Issue Comments

YLD.PR.A Downgraded by DBRS

YLD.PR.A is the 5.5% Class I Cumulative Preferred Shares; YLD.PR.B is the 7.0% Class II Cumulative Preferred Shares.

DBRS has announced:

DBRS has today downgraded the 5.5% Class I Cumulative Preferred Shares (the Class I Shares) issued by Split Yield Corporation (the Company) from Pfd-2 (low) to Pfd-3 with a Negative trend. Also, DBRS has confirmed the rating of the 7.0% Class II Cumulative Preferred Shares (the Class II Shares) at D.
…
Quadravest Capital Management (the Manager) manages the Portfolio, generating income from dividends, covered call option premiums and capital appreciation. The holders of the Class I Shares and the Class II Shares receive fixed, cumulative quarterly dividends yielding 5.50% and 7.00% per annum, respectively. The Class I Shares rank in priority to the Class II Shares with respect to the payment of dividends and repayment of capital on the Termination Date. Excess income, if any, is distributed on a quarterly basis to the Capital Shareholders.

Since inception, the net asset value (NAV) of the Portfolio has declined from $47.57 to $28.40 per share (as of December 31, 2007), a decline of about 40%. The current NAV provides downside protection of about 29.6% to the Class I Shares. If the portfolio was liquidated and proceeds distributed, the Class II Shareholders would experience a loss of about 44% of their initial principal. The Portfolio would have to generate a return of about 9% in the next year in order for the NAV to maintain its current level.

The downgrade of the Class I Shares is based on the current NAV of the Portfolio, as well as the annual grind on the Portfolio relative to its current NAV.

The rating history of these issues is:

YLD.PR.A – Class I prefs
From To DBRS
Rating
1998-04-16 2001-10-22 Pfd-1
2001-10-23 2002-07-10 Pfd-2
2002-07-11 2008-01-04 Pfd-2(low)
2008-01-07 Indefinite Pfd-3
(trend
negative)
YLD.PR.B – Class II prefs
From To DBRS
Rating
1998-04-16 2001-10-22 Pfd-3
2001-10-23 2003-01-27 Pfd-4
2003-01-28 Indefinite D

Both issues are tracked by HIMIPref™ but neither is included in the SplitShare index – YLD.PR.A because of volume concerns, YLD.PR.B due to credit concerns.

Market Action

January 4, 2008

There’s a real dearth of news and informed commentary today!

The US had a bad jobs number today, but that’s about it.

Otherwise, the only thing I saw today of even passing interest was Springfield, Massachusetts, getting angry at Merrill because some sub-prime linked CDOs that they bought have gone down in price. According to Steven Syre of the Boston Globe:

City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren’t legally allowed to own for reasons of safety and liquidity. What the broker actually disclosed about the nature of those investments at the time of the sale remains murky.

“We take very seriously the financial cost and the breach of public interest,” said Chris Gabrielli, the chairman of Springfield’s Finance Control Board and former gubernatorial candidate. “Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn’t have to settle for less than getting the money back.”

A Merrill spokesman said Springfield officials had sought AAA-rated securities offering higher returns than they had been getting. “These investments met both those criteria, and each was reviewed, approved, and authorized by Springfield officials.”

Who knows? It is possible, I suppose, that Merrill misrepresented the investment. I consider it far more likely that a few snivel-servants with Springfield were just thrilled to pieces about being big-shot hard-nosed investment geniuses, until they got to the “taking responsibility” part. We’ll see!

An excruciatingly slow day on the preferred share market, but performance continued to be good.

