February 19, 2010

February 19th, 2010

What-Debt? does not support a tax on financial institutions – taxes can be discussed, quantified and challenged in court: true to his authoritarian instincts, he seeks instead a transfer of power to regulators:

Canada opposes efforts to impose a new global tax on financial services in the world’s major economies, according to a government document obtained by Bloomberg News.

Prime Minister Stephen Harper’s government, which will host a summit of Group of 20 leaders in June, instead is urging countries to adopt sound regulatory practices such as Canada’s, according to an internal document distributed today to lawmakers from the governing Conservative Party.

Meanwhile, Spend Every Penny is proud of his total inability to think ahead:

“We know that other countries do this type of analysis [of the effects of demographics on government finances]. The U.S. does it annually. The U.K. does it annually. Scandinavians do it annually. Other countries do it every three years. This … needs to become a regular pattern in Canada.”

Finance Minister Jim Flaherty’s office suggested Mr. Page’s report is speculative. Spokesman Chisholm Pothier said the government is concerned with immediate challenges.

“Making assumptions and calculations 75 years into the future may be an important academic exercise for some, but Canadians expect their government to focus on today’s economy and securing the fragile economic recovery,” Mr. Pothier said.

I guess they’re too busy bragging to the G-20 about how often they lecture the banks about forward planning!
The Philadelphia SEC is incorporating social networks into market surveillance, which makes all kinds of sense:

“Our focus is on conducting trader-based investigations, rather than going security by security,” said [Philadelphia SEC Director Daniel] Hawke, who has run the Philadelphia office since 2006 and will now also serve as director of the new market abuse unit.

The goal, he said was to discover “hard-to-detect frauds.”

Much of the initial detective work that Hawke’s group is doing relies heavily on computers. The team cross-checks trading data on dozens of stocks with personal information about individual traders, such as where they went to business school or where they used to work.

Hawke said his investigators are looking for patterns of “behavior by traders across multiple securities” and seeing if there are any common relationships or associations between those traders.

The Boston Fed has released a Public Policy Brief by Katharine Bradbury titled State Government Budgets and the Recovery Act:

State and local governments, with revenues reduced sharply by the recession, are responding by cutting services, increasing tax rates, and drawing down reserves; they are also receiving some relief in the form of stimulus funds provided by the federal government. The stimulus funds legislated in the American Recovery and Reinvestment Act only partly offset the recession‐induced shortfalls and are scheduled to phase out before most analysts believe state and local governments will see fiscal recovery well underway. Thus, observers are concerned that the state‐local sector will create a substantial drag on the overall economy during fiscal year 2011 and into 2012. This brief compiles data on state gaps, responses, and stimulus funding nationwide and discusses potential implications for the national economy.

