PrefBlog

It’s a Fed-Watching Frenzy!

“The minutes largely reiterated what the chairman said in June,” Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said by e-mail. His firm oversees $290 billion. “Tapering, whether it will be this year or next, is inevitable. The market was initially encouraged that the Fed is waiting on additional data, but possibly taken aback by the fact that about half the participants indicated that asset purchases should end later this year.”

Minutes from the central bank’s June 18-19 meeting, released today in Washington, showed that while several members judged that a reduction in asset purchases “would likely soon be warranted,” many officials want to see more signs employment is picking up before they’ll begin slowing the pace of $85 billion in monthly bond purchases.

The Globe was a bit more colourful:

The minutes show there was an intense debate about how to communicate the Fed’s intentions. A minority of policy makers are worried that the Fed’s policies are too aggressive, risking inflation and asset-price bubbles, and should be reversed as soon as possible. And among the supporters of more QE, there was a feeling that the central bank should nonetheless send the message that economic conditions were improving, heralding an eventual end to the bond-buying program.

It was decided that Mr. Bernanke should attempt to lay out a path for QE at the press conference that followed the meeting. That’s when he told reporters that if the economic outlook held, the Fed likely would slow its bond purchases later in 2014 and end the program in the middle of 2015, when the unemployment rate likely will have fallen to about 7 per cent.

Stock markets plunged immediately, as traders the world over largely disregarded Mr. Bernanke’s insistence that the Fed also could boost asset purchases if the economy failed to unfold as expected.

BIS has published a paper titled Analysis of risk-weighted assets for credit risk in the banking book:

The bottom-up portfolio benchmarking exercise (the hypothetical portfolio exercise, or HPE), under which banks were asked to evaluate the risk of a common set of (largely low-default) wholesale obligors and exposures, revealed notable dispersion in the estimates of PD and LGD assigned to the same exposures. The three wholesale asset classes covered by the HPE analysis (sovereign, bank, and corporate) account on average for about 40% of participating banks’ total credit RWAs. A rough translation of the implied risk weight variations into potential impact on banks’ capital ratios suggests that the impact could be material; at the extremes, capital ratios could vary by as much as 1.5 to 2 percentage points (or 15 to 20% in relative terms) in either direction around the 10% benchmark used for this study. However, most of the banks (22 of the 32 participating banks) lie within one percentage point of that benchmark (see Chart 1 below).

Click for Big
Change from 10% capital ratio if individual bank risk weights from the HPE are adjusted to the median from the sample. Each bar represents one bank. The chart is based on the assumption that variations observed at each bank for the hypothetical portfolios are representative for the entire sovereign, bank, and corporate portfolios of the bank and are adjusted accordingly. No other adjustments are made to RWA or capital.

A reader brings to my attention a debunking of green disinformation:

• The “Gas Town Steam Clock” is not powered by steam
• The iconic wind turbine at Grouse Mountain is an energy sink
• BC Hydro’s emissions reporting is highly misleading
• Vancouver is nowhere as near as green as it likes to thing it is

I left this one out yesterday: DBRS confirmed RY at Pfd-1(low), although its NVCC-compliant RY.PR.W is still under Review-Negative:

RBC’s diversified business model and geographic profile have provided the Bank with consistently strong profitability and return on equity throughout various business and credit cycles. RBC is the largest retail bank in Canada and currently holds first or second-ranking positions in each business it participates in domestically, with an objective to become the leader in every business. The Bank continues to build on its leading market positions within Canada and is expanding its presence globally, particularly in wealth management and capital markets, where the Bank has been increasing its market share among the top global banks.

