IAG.PR.C Meets Hostile Reception

November 26th, 2008

Industrial Alliance has announced:

Industrial Alliance Insurance and Financial Services Inc. (“Industrial Alliance” or the “Company”) announced today the successful completion of a Canadian public offering of 4 million of Non-Cumulative 5-Year Rate Reset Class A Preferred Shares Series C (the “Series C Preferred Shares”) from Industrial Alliance for sale to the public at a price of $25.00 per preferred share, representing aggregate gross proceeds of $100 million.

The offering was underwritten by a syndicate of investment dealers led by Scotia Capital Inc. The Series C Preferred Shares commence trading on the Toronto Stock Exchange today under the symbol IAG.PR.C.

It would appear that no additional shares were sold by way of the greenshoe noted in the original announcement

The issue traded 115,300 shares in a range of 23.90-40, indicating that at least some of the issue made it off the underwriter’s shelves. It closed at 23.80-90, 100×4.

At the bid price, the YTW is 6.38% based on a Canada Five-Year rate of 2.57% and a limitMaturity. The “5-Year Yield” is 7.38%, based on a hoped for, but currently unlikely, call at par 2014-1-30.

The perpetual, IAG.PR.A, closed at 12.75-71 to yield 9.26% based on the bid price of 12.75 and a limitMaturity (yield from the ask is 8.54%). However you slice it, the spread vs. the straight is well over 200bp. Given that the 5-to-Long spread on Canadas is currently about 150bp I’d say the spreads between the straight perpetual yield and the Fixed-Reset’s Yield to Worst (not the five-year-call-yield) should be 100bp absolute maximum, and – I’m guessing, I can’t point to any analysis here and suspect that any such analysis would be … er … suspect – probably more like 60bp.

So, to me, these are still expensive. But I was saying that last spring and then look what happened!

Posted in Issue Comments | 2 Comments »

New Issue: BMO Fixed-Reset 6.50%+383

November 25th, 2008

Fresh from releasing their 4Q08 Financials, BMO has announced:

a domestic public offering of $150 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 18 (the “Preferred Shares”). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $100 million of the Preferred Shares exercisable at any time up to two days before closing.

The Preferred Shares will be issued to the public at a price of $25.00 per Preferred Share and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for an initial five years, as and when declared by the board of directors of the Bank, payable in the amount of $0.40625 per Preferred Share, to yield 6.50 per cent annually.

Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 3.83 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 19 on February 25, 2014 and on February 25th of every fifth year thereafter. Holders of the Preferred Shares Series 19 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 3.83 per cent.

The anticipated closing date is December 11, 2008. The net proceeds from the offering will be used by the Bank for general corporate purposes.

The first dividend will be $0.73459 payable 2009-5-25 based on a December 11 closing.

BMO PerpetualDiscounts are currently yielding about 8.50% (it depends on which one you look at, the market is very sloppy) AND will provide a rather impressive capital gain should long rates decline substantiall and they get called away. This new issue has zero potential for capital gain, the same credit exposure and yields 200bp less. I simply cannot believe that the reset feature is worth that much! I thought the Fear Du Jour was deflation! I thought … a lot of things!

Posted in New Issues | 6 Comments »

BMO Capitalization: 4Q08

November 25th, 2008

BMO has released its Fourth Quarter 2008 Report and Supplementary Package. Their earnings were good, so maybe there will be a slight cessation of the agonizing over whether their preferred dividend will be eliminated! I expect that tomorrow I will receive my first eMail regarding 1Q09 … ‘Well, what if there’s a nuclear war and all their assets are destroyed? Maybe I should sell!’.

Anyway it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to, in this environment!

Step One is to analyze their Tier 1 Capital, reproducing the prior format:

BMO Capital Structure
October, 2007
& October, 2008
  4Q07 4Q08
Total Tier 1 Capital 16,994 18,729
Common Shareholders’ Equity 83.8% 85.3%
Preferred Shares 8.5% 10.7%
Innovative Tier 1 Capital Instruments 14.3% 13.3%
Non-Controlling Interests in Subsidiaries 0.2% 0.2%
Goodwill -6.7% -8.7%
Miscellaneous NA -0.7%

Next, the issuance capacity (from Part 3 of the introductory series):

BMO
Tier 1 Issuance Capacity
October 2007
& October 2008
  4Q07 4Q08
Equity Capital (A) 13,126 14,363
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.666*A), 2Q08		 4,375 9,566
Innovative Tier 1 Capital (C) 2,422 2,486
Preferred Limit (D=B-C) 1,953 7,080
Preferred Actual (E) 1,446 1,996
New Issuance Capacity (F=D-E) 507 5,084
Items A, C & E are taken from the table
“Basel II Regulatory Capital and Risk Weighted Assets”
of the supplementary information;
Note that Item A includes Goodwill and non-controlling interest; it is equal to “Net Tier 1 Capital less preferred shares & Innovative instruments.

