July 29, 2008

July 29th, 2008

Accrued Interest reviews the performance of financial bonds vs. financial stocks and arrives at an interesting conclusion:

For financial stocks, the total return in percentage is graphed. What we see is that financials hit a low at -20% on March 17 (the day after the Bear/JP Morgan “merger”). At that point, the bonds of financial companies had fallen 6.5% vs. Treasuries, and high yield had fallen 10.3%. Then of course there was the rebound in April and early May, but let’s put that aside for a moment.

There are two things to notice here. First stocks, high-yield, and financial corporate bonds have all been highly correlated.

From May 7 to June 16, the financial corporate index had underperformed Treasury bonds by a whopping 8bps and high yield had actually outperformed by 127. From then until July 24, financial corporates underperformed Treasuries by 397bps and high-yield by 509bps.

Alright so where does this leave us? Looking in total from May 7 to July 24, financial stocks have fallen 23.6% whereas financial bonds have fallen 4.05% vs. government bonds. That’s about a 6-1 ratio. As of March 17, financial stocks had fallen 20% and financial bonds 6.5%, for a 3-1 ratio.

To me that implies that financial bonds remain overvalued vis a vie the equity.

Now, this is an empirical estimate based on not-too-many data points – only the current year-to-date is examined. I would want to see a much longer data sample before putting any credence in such a model; one not so heavily influenced by what must be regarded as one of the most severe modern-developed-market credit crunches ever experienced.

Assiduous Readers will remember my admiration of the Bank of England Financial Stability Report of April ’08 and the Figure 1.18 contained therein:

The methodology on which the charted decomposition depends was discussed in BoE Research: Decomposing Corporate Bond Spreads.

I’m all in favour of empirical analysis – a good chunk of HIMIPref™ is empirical – but such analysis becomes pretty dicey the more dissimilar the two investments being compared. And in the Accrued Interest analysis, the two series analyzed are:

  • Stock Return
  • Financial Bond return less Government bond return

Clearly, there is a connection; fear of extreme losses by a company will naturally affect – to a greater or lesser extent – market values of any type of investment in that company – but I want a deeper theoretical underpinning of why the two series should be connected with any sort of gearing ratio, with Accrued Interest contending he feels the 3:1 ratio of Dec 31 to March 17 being a better baseline than the 6:1 ratio of May 7 to July 24.

This might be restated as a variant of CAPM, with there being something of a conundrum in the definition of the risk-free rate; but basically, AI is claiming that a Beta of 0.33 for corporate bonds is more appropriate than a Beta of 0.16.

To my mind, I haven’t seen a good discussion of what constitutes the “liquidity” premium in the BoE research. Sure, a big chunk of it is, in fact, liquidity, but that’s kind of a touchy-feely concept used by academics who can’t bear to use the word “irrational” when describing market behaviour. What’s needed is some kind of theory that will describe both stock and bond prices in terms of an overlapping set of factors. Once such a model has been described and parameterized, perhaps we will see that a common factor has been forcing down the prices of both asset classes, perhaps with some kind of ratio attached. If we can show that this factor has a theoretical reason for being – and isn’t just a plug, useful only in describing investments in the financial sector during the period Dec 31, 2007, to July 24, 2008 – then, and only then, will we have something.

I was unable to quantify the historical relationship between financial bonds and financial stocks over time, but I was able to come up with this:

from the Bank of France Financial Stability Review of December 2006.

I am fully prepared to agree that there is a common factor between the returns of an entity’s stock and its bonds – so much is obvious! Don’t get me wrong; I certainly agree that there will be an element of corellation between financial stocks and financial bonds over time, regardless of whether this element dominates, is swamped or is amplified by other factors; I am also aware that by using the difference between financial bonds and government bonds as the return characteristic of note, AI is focussing on spreads, which will lend a great deal of orthagonalization to the picture … albeit not as much as one might think, because spreads tend to go contrary to rates.

Ortenca Kume of Robert Gordon University notes:

  • Strong positive impact of leverage ratios on credit spreads
    • Positive impact of the changes in leverage on the changes in credit spreads
  • Strong positive relation between company’s stock volatility and credit spreads
    • Positive impact of the changes in stock volatility on the changes in credit spreads
  • Changes in credit spreads are significantly positively related to changes in the probability of bond prices’ jumps
  • negative impact of the issue size on credit spreads
  • credit spreads not significantly related to the variables of:
    • free-cash flows
    • return on equity

I will also note a paper by Campbell & Taksler (full paper republished by Harvard) that points out that in “the late 1990’s the US equity and corporate bond markets behaved very differently … stock prices rose strongly, while at the same time, corporate bonds performed poorly.” There is also an interesting paper by Wesley Phoa Implications of Merton Models for Corporate Bond Investors … but most of the data shows a strong corellation for junk credits. The paper looks at Nextel in detail, but for most of the period Nextel wasn’t just junk, it was distressed. Junk is really just equity dressed up as bonds, and the transition to distressed status simply adds make up to the costume. This paper from 2006 emphasizes volatility over return. And finally – for now – there is a BIS paper by Zhang, Zhou & Zhu, Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms:

A structural model with stochastic volatility and jumps implies particular relationships between observed equity returns and credit spreads. This paper explores such effects in the credit default swap (CDS) market. We use a novel approach to identify the realized jumps of individual equity from high frequency data. Our empirical results suggest that volatility risk alone predicts 50% of CDS spread variation, while jump risk alone forecasts 19%. After controlling for credit ratings, macroeconomic conditions, and firms’ balance sheet information, we can explain 77% of the total variation. Moreover, the marginal impacts of volatility and jump measures increase dramatically from investment grade to high-yield entities. The estimated nonlinear effects of volatility and jumps are in line with the model impliedrelationships between equity returns and credit spreads.