Volume remained at good levels to close the week, but prices were mixed; PerpetualDiscounts lost 16bp while FixedResets gained 8bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 2.86 % 3.40 % 31,436 20.51 1 1.4902 % 1,927.9
FixedFloater 5.43 % 3.53 % 42,177 19.55 1 5.0394 % 2,909.1
Floater 1.99 % 1.71 % 43,612 23.28 4 -0.1640 % 2,310.3
OpRet 4.86 % -0.26 % 104,745 0.19 13 -0.2362 % 2,315.6
SplitShare 6.34 % -4.63 % 130,368 0.08 2 0.0657 % 2,151.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2362 % 2,117.4
Perpetual-Premium 5.76 % 5.43 % 83,580 5.91 7 -0.0621 % 1,900.1
Perpetual-Discount 5.84 % 5.88 % 175,467 14.04 69 -0.1641 % 1,806.9
FixedReset 5.40 % 3.57 % 313,059 3.76 42 0.0811 % 2,188.0
Performance Highlights
Issue Index Change Notes
MFC.PR.B Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 20.13
Evaluated at bid price : 20.13
Bid-YTW : 5.89 %
POW.PR.D Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 20.77
Evaluated at bid price : 20.77
Bid-YTW : 6.11 %
MFC.PR.A OpRet -1.09 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 26.34
Bid-YTW : 3.23 %
BAM.PR.O OpRet -1.06 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.94 %
BAM.PR.E Ratchet 1.49 % This issue forms a Strong Pair with BAM.PR.G; an analytical framework for Strong Pairs was discussed in the February PrefLetter.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 25.00
Evaluated at bid price : 19.75
Bid-YTW : 3.40 %
BAM.PR.G FixedFloater 5.04 % This issue forms a Strong Pair with BAM.PR.G; an analytical framework for Strong Pairs was discussed in the February PrefLetter. Today’s gain was entirely legitimate, as the issue traded 7,460 shares in a range of 19.30-00 before closing at 20.01-20, 1×9.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 25.00
Evaluated at bid price : 20.01
Bid-YTW : 3.53 %
Volume Highlights
Issue Index Shares
Traded		 Notes
CM.PR.K FixedReset 74,350 RBC crossed two blocks of 10,000 each, both at 26.83.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 26.77
Bid-YTW : 3.69 %
TRP.PR.A FixedReset 67,564 Nesbitt crossed 50,000 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.08
Bid-YTW : 3.78 %
TD.PR.P Perpetual-Discount 64,909 Nesbitt crossed 50,000 at 23.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 23.37
Evaluated at bid price : 23.56
Bid-YTW : 5.62 %
ACO.PR.A OpRet 63,517 Called for redemption. National bought 10,000 from Laurentian at 25.65; RBC crossed 50,000 at 25.64. Both these prices are in excess of the call price (including final dividend) and we are past the last full-dividend ex-Date … so either there is some kind of dividend-capture game going on or the buyers are stupid; one or the other, maybe both.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-21
Maturity Price : 25.50
Evaluated at bid price : 25.62
Bid-YTW : -1.96 %
RY.PR.H Perpetual-Premium 44,110 National crossed 17,500 at 25.02.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-19
Maturity Price : 24.67
Evaluated at bid price : 24.90
Bid-YTW : 5.70 %
BNS.PR.R FixedReset 37,516 RBC crossed 30,000 at 26.33.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.31
Bid-YTW : 3.65 %
There were 35 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | No Comments »

IAG Confirmed at Pfd-2(high) by DBRS

February 19th, 2010

I don’t usually highly rating agency confirmations, but this press release, DBRS Confirms Ratings on Industrial Alliance at “A”, Pfd-2 (high) was sufficiently meaty to warrant wider exposure.

DBRS has today confirmed its ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its related entities. All ratings have a Stable trend. The ratings reflect the Company’s consistently profitable operations and its sustainable and expanding market presence in the Canadian life insurance and wealth management industries, where it serves the financial planning and protection needs of individuals and groups. The Company’s market position is complemented by a conservative risk culture which has limited IAG’s earnings exposure to equity and credit market volatility through the recent credit/economic crisis.

Capitalization has become more aggressive, in line with that of the industry, with a total debt ratio of 32% at the end of 2009, increasing to 33.2% pro forma a $200 million preferred and common share issue in mid-February. Within the last two years, Canadian life insurance companies have been increasing their financial leverage to better maximize return on equity, while also optimizing regulatory capital in a low interest rate environment. The Company’s adjusted debt ratio, which gives some equity treatment to preferred shares, was 22.6% at year-end, falling to 22% following the February issues, which is within DBRS’s tolerance for the current credit rating. However, the Company’s use of hybrid capital instruments such as preferred shares has increased over the past two years, significantly reducing its fixed-charge coverage ratio, which has fallen from double digits in the pre-2008 period to 6.0 times in 2009, notwithstanding the return to normal profitability. The Company’s regulatory capital ratio, at 208% at the end of 2009, is currently above the top end of the Company’s targeted range of 175% to 200% and will rise further to 226%, pro forma the recent preferred and common share issues. The recent share issues have substantially improved IAG’s financial flexibility should it be required to augment its required capital or to fund another in a long line of acquisitions.

Given the existing conservative actuarial reserves and recent favourable experience in terms of interest rate and equity markets, there were no major net reserve adjustments required in 2009 as a result of changing actuarial assumptions or adverse experience. However, because the Company is more focused on the Canadian individual life insurance market than its peers, including its relatively strong market presence in the universal life market, it remains more exposed to the adverse impact of lower interest rates than its more diversified peers. Similarly, the Company retains a larger on-balance-sheet equity exposure to hedge the long-term liabilities under its life insurance products. A severe economic slowdown resulting in prolonged lower interest rates and equity markets would more seriously affect the Company than its peers, all other things being equal. To mitigate some of this risk, the Company remains very conservative in setting its policy reserves, including a recent reduction in the ultimate reinvestment rate assumption to 20 basis points below the Canadian Institute of Actuaries prescribed standard and relatively high reserves against equity market deterioration. In addition, the Company retains a higher proportion of mortality risk than its peers, rather than reinsuring it, since the long-term improvement in mortality ultimately accrues to the Company’s benefit, given its relatively large block of individual insurance.

