PrefBlog

OSFI’s revolving door revolved again, with the departure of the Assistant Croupier:

I am writing to announce the departure from OSFI of Mark White, Assistant Superintendent, Regulation Sector, effective October 31, 2011. Mark has accepted a position with a federally regulated financial institution and will assume his new role on November 1, 2011.

You can’t see the Sino-Forest for the trees:

Horsley, Chief Executive Officer Allen Chan, and director William Ardell held a 68-minute conference call with investors and analysts yesterday to refute assertions from Block’s Muddy Waters LLC that Sino-Forest overstated its timber holdings. Sino-Forest slumped 33 percent yesterday after the company’s earnings missed analysts’ estimates.

Paulson may have lost about C$515.5 million ($532.4 million) since June 1, the day before the Muddy Waters report on Sino-Forest was released.
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“Because Muddy Waters never approached the company before it issued the report, it came as a total surprise to us,” Chan said. “Had Muddy Waters approached us before the release of the report, definitely we would have had lots of opportunity to explain to them, to show them all the errors that they have made in the report.”

The company has established an independent committee to investigate Muddy Waters’ allegations and appointed PricewaterhouseCoopers LLP to assist. The probe won’t be finished for two to three months, slowing the pace of timberland acquisitions, Sino-Forest said yesterday in its earnings statement.

From the last two paragraphs, I’m not sure whether refuting the allegations is supposed to be easy or hard!

Time for some yellow journalism!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 15bp, FixedResets losing 1bp and DeemedRetractibles gaining 11bp. Volume was good.

Everything old is new again! Treasury STRIPS are popular:

Demand for zero-coupon bonds is rising so fast that Wall Street banks created $205.2 billion of them as of May, the most in three years and just $3.6 billion away from levels last seen at the beginning of 2000, according to the Treasury Department.
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Zero-coupon securities due in 30 years had their best and worst months in more than two decades during the last recession. The debt returned 26.7 percent in December 2008, a month after the consumer price index plunged 1.8 percent, the biggest drop in history, according to Bank of America Merrill Lynch index data. A month later, the securities lost 24 percent.

S&P downgrades Greece:

Greece had its credit rating cut three levels by Standard & Poor’s, which branded the nation with the world’s lowest debt grade and said a restructuring looks “increasingly likely.”

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement today. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

The downgrade follows Moody’s Investors Service’s decision this month to grade Greece only one level higher and may intensify pressure on European governments to stem the region’s sovereign-debt crisis. Credit-default swaps on Greece, Ireland and Portugal surged to records today on concern governments’ struggles to resolve the turmoil will threaten their ability to pay off their debts.

US housing remains nasty:

Southern California home prices fell 8.2 percent … as unemployment remained high and mortgages were hard to obtain, DataQuick said.

The median paid in the six-county region was $280,000, down from $305,000 a year earlier and unchanged from April, the San Diego-based data seller said today in a statement. Sales fell 17 percent from May 2010 to a total of 18,394 new and resale houses and condominiums, the 11th straight year-over-year decline.

DBRS confirmed SLF:

In recent years, the requirement for additional regulatory capital at its operating subsidiaries has resulted in an increase in the Company’s consolidated financial leverage as measured by the ratio of debt plus preferred shares to total capitalization. The Company is currently operating with this ratio at greater than 30%, which, while an increase from less than 25% which it reported five years ago, is no higher than its peers. Given the Company’s relative conservatism from a business risk perspective, DBRS believes that this level is still acceptable for the Company’s current ratings, especially given that several points of the recent increase in the debt ratio reflects the reduction in shareholders’ equity related to the $1.7 billion writedown in goodwill following the implementation of IFRS. However, since higher leverage combined with weaker earnings has resulted in lower expected fixed charge coverage ratio, the Company does not have a lot of excess financial flexibility. Fortunately, the Company has excellent sources of liquidity as represented by excess regulatory capital, a highly liquid asset portfolio and about $800 million in cash on hand at the holding company level, which is available to reduce financial leverage.

… but they downgraded the Bank of Ireland:

DBRS Inc. (DBRS) today has downgraded the ratings of all dated subordinated debt issued by The Governor and Company of the Bank of Ireland (Bank of Ireland) to “C” from CCC. Furthermore, DBRS has downgraded Bank of Ireland’s Primary Capital Notes to “C” from CCC (low), as well as the Perpetual Preferred Securities of various related entities to “C” from CC. Today’s downgrade follows the announcement by the Bank of Ireland that it has commenced an offer to exchange the aforementioned securities for cash or equity and a solicitation of consents in relation to the securities. Moreover, DBRS expects to downgrade the securities discussed above to “D” at completion of the buyback; as such, the securities remain Under Review with Negative Implications, where they were placed on 3 December 2010.

In DBRS’s view, the exchange offer, when completed, is tantamount to a default as defined by DBRS policy. DBRS views the proposed exchange offer as coercive as the offer affords investors in these instruments limited options. Should investors in these instruments reject the proposed offer, at a 80-90% discount if accepting the cash option, or a 60-80% discount if accepting the equity option, on the tendered securities, they risk receiving substantially less if the proposed consent amendments are ratified. Remaining investors in these instruments would then receive 0.001% of par value, should the consent to allow the “clean-up” of residual notes be accepted by tendering investors.