Despite strong performance in recent years, continued long-term domestic growth within Canada is expected to be a challenge given the Bank’s significant market share positions, the mature Canadian banking industry and the competitive landscape. Domestically, RBC and its large competitors have little room to grow beyond market growth rates, which have been strong in recent years. Additionally, foreign banks that previously exited the domestic market during the crisis have re-emerged as competitors.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

The rating on the Non-Cumulative First Preferred Shares, Series W remains Under Review with Negative Implications. DBRS hopes to resolve this rating in the near future after the publication of the results from DBRS’s recent Request for Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities

It was another day of retreat for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets off 8bp and DeemedRetractibles down 13bp. The Performance Highlights table was at average length – it hasn’t been average for a while!

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.65%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 240bp, unchanged from the figure reported July 3.

The US is taking effective action on bank capital ratios:

Capital standards at the biggest U.S. lenders would rise to 5 percent of assets for parent companies and 6 percent for their banking units under a plan proposed today by federal regulators.

The Office of the Comptroller of the Currency proposed a leverage ratio that’s 2 percentage points more than the 3 percent international minimum for holding companies, the agency said in a statement. Capital at U.S.-backed deposit and lending units must be twice the global standard at 6 percent, according to the OCC. The Federal Deposit Insurance Corp. is set to vote on the proposal later today.
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The changes would affect the eight U.S. institutions already tagged as globally important, according to the Federal Reserve. The Financial Stability Board, a group of international central bankers that coordinates financial rules, identified them as JPMorgan (JPM) Chase & Co., Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc., Bank of America Corp. (BAC), Morgan Stanley (MS), State Street Corp. (STT) and Bank of New York Mellon Corp.

Based on the largest banks’ September data, the holding companies fell short of the new leverage requirement by $63 billion, FDIC staff said in a meeting with reporters today. The insured lending units would need $89 billion more in capital.

Banks would have until Jan. 1, 2018 to comply, according to today’s statement. The proposal faces a 60-day public comment period and needs final approvals from the three agencies.

The NYSE is taking over LIBOR:

NYSE Euronext (NYX) will replace the British Bankers’ Association as Libor’s administrator in early 2014, the London-based lobby group that started the benchmark more than two decades ago said in a statement today. The U.K.’s Financial Conduct Authority began regulating Libor, the benchmark for more than $300 trillion of securities, in April as part of the overhaul.

The New York-based purchaser already operates Liffe, Europe’s second-largest derivatives exchange, which offers derivatives based on Libor. A government review recommended last year that the BBA should be stripped of responsibility for Libor after regulators found banks had tried to manipulate it to profit from bets on derivatives.

“The fact they are handing this to a derivatives exchange is a surprise,” Peter Lenardos, a financials and exchange analyst at RBC Capital Markets in London, said by telephone today. “It just doesn’t seem independent enough. They are taking the setting of Libor from the banks and giving it to an exchange not known as a benchmark provider.”

Americans, unlike everybody else on earth, are well known for meticulous attention to routine government bullshit:

Anthony J. Domico, a former contractor hired to check the backgrounds of U.S. government workers, filed a 2006 report with the results of an investigation.

There was just one snag: A person he claimed to have interviewed had been dead for more than a decade. Domico, who had worked for contractors CACI International Inc. (CACI) and Systems Application & Technologies Inc., found himself the subject of a federal probe.

Domico is among 20 investigators who have pleaded guilty or have been convicted of falsifying such reports since 2006. Half of them worked for companies such as Altegrity Inc., which performed a background check on national-security contractor Edward Snowden. The cases may represent a fraction of the fabrications in a government vetting process with little oversight, according to lawmakers and U.S. watchdog officials.

Hats off to the NYSE for its eagerness to feast at the government trough!

The IMF is full of cheer:

World economic growth will struggle to accelerate this year as a U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens, the International Monetary Fund said.

Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the Washington-based fund said today, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year’s outlook was trimmed to 2.7 percent from 3 percent initially reported in April.

So there continues to be a tug of war in the Fixed Income markets between the presumed tapering of Quantitative Easing and a really lousy global economy.

