PrefBlog

We’ll begin with a condensed version of ‘The Old Order Passeth’:

RDA Holding Co., publisher of the 91-year-old Reader’s Digest magazine, filed for bankruptcy to cut $465 million in debt and focus on North American operations as consumers shift from print to electronic media.

The company is the latest in a line of iconic businesses to have recently sought court protection from creditors, after Hostess Brands Inc., maker of Twinkies and Wonder Bread, and Eastman Kodak Co., inventor of Kodachrome and the Instamatic camera.

Reader’s Digest, founded by DeWitt and Lila Wallace, went public in 1990. An investor group led by private-equity firm Ripplewood Holdings LLC bought it in 2007 for $1.6 billion and the assumption of about $800 million in debt. The company also filed for bankruptcy in August 2009, citing a drop in advertising spending and the debt load incurred in its acquisition.

The company listed assets and debt of more than $1 billion each in Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in White Plains, New York. Under a restructuring agreement supported by Wells Fargo & Co., $465 million of remaining senior notes will all convert to equity. The company expects to have about $100 million in debt when it exits Chapter 11, about an 80 percent reduction.

GWO is buying in Ireland:

Great-West Lifeco Inc. is buying Ireland’s largest life, pensions and investment manager in a $1.75-billion deal.

Winnipeg-based Great-West says it has reached a deal with the government of Ireland to acquire, through subsidiary Canada Life Ltd., all of the shares of Irish Life Group Ltd.

Irish Life – which the government took over last year as part of its €4-billion ($5.4-billion Canadian) bailout of parent Irish Life & Permanent, has about $50-billion of assets under management and more than one million customers.
…
Great-West’s Irish subsidiary, Canada Life (Ireland), will be combined with
Irish Life over an 18 month period.

The merged businesses should deliver about €40-million per year in cost savings, Great-West said in a news release Tuesday.

As previously reported, PWF is issuing a Straight Perpetual, 4.80%, $300-million to fund a purchase of GWO subscription receipts.

RBC today demonstrated the Acquire and Dismantle Model of Canadian Banking:

On February 1, 2013, Royal Bank of Canada announced it completed the acquisition of Ally Financial Inc.’s Canadian auto finance business (Ally Credit Canada Limited) and Canadian deposit business (ResMor Trust Company).

As a result of the acquisition, RBC Royal Bank has performed a comprehensive review of Ally’s‡ product portfolio, and implemented some changes that may impact your account(s):

• Effective February 15, 2013, you will not be able to open new accounts with Ally.
• You can continue to manage your existing Ally account(s) through Ally’s call centre and website.

As a part of the product consolidation, all Ally High Interest Savings Accounts (HISA) will be closed on April 30, 2013.

Be sure to write your MP, copy to OSFI, and thank him for protecting Canada from the evils of competition.

Justine Hunter of the Globe writes a piece about the intellectual poverty of the political-media establishment:

To move to surplus from what is now expected to be a $1.2-billion deficit in the current fiscal year, the government is relying on tax hikes, $800-million worth of asset sales, and stringent – perhaps optimistic – containment of spending growth.

In the wake of the Irish Life deal discussed above, DBRS confirmed GWO, although the last line of the press release may provoke some hollow laughs:

DBRS has today confirmed the ratings on Great-West Lifeco Inc. (GWO or the Company) and its affiliates following the announcement of the acquisition from the Government of Ireland of Irish Life Group (Irish Life) by the U.K. operation of GWO’s Canada Life Assurance Company (Canada Life) subsidiary for EUR 1.3 billion. All trends remain Stable.
…
With a relatively low acquisition cost estimated at just 72% of Irish Life reported embedded value of EUR 1.8 billion and obvious expense synergies generated from merging Canada Life’s operation, accounting for 5% of the market, with that of Irish Life, representing 25% of the Irish life insurance market, the value proposition for GWO is compelling. Expected expense synergies between the acquired operations of Irish Life and the existing Irish operations of Canada Life will more than offset the increased financing expenses so that the acquisition is expected to be accretive to GWO before restructuring and acquisition-related costs. In addition, GWO could potentially benefit from revenue enhancements as it introduces different management approaches related to investment strategies and the use of reinsurance, which could enhance margins in the future.

The potential for adverse development post-acquisition is relatively small as there are limited guaranteed policy liabilities. Close to 80% of assets are unit-linked for the strict account of the policyholder. Combined with the Irish Life investment management operation, a substantial proportion of the Irish Life revenues take the form of investment management and administrative fees. The remaining assets are largely sovereign government bonds and, therefore, not likely to be a source of adverse credit experience.

Additionally, DBRS confirmed PWF:

DBRS has today confirmed its ratings on Power Financial Corporation (PWF or the Company) following the confirmation of Great-West Lifeco Inc.’s (GWO) ratings in the wake of its announced acquisition of Irish Life Group (Irish Life) from the Government of Ireland for EUR 1.3 billion. The trends remain Stable.

