Issue Comments

CIR.PR.A Downgraded to Pfd-3 by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican International Financial Split Corp. (the Company) to Pfd-3 from Pfd-2 (low) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In March 2007, the Company raised gross proceeds of $150 million by issuing 7.5 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each). The initial structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by international financial institutions (IFS) with strong credit quality. The Portfolio is actively managed by the Manager to invest in IFS that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to the Canadian dollar at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.0% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $16.50 after giving effect to such distributions. Furthermore, the Company cannot make special distributions to the Class A Shares if the NAV drops to less than $20, unless the distribution is required to eliminate tax on net capital gains. Since the Company’s NAV has decreased below $16.50, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward.

The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. Since inception, the NAV has dropped from $20 per share to $13.81 (as of April 11, 2008), a decline of more than 30%. As a result, the current downside protection available to the Preferred Shareholders is approximately 28%.

The downgrade of the Preferred Shares is based on the greatly reduced asset coverage available to cover repayment of principal.

The redemption date for both classes of shares issued is December 2, 2013

CIR.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splitshares has been reported on PrefBlog.

Issue Comments

ASC.PR.A Downgraded to Pfd-2(low) by DBRS

DBRS has announced:

has today downgraded the Preferred Shares issued by AIC Global Financial Split Corp. (the Company) to Pfd-2 (low) from Pfd-2 (high) with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

In 2004, the Company issued 1.6 million Preferred Shares at $10 each and 1.6 million of Class A Shares at $15 each. The initial structure provided downside protection of approximately 58% (net of expenses).

The net proceeds from the offering were invested in a portfolio (the Portfolio) that included common equities selected from leading bank-based, insurance-based and investment management–based financial services companies with strong credit ratings. The Portfolio is actively managed by AIC Investment Services (the Manager) to invest in companies that have at least a US$1 billion market capitalization. The weighted-average credit rating of the Portfolio will be at least equivalent to “A” at all times. To mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation, it is expected that a minimum of 90% of all foreign content will be hedged back to the Canadian dollar for the life of the transaction.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the net asset value (NAV) of the Portfolio is less than $15 after giving effect to such distributions. Since the NAV has been greater than $15 since inception, the Class A Shareholders have received a consistent dividend on their investment. As a result, the Company requires greater returns from capital appreciation to maintain the current NAV of the Company.

In December 2006, when the Preferred Shares were upgraded to Pfd-2 (high), the NAV was $27.50, providing downside protection of about 64%. Since then, the NAV has declined 33% to $18.45, and the current downside protection available to the Preferred Shares is approximately 46%. The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry.

The downgrade of the Preferred Shares is based on the reduced asset coverage available to cover repayment of principal.

The redemption date for both classes of shares issued is May 31, 2011.

The mass review of Financial Split-Shares was discussed on Prefblog on March 19. The 2-notch downgrade of this issue – with asset coverage of 1.8+:1 and only 3 years (and a bit) to maturity signals a new get-tough attitude by DBRS.

ASC.PR.A is tracked by HIMIPref™; it was removed from the SplitShares index at the end of April 2007, due to volume concerns. It had been upgraded to Pfd-2(high) in late 2006.

Index Construction / Reporting

Home-made Indices with Intra-Day Updating

Assiduous Reader kaspu has complained about the volatility of the S&P/TSX Preferred Share Index (TXPR on Bloomberg) – or, at least, the reported volatility.

The problem is that this index is based on actual trades; hence, it can bounce around a lot when 100 shares trade at the ask, $1 above the bid. For instance, today:

This sort of behaviour is endemic to indices created by small shops without much market knowledge or experience. Readers in need of indices with more precision may wish to use the HIMIPref™ Indices, which are, of course, based on much less volatile bid prices.

“Gummy” has announced a new spreadsheet, available from his website. This spreadsheet allows the download of bid and ask prices – and lots of other information – for stocks reported (with a 20 minute delay) by Yahoo. It strikes me that with minimal effort, one could reproduce TXPR (using the defined basket of CPD) and update the index at the touch of a button, with minimal set-up time required.

The Gummy Stuff website, by the way, is reliable AS FAR AS IT GOES. Dr. Ponzo is math-oriented to a much greater degree than investment-oriented and does not always respect hallowed fixed income market conventions. In other words, I have found that things are properly calculated in accordance with the (usually stated) assumptions, but these assumptions are not necessarily the ones I might make when performing a calculation with the same purpose.

