BMO.PR.L Goes Nuts in Last Half Hour of Trading

July 11th, 2008

Trading like this deserves its own post. These are the last ten trades in BMO.PR.L, as reported by the TSX:

BMO.PR.L
Last Ten Trades
July 11, 2008
Time Price Shares
15:58 23.01 300
15:58 23.01 100
15:58 13.00
23.00		 5,000
15:57 23.00 2,000
15:50 22.15 7,400
15:34 22.15 65
15:34 23.40 1,000
15:34 23.41 1,000
15:34 24.15 1,000
15:34 24.40 5,000

All the trades from 15:34 and 15:50, except for the odd lot, were with RBC as the seller; a total of 15,400 shares that took the price from 24.40 to 22.15. The closing quote was 23.00-24.68, 25×3.

Which leaves us guessing: forced seller? or fool?

BMO.PR.L started trading on April 3.

Posted in Issue Comments | 3 Comments »

Preferreds or Common?

July 11th, 2008

There was an interesting comment on FWF today:

I would always expect variation in daily value for a bond or a bond fund. What strikes me as not “fixed income” about preferreds is that they have noticeably deviated from any bond indice comparison. And corporate bonds have held up; so this is a preferred-specific issue. The market seems to be saying the risk factor in preferreds is much higher than comparable corporate bonds.

This was in the context of a discussion about the investment merits of bank preferreds vs. bank common, given that many Canadian banks’ common are trading with unheard of dividend yields in the current depressed market.

This is simply another example of trader-mentality vs. investor-mentality. I have nothing against traders. Trading is a useful skill and can be a lucrative skill … if I had a trader’s mentality, I’d still be counting my winnings from the Tech boom. Unfortunately (in this particular case, anyway) I have an investor mentality and simply would not be able to sleep at night, knowing that I held a piece of garbage for the sole reason that the price was rising.

For investors, it is important to look through trading behavior into the actual investment characteristics of a particular vehicle. I will certainly not deny that bank prefs are behaving a lot more like bank common nowadays than like bank bonds, but this observation does not constitute a solid ground for an investment strategy.

What do I always say? The investment world is chaotic, and things that were not even slightly important a year ago can become a driving force in the blink of an eye. It is not enough to look at price behaviour alone. At this time last year, non-bank ABCP with a General Market Disruption liquidity guarantee was just the same as bank ABCP with a Global liquidity guarantee. And, what’s more, the two classes had been trading in lockstep for years. Until, one day, they didn’t.

Preferred shares may, in times of stress, over-react to bad news about the common. There are many among us who have very fond memories of what happened to TRP.PR.X and TRP.PR.Y at the time that TRP common halved its dividend. Call me polyanna, but the fund loaded up on TRP Preferreds … because although the common dividend had halved, the preferred dividend looked … well … perhaps to say “as solid as ever” would be overstating the case, but “almost as solid as ever” seems to understate it! Assiduous Readers will know what I mean, anyway.

So by all means, prefs will often trade more like common than they trade like stock. An investor must look through that and realize that prefs are not common. Prefs are also not bonds. They’re preferreds. I feel it is appropriate to benchmark them (at least, the high quality ones) against long corporates because that is what their risk most resembles; but I recognize that sometimes markets will go blahooey, if for no other reason than their investor universe is different. Times when things are going blahooey is when I earn my pay – largely by doing nothing. Nice work, if you can get it.

I will note that the fact that things can go blahooey is a major reason behind my exhortations to limit preferred exposure to 50% maximum of a fixed income portfolio. The spreads are juicy, and sometimes they’re very juicy indeed … but when you need to raise cash for non-investment reasons, you really don’t want to be a forced seller.

PerpetualDiscounts finished the day with an average yield of 6.40%, equivalent to 8.96% at the standard conversion factor of 1.4x. Long corporates – which have been basically ignoring all this kerfuffle about financials, having priced it in months ago – continue to yield about 6.1%; the PerpetualDiscount / Long Corporate PTIE spread is therefore about 286bp. This is wild!

Posted in Spreads to Bonds | 1 Comment »

July PrefLetter Now in Preparation

July 11th, 2008

The markets have closed and the July edition of PrefLetter is now being prepared.

PrefLetter is the monthly newsletter recommending individual issues of preferred shares to subscribers. There is at least one recommendation from every major type of preferred share; the recommendations are taylored for “buy-and-hold” investors.