BNS was confirmed at Pfd-1(low) by DBRS:

Scotiabank continues to expand its footprint, both geographically and within business lines, by leveraging organic growth opportunities while still favouring an acquisition-oriented strategy. The Bank has made over 30 acquisitions since 2007, including sizable acquisitions, most notably the acquisition of ING Bank of Canada (ING) in August 2012 and the addition of a 51% stake in Colombian-based Banco Colpatria in January 2012. As a result of the aforementioned acquisitions, as well as organic growth, Scotiabank has grown in size at a more rapid pace than its Canadian banking peers. While offering greater growth opportunities and potentially higher returns, Scotiabank’s investments in the Caribbean, Central America, South America and Asia have inherently higher risk profiles relative to developed markets, resulting in additional political, economic, currency and operational risks.

The asset quality profile of the Bank remains good with particular strength in the Canadian market, although provisions in Latin America increased, in line with portfolio growth and a shift in portfolio mix. In May 2013, Scotiabank announced an upcoming leadership change: Rick Waugh will retire as CEO on November 1, 2013, and Brian Porter, the Bank’s current president, will assume the CEO role. Mr. Porter has extensive experience with the Bank and has held a number of high-level roles across several of its operating units; a smooth transition is expected, with no shift in strategic direction anticipated as a result of the change.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

DBRS confirmed CM at Pfd-1(low), with the NVCC-compliant issues still under review-negative:

CIBC has one of the larger multi-pronged distribution networks in Canada to service its retail customers. The Bank also has one of the largest wealth management platforms in Canada relative to its large Canadian peers, positioning CIBC to benefit from longer-term demographic shifts as the domestic population ages. DBRS believes that CIBC’s Canadian retail markets strategy – to increase product penetration using a relationship-based approach – will be challenging given the Bank’s below-average customer satisfaction scores. CIBC continues to have the lowest customer satisfaction index ranking among the five largest Canadian banks, according to J.D. Power and Associates’ 2012 Canadian Retail Banking Customer Satisfaction Study.

It has been almost a year since CIBC ceased mortgage originations from its FirstLine broker channel on July 31, 2012. CIBC has focused its efforts on transitioning FirstLine customers to branch-based mortgages where the Bank benefits from higher margins and deeper client relationships, offering cross-sell opportunities. Thus far, the Bank has successfully executed on its retention of FirstLine clients, exceeding the initial 25% customer retention target.

CIBC remains engaged in discussions with Aimia Inc. (Aimia), the parent company of Aeroplan, regarding negotiations over the contract renewal of Aeroplan co-branded credit cards. It remains unclear whether CIBC will choose to renew its contract with Aimia, as The Toronto-Dominion Bank has put forth a competitive bid for the contract, which CIBC has the right of first refusal to match. CIBC has been extensively evaluating the prospect of developing its own loyalty travel card, which it is prepared to invest heavily in. The Bank’s ability to create an in-house credit card offering as compelling as the Aeroplan co-branded card remains unclear, although its intention is to leverage customer information to provide an industry-leading travel rewards card.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

The ratings on the Non-Cumulative Class A Preferred Shares, Series 26, 27 and 29 remain Under Review with Negative Implications. DBRS hopes to resolve this rating in the near future after the publication of the results from DBRS’s recent Request for Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities.

DBRS confirmed BMO at Pfd-1(low):

BMO’s integration of its 2011 acquisition of Marshall and Ilsley Corporation (M&I) has thus far proved successful, with the Bank achieving a large portion of the forecasted synergies. The strong credit performance of the acquired portfolio has led to substantial recoveries over the past two years. DBRS notes that while the acquisition of M&I materially increased the scale of BMO’s U.S. operation, it further exposes the Bank to the U.S. economy, real estate market, and interest rate and regulatory environments.