Mean Joe Green used to crash through offensive lines. Mean Joe Yellow offensively crashes through your portfolio.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts getting whacked for 30bp, FixedResets losing 5bp and DeemedRetractibles gaining 1bp. BAM and BAM-related issuers dominated the Performance table (BAM itself was ex-dividend today) and volume was actually quite good.

I find the US Municipal bond market of great interest, simply because the investor profile is so similar to that of Canadian preferred shares. I was recently looking for some estimates of holdings by investor group; now that I don’t need it any more, of course, I found it:

Citigroup Inc. analysts say there’s something missing from the Federal Reserve’s tally of the municipal-bond market’s size: more than $700 billion of the securities were bought directly by individual investors.

The Fed’s quarterly figures, released yesterday, put the market at $2.9 trillion, 37 percent of which the central bank says is owned by households. Citigroup’s analysts George Friedlander, Mikhail Foux and Vikram Rai say individuals play an even larger role, holding half of a $3.7 trillion market that has been whipsawed by speculation about municipal defaults that is now starting to ebb.

“The instability in the muni market in late 2010 was exacerbated by individual investors becoming overly concerned about the fiscal strength of state and local governments,” Rai said in an e-mail after Citigroup’s report on the market was published on June 3. “Unsurprisingly, as credit fears abated, it resulted in lower volatility and a rally in the tax-exempt and taxable market.”
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Citigroup’s analysts didn’t challenge the Federal Reserve’s data on holdings by institutional investors such as mutual funds and insurance companies, which can be gleaned from corporate filings and other outside data sources. Without similar information on households, the analysts say, the Fed had to guess.

By underestimating the market, they’ve also diminished the extent to which individuals dominate it, they said. Citigroup estimates individuals they held $1.8 trillion, or half, of the municipal bonds outstanding at the end of 2010, compared with about $1.1 trillion estimated by the Federal Reserve.

“We always believed that the influence of retail investors in the municipal market was understated,” Rai said.

The Federal Reserve said it’s looking into the discrepancy, said Susan Stawick, a spokeswoman.

S&P Discusses Some Observations On Canada’s Consultation Paper For A Proposed Legislative Regime For Covered Bonds:

• On May 11, 2011, the Canadian Department of Finance released a consultation paper on its proposed covered bond legislation.
• We believe that, in general, the introduction of specific covered bond legislation would be positive, and would likely provide further assurances for investors.
• However, we note that the proposed codification of an overcollateralization cap may limit an issuer’s ability to manage and support its covered bond program by increasing the level of collateral and may, under our current analytical approach, potentially constrain the ability of issuers to achieve or maintain the highest potential ratings.

DBRS also commented:

One particular area of concern for DBRS is the proposed cap of 10% on the amount of overcollateralization that will be permitted for a Canadian covered bond program. In the event that additional overcollateralization is necessary to maintain a AAA rating on the covered bonds that have been issued, the 10% cap on overcollateralization may adversely affect the ratings on the existing covered bonds. However, DBRS notes that all of the existing Canadian covered bond programs rated by DBRS to date currently have required overcollateralization amounts that are less than 10%. Another area of concern for DBRS is the proposal to standardize asset valuation, particularly if an issuer is not permitted to issue covered bonds outside of the legislative framework, as the proposed asset valuation method may not be consistent with what is currently used in the Canadian covered bond programs that have been rated by DBRS to date.

Fabulous Fab is going to trial:

Fabrice Tourre, the Goldman Sachs Group Inc. (GS) trader accused of misleading investors in a collateralized debt obligation, failed to get a suit brought by the U.S. Securities and Exchange Commission dismissed.

While U.S. District Judge Barbara Jones in Manhattan did narrow some of the claims against him in her decision today, she said the SEC met its burden that Tourre violated a securities law designed to prevent fraudulent sales of securities and should stand trial on that claim.

The SEC initially sued the London-based trader in April 2010, saying he defrauded investors by not disclosing that hedge fund Paulson & Co. had helped pick the underlying securities for a CDO as Abacus and planned to bet against them. After reaching a $550 million settlement with New York-based Goldman Sachs, the SEC filed a new claim against Tourre, saying he gave the company “substantial assistance” as it misled investors.
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Citing last year’s U.S. Supreme Court ruling in Morrison v. National Australia Bank, the judge threw out some claims involving Duesseldorf, Germany-based IKB Deutsche Industriebank AG, which allegedly lost almost all of its $150 million investment, and ABN Amro Bank NV, which assumed the credit risk associated with a portion of Abacus.
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Jones let the case proceed on a claim against Tourre that he “knowingly, recklessly or negligently” made misrepresentations in the sale of securities to ACA Management LLC, IKB and ABN Amro.

Rhapsody in Yellow? A little cacaphonous today. The issues went ex-Dividend – good luck to anybody attempting to draw conclusions from the Dividend Drop Off Rate, which will be 100% if the total return is to be 0%.

It was an off day for the Canadian preferred share market, with PerpetualDiscounts losing 12bp, FixedResets down 3bp and DeemedRetractibles shrinking 5bp. Volatility was again muted, with no entries in the Performance Highlights table, but volume picked up and was only a little below average – RY DeemedRetractibles dominated the volume table.