The July issue will be eMailed to clients and available for single-issue purchase with immediate delivery prior to the opening bell on Monday. I will write another post on the weekend advising when the new issue has been uploaded to the server … so watch this space carefully if you intend to order “Next Issue” or “Previous Issue”!

Posted in PrefLetter | No Comments »

DBRS Affirms BAM at Pfd-2(low)

July 11th, 2008

BAM preferreds have suffered since the credit crunch got rolling last August so … I consider the otherwise routine affirmation of their credit rating by DBRS to be newsworthy:

DBRS has today confirmed the ratings of Brookfield Asset Management Inc. (Brookfield or the Company), including its A (low) Senior Notes and Debentures rating.

Brookfield’s credit profile continues to be supported by solid credit metrics and liquidity at the corporate level as it benefits from strong free cash flow generation from its diverse investments. Despite an increase in overall consolidated leverage in recent years, Brookfield has maintained solid interest coverage ratios at the corporate level and cash flows are now generated from a more stable asset base than in past years. As well, DBRS remains comfortable that the subsidiary debt is non-recourse to Brookfield and so far is supported by Brookfield’s solid balance sheet and good liquidity at the corporate level.

In 2007, the major acquisition of Multiplex Group (Multiplex) in Australia for $6.2 billion enhanced Brookfield’s commercial real estate portfolio by adding 8.5 million square feet of commercial office and retail space in major centres in Australia, as well as developments in Europe and the Middle East. Brookfield also established Brookfield Infrastructure Partners (BIP), which includes its Chilean transmission assets and certain North American timber assets, to represent a public vehicle for future growth of global infrastructure holdings. DBRS expects Brookfield to continue to establish further private and public vehicles to increase fees from third-party asset management activities; this should mitigate some of the risks with major acquisitions and raise capital to pursue other investments. The growth in asset management fees represents a stable source of cash flows at the corporate level.

DBRS notes that one of the major risks for Brookfield’s current ratings is the Company potentially undertaking significant acquisitions that materially increase financial risk at the corporate and/or subsidiary level. To date, Brookfield has maintained acceptable balance sheet ratios with just under 30% debt-to-total capital (book value) and cash flow-to-debt of 0.33 on a remitted basis (0.40 on an underlying basis). Brookfield’s coverage ratios also remained strong in 2007, with interest coverage on a remitted basis of 5.3 times and fixed charge coverage of 3.9 times. In 2007, Brookfield generated free cash flow (before one-time gains and after common dividends) of $558 million on a remitted basis or $1.4 billion including several large gains. Brookfield’s liquidity remains strong, with cash and financial assets at the end of Q1 2008 of $1.8 billion and $240 million available on its $800 million commercial paper limit.

Looking forward, DBRS expects Brookfield’s credit metrics to remain relatively stable or to improve slightly in 2008. Somewhat higher leverage (to finance major acquisitions) and weakness in the Company’s U.S. residential development business are expected to be more than offset by 1) higher cash flows from improved hydrology and pricing conditions in its power business, and 2) the contribution from dividends paid from its investment in Canary Wharf Group, plc.

The note that one of the major risks for Brookfield’s current ratings is the Company potentially undertaking significant acquisitions that materially increase financial risk at the corporate and/or subsidiary level is a little peculiar. It makes it seem as if DBRS has decided that BAM management is comprised of wild-eyed plungers, who are straining at the leash, eager to blow their (our!) money on a white elephant of some kind.

I’m pleased to see that they’ve highlighted the fact that an enormous chunk of their formal debt is secured by property and is non-recourse: I consider that quite important.

As I never fail to remind you, BAM has quite a few preferred issues outstanding: BAM.PR.B, BAM.PR.E, BAM.PR.G, BAM.PR.H, BAM.PR.I, BAM.PR.J, BAM.PR.K, BAM.PR.M, BAM.PR.N, BAM.PR.O.

Posted in Issue Comments | 9 Comments »

Lehman Discloses Basel II Ratios

July 11th, 2008

Lehman is in the news:

Lehman Brothers Holdings Inc., the securities firm that lost almost 75 percent of its market value this year, sank to the lowest since 2000 in New York trading as customers’ votes of confidence failed to halt speculation that the stock may drop further.

Lehman, once the biggest U.S. underwriter of mortgage bonds, fell 40 cents, or 5.2 percent, to $16.40 before the official open on the New York Stock Exchange. Shares of the New York-based investment bank have lost 24 percent this week.
…
“There’s a concentrated effort to break Lehman,” [Ladenburg Thalmann & Co. analyst Richard] Bove said. “And I can’t say it won’t work because it worked with Bear.”

