Market Action

December 8, 2008

American pension funds begged for relief from having to top up their accounts:

Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.

Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business. They’re pressing Congress to consider the issue this week before this year’s session adjourns.

It’s another difficult question of mark-to-market vs. whatever-other accounting! Frankly, I think the entire defined-benefit paradigm is dead – or if not dead, should be.

In a rather chilling development, specific bank credit decisions are being politicized:

Illinois Governor Rod Blagojevich said today the state would suspend its business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.

Blagojevich commented at a news conference after meeting with employees who have stayed at the factory since Dec. 5, when it closed after the bank canceled its line of credit. Illinois does “hundreds of millions of dollars” in business with the bank, he said.

Three-month US T-Bills are now trading at less than a beep:

The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929 amid record demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.

The bills were sold at a high discount rate of 0.005 percent, the Treasury said today in Washington. At last week’s auction, the bills drew a rate of 0.05 percent. The government received bids for the bills totaling more than triple the amount sold.

There is a report of another chapter in the BCE saga:

BCE Inc. told would-be acquirers that it received an auditor’s opinion showing the company would be solvent after the C$52 billion purchase by Ontario Teachers’ Pension Plan and a group of U.S. private-equity firms, according to two people briefed on the matter.

The opinion, delivered by PricewaterhouseCoopers LLP, is contrary to an analysis by rival accounting firm KPMG LLC.

Hmm … I wonder if the same deal can go the Supreme Court twice!

Sorry, folks! I’m just plain out of time, so there is no volume or price-change table today. I will point out though, that the SplitShare sector was on fire today, with strength pretty much across the board.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 7.09% 7.43% 87,773 13.18 6 +1.6424% 744.9
Floater 9.56% 9.85% 68,374 9.53 2 +0.4077% 370.8
Op. Retract 5.53% 6.99% 141,821 4.05 15 -0.1799% 978.1
Split-Share 6.94% 13.23% 71,831 3.94 14 +6.0720% 885.9
Interest Bearing 9.17% 18.04% 56,659 2.87 3 +2.7985% 798.7
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 7.76% 7.88% 206,837 11.55 71 +1.7398% 712.9
Fixed-Reset 6.07% 5.42% 1,125,193 14.41 16 +1.3936% 987.2
Interesting External Papers

IMF Releases December 2008 Issue of Finance & Development

The IMF has released its December 2008 Issue of Finance & Development. Articles are:

  • Cracks in the System: Repairing th Damaged Global Economy
  • F&D on Financial Crisis Origins
  • Preventing Future Crises
  • When Crises Collide
  • A Crisis to Remember
  • Global Financial Turmoil Tests Asia
  • The Crisis through the Lens of History
  • Ensuring Food Security
  • Stockholm Solutions
  • Neighborly Investments
  • The Road to Recovery: A View from Japan
  • Nigeria’s Shot at Redemption
  • The Catch-Up Game
  • The Economic Geography of Regional Integration

To be frank, I wasn’t much impressed by the Stockholm Solutions article about the Nordic crisis. It was very general.

A topic more suited to generality was The Crisis through the Lens of History:

A second important lesson is the value of providing macroeconomic support in parallel with financial actions. With the effectiveness of monetary policy limited by financial disruptions, fiscal stimulus must play an important role to help maintain the momentum of the real economy and curtail negative feedbacks between the financial and real sectors. Indeed, increasing interest is now being paid to boosting infrastructure spending, akin to the public work programs of the Depression era. But, as the Japanese example makes clear, macroeconomic support by itself provides only breathing room, not a cure; it is essential to use the space provided to address the underlying financial problems or the outcome will be a series of fiscal packages with diminishing impact. And it should also be recognized that there will be limited space for macroeconomic responses in countries where the weakness of public sector management has been an integral source of the problem, as has often been the case in emerging market crises.

Additionally, the article on Preventing Future Crises contains many of the familiar old nostrums but, as a saving grace, adds an element I’ve been harping on:

Safeguarding diversity to promote systemic complementarities
The degree to which financial institutions with long maturing liabilities (for example, pension funds and life insurance companies) should be subject to mark-to-market requirements or to risk management standards based on risk models focused on short-run price volatility in managing
their assets could be reconsidered. Regulations could increase the scope for such institutions to play the role of long-term, hold-to-maturity investors. But low-leverage financial institutions with limited systemic importance may need only light, if any, regulation, thus allowing them to play a potentially stabilizing role in taking more risky or contrarian positions compared with other market participants (Nugée and Persaud, 2006).

