PrefBlog

The Europeans are tying themselves in knots while hairsplitting over Greece:

European Union leaders pledged to stabilize the euro-area economy, vowing to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week.
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Leaders of Europe’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.

An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.

To make the rollover voluntary, talks with Greek bondholders must be held on a country-by-country basis, not organized from Brussels, an EU official told reporters yesterday. The EU wants national central banks and finance ministries to speak to financial institutions in their countries, the official said.

“We don’t see any way that investors are going to come out being paid on time and in full,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania.

Voluntarily agree to an exchange or there will be a coercive exchange! It would be laughable if it wasn’t so disgusting. Moral suasion from the central banks and finance ministries, eh? I bet that helps a lot when you call your bond guy looking for a bid; I bet that’s a really thin market.

Surprise! The banks don’t like being the voluntary piggy-banks of the state:

German Finance Ministry officials rebuffed a bid by bondholders for a state guarantee of new Greek securities as Chancellor Angela Merkel’s government jostled with creditors over their share of a second rescue for Greece.

German banks and insurers including Deutsche Bank AG (DBK) and Allianz SE (ALV) signaled a willingness to roll over maturing Greek debt if governments offer incentives such as guarantees, said five people with knowledge of the talks. The Finance Ministry sees guarantees as a non-starter because they would undermine the aim of relieving the burden on taxpayers, a government official said.

There are mutterings about another domino:

Russia may face a debt crisis similar to the one gripping Greece by 2030 unless the government reduces spending, said Sergei Ulatov, the resident World Bank economist in Moscow.

“By 2030 the debt level would be unsustainable like in Greece” if nothing changes, Ulatov said in an interview during the Russia and CIS Capital Markets Forum organized by Euromoney in London today. “Right now, we are mostly helped by oil prices and not by a very prudent macroeconomic policy.”

But the first domino’s quite enough:

With default looking ever more likely, the great fear is that a major Greek credit event could imperil some large European banks, given the substantial cross-border sovereign debt held in the eurozone’s biggest economies.

“If there were a failure to resolve that situation it would pose threats to the European financial system, the global financial system, and to European political unity I would conjecture as well,” Federal Reserve chairman Ben Bernanke said Wednesday, underlining the exposure of European money market funds to Greek debt.

I suspect that the Europeans will treat their zombie banks the same way they treated their zombie countries: not by ignoring the problem, but by changing the rules so that there is no problem.

Speaking of dominos and zombie banks…:

Italian banks slumped in Milan trading amid concern the European debt crisis may spread just as lenders face scrutiny from regulators over capital levels.

UniCredit SpA (UCG), Italy’s biggest bank, and Intesa Sanpaolo SpA (ISP), the second-largest, led lenders lower, tumbling as much as 8.9 percent and 7.2 percent respectively. Both stocks were briefly suspended after breaching limits on intraday swings. Italian 10-year bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999.
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Moody’s Investors Service said yesterday it may downgrade 13 Italian banks because they are vulnerable to a cut in the government’s credit rating. The firm had said last week it may cut the sovereign rating because the turmoil in Europe could drive the country’s borrowing costs higher.

Nobody is yet seriously worried about US Treasuries:

Two-year yields slipped one basis point to 0.33 percent today compared with a low of 0.31 percent in November. Ten-year yields lost 4 basis points to 2.87 percent today, the lowest since November.

Asssiduous Reader GL brought to my attention a speech by Mike Lazaridis titled The Killam Annual Lecture 2010:

I just want to ask people in the audience to answer a question for me. What would you say is your most prized possession? Have you ever thought about this? [someone in the audience yells out Blackberry] Yes, the Blackberry definitely could be up on that list but I would put something even higher . . . your education! How many people in this room could honestly say that if they thought about it their most prized possession would be their education?

On a slightly more paranoid note, I’ve always liked the point that an education is the one thing that “they” can never take away from you.

ISS backed the TMX-LSE deal:

Institutional Shareholder Services (ISS) instead threw its support behind TMX Group Inc. (X-T45.16-0.14-0.31%)’s proposed merger with London Stock Exchange Group Plc. The recommendation is important because ISS recommendations influence the votes of a number of institutional investors – though on it own, it will not likely be enough to tilt to balance in the LSE’s favour.
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But much of the cash to finance the Maple offer would be borrowed, using TMX’s balance sheet, a fact that both ISS and Glass Lewis, a smaller advisory firm, identified as a drawback. The two also found common ground on the risks that Maple’s proposal would not get past the Competition Bureau. Because ISS believes the barriers to getting this approval are higher than those that TSX-LSE must cross, it suggests shareholders support the LSE deal because it is a “bird in hand.”

