Issue Comments

GBA.PR.A Downgraded by DBRS

DBRS has announced:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) from Pfd-2 to Pfd-3 (high) with a Stable trend.
…
Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the NAV.

Since inception, the NAV has dropped from about $19 to $14.29 per share (as of January 10, 2008), a decline of nearly 25%. As a result, the current downside protection available to the Preferred Shareholders is approximately 30%. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry. In general, the valuations of the common shares of international banks have experienced significant volatility over the last few months due to credit concerns and large writedowns.

The downgrade of the Preferred Shares is based on the lower level of asset coverage available to cover the Preferred Shares principal.

As previously announced, this issue is not tracked by HIMIPref™.

Market Action

January 15, 2008

Well, stores didn’t sell anything in December (which attracted a lot of comment, so investors thought they’d fill the need. And the equity infusions just kept coming:

Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors including the governments of Singapore and Kuwait, former Chairman Sanford Weill and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, will receive $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.

Wall Street banks have now raised $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore’s Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.

As was reported on January 11, the capital to bail out Countrywide is actually domestic, but Bank of America is by no mean immune to the shift in fortunes:

Bank of America Corp., the second- largest U.S. bank, plans to cut 650 jobs from its corporate and investment bank and sell the prime brokerage unit that caters to hedge funds.

The bank is slashing its so-called structured products business, which packaged and sold real estate loans to investors, and will reduce investment banking in Europe and the U.S., Chief Executive Officer Kenneth Lewis said in a meeting with reporters today in New York.

Meanwhile, Menzie Chinn of Econbrowser attempts to cheer us up by reminding us of the preferred government response to recessions:

One reason to favor temporary modifications to automatic stabilizers, as opposed to permanent changes in the tax code, is that the current full-employment budget balance is probably around negative one percentage point of GDP, and we are facing an expanding deficit in the future, given the press of demographics and medical costs (see Orszag’s speech [pdf]).

The interesting stories in Canada are, of course, Quebecor and BCE. Quebecor is close enough to crisis that I gave it its own post today; Bloomberg has an interesting filler story:

A telephone repairman for Canada’s BCE Inc. barreled through a red light in May when the brakes on his company truck failed. He managed to stop only by shifting into low gear and hauling on the handbrake.

As investors led by a teachers’ retirement fund prepare to purchase BCE for C$52 billion ($51.1 billion), analysts say the cost of avoiding such perils may require selling all or part of its C$3.5 billion-a-year wireless business. Canada’s largest phone company needs to repair an aging fleet of trucks and add a TV service while paying down about C$34 billion in debt.
…
The wireless unit, whose growth is second only to the smaller satellite-TV division, may be the only BCE business that could attract investors, said Lawrence Surtees, an analyst at IDC Canada in Toronto who wrote a book on BCE. “Everything else is either flat or declining,” he said. He didn’t have an estimate for what the unit might fetch.

PerpetualDiscounts finally had a down day today, due largely to three issues of a certain bank that will remain nameless. The last down-day for this index was December 21 (the penultimate day of tax loss selling – and the last full day, since Dec 24 was an early-close); since then, the PerpetualDiscount index increased 4.56% to January 14, with thirteen consecutive trading days of gains. 