Item B is as per OSFI Guidelines; the limit was recently increased.
Items D & F are my calculations

and the all important Risk-Weighted Asset Ratios!

BMO
Risk-Weighted Asset Ratios
October 2007
& October 2008
  Note 2007 4Q08
Equity Capital A 13,126 14,363
Risk-Weighted Assets B 178,687 191,608
Equity/RWA C=A/B 7.35% 7.49%
Tier 1 Ratio D 9.51% 9.77%
Capital Ratio E 11.74% 12.71%
Assets to Capital Multiple F 17.17x 16.42x
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from BMO’s Supplementary Report
C is my calculation.
F is from OSFI (4Q07) and BMO’s Supplementary Report (4Q08)

BMO’s supplementary data discloses a “Tangible common equity-to-risk-weighted-assets” figure that sounds like it should be equal to my “Equity/RWA” in the table. Their figure is 7.47%; it is not immediately clear to me how this figure is calculated, but it’s pretty close!

Capital ratios deteriorated somewhat from 3Q08 due largely to an increase of Risk-Weighted $10-billion in “Corporate including specialized lending”. The increase in leverage (Q4 vs Q3) indicated by the Assets to Capital multiple was largely due to a $22-billion increase in Derivative Instrument Assets, $12-billion in Securities and $7-billion in loans, funded by a $9-billion increase in deposits, $24-billion in Derivative Instrument Liabilities. The gross-up in Derivatives appears (page 24 of the supplementary data) to be due to increases in OTC Interest Rate Swaps ($10-billion) and Foreign Exchange ($10-billion) [page 26 of the supplementary]. Unfortunately, there is no indication of the collateralization and/or counterparty strength of these exposures, so we’ll have to leave that as a question mark for now.

I note as well that there is no adjustment to capital for “Expected loss in excess of allowance”, indicating that their ALLL is again equal to the EL which is indicative of conservative approach to assessing credit write-offs. It is also noteworthy that their “Securities, Other Than Trading” includes $11-billion in Canadian Mortgage Backed Securities – which are eligible for the $50-billion buyback discussed on November 12 – this represents an increase of $2-billion from 3Q08.

All in all, it was a solid quarter. I would spend more time on earnings if I was an equity guy, but I’m not: I’m a fixed income guy focussing on whether or not they’ll go broke. Not very soon they won’t! The common dividend payout ratio remains high at 66.2%, but I agree with them that it’s “good overall performance in the context of current economic and market conditions”.

Update, 2008-11-28 The following query …

I note that there has been a significant gross-up in your balance sheet with respect to derivatives.

Do you have a table available showing the degree to which your derivative-based assets are collateralized or backed up by the credit strength of your counterparties? Or other information that would allow an assessment of the quality of these assets?

… has been met with the following response:

Thank you for your question.

Unfortunately we do not disclose information regarding the strength of our counterparties.

However, in Q4 the increase in derivatives is due mainly to the impact of the stronger U.S. Dollar. Page 29 of the Q4 supplemental package shows the exposure by risk weight and comparing quarter over quarter the actual risk weighting has not largely changed.

Our supplemental package is available at:

http://www2.bmo.com/ir/qtrinfo/1/2008-q4/Suppq408.pdfhttp://www2.bmo.com
/ir/qtrinfo/1/2008-q4/Suppq408.pdf.

Posted in Regulatory Capital | 2 Comments »

November 24, 2008

November 25th, 2008

Treasury Bond trading may soon enter the 18th century – the Treasury Market Practices Group is recommending penalties for ignoring a contract:

The underlying problem is the Treasury market contracting convention that a seller can deliver securities after the originally scheduled settlement date at an unchanged invoice price, i.e., without incurring any penalty. Introduction of a dynamic fails penalty with a finite cap rate would remedy this problem. In particular, a dynamic fails penalty would provide an incentive for sellers to resolve fails promptly, and could lead to repo contracting conventions that would give beneficial owners of Treasury securities an opportunity to earn as much as the cap rate in securities loan fee income regardless of the level of nominal interest rates.

