Archive for February, 2007

David Berry Saga : Finally, Some Details!

Monday, February 26th, 2007

Regulation Services has released a Settlement Agreement between itself and Scotia Capital regarding the continuing David Berry Saga:

Specifically, in the Relevant Period, Berry and McQuillen solicited 39 client orders in 16 new issues during the distribution period at the distribution price. In respect of 15 of the solicitations, on or about the first day of trading, Berry and McQuillen conducted off-marketplace trades in the newly listed shares by selling them short from the Inventory Account at the distribution price. In respect of 24 of the solicitations, the trades to clients from the Inventory Account took place before the security was listed, in the “grey market.” Berry and McQuillen covered their short positions in the Inventory Account by buying shares in the marketplace. The majority of the new issues shares involved in the trading traded in the secondary market at prices lower than the distribution price paid by clients and never reached the distribution price before the short positions in the Inventory Account were covered. The profit to the Inventory Account from shorting the shares was $731,959.00, of which Berry received 20% ($142.792.00) and Scotia Capital received 80% ($571,161.00). 

Because the syndication process was by-passed, clients purchased newly listed shares from the secondary market through the Inventory Account. They were therefore not afforded the inherent rights of purchasers pursuant to a prospectus. In addition, the off-marketplace trades were not transparent to other market participants and may have misled other participants as to the true nature of the demand for the shares and affected their subsequent investment decisions.

Specifically, for instance:

Solicitations 4, 5 and 6 – March 2005 – CIBC Series 30 (“CM.PR.H”)

4. On February 24, 2005, Berry and McQuillen solicited an order to purchase from client 1 to buy 100,000 CM.PR.H @ $25.00 per share. 

5. On February 24, 2005, Berry and McQuillen solicited an order to purchase from client 2 to buy 15,000 CM.PR.H @ $25.00 per share. 

6. On February 24, 2005, Berry and McQuillen solicited an order to purchase from client 3 to buy 75,000 CM.PR.H @ $25.00 per share. 

4. On March 10, 2005, client 1 bought 15,000 shares of CM.PR.H @ $25.00 per share in a principal trade with the 08 account.

5. On March 10, 2005, client 2 bought 100,000 shares of CM.PR.H @ $25.00 per share in a principal trade with the 08 account. 

The trades were not printed over the TSX. 


Feb 24, 2005

Press Release.

Berry and McQuillen solicited orders @ $25.00 per share from client 1 to buy 100,000 shares of CM.PR.H, from client 2 to buy 15,000 shares of CM.PR.H and from client 3 to buy 75,000 shares of CM.PR.H.

Client 3 is the same client referred to in trade 3 above. See Berry’s February 24, 2005 statements to the client in trade 3 regarding the source of the shares. 


March 1, 2005

Final prospectus receipted. 

March 7, 2005

A buy ticket for client 2 was prepared without quantity, price or symbol by McQuillen. The trade to client 3 was transacted in the grey market and confirmed to client 3 as transacted on this date.


March 9, 2005

A buy ticket for client 1 for 100,000 CM.PR.H @ $25.00 was time-stamped.

CM.PR.H was listed.


March 10, 2005

The buy ticket for client 1 was stamped a second time by McQuillen.

A buy ticket for client 2 to buy 15,000 CM.PR.H @ $25.00 was time-stamped by McQuillen.

The 08 account sold 100,000 CM.PR.H to client 2 @ $25.00.

The 08 account sold 15,000 CM.PR.H to client 1 @ $25.00.

CM.PR.H began trading on TSX; it opened @ $24.00 and closed @ $24.05 with a high of $24.10.

The trades with the clients 1 and 2 did not appear on the TSX trading data.



The 08 account was short 190,000 CM.PR.H shares as of March 10, 2005 as a result of selling to these 3 clients. 

Throughout the day on March 10, 2005, McQuillen sold short 2,000 CM.PR.H for the 08 account and also bought a total of 249,700, on the TSX, leaving the account with a long position.

The profit to the 08 account on the trading of CM.PR.H was $188,100.

