PrefBlog

This BMO Field thing really irritates me, so I have sent the following eMail:

Dear Mr. Ford, Ms. Doucette, Ms. Nash and Ms. DiNovo [my Mayor, Councillor, MP & MPP]

I write to urge very close scrutiny of the proposed arrangement whereby the City, provincial government and federal government are being asked to invest $10-million each in leasehold improvements for BMO Field in Toronto.

It has been claimed (link ) that this represents “a pretty good healthy return on the $10 million”.

I have made approximate calculations of the Internal Rate of Return based on figures published in the Toronto Star (link ) and arrive at a figure of approximately 6.2%. While this certainly exceeds the rate available on twenty year bonds, it is far below the rule of thumb for equity and, I suspect, far below the rate of return expected by MLSE, which has been described as “really good” in the context of private equity investments (link ) which have historically averaged more than double the IRR offered to the city ( link )

In addition, it will be noticed that there will be no return of the provincial and federal contributions, which will be lost completely. I wish to remind you all that it is all taxpayer money and for my part I am not too greatly concerned with the details of the route my money takes between my pocket and MLSE’s coffers.

It is apparent that the City has been taken to the cleaners under the give-away splashed out by the previous city administration. The city’s gross undervaluation of naming rights allowed MLSE to make an instant profit from its investment (link ) and in addition, the city’s current and projected receipts from the stadium and parking (roughly $500,000 p.a. to increase to $1.3-million p.a.) are laughable when compared to receipts on, for example, Ricoh Coliseum, estimated at $4-million p.a. (link citing Peddie, Richard (2013). Dream Job. Harper Collins ).

It is my understanding that MLSE wishes to extend the term of their lease in connection with their leasehold improvements, which is entirely understandable. I strongly urge that any such lease extension be examined with great care, with the City taking the opportunity to negotiate much higher payments by MLSE.

Sincerely,

DBRS confirmed BRF at Pfd-3(high):

BREP’s business risk profile is in the BBB (high) range. The Company’s output is highly contracted (93% of expected 2014 generation) with investment-grade counterparties, with an above-average weighted-average duration of approximately 18 years. In addition, BREP’s significantly diversified portfolio of 193 hydro-electric generating stations mitigates the Company’s exposure to hydrology and operational risk at each facility. However, over the last year, BREP has repeatedly purchased hydroelectric facilities that are exposed to the wholesale pricing environment in North America, including the White Pine and Black Bear facilities. Although DBRS expects BREP to attempt to secure long-term contracts for these assets, should BREP’s contracted output fall below 80%, the Company’s business risk profile could be negatively affected.

BREP’s financial risk profile is based on its deconsolidated credit metrics and is reflective of a BBB (high) rating because of the Company’s prudent financing strategy. BREP finances its assets with mostly non-recourse project level debt. With hydrology returning to a long-term average, BREP’s deconsolidated EBITDA-to-interest and deconsolidated cash flow-to-debt ratios returned to ranges reasonable for its current rating. While BREP’s deconsolidated debt-to-capital ratio in 2013 was slightly above the 20% threshold, DBRS expects BREP to maintain this ratio below the 20% threshold as the Company closes the acquisition of Safe Harbor and Bord Gáis with a prudent mix of non-recourse project-level debt and equity.

Brookfield Renewable Power Preferred Equity Inc. is the proud issuer of BRF.PR.A, BRF.PR.C, BRF.PR.E and BRF.PR.F.

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts up 4bp, FixedResets off 6bp and DeemedRetractibles gaining 3bp. Volatility was average. Volume was on the low side of average.

Top o’ the news banner headline! Live, real-time stock quotes for Globe Unlimited subscribers!

We are pleased to bring our Globe Unlimited subscribers live, real-time stock quotes from the Toronto Stock Exchange and TSX Venture Exchange.