I’ve said it before … I’ll say it again. The current crisis has shown significant cracks in bank regulation, but let’s not throw the baby out with the bathwater. What we should be aiming for is a rock solid banking system core, surrounded in turn by more exciting investment banks, which are in turn surrounded by a wild-n-wooly world of hedge funds, SIVs, and whatever else gets dreamed up to make a buck.

Issue Comments

RPQ.PR.A, RPB.PR.A, RPA.PR.A, PRF.PR.A : Expected Credit Event

Connor Clark & Lunn has announced:

that Tribune Company’s decision to voluntarily restructure its debt obligations under the protection of Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware is expected to constitute a credit event under the credit linked note (“CLN”) issued by their respective counterparties.

When it was chosen for inclusion in the Reference Portfolios, Tribune was in a stable industry with ample cash flow generation and rated A- by Standard & Poor’s. In December 2007, Tribune was acquired in a leveraged buy-out which reduced its rating to B- and it needed to sell off assets in order to raise cash to pay down its large debt load. Following the acquisition, a precipitous decline in revenue and a tough economy coupled with the credit crisis that makes it extremely difficult to support its current level of debt.

When Connor, Clark & Lunn Capital Markets Inc. receives further information regarding the credit event and the recovery rate we will provide an update on the impact on the companies.

A very defensive sounding press release! Bloomberg has a story on the Tribune filing.

Guys, guys, guys! I’m an old bond guy. I’ve been there. Bad things happen. The problem is not your selection of Tribune Company as one of your 125-odd names. The problem is your decision to concentrate your investment (by the terms of the credit note) to such an extent that a single default becomes a major problem. Such a note can make sense to both the buyer and the seller, as long as both realize that it’s disaster insurance; the buyer of the note gets a small premium and assumes the very small risk of a very large payout. But … that risk is increasing.

RPQ.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPB.PR.A was last mentioned on PrefBlog when the dividend was suspended and the rating withdrawn.

RPA.PR.A was last mentioned on PrefBlog when S&P downgraded it to P-2.

PRF.PR.A was last mentioned on PrefBlog with respect to the Lehman credit event.

None of these issues is tracked by HIMIPref™.

Interesting External Papers

BIS Quarterly Review Released

The Bank for International Settlements has released its Quarterly Review, December 2008.

Articles include:

  • Global financial crisis spurs unprecedented policy actions
  • Highlights of international banking and financial market activity
  • Developments in repo markets during the financial turmoil
  • Commodity prices and inflation dynamics
  • Bank health and lending to emerging markets
  • How many in negative equity? The role of mortgage contract characteristics

Repos and the Treasury Market Practices Group were briefly mentioned on November 24. The following is from the BIS article on repos:

By March 2008, however, the financial turmoil reached a point where heightened risk aversion coupled with uncertainty over valuations of particularly risky products led participants in the repo market to abruptly stop accepting anything other than Treasury and agency collateral. As a result, investment banks such as Bear Stearns suddenly found themselves short of funding, as a large part of their collateral pool was no longer accepted by the US repo market. This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. As the available supply of Treasury collateral dropped, those market participants willing to lend out Treasuries were able to borrow cash at increasingly cheap rates. At times, this effect pushed US GC repo rates down to levels only a few basis points above zero.

The scarcity of US Treasuries for repo transactions also manifested itself in a sharp increase in the number of Treasury settlement fails. Whereas fails to deliver Treasuries had averaged around $90 billion per week during the two years preceding the crisis, they rose to above $1 trillion during the Bear Stearns episode and then soared to record highs of almost $2.7 trillion
following the Lehman default (Graph 5).

MAPF

MAPF Performance: November 2008

The fund handsomely outperfomed its benchmark in November, but was dragged down by an unprecedented decline in preferred share prices. The immense volatility of the market is leading to most unusual trading opportunities.

How bad and how unprecedented was November? The BMOCM-50 Index was down 10.70%. Taking data from the BMOCM-50, I can say it was the worst month I have on record, with records beginning on December 31, 1992. And, you might well ask, what was the second-worst month? October 2008, down 8.16%. Third-worst? August, 1998 (Russian crisis) down a mere 4.51%.

In fact, of the twelve worst months since 1992-12-31, six have been in the last year.