Finally, I will refer to Accrued Interest‘s post, A disturbance in the Force, January 4, 2008, in which he published the following graph:

and commented:

From my seat, watching corporate bond spreads widen dramatically over the last 6 months, you’d certainly think recession is on the horizon. In fact, if you draw a horizontal line from where we are now in corporate spreads, you’d see that we’ve rarely been wider than current levels. We are wider than the worst points during the 1991 recession and 2001 recession, although we did touch a bit wider during 2002.

And yet the stock market is very near all-time highs. I did this graph up through 12/31, so the S&P would be a bit lower. But the basic story would be exactly the same: the stock and bond markets don’t agree about where we’re going next.

There are some logical reasons why stocks and bonds can diverge. One is that companies are increasing leverage. So equity returns might increase but bond risk rises. That’s not happening right now. Financial companies have gone into capital preservation mode, and all companies are finding the bond market quite inhospitable.

Expectations of a “gearing factor” that may be used by itself to evaluate financial stocks and bonds as rich/cheap against each other will require a correlation that is large, positive and stable. I find it a little hard to believe and want to see more data! I will also note that, as shown in the very hastily prepared literature survey above, the academics are plumping for volatility rather than performance as the equity characteristic of importance to bond spreads – which makes sense when you think about it terms of individual investors.

For instance, say each investor is characterized on a scale of 1-5, 1 being “raging bull” and 5 being an apocalyptionist. At any time, the universe of investors (dollar weighted!) will be “3”, since if it isn’t then the market level will adjust until they do.

A high volatility environment will result when the distribution of these views is flatter than normal; i.e., there are more 1s and 5s than there are in a normal distribution. The volatility will result from the marginal traders amongst the 1s and 5s temporarily gaining ascendency over their mirrors for a short period of time.

It makes sense that such a high-volatility environment will see increased spreads on corporates: if you’re a raging bull, you’re not going to bother with bonds and if you’re an apocalyptionist you’re going to be buying governments.

Or so goes my mapping of the statistics onto individual behavior, anyway!

For my own part, I suggest that spreads on financials are too wide, not too tight. It takes two to make a market!

Speaking of spreads on financials, PerpetualDiscounts had a good day today, up 0.6031% to yield 6.34%, interest equivalent 8.88%, about 268bp over the long corporates yield of 6.20%. In terms of total return, we are just a little below the closing value of July 9, down 3.67% on the month-to-date, but up 4.81% from the low of July 16. Which gives you a rough idea of just how low the low was!

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.37% 66,759 16.41 6 +0.3068% 1,089.1
Floater 4.12% 4.15% 58,100 17.10 3 +0.8437% 895.4
Op. Retract 5.00% 4.49% 128,465 3.05 17 -0.1067% 1,039.6
Split-Share 5.37% 6.11% 61,235 4.49 14 +0.2761% 1,031.1
Interest Bearing 6.14% 5.97% 40,672 3.67 3 +0.0001% 1,120.7
Perpetual-Premium 6.12% 6.08% 68,994 10.65 4 +0.3508% 984.8
Perpetual-Discount 6.28% 6.34% 225,468 13.43 67 +0.6031% 845.0
Major Price Changes
Issue Index Change Notes
BAM.PR.O OpRet -1.9149% Now with a pre-tax bid-YTW of 7.06% based on a bid of 23.05 and optionCertainty 2013-6-30 at 25.00. Compare with BAM.PR.H (6.50% to 2012-3-30), BAM.PR.I (6.72% to 2013-12-30) and BAM.PR.J (7.03% to 2018-3-30) … and consider the rather odd report in the comments to July 25!
POW.PR.C PerpetualDiscount -1.8014% Now with a pre-tax bid-YTW of 6.54% based on a bid of 22.35 and a limitMaturity.
ELF.PR.G PerpetualDiscount -1.4277% Now with a pre-tax bid-YTW of 7.25% based on a bid of 16.57 and a limitMaturity.
PWF.PR.L PerpetualDiscount +1.1224% Now with a pre-tax bid-YTW of 6.48% based on a bid of 19.82 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.1276% Now with a pre-tax bid-YTW of 6.40% based on a bid of 19.73 and a limitMaturity.
BCE.PR.R FixFloat +1.1558%  
CM.PR.E PerpetualDiscount +1.2432% Now with a pre-tax bid-YTW of 6.94% based on a bid of 20.36 and a limitMaturity.
BCE.PR.Z FixFloat +1.2503%  
BNA.PR.C SplitShare -1.3476% Asset coverage of 3.2+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 8.76% based on a bid of 17.79 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.12% to 2010-9-30) and BNA.PR.B (8.56% to 2016-3-25).
SLF.PR.D PerpetualDiscount +1.2550% Now with a pre-tax bid-YTW of 6.35% based on a bid of 27.75 and a limitMaturity.
MFC.PR.B PerpetualDiscount +1.2749% Now with a pre-tax bid-YTW of 5.94% based on a bid of 19.86 and a limitMaturity.
TCA.PR.X PerpetualDiscount +1.2876% Now with a pre-tax bid-YTW of 5.92% based on a bid of 47.20 and a limitMaturity.
BMO.PR.H PerpetualDiscount +1.3796% Now with a pre-tax bid-YTW of 6.35% based on a bid of 21.31 and a limitMaturity.
SLF.PR.C PerpetualDiscount +1.4327% Now with a pre-tax bid-YTW of 6.37% based on a bid of 17.70 and a limitMaturity.
PWF.PR.E PerpetualDiscount +1.4412% Now with a pre-tax bid-YTW of 6.33% based on a bid of 21.82 and a limitMaturity.
HSB.PR.D PerpetualDiscount +1.4737% Now with a pre-tax bid-YTW of 6.57% based on a bid of 19.28 and a limitMaturity.
CM.PR.G PerpetualDiscount +1.6021% Now with a pre-tax bid-YTW of 6.93% based on a bid of 19.66 and a limitMaturity.
RY.PR.F PerpetualDiscount +1.6468% Now with a pre-tax bid-YTW of 6.23% based on a bid of 17.90 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.8757% Now with a pre-tax bid-YTW of 6.40% based on a bid of 19.01 and a limitMaturity.
PWF.PR.H PerpetualDiscount +1.8826% Now with a pre-tax bid-YTW of 6.36% based on a bid of 22.73 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.9249% Now with a pre-tax bid-YTW of 6.09% based on a bid of 21.71 and a limitMaturity.
CU.PR.B PerpetualPremium +2.2032% Now with a pre-tax bid-YTW of 6.09% based on a bid of 25.05 and a limitMaturity.
BAM.PR.B Floater +2.3392%  
ELF.PR.F PerpetualDiscount +2.3517% Now with a pre-tax bid-YTW of 7.00% based on a bid of 19.15 and a limitMaturity.
CM.PR.D PerpetualDiscount +2.4878% Now with a pre-tax bid-YTW of 6.90% based on a bid of 21.01 and a limitMaturity.
IAG.PR.A PerpetualDiscount +3.2544% Now with a pre-tax bid-YTW of 6.68% based on a bid of 17.45 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BCE.PR.A FixFloat 253,800 Nesbitt crossed two tranches of 100,000 and one block of 50,000, all at 24.45.
BMO.PR.L PerpetualDiscount 231,000 Nesbitt crossed 200,000 at 23.80. RBC crossed 30,000 at the same price. Now with a pre-tax bid-YTW of 6.28% based on a bid of 23.81 and a limitMaturity.
CM.PR.A OpRet 193,950 Nesbitt crossed 30,000 & 100,000, both at 25.80; CIBC crossed 55,000 at the same price. Now with a pre-tax bid-YTW of 1.96% based on a bid of 25.78 and a call 2008-11-30 at 25.50.
SLF.PR.D PerpetualDiscount 97,784 CIBC crossed 87,300 at 17.54. Now with a pre-tax bid-YTW of 6.35% based on a bid of 17.75 and a limitMaturity.
BMO.PR.J PerpetualDiscount 74,200 Nesbitt crossed blocks of 25,000 and 15,000 at 18.40. CIBC crossed 25,000 at the same price. Now with a pre-tax bid-YTW of 6.28% based on a bid of 18.30 and a limitMaturity.