In the current environment of high consumer leverage, BMO has chosen to key in on products that, in management’s opinion, offer good risk-return tradeoffs, and reduced exposure in areas with less attractive risk-adjusted returns. As a result, BMO actively promoted a specific residential mortgage product – a five-year term 25-year amortization fixed-rate mortgage – that it believes has attractive fundamentals and low credit risk. At the same time, the Bank pulled back slightly on unsecured lending, which would likely be the first product to suffer delinquencies if consumer leverage stresses were to materialize, as well as on commercial real estate lending, where BMO has continued to limit the amount of its exposure in this highly competitive market.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

DBRS confirmed NA at Pfd-2:

National continues to maintain its strong regional franchise in Québec, with particular emphasis on its retail, small business and commercial banking units as well as its wealth management business and national financial markets franchise. While strong market shares in the home province remain a key strength of the Bank, the ratings reflect the Bank’s regional concentration in Québec.

National delivered strong earnings growth in its Wealth Management and Financial Markets units in the first six months of 2013, as the Bank has begun to reap the benefits of a greater national presence outside of its core Québec market. National is leveraging the interprovincial acquisitions it has made over the past few years to establish a broader domestic presence in Wealth Management and Financial Markets.

National’s efficiency ratio (operating expenses over operating revenue) continues to sit above the average of its peer group, partly as a result of the high cost structure in the Bank’s Wealth Management segment. Given the number of acquisitions undertaken in Wealth Management over the past five years, most recently the acquisitions in 2012 of HSBC Securities (Canada) Inc. and Wellington West Holdings Inc., the Bank will now have to focus on aligning the different pieces of the business unit. The broader domestic presence of the Wealth Management segment and the alignment of the different pieces of the business should create the potential for the Bank to lower the expense base of the operating segment.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

DBRS confirmed TD at Pfd-1(low):

Given revenue headwinds posed by the low interest rate environment and global uncertainty, TD, like its Canadian banking peers, has looked to expense management as a core focus of earnings growth. Contributions from Canadian personal banking will likely moderate as revenue growth slows, with households limiting new borrowing, and as the federal government’s tightening of mortgage rules continues to weigh on residential mortgage activity. TD continues to see earnings growth from its U.S. Personal and Commercial Banking (P&C) unit in 2013, supported by strong organic loan growth in personal and business lending relative to the prior year period (excluding the acquisition of Target Corporation’s U.S. credit card portfolio).

TD has created a retail banking north-south corridor in the eastern United States as a result of acquisitions and organic growth across its expanding network, providing the Bank with scale advantages. However, the U.S. P&C unit will be challenged by regulatory headwinds, margin pressures and the still-recovering economy within the United States.

In April of 2013, TD announced that its long-standing CEO, Ed Clark, will be stepping down in late 2014 and that Bharat Masrani, who leads the Bank’s U.S. P&C group, will assume the role of CEO. The long transition period for Masrani provides ample time for a smooth transition; no change in strategy or culture is anticipated. Additionally, TD closed two transactions in the second quarter of 2013, Target Corporation’s U.S. credit card portfolio and Epoch Holding Corporation, and entered into an agreement to acquire HSBC Retail Services Limited’s private label credit card portfolio. All transactions are consistent with the Bank’s strategy to grow assets within the United States.

DBRS does not expect potential house price depreciation in Canada to result in material losses from the Bank’s real estate secured lending portfolio, notwithstanding the high indebtedness of the average Canadian consumer and significant increases in housing prices in certain sectors of the Canadian real estate market.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 40bp, FixedResets off 10bp and DeemedRetractibles down 18bp. The larger-than-average Performance Highlights table is, unsurprisingly enough, dominated by PerpetualDiscount losers. Volume was quite high.

You think you’ve had a bad time in the markets for the past year? Here’s a guy who’s had a bad time in the markets for the past year:

Brazilian billionaire Eike Batista lost more than a quarter of his net worth after the state development bank said he offered personal guarantees for 2.3 billion reais ($1 billion) in loans and a rout of his publicly traded companies deepened.