To partially fund this acquisition, GWO will be raising $1.25 billion in common equity, for which PWF will subscribe for $550 million, which will reduce its direct ownership stake in GWO to an estimated 67.0% from the current level of 68.2%. The Company in turn will raise up to $250 million in perpetual preferred shares, with the balance of funds to be provided from cash on hand, which is estimated at close to $1 billion as of year-end 2012.

The increase in financial leverage is manageable, with the expected earnings accretion largely offsetting the additional financial costs and foregone investment income. In any event, the Company’s total debt ratio (including preferred shares) remains close to 17%, which is well within tolerance for financial leverage at a financial services holding company according to the DBRS holding company methodology, especially given the high quality of financial leverage used by the Company. Pro forma fixed-charge coverage ratios are expected to be in excess of 13 times, which is very strong.

The Irish Life transaction is consistent with the stated intention of PWF to facilitate strategic acquisitions by its subsidiaries of major properties that are in line with broader strategic goals of expanding in existing markets while achieving meaningful market shares and expense efficiencies.

And to round out the day, DBRS confirmed FTS:

DBRS has today confirmed the Issuer Rating and ratings of the Unsecured Debentures and Preferred Shares of Fortis Inc. (Fortis or the Company) at A (low), A (low) and Pdf-2 (low), respectively, with Stable trends. The confirmation reflects the Company’s strong mix of earnings generated from regulated utilities and reasonable financing strategies for the acquisition of CH Energy Group Inc. (CHG) (the Acquisition; approximately US$1.5 billion, including US$500 million assumed debt) and the Waneta hydropower project, of which Fortis has 51% ownership.

Upon completion of the Acquisition and Waneta project, Fortis’ non-consolidated leverage is expected to increase modestly, but should be maintained within the 20% range as a result of a prudent funding mix.
…
Fortis’ business risk profile is expected to improve moderately with the Acquisition, as approximately 97% of CHG’s earnings are generated from its regulated electric and gas businesses. This regulated earnings mix is higher than the Company’s consolidated mix of approximately 90% (remainder generated from higher-risk hotel properties and non-regulated generation businesses).

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums losing 6bp, FixedResets down 2bp and DeemedRetractibles off 1bp. Volatility was good, but almost all in the low-volume Floater sector, so it’s not clear whether it means a row of beans. Volume was very high.

Has the tide turned for junk bonds?

The biggest buyers of junk bonds are in retreat as exchange-traded funds suffer unprecedented withdrawals with the debt facing its first losses in eight months.

The outflows sent the combined value of the five biggest junk-debt funds down 7 percent from a four-month high in January to $29.8 billion, according to data compiled by Bloomberg. State Street Corp.’s $11.9 billion fund reported withdrawals of about $988 million in the 12 days ended Feb. 13, the longest stretch since August 2011.

A pullback three times bigger than that for mutual funds which cater to individuals suggests investors such as hedge funds and banks are cherry picking rather than investing in the broader market, said Peter Tchir of TF Market Advisors. Almost six years after the first high-yield ETF was created, the funds have been drawing the interest of institutions seeking rapid entries and exits with securities that traditionally were traded over the counter.

The best story I’ve seen so far on the Russian meteorite explosion was in Cracked, an irreverent internet humour site.

It was an unevenly positive day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets winning 23bp and DeemedRetractibles up 6bp. Volatility picked up a bit. Volume was quite high.

DBRS has confirmed TCL.PR.D at Pfd-3, Trend Negative:

The confirmation considers the declines in organic revenue and operating income over the past year, while acknowledging improvement in key credit metrics as a result of debt reduction. The trends remain Negative (as of April 20, 2012), based on DBRS’s view that weakening demand, combined with overcapacity, will continue to place pressure on the Company’s revenues, margins and cash flow generation going forward. The ratings continue to be supported by Transcontinental’s leading market position, economies of scale, and healthy free cash flow generation, while also reflecting its deteriorating earnings profile, which is being structurally affected by a consumer shift toward digital forms of media.
…
In terms of financial profile, Transcontinental has remained prudent, preserving credit metrics by using much of its free cash flow over the past two years to repay debt. DBRS notes that our concern regarding Transcontinental’s credit risk profile is not based primarily on the Company’s debt level, but rather on its future income and cash-generating prospects. If the Company’s plans and performance lead to signs of stabilization in organic revenue and operating income over the near to medium term, the ratings outlook could stabilize. However, a continued and meaningful decline in organic revenue and operating income and/or in key credit metrics over this period could result in a downgrade.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 7bp, FixedResets down 8bp and DeemedRetractibles gaining 5bp. Volatility was low. Volume was on the high side of average.