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

July 28, 2008

July 28th, 2008

The PerpetualDiscount winning streak ended today – the index was down less than a beep, but it was down! Volume continues fairly light.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.39% 66,304 16.33 6 +0.0289% 1,085.8
Floater 4.16% 4.18% 58,107 17.03 3 +0.8953% 887.9
Op. Retract 4.99% 4.59% 131,811 3.41 17 -0.0994% 1,040.7
Split-Share 5.38% 6.16% 61,773 4.49 14 -0.1275% 1,028.2
Interest Bearing 6.14% 6.02% 41,127 3.67 3 -0.1669% 1,120.7
Perpetual-Premium 6.15% 6.17% 70,163 10.65 4 -0.0544% 981.4
Perpetual-Discount 6.32% 6.38% 226,376 13.38 67 -0.0063% 840.0
Major Price Changes
Issue Index Change Notes
POW.PR.B PerpetualDiscount -2.0843% Now with a pre-tax bid-YTW of 6.39% based on a bid of 21.14 and a limitMaturity.
BAM.PR.I OpRet -1.9786% Now with a pre-tax bid-YTW of 6.73% based on a bid of 23.78 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.49% to 2012-3-30), BAM.PR.J (7.00% to 2018-3-30) and BAM.PR.O (6.60% TO 2013-6-30) … and consider the rather odd report in the comments to July 25!
CM.PR.D PerpetualDiscount -1.9608% Now with a pre-tax bid-YTW of 7.07% based on a bid of 20.50 and a limitMaturity.
MFC.PR.B PerpetualDiscount -1.9500% Now with a pre-tax bid-YTW of 6.02% based on a bid of 19.61 and a limitMaturity.
PWF.PR.E PerpetualDiscount -1.5561% Now with a pre-tax bid-YTW of 6.44% based on a bid of 21.51 and a limitMaturity.
GWO.PR.F PerpetualDiscount -1.4028% Now with a pre-tax bid-YTW of 6.06% based on a bid of 24.60 and a limitMaturity.
BNA.PR.C SplitShare -1.3476% Asset coverage of 3.2+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 8.92% based on a bid of 17.57 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.11% to 2010-9-30) and BNA.PR.B (8.55% to 2016-3-25).
ENB.PR.A PerpetualDiscount -1.0846% Now with a pre-tax bid-YTW of 6.13% based on a bid of 22.80 and a limitMaturity.
BAM.PR.K Floater +1.0101%  
PWF.PR.G PerpetualDiscount +1.1804% Now with a pre-tax bid-YTW of 6.17% based on a bid of 24.00 and a limitMaturity.
BAM.PR.B Floater +1.6757%  
IAG.PR.A PerpetualDiscount +2.1148% Now with a pre-tax bid-YTW of 6.90% based on a bid of 16.90 and a limitMaturity.
BNS.PR.J PerpetualDiscount +2.5105% Now with a pre-tax bid-YTW of 5.97% based on a bid of 22.05 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
ALB.PR.A SplitShare 131,314 CIBC crossed 128,600 at 24.26. Asset coverage of 1.6+:1 as of July 24, according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 5.81% based on a bid of 24.26 and a hardMaturity 2011-2-28 at 25.00.
TD.PR.M OpRet 130,100 Nesbitt crossed 130,000 at 26.05. Now with a pre-tax bid-YTW of 3.85% based on a bid of 26.02 and a softMaturity 2013-10-30 at 25.00.
TD.PR.O PerpetualDiscount 39,011 National crossed 30,000 at 20.84. Now with a pre-tax bid-YTW of 5.86% based on a bid of 20.81 and a limitMaturity.
RY.PR.F PerpetualDiscount 35,489 Now with a pre-tax bid-YTW of 6.33% based on a bid of 17.61 and a limitMaturity.
TD.PR.Q PerpetualDiscount 29,360 CIBC crossed 25,000 at 23.95. Now with a pre-tax bid-YTW of 5.87% based on a bid of 23.97 and a limitMaturity.

