PrefBlog

The European emergency measures is being extended:

Under pressure from investors to lead the charge against the spreading sovereign debt crisis, Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds.
…
While the ECB chose not to deploy new crisis-fighting tools, Trichet managed to avoid sparking another market selloff four days after traders gave a vote of no-confidence to a bailout of Ireland. He kept up pressure on governments to fight the crisis by saying that “benign neglect” is not enough and indicated they could expand Europe’s rescue fund amid concern it’s not large enough to finance any bailout of Spain.
…
The yield on Portuguese 10-year bonds dropped 50 basis points to 6.13 percent and Irish yields fell 37 basis points to 8.76 percent. The Spanish 10-year yield declined 22 basis points to 5.07 percent. The euro traded at $1.3228 at 5:41 p.m. in London compared with $1.3152 before Trichet started talking.
…
Signaling disagreement within the 22-member council, Trichet said an “overwhelming majority” of officials backed the ECB’s Securities Market Program and that a “consensus” supported maintaining the status quo on providing liquidity. Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said.

“It’s not quantitative easing, we’re withdrawing all the liquidity,” he said.

The future seniority of ESM debt to public sovereign debt is cited as a potential trigger for a Greek downgrade:

Greece’s ‘BB+’ long-term sovereign rating was placed on “CreditWatch” with negative implications, Standard & Poor’s Ratings Services said in a statement today from Madrid. S&P said it is assessing credit implications of the so-called European Stability Mechanism that may govern European Union sovereign bonds beginning in July 2013.

“Assigning ‘preferred creditor’ status to future official lending via the ESM could be detrimental to the ability of non- official holders of sovereign debt to be repaid,” S&P said.
…
The EU in October agreed on the need to set up the ESM as a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole. The Eurogroup, comprising the finance ministers of the 16 nations sharing the euro, said in a statement on Nov. 28 that “an ESM loan will enjoy preferred creditor status, junior only” to the loan from the International Monetary Fund.

Greece in May got a three-year aid package of 110 billion euros ($145 billion) from the euro area and the IMF to prevent a debt default.

The Icelandic model is being touted:

While analysts expect Iceland’s recession to extend into next year, the nation’s exporters are benefiting from a 28 percent drop in the krona against the dollar since September 2008. The decline may help the nation of 320,000 people rebalance its economy faster than Ireland, whose euro membership rules out a currency devaluation. With Iceland’s OMX share index up 17 percent this year, the third-biggest gain in Europe after Denmark and Sweden, Nobel Prize-winning economist Paul Krugman says Iceland may be an example of “bankrupting yourself to recovery.”

“The difference is that in Iceland we allowed the banks to fail,” Iceland President Olafur R. Grimsson said in a Nov. 26 interview with Bloomberg Television’s Mark Barton. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

The insolvency was highly unpopular at the time – but a lot better for the world than the pretend sort-of insolvencies being touted by politicians.

In the meantime, it appears that the US still isn’t taking its fiscal deficit seriously enough:

Senate Finance Committee Chairman Max Baucus, a Democrat, and incoming House Ways and Means Committee Chairman Dave Camp, a Republican, said today they will vote against the plan tomorrow. They join Representatives Paul Ryan, a Wisconsin Republican, and Jan Schakowsky, an Illinois Democrat, in opposition.

The plan requires approval from 14 of the panel’s 18 members to forward it to Congress, meaning five “no” votes would kill it. Texas Republican Jeb Hensarling said today he is leaning against the proposal.

The recommendations are “wrong for Montana and wrong for rural communities across the country,” Baucus of Montana said in a statement. While reducing the deficit is “imperative,” he said, “we cannot cut the deficit at the expense of veterans, seniors, ranchers, farmers and hard-working families.”

Ideally, of course, Baucus will be dead, retired, or gainfully employed by the time the shit hits the fan. ABC News reports that it:

has learned Andrew Stern will vote no on the deficit commission’s plan to reduce the national deficit by nearly $4 trillion. Mr. Stern, the former president of the SEIU, has informed co-chairmen Erskine Bowles and Alan Simpson that he will be the fifth member voting no, ending the commission’s hopes of officially passing the plan to Congress.

Two recent products to hit the Toronto market FFL / FFL.U and SST / SST.U are either craziness or genius. One or the other. The latter is the iPath® US Treasury Flattener Exchange Traded Note, which:

is linked inversely to the performance of the Barclays Capital US Treasury 2Y/10Y Yield Curve Index™. The index employs a strategy that seeks to capture returns that are potentially available from a “steepening” or “flattening”, as applicable, of the U.S. Treasury yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The level of the index is designed to increase in response to a “steepening” of the yield curve and to decrease in response to a “flattening” of the yield curve. To accomplish this objective, the performance of the index tracks the returns of a notional investment in a weighted “long” position in relation to 2-year Treasury futures contracts and a weighted “short” position in relation to 10-year Treasury futures contracts, as traded on the Chicago Board of Trade.