Scandinavians might find increased bank capital to be a mixed blessing:

Swedish regulators will require banks to set aside capital equivalent to at least 10 percent of their risk-weighted assets this year, with the minimum rising to 12 percent in 2015. The country’s four biggest banks, including Nordea, already exceed this target.
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Investors have rewarded the lenders for the perceived extra hedge against losses. It costs about 12 basis points less to insure against losses on senior notes issued by Nordea than it does for equivalent securities sold by Deutsche Bank AG, using five-year credit default swaps. Handelsbanken default-swaps trade 36 basis points lower.
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The stricter rules now being implemented across Europe will cost banks as much as 115 billion euros ($155 billion) a year, a figure that exceeds total financial industry profits for 2011, Clausen said. In response, banks need to adjust their business models and focus on “capital-light” areas that don’t burden their balance sheets, [European Banking Federation President Christian] Clausen said in an interview last month.

Many lenders have already started adjusting their business and cut jobs in retail and corporate lending to focus instead on debt underwriting. Nordea and Danske are both hiring more bankers in units that help manage corporate and agency bond sales. That’s in contrast to cuts elsewhere. Nordea is cutting 10 percent of its workforce, while Danske this month reiterated plans to eliminate 3,000 jobs.

There’s an interesting observation about the profitability of High Frequency Trading:

GETCO gets almost all its revenue from what it calls “market making,” which is essentially the high frequency trading business. In the first nine months of 2011, It brought it $714.1-million in revenue from market making. In the first nine months of last year, that had plunged 44 per cent to $398.5-million. About 68 per cent of that revenue came from equity trading.

GETCO blamed “industry specific trends such as lower market volumes and volatility across all asset classes,” as well as the fact that other players in markets are increasingly “internalizing” their orders – matching buys and sells in house – rather than sending them to markets where GETCO can trade against them. That resulted in lower market share, GETCO said.

This suggests to me that order flow – which comes from clients – is becoming more valuable. Which should, ultimately, result in even better deals for clients. Not to mention increased promotion of idiocy like stop-orders by the brokerages, and perhaps punitive surcharges for limit orders.

The Bank of Canada has released the December Financial System Review, with yet another attempt to justify the reckless imposition of central clearing for derivatives:

Canadian authorities judge that global CCPs will provide a safe, robust and resilient environment for clearing OTC derivatives, provided they comply with the CPSS-IOSCO Principles, meet the four safeguards and comply with specific recognition requirements imposed by Canadian regulators. While work on the safeguards is ongoing, Canadian authorities are satisfied with the direction and pace of the international efforts, including their implementation at global CCPs serving the Canadian market.

SwapClear, in particular, has established:

• Fair and open access: SwapClear’s access criteria ave been revised and are in line with the CPSSI-OSCO Principles and the access safeguard.[note] Five major Canadian banks have direct clearing access to SwapClear, while another is in the process of obtaining membership.
• …

Footnote reads: For example, SwapClear has reduced the minimum net capital requirement for clearing members from $5 billion to $50 million, scaled according to the risk assumed by a member. The requirement that SwapClear members hold a swap book with $1 trillion in notional amount outstanding has also been removed.

Why, the notion of Fair and Open Access just makes my heart go pitty-pat, especially when the fairness and openness of the access will be judged by bureaucrats with no skin in the game. I wonder if SwapClear will allow membership by terrorists, such as Iceland and whoever else the UK happens to be angry with next time?

It was another modestly good day for the Canadian preferred share market, with PerpetualPremiums winning 11bp, FixedResets gaining 2bp and DeemedRetractibles up 10bp. Volatility was low. Volume was above average.

The Federal Reserve bank presidents have written a comment letter on MMF reform:

As support for the Council’s proposed determination and to set the context for identifying the essential elements of reform, we briefly discuss some of the risks associated with MMFs’ activities and practices in Section I. Section II focuses on issues that should be addressed as part of any prime MMF reform proposal – most notably, suggestions for the enhancement of the accuracy of market-based net asset values (“NAVs” and each, a “NAV”), particularly in the context of Alternative 1, the Floating NAV. Section III then presents observations concerning each of the three reform alternatives included in the Proposal. Section IV briefly discusses standby liquidity fees and redemption gates and explains why these mechanisms, as proposed by some industry participants, do not meet reform requirements. Finally, we conclude by concurring with the Council’s view that more than one MMF reform alternative could address the financial stability concerns posed by MMFs, in which case fund complexes could be permitted to choose from among multiple alternatives. For example, a complex could offer both a floating NAV fund and separately a stable NAV fund with a capital buffer (and possibly coupled with a Minimum Balance at Risk (“MBR”)), from which investors could choose.

I don’t like the “Minimum Balance at Risk” proposal (discussed on August 14, 2012), but the capital buffer idea is long overdue. I am not terribly enthusiastic about their idea that a floating NAV obviates the need for a capital buffer: MMFs are banks and should be regulated that way, as I have often argued in the past.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets winning 8bp and DeemedRetractibles up 7bp. Volatility was minimal. Volume was average.