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 5.36% 5.38% 57,070 14.84 2 -0.0609% 1,070.9
Fixed-Floater 4.92% 5.38% 73,412 15.02 9 -0.0017% 1,037.4
Floater 5.24% 5.28% 90,437 15.07 3 +0.2397% 840.5
Op. Retract 4.83% 2.47% 81,657 2.83 15 +0.1564% 1,043.0
Split-Share 5.25% 5.34% 99,278 4.32 15 +0.1062% 1,044.9
Interest Bearing 6.28% 6.36% 60,126 3.43 4 +0.1783% 1,072.5
Perpetual-Premium 5.76% 4.58% 65,175 5.20 12 +0.2224% 1,024.8
Perpetual-Discount 5.42% 5.45% 339,838 14.10 54 -0.0776% 945.0
Major Price Changes
Issue Index Change Notes
CM.PR.H PerpetualDiscount -2.2222% Now with a pre-tax bid-YTW of 5.57% based on a bid of 21.56 and a limitMaturity.
CM.PR.I PerpetualDiscount -2.0833% Now with a pre-tax bid-YTW of 5.58% based on a bid of 21.15 and a limitMaturity.
CM.PR.J PerpetualDiscount -1.9408% Now with a pre-tax bid-YTW of 5.59% based on a bid of 20.21 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.7021% Now with a pre-tax bid-YTW of 5.45% based on a bid of 23.10 and a limitMaturity.
HSB.PR.C PerpetualDiscount -1.4675% Now with a pre-tax bid-YTW of 5.47% based on a bid of 23.50 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.0335% Now with a pre-tax bid-YTW of 5.95% based on a bid of 20.11 and a limitMaturity.
FTU.PR.A SplitShare +1.0571% Asset coverage of 1.7+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.40% based on a bid of 9.56 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.G FixFloat +1.0606%  
IAG.PR.A PerpetualDiscount +1.0658% Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.81 and a limitMaturity.
TD.PR.M OpRet +1.1073% Now with a pre-tax bid-YTW of 3.01% based on a bid of 26.48 and a call 2009-5-30 at 26.00. The yield to the softMaturity 2013-10-30 is a mere 3.54% … still less than 5% interest-equivalent.
TCA.PR.X PerpetualPremium +1.1637% Now with a pre-tax bid-YTW of 5.07% based on a bid of 51.29 and a call 2013-11-14 at 50.00.
BAM.PR.B Floater +1.3699%  
Volume Highlights
Issue Index Volume Notes
CM.PR.A OpRet 185,100 ITG (who?) crossed 177,200 at 25.94. Now with a pre-tax bid-YTW of -4.12% based on a bid of 25.90 and a call 2008-2-14 at 25.75. I guess there are some bets out there that it won’t be called!
RY.PR.B PerpetualDiscount 107,050 Now with a pre-tax bid-YTW of 5.27% based on a bid of 22.61 and a limitMaturity.
BMO.PR.I OpRet 85,250 ITG crossed 77,500 at 25.35. Now with a pre-tax bid-YTW of 0.97% based on a bid of 25.24 and a call 2008-2-14 at 25.00.
TD.PR.M OpRet 56,940 ITG crossed 52,200 at 26.78. Now with a pre-tax bid-YTW of 3.01% based on a bid of 26.41 and a call 2009-5-30 at 26.00.
GWO.PR.I PerpetualDiscount 33,565 Scotia bought 21,700 from Nesbitt at 21.45. Now with a pre-tax bid-YTW of 5.29% based on a bid of 21.47 and a limitMaturity.

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

HIMI Preferred Indices

HIMIPref™ Preferred Indices : April 2005

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2005-4-29
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,347.1 1 2.00 2.65% 20.6 92M 2.67%
FixedFloater 2,247.5 7 2.00 2.41% 2.5 67M 5.30%
Floater 2,002.2 6 2.00 -2.90% 0.1 56M 3.27%
OpRet 1,805.6 19 1.54 3.41% 3.3 88M 4.68%
SplitShare 1,849.8 15 1.93 4.13% 4.1 87M 5.04%
Interest-Bearing 2,224.3 9 2.00 5.24% 1.7 98M 6.57%
Perpetual-Premium 1,380.1 36 1.64 4.96% 5.5 93M 5.50%
Perpetual-Discount 1,513.0 6 1.33 4.96% 15.5 2,064M 4.98%

Index Constitution, 2005-4-29, Pre-rebalancing

Index Constitution, 2005-4-29, Post-rebalancing

Issue Comments

IQW.PR.D : What's the story?

There was a post on the Globe site excitedly announcing that investors don’t much like the proposed restructuring plan … which I can’t say I find too surprising, given that indications are that it will wipe out the current equity owners. It also doesn’t surprise me much to see that IQW.PR.C is down a lot on the day … presumably, should the plan be executed, the controlling faction will first force conversion into SVS, prior to wiping out the SVS.

The IQW.PR.D, though, are more interesting, according to the prospectus:

The Series 3 Preferred Shares will not be redeemable prior to December 1, 2007. The Series 3 Preferred Shares will be redeemable, subject to applicable law and to “Restrictions on Dividends and Retirement of Shares”, on December 1, 2007 or on December 1 in every fifth year thereafter, at the option of the Company, in whole but not in part, at $25.00 per share in cash, plus an amount equal to all accrued and unpaid dividends up to but excluding the date of redemption. Notice of the redemption will be given by the Company not less than 45 days nor more than 60 days prior to the date fixed for redemption.