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

July 25, 2008

July 25th, 2008

PerpetualDiscounts had a good strong day on light volume: up 0.41% to finish just short of the July 10 level. They are now down a mere 4.24% on the month; yield 6.37% or 8.92% interest-equivalent at the standard 1.4x equivalency factor; long corporates continue to yield 6.2%, so the spread is now 272bp.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.39% 67,557 16.33 6 +0.1243% 1,085.5
Floater 4.19% 4.22% 58,149 16.97 3 -1.3008% 880.0
Op. Retract 4.99% 4.47% 134,727 3.26 17 +0.1054% 1,041.7
Split-Share 5.37% 6.13% 61,157 4.50 14 +0.0991% 1,029.5
Interest Bearing 6.13% 5.90% 41,382 3.69 3 +0.2026% 1,122.6
Perpetual-Premium 6.14% 6.15% 70,640 10.67 4 +0.5314% 981.9
Perpetual-Discount 6.32% 6.37% 228,563 13.39 67 +0.4139% 840.0
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -2.1164%  
CM.PR.E PerpetualDiscount -2.0319% Now with a pre-tax bid-YTW of 6.97% based on a bid of 20.25 and a limitMaturity.
BAM.PR.K Floater -2.0313%  
SLF.PR.E PerpetualDiscount -1.9337% Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.75 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.5285% Now with a pre-tax bid-YTW of 6.77% based on a bid of 16.75 and a limitMaturity.
NA.PR.M PerpetualDiscount -1.2097% Now with a pre-tax bid-YTW of 6.13% based on a bid of 24.50 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.0107% Now with a pre-tax bid-YTW of 6.33% based on a bid of 17.99 and a limitMaturity.
BNS.PR.N PerpetualDiscount +1.0214% Now with a pre-tax bid-YTW of 6.07% based on a bid of 21.76 and a limitMaturity.
RY.PR.C PerpetualDiscount +1.0799% Now with a pre-tax bid-YTW of 6.16% based on a bid of 18.72 and a limitMaturity.
TCA.PR.X PerpetualDiscount +1.0870% Now with a pre-tax bid-YTW of 6.01% based on a bid of 46.50 and a limitMaturity.
BNS.PR.J PerpetualDiscount +1.1284% Now with a pre-tax bid-YTW of 6.14% based on a bid of 21.51 and a limitMaturity.
BNA.PR.C SplitShare +1.1284% Asset coverage of 3.2+:1 as of June 30 according to the company. Now with a pre-tax bid-YTW of 8.73% based on a bid of 17.81 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.19% to 2010-9-30) and BNA.PR.B (8.52% to 2016-3-25).
ENB.PR.A PerpetualDiscount +1.3187% Now with a pre-tax bid-YTW of 6.06% based on a bid of 23.05 and a limitMaturity. Trading through Royal Bank. Right.
PWF.PR.H PerpetualDiscount +1.3636% Now with a pre-tax bid-YTW of 6.74% based on a bid of 22.30 and a limitMaturity.
CU.PR.B PerpetualDiscount +1.6598% Now with a pre-tax bid-YTW of 6.22% based on a bid of 24.50 and a limitMaturity.
W.PR.J PerpetualDiscount +1.7908% Now with a pre-tax bid-YTW of 6.53% based on a bid of 21.60 and a limitMaturity.
GWO.PR.F PerpetualDiscount +1.7952% Now with a pre-tax bid-YTW of 5.97% based on a bid of 24.95 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.8216% Now with a pre-tax bid-YTW of 6.47% based on a bid of 21.80 and a limitMaturity.
PWF.PR.F PerpetualDiscount +2.3278% Now with a pre-tax bid-YTW of 6.26% based on a bid of 21.10 and a limitMaturity.
MFC.PR.C PerpetualDiscount +2.6158% Now with a pre-tax bid-YTW of 6.06% based on a bid of 18.83 and a limitMaturity.
POW.PR.D PerpetualDiscount +3.0384% Now with a pre-tax bid-YTW of 6.53% based on a bid of 19.33 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 316,750 Nesbitt crossed 300,000 at 17.75. Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.75 and a limitMaturity.
RY.PR.B PerpetualDiscount 46,195 Royal crossed 25,000 at 19.10. Now with a pre-tax bid-YTW of 6.24% based on a bid of 18.87 and a limitMaturity.
TD.PR.R PerpetualDiscount 33,900 CIBC crossed 25,000 at 23.95. Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.91 and a limitMaturity.
BAM.PR.N PerpetualDiscount 31,735 Nesbitt crossed 18,000 at 16.20. See BAM.PR.M, below. Now with a pre-tax bid-YTW of 7.38% based on a bid of 16.33 and a limitMaturity.
BAM.PR.M PerpetualDiscount 27,985 Nesbitt crossed 18,000 at 16.50. See BAM.PR.N, above. This really looks like a tax-loss crystallization, but why the different prices? Is one fund being favoured over another? Now with a pre-tax bid-YTW of 7.35% based on a bid of 16.40 and a limitMaturity.