About 70.3 million shares, or 10 percent of Lehman’s outstanding stock, were sold short by investors as of June 30, compared with 37 million at the start of the year, the New York Stock Exchange said yesterday.

According to Lehman:

Lehman’s Capital
May 31, 2008
Item Billions (except for percentages)
Common Equity $19.3
Intangibles (4.1)
Deferred Tax (2.3)
own debt valuation (1.5)
Other (0.1)
Qualifying unrestricted securities 7.9
Qualifying Restricted Securities 4.0
Total Tier 1 Capital 23.2
Qualifying subordinated notes 11.6
Total Capital 34.8
Risk Weighted Assets : Credit Risk 93.3
Risk Weighted Assets: Market Risk 91.1
Risk Weighted Assets: Operational Risk 32.2
Total Risk Weighted Assets 216.6
Tier 1 Ratio 10.7%
Total Capital Ratio 16.1%
The number above does not reflect the impact of the issuance of $4.0 billion of Common Stock and of $2.0 billion of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock Series Q on June 12, 2008.

So what’s the problem? Well, problem #1 is leverage:

Lehman Brothers Leverage Ratios
Item 2008-5-31 2008-2-29 2007-11-30
Total Stockholders’ Equity $26,276 $24,832 $22,490
Junior Sub. Notes 5,004 4,976 4,740
Intangibles (4,101) (4,112) (4,127)
Tangible Equity Capital $27,179 $25,696 $23,103
Total Assets 639,432 786,035 691,063
Leverage Ratio 24.34x 31.65x 30.73x
Net Assets 327,774 396,673 372,959
Net Leverage Ratio 12.06x 15.44x 16.14x
The table above does not reflect the impact of the issuance of $4.0 billion of common stock and of $2.0 billion of 8.75% Non-Cumulative Mandatory Convertible Preferred Stock, Series Q, on June 12, 2008. On a pro forma basis including those equity issuances, the Company’s leverage ratio and net leverage ratio would have been 20.00x and 10.06x, respectively.

The company states:

The Company believes that a more meaningful, comparative ratio for companies in the securities industry is net leverage, which is the result of net assets divided by tangible equity capital.

The Company’s net leverage ratio is calculated as net assets divided by tangible equity capital. The Company calculates net assets by excluding from total assets: (i) cash and securities segregated and on deposit for regulatory and other purposes; (ii) collateralized lending agreements; and (iii) identifiable intangible assets and goodwill. The Company believes net leverage based on net assets to be a more useful measure of leverage, because it excludes certain low-risk, non-inventory assets and utilizes tangible equity capital as a measure of equity base.

Virtually the entire difference between “Total Assets” and “Net Assets” is due to “Collateralized lending agreements”.

One manner in which they attempt to address the liquidity risk is:

Seeking term funding whenever possible. The average remaining maturity of the Company’s tri-party repurchase agreements, excluding government and agency securities, was 35 days at May 31, 2008, compared with 22 days at February 29, 2008 and 27 days at November 30, 2007. Excluding securities that can be pledged to central banks, the average remaining maturity of the Company’s tri-party repurchase agreements was over 40 days at May 31, 2008.

Conclusions? You won’t find any here! If they were to experience difficulty in rolling their repos, the difference between “gross assets” and “net assets” could become rather important.

Posted in Miscellaneous News | 1 Comment »

July 10, 2008

July 10th, 2008

We may be nearing the point of crisis.

Accrued Interest is getting panicky:

Unfortunately, the panic is legitimate. No one knows what a GSE bailout will look like.
…
There are also rumors that PIMCO and SAC were not trading with Lehman. Both PIMCO and SAC have denied the rumor. Worth noting that PIMCO was one of the first to stop trading with Bear Stearns.
…
The more panicky things get, the more likely we get a relief rally after bank earnings are out. Odds are good that it will be a mixed bag, with some banks looking particularly ugly (Wachovia this morning warned of a huge loss) and others will be bad but not that bad.

What’s all this about? The GSEs are looking sick … very sick indeed:

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don’t have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in the interview yesterday.

There are soothing words from the administration:

U.S. Treasury Secretary Henry Paulson said he’s been assured by the regulator for Fannie Mae and Freddie Mac that the two government-chartered mortgage companies have enough capital.

The Office of Federal Housing Enterprise Oversight “has made clear that they are adequately capitalized,” Paulson told the House Financial Services Committee.