See that? Cash. Redeemable for cash. None of this SVS nonsense. This whole affair gets more interesting by the minute! However, the Quebecor press release states:

Completion of the recapitalization plan is subject to a number of conditions, including, but not limited to, the approval of the financing plan by holders of certain debt securities issued by Quebecor World, the conversion of all Series 5 preferred shares and Series 3 preferred shares into subordinate voting shares and receipt of all required regulatory and other approvals and settlement of definitive documentation. In addition, the rescue proposal specifically contemplates that the consent of the holders of the Company’s debt securities maturing in 2008, 2013 and 2027 must be obtained and Quebecor Inc. and Tricap Partners have informed Quebecor World that they intend to commence discussions with these holders immediately.

So my question is … how many SVS per IQW.PR.D? And what if the IQW.PR.D holders Just Say No?

More than half of the IQW.PR.C are already being converted.

Update: National Post:

As of 5:30 pm, the company hadn’t revealed the outcome of negotiations with its bankers.

Update: National Post:

As of 6:20 pm, the company hadn’t revealed the outcome of negotiations with its bankers. Stay tuned for further developments this evening.

Update: Missed!

Quebecor World Inc. (TSX: IQW, NYSE: IQW) announced today that in connection with the waivers obtained from its banking syndicate and the sponsors of its securitization program announced on December 31, 2007, it has not obtained by January 15, 2008, US$125 million of new financing, as had been required under the terms of the waivers.
…
The Company had requested a one week waiver of this condition from its banking syndicate and securitization sponsors to facilitate the rescue financing initiative currently underway, but has declined to pay the significant waiver costs requested by its banking syndicate for this waiver, as the Company believes it must preserve cash and this payment would not be in the best interests of all of the Company’s stakeholders. The Company renewed its request that the banking syndicate provide a suitable waiver and is awaiting the response.

In addition, Quebecor World announced today that in light of the announced rescue initiative and its current circumstances, it will not make the US$19.5 million payment of interest due today on its outstanding US$400 million 9.75% Senior Notes due 2015.
…
Quebecor World continues to work with Quebecor Inc. and Tricap Partners Ltd. on the rescue financing plan announced on January 14, 2008 and believes that satisfaction of the conditions of such initiative would be in the best interests of the Company and all its stakeholders. There is no assurance all the consents and approvals to the completion of the rescue financing plan and recapitalization initiative will be received on a timely basis.

 

Miscellaneous News

Intermittent Database Problems

There have problems connecting with PrefBlog!

These are due to intermittent database connectivity problems. My hosting service assures me that their engineers are hard at work, sweating to bring PrefBlog to the huddled masses.

They are unable to tell me when it will actually be fixed. Sorry, people! You’d think that for all the money I spend on a brand-name host, there would be better reliability!

 

Market Action

January 14, 2008

I spent a lot of time this afternoon worrying about my Assiduous Readers. “Geez”, I thought, “There’s nothing going on today and I can’t think of anything interesting to say about it. What will I do? Without pearls of PrefBlog wisdom, they might fall into evil habits!”

Fortunately, there was CM Equity Issue and the OSFI change in issuance limit to fill in the space.

And it looks like Citigroup’s getting serious, too:

Citigroup Inc. plans to eliminate more than 20,000 jobs, slash its quarterly dividend and collect at least $10 billion in cash from outside investors to shore up capital eroded by subprime losses, the Wall Street Journal reported, citing unidentified people familiar with the matter.

About 6,500 of the more than 20,000 job cuts will be in the investment bank, the Journal said. The largest investor to add new capital is the Government Investment Corp. of Singapore, the report said. The Kuwait Investment Authority, Saudi Prince Alwaleed bin Talal and at least one U.S. fund management firm are also investing in Citigroup, the Journal said.

So the world is recapitalizing as it should. But it definitely looks like the centre of the financial world is shifting a little!

PerpetualDiscounts were up again today as volume returned to entirely reasonable levels. The market is still volatile however – the “price moves” list is always longer than I expect!

