instructions:

Europe’s leaders are accusing the world’s largest credit-rating agencies of bias in assessing the debt of troubled countries, renewing calls for the creation of a European rating agency.

The complaints were sparked after Moody’s downgraded Portugal by four notches Tuesday to “junk” status, and Standard & Poor’s warned Monday it would consider it a “selective default” if banks and insurers roll over about $42-billion of Greek debt – a move that could derail efforts to restructure Greece’s debt.

German Finance Minister Wolfgang Schaeuble said Wednesday he was surprised by the decision to downgrade Portugal, saying he “can’t decipher” the basis for the evaluation.

“We need to break the oligopoly of rating agencies,” he told reporters in Berlin.

Meanwhile Satyajit Das has a nice piece in the Globe, unsuccessfully attempting to make the numbers add up:

Under the sketchy proposal, for every €100 of maturing bonds, the banks will subscribe to new 30-year securities, but only equal to €70 (70 per cent). The banks will keep €50 and invest the other €20 in 30-year high-quality zero-coupon bonds (via a special purpose vehicle) to secure repayment of the new bonds. The new 30-year Greek debt will carry an interest rate of 5.5 per cent per annum with a bonus element linked to Greek growth of up to an additional 2.5 per cent.

Of the €340-billion in outstanding Greek bonds, banks hold 27 per cent, institutional and retail investors hold 43 per cent and the International Monetary Fund and European Central Bank hold 30 per cent. It is not clear whether non-bank investors are willing to participate in the arrangements. The ECB has previously resisted any debt restructuring, including maturity extension.

The French plan assumes holders of bonds would agree to roll over 50 per cent of their holdings to provide Greece net funding of €30-billion ($41-billion). But under the French banking federation’s own figures, this would be impossible unless all the €60.5-billion (excluding central bank holdings) maturing by mid-2014 is rolled over. This is inconsistent with the proposal’s assumption of investor acceptance of 80 per cent.
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Greece must find €50 for every €100 debt exchanged under the proposal. Given it has no access to commercial funding, this would have to come from the EU, IMF, EFSF or ECB.

Greece’s cost would be between 7.7 per cent and 11.20 per cent per annum, as it only receives €50 of the €70 face value of the new bonds. Assuming the remaining funding is at 6 per cent, then Greece’s blended rate for every €100 of finance would be 6.85-8.60 per cent per annum, compared to the 7-8 per cent per annum considered sustainable by markets.

Most importantly, the overall level of debt, considered unsustainable, of Greece would remain unchanged.

Speaking of numbers that don’t add up, there’s more Sino-Forest related news:

John Paulson lost 11 percent in his biggest fund in June, according to an investor, as the firm sold off Sino-Forest Corp. (TRE) after a short-seller’s allegations.

The drop left Paulson’s Advantage Plus Fund, which uses strategies designed to profit from corporate events such as takeovers and bankruptcies, down 18 percent this year, said the client, who asked not to be named because the information is private. The fund’s gold-denominated share class declined 11 percent in June and 12 percent in 2011.

The crows are feasting on Nortel’s unexpectedly fat corpse:

Two and half years on, the breakup of Nortel Networks Corp. is all but complete save for one last but significant obstacle — how to allocate an unexpectedly large pile of cash of more than US$10-billion.

That job falls on the shoulders of Ontario Chief Justice Warren Winkler, who Wednesday was appointed mediator for all outstanding claims, which could swell in light of the colossal sum raised through last week’s US$4.5-billion patent sale to a consortium of technology giants.
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Unsecured holders of Nortel’s suddenly hot bonds will also expect to be paid out at 100¢ on the dollar. Bonds maturing in 2013 and 2016 carry coupons of more 10% and are trading well above par. Each class of bond is up more than 650% since hitting bottom in February 2009.

JPMorgan was naughty:

Typically, when investors purchase municipal securities, the municipalities temporarily invest the proceeds of the sales in municipal reinvestment products until the money is used for the intended purposes. Under relevant Internal Revenue Service (IRS) regulations, the proceeds of tax-exempt municipal securities generally must be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

The SEC alleges that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations and omissions undermined the competitive bidding process, affected the prices that municipalities paid for reinvestment products, and deprived certain municipalities of a conclusive presumption that the reinvestment instruments had been purchased at fair market value. JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The employees involved in the alleged misconduct are no longer with the company.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, JPMS, acting as the agent for its affiliated commercial bank, JPMorgan Chase Bank, N.A., at times won bids because it obtained information from the bidding agents about competing bids, a practice known as “last looks.” In other instances, it won bids set up in advance for JPMS to win (“set-ups”) because the bidding agent deliberately obtained non-winning bids from other providers, and it facilitated bids rigged for others to win by deliberately submitting non-winning bids.

Dan Hallett has another nice piece in the Globe, How rising rates may affect bond portfolios.

RBC may be going into the ETF business:

Royal Bank of Canada (RY-T54.57-0.24-0.44%), which owns Canada’s largest mutual fund player, is the second domestic bank to jump into the fast-growing exchange traded fund (ETF) business.