The fund’s price at November 28, 2008 was $7.0106, after expenses, but before fees (which are billed individually to each client).

Returns to November 28, 2008
Period MAPF Index CPD
according to
Claymore
One Month -9.24% -10.70% -11.06%
Three Months -17.07% -20.11% -19.85%
One Year -14.15% -20.93% -22.79%
Two Years (annualized) -9.69% -14.04%  
Three Years (annualized) -4.55% -8.29%  
Four Years (annualized) -1.92% -5.19%  
Five Years (annualized) +1.23% -3.03%  
Six Years (annualized) +5.62% -1.33%  
Seven Years (annualized) +4.56% -0.78%  
The Index is the BMO-CM “50”
CPD Returns are for the NAV and are after all fees and expenses.

Returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Sustainable
Income
June, 2007 9.3114 5.16% 1.03 5.01% 0.4665
September 9.1489 5.35% 0.98 5.46% 0.4995
December, 2007 9.0070 5.53% 0.942 5.87% 0.5288
March, 2008 8.8512 6.17% 1.047 5.89% 0.5216
June 8.3419 6.034% 0.952 6.338% $0.5287
September 8.1886 7.108% 0.969 7.335% $0.6006
November, 2008 7.0106 11.000% 1.001 11.001% $0.7712
NAVPU is shown after quarterly distributions.
“Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00%
“Securities YTW” divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
“Sustainable Income” is the best available estimate of the fund’s dividend income per unit, before fees and expenses.

The fund has positions in three “Split Share” preferreds – terribly out of fashion at this time and trading at yields higher than the perpetuals – which, as explained in August results in the calculation being rendered somewhat suspect. If these positions were sold – at the closing bid on 11/28 – and all cash reinvested in rest of the portfolio, the resultant portfolio would yield 8.22% and the estimated sustainable dividend per unit (before fees and expenses) would be $0.5763; significantly less than the figure calculated above, but still an increase from last month’s adjusted figure and continuing the long-term upward trend.

The current situation whereby investment-grade SplitShare preferreds yield more than PerpetualDiscounts cannot last forever, and it may be anticipated that the calculated Sustainable will fall towards the adjusted figure of $0.5763 … the current calculation assumes that the yield will last forever, rather than the two or three years remaining until the maturity of the SplitShares. On the other hand, it is possible – unlikely, perhaps, in the current climate, but possible – that the yield on the split shares will fall so rapidly that profits may be taken as a capital gain in the near term and reinvested at sustainable yields close to the assumed level of 8.22%, which would lock in the currently estimated sustainable yield. I am not sure how the analysis may be best presented; perhaps at some point I will recalculate all the data using a sustainable yield equal to the PerpetualDiscount index.

It will be noted that if there was no trading in the portfolio, one would expect the sustainable yield to be constant (before fees and expenses). The success of the fund’s trading is showing up in

  • the very good performance against the index
  • the long term increases in sustainable income per unit

As has been noted, the fund has maintained a credit quality equal to or better than the index; outperformance is due to constant exploitation of trading anomalies.

Trading in November continued to be heavy, with portfolio turnover at about 175%. Most of these trades were not just intra-sector, but intra-issuer; that is, between similar issues of the same issuer, notably the PerpetualDiscount issues of CM, BMO and SLF. These trades were, in aggregate, highly profitable.

A major trade was executed from PerpetualDiscounts into SplitShares when – against all reason – the split share with a short term maturity and well-buffered against default underperformed the PerpetualDiscount index. This trade – into FFN.PR.A; discussed in the post on portfolio composition – is not yet profitable, but I am confident that it will become so in the near future.

Of greater interest – and greater profitability, so far – was the November 24 trade from WFS.PR.A to FBS.PR.B:

Post-Mortem
WFS.PR.A to FBS.PR.B
Date WFS.PR.A FBS.PR.B
10/31 7.71
Yield: 16.57%
8.70
Yield: 9.99%
Trade, 11/24
Net of Commission
7.735 7.024
11/28 7.80
Yield: 16.59%
No Dividends
7.49
Yield: 15.39%
Earned Dividend $0.11875

The position in WFS.PR.A was largely established in July, with smaller purchases and sales since then. The largest single day’s trade was a purchase of 6,800 shares on July 9, funded by a sale of GWO.PR.G:

Post-Mortem:
GWO.PR.G to WFS.PR.A
Date GWO.PR.G WFS.PR.A
Trade
2008-7-9
Sold
21.31
Bought
9.08
Closing
Bid
11/24
14.51 7.88
Dividends Missed
$0.325
Earned
$0.13125

Most satisfactory! It should be noted that trades both in and out of GWO.PR.G have been performed against different issues as the market allowed in the interim.