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

Update, 2008-7-28: Newly Assiduous Reader newtoprefs comments that he she has been advised to sell BAM.PR.O short. I have uploaded the HIMIPref™ OpRet Index for 7/25. It is unclear to me why, if you were going to shortsell anything in this index (a big if, in my opinion, but what do I know?) AND you were going to shortsell one of the BAM issues … why wouldn’t you shortsell BAM.PR.I? The yield is 30bp lower than that of BAM.PR.O.

Canadian Debt Market Statistics, 1Q08

July 25th, 2008

The Investment Industry Association of Canada has announced:

Widening credit spreads and unsettled markets, coupled with rising inflation and falling real yields, created difficult borrowing conditions in the latest quarter. For the first three months this year, total debt issuance declined 18% quarter-over-quarter. The fall was broad-based, with a notable pullback in provincial and municipal financings. Although issuance fell short of last year’s Q1 level, encouragingly, debt trading activity remained steady with $1.7 billion worth of bonds exchanging hands in the quarter. The Investment Industry Association of Canada (IIAC) today released its periodical An Issue of Debt: Inside Canada’s Debt Markets that includes analysis and results for the first quarter of 2008.

I don’t think much of the articles, but the statistics fall into the “Impressive-sounding statistics to Quote” category.

July 24, 2008

July 24th, 2008

A story on Bloomberg discussed the repercussions of the liquidity freeze-up in US Auction Rate Securities:

New York Attorney General Andrew Cuomo filed a lawsuit against UBS AG over its role in the sale of auction-rate securities, five months after the market collapsed, stranding investors.

Cuomo alleges the Zurich-based bank committed fraud by misleading investors in its marketing of the long-term securities as money market-like instruments that were easy to buy and sell. UBS continued selling the debt even as the market unraveled and top bank executives unloaded $21 million in personal auction-rate holdings, Cuomo’s suit alleges.

… and, to my gratification, included a link to the Massachusetts lawsuit site. The complaint against UBS alleges many things, but what it all boils down to is that some people have made an investment that didn’t work out as intended.

Just where to draw the regulatory line is a matter of opinion. I just hope the regulators and politicians know where their current hard line attitude is taking us: to a world where brokerages are on the hook for whatever they sell their clients and therefore offer nothing but the blandest investments possible. It’s regulation by headline and it will ultimately cost us all a great deal of money.

It leads to another interesting thought … if banks are to be on the hook for short-term paper they sell to their retail clients, shouldn’t this be recognized as credit risk (in addition to operational risk) for capital calculation purposes? I’ve already advocated that their exposure to their branded MMFs be recognized.

As far as today is concerned … so much for the financial rally:

U.S. stocks tumbled, sending financial shares to their worst drop in eight years, after home sales slid more than forecast …

Financial stocks in the S&P 500 fell 6.7 percent as a group, the third drop in the past three weeks greater than 5 percent. Today’s slump follows a six-day, 30 percent rally spurred by better-than-estimated earnings reports from Citigroup, JPMorgan and Wells Fargo and legislation to rescue Fannie Mae and Freddie Mac.

I wonder how many sigmas that makes?