Its fund arm, RBC Global Asset Management, has filed a preliminary prospectus to list eight, target-date maturity corporate bond ETFs on the Toronto Stock Exchange. These ETFs wind up in a specified year ranging from 2013 to 2020, and the cash is distributed to unitholders.

Jonathan Chevreau comments:

The entry of Canada’s largest bank, RBC, into exchange-traded funds is bound to legitimize the fast-growing ETF industry, just as the banks made mutual funds a household name in the late 1980s.

Yes, sir, that’s what ETFs need! Legitimacy!

Canada nestled deeper into Israel’s pocket:

The committee recommends that police forces across Canada be better trained to deal with anti-Semitism; that universities host conferences to counter events such as “Israeli Apartheid Week”; and that there should be a clear definition of what anti-Semitism entails.
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The CPCCA countered that it did not want to limit reasonable criticism of Israel. But it also explained that “anti-Semitism is being manifested in a manner which has never been dealt with before. … This problem is especially prevalent on campuses where Jewish students are ridiculed and intimidated for any deemed support for the ‘Nazi’ and ‘apartheid’ State of Israel, which is claimed to have no right to exist.”

Don’t engage in vigorous debate! Not in Canada! The people with whom you vehemently disagree might be fwightened! Some of us believe that criticism of Israel, no matter how vociferous and ignorant, is not anti-Semitism – but perhaps the CPCCA considers that at anti-Semitic viewpoint. At least we can all be joyful that the CPCCA does not want to limit what it deems to be reasonable criticism of Israel. Golly, thanks guys!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets winning 10bp, and DeemedRetractibles up 1bp. Volatility was good. Volume was fair.

Portugal’s downgrade is contagious:

Portugal’s downgrade to junk may stifle corporate bond sales in Europe, killing off a mini- revival in issuance spurred by investor optimism about Greece’s efforts to avoid default.

“The primary window has almost slammed shut just as spectacularly as it had flung open,” said Suki Mann, senior credit strategist at Societe Generale SA in London.

Notes sold by Enel SpA (ENEL), Italy’s largest power operator, and Fiat SpA (F) fell in their first day of trading today, while two issuers pulled deals. Enel and Fiat led 5.4 billion euros ($7.7 billion) of company bond sales in Europe this week, the biggest round of issuance by non-financial borrowers since May, according to data compiled by Bloomberg.

Ireland may be next!

Ireland’s credit rating may be cut to junk by Moody’s Investors Service after Portugal yesterday lost its investment grade rating, according to analysts.

Moody, which slashed Portugal to Ba2 from Baa1, in April lowered Ireland’s credit rating to the lowest investment grade Baa3 and left country’s outlook on negative.

The ratings company cut Portugal’s rating in part because the nation may not be able to return to debt markets in the second half of 2013. Ireland has been locked out of markets since September, and the yield on 10-year Irish bonds climbed to 12.44 percent today, a euro-area record for the country that agreed to a rescue package with the European Union and International Monetary Fund last November.

Synthetic ETFs are really getting a working-over:

U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the proper tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

The Serious Fraud Office, which prosecutes white collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England’s Financial Policy Committee have warned of a lack of transparency in the ETF market.
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“From the investor’s point of view, I think there are question marks over whether synthetic ETFs really are appropriate for all types of the retail marketplace,” FSA Chief Executive Officer Hector Sants said June 24.

Concerns about synthetic ETFs were last discussed on PrefBlog when the BoE June 2011 Financial Stability Report focussed on them.

It was a mixed day for the Canadian preferred share market, as PerpetualDiscounts gained 20bp, FixedResets were up 4bp and DeemedRetractibles lost 8bp. Volatility was quite good. Volume was average; Nesbitt scored a shut-out on the highlights table.

PerpetualDiscounts now yield 5.44%, equivalent to 7.07% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.35% so the pre-tax interest-equivalent spread is now about 175bp, a narrowing from the 185bp reported on June 29 due to a decline of PerpetualDiscount yields.

FixedResets and new issuers got some ink in the Globe:

BCE Inc. (BCE-T38.220.230.61%), which has long history with these shares, is one of the latest firms to tap into this demand, closing a $345-million offering on Tuesday. These shares pay a fixed yield of 4.15 per cent for the first five years, and then investors have the choice to either take a rate equal to the Government of Canada 5-year yield plus 1.88 per cent, or a floating three-month T-bill rate plus 1.88 per cent.

Yet BCE isn’t alone. Intact Financial also just sold $225-million of these securities, as did Canaccord Financial. These two issues were a bit more surprising because both deals were the first time these firms offered this type of security.

Still, it makes a lot of sense. Much like Intact and Canaccord, firms such as GMP Capital and Bell Alliant also recently sold their first issue of rate reset preferred shares. If sales continue to be strong, don’t be surprised if more first-time issuers jump on the bandwagon.