The TMPG recommends that market participants agree that the invoice price–that is, the cash amount that a buyer has agreed to pay against the delivery of securities–on any cash or financing transaction that fails to settle on the originally scheduled date be reduced at a
fails penalty rate equal to the greater of (a) 3 percent per annum minus the fed funds target rate at 5 p.m. EST on the business day prior to the originally scheduled settlement date, and (b) zero.
…
2. Margining of settlement fails: When sellers fail to deliver securities in settlement of agreed upon trades, counterparty risk exposures grow and can become acute as these fails age. To mitigate counterparty risk and to better incentivize delivery by increasing the cost of aged fails, the TMPG recommends that market participants take prompt steps to study the most efficient way to commence margining of fails in all cash and financing transactions in Treasury securities. The TMPG plans to convene a working group on this subject to make a recommendation by January 5, 2009.

Point two may be taken as criticism of the SEC for allowing counterparty risk to go unmargined. It is definitely criticism of bonehead risk control in the industry. Assiduous Readers will recall that on November 18 Scotia announced a big loss on trades – equities, admittedly – that were affected by that there counter-whatsit thingamajig.

RBC has announced that 4Q08 will include some market-related write-downs … but not without some accounting gymnastics:

we reclassified most of our U.S. auction rate securities and U.S. agency and non-agency mortgage-backed securities from held-for-trading to available-for-sale. This reclassification is effective August 1, 2008. Accordingly, any unrealized changes in the fair value of these securities will not be reflected in our fourth quarter earnings

.

Realized pre-tax losses include

  • $645-million loss on trading inventory
  • $355-million loss on permanent impairment of available-for-sale securities
  • $330-million gain on RBC’s liabilities designated as held-for-trading

RBC’s 2007 Annual Report notes that:

The decrease of $18 billion in financial assets classified as
held-for-trading and the increase of $8 billion in financial liabilities classified as held-for-trading in 2007 are primarily due to our equity and bond securities held related to our proprietary equity arbitrage and fixed income trading businesses, where we offset the risks from our securities holdings by short selling other securities that are of similar risks to those in our portfolios. The increase of $29 billion in derivative assets and of $30 billion in derivative liabilities in 2007,
primarily in foreign exchange and interest rate contracts, are largely due to increased volatility, strong shifts in exchange rates and interest rates, and higher client and trading activity, partially offset by the weakening of the U.S. dollar relative to the Canadian dollar. These
activities are consistent with our strategy for these businesses and the increases in 2007 are within the approved risk limits.

… and …

For the year ended October 31, 2007, we recognized a gain of $18 million in Trading revenue as a result of the net increase in fair values in various trading portfolios previously measured at amortized cost. This gain includes a $59 million gain on our deposit liabilities designated as held-for-trading resulting from the widening of our own
credit spread during the year.

… and …

liabilities designated as held-for-trading include (i) deposits and structured notes with embedded derivatives that are not closely related to the host contracts; (ii) assets sold under repurchase agreements that form part of our trading portfolio which is
managed and evaluated on a fair value basis; and (iii) certain deposits to offset the impact of related hedging derivatives measured at fair value. Fair value designation for these financial assets and financial liabilities significantly reduces the measurement inconsistencies.

Econbrowser‘s James Hamilton discusses the deflation problem in his latest post. Assiduous Readers will recall that I am completely unimpressed by the so-called evidence of deflation so far, but Dr. Hamilton takes the view that it doesn’t matter whether low yields on Treasuries are evidence of deflation or of flight to quality:

But a second and equally troubling suggestion of expected deflation is the extremely low yields on short-term Treasury bills. Again there may be those who interpret this not as a harbinger of deflation but instead as a reflection of the astonishing (and equally frightening) flight to quality that we have been witnessing.

Even if you don’t interpret the October CPI, TIPS yields, and nominal T-bill yields as warning flags of deflation, they nonetheless raise what is to me the core question: If the Fed wanted to use monetary policy to stimulate the economy at the moment, as I believe it should, what would it do?

TIPS yields are discussed in a John Dizard column in the Financial Times:

Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.

As a practical matter, long before we had significant “negative prints” of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with “quantitative easing”. Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings.

