PrefBlog

There’s a new bid for the NYSE:

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) made an unsolicited bid of about $11.3 billion for NYSE Euronext, trying to snatch the owner of the New York Stock Exchange away from Deutsche Boerse AG. (DB1)

Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

Ireland’s credit rating has been cut again:

Ireland’s credit rating was cut one level by Standard & Poor’s and put on watch for a possible downgrade by Fitch Ratings after the cost of rescuing Irish banks reached as much as 100 billion euros ($141.5 billion).

S&P today lowered the rating to BBB+ from A-, putting the country on the same level as Thailand and the Bahamas. The outlook is stable, S&P said in a statement. Fitch placed its long-term foreign and local-currency issuer default ratings of BBB+ on negative, “indicating a heightened probability of a downgrade in the near term,” it said in a statement.

But the interesting part is the wrangling over the banks’ senior debt:

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”
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During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
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The cost of insuring against losses on the senior debt of European banks fell to the lowest in more than five months today. The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers, dropped as much as 6 basis points to 137, the lowest since November 19, before paring the decline, according to JPMorgan Chase & Co. Credit-default swaps on Portugal, Ireland, Greece and Spain also declined.

California has problems of its own:

[California Governor Jerry ] Brown said yesterday he’s also putting together a plan to deal with the growing gap between assets and expected obligations of the California State Teachers’ Retirement System, the second-largest public pension in the U.S.

Calstrs’ so-called unfunded liability grew to $56 billion at the end of June, according to a report released yesterday. The 38 percent increase will require the state to boost its annual contribution by $140 million to $150 million, according to the pension fund. California paid $573 million toward teacher retirements last year.

Since 1999, teachers have been allowed to purchase up to five years of service credit to retire early and collect a full pension. Brown would repeal that benefit beginning in July.

DBRS has published a comment letter on the new ESMA guidelines:

The Consultation Paper seeks to clarify the endorsement regime and update the endorsement guidelines. ESMA currently interprets that “as stringent as” CRA requirements must be established by law or regulation in a third country by June 7, 2011 in order for the use of endorsement. It does not currently support the interpretation that a third country CRA would be permitted to follow “as stringent as” standards through its own policies and procedures. The Consultation Paper states that the CRA Regulation does not envisage a dual system of compliance or some combination of a third country legal/regulatory regime topped up by policies and procedures adopted by the third country CRA.

By way of background, endorsement allows the use in the EU of ratings issued outside the EU under certain conditions.
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DBRS does not support ESMA’s current interpretation that it cannot supervise EU-registered CRAs who use endorsement without an equivalent third country regulatory regime in place. The key test should be whether a third country CRA adheres to standards as stringent as those required by the CRA Regulation, whether or not a third country regime has been enacted into law.

Endorsement is important because, according to the consultation paper:

A credit rating that a registered CRA endorses in compliance with the conditions set out in article 4.3 “shall be considered to be a credit rating issued by a credit rating agency established in the Community and registered in accordance with this Regulation” (art. 4.4). These ratings can be therefore used for regulatory purposes and be distributed to the public by registered CRAs.

This endorsement process started in October, 2009. The Canadian Securities Administrators published proposed regulatory changes on March 18, due to pressure from the Europeans:

The CESR’s stance is that the “comply or explain” model is insufficient, and thus they indicated to the CSA that they would not provide an equivalency recommendation to the European Commission should the CSA proceed on that basis. As the CSA notes in the introduction to the revised proposal, it’s a threat worth paying attention to:

The failure to obtain an equivalency determination from the European Commission, and the consequent inability of a CRO that issues ratings out of Canada to rely on the endorsement or certification models in the EU Regulation, would have a negative impact on such CROs. The issuers that such CROs rate might also be negatively impacted to the extent those ratings are used for regulatory purposes in the European Union.

As a result, the CSA are now proposing that, in the absence of exemptive relief, DROs must establish codes of conduct which do not deviate from the provisions set out in the proposed Instrument. Those provisions have also been revised somewhat, to require that a DRO establish certain governance protections, such as a majority of independent directors, and a formal internal controls system.

Thus, we finally have a clear statement from the regulator that Credit Rating Agencies have the function of cheerleading for issuers. Yay.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 3bp, FixedResets up 9bp and DeemedRetractibles gaining 6bp. Volatility was muted, volume was fair.

Europe’s on credit watch:

Moody’s Investors Service said it can’t rule out further credit downgrades for euro-region nations because the agreement on a permanent bailout fund, the European Stability Mechanism, doesn’t go far enough.