At some point – and I won’t guess when that time will be! – the market will cease its decline and, probably, return to its normal levels of between 100bp and 150bp above long term corporates, which in turn will return to more normal levels against long term Canadas. This could happen extremely quickly and attempting to time the market is folly. At the moment, however, people are scared, the market is sloppy and trading opportunities abound.

The absolute performance of the fund is terrible, but the performance relative to the index and tradeable benchmark is superb. The sustainable yield – however calculated – is increasing. As the market recovers – or even stabilizes! – the steady drip, drip, drip of dividends will make itself felt in long-term returns.

New Issues

New Issue (Maybe) [Continued]: BNS Fixed-Reset 6.25%+384

I have some more information on the new issue of BNS Fixed-Resets that was previously discussed when Scotia announced the issuance as partial settlement of their purchase of a big chunk of CI from SunLife.

This comes from the Bank’s recent filing on SEDAR of a Material Change Reporte dated 2008-12-5: an “Amending Agreement” dated 2008-12-3, schedule 2.03.

Issue: Preferred Shares Series 24

Dividends: Initial Rate 6.25% until the first Exchange Date, 5-Year Canadas + 384bp thereafter. First Dividend $0.5865 [unless the closing date changes] payable 2009-4-28. The closing date is specified in the Amending Agreement only as:

“Closing Date” means the date that is six (6) Business Days after all conditions to the purchase and sale of the Securities set out in Sections 5.01 and 5.02 (other than those conditions that by their nature can only be satisfied on the Closing Date) having been satisfied or waived or (ii) such other date as may be agreed to in writing by the Vendors and the Purchaser.

… but $0.5685 is 137 days’ coupon at 6.25%, implying a projected Closing Date of 2008-12-12 … assuming that the dividend is payable on the last day of its accrual. Floaters pay 3-Month Bills + 384bp, reset quarterly.

Size: 10-million shares (=$250-million).

Exchange Dates: 2014-1-26 and every five years thereafter.

Redemption: Every Exchange Date at $25.00. Floaters redeemable every exchange date at $25.00 and at $25.50 at all other times.

Convertable: Every Exchange Date to and from Series 25 (“Floaters”)

There is nothing specific about the plan of distribution, but Section 2.11 of the Amended Agreement states:

The Purchase Agreement is amended by (i) deleting “and” at the end of Section 5.02(d), (ii) deleting the period at the end of Section 5.02(e) and substituting therefor “;”, and (iii) adding the following immediately after Section 5.02(e) thereof:

“(f) The Purchaser will have (i) prepared and filed with the Ontario Securities Commission, as principal regulator, and with the securities regulatory authorities in each of the other provinces and territories of Canada (together with the Province of Ontario, “Qualifying Jurisdictions”) and received a receipt or other decision document therefor, an amendment to the Purchaser’s short form base shelf prospectus dated April 16, 2008 (the “Prospectus”), and (ii) prepared and filed a prospectus supplement to the Prospectus (together, the “Prospectus Supplement”) with the Ontario Securities Commission, as principal regulator, and with securities regulatory authorities in each of the other Qualifying Jurisdictions, qualifying the distribution to the Vendors, as applicable, of the BNS Common Shares and BNS Preferred Shares contemplated by Section 2.06; and

(g) The BNS Common Shares and BNS Preferred Shares contemplated by Section 2.06 will be listed on the Toronto Stock Exchange and the Series 25 Preferred Shares will be conditionally listed on the Toronto Stock Exchange.”

Update, 2008-12-11: There is a prospectus supplement describing these shares on SEDAR, filed by Bank of Nova Scotia on 2008-12-9.

Market Action

December 5, 2008

BCE gyrations continue:

Citigroup Inc. and Deutsche Bank AG, lead lenders on the C$52 billion ($42 billion) acquisition of BCE Inc., have indicated they are unwilling to fund an alternative proposal that would keep the phone company publicly traded, according to two people familiar with the matter.

Private-equity firms had proposed investing C$8 billion to C$10 billion in preferred securities in lieu of the original leveraged buyout. The alternative transaction hinged on financing from the banks backing the LBO, which are opposed, according to the people, who asked not to be named because the discussions are private.