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 5.19% 5.17% 66,153 15.16 2 -0.0201% 1,073.5
Fixed-Floater 4.95% 5.32% 76,512 15.12 9 -0.0615% 1,028.5
Floater 5.29% 5.32% 92,573 15.06 3 -0.3835% 832.5
Op. Retract 4.83% 3.20% 80,887 3.48 15 +0.1655% 1,041.2
Split-Share 5.28% 5.46% 102,462 4.04 15 +0.1144% 1,036.6
Interest Bearing 6.33% 6.58% 60,575 3.66 4 +0.3129% 1,064.2
Perpetual-Premium 5.77% 5.20% 67,526 5.21 12 -0.1591% 1,019.3
Perpetual-Discount 5.47% 5.50% 361,163 14.67 54 +0.1951% 934.8
Major Price Changes
Issue Index Change Notes
FBS.PR.B SplitShare -2.9029% Asset coverage of just under 1.7:1 according to TD Securities. Now with a pre-tax bid-YTW of 5.72% based on a bid of 9.70 and a hardMaturity 2011-12-15 at 10.00.
BCE.PR.G FixFloat -1.3750%  
BSD.PR.A InterestBearing +1.0929% Asset coverage of just under 1.7:1 according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.48% (mostly as interest) based on a bid of 9.25 and a hardMaturity 2015-3-31 at 10.00.
MFC.PR.C PerpetualDiscount +1.1850% Now with a pre-tax bid-YTW of 5.11% based on a bid of 22.20 and a limitMaturity.
BCE.PR.Z FixFloat +1.2033%  
BNA.PR.B SplitShare +1.3787% Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 6.96% based on a bid of 22.06 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.15% to 2010-9-30) and BNA.PR.C (7.20% to 2019-1-10).
IGM.PR.A OpRet +1.8437% Now with a pre-tax bid-YTW of 1.55% based on a bid of 27.62 and a call 2009-7-30 at 26.00. Realized yield will be 3.67% if it survives until its softMaturity 2013-6-29 at 25.00.
IAG.PR.A PerpetualDiscount +2.2149% Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.69 and a limitMaturity.
ELF.PR.F PerpetualDiscount +2.5000% Now with a pre-tax bid-YTW of 6.25% based on a bid of 21.32 and a limitMaturity.
BNA.PR.C SplitShare +2.7504% Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 7.20% based on a bid of 19.80 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.15% to 2010-9-30) and BNA.PR.B (6.96% to 2016-9-30).
Volume Highlights
Issue Index Volume Notes
BAM.PR.K Floater 19,950  
BAM.PR.N PerpetualDiscount 19,500 Now with a pre-tax bid-YTW of 6.44% based on a bid of 18.59 and a limitMaturity.
CM.PR.I PerpetualDiscount 13,646 Now with a pre-tax bid-YTW of 5.64% based on a bid of 20.90 and a limitMaturity.
BAM.PR.M PerpetualDiscount 13,500 Now with a pre-tax bid-YTW of 6.42% based on a bid of 18.67 and a limitMaturity.
RY.PR.D PerpetualDiscount 12,300 Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.38 and a limitMaturity.

There were three other index-included $25.00-equivalent issues trading over 10,000 shares today.

Market Action

January 3, 2008

Here’s a switch! US ABCP outstanding actually increased last week, from USD 747.6-billion to USD 773.8-billion. It has been suggested that the market is stabilizing … but I’ll wait for a little more data, not taken at year-end in the midst of an enormous liquidity injection, before celebrating.

An article on the collapse of the Bear Stearns hedge funds provides some food for thought:

Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds’ CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what’s known in the debt markets as a margin call.

Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.

In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.

Whenever this sort of thing has happened in the past, regulators have responded by tightening margin requirements. Perhaps derivative debt should be eligible for only 15% margin; perhaps 20%. I suspect we will be hearing a lot more about this over the next while. There will be definitional problems, to be sure!

In what may well turn out to be a sign of the times, there was a US junk bond default today:

Buffets, a closely held company based in Eagan, Minnesota, failed to make the coupon payment yesterday on its 12.5 percent notes maturing in 2014, according to Matthew Lee, a customer service representative at U.S. Bank National Association in St. Paul, Minnesota, the trustee for the debt.

Buffets is at least the second company to miss an interest payment in the past week as the worst home sales market since 1981 stokes concern about a slowing economy. Tousa Inc., the Florida homebuilder that lost 99 percent of its market value in the past year, also missed interest payments on $485 million in debt, the company said in a regulatory filing yesterday.
…
The 12 month dollar-weighted high-yield default rate will rise to 2.25 percent by the end of this year from 0.34 percent in December, JPMorgan Chase & Co. high-yield strategist Peter Acciavatti in New York predicted in a report dated yesterday. The rate will climb to 4 percent by year-end 2009, he forecast.