With respect to Kaspu‘s question about other indices … the latest CPD literature references the “Desjardins Preferred Share Universe Index”, which is new to me … and I have no further information. Claymore may be preparing for a showdown with the TSX about licensing fees (you should find out what they want for DEX bond data … it’s a scandal).

Additionally, there is the BMO Capital Markets “50” index, but that is available only to Nesbitt clients … maybe at a library, if you have a really good one nearby that gets their preferred share reports.

Update, 2008-5-1: “Gummy” has announced a spreadsheet that does exactly this! Just watch out for dividend ex-Dates!

Miscellaneous News

TD Securities Analysis Link Added to Blogroll

I’ve made a few additions to the blogroll lately – usually I don’t mention them – and there’s one that needs to be explained.

I’ve added TD Securities Public Currency and Research to the list, largely in the hopes that more of this research will be made public.

Read it, don’t read it, your choice, but remember the basic rules about dealer research:

  • The data is excellent
  • The ideas are interesting
  • The actual value of specific trade recommendations is dubious

I’ve also added a link to the Gummy Stuff website, which contains a plethora of utilities that are very useful for retail investors.

Issue Comments

NA.PR.M Settles Slightly Below Par

The new issue of National Bank 6.00% Perpetuals, announced March 31 and reported to have experienced brisk demand settled today, trading 412,080 shares in a range of 24.80-95, closing at 24.86-93, 10×25.

I have not seen an announcement regarding the greenshoe, but this is exercisable for 30 days after closing. The TSX website reflects the advertised 6-million-share ($150-million) size of the offering.

Comparables at the close are:

NA.PR.M and Comparables, 4/16
Issue Quote Dividend YTW CurvePrice
NA.PR.K 24.66-78 1.4625 5.93% 24.82
NA.PR.L 20.92-30 1.2125 5.80% 21.66
NA.PR.M 24.86-93 1.50 6.07% 25.44
BMO.PR.L 24.75-77 1.45 5.91% 25.33
Miscellaneous News

Giant JPMorgan Preferred Issue in the States

In news certain to make Assiduous Reader madequota (who hates new issues) glad that he’s north of the border, JPM has come out with a $6-billion fixed-floater:

The non-cumulative securities priced to yield 419 basis points more than U.S. Treasuries due in 2018 and pay a fixed rate of 7.9 percent for 10 years. If not called, the debt will begin to float at 347 basis points more than the three-month London interbank offered rate, a borrowing benchmark, currently set at 2.73 percent. A basis point is 0.01 percentage point.

Writedowns have reduced JPMorgan’s Tier 1 capital ratio, which regulators monitor to assess a bank’s ability to absorb loan losses, to 8.3 percent from 8.4 percent. That compares with ratios of 7.5 percent at Wachovia Corp. and 7.1 percent at Citigroup Inc. as of Dec. 31.

The minimum for a “well-capitalized” rating from regulators is 6 percent. The assets are calculated by weighing each type relative to its chance of default

Lehman Brothers Holdings Inc., the fourth-largest securities firm, sold $4 billion of preferred shares on April 1 that pay a coupon of 7.25 percent and are convertible to stock when Lehman shares reach $49.87. Citigroup, which has reported subprime losses of $24 billion and raised more than $30 billion in capital since November, pays 8.13 percent for preferred stock it sold in January. Bank of America Corp. is paying 8 percent on perpetual preferred shares sold the same month.

Market Action

April 16, 2008

The latest report of nefarious skullduggery involves the possibility that banks have under-reported the yields paid on interbank borrowing to avoid looking desperate, resulting in a quote for LIBOR that understates the true rate. Naked Capitalism republishes an extract from the WSJ article; the British Bankers’ Association has threatened to ban any bank caught misquoting rates.

Speaking of the BBA, they have recently released a response to proposals for increased/changed regulation … most of it is UK-specific, but they have strong views on the funding of a central deposit insurer:

We are strongly of the view that a pre-funded deposit protection scheme is inappropriate for UK market. We believe that there should be greater appreciation of the limited ability of deposit protection schemes to save a troubled bank and the impracticality of devising a scheme large enough to cope with the failure of a large UK institution.