Golly, there’s a surprise, eh? It may be that the entire proposal was simply lawsuit-avoidance grandstanding … but who knows? BCE denies the rumours:

issuing a statement in response to certain rumours reported in the media regarding a possible minority investment in the company by some or all of theinvestor group led by Teachers’ Private Capital, the private investment arm ofthe Ontario Teachers’ Pension Plan, and affiliates of Providence EquityPartners Inc., Madison Dearborn Partners, LLC, and Merrill Lynch GlobalPrivate Equity.

While it is BCE’s policy not to comment on rumours or speculation, in theinterest of its shareholders, BCE is today confirming that no such offer has been made to the company.

The company continues to work with KPMG and the Purchaser to seek tosatisfy all closing conditions under the June 29, 2007 Definitive Agreement,as amended.

The press release has “legal advice” written all over it. It is not clear to me just what the precise, legally justifiable, meaning of “no such offer has been made” really means. To my untrained eye, it could mean ‘They haven’t actually signed anything yet’.

There is continued muttering that Bernanke’s Big Mistake was Lehman:

The more than half a million U.S. jobs lost in November were the latest in a drumbeat of dire economic data that may have been triggered by the Federal Reserve’s decision in mid-September to allow Lehman Brothers Holdings Inc. to fail, economists and bankers said.

“It’s the collapse heard around the world,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s probably one of the worst decisions the Fed ever made — to save everybody else but Lehman.”

Bernanke has said he won’t do it again. Assiduous Readers will remember my earlier remark:

The only mistake so far, I think, is allowing Lehman to fail … but neither I, nor any responsible commentator I know of, dreamed at the time that the bankruptcy would have such enormous systemic effects.

Across the Curve passes on some HSBC commentary on the jobs number. HSBC expects FOMC to cut to zero December 16.

Accrued Interest heaps scorn on the NY Port Authority for setting themselves up for a failed bond issue.