And finally, Accrued Interest reminds us of what “crisis” really means:

In my mind, a marriage in crisis is one where divorce is an imminent possibility. Not one where the couple just had a big ugly fight.
…
So back to the “crisis” question. It is these speculators who are insolvent. So what we have are people who speculated in houses and lost. We have are banks who lent to the afore mentioned speculators and have lost too. Bear in mind, these banks are the ones who agreed to limited documentation of income (perhaps so the speculator could claim this would be his/her primary residence?) or minimal down payments.
…
All this isn’t a crisis. Its how the credit cycle works. When credit becomes too easy, bad loans get made. People get hurt. But that’s the way of the world. You move on.

Where a crisis could develop is when the innocent are hurt just because capital becomes tight. Where a good borrower can’t get a mortgage loan. Where a solid commercial real estate project can’t roll over its bridge loan because banks are short on capital. That’s where the real crisis can get going. Foreclosures happen that didn’t need to happen, driving the price of assets lower. Lenders start taking losses on good loans, and suddenly are unwilling to lend to anyone. Investors struggle to value assets, not because of unknown losses, but because of unknown liquidity. Bids dissappear.

That’s a crisis.

Meanwhile, President Bush is contemplating fiscal stimulus. Some might say there is far too much fiscal stimulus already.

Another day of light volume and strong returns for preferreds. It should be most interesting to see whether the returns stand up next week when I assume volume will return … particularly with stocks looking sick in Japan and the US.

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 5.17% 5.15% 68,598 15.19 2 +1.3711% 1,073.7
Fixed-Floater 4.94% 5.30% 78,000 15.15 9 +0.0138% 1,029.1
Floater 5.27% 5.30% 91,523 15.10 3 -0.2322% 835.7
Op. Retract 4.83% 3.32% 82,266 3.28 15 +0.0400% 1,039.5
Split-Share 5.28% 5.44% 103,989 4.03 15 +0.4827% 1,035.4
Interest Bearing 6.35% 6.52% 60,109 3.43 4 -0.1534% 1,060.9
Perpetual-Premium 5.76% 4.91% 68,001 4.98 12 +0.0531% 1,020.9
Perpetual-Discount 5.48% 5.52% 370,352 14.64 54 +0.3901% 933.0
Major Price Changes
Issue Index Change Notes
BAM.PR.G FixFloat -1.7370%  
RY.PR.A PerpetualDiscount -1.4279% Now with a pre-tax bid-YTW of 5.27% based on a bid of 21.40 and a limitMaturity.
PWF.PR.L PerpetualDiscount -1.2134% Now with a pre-tax bid-YTW of 5.49% based on a bid of 23.61 and a limitMaturity.
BCE.PR.Z FixFloat +1.0059%  
CM.PR.G PerpetualDiscount -1.0818% Now with a pre-tax bid-YTW of 5.78% based on a bid of 23.36 and a limitMaturity.
RY.PR.E PerpetualDiscount -1.1294% Now with a pre-tax bid-YTW of 5.31% based on a bid of 21.49 and a limitMaturity.
W.PR.J PerpetualDiscount +1.1454% Now with a pre-tax bid-YTW of 6.12% based on a bid of 22.96 and a limitMaturity.
BNA.PR.C SplitShare +1.1549% Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 7.53% based on a bid of 19.27 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.29% to 2010-9-30) and BNA.PR.B (7.17% to 2016-3-25).
CM.PR.I PerpetualDiscount +1.2130% Now with a pre-tax bid-YTW of 5.65% based on a bid of 20.86 and a limitMaturity.
IGM.PR.A OpRet +1.2318% Now with a pre-tax bid-YTW of 2.77% based on a bid of 27.12 and a call 2009-7-30 at 26.00.
FFN.PR.A SplitShare +1.2987% Asset coverage of 2.3+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 5.04% based on a bid of 20.14 and a hardMaturity 2014-12-1 at 10.00.
CM.PR.J PerpetualDiscount +1.3588% Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.14 and a limitMaturity.
RY.PR.G PerpetualDiscount +1.4144% Now with a pre-tax bid-YTW of 5.30% based on a bid of 21.51 and a limitMaturity.
WFS.PR.A SplitShare +1.7103% Asset coverage of just under 2.0:1 as of December 24, according to Mulvihill. Now with a pre-tax bid-YTW of 4.95% based on a bid of 10.11 and a hardMaturity 2011-6-30 at 10.00.
IAG.PR.A PerpetualDiscount +2.0192% Now with a pre-tax bid-YTW of 5.46% based on a bid of 21.22 and a limitMaturity.
GWO.PR.H PerpetualDiscount +2.1286% Now with a pre-tax bid-YTW of 5.41% based on a bid of 22.55 and a limitMaturity.
FAL.PR.A Ratchet +2.2440%  
Volume Highlights
Issue Index Volume Notes
IQW.PR.D Scraps (would be FixFloat but there are credit concerns) 106,355 Down almost 13% on the day as players continue to debate the company’s viability.
TD.PR.P PerpetualDiscount 61,909 Now with a pre-tax bid-YTW of 5.33% based on a bid of 25.00 and a limitMaturity.
BMO.PR.K PerpetualDiscount 51,600 Nesbitt crossed 50,000 at 24.80. Now with a pre-tax bid-YTW of 5.41% based on a bid of 24.75 and a limitMaturity.
RY.PR.D PerpetualDiscount 21,218 Now with a pre-tax bid-YTW of 5.37% based on a bid of 21.25 and a limitMaturity.
TD.PR.O PerpetualDiscount 18,314 Now with a pre-tax bid-YTW of 5.30% based on a bid of 23.26 and a limitMaturity.
RY.PR.W PerpetualDiscount 15,000 Now with a pre-tax bid-YTW of 5.27% based on a bid of 23.51 and a limitMaturity.