… but as of noon:

Freddie Mac (FRE US) sank 16 percent to $8.57, a 16-year low. UBS AG analysts cut their price target on the second-largest mortgage-finance company to $10 from $28, citing growing credit losses and problems raising capital.
…
Fannie Mae slumped 5.2 percent to $14.52, the lowest since July 1991. MGIC Investment Corp. (MTG US), the largest U.S. mortgage insurer, lost 17 percent to $5.55.

… even while the implicit guarantee became a whole lot more explicit …

Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.

The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain of Arizona and Democratic Senator Charles Schumer of New York.

The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms’ shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies failing and threatening a deeper housing recession.

Naked Capitalism reviews media stories on disaster planning

I said it most recently on May 2:

The GSEs have to start being regulated like banks; there’s no question in my mind about that.

If Congress wants to cut a special deal with them to achieve politically favourable goals, it should simply buy a preferred share – with cash – make it puttable to the company unless the company does A, B and C, and write a specific exclusion to the capital rules allowing this to be Tier 1 capital. Then … walk away and let the regular regulators do as they please.

Yet another thoroughly appalling day, with PerpetualDiscounts getting absolutely hammered. The average yield of 6.34% is equivalent to 8.88% interest (with a conversion factor of 1.4x), representing a spread of about 278bp over long corporates.

You know … I’m not worried about myself so much (I’m fairly phlegmatic about market prices), and I’m not worried about the fund so much (while it’s underperforming due to PerpetualDiscount exposure, it’s executing a steady stream of little income-enhancing trades that will eventually pay off), and I’m not worried about the market so much (all we have to fear is defaults, and none of those are even on the horizon, for instruments I hold. None of this excitement is showing up in the Canadian bond market at all.), but I am worried about retail. This is the type of environment where even very reasonable people might panic – or, worse, indulge in a little market timing – and these investors could hurt themselves badly.

