PrefBlog

Bloomberg’s Matt Levine writes a nice piece on Lloyds bank and regulatory par calls. Looks like a bit more of OSFI-style capital-markets-as-a-cooperative-game legitimate-expectations-of-security-holders garbage:

So Lloyds’s ECNs, like most capital securities, had an explicit regulatory par call, which provided that Lloyds could redeem them at par upon a “Capital Disqualification Event,” which would occur if they didn’t count as tier 2 capital or if they “cease to be taken into account ” by the U.K.’s Prudential Regulation Authority “for the purposes of any ‘stress test’ applied by the PRA in respect of the Consolidated Core Tier 1 Ratio.” And, earlier this year, that happened. (Maybe!)6

So Lloyds can just call them at par. Or, not quite; regulators would probably get mad if Lloyds just got rid of even not-so-good old-timey capital, and anyway that wouldn’t do anything to improve Lloyds’s capital position. Lloyds would have to sell new capital things — 7-percent trigger cocos, most efficiently, or I guess common stock but hahaha who issues common stock? — and use the proceeds to pay off the old ECNs at par.

Alternately Lloyds can buy the old ECNs for their current trading levels, which seem not to take into account the fact that they’re callable at par, which boggles me but is sort of par for the course.[Footnote]

[Footnote reads] Here is Tracy Alloway at FT Alphaville on Credit Suisse’s similarly callable, similarly above-par “Claudius” capital instruments. The link in the text is me making fun of the people buying Claudiuseses at above par, and judging by the reader e-mails I got from that linkwrap I suspect I’m not the only one who’s boggled.

I’ve sent Mr. Levine an eMail alerting him to the Canadian version of the mind-boggler.

The Parakeet has assured us that the lousy economy is not his boss’ fault – it’s those darn boomers again. Who would have thought they’d ever get old?:

We continue to believe that the world economy is healing, and that Canada will benefit in the form of stronger exports. From there, we expect to see more investment and new firm creation. This will permit the emergence of a natural, sustained growth trajectory for Canada, and a return of inflation to our 2 per cent target.

But the demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend, and it will also be associated with lower equilibrium rates of interest than we are used to. Fortunately, global policy-makers have the ability to redefine the limits to growth by removing growth impediments, but as business people and investors, we must keep those efforts in perspective.

The dollar dived, since boomers in the US remain youthful:

The loonie, as Canada’s dollar coin is known, was at 90.5 cents when the Bank of Canada posted the governor’s speech on its website, noted chief currency strategist Camilla Sutton of Bank of Nova Scotia.

Within a few minutes, it slipped to 90.2 cents. And by the time he had finished a question-and-answer session, during which he said he couldn’t rule out the possibility of an interest rate cut, the loonie was down to 89.75 cents.

It weakened further from there later in the day.

Spend-every-Penny is approaching his reward:

Yesterday, I informed the Prime Minister that I am resigning from Cabinet. This was a decision I made with my family earlier this year, as I will be returning to the private sector.

I suppose “private sector” means cushy job at a bank.

The touted replacement is probably too old to run for Conservative leadership:

Natural Resources Minister Joe Oliver will become the federal government’s new finance minister, replacing Jim Flaherty who announced his resignation earlier on Tuesday, CBC News has learned.

Oliver will be named finance minister on Wednesday in Ottawa.

Joe Oliver does not yet have an official PrefBlog nickname; he is best known from his days at the IDA, for giving money that should be regarded as public funds to a buddy’s start-up business; that money is all gone now, but what the hell – there’s more where that came from. The buddy was an ex-Executive Director of the OSC – by an amazing coincidence Oliver is also an ex-Executive director of the OSC.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets gaining 13bp and DeemedRetractibles off 2bp. Volatility was average, but uniformly positive. Volume was average.

The wonderful thing about trade is that it’s very difficult to go half-way:

The Ukrainian crisis is putting a strain on Russia’s $2 trillion economy, which grew 1.3 percent in 2013 after expanding 3.4 percent previous year.
…
Morgan Stanley (MS) economists Jacob Nell and Alina Slyusarchuk cut their forecast for 2014 growth to 0.8 percent from 2.5 percent according to a note to clients yesterday.

“We see Russia close to recession in the first half of 2014 as a result of the Ukrainian security crisis driving higher rates and risk premia, leading to weaker consumptions and contracting investment,” they wrote.

Capital outflow from Russia may reach $70 billion in the first quarter and there is “a real risk that this could push Russia into recession,” London-based Capital Economics said in a report published yesterday.

There hasn’t been any effect on China … yet. But it will come. Mind you, I don’t expect any road to Damascus conversion by Putin – but the consequences will have an effect on his choices.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 17bp, FixedResets up 5bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was extremely low … all the players were reading PrefLetter!

Some little kids want Mommy to make everything nice:

For nearly a year, a group of major bond investors has been looking for answers to a seemingly simple question — who among Canada’s many regulators is in charge of Cdor [Canadian Dealer Offered Rate], a benchmark rate affecting some $6-trillion bonds, corporate loans, derivatives and other securities held by investors across the country. They have yet to get an answer.

“It’s kind of exasperating,” said Joe Morin, chair of the Canadian Bond Investors Association, which represents some 30 fixed income funds with more than $300-billion of assets. “Nobody has stepped up to take responsibility.”
…
On Aug 20, nearly five months [after whimpering to Mommy], they received a reply from the OSC, referring the group to a “review” of Cdor published by another regulator, the Investment Industry Regulatory Organization of Canada, made public in Jan 2013. The review found that the Cdor rate setting process had the “potential” for manipulation. It also found that none of this country’s regulators had proper jurisdiction over the rate.

In January of this year the Office of the Superintendent of Financial Institutions appeared to clear away the regulatory cobwebs, announcing it would “assume a role” in the oversight of Cdor, which was interpreted by many as a declaration that it was taking responsibility for the rate.

But it turned out that was not the case.

“We would like to clarify that OSFI is not the regulator of Cdor,” a spokesman for the regulator said in an email to the Financial Post on Feb 20.

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

Capital Power Corporation, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, has been confirmed at Pfd-3(low) [Stable] by DBRS:

CPC’s preferred shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC.
…
CPC has no bonds/debentures issued at the parent level and is not expected to issue any debt in the foreseeable future. CPC currently has $464 million of preferred shares outstanding, of which $73 million is treated as debt by DBRS in CPC’s adjusted debt-to-capital calculation (adjusted debt-to-capital ratio was approximately 3% in 2013). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds and minority interest) is treated as debt. CPC’s adjusted debt-to-capital ratio remains in line with its rating category. In addition, the pro forma unconsolidated fixed charge coverage ratio is expected to remain high, at around four times.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets off 1bp and DeemedRetractibles flat. Volatility was not just minimal, it just reversed yesterday’s. Volume was below average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 3bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was average, with the highlights comprised entirely of FixedResets.