There were five other index-included $25.00-equivalent issues trading over 10,000 shares today.

Issue Comments

Effect of BAM.A Special Dividend on BNA.PR.A BNA.PR.B BNA.PR.C

BAM Split Corp has announced:

that, in anticipation of the special dividend of units of Brookfield Infrastructure Partners L.P. to be paid by Brookfield Asset Management Inc. (“Brookfield”) to the holders of its Class A Limited Voting shares (the “Brookfield Class A Shares”), BAM Split’s board of directors has declared a corresponding special dividend to be paid on its capital shares on the same payment date as for the Brookfield dividend.  The special dividend will be paid to BAM Investments Corp. (“BAM Investments”), the only holder of BAM Split’s capital shares.

In addition, BAM Split has agreed that, following the payment of the special dividend, it will acquire from BAM Investments additional Brookfield Class A Shares with the same value as the special dividend.  The Brookfield Class A Shares will be acquired in exchange for a new series of non-dividend bearing subordinate preferred shares.  The rating for BAM Split’s outstanding preferred shares will not be affected by this transaction.

As a result of these transactions, BAM Split’s investment portfolio will continue to consist entirely of Brookfield Class A Shares.  BAM Investments will continue to directly and indirectly own the same number of securities of Brookfield and Brookfield Infrastructure Partners as before the transactions.

The BAM Split preferreds are regularly referred to on this blog as they have been very volatile – especially BNA.PR.C, which was discussed in detail last November.

Brookfield Infrastructure Partners (BIP) is being spun out on the basis of 1 BIP for every 25 BAM.A held; according to Brookfield, the intended dividend on BIP is $1.06 annually, implying that the spin-out represents dividends of about 4.25 cents per BAM.A share. BAM.A currently pays USD 0.48 annually, so there should not be a huge effect on BNA’s income coverage.

Market Action

January 2, 2008

Accrued Interest leads off with a very informative discussion of American Municipal Bond Insurance, something that is in the news lately, what with credit problems and Berkshire Hathaway’s entry to the field.

A very light day on the preferred share market, but performance was good.