The Company’s steady diversification of revenues and income across both product lines and geographical markets, combined with a conservative risk culture, has helped it to return to attractive levels of profitability before many of its larger competitors.

IAG has two Straight issues outstanding, IAG.PR.A and IAG.PR.E; and one FixedReset, IAG.PR.C. They are currently marketting a new issue of 5.90% Straights.

Posted in Issue Comments | No Comments »

BIS Schedule for Regulatory Reform

February 19th, 2010

The Bank for International Settlements issued a press release on January 11 (sorry I’m so late reporting!) titled Group of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package setting a road map for the next elements of bank regulatory reform:

Provisioning: It is essential that accounting standards setters and supervisors develop a truly robust provisioning approach based on expected losses (EL)….The Basel Committee should translate these principles into a practical proposal by its March 2010 meeting for subsequent consideration by both supervisors and accounting standards setters.

Introducing a framework of countercyclical capital buffers: Such a framework could contain two key elements that are complementary. First, it is intended to promote the build-up of appropriate buffers at individual banks and the banking sector that can be used in periods of stress. This would be achieved through a combination of capital conservation measures, including actions to limit excessive dividend payments, share buybacks and compensation. Second, it would achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth through a countercyclical capital buffer linked to one or more credit variables.

Addressing the risk of systemic banking institutions: Supervisors are working to develop proposals to address the risk of systemically important banks (SIBs). To this end, the Basel Committee has established a Macroprudential Group. The Committee should develop a menu of approaches using continuous measures of systemic importance to address the risk for the financial system and the broader economy. This includes evaluating the pros and cons of a capital and liquidity surcharge and other supervisory tools as additional possible policy options such as resolution mechanisms and structural adjustments. This forms a key input to the Financial Stability Board’s initiatives to address the “too-big-to-fail” problem.

Contingent capital: The Basel Committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework. This includes possible entry criteria for such instruments in Tier 1 and/or Tier 2 to ensure loss absorbency and the role of contingent and convertible capital more generally both within the regulatory capital minimum and as buffers.

Liquidity….

Central Bank Governors and Heads of Supervision will review concrete proposals on each of these topics later this year.
…
The fully calibrated set of standards will be developed by the end of 2010 to be phased in as financial conditions improve and the economic recovery is assured with the aim of implementation by the end of 2012. This includes appropriate phase-in measures and grandfathering arrangements for a sufficiently long period to ensure a smooth transition to the new standards.

The practical effects of not paying your best producers top rates because other parts of the bank are losing money are even now being illustrated:

Bank of America, Merrill Lynch’s owner, raised London managing directors’ base pay to about 230,000 pounds, from 150,000 pounds in 2009, said the people, who declined to be identified because the terms are private.

“Some of these firms were hemorrhaging talent, and those gaps are being filled in a hurry,” said Simon Hayes, London- based head of financial services at Odgers Berndtson, a 45-year- old recruitment firm. “The likes of Merrill and UBS in London and elsewhere have been hiring very aggressively to deal with the losses of the previous 18 months.”

Both banks are no longer taxpayer owned, leaving them free to set pay themselves.
…
“In the world of investment banking, it’s a simple case of who pays wins,” said John Purcell, managing director of London- based executive search firm Purcell & Co. “Institutions that are fairly directly under political control are facing significant difficulties retaining staff.”

I am very pleased to see that BIS will officially be “evaluating the pros and cons of a capital and liquidity surcharge”. I have long advocated the imposition of surcharges on capital for size (although I feel this should be a surcharge on Risk Weighted Assets), rather than absolute caps or special regulatory regimes. This will allow the major banks to make decisions regarding asset growth to be made in a familiar business-like manner.

And finally, I’m very pleased to see contingent capital front-and-centre, although some indication of the committee’s thinking regarding triggers and conversion prices would have been very greatly appreciated. I can only suppose that this is a bone of contention.