Batista is now worth $2.9 billion, down from $4.1 billion at the close of trading July 2, according to the Bloomberg Billionaires Index. The loans are part of the 10.4 billion reais that Batista’s companies contracted with the state-run lender, known as BNDES, since 2007. BNDES provided the tally of the loans and their respective guarantees in response to a request by Bloomberg under Brazil’s freedom of information law. The bank didn’t say how much is outstanding.

Batista’s fortune has plunged from a peak of $34.5 billion last year after he repeatedly failed to meet targets he had set for his startup companies. The latest disappointment came when his flagship OGX Petroleo & Gas Participacoes SA (OGXP3) said July 1 that it may shut down its only producing oil field, prompting a selloff that’s since erased $1 billion in market value from his six publicly traded units.
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The information provided by BNDES follows a July 1 report from Bank of America Corp. that estimated that the Rio de Janeiro-based lender was the most exposed of Brazil’s banks to Batista’s companies, having lent 4.9 billion reais, or 5.8 percent of the bank’s regulatory capital.

The best thing about bond ETFs is that they provide liquidity. The worst thing about them is that they provide liquidity:

Investors who sought exchange-traded funds as a faster way to trade corporate bonds are finding that they can be as expensive to trade as the underlying debt.

As trading in the three-biggest credit ETFs surged to unprecedented levels last month amid the market’s biggest losses since 2008, the funds’ shares dropped as much as 1.1 percentage points more than the net value of the less-traded securities they hold. The two largest high-yield bond ETFs have lost about 6 percent since reaching a five-year high May 8. That’s about 2 percentage points more than the loss for the Bank of America Merrill Lynch U.S. High Yield Index.

The gap reflects the extra charge investors paid for a speedier exit in a declining market by using ETFs that trade like stocks rather than buying and selling the less-liquid debt. Investors yanked about $1.83 billion of shares from the two-biggest junk ETFs last month, forcing sales of their holdings at a time when demand was evaporating.
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Shares of BlackRock Inc.’s $13.7 billion iShares iBoxx $ High Yield Corporate Bond ETF, the biggest of its kind, plummeted 4.3 percent in the six days ended June 24, while the net value of its assets dropped 3 percent, data compiled by Bloomberg show. The fund’s share price fell to the lowest level in 12 months on June 24, to $89.04. The lowest value last month for the underlying assets was $89.66, the data show.

“The price reflects where you can exchange risk,” said Matt Tucker, head of iShares fixed-income strategy at BlackRock, the biggest ETF provider. “It’s the correct price. The reality is the majority of the high-yield market doesn’t trade every day.”

Nature abhors a vacuum:

Blackstone Group LP (BX), the private-equity firm that has spent $5 billion on more than 30,000 distressed houses, is preparing to expand its bet on the housing recovery by lending to other landlords.

The firm, which already owns more rental homes than any other investor, has set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private.

The world’s largest private-equity firm said last month that it was entering the later stages of its buying spree after leading a group of institutional investors who’ve spent at least $17 billion on more than 100,000 homes over two years, helping fuel the fastest price gains since 2006. By increasing its stake in the rebound through lending, New York-based Blackstone could benefit from smaller landlords already investing in what Goldman Sachs Group Inc. estimates to be a $2.8 trillion market.

Live by market-timing, die by market timing:

John Paulson, the billionaire hedge-fund manager seeking to rebound from losses tied to bullion, posted a 23 percent decline in his PFR Gold Fund last month, according to a letter to investors.

The drop brings losses in the strategy, formerly known as the Paulson Gold Fund, to 65 percent since the start of the year, the firm said in the July 3 letter, a copy of which was obtained by Bloomberg News.

This report was delayed due to the incompetence of Toronto Hydro.

It was a day of modest recovery for the Canadian preferred share market; more modest than many recent days, but still a recovery! PerpetualDiscounts and DeemedRetractibles were both up 8bp, while FixedResets won 12bp. Volatility was more than one could generally expect on such a day; volume was average.