European Union leaders met March 25 and set out new rules on bailout loans. Their failure so far to provide a permanent system whereby stronger nations support the finances of their weaker counterparts leaves bondholders at risk, Moody’s said.

“The absence of a fiscal-transfer mechanism and the conditions under which assistance will prospectively be made available leave downside risk to private creditors,” the rating agency said in an e-mailed report today. “Consequently, further rating downgrades cannot be ruled out.”

… so the ECB is suspending credit quality requirements:

The European Central Bank said it will accept all debt instruments backed by the Irish government as collateral against ECB loans as the country attempts to shore up its banking industry.

The Frankfurt-based ECB said Ireland’s commitment to recapitalize its banks and comply with a consolidation program prescribed by the European Union and International Monetary Fund must be assessed “positively.” The suspension of the minimum credit-rating threshold is based on “this positive assessment of the program,” a capital increase for Ireland’s four banks and the decision to “deleverage and downsize the banking sector,” the ECB said.
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It is not the first time the ECB has loosened its collateral rules to help a euro-area member state in distress. In May last year, the ECB announced it would accept all Greek government debt as collateral when lending to banks, suspending minimum credit-rating thresholds to support a 110 billion-euro bailout of the debt-strapped nation. Ireland was the second of the now 17 euro-area members to receive a bailout last year.

The ECB “deems debt instruments issued or guaranteed by the Irish government to fulfill the credit standards required for collateral in Eurosystem credit operations,” the bank said. “The relevant risk control measures will be reviewed on a continuous basis.”

It was a good day to end the month in the Canadian preferred share market, with PerpetualDiscounts gaining 10bp, FixedResets exactly flat and DeemedRetractibles winning 13bp. Volatility was muted, with only two entries on the Performance Highlights table. Volume was average.

Europeans seem to want to blame commodity price inflation on speculators – Hoenig blames the Fed:

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and the lone dissenter at Fed meetings last year, said in the text of a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

This was also discussed in the post QE2 and Inflation.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts getting whacked for 23bp, FixedResets down 2bp and DeemedRetractibles gaining 10bp. Not a lot of volatility, with only three entries in the Performance Highlights table. Volume was above average.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at this year’s standard conversion factor of 1.3x. Long Corporates now yied 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 170bp, a significant tightening from the 180bp reported on March 23.

How ’bout them US house prices, eh?:

The S&P/Case-Shiller index of property values in 20 cities fell 3.1 percent from January 2010, the biggest year-over-year decrease since December 2009, the group said today in New York. The decline was in line with the 3.2 percent median forecast by economists in a Bloomberg News survey.

Rising foreclosures are swelling the number of houses on the market, which may put additional pressure on prices in coming months. At the same time, a further decline in home values may keep potential buyers on the sidelines as they foresee better deals, hurting construction and consumer spending as owners’ equity evaporates.

It’s an ill wind that blows nobody any good. We may be witnessing the birth of a few residential real-estate empires:

Delavaco Properties LP plans to spend as much as $30 million this year and $40 million in 2012 to buy bank-owned houses and condominiums in foreclosure-ridden South Florida. The private-equity fund will pay cash.

As lenders tighten mortgage standards and consumers stay on the sidelines amid a five-year slide in home prices, all-cash purchases are surging. The deals are done mostly by investors who can get properties for less than buyers needing loans, fix them up and resell or rent them.

But there’s finally a start to the eventual wind-down of Fannie & Freddie:

U.S. House Republicans proposed legislation that would begin reducing the influence of government-run mortgage companies Fannie Mae and Freddie Mac.
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Representative Scott Garrett, a New Jersey Republican and chairman of the capital markets panel of the House Financial Services Committee, is leading the effort. Most of the Republican proposals line up with a list of recommendations put forth in February by the Treasury Department and the Department of Housing and Urban Development. Garrett’s panel will hold a hearing on March 31 on the proposals.

When it comes to the Treasury, “at the end of the day, we have the same ultimate goal to achieve here,” Garrett said at a press conference today. “If you look through their white paper, if you look at what we have, in essence we’re on the same page.”

Won’t last though – politicians love loan guarantees. ‘We can Do Good, and it doesn’t even cost anything!’

Europe’s politicians might find it harder to get co-investors:

Portugal and Greece were downgraded by Standard & Poor’s, which said the European Union’s new bailout rules may mean that both nations eventually renege on their debt obligations.

S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece’s rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries may be forced to restructure debt after seeking European aid and that governments will be paid back before other creditors.

It was a strong day on the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets up 13bp and DeemedRetractibles gaining 9bp. Volume was good and volatility jumped.