PerpetualDiscounts managed to eke out a two-basis-point gain today (which, when you annualize it, is about right) keeping the streak alive: there have been six consecutive gains.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.40% 69,576 16.32 6 -0.0067% 1,084.2
Floater 4.14% 4.16% 58,395 17.08 3 +0.8780% 891.6
Op. Retract 4.99% 4.47% 137,526 3.42 17 -0.0353% 1,040.6
Split-Share 5.38% 6.14% 61,694 4.50 14 -0.0084% 1,028.5
Interest Bearing 6.15% 6.23% 41,154 3.69 3 -0.2349% 1,120.3
Perpetual-Premium 6.17% 6.18% 71,954 10.61 4 -0.0305% 976.8
Perpetual-Discount 6.34% 6.40% 231,051 13.36 67 +0.0216% 836.6
Major Price Changes
Issue Index Change Notes
POW.PR.D PerpetualDiscount -3.2990% Now with a pre-tax bid-YTW of 6.73% based on a bid of 18.76 and a limitMaturity.
PWF.PR.H PerpetualDiscount -2.8698% Now with a pre-tax bid-YTW of 6.56% based on a bid of 22.00 and a limitMaturity.
BAM.PR.M Floater
PerpetualDiscount
-2.1674% Now with a pre-tax bid-YTW of 7.41% based on a bid of 16.25 and a limitMaturity.
W.PR.J PerpetualDiscount -1.7138% Now with a pre-tax bid-YTW of 6.66% based on a bid of 21.22 and a limitMaturity.
SLF.PR.B PerpetualDiscount -1.5789% Now with a pre-tax bid-YTW of 6.50% based on a bid of 18.70 and a limitMaturity.
POW.PR.A PerpetualDiscount -1.5632% Now with a pre-tax bid-YTW of 6.60% based on a bid of 21.41 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.4444% Now with a pre-tax bid-YTW of 6.28% based on a bid of 17.74 and a limitMaturity.
BAM.PR.I OpRet -1.1837% Now with a pre-tax bid-YTW of 6.32% based on a bid of 24.21 and softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.43% to 2012-3-30), BAM.PR.J (7.06% to 2018-3-30) and BAM.PR.O (6.57% to 2013-6-30).
RY.PR.A PerpetualDiscount -1.0440% Now with a pre-tax bid-YTW of 6.19% based on a bid of 18.01 and a limitMaturity.
ALB.PR.A OpRet -1.0204% Asset coverage of just under 1.6:1 as of July 17 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 5.80% based on a bid of 24.25 and a hardMaturity 2011-2-28.
BAM.PR.O OpRet -1.0105% See BAM.PR.I, above.
ELF.PR.F PerpetualDiscount +1.1873% Now with a pre-tax bid-YTW of 7.14% based on a bid of 18.75 and a limitMaturity.
CM.PR.J PerpetualDiscount +1.4916% Now with a pre-tax bid-YTW of 6.66% based on a bid of 17.01 and a limitMaturity.
PWF.PR.K PerpetualDiscount +1.5175% Now with a pre-tax bid-YTW of 6.42% based on a bid of 19.40 and a limitMaturity.
GWO.PR.H PerpetualDiscount +1.5536% Now with a pre-tax bid-YTW of 6.26% based on a bid of 19.61 and a limitMaturity.
SLF.PR.D PerpetualDiscount +1.6851% Now with a pre-tax bid-YTW of 6.44% based on a bid of 17.50 and a limitMaturity.
PWF.PR.G PerpetualDiscount +1.8096% Now with a pre-tax bid-YTW of 6.27% based on a bid of 23.63 and a limitMaturity.
NA.PR.M PerpetualDiscount +1.8480% Now with a pre-tax bid-YTW of 6.06% based on a bid of 24.80 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.9990% Now with a pre-tax bid-YTW of 6.30% based on a bid of 21.43 and a limitMaturity.
BAM.PR.B Floater +2.1070%  
POW.PR.C PerpetualDiscount +2.4512% Now with a pre-tax bid-YTW of 6.48% based on a bid of 22.57 and a limitMaturity.
MFC.PR.B PerpetualDiscount +2.6140% Now with a pre-tax bid-YTW of 5.89% based on a bid of 20.02 and a limitMaturity.
SLF.PR.E PerpetualDiscount +2.7825% Now with a pre-tax bid-YTW of 6.29% based on a bid of 18.10 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BCE.PR.A FixFloat 290,900 CIBC crossed three blocks at 24.35: 50,000, 200,000 and 40,500.
BNS.PR.J PerpetualDiscount 108,439 “Anonymous” bought & sold (or maybe crossed) 79,000 at 21.25.Now with a pre-tax bid-YTW of 6.21% based on a bid of 21.27 and a limitMaturity.
BNS.PR.N PerpetualDiscount 43,400 “Anonymous” bought & sold (or maybe crossed) 40,000 at 21.60. Now with a pre-tax bid-YTW of 6.12% based on a bid of 21.54 and a limitMaturity.
BAM.PR.N PerpetualDiscount 30,440 Now with a pre-tax bid-YTW of 7.39% based on a bid of 16.30 and a limitMaturity.
CM.PR.I PerpetualDiscount 27,521 Now with a pre-tax bid-YTW of 6.81% based on a bid of 17.39 and a limitMaturity.

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

RF.PR.A Raising Capital

July 24th, 2008

C.A.Bancorp has announced:

that a preliminary prospectus had been filed with, and a receipt therefor issued by, the securities regulatory authorities in each of the provinces and territories of Canada.

The Corporation is offering (the “Offering”) units (the “Units”) at a price of $10.00 per Unit. Each Unit consists of one Class A Share and one warrant (a “Warrant”) to purchase one Series 1, Preferred Share (the “Preferred Shares”). Prospective purchasers may purchase Units by (i) cash payment, or (ii) an exchange (the “Exchange Option”) of eligible securities of certain issuers (“Issuers”) at the applicable exchange ratio. The Offering is for a minimum of 2,000,000 Units ($20,000,000) and a maximum of 10,000,000 Units ($100,000,000).

C.A. Bancorp Ltd. (the “Manager”) views the Preferred Shares as a form of financial leverage to the Class A Shares as the Preferred Shares have a fixed term, fixed cash distributions and fixed maturity value.

The Manager uses the maturity value of the Preferred Shares issued and outstanding and compares that to the tangible net book value of the Class A Shares issued and outstanding as a measure of debt (the Preferred Shares) to equity (the Class A Shares) ratio of the Corporation (the “Leverage Ratio”). As at June 30, 2008, the Leverage Ratio was 8.8 to 1.

Each Warrant will entitle the holder to purchase one Preferred Share at a subscription price of $24.50 at any time on or before 4:00 p.m. (Toronto time) on September 30, 2011.

Assiduous Readers will recall I hated this issue on announcement. At issue, the Leverage Ratio was about 8:1, so it would appear that so far in their short history, they’ve lost money … but this is just a guess, since their investment update, while lauding many attractive features of the fund, does not go so far as to provide even an estimated mark-to-market of the fund’s value. Fortunately, however, there is a prospectus for this capital raise on SEDAR (search the last six months for “Bancorp”):

EARNINGS COVERAGE RATIOS

The Preferred Shares’ distribution (interest) requirements, after giving effect of the issuance of Preferred Shares through the exercise of the maximum number of Warrants offered under this Offering would have been $19,473,273 per annum. The Corporation had a loss before interest of $1,870,240 (annualized from $666,113 for the 130 days ended June 30, 2008). An increase of $24,573,439 per annum in earnings would be necessary to produce an earnings coverage ratio of one to one for the annualized period ended June 30, 2008 which would have required a yield of 7.32% on any net proceeds received on a maximum Offering of Class A Shares and full exercise of all Warrants distributed under the Offering.