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 5.22% 5.21% 70,565 15.11 2 0.0000% 1,059.2
Fixed-Floater 4.94% 5.28% 79,446 15.17 9 +0.2561% 1,028.9
Floater 5.25% 5.28% 93,545 15.12 3 +0.9531% 837.7
Op. Retract 4.83% 3.06% 83,409 3.28 15 -0.0521% 1,039.1
Split-Share 5.31% 5.55% 105,678 4.31 15 +0.0887% 1,030.5
Interest Bearing 6.34% 6.47% 60,633 3.44 4 +0.3862% 1,062.5
Perpetual-Premium 5.76% 4.47% 69,685 5.12 12 +0.1682% 1,020.4
Perpetual-Discount 5.50% 5.54% 376,437 14.45 54 +0.1305% 929.4
Major Price Changes
Issue Index Change Notes
BAM.PR.J OpRet -2.1135% Now with a pre-tax bid-YTW of 5.43% based on a bid of 25.01 and a softMaturity 2018-3-30 at 25.00.
BAM.PR.N PerpetualDiscount -1.5991% Now with a pre-tax bid-YTW of 6.49% based on a bid of 18.46 and a limitMaturity.
GWO.PR.H PerpetualDiscount -1.5165% Now with a pre-tax bid-YTW of 5.52% based on a bid of 22.08 and a limitMaturity.
MFC.PR.C PerpetualDiscount -1.3538% Now with a pre-tax bid-YTW of 5.19% based on a bid of 21.86 and a limitMaturity.
NA.PR.K PerpetualDiscount -1.2068% Now with a pre-tax bid-YTW of 6.04% based on a bid of 24.56 and a limitMaturity.
POW.PR.A PerpetualDiscount -1.1832% Now with a pre-tax bid-YTW of 5.79% based on a bid of 24.22 and a limitMaturity.
BNA.PR.A SplitShare -1.1395% Asset coverage of 3.7+:1 as of November 30 according to the company. Now with a pre-tax bid-YTW of 6.22% based on a bid of 25.16 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (7.17% to 2016-3-25) and BNA.PR.C (7.67% to 2019-1-10).
CM.PR.D PerpetualDiscount -1.0183% Now with a pre-tax bid-YTW of 5.80% based on a bid of 24.80 and a limitMaturity.
W.PR.H PerpetualDiscount +1.0615% Now with a pre-tax bid-YTW of 6.01% based on a bid of 22.85 and a limitMaturity.
BAM.PR.H OpRet +1.0886% Now with a pre-tax bid-YTW of 4.43% based on a bid of 26.00 and a call 2008-10-30 at 25.75.
SLF.PR.B PerpetualDiscount +1.1151% Now with a pre-tax bid-YTW of 5.32% based on a bid of 22.67 and a limitMaturity.
LFE.PR.A SplitShare +1.1583% Asset coverage of 2.7+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 4.18% based on a bid of 10.48 and a hardMaturity 2012-12-1 at 10.00.
CM.PR.P PerpetualDiscount +1.3186% Now with a pre-tax bid-YTW of 5.72% based on a bid of 23.82 and a limitMaturity.
CM.PR.H PerpetualDiscount +1.3783% Now with a pre-tax bid-YTW of 5.64% based on a bid of 21.33 and a limitMaturity.
PWF.PR.G PerpetualDiscount +1.4665% Now with a pre-tax bid-YTW of 5.51% based on a bid of 25.60 and a call 2011-8-16 at 25.00.
BNA.PR.B SplitShare +1.6355% See BNA.PR.A, above. Now with a pre-tax bid-YTW of 7.17% based on a bid of 21.75 and a hardMaturity 2016-3-25 at 25.00.
BAM.PR.G FixFloat +1.7677%  
BAM.PR.M PerpetualDiscount +1.8468% Now with a pre-tax bid-YTW of 6.39% based on a bid of 18.75 and a limitMaturity.
BNA.PR.C SplitShare +1.8717% See BNA.PR.A, above. Now with a pre-tax bid-YTW of 7.67% based on a bid of 19.05 and a hardMaturity 2019-1-10 at 25.00.
CM.PR.J PerpetualDiscount +2.5813% Now with a pre-tax bid-YTW of 5.67% based on a bid of 19.87 and a limitMaturity.
POW.PR.D PerpetualDiscount +2.6970% Now with a pre-tax bid-YTW of 5.22% based on a bid of 23.99 and a limitMaturity.
TOC.PR.B Floater +2.9601%  
Volume Highlights
Issue Index Volume Notes
RY.PR.D PerpetualDiscount 177,540 Now with a pre-tax bid-YTW of 5.38% based on a bid of 21.21 and a limitMaturity.
SLF.PR.A PerpetualDiscount 64,304 Nesbitt crossed 35,700 at 22.35, then another 25,000 at 22.36. Now with a pre-tax bid-YTW of 5.37% based on a bid of 22.25 and a limitMaturity.
POW.PR.D PerpetualDiscount 24,075 Now with a pre-tax bid-YTW of 5.22% based on a bid of 23.99 and a limitMaturity.
BAM.PR.N PerpetualDiscount 18,990 Now with a pre-tax bid-YTW of 6.49% based on a bid of 18.46 and a limitMaturity.
BNS.PR.N PerpetualDiscount 16,900 Now with a pre-tax bid-YTW of 5.31% based on a bid of 24.70 and a limitMaturity.