What’s really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can’t afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

The arbs, well, they thought they had risk-free books with perfectly offsetting positions. These turned out to be long-term, illiquid investments that first bled out negative carry and then were sold off by merciless prime brokers.

Whatever the nature of the beast, Dr. Hamilton concurs with Mr. Dizard regarding the policy prescription:

So here’s my suggested Plan C. The goal of monetary policy should be to achieve a core inflation rate of 3.0% (at an annual rate) over the next 6 months. That’s something that can be accomplished without rate cuts or lending facilities, and here’s how.
…
Step 3 is to start creating money and use it to buy up assets until the [3% inflation] goal set out in Step 1 is achieved. What sort of assets?
…
What specifically would such assets be? I’d start with those clearly undervalued TIPS. Next I’d buy short-term securities in the currencies relative to which the dollar has been appreciating. Here again if the Fed has to sell these off in a sudden change in perceptions, the Fed will have both made a profit and, by selling, be a stabilizing force. If we’re still seeing no improvement, the Fed can start to buy longer-term Treasuries.

TD Bank is diluting its common:

The Toronto-Dominion Bank (TD Bank Financial
Group or TDBFG) today announced it expects to further enhance its capital position by issuing common equity. TDBFG has entered into an agreement with a syndicate of underwriters led by TD Securities Inc. for an issue of 30.4 million common shares, at a price of $39.50 per common share, to raise gross proceeds of $1.2 billion.

The issue will qualify as Tier 1 capital for TDBFG and the expected closing date is December 5, 2008.

As announced last week, TDBFG’s Tier 1 capital ratio was 8.3% as of November 1, 2008. On a pro forma basis, adjusting for this $1.2 billion of common equity and the $220 million of Series AC preferred shares issued on November 5, 2008, TDBFG’s November 1st Tier 1 capital ratio would be approximately 9%.

Thanks, guys, for making the world a safer place for preferred share investors!

The preferred share world could use a little more safety, that’s for sure (provided one equates safety with price stability). Because it was yet another thoroughly appalling day. I don’t know where all the worry is coming from – how can people worry about preferred dividend cuts when the common dividend hasn’t even be touched yet? And not just not yet touched, but unlikely to be touched? I’m with Genuity Capital Markets analyst Mario Mendonca and an unnamed analyst quoted in the Globe today:

Mr. Mendonca said he does not expect any bank to cut dividends, and believes they would sooner turn to raising capital like CIBC did earlier this year when it tapped the market for a $2.9-billion equity injection.

“The odds are low, but not zero,” another analyst said of dividend cuts.

It could, just possibly, happen, to a limited extent (it’s more likely they do dilutive issues, like TD & CIBC this year, and keep the dividend steady for a long time). And I’m talking about the common dividends, people!

