PrefBlog

Maple bonds aren’t selling well this year:

Four banks outside Canada raised just C$500 million ($492 million) selling Maple bonds, or foreign debt denominated in Canadian dollars, according to Bloomberg data. That compares with C$20.6 billion from 55 issues in the first half of 2007.

“Investors are having a preference for well-known, well- understood companies, and they have a home-market bias,” said Chris Seip, head of Canadian debt capital markets at RBC Capital Markets in Toronto.
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By contrast, bond sales by Canadian governments rose 19 percent in the first half of the year, to C$40.5 billion. Corporate bond sales rose 1.4 percent to C$45.3 billion, according to Bloomberg data.

Speaking of “home market bias”, I suspect that FTU.PR.A (US Financial 15 Split) is ripe for another downgrade … it was downgraded to Pfd-3 when asset coverage was 1.4+:1 … asset coverage is just under 1.1:1 as of June 30.

My notes from yesterday attracted some comment on Financial Webring Forum:

To quote Preferred Share High Priest Hymas from his Prefblog of yesterday:
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Let’s see: 250bp over long corporates, 10-year high and short-lived…

Need I say more?

Let’s hope people don’t come to their senses too fast

Well, I like flattery as much as anybody else … but remember my feelings about market timing! I may think that this episode is overblown, I may be able to show it’s a ten-year high, I may think that in the past spikes such as the current episode have been short-lived … but I don’t know anything. Markets teach you to be humble and not to get too greedy! So … well, if you’ve been looking for an entry point, now seems to be a good time! But don’t over-allocate (my rule of thumb is a maximum of 50% of the fixed income portion of your portfolio can go into prefs), don’t get greedy and don’t mortgage the house.

And FWF participant has a very good idea:

I’ve also been trying to swap ‘weak pairs’ of perpetuals that I already owned before the slide to book those losses. I may as well make a positive out of a negative.

This is smart thinking. ‘Weak Pairs’ were discussed in an article I published last year. They can even be extremely weak pairs … that is, it’s also reasonable to do this with PerpetualDiscounts from the same issuer as long as the coupon isn’t all that much different … maybe I’m being too fussy, but the more similar the elements of a swap, the better it is for a retail investor who doesn’t trade very much and doesn’t want to spend a lot of time on analysis.

Look …. say you own one of the RY low coupon issues and you’re sitting on a capital loss. Swapping it into another RY low coupon issue and crystallizing that loss for tax purposes is good business, as long as you don’t give up yield after paying commission. In this market, you might even be able to pick up a few basis points, if you show some discipline and watch the market.

As long as the coupons aren’t too different, and the issuer is the same, overall investment characteristics of the issues will be almost identical and (when following this particular example and swapping RY issues) then you can take advantage of the fact that the ex-dates are identical and trade off current yield rather than YTM. Just make absolutely sure when you do this that ex-Dates are identical! Some issuers have different dates for different issues.

Anyway … the markets. I’ve got some good news, some bad news and then some good news.

The good news BCE issues rocketted today on the BCE announcement that financing has been arranged.

The bad news is that PerpetualDiscounts got hammered again.

The good news is that the markets will be closed for the weekend.

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

The Penn National Gaming takeover has failed:

Penn National Gaming Inc. said Fortress Investment Group LLC and Centerbridge Partners LP scrapped their $6.1 billion plan to buy the racetrack and casino company as the credit markets collapsed.

Penn is the largest leveraged buyout agreement, including debt, to fall apart since J.C. Flowers & Co. backed out of an accord last year to purchase SLM Corp., also known as Sallie Mae, for $25.3 billion.
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Penn said it will receive $225 million to terminate the takeover and a $1.25 billion interest-free loan.

“This transaction represents the company’s best alternative to the uncertainty of litigation,” Penn said.

And today I received an eMail from a reader gazing with lust in his eyes at the BCE issues! Said it before, I’ll say it again: BCE prefs are a speculation on the success of the Teachers’ deal. They are only a fixed income investment by courtesy, at this point.

Further, I noted yesterday that the US TruPS market was being hit by a CDO buyers’ strike. This could also, indirectly, make financing the BCE LBO more difficult:

Defaults on leveraged-buyout loans may rise as firms struggle to refinance about $500 billion of debt used to fund the takeovers, the Bank for International Settlements said.

Companies bought by private-equity firms worldwide must repay the high-risk, high-yield loans and bonds by 2010, the Basel, Switzerland-based bank said in a report today, citing Fitch Ratings data. They may find it hard to raise the cash because of a slump in demand for collateralized debt obligations that pool the loans, BIS said.

Investors are shunning structured debt instruments such as CDOs, the main buyers of leveraged loans, after the credit-market seizure caused by the U.S. subprime mortgage collapse, the BIS said. The ability of LBO firms to refinance may be crimped further as banks tighten lending criteria after reporting $402 billion of credit losses and asset writedowns.

The BIS report, Private Equity and Leveraged Finance Markets, is available online.

BIS has also published a report on the rating of structured finance: Ratings in Structured Finance: What Went Wrong and What Can Be Done to Address Shortcomings? which has been briefly discussed on PrefBlog.

In news that is certain to inflame the Internuts, the Fed has announced:

The Federal Reserve said the portfolio of Bear Stearns Cos. assets it accepted as part of the firm’s takeover by JPMorgan Chase & Co. is now worth $28.9 billion, down from the $30 billion estimated in March.

The central bank cut the “fair value” of the assets by 3.7 percent as of June 26, the Fed said today in Washington. The Fed loaned $28.8 billion last week to a company it formed to purchase the investments, which as of mid-March included debt backed by mortgages and other items JPMorgan deemed too risky to take on.

The Fed gave the fair-value estimate of Maiden Lane LLC’s holdings as part of its weekly report on its balance sheet today.

Details are posted with the July 3 H.4.1 Release.

Yet another thoroughly appalling day in what has become (as far as I can tell) a self-feeding panic. Today’s pre-tax bid-YTW of 6.14% is equivalent to 8.60% interest (at a conversion factor of 1.4x), which is now 250bp over long corporates. And it’s not too hard to get that 6.14% average from a big-name bank, either!

On the bright side, that 250bp represents a 10-year high and the previous high was very short-lived. We shall see!

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