Our Globe Investor readers have asked for this feature for years, since Canadian media websites and portals offer stock quotes with a 15-minute delay. Our real-time quotes, which come with a Globe Unlimited subscription, are sourced from the TSX and reflect a large trading volume, for the most accurate price.

This is the first time a Canadian media site has integrated live stock quotes with market data and breaking news. Our subscribers can now see the latest news on their investments on the same page as real-time stock quotes. You can find them at the top of our company stock quote pages — all you need to do is type in a ticker symbol and click on it to get to the page.

They will probably just be the bare quote (i.e., no depth information, possibly no size), but I won’t know until I’ve looked at it during market hours tomorrow. But one way or another, it’s good news!

The Pension Fund That Doesn’t Do It’s Own Credit Analysis has won a round against S&P:

McGraw Hill Financial Inc. (MHFI)’s Standard & Poor’s unit must face California’s claims it deceived the state’s pension funds in its ratings of mortgage-back securities, a judge said in a provisional ruling.

California Superior Court Judge Curtis Karnow in San Francisco said yesterday he was inclined to deny the company’s request to throw out the state’s claims of deceptive conduct from a lawsuit alleging S&P violated false-advertising and business practices laws.
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The California pension systems bought the securities because they had received AAA ratings, signaling they were low-risk, California Attorney General Kamala Harris said in the lawsuit.

Rob Ford doesn’t believe in corporate welfare:

The deal to expand BMO Field will see Maple Leaf Sports and Entertainment pony up $90 million to add a second deck, a roof over the stands and make it both football and soccer friendly.

But for it to go ahead they will be asking all three levels of government for $30 million, which would include a $10-million loan from Toronto.

“I just don’t think the taxpayers should have to pay for it,” said the mayor. “It should be paid for by the private sector. It would be nice if we wanted to expand Deco Labels and have the taxpayers help us out, but it doesn’t work like that.”

Ford says taxpayers already built a stadium on the CNE grounds to the tune of $55 million in cash and land contributions and if MLSE wants to change it, it should be them who pays for it.

… so naturally he’s getting criticized again:

It’s a measure of his frustration with Ford’s attempt to make the expansion of BMO Field a political issue that Leiweke chose this venue to air his grievances.

Leiweke first talked about the surprisingly decent weather, before segueing to more prosaic matters.

“The other good news I had today is that the mayor’s going to vote against our (stadium expansion) plan, which probably means we win 42-2.”

I don’t know the details on this particular issue, but I do know that the city got taken to the cleaners by the MLSE welfare bums on the initial deal:

Even before the team began playing its owner, Maple Leaf Sports and Entertainment, partnered with all three levels of government to build the team’s home stadium. MLSE pledged $18 million to the stadium’s $62.8 million cost, while the city contributed $9.8 million in cash and donated land worth $10 million.

MLSE quickly recouped its initial investment by selling the stadium’s naming rights to Bank of Montreal for a reported $27 million, but the cash-strapped city’s return on investment has materialized more slowly.

Monday MLSE and the city issued a joint press release stating that BMO Field had tuned a $1.1 million profit, which the city and MLSE would split.

In the five years since the stadium opened the city’s share of the profits has totaled $1.75 million, enough to make author Dave Zirin wonder whether Toronto had wasted cash on a team that didn’t need its help.

“The people of Toronto would be better off if that money was dropped from a plane and people could just pick it up and spend it (locally)” says Zirin, author of Bad Sports: How Owners are Ruining the Games we Love. “Every bit of factual data shows that the return on the investment is just not worth it.”

Poor Rob! He never learned the rules of the Club: when you get some influence, you have to grease the other club members. If he’d followed that rule, I don’t think there would be quite so many other issues.

A buddy sent me a link to Did Hyman Minsky find the secret behind financial crashes?:

The “Minsky moment”, a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.

It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they’re on solid ground. But then there’s a moment of sudden realisation – the Minsky moment – when they look down and see nothing but thin air. Then they plummet to the ground, and that’s the crisis and crash of 2008.

