PrefBlog

Germany is preparing for the inevitable:

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

Meanwhile, the ECB is losing credibility daily:

Juergen Stark resigned from the European Central Bank’s Executive Board after protesting the bank’s bond purchases on a conference call earlier this week, said a euro-area central bank official familiar with the meeting.

During the Sept. 4 call, Stark, 63, expressed his strong opposition to the program, which was expanded last month when the ECB started buying Italian and Spanish bonds, said the official, who spoke on condition of anonymity because the discussions are confidential. Stark was supported by the central banks of Austria and the Netherlands, the person said. The resignation of Stark, the ECB’s chief economist, is a blow to the bank, the official said, noting he is the second German ECB member after Axel Weber to leave over the bond program.

Stark’s resignation, less than two months before President Jean-Claude Trichet’s term ends, suggests policy makers are increasingly split over the best way to fight Europe’s debt crisis.

All in all, it was an interesting day:

Treasuries rallied, pushing 10-year note yields to a record low, as a surge in European bank and sovereign-credit risk to all-time highs on speculation Greece may default bolstered the refuge appeal of U.S. government debt.
…
Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 1.92 percent at 4:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained 17/32, or $5.31 per $1,000 face amount, to 101 27/32.

The Standard & Poor’s 500 Index tumbled 2.7 percent. The Stoxx Europe 600 Index fell 2.6 percent. Gold futures for December delivery gained 0.6 percent to $1,869.20 an ounce. Prices rose to a record $1,923.70 on Sept. 6.

The 10-year yields had a weekly drop of seven basis points after falling to 1.8942 percent, the lowest level on record in Federal Reserve data going back to 1953. The yields earlier advanced four basis points to 2.02 percent.

The WSJ opined on YLO.PR.A a few days ago:

From March to December 2012, Yellow Media has an option to convert the preferred stock to common stock. Importantly, Yellow Media gets to exchange the securities at a rate of C$2 per common share so long as the stock trades below that level. With the common stock now trading at about 84 Canadian cents, the company stands to issue common stock valued at just C$111 million, rather than paying C$264 million in cash.

The company said in early August that it still plans to purchase the preferred shares with cash. Unlike private equity, which typically enjoys outright control, Yellow Media’s shareholders can’t force the company to make preferred investors take the hit. But Yellow Media shouldn’t be scared to act itself.

YLO.PR.A was down $4.47 on the week (from 17.07 to 12.60), a drop of over 25%, presumably related to this opinion. The other issues were down as well, but less dramatically.

YLO has been deleted from the S&P/TSX 60 and is now merely a member of the Completion index.

YLO had no TMX-reported insider trading nor any SEDI-reported filings again today. I’m going to keep checking, but this will be the last negative report for a while, anyway.

DBRS confirmed CCS at Pfd-3(high).

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets up 5bp and DeemedRetractibles gaining 1bp. Volatility was good. Volume was below average.

The news from Greece just keeps getting worse:

Credit-default swaps on Greek government debt surged to a record, signaling there’s a 91 percent probability the nation won’t meet debt commitments, after its economy shrank more than previously reported.

Five-year contracts on the country’s sovereign bonds jumped 240 basis points to a record 3,045 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Gross domestic product shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Hellenic Statistical Authority said. Greece’s financial situation is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers last night, the parliament’s HIB bulletin said.

But Greece swears up and down it will stay in the Euro:

Greece ruled out quitting the euro on Thursday, shrugging off warnings by its biggest creditor Germany and yet another set of bad economic figures showing it is struggling under the weight of EU/IMF-imposed austerity.

Anger at Greece’s failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior German politicians now talking openly about the possibility of Athens exiting the euro zone.

But Athens ruled out any chance of quitting the single currency, pledging to make every effort to qualify for a €109-billion bailout agreed by euro zone leaders in July, the second rescue package for the debt-laden country in little more than a year.

“There is no threat of Greece exiting the euro zone,” government spokesman Ilias Mosialos said. “We are proceeding with reforms quickly.”

It’s reminiscent of old times! ‘We will not devalue! We will not devalue! We will not devalue! Well, we just devalued, but we had to and that was the last time! We will not devalue!’

Trichet is showing signs of strain:

Trichet, 68, lost his cool yesterday with a reporter who asked whether Germany should abandon the euro and return to the mark as Europe’s debt crisis roils markets and spooks voters.

“I would like very much to hear the congratulations for an institution which has delivered price stability in Germany for almost 13 years,” Trichet said in Frankfurt in an uncharacteristically raised voice. “It’s not by chance we have delivered price stability,” he said. “We do our job, it’s not an easy job.”

If it works, this is bad news for YLO:

Google Inc. (GOOG), owner of the world’s most-used search engine, has acquired Zagat Survey LLC, the review and ratings service, to add features aimed at local businesses and advertisers.

Zagat brings an array of reviews of hotels, restaurants, shopping and other categories, the company said in a blog post today. The service, which offers both printed and online reviews and ratings, was founded more than 30 years ago.

But will small businesses want to buy all their advertising through a place that allows bad reviews?

There was no insider trading of YLO issues reported by the TMX today; nor was there anything new filed on SEDI.

DBRS confirmed three more SplitShare Corporations.

The TRE cease trading order was extended.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets up 9bp and DeemedRetractibles winning 10bp. Not much volatility. Volume was below average.

There were no surprises in the BoC release:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated
…
Slower global economic momentum will dampen domestic resource utilization and inflationary pressures. The Bank expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well-contained as labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

There are rumours that the completely voluntary and not coerced in any way whatsoever Greek bond exchange offer might be in trouble:

Private sector participation in a Greek debt swap has so far reached the 75-percent mark, far below a 90 percent target, newspaper Imerisia reported on Wednesday without naming its sources.

Greece last month turned the screws on investors, saying it may not go ahead with the debt swap—a key part in a second bailout package to stave off the country’s bankruptcy—if holders of less than 90 percent of the bonds take part.
…
A Greek finance ministry official said it was too early to provide a take-up figure. “The process is ongoing, it is premature to give a percentage,” the official told Reuters on condition of anonymity.

Greece has asked bondholders to declare their interest in taking part in the debt swap by Friday. Greece expects to submit a final bond swap offer to investors in October, with a view to complete the exercise by the end of the same month.

As I have often noted, bankruptcy laws evolved over a period of 300 years. To their vast astonishment, the Europeans are finding that the re-write may take a little time:

There were no insider trading reports for YLO today, but I did learn that overlapping NCIBs are allowed which seems a little strange to me. The TMX reported no insider buying of YLO issues today.

It was a good day overall for the Canadian preferred share market, with PerpetualDiscounts losing 4bp, FixedResets gaining 10bp and DeemedRetractibles winning 26bp. Volatility picked up, skewed to the upside. Volume was a little above average.

PerpetualDiscounts now yield 5.29%, equivalent to 6.88% at the standard equivalency factor of 1.3x. Long-term Corporates now yield about 4.9% (maybe a little less?) so the pre-tax interest-equivalent spread is now about 200bp, the same as it was on August 31 as both yields have declined about the same amount.