In any other country, of course, a proposal to merge the #1 exchange with the #2 wouldn’t even get the time of day at the Competition Bureau – particularly given that places #3 through #37 are not awarded due to the small size of the also-rans. But this is Canada; bureaucrats and politicians have to think about where their next job’s going to come from, so it just means ‘higher barriers’.

However, the ISS endorsement is, I believe, more important that the Globe story makes out: there will be a lot of firms, particularly those with index funds, who will be very heavily influenced by these third party recommendations.

How much did Paulson lose on Sino-Forest? It depends on how you count:

Paulson & Co. held 31 million shares of Sino-Forest in May, or 12.5 percent of outstanding stock, the firm said in a letter to clients. It had sold the entire stake as of June 17. The net realized loss on the investment since Paulson started buying Sino-Forest in 2007 was C$106 million, according to the letter.
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Sino-Forest’s shares have dropped 82 percent since June 2, when Carson Block’s Muddy Waters LLC said the company overstated its timber holdings. Sino-Forest has denied the allegations. Paulson’s fund had C$562 million in mark-to-market losses since Dec. 31 on the investment, the firm said in the letter.

It must be fun doing business in Illinois:

In Illinois, you’re never too big or too small to get stiffed by the state, which is $4 billion behind in its bills.
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While states periodically fall behind in paying Medicaid providers or, in the case of California, rely on bank loans and IOUs, the Illinois backlog has been growing for three years. It’s forcing some vendors to fire workers, cut services and, if they can, obtain loans and lines of credit to keep their businesses going while the state takes months to pay.
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“These are small businesses owed $1,100 to $1,500 and waiting six to nine months to get paid,” said Duane Marsh, executive director of the Illinois Funeral Directors Association. “It isn’t chump change.”

Delayed payments are also affecting hospitals, universities and public-school districts.

S&P has put Gaz Metro on watch-negative:

• •Quebec energy company Gaz Metro Inc. (GMI) has announced an offer to acquire Central Vermont Public Service Corp. (CVPS) for nearly US$500 million.
• •As a result, Standard & Poor’s is placing its ratings on GMI and subsidiary Gaz Metro L.P., including its ‘A-‘ long-term corporate credit and ‘A’ secured debt ratings, on CreditWatch with negative implications.
• •GMI’s offer includes the assumption of US$230 million of CVPS’s debt.•We plan to resolve the CreditWatch in a timely manner after further assessment of this deal and discussions with the company.

What happened to Yellow this week?

It was a relatively quiet day on the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets gaining 2bp and DeemedRetractibles losing 10bp. Volatility was minimal. Volume was anemic.

Moody’s will be making adjustments to some debt ratings:

A landmark Ontario court ruling bolstering the rights of pension plan members in bankruptcy cases could have an impact on credit ratings for companies with underfunded pension plans, according to a new report by debt rating agency Moody’s Investors Services Inc.

Moody’s said a review of 84 Canadian industrial companies it rates found two companies — Air Canada (AC.B-T2.250.073.21%) and Essar Steel Algoma Inc. — whose debt might be vulnerable to downgrade if the Ontario court decision is upheld by the Supreme Court of Canada. The report said the impact would likely be limited and would affect ratings of specific debt instruments rather than a company’s overall credit rating.
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“The ruling does not change how we measure debt and other liabilities, but it does change the priority of claim and the relative ranking of liabilities, which is relevant when assessing individual debt-instrument ratings,” said Bill Wolfe, Moody’s vice-president and senior credit officer.

“On this basis, we expect that only instrument-level ratings will be affected by the ruling.”
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Moody’s said it will not change any ratings until there is a decision from the Supreme Court and it is clear there is a final ruling in the case.

Presumably it is Loss Given Default that will be affected more than Probability of Default. The effect of the ruling appears to be similar to the intent of Bill C-501.

Allied Irish has defaulted in the view of DBRS:

DBRS Inc. (DBRS) today has downgraded the ratings of certain subordinated debt issued by Allied Irish Banks p.l.c. (AIB or the Group) to “D” from “C”. Today’s downgrade follows the execution of the Group’s note purchase offer.

Almost all of these instruments have been extinguished. The default status for the purchased and now-extinguished notes reflect DBRS’s view that bondholders were offered limited options, which is considered a default under DBRS policy, as discussed in DBRS’s press release dated 19 May 2011.