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 4.30% 2.40% 48,291 0.08 1 -0.2352% 1,119.7
Fixed-Floater 4.66% 4.38% 71,482 16.36 6 -0.1903% 1,090.4
Floater 4.08% 4.10% 50,672 17.22 3 -1.2984% 902.4
Op. Retract 4.96% 3.71% 165,062 2.54 17 +0.0677% 1,046.4
Split-Share 5.39% 6.68% 64,639 4.13 14 -0.5388% 1,023.8
Interest Bearing 6.16% 5.56% 45,237 1.97 3 -0.4326% 1,118.7
Perpetual-Premium 6.04% 5.94% 66,893 10.89 4 -0.1225% 998.3
Perpetual-Discount 6.29% 6.34% 242,094 13.45 67 -0.8872% 840.2
Major Price Changes
Issue Index Change Notes
CM.PR.D PerpetualDiscount -6.0418% Now with a pre-tax bid-YTW of 6.83% based on a bid of 21.15 and a limitMaturity.
NA.PR.L PerpetualDiscount -3.1480% Now with a pre-tax bid-YTW of 6.57% based on a bid of 18.46 and a limitMaturity.
SLF.PR.C PerpetualDiscount -2.9213% Now with a pre-tax bid-YTW of 6.50% based on a bid of 17.28 and a limitMaturity.
SBC.PR.A SplitShare -2.7054% Asset coverage of 1.9+:1 as of July 3, according to Brompton Group. Now with a pre-tax bid-YTW of 6.03% based on a bid of 9.71 and a hardMaturity 2012-11-30.
PWF.PR.G PerpetualDiscount -2.6778% Now with a pre-tax bid-YTW of 6.35% based on a bid of 23.26 and a limitMaturity.
CM.PR.H PerpetualDiscount -2.5056% Now with a pre-tax bid-YTW of 6.88% based on a bid of 17.51 and a limitMaturity.
BAM.PR.M PerpetualDiscount -2.4814% Now with a pre-tax bid-YTW of 7.64% based on a bid of 15.72 and a limitMaturity.
BAM.PR.K Floater -2.4500%  
W.PR.J PerpetualDiscount -2.4368% Now with a pre-tax bid-YTW of 6.64% based on a bid of 21.22 and a limitMaturity.
ENB.PR.A PerpetualDiscount -2.4319% Now with a pre-tax bid-YTW of 5.98% based on a bid of 23.27 and a limitMaturity.
CM.PR.P PerpetualDiscount -2.4295% Now with a pre-tax bid-YTW of 6.88% based on a bid of 20.08 and a limitMaturity.
POW.PR.D PerpetualDiscount -2.3736% Now with a pre-tax bid-YTW of 6.65% based on a bid of 18.92 and a limitMaturity.
W.PR.H PerpetualDiscount -2.2556% Now with a pre-tax bid-YTW of 6.66% based on a bid of 20.80 and a limitMaturity.
SLF.PR.A PerpetualDiscount -2.1627% Now with a pre-tax bid-YTW of 6.31% based on a bid of 19.00 and a limitMaturity.
LBS.PR.A SplitShare -1.8943% Asset coverage of just under 2.0:1 as of July 3, according to Brompton Group. Now with a pre-tax bid-YTW of 5.62% based on a bid of 9.84 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.7704% Now with a pre-tax bid-YTW of 6.53% based on a bid of 17.20 and a limitMaturity.
CM.PR.I PerpetualDiscount -1.7694% Now with a pre-tax bid-YTW of 6.86% based on a bid of 17.21 and a limitMaturity.
PWF.PR.F PerpetualDiscount -1.7370% Now with a pre-tax bid-YTW of 6.65% based on a bid of 19.80 and a limitMaturity.
SLF.PR.E PerpetualDiscount -1.6854% Now with a pre-tax bid-YTW of 6.49% based on a bid of 17.50 and a limitMaturity.
BAM.PR.B Floater -1.6145%  
CU.PR.A PerpetualPremium (for now!) -1.5650% Now with a pre-tax bid-YTW of 5.99% based on a bid of 24.53 and a limitMaturity.
BMO.PR.J PerpetualDiscount -1.5426% Now with a pre-tax bid-YTW of 6.18% based on a bid of 18.51 and a limitMaturity.
CIU.PR.A PerpetualDiscount -1.5337% Now with a pre-tax bid-YTW of 6.06% based on a bid of 19.26 and a limitMaturity.
GWO.PR.G PerpetualDiscount -1.5041% Now with a pre-tax bid-YTW of 6.47% based on a bid of 20.30 and a limitMaturity.
BMO.PR.H PerpetualDiscount -1.3395% Now with a pre-tax bid-YTW of 6.31% based on a bid of 21.36 and a limitMaturity.
BSD.PR.A InterestBearing -1.3388% Asset coverage of just under 1.7:1 as of July 4, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.92% (mostly as interest) based on a bid of 9.58 and a hardMaturity 2015-3-31 at 10.00.
BNS.PR.J OpRet
PerpetualDiscount		 -1.2670% Now with a pre-tax bid-YTW of 6.02% based on a bid of 21.82 and a limitMaturity.
POW.PR.C PerpetualDiscount -1.2417% Now with a pre-tax bid-YTW of 6.54% based on a bid of 22.27 and a limitMaturity.
TD.PR.Q PerpetualDiscount -1.2068% Now with a pre-tax bid-YTW of 5.91% based on a bid of 23.74 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.0870% Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.20 and a limitMaturity.
SLF.PR.B PerpetualDiscount -1.0417% Now with a pre-tax bid-YTW of 6.38% based on a bid of 19.00 and a limitMaturity.
GWO.PR.H OpRet -1.0390% Now with a pre-tax bid-YTW of 6.43% based on a bid of 19.05 and a limitMaturity.
FBS.PR.B SplitShare -1.0363% Asset coverage of 1.5+:1 as of July 10, according to TD Securities. Now with a pre-tax bid-YTW of 6.38% based on a bid of 9.55 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.0077% Now with a pre-tax bid-YTW of 6.77% based on a bid of 16.70 and a limitMaturity.
BCE.PR.Y FixFloat +1.2245%  
IAG.PR.A PerpetualDiscount +2.0307% Now with a pre-tax bid-YTW of 6.25% based on a bid of 18.59 and a limitMaturity.
MFC.PR.B PerpetualDiscount +2.9101% Now with a pre-tax bid-YTW of 6.05% based on a bid of 19.45 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CGI.PR.C Scraps (would be SplitShare but there are volume concerns) 100,000 CIBC crossed 100,000 at 23.75. Asset coverage of about maybe 4.0+:1 as of May 31, according to their Current Information and Annual Report … but this figure is not official and should be checked. Now with a pre-tax bid-YTW of 5.13% based on a bid of 23.12 and a softMaturity 2016-6-14 at 25.00.
ACO.PR.A OpRet 40,160 CIBC crossed 40,000 at 26.50. Now with a pre-tax bid-YTW of 2.62% based on a bid of 26.51 and a call 2008-12-31 at 26.00.
CM.PR.I PerpetualDiscount 31,500 Now with a pre-tax bid-YTW of 6.86% based on a bid of 17.21 and a limitMaturity.
CM.PR.H PerpetualDiscount 29,665 Now with a pre-tax bid-YTW of 6.88% based on a bid of 17.51 and a limitMaturity.
BCE.PR.Y FixFloat 27,518 HSBC bought 10,000 from Nesbitt at 25.00, and another 10,000 a split-second later at 25.44. HSBC was on the buy-side for nine of the last ten trades for BCE.PR.Y, taking the price up to 25.44, up $0.99 from yesterday’s close. A buy-in? A whoopsee? Who knows?
TD.PR.O PerpetualDiscount 26,150 Now with a pre-tax bid-YTW of 5.97% based on a bid of 20.38 and a limitMaturity.