Posted in Regulation | 1 Comment »

BoC's Longworth Supports Contingent Capital

February 19th, 2010

David Longworth, Deputy Governor of the Bank of Canada, delivered a speech to the C D Howe Institute, Toronto, 17 February 2010, titled Bank of Canada liquidity facilities – past, present, and future. It’s a good review of the actions taken by the BoC during the credit crunch to address liquidity problems, albeit lamentably short of meat.

For instance, he emphasizes the importance of penalty rates in avoiding moral hazard:

Fifth, and finally, the Bank should mitigate the moral hazard of its intervention. Such measures include limited, selective intervention; the promotion of the sound supervision of liquidity-risk management; and the use of penalty rates as appropriate.

but nowhere attempts to quantify the penalties that were actually applied.

One of the things that scares me about the regulatory response to the crisis is the central counterparty worship. Mr. Longworth lauds the BoC’s role in:

Encouraging and overseeing the implementation of liquidity-generating infrastructure, such as a central counterparty for repo trades, that help market participants self-insure against idiosyncratic shocks

Central counterparties reduce the role of market discipline in the interbank marketplace by offering a third party guarantee of repayment; I can therefore lend a billion to Dundee Bank with the same confidence that I lend to BNS. Additionally, they soak up bank capital; the counterparty has to be capitalized somehow and it may be taken as a given that the total bank capital devoted to the maintenance of the central counterparty will be greater than the bank capital devoted to the maintenance of a distributed system. Finally, while I agree that a central counterparty will decrease the incidence of systemic collapse, I assert that it will increase the severity; I claim that basic engineering good practice will seek to reduce the incidence of catastrophic single point failure, not increase it!

He also addressed the headline issue, noting the potential for:

Requiring the use of contingent capital or convertible capital instruments, perhaps in the form of a specific type of subordinated debt, to help ensure loss absorbency and thus reduce the likelihood of failure of a systemically important institution.

Footnote: The BCBS press release of 11 January 2010 entitled, “Group of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package,” announces that the “Basel Committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework.” See also “Considerations along the Path to Financial Regulatory Reform,” remarks by Superintendent Julie Dickson, Office of the Superintendent of Financial Institutions, 28 October 2009

I have added a link in the above to the PrefBlog review of the Dickson speech; I will attend to the BIS press release shortly.

Most of the commentary I’ve seen discusses contingent capital solely as the concept applies to subordinated debt; I will assert that logically, if the subordinated debt is liable to become common equity, then more junior elements of capital such as preferred shares must also have this attribute.

Posted in Contingent Capital | 5 Comments »

February 18, 2010

February 18th, 2010

There are mutterings that maybe London isn’t as bad as all that, taxes and all:

Heavy tax demands on London’s under-fire hedge fund industry are unlikely to spark an exodus of operators to rival financial hubs such as Dublin or Geneva, a survey by property advisor Cushman & Wakefield showed.

The study into the impact of taxation on corporate locations showed only one in 10 UK-based companies considered national tax policy or government incentives as an “absolutely essential” factor when choosing a location for their businesses.

Instead, financial occupiers like hedge funds prize ease of international travel, good internal infrastructure and access to a diverse labour market over fiscal policy, putting London ahead of traditional rival Geneva on all counts, the report showed.