Those of a historical bent may find amusement in my market report of November 23, 2007:

Times are tough. There’s a big indigestible mass of dubious debt on the books all over the place, but – as far as I can see – the financial system is not melting down and we are not in a depression. I’ll simply repeat what I’ve been saying for the past several months: Times are tough. Firms that have been living on the edge may find they fall off. There may even be a spectacular blow-up or two, if a financial institution finds out its risk controls aren’t what they might have wished them to be. And I most certainly would not want to be earning my living as a casual labourer in the US housing industry. But it’s a pause, nothing more.

We arrived at the Minsky Moment about ten months later. To my astonishment, the blog Naked Capitalism is still going strong … gloom, doom and complete lack of analytical ability sells well!

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets gaining 11bp and DeemedRetractibles up 12bp. There were quite a few performance highlights, all but one of them winners. Volume was below average.

There was a thought-provoking comment in a Globe & Mail story on the Ukraine’s importance to the global grain trade:

One thing I don’t see in this article: to what extent is Ukraine dependant on Crimean ports for its grain exports?

There’s a very good infographic published by Lloyd’s List … most of the shipping is from western ports around Odessa, but there are quite a few busy ports in the Crimea. Lloyd’s List has a long string of articles about the Crimean situation, but there’s a pay-wall. One purported reprint claims:

“But the situation with the sea ports is much more serious, because the Crimean ports cover nearly 5.4m tonnes of potential shipment volumes, through Sevastopol, Kerch and Feodosia,” said Mr [Rodion] Rybchinskiy [head of the business projects division at APK-Inform, a Russian-owned agricultural consultancy with a Kiev office].

His expectation is that secession after Sunday’s referendum will see grain shipments changed to ports that remain in Ukraine, namely Odessa, Nikolayev and Kherson, which stand to benefit from the situation.

Bloomberg’s Matt Levine highlights the fact that competent traders don’t get cheated:

He then tendered it into the quantitative easing auction at the end of that day, and … oops! The BOE decided to be price-sensitive, for the only time ever,3 because this bond’s price got really out of whack, and because other dealers called the BOE to complain, as you’d expect them to:

By 09:39 (38 minutes after Mr Stevenson began trading in the Bond), a market participant had telephoned the BOE regarding the Bond’s outperformance. Several other market participants telephoned the BOE throughout the day, suggesting that the Bond had been “squeezed”, “rammed”, and that someone “was messing around with” it.

No honor among thieves etc. So the BOE didn’t buy any of the bond that Stevenson was trading, its price got right back into whack, and Stevenson lost a lot of money:
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One lesson here is, if you’re going to manipulate markets, you should be really sure that your price-insensitive buyer is in fact price-insensitive,4 and a buyer.

Which is exactly what should be happening, but Stevenson’s been banned from the industry anyway, just to prove how rough and tough the regulators are in their desire to protect incompetent traders from facing the consequences of their incompetence. This ensures that there will always be lots of incompetent traders, and hence a need to protect them.

We might soon be getting crowdfunding:

Crowdfunding would be available to Canadian issuers (both reporting issuers and non-reporting issuers), other than investment funds, non-reporting real estate issuers and issuers without a written business plan. Under the exemption, a crowdfunding issuer, its affiliates and others in a common enterprise with the issuer would be permitted to raise an aggregate of $1.5 million within any 12-month period. (The British Columbia proposal limits a crowdfunding issuer to two offerings of a maximum of $150,000 each over any calendar year). Investment by a purchaser under the proposed OSC exemption would be limited to $2,500 per single investment with a $10,000 aggregate limit on all crowdfunding investments for each calendar year.