Nice article on pension derisking:

Such pension “derisking” approaches include lump-sum payouts to vested, terminated employees; liability-driven investment (LDI) strategies that match up plan assets with pension liabilities by moving from equities to long-term bonds; and the one currently making headlines — annuitization, the transfer of a sizable percentage of pension obligations to an insurance company for a paid premium. These tactics join more-traditional approaches, such as freezing and closing pension plans. Taken together, they constitute a sea change in pension-plan treatment.

A good US jobs number had the market in a tizzy:

Employment roared ahead in June, indicating the U.S. economy is poised for faster growth as it shakes off the impact of tax increases and budget cuts.

Payrolls rose by 195,000 workers for a second month, the Labor Department reported today in Washington, exceeding the 165,000 gain projected by economists in a Bloomberg survey. The jobless rate stayed at 7.6 percent, close to a four-year low.

Hourly earnings in the year ended in June advanced by the most since July 2011, giving Americans already buoyed by higher home prices more reason to boost household spending, which accounts for 70 percent of the economy. Stocks climbed, while the yield on 10-year Treasuries rose to the highest in almost two years on expectations the Federal Reserve will start trimming $85 billion in monthly bond purchases in September.

The Canadian preferred share market got knocked back, with PerpetualDiscounts losing 51bp, FixedResets off 20bp and DeemedRetractibles down 35bp. The Performance Highlights table was suitably dismal: very lengthy with only one winner; Brookfield issues led the way downwards. Interestingly, the Volume Highlights table is comprised entirely of Royal Bank issues, led by DeemedRetractibles; volume was above average.

There are rumours that European rates will continue low:

The European Central Bank will keep interest rates at record lows for an extended period and could yet cut them further, the bank’s chief, Mario Draghi, said on Thursday.

Less than two hours after the Bank of England gave a steer about future interest rate moves at Mark Carney’s debut policy meeting as governor, the ECB president adopted the same tactic.

“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Draghi told a news conference after the ECB left interest rates at 0.5 per cent, emphasizing that this was the first time that the ECB had done so.

Mind you, European leadership demonstrated during the crisis that they were willing to compromise their personal integrity when this was considered expedient; as for the BoE, Lapdog Carney will do what he’s told and read whatever speech he’s handed. That’s why he was hired. And, I’m afraid, with Parakeet Poloz now in charge of the Bank of Canada, we’re left only with Bernanke as a trustworthy central banker.

There are more jolly bond fund statistics:

Investors have pulled about $60 billion from U.S. bond funds since Federal Reserve Chairman Ben S. Bernanke rattled markets by outlining his plan to end the central bank’s unprecedented asset purchases.
The redemptions foreshadow what’s in store for asset managers when the central bank eventually scales back the $85 billion in monthly purchases of bonds and mortgage securities that investors have come to rely on. Bond funds had $28.1 billion in net redemptions in the week ended June 26, the Washington-based Investment Company Institute said yesterday.

But to put that in perspective:

Overall bond redemptions were less than 2 per cent of total assets.

Here’s another object lesson in regulatory competence and honesty:

[Vincent] Tchenguiz has launched an unprecedented legal assault on the Serious Fraud Office, one of the top agencies for prosecuting white-collar crime in the U.K. After the SFO’s investigation of Tchenguiz’s dealings with an Icelandic bank fell apart last year, he accused the office of malicious prosecution and false imprisonment in a lawsuit filed in the High Court in London in December.

Tchenguiz, who was arrested on suspicion of fraud in 2011, is seeking damages of 200 million pounds ($313 million). And his younger brother, Robert, 52, who was also arrested, filed a similar suit, asking for 100 million pounds.

n July 2012, the High Court ruled that the SFO, under former director Richard Alderman, had misrepresented key facts in the case and directed the SFO to pay Vincent’s 3 million pound legal bill. The agency isn’t appealing the decision.
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The SFO also erred when it alleged Vincent had failed to inform Kaupthing that other banks had prior claims on his real estate; the loan agreement stated that fact more than 100 times.