Volume moderated a little on a day enlivened by the ACO.PR.A redemption announcement and a a new FixedReset issue, 5.25%+262, from Brookfield Renewable Power Preferred Equity. PerpetualDiscounts lost 6bp and FixedResets were down 4bp.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 2.91 % 3.48 % 29,754 20.43 1 2.4211 % 1,899.6
FixedFloater 5.71 % 3.78 % 40,123 19.23 1 0.0000 % 2,769.5
Floater 1.99 % 1.71 % 45,044 23.28 4 0.1642 % 2,314.1
OpRet 4.85 % -1.20 % 106,626 0.09 13 -0.2503 % 2,321.1
SplitShare 6.35 % -8.01 % 131,490 0.08 2 0.7489 % 2,150.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2503 % 2,122.4
Perpetual-Premium 5.75 % 5.34 % 84,518 5.91 7 -0.0790 % 1,901.2
Perpetual-Discount 5.83 % 5.86 % 168,668 14.09 69 -0.0588 % 1,809.9
FixedReset 5.41 % 3.56 % 304,917 3.76 42 -0.0375 % 2,186.2
Performance Highlights
Issue Index Change Notes
ACO.PR.A OpRet -2.29 % Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-20
Maturity Price : 25.50
Evaluated at bid price : 25.60
Bid-YTW : -1.20 %
BAM.PR.J OpRet -1.89 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 4.94 %
TD.PR.Y FixedReset -1.43 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-11-30
Maturity Price : 25.00
Evaluated at bid price : 26.23
Bid-YTW : 3.72 %
BNS.PR.J Perpetual-Discount -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 22.49
Evaluated at bid price : 23.23
Bid-YTW : 5.67 %
ELF.PR.G Perpetual-Discount 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 6.69 %
BNA.PR.C SplitShare 1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 19.45
Bid-YTW : 7.88 %
BAM.PR.E Ratchet 2.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 25.00
Evaluated at bid price : 19.46
Bid-YTW : 3.48 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.L Perpetual-Discount 116,389 Nesbitt crossed 100,000 at 20.26.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 20.24
Evaluated at bid price : 20.24
Bid-YTW : 5.62 %
MFC.PR.D FixedReset 114,382 Desjardins crossed 100,000 at 28.19.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 28.19
Bid-YTW : 3.76 %
RY.PR.W Perpetual-Discount 105,620 Nesbitt crossed two blocks of 50,000 each at 21.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 21.50
Evaluated at bid price : 21.76
Bid-YTW : 5.65 %
ACO.PR.A OpRet 90,207 Called for redemption. RBC bought 10,000 from Laurentian at 25.65. Desjardins crossed 41,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-20
Maturity Price : 25.50
Evaluated at bid price : 25.60
Bid-YTW : -1.20 %
TD.PR.N OpRet 80,100 RBC crossed 75,000 at 26.21.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-20
Maturity Price : 26.00
Evaluated at bid price : 26.18
Bid-YTW : -1.48 %
TD.PR.O Perpetual-Discount 76,041 TD crossed 47,300 at 22.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-18
Maturity Price : 21.60
Evaluated at bid price : 21.94
Bid-YTW : 5.56 %
There were 33 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | No Comments »

BoC Releases Winter 2009-10 Review

February 18th, 2010

The Bank of Canada has released the Bank of Canada Review Winter 2009-2010, with articles:

  • Declining Inflation Persistence in Canada: Causes and Consequences
  • The Evolution of Capital Flows to Emerging-Market Economies
  • Making Bank Notes Accessible for Canadians Living with Blindness or Low Vision

Inflation persistence is defined as

the correlation between current and lagged inflation.

The article concludes that the low level of inflation persistence in Canada will facilitate Price Level Targetting, should be BoC implement such a policy:

For a central bank considering the relative merits of price-level versus inflation targeting, recent research suggests that low structural persistence in inflation will tend to favour the former. Moreover, the transition period to a price-level-targeting regime, when the private sector may still be learning about the precise nature of the change, appears to be less costly when structural infl ation persistence is low.

Posted in Interesting External Papers | No Comments »

New Issue: Brookfield Renewable Power Preferred Equity FixedReset 5.25%+262

February 18th, 2010

Brookfield Renewable Power Fund has announced:

that the Corporation (as defined below) will issue in Canada a total of 7 million Class A Preference Shares, Series 1 (the “Series 1 Preferred Shares”) guaranteed by the Fund, at a price of $25.00 per share, for aggregate gross proceeds of $175 million, on a bought deal basis to a syndicate of underwriters in Canada led by Scotia Capital Inc., CIBC, RBC Capital Markets and TD Securities Inc.

The holders of Series 1 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.3125 per share, payable quarterly, as and when declared by the Board of Directors of Brookfield Renewable Power Preferred Equity Inc. (the “Corporation”), a wholly-owned subsidiary of the Fund. The Series 1 Preferred Shares will yield 5.25% annually at the issue price, for the initial five-year period ending April 30, 2015 with the first dividend payment date scheduled for April 30, 2010, based on an anticipated closing date of March 10, 2010. The dividend rate will reset on April 30, 2015 and every five years thereafter at a rate equal to the then five-year Government of Canada Bond yield plus 2.62%. The Series 1 Preferred Shares are redeemable on or after April 30, 2015.

The holders of Series 1 Preferred Shares will have the right to convert their shares into Class A Preference Share, Series 2 (the “Series 2 Preferred Shares”), subject to certain conditions, on April 30, 2015 and on April 30 of every fifth year thereafter. The holders of Series 2 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors, at a rate equal to the then three month Government of Canada Treasury Bill yield plus 2.62%.