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 5.10% 5.03% 74,161 15.58 6 +2.8682% 1,030.0
Floater 9.18% 9.42% 54,800 9.93 2 +4.9567% 383.5
Op. Retract 5.38% 6.54% 138,169 3.89 15 -0.1918% 989.2
Split-Share 7.42% 15.50% 65,159 3.77 12 +2.3067% 826.1
Interest Bearing 9.61% 20.48% 57,230 2.82 3 -3.0032% 752.0
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 8.24% 8.36% 181,471 11.07 71 -1.5712% 666.9
Fixed-Reset 5.76% 5.36% 875,709 14.64 12 -0.5339% 1,021.6
Major Price Changes
Issue Index Change Notes
POW.PR.A PerpetualDiscount -11.7778% Now with a pre-tax bid-YTW of 9.01% based on a bid of 15.88 and a limitMaturity. Closing quote 15.88-17.04 (!), 2×6. Day’s range of 15.71-18.00 (!).
BSD.PR.A InterestBearing -8.1633% Asset coverage of 0.8-:1 as of November 21 according to Brookfield Funds. Now with a pre-tax bid-YTW of 23.73% based on a bid of 4.50 and a hardMaturity 2015-3-31 at a hoped-for-but-dubious 10.00. Closing quote of 4.50-4.77, 5×2. Day’s range of 4.51-90.
CU.PR.B PerpetualDiscount -6.3232% Now with a pre-tax bid-YTW of 7.56% based on a bid of 20.00 and a limitMaturity. Closing quote 20.00-76, 1×9. Day’s range of 20.76-00.
PWF.PR.E PerpetualDiscount -5.9394% Now with a pre-tax bid-YTW of 9.01% based on a bid of 15.52 and a limitMaturity. Closing quote 15.52-28, 1×8. Day’s range of 15.49-16.50.
PWF.PR.F PerpetualDiscount -5.9016% Now with a pre-tax bid-YTW of 9.31% based on a bid of 14.35 and a limitMaturity. Closing quote 14.35-80, 3X3. Day’s range of 14.25-15.50.
RY.PR.C PerpetualDiscount -5.8750% Now with a pre-tax bid-YTW of 7.71% based on a bid of 15.06 and a limitMaturity. Closing quote 15.06-63, 2×12. Day’s range of 15.00-16.00.
POW.PR.D PerpetualDiscount -5.4759% Now with a pre-tax bid-YTW of 8.80% based on a bid of 14.50 and a limitMaturity. Closing quote 14.50-85, 10×1. Day’s range of 14.02-15.29.
BNA.PR.C SplitShare -4.7187% Asset coverage of 1.5+:1 based on BAM.A at 15.91 and 2.4 BAM.A / unit. Now with a pre-tax bid-YTW of 16.29% based on a bid of 10.50 and a hardMaturity 2019-1-10 at 25.00. Closing quote 10.50-34, 5×8. Day’s range of 10.17-11.24.
BNS.PR.M PerpetualDiscount -4.6823% Now with a pre-tax bid-YTW of 8.02% based on a bid of 14.25 and a limitMaturity. Closing quote 14.25-74, 10×15. Day’s range of 14.50-00.
BNS.PR.J PerpetualDiscount -4.6259% Now with a pre-tax bid-YTW of 7.98% based on a bid of 16.70 and a limitMaturity. Closing quote 16.70-00, 4×9. Day’s range of 16.33-18.19.
RY.PR.A PerpetualDiscount -4.4390% Now with a pre-tax bid-YTW of 7.24% based on a bid of 15.50 and a limitMaturity. Closing quote 15.50-68, 2×4. Day’s range of 15.50-22.
PWF.PR.K PerpetualDiscount -4.3333% Now with a pre-tax bid-YTW of 8.77% based on a bid of 14.35 and a limitMaturity. Closing quote 14.35-00, 3X5. Day’s range of 14.02-70.
NA.PR.N FixedReset -4.2203%  
ENB.PR.A PerpetualDiscount -4.0476% Now with a pre-tax bid-YTW of 6.87% based on a bid of 20.15 and a limitMaturity. Closing quote 20.15-50, 3×2. Day’s range of 19.81-50.
BAM.PR.K Floater +4.5519% Hey, I didn’t know those things could go up!
BNS.PR.K PerpetualDiscount +4.7458% Now with a pre-tax bid-YTW of 7.89% based on a bid of 15.45 and a limitMaturity. Closing quote 15.45-15, 1×6. Day’s range of 15.00-16.18.
BCE.PR.G FixFloat +4.7619%  
LBS.PR.A SplitShare +5.1852% Asset coverage of 1.3+:1 as of November 20, according to Brompton Group. Now with a pre-tax bid-YTW of 13.68% based on a bid of 7.10 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 7.10-39, 13×3. Day’s range of 6.80-00.
BAM.PR.B Floater +5.3333% Wow! This one went up as well!
LFE.PR.A SplitShare +10.1523% Asset coverage of 1.6-:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 18.11% based on a bid of 6.51 and a hardMaturity 2012-12-1 at 10.00. Retraction formula is (96%NAV) – C [I think] but they want 20 days notice! Closing quote of 6.51-99, 18X13. Day’s range of 5.01-6.95.
FFN.PR.A SplitShare +17.2549% Asset coverage of 1.4+:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 16.18% based on a bid of 5.98 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 5.98-50, 45×4. Day’s range of 5.25-00.
Volume Highlights
Issue Index Volume Notes
BNS.PR.K PerpetualDiscount 158,550 TD crossed 100,000 and two blocks of 25,000 each, all at 15.25. Now with a pre-tax bid-YTW of 7.89% based on a bid of 15.45 and a limitMaturity.
CM.PR.I PerpetualDiscount 137,955 Scotia crossed 117,500 at 13.95. Now with a pre-tax bid-YTW of 8.66% based on a bid of 13.80 and a limitMaturity.
WN.PR.B Scraps (would be OpRet but there are credit concerns) 102,830 Desjardins crossed two blocks of 50,000, both at 25.20. Now with a pre-tax bid-YTW of 5.04% based on a bid of 25.20 and a call 2009-4-1 at 25.00.
TD.PR.C FixedReset 50,500 RBC crossed 13,500 at 24.96.
BMO.PR.K PerpetualDiscount 48,117 Scotia crossed 27,500 at 16.00. Now with a pre-tax bid-YTW of 8.52% based on a bid of 15.56 and a limitMaturity.
RY.PR.L FixedReset 40,900  