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 5.35% 5.36% 57,411 14.87 2 +0.5976% 1,071.6
Fixed-Floater 4.92% 5.36% 73,791 15.04 9 +0.3295% 1,037.4
Floater 5.29% 5.29% 90,410 15.05 3 +0.0835% 838.5
Op. Retract 4.84% 2.80% 80,133 3.31 15 +0.2095% 1,041.4
Split-Share 5.25% 5.39% 100,249 4.33 15 -0.1196% 1,043.8
Interest Bearing 6.29% 6.42% 60,056 3.43 4 +0.0002% 1,070.6
Perpetual-Premium 5.77% 4.69% 65,505 5.20 12 -0.0374% 1,022.6
Perpetual-Discount 5.42% 5.44% 342,922 14.32 54 +0.1479% 945.7
Major Price Changes
Issue Index Change Notes
FTU.PR.A SplitShare -2.5747% Asset coverage of 1.7+:1 as of December 31 according to the company. Now with a pre-tax bid-YTW of 6.65% based on a bid of 9.46 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.G FixFloat -1.0495%  
BCE.PR.B Ratchet +1.2053%  
BNA.PR.C SplitShare +1.4778% Asset coverage of 3.6+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.74% based on a bid of 20.60 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (5.88% to 2010-9-30) and BNA.PR.B (6.71% to 2016-3-25).
BCE.PR.G FixFloat +1.6667%  
IGM.PR.A OpRet +1.8484% Now with a pre-tax bid-YTW of 3.13% based on a bid of 27.00 and a call 2009-7-30 at 26.00.
BCE.PR.Z FixFloat +1.9983%  
POW.PR.D PerpetualDiscount +2.0348% Now with a pre-tax bid-YTW of 5.21% based on a bid of 24.07 and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.5745% Now with a pre-tax bid-YTW of 5.88% based on a bid of 20.32 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
IQW.PR.D Scraps (would be Ratchet, but there are credit concerns) 311,320 Answer Hazy. Try again Later.
IQW.PR.C Scraps (would be OpRet but there are credit concerns) 115,000  
GWO.PR.I PerpetualDiscount 95,459 Now with a pre-tax bid-YTW of 5.32% based on a bid of 21.36 and a limitMaturity.
MFC.PR.C PerpetualDiscount 34,247 Now with a pre-tax bid-YTW of 5.09% based on a bid of 22.31 and a limitMaturity.
PWF.PR.G PerpetualPremium 26,800 Now with a pre-tax bid-YTW of 5.60% based on a bid of 25.21 and a call 2011-8-16 at 25.00.
GWO.PR.H PerpetualDiscount 26,147 Now with a pre-tax bid-YTW of 5.38% based on a bid of 22.72 and a limitMaturity.
RY.PR.G PerpetualDiscount 25,809 Now with a pre-tax bid-YTW of 5.25% based on a bid of 21.67 and a limitMaturity.

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

HIMI Preferred Indices

HIMIPref™ Preferred Indices : March 2005

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2005-3-31
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,353.1 1 2.00 2.63% 20.7 104M 2.65%
FixedFloater 2,245.0 8 2.00 2.48% 2.3 72M 5.29%
Floater 1,989.4 5 2.00 -2.42% 0.1 60M 3.29%
OpRet 1,808.4 20 1.51 3.16% 3.7 85M 4.70%
SplitShare 1,838.8 15 1.87 4.10% 4.2 89M 5.07%
Interest-Bearing 2,202.6 9 2.00 5.43% 1.8 113M 6.64%
Perpetual-Premium 1,376.1 34 1.62 5.02% 5.6 101M 5.50%
Perpetual-Discount 1,504.9 6 1.34 5.04% 15.4 2,385M 5.06%

Index Constitution, 2005-3-31, Pre-rebalancing

Index Constitution, 2005-3-31, Post-rebalancing

Regulatory Capital

OSFI Increases Limits on Bank Preferred Issuance

The Office of the Superintendent of Financial Institutions Canada has announced:

In Principle 1 of the Appendix: Principles Governing Inclusion of Innovative Instruments in Tier 1 Capital, “common shareholder’s equity (i.e., common shares, retained earnings, and participating account surplus, as applicable) should be the predominant form of a FRFI’s tier 1 capital. A strongly capitalized FRFI should not have innovative instruments and perpetual non-cumulative preferred shares that, in aggregate, exceed 25% of its net tier 1 capital”.

After taking into account the fundamental characteristics of tier 1 capital and reviewing guidance in other jurisdictions, OSFI has decided to increase this limit to 30%. The maximum amount of innovative tier 1 instruments that can be included in the aggregate limit calculation continues to be 15% of net tier 1.

References to 25% in the April 2003 Advisory Tier 1 Capital Clarifications are amended to 30%. In addition, section 2(b) of the advisory is replaced by the following:

Tier 1 qualifying preferred shares and innovative instruments, at the time of issuance, should not normally exceed 30% of net tier 1 capital. A FRE that wishes to include excess preferred share amounts in tier 1 capital must obtain OSFI’s prior confirmation that this treatment is acceptable. The FRE must provide a supportable plan, acceptable to OSFI, outlining how it proposes to eliminate the excess.