PerpetualDiscounts gained slightly as volume continued high. The weighted-average pre-tax bid-YTW of the PerpetualDiscount Index is now 8.01%, equivalent to 11.21% at the standard equivalency factor of 1.4x. This may be compared to long Corporates at 7.50%, implying a still-astonishing Pre-Tax Interest-Equivalent spread of 371bp.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 7.21% 7.55% 83,576 13.05 6 -2.0302% 732.8
Floater 9.52% 9.80% 66,716 9.53 2 -3.2834% 372.3
Op. Retract 5.51% 6.99% 142,052 4.18 15 -0.1195% 979.9
Split-Share 7.35% 14.96% 69,171 3.92 14 -1.2643% 835.2
Interest Bearing 9.42% 19.85% 57,380 2.87 3 +2.3045% 776.9
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 7.89% 8.01% 202,056 11.41 71 +0.0785% 700.7
Fixed-Reset 6.14% 5.60% 1,040,933 14.18 15 -0.0582% 973.7
Major Price Changes
Issue Index Change Notes
BNA.PR.B SplitShare -7.3333% Asset coverage of 1.6+:1 as of December 4 based on BAM.A at 16.72 and 2.4 BAM.A per unit. Now with a pre-tax bid-YTW of 15.37% based on a bid of 13.90 and a hardMaturity 2016-3-25 at 25.00. Closing quote of 13.90-16.44, 2×5. Day’s range of 14.54-15.75.
NA.PR.N FixedReset -6.2951%  
ALB.PR.A SplitShare -4.9683% Asset coverage of 1.2-:1 as of December 4 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 16.52% based on a bid of 19.51 and a hardMaturity 2011-2-28 at 25.00. Closing quote of 19.51-21.24 (!) 34×3. Day’s range of 20.02-53.
BCE.PR.Z FixFloat -4.6875%  
WFS.PR.A SplitShare -4.5743% Asset coverage of 1.3-:1 as of November 30 according to Mulvihill. Now with a pre-tax bid-YTW of 18.47% based on a bid of 7.51 and a hardMaturity 2011-6-30 at 10.00. Closing quote of 7.51-88, 20×10. Day’s range of 7.44-87.
LFE.PR.A SplitShare -4.5033% Asset coverage of 1.7-:1 as of November 28 according to the company. Now with a pre-tax bid-YTW of 14.91% based on a bid of 7.21 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 7.21-74, 45×1. Day’s range of 7.15-50.
BNA.PR.C SplitShare -4.3668% See BNA.PR.B, above. Now with a pre-tax bid-YTW of 19.30% based on a bid of 8.76 and a hardMaturity 2019-1-10 at 25.00. Closing quote of 8.76-9.18, 2×1. Day’s range of 8.51-50.
DFN.PR.A SplitShare -4.1860% Asset coverage of 1.9-:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 9.22% based on a bid of 8.24 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 8.24-42, 1×21. Day’s range of 8.25-90.
NA.PR.L PerpetualDiscount -4.0667% Now with a pre-tax bid-YTW of 8.56% based on a bid of 14.39 and a limitMaturity. Closing quote 14.39-70, 2×3. Day’s range of 14.10-15.15.
POW.PR.C PerpetualDiscount +4.4989% Now with a pre-tax bid-YTW of 7.30% based on a bid of 18.35 and a limitMaturity. Closing quote 18.35-73, 10×4. Day’s range of 17.52-18.94.
BSD.PR.A InterestBearing +5.1220% Asset coverage of 0.9-:1 as of November 28, according to Brookfield Funds. Now with a pre-tax bid-YTW of 24.13% based on a bid of 4.31 and a hardMaturity 2015-3-31 at 10.00. Closing quote of 4.31-44, 4×2. Day’s range of 4.00-30.
Volume Highlights
Issue Index Volume Notes
YPG.PR.A Scraps (Would be OpRet but there are credit concerns) 389,862 RBC crossed 360,000 at 15.55. Now with a pre-tax bid-YTW of 17.12% based on a bid of 16.10 and a softMaturity 2012-12-30 at 25.00.
PWF.PR.M FixedReset 307,380 Nesbitt bought 300,000 from anonymous at 24.00.
SLF.PR.D PerpetualDiscount 219,522 Desjardins crossed 80,000 at 14.00, then another 110,000 at the same price. Now with a pre-tax bid-YTW of 8.38% based on a bid of 13.32 and a limitMaturity.
SLF.PR.E PerpetualDiscount 202,290 Desjardins crossed 80,000 at 13.90, then another 110,000 at the same price. Tax loss internal cross against SLF.PR.D? Now with a pre-tax bid-YTW of 8.13% based on a bid of 13.90 and a limitMaturity.
BNA.PR.B SplitShare 121,800 TD crossed 30,000 at 14.80; Scotia crossed 70,000 at 15.20. Asset coverage of 1.6+:1 as of December 4 based on BAM.A at 16.72 and 2.4 BAM.A per unit. Now with a pre-tax bid-YTW of 15.37% based on a bid of 13.90 and a hardMaturity 2016-3-25 at 25.00.
WFS.PR.A SplitShare 249,250 Desjardins crossed 120,000 at 7.54, then another 100,000 at 7.55. See above
PIC.PR.A Scraps (Would be SplitShare but there are credit concerns) 119,038 Desjardins crossed 100,000 at 11.65. Asset coverage of 1.2-:1 as of November 30 according to Mulvihill. Now with a pre-tax bid-YTW of 20.98% based on a bid of 11.67 and a hardMaturity 2010-11-1 at 15.00.
TD.PR.Q PerpetualDiscount 112,478 National Bank crossed 40,000 at 19.05, 49,700 at 19.09 and 100,000 at 18.90. Now with a pre-tax bid-YTW of 7.44% based on a bid of 19.15 and a limitMaturity.
BCE.PR.I FixFloat 111,846 TD crossed two lots of 50,000 each at 16.10.
BCE.PR.H Scraps (Would be Ratchet but there are volume concerns) 100,000 TD crossed 100,000 at 16.30.

There were sixty-eight index-included $25-pv-equivalent issues trading over 10,000 shares today

Issue Comments

SLS.PR.A Downgraded to Pfd-4(low) by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SL Split Corp. (the Company) to Pfd-4 (low), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In November 2007, the Company raised gross proceeds of $59.4 million by issuing 1.055 million Preferred Shares (at $25.78 each) and 2.11 million Capital Shares (at $15.26 each). The initial split share structure provided downside protection of 52% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Sun Life Shares) of Sun Life Financial Inc. (Sun Life). Dividends received from the Sun Life Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 5.00% annually. Excess dividends net of all expenses of the Company may be paid as dividends on the Capital Shares. The current dividend income on the Sun Life Shares less administration fees and other Company expenses is approximately equal to the cost of the Preferred Shares distributions.