The Corporation has granted the underwriters an over-allotment option exercisable up to 30 days after closing to purchase up to an additional 1.05 million Series 1 Preferred Shares at the issue price on the same terms, for additional gross proceeds of up to $26.25 million.

The Corporation intends to lend the net proceeds of the offering to the Fund, which will repay in whole or in part the $200 million promissory note issued to Brookfield Renewable Power Inc. (“BRPI”) in connection with the Fund’s acquisition of substantially all of BRPI’s Canadian power generating assets in August 2009.

The Fund has previously announced its intention to convert to a corporation on or before January 1, 2011. It is expected that the Corporation will become the successor of the Fund through the conversion. If the Corporation does not become the successor, the successor entity will assume all the obligations of the Fund including those related to the Series 1 and Series 2 Preferred Shares.

The Series 1 and Series 2 Preferred Shares will be offered to the public in Canada pursuant to a short form prospectus that will be filed with securities regulatory authorities in each of the provinces of Canada.

Sorry for the lengthy headline, but I don’t think Brookfield Renewable Power Preferred Equity Inc. has a ticker symbol at this time. The parent and guarantor, Brookfield Renewable Power Fund, is BRC.UN.

Brookfield Asset Management (BAM) notes:

The Brookfield Renewable Power Fund (formerly Great Lakes Hydro Income Fund) was established in November 1999 as a publicly traded investment vehicle to acquire long-life, low cost generating assets which provide stable and sustainable cash distributions to unitholders. Brookfield owns 50.01% of the units on a fully-exchanged basis, with the remaining 49.99% owned by institutional and retail unitholders.

… so this issue should be counted as BAM for issuer concentration calculation purposes.

Update: I understand the deal size has been increased to $250-million.

Update, 2010-2-19: Brookfield press release on increase:

Brookfield Renewable Power Fund (the “Fund”) today announced that as a result of strong investor demand for its previously announced public offering of Class A Preference Shares, Series 1 (the “Series 1 Preferred Shares”), it has agreed to increase the size of the offering from $175 million to $250 million, or from 7 million Series 1 Preferred Shares to 10 million Series 1 Preferred Shares. The issue will be guaranteed by the Fund and will be completed on a bought deal basis to a syndicate of underwriters in Canada led by Scotia Capital Inc., CIBC, RBC Capital Markets and TD Securities Inc. There will not be an over-allotment option, as was previously granted.

DBRS maintains the Pfd-3(high) provisional rating.

Posted in New Issues | 1 Comment »

ACO.PR.A to be Redeemed

February 18th, 2010

ATCO Ltd. has announced:

it will redeem on March 23, 2010 all of its outstanding 5.75% Cumulative Redeemable Preferred Shares, Series 3 at a price of $25.586644 (representing the $25.00 designated capital of each share and a prescribed premium of $0.50 per share plus $0.086644 of accrued and unpaid dividends per share). The total cost of this redemption is $153.5 million.

  Shares TSX Stock Redemption Price
Shares Outstanding Symbol Per Share ($)
5.75% Series 3 6,000,000 ACO.PR.A 25.586644

These dividends are eligible dividends for Canadian income tax purposes.

A formal notice and instructions for the redemption of the Series 3 Preferred Shares will be sent to preferred shareholders in accordance with the conditions attached to the Series 3 Preferred Shares.

ACO.PR.A closed last night at 26.20-38, so the risks of holding issues with negative yields-to-worst are illustrated yet again! Of course, one reason they are priced so high appears to be buying by CPD and other indexers in response to the issue’s addition to TXPR in the January rebalancing.

ACO.PR.A was last mentioned on PrefBlog in connection with the calculation of yield-to-issuer-best. It is tracked by HIMIPref™ and is a constituent of the Operating Retractible subindex.

Update: I have uploaded a Chart of the ACO.PR.A / CM.PR.A bid prices from 2009-12-31 to 2010-2-17 (CM.PR.A is the best comparator I can find, although not a very good one). There is a clear bump in the price of ACO.PR.A in the period in which it may be assumed CPD was buying. See the post POW.PR.C: Yes, CPD is the Buyer for another example.

Update, 2010-3-16: S&P announcement of removal from TXPR.