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

Posted in Market Action | 1 Comment »

XMF.PR.A Reviewing Strategic Options

November 24th, 2008

M-Split Corp has announced (emphasis added):

Since the inception of the Company on April 18, 2007 the price of Manulife has declined 52% from $41.08 to $19.75 as of November 24, 2008. This sharp decline in Manulife has resulted in the Company’s net asset value being reduced significantly and as mentioned in the previous update, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in Manulife’s share price of 20% during the week ended November 21, the Company has dramatically decreased its exposure to Manulife under the requirements of the plan.

The Company’s total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $8.04 at maturity in 2014. The reduced exposure to Manulife will materially limit the future impact of price movements of Manulife shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in Manulife shares since inception of the Company has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of Manulife, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

With respect to the net value of the firm, they have stroked the nail right on the button. XMF closed today at 0.91-1.15, 10×2. XMF.PR.A closed at 6.88-49, 51×28; which may be compared to “total net asset value is approximately $9.01 per unit as at November 24, 2008, consisting of $6.43 per unit in cash and permitted repayment securities (current value) and $2.58 in Manulife exposure per Unit.”. I confess I haven’t checked to see what retraction options there might be; nor have I looked at the effects of fees and expenses on NAV over time.

The previous mention of XMF.PR.A on PrefBlog noted the suspension of dividends on capital units. XMF.PR.A is not tracked by HIMIPref™.

Posted in Issue Comments | 1 Comment »

XCM.PR.A Reviewing Strategic Options

November 24th, 2008

Commerce Split Corp has announced (emphasis added):

Since the inception of the Company on February 16, 2007 the price of CIBC has declined 58% from $102.15 to $43.19 as of November 24, 2008. This sharp decline in CIBC has resulted in the Company’s net asset value being reduced significantly and as mentioned in previous updates, has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. The plan’s objective was to provide that the Priority Equity Share Repayment amount would be paid in full on the termination date (December 1, 2014). Due to the recent decline in CIBC’s share price of 21% during the week ended November 21, the Company has dramatically decreased its exposure to CIBC under the requirements of the plan.

The Company’s total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit. The permitted repayment securities have an estimated forward value of approximately $9.06 at maturity in 2014. The reduced exposure to CIBC will materially limit the future impact of price movements of CIBC shares on the net asset value of the Company and lower the ability of the Company to generate income from dividends and its covered call option writing program.

The combined trading prices of both classes of the Company’s shares are trading at a substantial discount to the current net asset value per unit. In addition, the significant price decline in CIBC shares since inception of the Fund has made it difficult to achieve the original stated objectives for both classes of shares. As a result, the Company is reviewing options to maximize shareholder value that may include but not limited to establishing a normal course issuer’s bid and initiating proposals (subject to shareholder vote) to reorganize the Company.

The Company’s portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of CIBC, the permitted repayment securities, and or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Protection Plan.

They’re right, you know. XCM closed today with a quote of $1.11-29, 10×4; XCM.PR.A closed at $6.02-24, 5×3, compared to “total net asset value is approximately $8.80 per unit as at November 24, 2008, consisting of $7.25 per unit in cash and permitted repayment securities (current value) and $1.55 in CIBC exposure per Unit”

There are 8.667-million units outstanding, according to the TSX.

XCM.PR.A’s Protection-Plan Status has been previously reported on PrefBlog. XCM.PR.A is not tracked by HIMIPref™.

Posted in Issue Comments | 1 Comment »

XTD.PR.A Enters Protection Plan

November 24th, 2008

TDb Split Corp. has announced:

during the week ending November 21, 2008, the share price of TD Bank has declined by approximately 23% resulting in an overall total decrease in the share price of TD Bank of 38% since the inception date of the Company. TD Bank was $69.03 as at the inception date of the Company on August 7, 2007 and closed on November 24, 2008 at $42.90. This very sharp and accelerated decline in TD Bank has resulted in the Company’s net asset value being reduced significantly and has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. As detailed in the prospectus, this strategy is intended to provide that the Priority Equity Share Repayment amount will be paid in full to holders of the Priority Equity shares on the termination date on December 1, 2014.