Investors must receive a disclosure document containing basic information about the offering, the issuer and the funding portal and sign a risk acknowledgement form. If the issuer has incurred expenditures prior to using the exemption, the disclosure document would be required to include annual financial statements and, if specified capital raising ($500,000) or expenditure ($150,000) thresholds have been surpassed by the issuer, the financial statements would haved to be audited. Investors will have a right of action for damages or rescission if any materials made available to them by the issuer, including the disclosure document, contain a misrepresentation, and will have 48 hours prior to the disclosed offering deadline to withdraw their subscription.

I’m sure I’m way behind the curve on this one, but I’ve become aware of a new trend in Toronto real-estate:

In some cases, the eye-popping amounts that some home buyers are flinging around in order to win bidding wars in Toronto these days lead to an inevitable question.

“I wonder what it will get appraised for,” speculate the real estate agents who keep an eye on the action.

In other words, a bidder who pays $150,000 above an asking price of, say, $700,000 or $800,000 better hope that an appraiser won’t balk at the selling price if the buyer hopes to have a mortgage and mortgage insurance.

Mr. Fleming says bidders who are tempted to overpay in their desperation to obtain a house can run into difficulty if the property appraiser estimates that the house is worth far less. He says deals don’t often fall through but buyers should be aware of the pitfalls. “I think it very rarely happens. But if you don’t have the minimum required, you end up having to go to the bank of mom and dad.”

A buddy of mine recently sold her condominium for about $150,000. She got one lowball and two acceptable offers … both of the acceptable offers were conditional on financing and were void when the CMHC turned down the banks’ applications for insurance. She’s sold it now, thanks to the purchaser’s Bank of Mom and Dad.

It was a fine day for the Canadian preferred share market, with PerpetualDiscounts up 16bp, FixedResets winning 24bp and DeemedRetractibles gaining 4bp. Volatility was average, but comprised exclusively of FixedReset winners. Volume was average.

The war on traders is having one predictable effect:

Junior bankers in the United Arab Emirates are reaping almost 36 percent more salary than their counterparts in London, with bonuses almost double those paid in the U.K. capital, compensation data provider Emolument said.

Fixed salaries at the analyst level in the U.A.E. average $91,000, compared with $73,000 in London, the group said in an e-mailed statement. Bonuses in the U.A.E., which consists of sheikhdoms including Dubai and Abu Dhabi, averaged $27,000 compared with $14,000. For associates, fixed pay in the U.A.E. was $107,000, compared with $108,000 in London, while bonuses of $40,000 in the U.K. were about 29 percent higher.

The SEC is hoping to destroy the remnants of the public bond market:

The U.S. Securities and Exchange Commission is examining how electronic bond-trading platforms allow dealers to give clients different prices on the same securities in the $40 trillion market, potentially hurting smaller investors.

SEC regulators want to understand why brokers sometimes block their rivals and clients from seeing some of their prices for municipal, corporate and other bonds, according to a person with direct knowledge of the examination. They’re concerned that being able to turn quotes on and off may allow market manipulation, and that smaller buyers may not get the best prices, the person said.
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Banks have increasingly turned to electronic systems to sell bonds on behalf of their clients as a way of aggregating a greater number of bids. That’s become more appealing as it’s become more expensive for dealers to use their own money to make markets because of higher regulatory capital requirements.

U.S. investment firms predict that 30 percent of corporate-bond trading will occur electronically by 2015, up from 14 percent of investment-grade notes in 2012, according to an August 2013 report by Greenwich Associates and McKinsey & Co. As much as 50 percent of municipal trades already may occur electronically, according to a TMC Bonds comment letter to the SEC last year.

Today was something of a non-event for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both flat, while DeemedRetractibles were off 3bp. Volatility was minimal. Volume was above average.

Jonathan Weil of Bloomberg decries regulatory extortion:

New York Attorney General Eric Schneiderman is out again with another reminder that he doesn’t like the way high-frequency traders operate. He believes they have unfair advantages, and that it’s a bad idea for stock exchanges to sell them special services that cater to their wants. For that matter, so do I. So on that we can agree.