Posted in Issue Comments | 4 Comments »

February 17, 2010

February 17th, 2010

Assiduous Readers will remember that I am rather curious about the social benefits of increasing bank capital. It is all very well to say that more capital is good, but in a world of limited resources, socking away huge amounts of capital and taking it away from productive investment elsewhere is going to have costs as well as benefits. I haven’t seen any econometric analysis of those costs, but JP Morgan is starting the conversation:

Top banks will need an extra $221 billion (139.6 billion pounds) of capital and see annual profits slump by $110 billion if all proposed regulations to reform the industry are brought in, leading analysts said on Wednesday.
If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 percent from 13.3 percent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned.

“The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy,” Nick O’Donohue, head of research at JPMorgan, said in a research note.

KPMG has issued a TaxNewsFlash titled CRA Narrows GST-Exempt Financial Services; one of the items is:

Investment dealers’ trailer fees
In this example, an investment dealer who arranges to purchase units of a mutual fund for an investor receives a “trailer commission or fee” from the fund manager. The prospectus describes these fees as being paid in recognition of investment advice and ongoing administrative services provided by the dealer to the investors.

In this situation, the CRA says the services provided by the investment dealer including advice, arranging for the purchase of the units and ongoing administrative services are GST-taxable.

Volume picked up again today, but prices were off by a hair, with both PerpetualDiscounts and FixedResets losing 2bp on the day. The day was enlivened by the announcement of a new IAG 5.90% Straight after the close.

PerpetualDiscounts now yield 5.85%, equivalent to 8.19% at the standard equivalency factor of 1.4x. Long Corporates have eased of to a yield of about 5.9% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 230bp, coming in a bit from the 240bp reported February 10.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 2.98 % 3.59 % 28,592 20.29 1 1.0638 % 1,854.7
FixedFloater 5.71 % 3.78 % 38,454 19.23 1 0.0000 % 2,769.5
Floater 1.99 % 1.72 % 46,787 23.23 4 0.8537 % 2,310.3
OpRet 4.83 % -1.63 % 106,142 0.09 13 0.0737 % 2,326.9
SplitShare 6.29 % -2.17 % 131,713 0.08 2 0.0000 % 2,134.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0737 % 2,127.7
Perpetual-Premium 5.75 % 5.33 % 85,383 1.98 7 0.2999 % 1,902.7
Perpetual-Discount 5.82 % 5.85 % 167,909 14.10 69 -0.0241 % 1,811.0
FixedReset 5.41 % 3.57 % 305,994 3.76 42 -0.0218 % 2,187.0
Performance Highlights
Issue Index Change Notes
ELF.PR.G Perpetual-Discount -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-17
Maturity Price : 17.82
Evaluated at bid price : 17.82
Bid-YTW : 6.77 %
POW.PR.D Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-17
Maturity Price : 20.92
Evaluated at bid price : 20.92
Bid-YTW : 6.06 %
BAM.PR.E Ratchet 1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-17
Maturity Price : 25.00
Evaluated at bid price : 19.00
Bid-YTW : 3.59 %
RY.PR.H Perpetual-Premium 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-17
Maturity Price : 24.65
Evaluated at bid price : 24.88
Bid-YTW : 5.70 %
TRI.PR.B Floater 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-17
Maturity Price : 22.28
Evaluated at bid price : 22.55
Bid-YTW : 1.72 %
Volume Highlights
Issue Index Shares
Traded		 Notes
MFC.PR.D FixedReset 113,474 Desjardins crossed 100,000 at 28.19.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 28.16
Bid-YTW : 3.79 %
PWF.PR.M FixedReset 105,385 National crossed 100,000 at 27.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 27.28
Bid-YTW : 3.62 %
TRP.PR.A FixedReset 100,435 National crossed blocks of 25,000 and 15,000, both at 26.09. RBC crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 3.81 %
TD.PR.M OpRet 100,341 RBC crossed 98,000 at 26.24.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-19
Maturity Price : 26.00
Evaluated at bid price : 26.23
Bid-YTW : -3.78 %
TD.PR.N OpRet 92,000 RBC crossed 90,000 at 26.21.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-03-19
Maturity Price : 26.00
Evaluated at bid price : 26.18
Bid-YTW : -1.63 %
TD.PR.I FixedReset 71,600 TD crossed 25,000 at 27.85. National crossed 25,000 at 27.90.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 27.82
Bid-YTW : 3.64 %
There were 44 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | 1 Comment »

New Issue: IAG 5.90% Straight

February 17th, 2010

Industrial Alliance has announced a new issue.