The value of the Sun Life Shares has declined significantly since inception. Sun Life announced a third-quarter loss due to writedowns of $636 million from holdings in Lehman Brothers Holdings Inc., Washington Mutual, Inc. and American International Group, Inc (AIG), as well as $326 million in charges from the decline in equity markets. From November 7, 2007, to December 3, 2008, the net asset value (NAV) of the Company dropped from $53.31 to $24.87, a decline of about 53%. As a result, all of the initial downside protection available to the Preferred Shares has eroded. As of December 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 3.5% of their initial issuance price if the Sun Life Shares had been liquidated and proceeds distributed. However, the credit quality of Sun Life remains strong as DBRS confirmed its senior unsecured debt rating at AA (low) with a Stable trend on July 9, 2008.

As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low) with a Stable trend. A main constraint to the rating is that volatility of the common share price and changes in the dividend policies of Sun Life may result in reductions in asset coverage or dividend coverage from time to time.

The redemption date for both classes of shares issued is January 31, 2013.

SLS.PR.A was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

Issue Comments

SNH.PR.U Downgraded to Pfd-5(high) by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by SNP Health Split Corp. (the Company) to Pfd-5 (high), with a Stable trend, from Pfd-3 (high). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In February 2002, the Company raised gross proceeds of approximately US$156 million by issuing 3.3 million Preferred Shares (at US$25 each) and 6.6 million Capital Shares (at US$11.15 each). The initial split share structure provided downside protection of 47% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the Portfolio) of companies that make up the S&P Health Care Sector Index of the S&P 500 Index. Holders of the Preferred Shares receive a fixed, cumulative quarterly dividend yielding 6% annually. The distributions are funded from dividends received on the Portfolio holdings as well as from income generated by writing covered call options and cash-covered put options. The Capital Shareholders do not receive distributions.

The redemption date for both classes of shares issued is February 11, 2009, so there are less than three months remaining until maturity. However, the value of the Portfolio has declined significantly in the last few months, putting full repayment of the Preferred Shares principal at risk. From August 28, 2008, to December 3, 2008, the net asset value (NAV) of the Company dropped from $36.80 to $26.34 due to market volatility, a decline of approximately 28%. As a result, most of the initial downside protection available to the Preferred Shares has eroded; the current downside protection is 5% (as of December 3, 2008).

As a result of the volatility in the current equity markets and the lower asset coverage available, DBRS has downgraded the rating of the Preferred Shares to Pfd-5 (high) with a Stable trend.

SNH.PR.U was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.

Issue Comments

BSD.PR.A: DBRS Downgrades to Pfd-5

DBRS has announced that it:

has today downgraded the Preferred Securities issued by Brascan SoundVest Rising Distribution Split Trust (the Trust) to Pfd-5, with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The initial split share structure provided downside protection of 58% to the Preferred Securities (after expenses).

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units received regular monthly cash distributions from April 2005 to September 2008. The Trust may not make any cash distributions on the Capital Units if the asset coverage available to the Preferred Securities would be less than 1.4 times after giving effect to the proposed distribution. Due to a large decline in the net asset value (NAV) during September and October, the Capital Unit distribution was suspended for the first time in October 2008.

Based on the 2008 interim financial statements, the interest coverage ratio available to the holders of the Preferred Securities was over 2.5 times. This ratio will vary depending on the distributions from the Trust’s underlying holdings.

The NAV of the Trust has declined significantly in the last few months. From August 29, 2008, to November 28, 2008, the NAV of the Trust dropped from $16.35 to $8.72, a decline of about 47%. As a result, all of the initial downside protection available to the Preferred Securities has been eroded. As of November 28, 2008, holders of the Preferred Securities would have experienced a loss of approximately 13% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Securities to Pfd-5 with a Negative trend.

The redemption date for the Preferred Securities is March 31, 2015.

BSD.PR.A was part of the DBRS Mass Review of Splits. Retractions and the Capital Unit dividend were suspended in October. The reported NAV has been extremely volatile lately.

BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing subIndex. Given the downgrade, it will be relegated to “Scraps” at the December month-end rebalancing.

This issue has been the topic of much discussion on PrefBlog over the past few months. Assiduous Reader prefhound takes the view that the vaunted income coverage will decline considerably in the near future.