The iPath® US Treasury Flattener ETN employs an index multiplier that provides the investor at maturity or upon redemption a participation rate of $0.10 gain or loss per each 1.00 point decrease or increase, respectively, in the level of the index. For purposes of calculating the closing indicative note value on a given day, the index multiplier is multiplied by the daily index performance, which is added to the daily interest that accrued from a notional investment of the value of the ETN at the 28-day U.S. Treasury Bill rate, from which all applicable costs and fees are deducted.

On the one hand, this is a way for retail and small institutions to adjust their exposures without entering into costly trades. On the other hand, trading Treasuries is about the cheapest thing you can do in the capital markets. And retail’s lucky if it understands duration, let alone steepeners, flatteners and convexity. And there’s no related product to handle the 10-30 spread. On the other hand, I guess, if it sells, it sells.

CIBC debt capital markets division is doing well:

Canadian Imperial Bank of Commerce ranks among the top three banks managing corporate bond sales in Canada for the first time since 2004, displacing Toronto- Dominion Bank as company issuance surges to a three-year high.

The bank’s CIBC World Markets unit ranks second this year after leading debt sales for companies such as Telus Corp. and BCE Inc. Royal Bank of Canada’s RBC Capital Markets is first, extending its streak of more than a decade as the top arranger, according to data compiled by Bloomberg. Bank of Nova Scotia’s Scotia Capital unit ranks third among Canada’s six major banks.
…
Companies have raised C$69.4 billion ($68.2 billion) in bond sales this year, up from C$57.2 billion in all of 2009 and the highest since 2007, according to Bloomberg data.
…
The Toronto-based firm also raised about C$6.2 billion for its parent, Canadian Imperial Bank of Commerce, the country’s fifth-biggest bank.

By comparison, TD Securities had one C$1 billion debt sale this year for its parent, Toronto-Dominion Bank, Canada’s second-biggest bank.

“When we look at things, excluding self-led deals, we see ourselves solidly in second place,” Brad Saunders, vice president of debt syndication at TD Securities, said in an interview.

It was clobberin’ time in the Canadian preferred share market today, with PerpetualDiscounts losing 38bp and FixedResets being hammered for an unbelievable (semi-believable, at best) loss of 58bp. Volume was extremely heavy; so heavy that the market maker for GWO.PR.J had to take the afternoon off – which cost the FixedReset index about a third of its apparent loss.

S&P has put Portugal on watch-negative:

What Portugal does to combat downward pressures on growth and under what terms it accepts external support–if it does at all–will influence the government’s creditworthiness. The Eurogroup Ministers recently proposed treaty changes to establish a permanent crisis mechanism to be called the European Stability Mechanism (ESM), which will be based on the European Financial Stability Facility. It is our understanding that the ESM may be designed to rank ahead of private creditors in any future debt restructurings beginning in 2013. As a result, debt that European Monetary Union member states issue might not rank pari passu with debt that the ESM issues. We think that this treaty change would represent a move away from the original design of the European Financial Stability Facility, which was intentionally exempt from preferred creditor status by the 16 members of the Euro Area in an effort to assist European Monetary Union members in financial difficulties.

I’m always looking for new perspectives, so I asked the question:

Why Issue Preferred Shares

Glad you asked…
Perferred shares are issued for a wide variety of reasons. One of the reasons why a preferred share may be issued is because people actually like these kinds of shares compared to other types of shares.

Nicole_Marie8201, Answers Expert

Well, I’m relieved to have finally cleared that one up!

Are politicians taking the US fiscal deficit seriously enough? Is the perfect the enemy of the good? If two deficit panel members are to be believed, the answers are “No” and “Yes”:

A panel vote set for today was delayed until Dec. 3. Bowles said yesterday he didn’t know if members will reach agreement on the proposal, which includes scaling back such popular tax breaks as the home-mortgage interest deduction. Agreement from 14 of the commission’s 18 members is needed to send a plan to Congress for a vote on whether to put it into effect. A failure to get 14 votes would kill the plan.
…
Representative Paul Ryan, a Wisconsin Republican on the panel, said in an interview he will vote against the plan because it doesn’t do enough to address rising health-care costs. Representative Jeb Hensarling, a Texas Republican, expressed the same concern and said, “I don’t know if you’re going to get my vote.”

Achieving the goal imperfectly and then merely having to tinker with the solution in place is just not sexy enough, I guess.

