PrefBlog

Sunlife has released its 1Q09 results, so we can take a quick look at their exposures.

Earnings suffered with the markets:

Sun Life Financial Inc.2 reported a net loss attributable to common shareholders of $213 million for the quarter ended March 31, 2009, compared with net income of $533 million in the first quarter of 2008. The Company incurred operating losses of $186 million for the first quarter of 2009 compared with operating earnings of $533 million in the first quarter of 2008. First quarter 2009 earnings were unfavourably impacted by $65 million from changes in the value of the Canadian dollar. Results in the first quarter of 2008 include earnings of $43 million or $0.08 per share from the Company’s 37% ownership interest in CI Financial, which the Company sold in the fourth quarter of 2008. The operating loss for the first quarter of 2009 does not include after-tax charges of $27 million for restructuring costs taken as part of the Company’s efforts to reduce expense levels and improve operational efficiency.

Net losses in the first quarter of 2009 were driven primarily by reserve strengthening, net of hedging, of $325 million related to equity market declines, reserve increases of $167 million for downgrades on the Company’s investment portfolio, equity impairments of $42 million and net credit impairments of $34 million. The Company’s equity hedging program operated as planned, offsetting some of the impact of reserve strengthening related to segregated fund and variable annuity guarantees as a result of volatility in capital markets during the quarter. First quarter results were also unfavourably impacted by increases in actuarial reserves related to the very low interest rate environment reflecting current and prior period experience.

Exposures:

This bit from the Shareholders’ Report is rather interesting:

The estimated impact from these obligations of an immediate parallel increase of 1% in interest rates as at March 31, 2009, across the yield curve in all markets, would be an increase in net income in the range of $125 million to $175 million. Conversely, an immediate 1% parallel decrease in interest rates would result in an estimated decrease in net income in the range of $250 million to $325 million. Interest rate sensitivities increased from prior quarter levels as a result of a number of factors, including increases in actuarial reserves, reflecting current and prior period experience, related to the very low interest rate environment as well as changes in market levels and interest rate hedging during the quarter.

In the first place, the effect is in the opposite direction from that expected, implying that the duration of their assets is less than the duration of their offsetting liabilities. In the second place, figures for 4Q08 were +100 to +150 and -150 to -200, respectively, implying they have increased their mismatch.

Despite including this post in the “Regulatory Capital” category of PrefBlog, I will not discuss MCCSR. This figure is useless for analytical purposes, since:

• Corresponding US calculations are not disclosed
• As preferred share investors we are interested in the publicly issued preferred shares, at the holdco level

As noted by DBRS:

The incurrence of debt at the holding company to provide equity capital to operating subsidiaries constitutes double leverage, the use of which should be conservative. The analysis of double leverage requires a review of the unconsolidated financial statements of the holding company, which are generally not in the public domain.

I mentioned on May 1:

I understand that Scotia has done an Innovative Tier 1 Capital deal, described as “650 million deal June 30, 2019-2108 … at 7.804%”, but have no further details, no press release, nothing on SEDAR.

Well, still no press release, but the prospectus is on SEDAR, dated May 1, 2009:

From the date of issue to, but excluding, June 30, 2019 the interest rate on the Scotia BaTS III Series 2009-1 will be fixed at 7.802% per annum. Starting on June 30, 2019 and on every fifth anniversary of such date thereafter until June 30, 2104 (each such date, an “Interest Reset Date”), the interest rate on the Scotia BaTS III Series 2009-1 will be reset at an interest rate per annum equal to the Government of Canada Yield (as defined herein) plus 7.05%. The Scotia BaTS III Series 2009-1 will mature on June 30, 2108. Holders of Scotia BaTS III Series 2009-1 may, in certain circumstances, be required to invest interest paid on the Scotia BaTS III Series 2009-1 in a series of newly-issued preferred shares of the Bank with non-cumulative dividends (each such series is referred to as “Bank Deferral Preferred Shares). See “Description of the Trust Securities — Scotia BaTS III Series 2009-1 — Deferral Right”.
…
The Bank will covenant for the benefit of holders of Scotia BaTS III Series 2009-1 (the “Dividend Stopper Undertaking”) that, in the event of an Other Deferral Event (as defined herein), the Bank will not declare dividends of any kind on any preferred shares of the Bank (“Bank Preferred Shares”) or, failing any Bank Preferred Shares being outstanding, on all of the outstanding common shares of the Bank (“Bank Common Shares” and, collectively with the Bank Preferred Shares, the “Dividend Restricted Shares”) until the 6th month (the “Dividend Declaration Resumption Month”) following the relevant Deferral Date (as defined herein).
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On or after June 30, 2014 the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the Scotia BaTS III Series 2009-1, redeem the Scotia BaTS III Series 2009-1, in whole or in part. The redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding tax. The redemption price payable by the Trust will be paid in cash.
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It is expected that the closing date will be on or about May 7, 2009 (the “Closing Date”)
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On or after June 30, 2014 the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the Scotia BaTS III Series 2009-1, redeem the Scotia BaTS III Series 2009-1, in whole or in part. The redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of Scotia BaTS III Series 2009-1 redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption.
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Canada Yield Price means the price per $1,000 principal amount of Scotia BaTS III Series 2009-1 calculated by the Bank to provide an annual yield thereon from the applicable date of redemption to, but excluding, the next Interest Reset Date equal to the GOC Redemption Yield plus (i) 1.17% if the redemption date is any time prior to June 30, 2019 or (ii) 2.35% if the redemption date is any time on or after June 30, 2019.
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GOC Redemption Yield means, on any date, the average of the annual yields at 12:00 p.m. (Eastern time) on the Business Day immediately preceding the date on which the Trust gives notice of the redemption of the Scotia BaTS III Series 2009-1 as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, the Bank, as being the annual yield from the applicable date of redemption to, but excluding, the next Interest Reset Date which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued in Canadian dollars at 100% of its principal amount on the date of redemption and maturing on the next Interest Reset Date.
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Government of Canada Yield means, on any Interest Reset Date, the average of the annual yields as at 12:00 p.m. (Eastern time) on the third Business Day prior to the applicable Interest Reset Date as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, the Bank, as being the annual yield to maturity on such date which a non-callable Government of Canada bond would carry, assuming semiannual compounding, if issued in Canadian dollars in Canada at 100% of its principal amount on such date with a term to maturity of five years.
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Interest Reset Date means June 30, 2019 and every fifth anniversary of such date thereafter until June 30, 2104 on which dates the interest rate on the Scotia BaTS III Series 2009-1 will be reset as described in this prospectus.

There hasn’t been a new BNS Fixed-Reset since January and the market has changed a lot since then, so let’s do a quick comparison with the more recent RY.PR.Y 6.10%+413:

• The preferred dividend is equivalent to 8.54% interest, so there’s a give up of about 75bp to move to the Tier 1 issue. Mind you, RY.PR.Y closed last night with a 25.90 bid to yield 5.40% until its first call at the end of 2014, which eliminates the yield differential quite handily
• The Tier 1 issue does not reset the rate for 10 years
• If the Tier 1 issue is called prior to 2019-6-30, holders get a whacking great premium
• The Tier 1 issue is slightly senior to Preferreds

It would appear that this issue is greatly superior to equivalent bank preferred issues.