We have significant concerns over the competitiveness impacts on the UK financial sector of moving to a pre-funded deposit protection scheme. The costs of moving to a pre-funded scheme would be significant and would have a harmful effect on banks’ competitiveness and their ability to lend to business and individuals alike. The industry has already sustained a significant cost increase from the removal of coinsurance and, subject to further consideration of the issues involved, would be prepared to take on the additional costs of a move to gross payments.

We note that in the US scheme, operated by the FDIC, the pre-fund was created for the purposes of closure and/or failure of a large number of small entities operating in that market. It is not set up to resolve problems in a bank the size of Northern Rock nor does the US system necessarily need a pre-fund to operate. Consumer confidence is driven by expectations that money can be retrieved in a crisis. We believe it would be impractical to build up a UK fund of sufficient size to deliver his. The United States ex-ante scheme of $49bn, built up over many years and in relation to circa $4 trillion insured deposits, is approximately equivalent to Northern Rock’s retail deposit base prior to the run. So unless it is a small institution that is in distress there would not be enough in the fund to head off a run.Whilst a pre-funded scheme would provide a ready pool of liquidity in the event of a bank default there are other more efficient means of delivering liquidity for prompt payout.

FDIC insurance is backed by the “full faith and credit of the United States Government”. We believe that a similar arrangement whereby the UK government provides support for an FSCS deposit scheme which borrows funds only when required provides the most effective balance for achieving a credible scheme in the eyes of the consumer whilst minimising costs to the industry.

In an update to my post Is Crony Capitalism Really Returning to America, I confessed to some confusion regarding the rationale for brokerages having such enormous chunks of sub-prime on their books:

Taking the last point a little further, I will highlight my confusion as to why the brokerages are taking such enormous write-downs on sub-prime product. This has never made a lot of sense to me

. The WSJ (via Naked Capitalism) has provided a much more venal rationale than the one I suggested at the time:

In August 2006, one Merrill trader fought back when managers pushed to have the firm retain $975 million of a new $1.5 billion CDO named Octans….

The result was a heated phone conversation with Merrill’s CDO co-chief, Harin De Silva, who was out of the office. Mr. De Silva urged the trader to accept the securities….The alternative was to let the deal fall apart, which would leave Merrill holding the risk of all the securities that would have backed the CDO.

In the end, Mr. Roy’s group took the $975 million of securities on the firm’s books….a step that helped the firm hold its top rank in CDO underwriting and led to an estimated $15 million in fee revenue…

Pressures rose in early 2007 as the housing bubble lost air. Merrill set out to reduce its exposure, in an effort referred to innocuously as “de-risking.”

It could have sold off billions of dollars’ worth of mortgage-backed bonds that it had stockpiled with the intention of packaging them into more CDOs. But with the market for such bonds slipping, Merrill would have had to record losses of $1.5 billion to $3 billion on the bonds, says a person familiar with the matter.

Instead, Merrill tried a different strategy: quickly turn the bonds into more CDOs.

Doing so was no longer a profitable enterprise….Still, executives believed that so long as all they retained on their books were super-senior tranches, they would be shielded from falls in the prices of mortgage securities….

In the first seven months of 2007, Merrill created more than $30 billion in mortgage CDOs, according to Dealogic, keeping Merrill No. 1 in Wall Street underwriting for this type of security.

The call for comments, Financial stability and depositor protection: strengthening the framework. At issue are the following notes regarding UK deposit insurance:

1.48 On 1 October 2007, the FSA changed the FSCS compensation limit applying to deposits so that 100 per cent of an eligible depositor’s losses up to £35,000 are covered. The FSA proposes that this limit will continue to be applied per person per bank, and without any co-insurance below the limit. The FSA intends to consult on a review of the FSCS limits in all sectors and other changes to the compensation scheme. The Authorities will also work with the financial sector to explore alternative ways for individuals to cover amounts above the threshold, as the Treasury Select Committee has recommended.

4.42 The Authorities have considered the possibility of making depositors a preferential class of creditor, (i.e. to introduce depositor preference), but the likely adverse consequences of this for other creditors in insolvency proceedings and for banks generally, in terms of increased costs of credit, shorter loan periods and increased demand for collateral, appear to make this undesirable in the UK context. It is therefore proposed that the claims of the FSCS and depositors (whose claims are not settled by the FSCS) will continue to rank alongside the claims of other ordinary unsecured creditors. While a bank liquidator will have a duty to assist the FSCS to effect a repaid payout (i.e. to process depositor information at an early stage), the funding for any payout to depositors would be provided by the FSCS.