There were five other index-included $25.00-equivalent issues trading over 10,000 shares today.

Index Construction / Reporting

HIMIPref™ Index Rebalancing : December 31, 2007

HIMI Index Changes, December 31, 2007
Issue From To Because
BAM.PR.G Scraps FixFloat Volume
TOC.PR.B Scraps Floater Volume
CM.PR.D PerpetualPremium PerpetualDiscount Price
PWF.PR.H PerpetualDiscount PerpetualPremium Price
ENB.PR.A PerpetualDiscount PerpetualPremium Price
ACO.PR.A OpRet Scraps Volume

Index performance for December has been discussed previously.

MAPF

MAPF Portfolio Composition : December 2007

There was a good level of trading in December, most of it intra-sector.

MAPF Sectoral Analysis 2007-12-31
HIMI Indices Sector Weighting YTW ModDur
Ratchet 0% N/A N/A
FixFloat 0% N/A N/A
Floater 0% N/A N/A
OpRet 0% N/A N/A
SplitShare 29% (-9) 6.82% 5.56
Interest Rearing 0% N/A N/A
PerpetualPremium 0% N/A N/A
PerpetualDiscount 64% (+2) 5.48% 14.70
Scraps 0% N/A N/A
Cash 6% (+6) 0.00% 0.00
Total 100% 5.53% 11.10
Totals will not add precisely due to rounding.
Bracketted figures represent change from November month-end.

The “total” reflects the un-leveraged total portfolio (i.e., cash is included in the portfolio calculations and is deemed to have a duration and yield of 0.00.). MAPF will often have relatively large cash balances, both credit and debit, to facilitate trading. Figures presented in the table have been rounded to the indicated precision.

Credit distribution is:

MAPF Credit Analysis 2007-12-31
DBRS Rating Weighting
Pfd-1 44.5% (+10.5)
Pfd-1(low) 13.0% (-4.0)
Pfd-2(high) 7.8% (+7.8)
Pfd-2 13.7% (-7.3)
Pfd-2(low) 15.1% (-11.9)
Cash 5.8% (+5.8)
Totals will not add precisely due to rounding.
Bracketted figures represent change from November month-end. 

The fund does not set any targets for overall credit quality; trades are executed one by one. Variances in overall credit will be constant as opportunistic trades are executed.
Liquidity Distribution is:

MAPF Liquidity Analysis 2007-12-31
Average Daily Trading Weighting
<$50,000 0.9% (-0.1)
$50,000 – $100,000 0.5% (+0.5)
$100,000 – $200,000 7.8% (-55.2)
$200,000 – $300,000 28.3% (+10.3)
>$300,000 56.6% (+38.6)
Cash 5.8% (+5.8)
Totals will not add precisely due to rounding.
Bracketted figures represent change from November month-end.

MAPF is, of course, Malachite Aggressive Preferred Fund, a “unit trust” managed by Hymas Investment Management Inc. Further information and links to performance, audited financials and subscription information are available on the fund’s web page. A “unit trust” is like a regular mutual fund, but is sold by offering memorandum rather than prospectus. This is cheaper, but means subscription is restricted to “accredited investors” (as defined by the Ontario Securities Commission) and those who subscribe for $150,000+. Fund past performances are not a guarantee of future performance. You can lose money investing in MAPF or any other fund.

The fund’s performance and the performance of the indices has already been discussed.

Update: Some doubting Thomases, unconvinced of the abject failure of the Efficient Market Hypothesis in characterizing the Canadian preferred share market, might object that outperformance this month is due simply to long duration in an up-month.

I attach a graph and an associated Regression Report plotting total return against Modified Duration (YTW) of issues in the HIMIPref™ Universe that are in the top three rating classes (by DBRS). It may be seen that although Specific Risk increases with MD-YTW, there does not appear to be any Systemic Risk associated with term … at least, not this month!