Issue Name: Industrial Alliance and Financial Services Inc. Non-Cumulative Class A Preferred Shares, Series F

Issue Size: 4-million shares (=$100-million). No greenshoe.

Dividends: 5.90% p.a. (=$1.475), payable quarterly M/J/S/D. Initial dividend payable 2010-6-30 for $0.50110, assuming closing 2010-2-26.

Redemption: From 2015-3-31 to 2016-3-30 @ 26.00
From 2016-3-31 to 2017-3-30 @ 25.75
From 2017-3-31 to 2018-3-30 @ 25.50
From 2018-3-31 to 2019-3-30 @ 25.25
After 2019-3-30 @ 25.00

Comparators are:

IAG Straights 2010-2-17
Ticker Dividend Quote, 2/17 Bid Yield to Worst
IAG.PR.A 1.15 19.87-96 5.89%
IAG.PR.E 1.50 25.41-59 5.92%
Based on call 2019-1-30 at 25.00
IAG.PR.? 1.475 25.00
Issue Price		 5.92%

The new issue looks expensive – I don’t think it will see much buying from those who understand the principles of the Straight Perpetual Implied Volatility Calculator introduced in the January 2010 PrefLetter!

Update: IAG has issued a rather lengthy press release:

Industrial Alliance Insurance and Financial Services Inc. (“Industrial Alliance” or the “Company”) has today entered into an agreement with a syndicate of underwriters co-led by BMO Capital Markets and RBC Capital Markets under which the underwriters have agreed to buy, on a bought deal basis, 2,950,000 Common Shares (the “Common Shares”) from Industrial Alliance for sale to the public at a price of $34.00 per Common Share, representing aggregate gross proceeds of $100 million, and 4,000,000 Non-Cumulative Class A Preferred Shares Series F (the “Series F Preferred Shares”) from Industrial Alliance for sale to the public at a price of $25.00 per Series F Preferred Share, representing aggregate gross proceeds of $100 million. The Company has also granted the underwriters an option to buy up to an additional 15% of the Common Shares at the offering price to cover over-allotments, if any.

These share offerings are expected to close on or about February 26, 2010. Their purpose is to increase the Company’s financial flexibility, further improve its balance sheet and provide it with the necessary capital to finance potential acquisitions. The net proceeds of these issues will be added to Industrial Alliance’s capital.

Preferred Shares

The Series F Preferred Shares will yield 5.90% per annum, payable quarterly, as and when declared by the Board of Directors of the Company. The Series F Preferred Shares will not be redeemable prior to March 31, 2015. Subject to regulatory approval, on or after March 31, 2015, Industrial Alliance may, on no less than 30 or more than 60 days’ notice, redeem the Series F Preferred Shares in whole or in part, at the Company’s option, by the payment in cash of $26.00 per Series F Preferred Share if redeemed prior to March 31, 2016, at $25.75 per Series F Preferred Share if redeemed on or after March 31, 2016 but prior to March 31, 2017, at $25.50 per Series F Preferred Share if redeemed on or after March 31, 2017 but prior to March 31, 2018, at $25.25 per Series F Preferred Share if redeemed on or after March 31, 2018 but prior to March 31, 2019 and at $25.00 per Series F Preferred Share if redeemed on or after March 31, 2019, in each case together with all declared and unpaid dividends up to but excluding the date fixed for redemption.

Impact of the Share Issues

According to pro forma data as at December 31, 2009, an issue of $100 million of Common Shares and $100 million of Preferred Shares would increase Industrial Alliance’s solvency ratio from 208% to 226% (228% if the over-allotment is exercised).

These issues will also improve the leeway available to the Company to absorb potential stock market downturns. The Company thus estimates that the solvency ratio will remain above 175% as long as the S&P/TSX stays above about 6,900 points (compared to 7,700 points without these issues) and will remain above 150% as long as the S&P/TSX index stays above about 5,400 points (compared to 6,300 points without these issues).

Notwithstanding the Common Share and Preferred Share offerings, the Company is maintaining its 2010 guidance regarding earnings per share and return on common shareholders’ equity that it gave to the financial markets on February 12, 2010 when it published its results for the fourth quarter of 2009.

Posted in New Issues | 2 Comments »

« Older Entries
Newer Entries »