For AIB’s GBP 500 million Dated Subordinated Debt due 2025 and its EUR 500 million Dated Subordinated Debt due 2017, which are still outstanding due to the lack of consent for a clean up call, DBRS has downgraded their ratings to ‘D’. The downgrade reflects DBRS’s expectations that the interest payments of these outstanding subordinated instruments will be halted on the next payment date, as allowed by the Irish High Court. Further, the downgrade considers the extension of the final maturity dates, which are now extended to 2035. Given that bondholders are unlikely to receive interest as agreed upon and that the expected maturity has been extended, DBRS views these actions as disadvantageous to bondholders, which is considered a default under DBRS policy.

However, the rating of AIB’s GBP 368.253 million Dated Subordinated Debt due 2019, which is still outstanding, is unchanged at ‘C’, Under Review with Negative Implications. This rating considers that these notes have not yet been amended by AIB pursuant to the Subordinated Liabilities Order from the Irish High Court as a challenge in respect to these notes is ongoing before this Court.

S&P put Encana on Outlook-Negative:

• •On June 21, 2011, Encana Corp. announced that it had ended its C$5.4 billion Cutbank Ridge joint venture negotiations with PetroChina International Investment Co.
• •As a result, Standard & Poor’s is revising its outlook on Encana to negative from stable, and affirming its ‘BBB+’ long-term corporate credit and senior unsecured debt ratings on the company.
• •We are also lowering our Canada scale commercial paper rating on Encana to ‘A-2’ from ‘A-1(Low)’.
• •The negative outlook reflects our view that Encana’s adjusted debt to EBITDAX will remain above 2x through 2012, given weak natural gas prices and the company’s high capital expenditure plans, which we expect to outspend operating cash flow generated.

It was a mixed down day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets of 11bp and DeemedRetractibles up 1bp. Volatility was muted; volume was quite good. Scotia had a good day..

Jim Kelsoe, proud portfolio manager of the worst bond fund in the history of the universe (so far), was last mentioned on PrefBlog on April 7, 2010. Now he’s been barred from the industry:

According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.

Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.

The Fed is going to maintain an easy monetary policy:

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The TMX-LSE deal has been sweetened:

A week before the London Stock Exchange and TMX Group Inc. ask shareholders to bless their planned marriage, the pair sweetened the pot Wednesday with a $4 per share special dividend for TMX shareholders.

London exchange shareholders will also receive a special dividend of 84.1 pence per ordinary share, payable on closing.

In the face of a rival hostile bid from Maple Group, a consortium of Canadian financial firms, the exchange partners said they also intend to increase the regular post-merger dividend “to be consistent with the [higher] current regular dividend of TMX Group.”

Here’s an interesting legal point – I know that some will misconstrue my interest and I’ll get into all kinds of trouble about this, but what the hell – regarding Galliano’s anti-semitic rant:

Under sentencing rules for hate speech, Galliano faces a maximum 22,500-euro ($32,500) fine and six months in prison if found guilty. His lawyer, Aurelien Hamelle, has said similar cases “most often” result in fines rather than jail time.

Geraldine Bloch, who filed a complaint over the February incident, testified that Jewish “was one of the terms said the most” in Galliano’s slurs against her. “I don’t know if he was drunk. He was a bit bizarre. He sweated a lot.”

Galliano’s addictions can’t excuse his statements, Eric Zerbib, a lawyer for LICRA, an international organization opposed to racism and anti-Semitism, said before today’s testimony.

It doesn’t explain and it doesn’t excuse anything,” said Zerbib. “In vino, veritas. In wine, the truth. Wine has a liberating effect which allows one to know an individual’s real personality, and given that the deeds were repeated several times, thus we know John Galliano’s personality.”

OK, so I don’t know the law here, but it’s rather an interesting point: Will Galliano be in trouble for having a shitty personality (which is exposed by drunkenness, yay! Or he may simply have reached in to the bag of tricks for the most offensive things he could think of.) or for expressing his personality (in which case drunkenness may be considered a mitigating factor)?

It was a good day on the Canadian preferred share market with PerpetualDiscounts up 15bp, FixedResets winning 11bp and DeemedRetractibles gaining 13bp. Volatility was up a bit. Volume was very good.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.25% (!) so the pre-tax interest equivalent spread is now about 195bp, a significant widening from the 185bp reported on June 15 as yields have gone in opposite directions.