5.53 The Treasury Select Committee has identified two disadvantages of a ‘pay as you go’ approach to financing the FSCS:

Market Action

April 15, 2008

There are reports that Citigroup’s sale of LBO debt is not going as planned, with investors picking off debt from the deals they know best, rather than buying the complete package holus-bolus.

And the SIV-unwinding proceeds apace. Bloomberg reports that State Street bought $850-million in assets from its sponsored conduits; Assiduous Readers will remember that PrefBlog reported on August 28 that State Street had the highest exposure to conduits of its American and European peers. However, they’ve experienced a strong first quarter:

“During the first quarter, we strengthened our regulatory capital position with strong net income of more than $500 million and the issuance of $500 million of tier-1 qualified regulatory capital.”

Their 8-K filed today discloses (page 32 of the PDF) that their Tier 1 Capital Ratio of 12.35% would decline to 10.15% if all their ABCP conduits were to be consolidated. They have a considerable investment portfolio devoted to AAA tranches of sub-prime – fortunately, mostly well seasoned, with a high degree of credit enhancement.

Credit enhancement is a good thing, with bank repossessions of houses doubling over 2007 levels! Meanwhile, Naked Capitalism highlights a story about increased corporate bankruptcies … some firms were dancing pretty close to the edge even in those halcyon days of easy money and have now been pushed off, as I suggested September 20.

Derivative indices have come in for some heavy criticism:

“The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that’s ceased to exist,” Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.

“The last thing the securitization market needs is another no-cash-upfront instrument that people can use to knock the markets about with,” said Andrew Dennis, the London-based head of the asset-backed debt syndication group for UBS AG of Zurich.

The latest version for AAA rated subprime mortgage bonds slumped by 43 percent since it began trading in August, according to Markit, as rising U.S. home loan delinquencies triggered a surge in the cost of credit-default swaps. That implies a 53 percent loss on the underlying mortgages, according to Schultz, almost four times the 13.75 percent rate predicted by Wachovia.

The cost to protect $10 million of AAA commercial mortgage securities jumped 10-fold during one six-month period to $100,000 a year, based on the first CMBX index from Markit. That implies about 13 percent losses on the underlying loans, more than four times the 2.8 percent forecast in the event of a recession by JPMorgan Chase & Co. analyst Alan Todd in New York.

“ABX, CMBX, any kind of X you like, are totally uncorrelated to any kind of underlying market,” Swiss Re’s Aigrain said at the Dubai conference.

Indices without an option of forcing delivery (of something! anything!) are evil. Assiduous Readers will remember that I pointed out the discrepency between the cash market and the index-marked market in my review of the IMF report as well as the earlier Goldman Sachs paper.

There was finally a day of decent volume for preferreds, but price moves were pretty insignificant.

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
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.12% 5.17% 27,663 15.20 2 +0.0000% 1,088.4
Fixed-Floater 4.77% 5.20% 63,560 15.27 8 +0.3722% 1,048.1
Floater 5.01% 5.05% 67,669 15.44 2 +1.1311% 832.3
Op. Retract 4.85% 3.41% 85,355 3.32 15 -0.0150% 1,047.2
Split-Share 5.38% 6.00% 86,859 4.08 14 +0.0710% 1,029.8
Interest Bearing 6.16% 6.12% 64,909 3.89 3 +0.3055% 1,100.1
Perpetual-Premium 5.91% 5.59% 201,602 4.81 7 -0.0562% 1,017.7
Perpetual-Discount 5.65% 5.67% 286,676 13.65 63 -0.0703% 922.1
Major Price Changes
Issue Index Change Notes
RY.PR.A PerpetualDiscount -1.5370% Now with a pre-tax bid-YTW of 5.52% based on a bid of 20.50 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.0989% Now with a pre-tax bid-YTW of 5.60% based on a bid of 22.50 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.0204% Now with a pre-tax bid-YTW of 5.78% based on a bid of 22.77 and a limitMaturity.
BNA.PR.C SplitShare +1.0698% Asset coverage of just under 2.7:1 as of March 31, according to the company. Now with a pre-tax bid-YTW of 7.25% based on a bid of 19.84 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.57% to 2010-9-30) and BNA.PR.B (8.45% to 2016-3-25).
LFE.PR.A SplitShare +1.1707% Asset coverage of 2.4+:1 as of March 31, according to the company. Now with a pre-tax bid-YTW of 4.42% based on a bid of 10.37 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.G FixFloat +1.4174%  
BAM.PR.B Floater +1.5385%  
Volume Highlights
Issue Index Volume Notes
BNS.PR.J PerpetualDiscount 115,900 Now with a pre-tax bid-YTW of 5.44% based on a bid of 23.93 and a limitMaturity.
BCE.PR.A FixFloat 74,550 Nesbitt crossed 18,000 at 23.90, then 50,000 at 24.05.
RY.PR.K OpRet 71,625 Anonymous bought 10,000 from Nesbitt at 25.30, then 10,000, then 19,900 at the same price, but not necessarily the same anonymous! Then, anonymous bought 12,000 from RBC at 25.30. Now with a pre-tax bid-YTW of 0.34% based on a bid of 25.26 and a call 2008-5-15 at 25.00.
BMO.PR.K PerpetualDiscount 59,300 Scotia crossed 50,000 at 22.90. Now with a pre-tax bid-YTW of 5.82% based on a bid of 22.90 and a limitMaturity.
CM.PR.A OpRet 58,315 Now with a pre-tax bid-YTW of -1.63% based on a bid of 25.85 and a call 2008-5-15 at 25.75.