This increase was briefly noted in the CIBC announcement of an equity issue.

When we look at the year-end summary of issuance capacity we see that this really only affects Royal Bank (RY) and, to a limited extent, Commerce (CM) … the others already had tons of unused capacity, and National Bank (NA) has announced a $400-million Innovative Tier 1 Capital issue, which will have soaked up their room.

Issue Comments

CM Raises Equity Capital

The Canadian Imperial Bank of Commerce (CM) has announced:

it expects to further enhance its capital position by raising a minimum of $2.75 billion of newly issued common equity.
    Specifically, CIBC has received written commitments from a group of institutional investors, including  Manulife Financial Corporation, Caisse de dépôt et placement du Québec, Cheung Kong (Holdings) Ltd. and OMERS Administration Corporation, to invest, by way of a private placement, $1.5 billion in CIBC common shares. CIBC World Markets Inc. and UBS Securities Canada Inc. acted as joint bookrunners in the private placement.
    In addition, CIBC has entered into an agreement with a syndicate of underwriters led by CIBC World Markets Inc. as bookrunner and jointly led by UBS Securities Canada Inc. under which they have agreed to purchase $1.25 billion in CIBC common shares at a price of $67.05.

The press release includes a handy table:

Tier 1 Ratio Sensitivity to Additional Write-downs on U.S. Residential Real Estate Exposures
Capital Raised ($-billion) Dec 31/07 Tier 1 Ratio Estimate (1) factoring in $2.4-billion pre-tax writedown Tier 1 Ratio Estimate with Hypothetical Additional (2) Write-downs of:
$2.0-billion Pre-tax ($1.3-billion after tax) $4.0-billion Pre-tax ($2.7-billion after tax)(3)
2.75 11.3% 10.2% 9.0%
2.94(4) 11.4% 10.3% 9.2%
(1) Estimated on a Basel II basis
(2) i.e., in addition to the write-downs taken as of December 31/07 described in press release. These numbers are illustrative only. CIBC has no information that would lead it to conclude that any additional material write-downs will be taken.
(3) OSFI has announced that as of January 2008 the amount of preferred shares permitted for inclusion in Tier 1 capital has increased from 25% to 30%. The pro-forma impact of this change is to increase the Tier 1 ratio to 9.1% in the $2.75 billion capital raised case and 9.3% in the $2.94 billion capital raised case.
(4) $2.94 billion includes the underwriters over-allotment option.

These are very strong numbers compared with Year-end levels; with the entry of new equity holders kindly offering to take the first loss, the credit watch should probably be cancelled. Now, if only we could be sure that the bank can avoid shooting itself in the foot for another little while!

The bank has the following series of preferred shares: CM.PR.A, CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.H, CM.PR.I, CM.PR.J, CM.PR.P and CM.PR.R.

Update: DBRS has announced:

CIBC’s ratings remain Under Review with Negative Implications, including all the long-term, short-term and preferred ratings, despite the equity capital injection as concentration risk of counterparty and overall risk management processes of the Bank remain concerns for DBRS.

Update: The bank has released An Investor Presentation, confirming that the private placement was done at $65.26. I have heard, with good reliability, that there was also a 4% commitment fee in that part of the deal, which would make the net price $62.65.

Update, 2008-2-9: The greenshoe was fully exercised:

CIBC (CM: TSX; NYSE) announced today that it completed its previously announced offering of 45,346,130 common shares for aggregate gross proceeds of $2,937,669,337.50.
    At today’s closing, CIBC issued 21,441,750 common shares to the public through a bought deal public offering in Canada led by CIBC World Markets Inc. as book runner and jointly led by UBS Securities Canada Inc. The public
offering included 2,796,750 common shares issued upon the exercise, in full, of an over-allotment option granted by CIBC to the underwriters.
    CIBC also issued an additional 23,904,380 common shares to a group of institutional investors by private placements.

PrefLetter

January, 2008, Edition of PrefLetter Released!

The January, 2008, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”.

Until further notice, the “Previous Edition” will refer to the January, 2008, issue, while the “Next Edition” will be the February, 2008, issue, scheduled to be prepared as of the close February 8 and eMailed to subscribers prior to market-opening on February 11.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.