Well, it’s all very interesting, but I won’t be looking at this further. It’s a wonderful idea for a company, but I have great difficulty envisaging the preferred shares as investment grade. Mind you, RF.PR.A is currently quoted at 20.51-50, 4×1, so those with an appetite for junk might be interested.

DBRS Places FTN.PR.A Under "Review-Developing"

July 24th, 2008

Following the shareholder approval of the term extension, DBRS:

has today placed the rating of the Preferred Shares issued by Financial 15 Split Corp. (the Company) Under Review with Developing Implications.

An initial rating of Pfd-2 was assigned to the Preferred Shares in November 2003. The Preferred Shares had a scheduled final maturity date of December 1, 2008. On June 3, 2008, Quadravest Capital Management (the Manager) announced a proposal would be made to the Company’s shareholders to extend the mandatory termination date for the Company from December 1, 2008 to December 1, 2015.

On July 23, the Manager announced that the resolution to extend the final maturity was approved by the required percentage of Preferred Shareholders and Class A Shareholders. As a result of such developments, DBRS has placed the rating of the Preferred Shares Under Review with Developing Implications.

FTN.PR.A had an asset coverage of just under 1.7:1 as of July 15, according to the company, with the note:

As at the close on July 17, 2008, there have been material upward movements in the net asset values ranging from 10% to 25%.

Shall we guess? Based on the downgrade of WFS.PR.A and the downgrade of FFN.PR.A, I’d call it 50-50 between a rating of Pfd-2(low) and Pfd-3(high) once the review has been completed.

FDIC Approves Covered Bonds

July 24th, 2008

The US Federal Deposit Insurance Corporation has issued a press release announcing their formal approval of covered bonds:

On April 23, 2008, the FDIC published an Interim Final Covered Bond Policy Statement and requested public comment. The FDIC received approximately 130 comment letters, including comments from national banks, federal home loan banks, industry groups, and individuals. Most commenters supported the FDIC’s adoption of the Policy Statement to clarify how the FDIC would treat covered bonds in the case of a conservatorship or receivership and, thereby, facilitate the development of the U.S. covered bond market. After reviewing the comments, FDIC staff recommended Board approval of the final Policy Statement.

The full statement reviews the comment letters. It’s a very different release altogether from the terse OSFI statement.

Basel II in the United States : CRS Report RL33278

July 24th, 2008

This background report has been written by the Congressional Research Service.

Good background, an excellent primer. Of particular interest was:

The third pillar of the Basel II framework is public disclosure. Pillar three is a set of public information disclosures that a bank must make about itself. These disclosures are to make it easier for creditors and investors in financial markets to assess a bank’s risk posture more accurately and adjust borrowing and capital costs accordingly. The idea behind this requirement is to bring market discipline to bear to give bank management a cost incentive to adopt strong safety and soundness practices. The disclosure requirements will also make it easier for depositors, investors, and regulators to make comparisons across banking institutions. This knowledge, in turn, is expected to affect the willingness of investors to invest in banks and their related businesses. Without pillar three, financial institutions could become more opaque and more difficult to understand as the institutions develop new products and complex risk-hedging strategies that are difficult to evaluate. It could also make it more difficult to understand the risk profile of the firm creating and selling these products as well as the firms buying and using them.

Stirring principals certainly; I’m not sure how well it works in practice, but I do find American disclosure far superior to Canadian disclosure. OSFI, for instance, will not reveal why they have given Royal Bank an increased Assets to Capital multiple cap for the last five-odd years.