There were twenty-six other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Issue Comments

AO.PR.A & AO.PR.B On TSX Delisting Review

The TSX has announced that it is:

reviewing Algo Group Inc.’s Common Shares (Symbol: AO), Convertible Redeemable Retractable Third Preferred Shares Series I (Symbol: AO.PR.A) and 6% Cumulative Redeemable Convertible Second Preferred Shares Series I (Symbol: AO.PR.B) with respect to meeting the continued listing requirements. The Company has been granted 90 days in which to regain compliance with these requirements, pursuant to the Remedial Review
Process.

Algo is not having a nice time. The most recent financials on SEDAR show a working capital deficiency and a shareholders’ equity deficiency. Their recent press release was a tale of woe:

Algo Group Inc. (TSX : AO) announced that it has recently sold certain assets of its W. Green Jeans division and as a consequence ceased operations in this division. The sale was completed with 4453166 Canada Inc., a company controlled by Mr. Warren Green. The proceeds were used by the Company to reduce the loan with its primary lender. Mr. Green, previously the Company’s Vice President, Sportswear, has terminated his employment with the Company.
At the outset of 2008, due to an administrative reorganization of Algo, the services of the Company’s Chief Financial Officer, Mr. Ken Labelle, were terminated. Additionally, due to the administrative reorganization and Algo’s financial situation, Algo was not in a position early in the year to have its auditors commence the audit fieldwork required in order to complete its annual audit. As a result, the audit of Algo’s consolidated financial statements will not be completed by March 31, 2008 and, as such, Algo will not be in a position to file its audited consolidated financial statements, related audit report and MD&A by the March 31, 2008 filing deadline applicable to reporting issuers in Canada.

AO.PR.A and AO.PR.B are not tracked by HIMIPref™

Issue Comments

FSV.PR.U Put on Credit Review – Developing by DBRS

This is a USD denominated cumulative perpetual (see SEDAR, company search “FirstService”, Document type “Security holders documents – English”, dated June 27, 2007) issued as a stock dividend in June, 2007.

Following their announcement of the sale of their security division, DBRS has announced it:

has today placed the Pfd-3 (low) rating of FirstService Corporation’s (FSC or the Company) Preferred Share issue Under Review with Developing Implications.

The action follows FSC’s statement that it intends to use the proceeds from the recently announced divestiture of its integrated security division, together with existing funds and available capital, to finance organic growth and acquisitions in its commercial real estate, residential property management, and property improvement services divisions.

DBRS will also focus on FSC’s financial intentions, as we seek to gain comfort that credit metrics will remain appropriate for the current rating category within the context of the growth strategy and changing business profile. Prior to the divestiture, the Company’s debt balance was $331 million ($550 million lease-adjusted) at December 31, 2007 versus $230 million ($430 million lease-adjusted) at March 31, 2007, as a result of strong acquisition activity in its real estate services areas (total of $132 million in the first nine months of F2008). This has led debt-to-EBITDA for LTM ending December 31, 2007 to increase to 2.4 times (x) from 2.0x in F2007. (Corresponding lease-adjusted debt-to-EBITDAR has increased to 3.2x from 2.9x.)

FSV.PR.U is not tracked by HIMIPref™