As a further illustration, I attach an evaluation of the December performances of the individual issues in the PerpetualDiscount index, sorted by performance and by issuer.

While classes will very often show a normal qualitative relationship amongst themselves, variance is generally very high compared to the average (in other words, there’s a lot of noise around each signal).

MAPF

MAPF Performance : December 2007

You know, sometimes everything works. 

Malachite Aggressive Preferred Fund has been valued for December, 2007, month-end. The unit value is $9.0070, after giving effect to a dividend distribution of $0.173192. Returns over various periods are:

MAPF Returns to December 31, 2007
One Month +4.50%
Three Months +0.34%
One Year -1.63%
Two Years (annualized) +2.54%
Three Years (annualized) +3.66%
Four Years (annualized) +6.01%
Five Years (annualized) +11.02%
Six Years (annualized) +9.31%

Returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not  a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page.

The December returns reflect outperformance against CPD (which returned +1.14% on the month) and DPS.UN (estimated at +1.93%).

The quarterly performance includes October’s poor performance, which I have attributed to a move into perpetualDiscount issues that proved to be somewhat early. The move has now been amply rewarded, as volatility in December provided the setting for several profitable trades. The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW		 Leverage
Divisor		 Sustainable
Income
June, 2007 9.3114 5.16% 1.03 0.4665
September 9.1489 5.35% 0.98 0.4995
October 8.8084 5.71% 1.00 0.5030
November 8.7845 6.11% 1.00 0.5357
December, 2007 9.0070 5.53% 0.942 0.5288
NAVPU is shown after quarterly distributions. 

It was something of an interesting month, as early strength crumbled in the face of tax-loss selling; after the December 24 deadline for 2007 settlement passed the market rocketted upwards. Actually, many issues started to bounce back on the 24th – it was December 21 that the selling peaked.

One issuer that appeared to be particularly hard hit by tax loss selling was the Canadian Imperial Bank of Commerce (CM), which announced on December 19 that:

Following Standard and Poor’s announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from “A” to “CCC”, CIBC confirmed that ACA is a hedge counterparty to CIBC in respect of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.
    It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

Well, I’m not going to say this news is meaningless to preferred shareholders. Credit Ratings Agencies are annoyed; due, I think, both the loss itself and the revelation that so many eggs were placed in the ACA basket. But. But! The loss will be borne by the common shareholders. That’s what common shareholders are good for, taking the first loss. While this is indeed meaningful to preferred shareholders, the market grossly over-reacted, and MAPF was able to scoop up a good position in two of CM’s perpetual issues – some of which was unwound prior to month end with both a chunky capital gain and a dividend.

There were many other trades, but the CM is the easiest to explain!

I consider 2007 to have been a very successful year for the fund. Although the fund lost 1.63% on the year, it outperformed the benchmark quite handsomely – for those who are seeking a long-term investment in preferred shares due to the various qualities of this asset class, outperformance in a down year is just as good as the same outperformance in an up year.

And down years are rare. Subscribers to Canadian Moneysaver will have seen my exposition of just how bad 2007 was for preferred shareholders (and my attempts to explain why) … cheapskates who don’t subscribe will just have to wait until I republish it after the black-out period is over.

Update, 2008-01-08: The main returns pages have been updated to reflect the BMO-CM 50 index returns: Monthly, Quarterly, Annually to Dec. 31 and Annualized to Dec. 31.

Index Construction / Reporting

Index Performance, December 2007

Performance of the HIMIPref™ Indices for December was:

Total Return
Index Performance
December 2007		 Performance
4Q07
Ratchet +0.91%  -0.55%
FixFloat -0.88%  -0.68%
Floater -14.53%  -21.59%
OpRet +0.76%  +1.20%
SplitShare +1.08%  -1.53%
Interest -0.68%  +1.62%
PerpetualPremium +1.04%  -0.11%
PerpetualDiscount +2.63%  -2.33%
Funds (see below for calculations)
CPD +1.14%  -2.27%
DPS.UN +1.93%  -1.11%

The FloatingRate index was adversely affected by both of its constituents (BAM.PR.B & BAM.PR.K) performing very poorly during the month – in fact, these two issues were the two worst performers, by far, of all index-included issues in the HIMIPref™ universe. The issue removed from the “Floater” index at the November rebalancing, TOC.PR.B, returned -4.94% on the month.