I had a laugh at the 7% targetted distribution of Quadravest’s Dividend Select 15 on November 26. In the interest of fairness, I think we should all now laugh just as loudly at Mulvihill’s Canadian Utilities & Telecom Income Fund:

The Fund’s investment objectives are (i) to pay holders of its Units (“Unitholders”) monthly distributions in an amount targeted to be 7.0% per annum on the NAV of the Fund; and (ii) to preserve and enhance the Fund’s NAV while reducing portfolio volatility.

The Fund will seek to achieve its investment objectives by investing in a portfolio consisting principally of equity securities of large capitalization (over $1 billion) utility and, to a lesser degree, telecommunications issuers listed on the Toronto Stock Exchange (“TSX”).

The underwriter’s fee is 5.25%. dealers get a trailer of 40bp, and Mulvihill gets 1.1%; the total underlying performance required for a stable NAV is about 8.91% … not entirely unreasonable for equities, provided we ignore sequence-of-returns risk. And, of course, Mulvihill does not provide details of its track record in the prospectus, merely their experience.

PrefBlog salutes Emil Cohen who, despite the best efforts (and a little bullying) of the Toronto District School Board, has the makings of an independent and assertive young man.

In a further abuse of the right to due process, police can now impound cars for failure to make family support payments. Doesn’t this make everybody feel good? After all, the SIU now admits that their investigation of the police assault on Adam Nobody did not include such esoteric investigative techniques as talking to the guy who made the video (although it seems that in the last few days they have listened to a lecture on investigative techniques by Officer Bubbles).

Abuse of police authority? Cover-ups and grossly incompetent pseudo-investigations? A police spokesman claims the officers involved would be outraged at allegations that there’s any kind of cover-up going on, no sir, no way, ain’t never gonna happen, but remains unable to name the officers. Ah, well … here in the true North strong and free, abuse of power is rewarded.

There was continued high volume on the Canadian preferred share market today, with PerpetualDiscounts losing 14bp and FixedResets down marginally.

PerpetualDiscounts now yield 5.37%, equivalent to 7.52% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.4%, so the pre-tax interest equivalent spread is now 210bp, an apparrent, but probably meaningless, tightening from the 220bp reported at month-end (i.e., yesterday).

Markets remain unimpressed by the Irish bail-out:

The difference in yield between Italian 10-year bonds and German bunds widened to 199 basis points after reaching 212 points earlier. The Spanish-German yield spread rose 17 basis points to 284 basis points and the yield premium for Belgian 10- year bonds reached 131 basis points, the most since January 2009.
…
Credit-default swaps insuring Italian government bonds rose 24 basis points to 270, contracts on Spain increased 16 basis points to 368 and Portugal climbed 12 basis points to 552, all record highs, according to CMA, a data provider.

DBRS has assigned ratings to Loblaw’s shelf prospectus:

DBRS has today assigned a rating of BBB with a Stable trend to Loblaw Companies Limited’s (Loblaw or the Company) new $1 billion Short Form Base Shelf Prospectus, dated November 25, 2010.

This prospectus will enable Loblaw to offer and issue up to $1.0 billion of debentures and second preferred shares during the 25-month period the base shelf prospectus remains valid. Additionally, DBRS has assigned a new rating of Pfd-3 to the Company’s preferred share portion of this prospectus.

Connor Clark & Lunn, best known for the default of their highly structured RPB.PR.A offering (among others) are reinforcing their effort (kicked off with the issue of HBanc Capital Securities Trust, discussed on October 13) to win the covetted PrefBlog “Most Ridiculous Family of Funds” award with the issue of Australian Banc Capital Securites Trust. It should do quite well; the underwriting fee on the Class A units is 5.25%, not that that will have anything to do with the success of the offering, of course.

Coincidentally, a team of analysts has commented on the Aussie Dollar:

Cricket’s oldest international rivalry resumed last week in Australia without a traditional taunt of traveling English fans: “We’re fat, we’re round, three dollars to the pound.”
…
The dollar chant “won’t be coming out of the songbook this time,” Barmy Army spokeswoman Becky Fairlie-Clarke said in a telephone interview. “It’s more like 1 1/2 now.”

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 24bp and FixedResets losing 10bp. Volume was heavy.

PerpetualDiscounts now yield 5.41%, equivalent to 7.57% interest at the standard equivalency factor of 1.4x. Long Corporates continue to yield about 5.4% (maybe a little under) , so the pre-tax interest-equivalent spread is now about 220bp, a significant widening from the 210bp reported on November 24, although it must be noted that the spread has been bouncing between these two levels all month.

It is instructive to review the performance of the BMO Long Corporate ETF for the month:

Click for big

Long Corporates had a total return of about -1% on the month.

And that’s a wrap for November, 2010!