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

Posted in Market Action | 4 Comments »

Marginal Tax Rates: BC 2008

July 10th, 2008

Here are the rates from the E&Y Tax Calculator, as updated to include legislation to May 8, 2008.

Clawbacks are not included; I am hopeful that at some point I will be able to get some authoritative data on the effects of clawbacks, but have not found anything credible … please contact me if you do know of any credible public sources!

Investors Taxable Income Marginal Rate on Interest Marginal Rate on Dividends Equivalency Factor
Widows & Orphans $30,000 20.24% 0.00% 1.25
Professionals $75,000 32.50% 4.40% 1.42
Plutocrats $150,000 43.70% 18.47% 1.45

Look at those rates, eh? The choice between interest and dividends is roughly the same as in Ontario at all income levels … but I look at the rate on dividends for “professionals” and I just can’t believe my eyes!

The comments to the Ontario update included some discussion of the calculation of the equivalency factor in the presence of the OAS clawback.

Posted in Taxation | 2 Comments »

July 9, 2008

July 9th, 2008

Times are tough! European banks are paying a spread of 542bp for Innovative Tier 1 Capital:

European banks are having to pay the highest costs in at least a decade to raise capital reserves required by regulators.

Investors now demand 542 basis points of extra yield over government debt to buy so-called Tier 1 securities, which regulators demand banks hold to buffer depositors and senior bondholders against losses, according to Merrill Lynch & Co.’s Euro Sub-Debt Tier 1 Index. The index started the year at 284 basis points.
…
Regulators consider Tier 1 securities as close to equity because in some circumstances issuers can defer interest payments. Instead of a fixed due date, the bonds often give the issuer the option of redeeming them after five or 10 years and inflict higher interest payments if that doesn’t happen.

As financing costs increase banks may no longer view a higher coupon as penalizing them, meaning investors risk holding bonds that may never mature, said Simon Adamson, an analyst at debt research firm CreditSights Inc. in London.

I don’t know the details of the “Euro Sub-Debt Tier 1 Index”, but the spread probably relates to 10-year governments; the so-called bonds will (probably!) have a call and step-up provision at that time so the salesmen can pretend it’s 10-year money.

By way of comparison, we know from yesterday that PerpetualDiscounts are trading to yield 265bp over long corporates, and long corporates are trading about 200bp over Canadas. As a further comparison, the NBC CaPS II, 7.447% until the pretend-maturity 2020-6-30 (after which it’s BAs + 409bp), are quoted at 370bp over the Canada 2018s.

No prizes will be awarded for guessing which direction the market took today! This is getting awfully depressing, you know? But there’s no way of telling when this trend will reverse … and in the meantime, there are some awfully juicy swaps popping up often enough to make life interesting for a fully invested portfolio that isn’t afraid of trading.

The sloppiness of the market is well illustrated by the fact that the market did not appear to notice that National Bank went ex-Dividend today.