July 23, 2008

July 23rd, 2008

PerpetualDiscounts had a wonderful day today, up nearly a point and closing just short of their value on July 10. They are now down a mere 4.66% on the month, with a weighted-mean-average pre-tax bid-Yield-to-Worst of 6.40% (up 37bp on the month), interest-equivalent to 8.96%, which is a spread of +276bp to long corporates.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.68% 4.40% 68,855 16.31 6 -0.0675% 1,084.2
Floater 4.17% 4.20% 56,240 17.01 3 -1.1328% 883.8
Op. Retract 4.99% 4.44% 140,946 3.42 17 +0.1973% 1,041.0
Split-Share 5.37% 6.11% 62,575 4.50 14 +0.1881% 1,028.6
Interest Bearing 6.13% 5.93% 40,969 3.69 3 +0.3373% 1,122.9
Perpetual-Premium 6.17% 6.18% 72,676 10.62 4 +0.4087% 977.0
Perpetual-Discount 6.35% 6.40% 232,414 13.36 67 +0.9457% 836.4
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -2.2553%  
SLF.PR.D PerpetualDiscount -1.6571% Now with a pre-tax bid-YTW of 6.55% based on a bid of 17.21 and a limitMaturity.
BAM.PR.B Floater -1.3326%  
BNA.PR.B SplitShare -1.3107% Asset coverage of 3.2+:1 as of June 30, according to the company. Now with a pre-tax bid-YTW of 8.48% based on a bid of 20.33 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.15% to 2010-9-30) and BNA.PR.C (8.94% to 2019-1-10).
BAM.PR.O OpRet +1.0208% Now with a pre-tax bid-YTW of 6.33% based on a bid of 23.75 and optionCertainty 2013-6-30 at 25.00. Compare with BAM.PR.H (6.46% to 2012-3-30), BAM.PR.I (6.05% to 2013-12-30) and BAM.PR.J (7.02% to 2018-3-30).
BAM.PR.I OpRet +1.0309% See BAM.PR.O, above.
RY.PR.G PerpetualDiscount +1.0603% Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.11 and a limitMaturity.
PWF.PR.H PerpetualDiscount +1.1161% Now with a pre-tax bid-YTW of 6.38% based on a bid of 22.65 and a limitMaturity.
FFN.PR.A SplitShare +1.2461% Asset coverage of just under 1.6:1 as of July 15, according to the company … “As at the close on July 17, 2008, there have been material upward movements in the net asset values ranging from 10% to 25%.” Now with a pre-tax bid-YTW of 5.82% based on a bid of 9.75 and a hardMaturity 2014-12-1 at 10.00.
RY.PR.H PerpetualDiscount +1.2605% Now with a pre-tax bid-YTW of 5.86% based on a bid of 24.10 and a limitMaturity.
CM.PR.P PerpetualDiscount +1.3678% Now with a pre-tax bid-YTW of 6.92% based on a bid of 20.01 and a limitMaturity.
POW.PR.C PerpetualDiscount +1.3806% Now with a pre-tax bid-YTW of 6.63% based on a bid of 22.03 and a limitMaturity.
RY.PR.D PerpetualDiscount +1.3920% Now with a pre-tax bid-YTW of 6.19% based on a bid of 18.21 and a limitMaturity.
BNS.PR.L PerpetualDiscount +1.3959% Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.16 and a limitMaturity.
RY.PR.W PerpetualDiscount +1.4344% Now with a pre-tax bid-YTW of 6.20% based on a bid of 19.80 and a limitMaturity.
SLF.PR.B PerpetualDiscount +1.5500% Now with a pre-tax bid-YTW of 6.40% based on a bid of 19.00 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.6585% Now with a pre-tax bid-YTW of 7.25% based on a bid of 16.55 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.6618% Now with a pre-tax bid-YTW of 6.35% based on a bid of 20.80 and a limitMaturity.
TD.PR.P PerpetualDiscount +1.7082% Now with a pre-tax bid-YTW of 5.99% based on a bid of 22.03 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.7624% Now with a pre-tax bid-YTW of 6.36% based on a bid of 17.90 and a limitMaturity.
PWF.PR.L PerpetualDiscount +1.8267% Now with a pre-tax bid-YTW of 6.58% based on a bid of 19.51 and a limitMaturity.
PWF.PR.K PerpetualDiscount +1.9200% Now with a pre-tax bid-YTW of 6.52% based on a bid of 19.11 and a limitMaturity.
FBS.PR.B SplitShare +1.9792% Asset coverage of 1.5+:1 as of July 17, 2008, according to TD Securities. Now with a pre-tax bid-YTW of 5.64% based on a bid of 9.79 and a hardMaturity 2011-12-15 at 10.00.
POW.PR.B PerpetualDiscount +1.9903% Now with a pre-tax bid-YTW of 6.43% based on a bid of 21.01 and a limitMaturity.
POW.PR.A PerpetualDiscount +2.1127% Now with a pre-tax bid-YTW of 6.49% based on a bid of 21.75 and a limitMaturity.
CM.PR.D PerpetualDiscount +2.1144% Now with a pre-tax bid-YTW of 6.81% based on a bid of 21.25 and a limitMaturity.
RY.PR.B PerpetualDiscount +2.1277% Now with a pre-tax bid-YTW of 6.13% based on a bid of 19.20 and a limitMaturity.
CM.PR.G PerpetualDiscount +2.1388% Now with a pre-tax bid-YTW of 6.95% based on a bid of 19.58 and a limitMaturity.
GWO.PR.H PerpetualDiscount +2.1693% Now with a pre-tax bid-YTW of 6.36% based on a bid of 19.31 and a limitMaturity.
BMO.PR.H PerpetualDiscount +2.2395% Now with a pre-tax bid-YTW of 6.43% based on a bid of 21.00 and a limitMaturity.
CM.PR.E PerpetualDiscount +2.2920% Now with a pre-tax bid-YTW of 6.87% based on a bid of 20.53 and a limitMaturity.
PWF.PR.I PerpetualDiscount +2.5195% Now with a pre-tax bid-YTW of 6.38% based on a bid of 23.60 and a limitMaturity.
GWO.PR.G PerpetualDiscount +3.7313% Now with a pre-tax bid-YTW of 6.31% based on a bid of 20.85 and a limitMaturity.
PWF.PR.E PerpetualDiscount +4.2213% Now with a pre-tax bid-YTW of 6.44% based on a bid of 21.48 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BNS.PR.L PerpetualDiscount 543,211 Nesbitt crossed 500,000 at 18.00, then another 25,000 at the same price. Now with a pre-tax bid-YTW of 6.23% based on a bid of 18.16 and a limitMaturity.
BNS.PR.M PerpetualDiscount 524,912 Nesbitt crossed 500,000 at 18.00. Now with a pre-tax bid-YTW of 6.24% based on a bid of 18.15 and a limitMaturity.
CM.PR.I PerpetualDiscount 523,950 Nesbitt crossed 500,000 at 17.00. Now with a pre-tax bid-YTW of 6.82% based on a bid of 17.36 and a limitMaturity.
PWF.PR.I PerpetualDiscount 254,030 Nesbitt crossed 250,000 at 23.25. Now with a pre-tax bid-YTW of 6.38% based on a bid of 23.60 and a limitMaturity.
BNS.PR.J PerpetualDiscount 226,575 Two trades, four anonymouses. Two blocks of 100,000 at 21.25. Now with a pre-tax bid-YTW of 6.21% based on a bid of 21.28 and a limitMaturity.
BPO.PR.J Scraps (Would be OpRet, but there are credit concerns) 123,950 TD crossed 100,000 at 20.50, then bought 16,200 from Nesbitt at the same price. Now with a pre-tax bid-YTW of 8.98% based on a bid of 20.36 and a softMaturity 2014-12-30 at 25.00.

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