Claymore has published dividend and NAV data for the CPD Exchange Traded Fund and I have derived the following table:

CPD Return, 1- & 3-month, to December 31
Date NAV Distribution Return for Sub-Period Monthly Return
September 28, 2007 18.59      
October 31, 2007 18.19   -2.15% -2.15%
November 30 17.97   -1.21% -1.21%
December 24 17.75 0.2219 +0.01% +1.14%
December 31, 2007 17.95   +1.13%
Quarterly Return -2.27%

The DPS.UN NAV for December 27 has been published, together with the distribution history, so we may calculated the December-ish returns for it:

DPS.UN NAV Return, November-ish 2007
Date NAV Distribution Return for period
November 28 $21.07 $0.00  
December 27, 2007 21.07 0.30 +1.42%
Adjustment for November stub-period -0.17%
Adjustment for December stub-period +0.67%
Estimated December Return +1.93%
CPD had a NAV of $17.94 on November 28 and $17.97 on November 30. The estimated November end-of-month stub period return for CPD was therefore +0.17%, which is subtracted from the DPS.UN total return when estimating the return for December.
CPD had a NAV of $17.83 on December 27 and $17.95 on December 31. The estimated December end-of-month stub period return for CPD was therefore +0.67%, which is added to the DPS.UN total return when estimating the return for December.

 

Now, to see the DPS.UN quarterly NAV approximate return, we refer to the calculations for October and November:

DPS.UN NAV Returns, three-month-ish to end-December-ish, 2007
October-ish -1.86%
November-ish -1.14%
December-ish +1.93%
Three-months-ish -1.11%

 

Issue Comments

Best & Worst Performing Issues : December, 2007

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

Issue Index DBRS Rating Monthly Performance Notes (“Now” means “December 31”)
BAM.PR.B Floater Pfd-2(low) -15.01% Hideous performance in November (-10.60%) is now followed up with even worse performance in December.
BAM.PR.K Floater Pfd-2(low) -14.29%  Another BAM issue that performed appallingly in November (-9.68%), although it is not clear to me whether the critical factor is “BAM” or “Floater”.
BSD.PR.A InterestBearing Pfd-2 -8.00% Asset coverage of just under 1.7:1 as of December 28, according to the company. Now with a pre-tax bid-YTW of 7.77% (mostly as interest) based on a bid of 9.09 and a hardMaturity 2015-3-31 at 10.00. Dividends on the Capital Stock have been reduced, which should help this issue’s asset coverage going forward. This issue has now fallen back from its superb performance (+5.94%) in November.
CM.PR.J PerpetualDiscount Pfd-1(low) -5.52% Now with a pre-tax bid-YTW of 5.82% based on a bid of 19.37 and a limitMaturity.
W.PR.H PerpetualDiscount Pfd-2(low) -4.37% Now with a pre-tax bid-YTW of 6.08% based on a bid of 22.61 and a limitMaturity.
… … … … …
PWF.PR.L PerpetualDiscount Pfd-1(low) +7.36% Now with a pre-tax bid-YTW of 5.41% based on a bid of 23.92 and a limitMaturity.
POW.PR.D PerpetualDiscount Pfd-2(high) +7.93% Now with a pre-tax bid-YTW of 5.36% based on a bid of 23.36 and a limitMaturity.
BAM.PR.N PerpetualDiscount Pfd-2(low) +8.60% Now with a pre-tax bid-YTW of 6.38% based on a bid of 18.76 and a limitMaturity.
ELF.PR.F PerpetualDiscount Pfd-2(low) +8.64% Now with a pre-tax bid-YTW of 6.46% based on a bid of 20.60 and a limitMaturity. This was one of November’s worst performers (-11.20%), so this improvement represents something of a bounce.
ELF.PR.G PerpetualDiscount Pfd-2(low) +6.21% Now with a pre-tax bid-YTW of 6.21% based on a bid of 19.20 and a limitMaturity. Just as with ELF.PR.F, above, this performance represents a bounce from November’s return of -14.21%.