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 4.29% -0.48% 50,270 0.08 1 +0.2358% 1,122.4
Fixed-Floater 4.64% 4.37% 71,686 16.38 6 -0.1151% 1,092.5
Floater 4.03% 4.05% 50,894 17.34 3 -0.2713% 914.3
Op. Retract 4.96% 3.78% 169,146 2.54 17 -0.0276% 1,045.7
Split-Share 5.37% 6.35% 64,972 4.13 14 -0.0279% 1,029.4
Interest Bearing 6.13% 5.41% 45,516 1.99 3 +0.4059% 1,123.6
Perpetual-Premium 6.03% 5.94% 65,096 10.91 4 -0.6692% 999.5
Perpetual-Discount 6.23% 6.28% 243,672 13.53 67 -0.4592% 847.7
Major Price Changes
Issue Index Change Notes
SLF.PR.D PerpetualDiscount -2.9917% Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.51 and a limitMaturity.
ELF.PR.F PerpetualDiscount -2.5789% Now with a pre-tax bid-YTW of 7.21% based on a bid of 18.51 and a limitMaturity.
BAM.PR.J OpRet -2.5652% Now with a pre-tax bid-YTW of 6.95% based on a bid of 22.41 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (5.41% to 2012-3-30), BAM.PR.I (5.99% to 2013-12-30) and BAM.PR.O (6.27% to 2013-6-30).
PWF.PR.I PerpetualDiscount -2.4777% Now with a pre-tax bid-YTW of 6.25% based on a bid of 24.01 and a limitMaturity.
SLF.PR.E PerpetualDiscount -2.4658% Now with a pre-tax bid-YTW of 6.38% based on a bid of 17.80 and a limitMaturity.
CM.PR.D PerpetualDiscount -2.1304% Now with a pre-tax bid-YTW of 6.40% based on a bid of 22.51 and a limitMaturity.
MFC.PR.B PerpetualDiscount -2.1233% Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.90 and a limitMaturity.
CM.PR.I PerpetualDiscount -2.1229% Now with a pre-tax bid-YTW of 6.73% based on a bid of 17.52 and a limitMaturity.
SLF.PR.B PerpetualDiscount -2.0908% Now with a pre-tax bid-YTW of 6.31% based on a bid of 19.20 and a limitMaturity.
IAG.PR.A PerpetualDiscount -2.0430% Now with a pre-tax bid-YTW of 6.37% based on a bid of 18.22 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.9391% Now with a pre-tax bid-YTW of 6.42% based on a bid of 17.70 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.8687% Now with a pre-tax bid-YTW of 6.50% based on a bid of 19.43 and a limitMaturity.
PWF.PR.L PerpetualDiscount -1.7500% Now with a pre-tax bid-YTW of 6.51% based on a bid of 19.65 and a limitMaturity.
BNS.PR.O PerpetualDiscount -1.6082% Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.86 and a limitMaturity.
PWF.PR.E PerpetualDiscount -1.5712% Now with a pre-tax bid-YTW of 6.48% based on a bid of 21.30 and a limitMaturity.
CM.PR.G PerpetualDiscount -1.4126% Now with a pre-tax bid-YTW of 6.70% based on a bid of 20.24 and a limitMaturity.
W.PR.J PerpetualDiscount -1.4053% Now with a pre-tax bid-YTW of 6.47% based on a bid of 21.75 and a limitMaturity.
PWF.PR.K PerpetualDiscount -1.3326% Now with a pre-tax bid-YTW of 6.45% based on a bid of 19.25 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.2873% Now with a pre-tax bid-YTW of 6.70% based on a bid of 16.87 and a limitMaturity.
W.PR.H PerpetualDiscount -1.1152% Now with a pre-tax bid-YTW of 6.50% based on a bid of 21.28 and a limitMaturity.
GWO.PR.H PerpetualDiscount -1.0791% Now with a pre-tax bid-YTW of 6.36% based on a bid of 19.25 and a limitMaturity.
PWF.PR.G PerpetualDiscount -1.0352% Now with a pre-tax bid-YTW of 6.71% based on a bid of 17.96 and a limitMaturity.
BAM.PR.I OpRet +1.0305% See BAM.PR.J, above.
NA.PR.M PerpetualDiscount +1.1838% Ex-Dividend today but nobody noticed. Now with a pre-tax bid-YTW of 6.08% based on a bid of 24.65 and a limitMaturity.
NA.PR.K PerpetualDiscount +1.3546% Ex-Dividend today but nobody noticed. Now with a pre-tax bid-YTW of 6.28% based on a bid of 23.25 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.4129% Now with a pre-tax bid-YTW of 6.49% based on a bid of 19.38 and a limitMaturity.
BAM.PR.O OpRet +2.1505% See BAM.PR.J, above.
Volume Highlights
Issue Index Volume Notes
MFC.PR.B PerpetualDiscount 214,850 CIBC crossed 150,000 at 19.25, then Nesbitt crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 6.22% based on a bid of 18.90 and a limitMaturity.
CM.PR.A OpRet 53,600 CIBC crossed 50,000 at 25.85. Now with a pre-tax bid-YTW of -0.48% based on a bid of 25.80 and a call 2008-8-8 at 25.75.
TD.PR.P PerpetualDiscount 33,798 Nesbitt crossed 29,300 at 22.30. Now with a pre-tax bid-YTW of 5.85% based on a bid of 22.46 and a limitMaturity.
PWF.PR.E PerpetualDiscount 33,100 Nesbitt crossed 30,000 at 21.35. Now with a pre-tax bid-YTW of 6.48% based on a bid of 21.30 and a limitMaturity.
TD.PR.O PerpetualDiscount 30,986 Now with a pre-tax bid-YTW of 5.93% based on a bid of 20.50 and a limitMaturity.