The SFO’s key mistake was in taking on somebody with the resources to pay a £3-million legal bill. But the rest isn’t surprising.

DBRS confirmed RON.PR.A at Pfd-4(high) [Trend Negative]:

Same-store sales were flat in 2012, yet net sales increased approximately 1.7% to nearly $4.9 billion versus the previous year based on higher sales in the Commercial and Professional Market segment, new store openings, new dealer-owners and improved same-store distribution sales to affiliate dealers. EBITDA margins were negatively affected by weaker gross margins due to promotional activity in a highly competitive environment and higher selling, general and administrative costs. As such, EBITDA declined by approximately 40% to $171 million, marking the third consecutive year of declining EBITDA.

Balance-sheet debt increased notably in F2012 to approximately $328 million, which combined with weakness in operating income to result in further deterioration of credit metrics. Lease-adjusted debt-to-EBITDAR increased to approximately 3.77 times (x) in 2012 versus 2.54x in 2011 and 2.80x in 2010 (improvement in 2011 was primarily attributable to the early voluntary repurchase of debentures) and lease-adjusted EBIT coverage declined to 1.51x in 2012 versus 2.26x in 2011 and nearly 3.7x in 2010.

Going forward, DBRS believes meaningful recovery in Rona’s earnings profile will remain challenging as the Company is expected to continue to face intense competition and a highly promotional environment while Canadian consumers may remain prudent in the uncertain housing and interest rate environment. On June 27, 2013, the Company announced the next phase of its Transformational Plan, which includes the closure of 11 non-profitable stores in Ontario and British Columbia, as well as additional administrative headcount reduction and other cost-cutting initiatives. DBRS expects that a significant improvement in operating performance will be difficult to realize over the near term but EBITDA could benefit from the successful implementation of the Company’s Transformational Plan over the medium term.

Capstone Infrastructure, proud issuer of CSE.PR.A, is making an acquisition by share exchange:

Capstone Infrastructure Corporation (TSX: CSE; CSE.PR.A; CSE.DB.A – “Capstone”) and Renewable Energy Developers Inc. (formerly Sprott Power Corp.) (TSX: RDZ; RDZ.DB – “ReD”) have entered into a definitive agreement (the “Agreement”) whereby Capstone will acquire all the outstanding shares of ReD (the “Transaction”) by way of a share exchange, which will result in a larger infrastructure company with power generation facilities across Canada totalling approximately net 465 megawatts (“MW”) of installed capacity, an attractive pipeline of contracted development opportunities in Canada representing net 79 MW of capacity, and international investments in regulated water and district heating businesses. The Board of Directors of each company has unanimously approved the Transaction.

Under the terms of the Transaction, shareholders of ReD will receive 0.26 of a Capstone common share and $0.001 in cash, which, combined, is currently the equivalent of $1.01, for each common share of ReD. The consideration payable to ReD’s shareholders represents a premium of 10.8% based on the 20-day volume weighted average price (“VWAP”) of ReD’s common shares and Capstone’s common shares on the Toronto Stock Exchange (“TSX”) as at July 2, 2013 of $0.91 and $3.88, respectively. Upon completion of the Transaction, which is valued at approximately $70 million, existing Capstone shareholders and ReD shareholders will own approximately 80% and approximately 20% of the common shares of the combined company, respectively.
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• • Expands Capstone’s renewable power footprint in Canada by adding net 95 MW in operating wind power facilities in Nova Scotia and Ontario.
• • Enables Capstone to access a net 35 MW pipeline of wind power projects with 20-year power purchase agreements (“PPAs”) under development in Nova Scotia, Ontario, Saskatchewan and Quebec, and the option to acquire an additional net 44 MW in wind power projects with PPAs in Ontario. These projects will require equity funding from Capstone in the amount of approximately $60 million over the next two years, with the balance of the projects’ financing requirement to be satisfied with project-level debt.
• • Brings additional proven development and project management personnel with a record of completing renewable power projects on time and on budget.
• • Delivery of the development projects in ReD’s pipeline is expected to be accretive to cash flow over the long term.