But Schneiderman also says there’s something about these arrangements that might be illegal, without saying what it is. If that’s true, he ought to spell it out. Instead, he’s back to his old ways of threatening to investigate companies and maybe sue them for fraud unless they change their practices in a way that he deems acceptable. No matter how noble his intentions, this isn’t how a law-enforcement officer should operate.

Sadly, extortion works:

Marketwired, a company that publishes and distributes corporate earnings and other market-moving news releases, said on Wednesday that it will no longer sell directly to high-frequency trading companies.

The action comes amid a wide-ranging probe by New York Attorney General Eric Schneiderman to end early access to information by technologically sophisticated traders, and follows a similar decision last month by Berkshire Hathaway’s Business Wire.

Marketwired said it would no longer provide its distribution service to high-frequency trading firms to “eliminate any perceived advantages gained through technology by certain customers,” according to a statement.

Naturally, there is a little reaction:

Mark Gorton knows what will happen on the day high-frequency traders’ computers get kicked out of the New York Stock Exchange.

“All you’re going to do is have a data center that’s across the street,” said Gorton, founder of the Lime Wire LLC music-sharing service and managing director of Tower Research Capital LLC, one of the most prolific equity traders in America. “Everyone’s going to want to put their computers there.”
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During a panel discussion yesterday following Schneiderman’s speech, Chad Johnson, chief of the New York Investor Protection Bureau in the attorney general’s office, said his boss doesn’t “pine for the days before electronic trading,” and recognizes there were issues in the past.

“The focus of our initiative is on the abusive practices, the latency arbitrage and the like,” Johnson said yesterday. “The strategies are ultimately extracting from the capital markets enormous sums of money and not providing benefit that makes that worthwhile,” he added. “You don’t necessarily have to get rid of the bad and toss the good — if there is good — at the same time.”

At issue is a model that regulators have permitted for years. Firms pay to place their systems in the same data centers as the exchanges, letting them directly plug in their companies’ servers and trade thousandths or even millionths of a second faster. They also purchase proprietary data feeds, which are faster and more detailed than the stock-trading information available on the public ticker.

The fact is that the market structure rewards speed. So there’s going to be competition for speed. I don’t see that there’s any way around that, even supposing that a rational person would want to get around that. The best that the regulators can do – assuming they are stupid enough to do it – is create a forest of totally arbitrary rules, which people will then devote vast resources to getting around. Sheer craziness. But Gorton’s last point is best:

“It’s true that grandma is not putting a computer in the data center to execute her orders,” Gorton said. “But when she routes her orders through a brokerage firm, that firm has an order and now actually the computer at the brokerage firm and the computer of the professional traders are on an exact level playing field.”

Exactly. It’s called competition. Why is Schneiderman so eager to protect the incompetent?

The article referenced a paper by Eric Budish†, Peter Cramton and John Shim titled The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response:

We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.

The FOMC announced more tapering:

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Mexico is issuing long bonds:

When a French utility completed its sale of 100-year bonds denominated in pounds in January, Mexico took note.

Four years after becoming just the second country to sell dollar debt due in 100 years, Mexico last week issued 1 billion pounds ($1.66 billion) of securities that mature in 2114, becoming the only nation with two century bonds. U.K. investors accounted for 84 percent of buyers in the March 12 offering, said Alejandro Diaz de Leon, Mexico’s public debt chief. The sale by Electricite de France SA in January underscored the pent-up demand for longer-dated debt in pounds, according to Barclays Plc, which helped underwrite both deals.

“Mexico historically has distinguished themselves from other sovereigns in terms of always looking at creative ways of getting more efficiency in terms of their debt management strategy,” Raul Martinez-Ostos, head of Mexican operations at Barclays, said by phone from Mexico City. “Here it was really driven by real-money institutional accounts in the U.K.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets up 10bp and DeemedRetractibles gaining 5bp. Volatility was low. Volume was low.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.45%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a significant widening from the 265bp reported March 12.