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

Posted in Market Action | 5 Comments »

Deposit Insurance in Chile

July 9th, 2008

My route to this paper is, perhaps, best described at another time. But Deposit Insurance: Handle with Care is a good background paper with excellent references.

The abstract:

Explicit deposit insurance has been spreading rapidly in the past decades, most recently to countries with low levels of financial and institutional development. This paper documents the extent of crosscountry differences in deposit-insurance design and reviews empirical evidence on how particular design features affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. This evidence challenges the wisdom of encouraging countries to adopt explicit deposit insurance without first stopping to assess and remedy weaknesses in their informational and supervisory environments. The paper also includes recommendations for reforming the Chilean deposit insurance system based on the results of the research reviewed here.

… and a few observations …

On investigating individual design features, Demirgüç-Kunt and Detragiache also show that deposit insurance causes the most trouble in countries where coverage is extensive, where authorities amass a large fund of explicit reserves and earmark it for insolvency resolution, and where the scheme is administered by government officials rather than the private sector.
…
It is common practice to issue blanket guarantees to arrest a banking crisis. Countries that have adopted this strategy include Sweden (1992), Japan (1996), Thailand (1997), Korea (1997), Malaysia (1998), and Indonesia (1998). More recently, Turkey tried to halt its financial panic by guaranteeing not just bank depositors, but all domestic and foreign nondeposit creditors of Turkish banks. Advocates of using blanket guarantees to halt a systemic crisis argue that sweeping guarantees can be helpful, even essential, in halting depositors’ flight to quality. However, because blanket guarantees create an expectation of their future use in similar circumstances, they undermine market discipline and may prove greatly destabilizing over longer periods. Although some countries have managed to scale back formal insurance coverage once a crisis has receded, it is very difficult to scale back informal coverage in a credible manner.
…
Concentrated banking systems experience fewer systemic banking crises (Beck, Demirgüç-Kunt, and Levine, 2003) and almost always generate a high level of implicit insurance coverage, partly because of “too big to fail” pressures. Not surprisingly, empirical evidence confirms that incremental exposure to moral hazard from introducing an explicit insurance system is limited in highly concentrated environments.

By the way …

Deposit insurance was established in Chile in 1986. The system does not have a permanent fund in place. The Chilean Central Bank guarantees 100 percent of demand deposits in full, and 90 percent of household savings and time deposits up to UF 120 per person (approximately US$ 2,800). To limit the Central Bank’s exposure, banks with demand deposits in excess of 2.5 times the capital reserves are required to maintain 100 percent reserves at the Central Bank in short-term central bank or government securities. Foreign exchange deposits are covered, but coverage excludes interbank deposits. Membership is compulsory for all banks, and the scheme is publicly administered.

Posted in Interesting External Papers | No Comments »

Marginal Tax Rates: Ontario 2008

July 9th, 2008

Here are the rates from the E&Y Tax Calculator, as updated to include legislation to May 8, 2008.

Clawbacks are not included; I am hopeful that at some point I will be able to get some authoritative data on the effects of clawbacks, but have not found anything credible … please contact me if you do know of any credible public sources!

Investors Taxable Income Marginal Rate
on Interest		 Marginal Rate
on Eligible Dividends		 Equivalency Factor
Widows & Orphans $30,000 21.05% 0.00% 1.27
Professionals $75,000 39.41% 13.81% 1.42
Plutocrats $150,000 46.41% 23.96% 1.42

These figures are not much different from the 2006 numbers. The top marginal rate on eligible dividends is expected to increase to 26.7% in 2012; this would decrease the equivalency factor to 1.37. But frankly, I take estimates of future taxation rates with a grain of salt – we have no way of knowing what will be politically convenient next month, let alone four years off.

Posted in Taxation | 5 Comments »

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