The Priority Equity Portfolio Protection Plan provides that if the net asset value of the Company declines below a specified level, the Manager will liquidate a portion of the common shares of TD Bank held by the Company and use the net proceeds to acquire (i) qualifying debt securities or (ii) certain securities and enter into a forward agreement (collectively, the “Permitted Repayment Securities”) in order to cover the Preferred Share Repayment Amount in the event of further declines in the net asset value of the Company. Under the Priority Equity Portfolio Protection Plan, the amount of the Company’s net assets, if any, required to be allocated to Permitted Repayment Securities (the “Required Amount”) will be determined such that (i) the net asset value of the Company, less the value of the Permitted Repayment Securities held by the Company, is at least 125% of (ii) the Preferred Share Repayment Amount, less the amount anticipated to be received by the Company in respect of its Permitted Repayment Securities on the Termination Date.

The Company’s net asset value as at November 24, 2008 was $11.96 per unit which includes $8.84 per unit in shares of TD Bank and $3.12 per unit in cash and permitted repayment securities (current value). The permitted repayment securities have an estimated forward value of $3.90 per unit at maturity in 2014. This leaves the Priority Equity Shareholder exposed to $6.10 per share ($10.00 par value – $ 3.90 in cash and equivalent notional value of Permitted Repayment Securities) in TD Bank holdings.

The portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of TD Bank, the Permitted Repayment Securities, and/or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Portfolio Protection Plan.

XTD.PR.A is a small issue, with only 1.75-million shares outstanding, according to the TSX. This is the first mention of this issue on PrefBlog. XTD.PR.A is not tracked by HIMIPref™.

Posted in Issue Comments | No Comments »

New Issue: Royal Bank Fixed-Reset 6.25%+350

November 24th, 2008

Yet another new issue!

Issue: Royal Bank Non-Cumulative 5-Year Rate Reset Preferred Shares, Series AN

Size: 9-million shares @$25.00 (=$225-million); Greenshoe for 4-million shares (=$100-million)

Dividend: 6.25% until first Exchange Date; reset every Exchange Date at 5-Year Canadas + 350bp. First Dividend 2009-5-24 for $0.71490. Floaters pay 3-month Bills +350, reset quarterly.

Exchangeable: Every Exchange Date to and from Series AO (“Floaters”).

Exchange Date: 2014-2-24 and every five years thereafter.

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

Closing: 2008-12-8

Posted in New Issues | 1 Comment »

canadianBondIndices.com Not Really Gone

November 24th, 2008

The very useful website canadianBondIndices.com (linked in the right hand panel, under “Canadian Fixed Income Data”) is temporarily unavailable.

I am advised that this is a mere technical issue with a change in DNS provider and that the site should be available again in the near future.

Posted in Miscellaneous News | No Comments »

Treasury Gives Tail Protection to Citigroup

November 24th, 2008

A Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup has been released (just before 11pm):

Washington, DC — The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. 

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

  • We will work to support a healthy resumption of credit flows to households and businesses.
  • We will exercise prudent stewardship of taxpayer resources.
  • We will carefully circumscribe the involvement of government in the financial sector.
  • We will bolster the efforts of financial institutions to attract private capital.

A term sheet gives the details. The most interesting are:

Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves)

Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%).
…
Institution is prohibited from paying common stock dividends, in excess of $.01 per share per quarter, for 3 years without UST/FDIC/FRB consent. A factor taken into account for consideration of the USG’s consent is the ability to complete a common stock offering of appropriate size.

and the politically popular:

An executive compensation plan, including bonuses, that rewards longterm performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG

Well, they had to do something, or Monday would be carnage.

Fearless forecast? Geez, you know, it’s hard to say. But in early Asian trading:

Suncorp-Metway Ltd., Australia’s third-largest insurer, dropped 4.9 percent in Sydney after increasing its forecast for bad loans. Standard Chartered Plc fell 5.1 percent in Hong Kong following a Financial Times report that the U.K. lender will sell $3 billion of stock to replenish capital. Financial shares declined as the U.S. agreed to protect $306 billion of loans and securities on Citigroup Inc.’s books against losses. BHP Billiton Ltd., Australia’s largest oil company, climbed 6.4 percent in Sydney after crude prices climbed.

Posted in Banking Crisis 2008 | No Comments »

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