Tomorrow’s report will be late, by which I mean Sunday.

It was another day of strong recovery for the Canadian preferred share market, with PerpetualDiscounts winning 56bp, FixedResets gaining 12bp and DeemedRetractibles up 19bp. The performance highlights table is comprised entirely of winners. Volume was on the low side of average, but not bad for a US holiday.

Europe’s back in the news:

A broad market selloff was triggered Wednesday morning by the crumbling of the centre-right government of Portuguese prime minister Pedro Passos Coelho, which has been rocked by the resignations of its finance and foreign ministers in the last two days.

The prospect of the outright collapse of his government has triggered a fresh political crisis in Portugal that is unnerving investors across the continent. The fear is that a political vacuum, followed by polls that could elect an anti-austerity government, or another shaky coalition government, would undermine the reforms and spending cuts agreed in 2011, when the European Union and the International Monetary Fund sponsored a €78-billion Portuguese bailout package.

Lisbon’s main market index, the PSI 20 was down about 5.5 per cent in early afternoon trading, European time though it had been down almost 7 per cent in the morning.
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The government of Greek prime minister Antonis Samaras last month lost one of its two coalition partners in protest of Mr. Samaras’s unilateral decision to shut the national broadcaster, ERT, eliminating almost 3,000 jobs.

In Italy, the government of prime minister Enrico Letta, in office since April, faces uncertainty because former prime minister Mario Monti is frustrated by the slow pace of economic reform and has threatened to withdraw his support.

There are some interesting changes coming in the US securities market:

U.S. securities regulators are set to vote next week to lift an 80-year-old rule that prohibits companies and private funds from advertising to raise capital outside of a public offering.

The Securities and Exchange Commission is required to remove the advertising ban under a 2012 law that sought to ease regulations on financing for startups and small businesses. In a nod to complaints from critics who say the change will open the door to more fraud, the SEC will also propose a separate rule during the July 10 meeting to add some investor protections and make it easier for the agency to monitor the change.
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A third rule scheduled for a vote the same day would block felons and others found culpable of securities-law violations from marketing such deals, which are more lightly regulated than public offers of stock or debt.

Gotta have that third rule! What’s the point of being a big-shot regulator if you can’t indulge in a little extra-judicial punishment every now and then?

David Parkinson of the Globe reminds us that the economy is still shaky:

The ISM’s index, which indicates the pace of service-sector activity in the U.S. economy, slipped to 52.2 for June, its lowest level in more than three years. While any reading above 50 still indicates growth, the index indicates that the pace of growth has been in steady decline; it has fallen in three of the past four months, after hitting a one-year high of 56.0 in February.

Yet the stock market has been somewhere between dismissive and contemptuous toward this erosion in the services ISM. The S&P 500 was up slightly in mid-afternoon trading Monday; over the course of the services ISM’s four-month slide, the S&P 500 is up almost 8 per cent.

OSFI has published Capital Disclosure requirements.

It was another very nice recovery day for the Canadian preferred share market, with PerpetualDiscounts winning 40bp, FixedResets gaining 12bp and DeemedRetractibles up 24bp. There’s a very lengthy Performance Highlights table, but with no clear pattern to it. Volume was above average.

PerpetualDiscounts now yield 5.39%, equivalent to 7.01% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.6%, so the pre-tax interest-equivalent spread is now about 240bp, down substantially from the 270bp reported June 26 but still above post-Crunch norms. Note that this week’s figure is not strictly comparable with last weeks figure due to the significant influx of former PerpetualPremiums into the PerpetualDiscount pool but, on a brighter note, is more comparable with older figures than has been the case recently.