Moody’s says Portugal is junk after a four-notch downgrade:

Moody’s Investors Service on Tuesday cut Portugal’s credit rating by four levels to Ba2, two notches into junk territory, saying there is great risk the country will need a second round of official financing before it can return to capital markets.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets winning 15bp and DeemedRetractibles gaining 5bp. Volatility was muted. Volume was average and dominated by FixedResets – perhaps due to portfolio reshuffling with the closing of the BCE.PR.K new issue.

Nortel’s carcass is worth big bucks:

Apple Inc. (AAPL) joined with rivals Microsoft Corp. (MSFT) and Research in Motion Ltd. (RIM) to outbid Google Inc. (GOOG) for a patent portfolio from Nortel Networks Corp. and gain rights to technologies for mobile phones and tablet computers.

The group, which also includes Sony Corp. (6758), Ericsson AB and EMC Corp., agreed to pay $4.5 billion in cash for the assets, Ontario-based Nortel said in a statement. The companies aim to complete the sale this quarter pending approval from U.S. and Canadian courts, it said.

The purchase will give Apple, RIM and their bidding partners control over more than 6,000 patents and applications that cover wireless and Internet technologies. The winning offer came after several rounds of bidding and was five times the $900 million Google had offered before the auction for Nortel’s remaining intellectual property.
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Nortel, which filed for bankruptcy in 2009, fetched more for the patents than the $3 billion it had previously raised by selling almost all its businesses. RIM, maker of the BlackBerry smartphone, will pay about $770 million for its share of the patents, the Waterloo, Ontario-based company said in a statement. Ericsson will pay $340 million, the Stockholm-based networking-equipment maker said. Steve Dowling, a spokesman for Apple, declined to comment beyond the Nortel statement.

The Greek problem has been papered over – at least for now:

The euro area approved its share of a 12 billion-euro ($17.4 billion) aid payment for Greece and pledged to complete work in the coming weeks on a second rescue package for the cash-strapped nation to prevent a default and contagion.

Finance ministers agreed to disburse 8.7 billion euros of loans under last year’s 110 billion-euro bailout, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament. The International Monetary Fund is due to provide the rest of the July aid installment, the fifth under the 2010 package.

The spotlight now turns to a second bailout to which banks and insurers plan to contribute following German demands for taxpayer relief. Euro-area governments and investors will provide 70 percent of new aid that may total as much as 85 billion euros, with the IMF offering the rest, Thomas Wieser, an Austrian Finance Ministry official, said on June 30.

S&P will likely label a Greek term extension as a selective default:

In summary, the growing risk that the Hellenic Republic might engage in a distressed debt restructuring was one of the reasons we lowered its rating on June 13 (see, “Long-term Sovereign Rating On Greece Cut To ‘CCC’; Outlook
Negative”). While we would likely view the FBF proposal, if it proceeds in its current form, as an effective default, we recognize that it is just one of a number of proposals attempting to address the Greek government’s 2011-2014 financing needs and the sustainability of its future debt burden. We
understand that the FBF proposal may change, and it is possible that it could take a form that results in a different rating outcome. Regardless of whether the current FBF proposal is implemented, however, we continue to believe the Hellenic Republic’s uncertain ability to implement the revised EU/IMF program
is a key risk weighing on its credit standing.

This has European shorts in a knot:

That may leave the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

“It sends all the officials and banks back to drawing board to think something new,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The ECB is saying it won’t accept debt in a default. Someone needs to give in — either Germany or the ratings agencies or the ECB. One of three will have to compromise.”

Despite all this, Greek notes had a good day:

Greek two-year note yield dropped below 26 percent for the first time since June 14.
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Greek two-year yields slid 73 points to 26.11 percent, at one point dipping to 25.76 percent. The cost of insuring Greek debt against default rose four basis points to 1,865, signaling 80 percent odds the country will miss a bond payment in five years. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed four basis points to 222. The euro slipped 0.1 percent against the dollar and the yen.

There’s a new chapter in the Sino-Forest saga:

Sino-Forest Corp. (TRE), the Chinese tree- plantation operator accused by a short seller of overstating timber holdings, climbed in Toronto after Wellington Management Co. said it owned 11.5 percent of the company.

Sino-Forest rose as much as 56 percent after the Boston- based investment firm said in a regulatory filing it held 28.3 million shares as of June 30. Wellington, which manages $663 billion, held 79,700 Sino-Forest shares, or 0.03 percent, as of Dec. 31, according to data compiled by Bloomberg.

I just finished reading The Taste of Conquest by Michael Krondl. Excellent, and a worthy companion to William Bernstein’s A Splendid Exchange.

After our beloved mayor turned down a chance to say hello to umpteen thousand tourists with deep pockets, another councillor suggested cutting off funds for the city’s #2 tourist event – even if it means #1 will become collateral damage. Meanwhile, crappy pseudo-festivals organized by the well-connected get megabucks. Just what exactly do we need to do in this city to get a competent, pro-business administration?

The month – and the quarter – started off on an upbeat for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets up 11bp and DeemedRetractibeswinning 21bp. Decent volatility, volume was average. RBC had a nice day.