Now, perhaps this just shows my evil nature, but I can’t see what harm was done in this instance that was worth destroying a man’s career. Rules are rules, and it certainly seems from the agreement that RS & Scotia have agreed that they have been broken, but when we look at the Section titled “Effect of the Trading Strategy on Scotia Capital’s Clients and Market Integrity, we see:

In the 15 instances of off-marketplace trades, the syndication process was by-passed and, as a consequence, clients purchased newly listed shares from the secondary market through the 08 account. Because clients did not receive new issue shares from the primary market through the Syndication Desk, pursuant to a prospectus, they were deprived of all the inherent rights afforded to such purchasers.

OK, there’s the right of recission. Big deal. Are there any others? I quite honestly don’t know.

Some clients were aware that they would be receiving shares in the new issue at the distribution price from a transaction with the 08 account which might result in a profit to the 08 account. Some were not.

They got their shares at the price they agreed to pay, which was the same price as the syndication price. There are problems here with the difference between acting as broker and acting as principal, which in some cases can be meaningful … but the harm done in this case seems pretty minor.

The majority of the new issue shares involved in the Trading traded in the secondary market at prices lower than the distribution price paid by the clients and never reached the distribution price before any short positions in the 08 account were subsequently covered. Accordingly, the 08 account profited from its short positions in these shares.

OK. And?

By filling client orders by means of the Trading, Berry was not restricted to the allocation formula or guidelines used by Scotia Capital in the normal syndication process. This increased Berry’s opportunity for profit and generated goodwill from clients.

OK. And?

The overall profit to the 08 account from shorting the shares was $713,959. Berry received 20% of the profit or $142,792. Scotia Capital’s profit was therefore $571,167.

OK. And?

The off-marketplace trades precluded other market participants from seeing those trades printed on a marketplace or organized regulated market and resulted in a lack of transparency to other market participants. Transparency is a cornerstone of the maintenance of market integrity.

Not a good thing. I am not clear on the grey-market rules (I just buy things when I think they’re cheap and sell when I think they’re expensive, but I’m kind of old fashioned that way). It is not clear to me whether a grey-market transaction was possible in such a situation, and what the implications of alternatives are, but I see no real harm arising from this particular case.

Market participants had no knowledge of Berry and McQuillen selling shares in the new issue to clients once the shares opened for trading. They only saw Berry and McQuillen buying the shares, which is consistent with an accumulation strategy. This had the potential to mislead other market participants as to the true nature of the demand for the stock, and affect their subsequent investment decisions.

If there were, in fact, market participants who nodded wisely to each other about ‘Scotia’s accumulation strategy’ and slapped dollars down on the table as a result of this, then the faster those market participants go bankrupt and lose their licenses on grounds of boneheadedness, the better.

David Berry is facing a “Contested Hearing” on this matter (essentially, the same thing as the Scotia Settlement, but re-labelled). It will be most interesting to hear further arguments as to the actual harm caused.

Update : Perhaps somebody with more familiarity with the trading and syndication rules than I can comment on how Berry could have accomodated his clients without falling afoul of the rules … if indeed he did, which has been agreed to by Scotia, but not yet by Berry in his contested hearing.

And, to clarify a bit: my point in not taking umbrage at the conflict is that the clients purchased their shares at the same price everybody else did. There is a definite problem with Berry acting as principal if the client thought he was acting as broker … but on the other hand, Berry was in fact taking on market risk in confirming a sale in the expectations of covering on the market later. It’s not quite the same thing as telling a client that, as broker, you bought shares for him at $25, when in fact you had already bought them as principal at $24.

Another Update: It should be remembered that my background is bonds. Good old fixed income bonds, where it’s understood that everybody deals as principal and if you can make a nickel by bankrupting somebody, your boss will ask you why you didn’t make a dime. There’s one story I particularly remember, from the Euromarket in the late eighties … Merrill Lynch bought more of a new issue than existed and the other dealers, who had gone short in expectations of covering in the open market (just like Berry!) found out they had … er … something of a problem, what with Merrill insisting on either delivery, or a buy-in at a ridiculous price.

Yet another update: I really don’t want anybody to think I’m a scofflaw! I would be much more upset about this situation if, for instance, Berry had sold to his client at $25.10 while I or anybody else was dutifully following the rules and publicly trying to sell at $25.05. But there’s no indication in the settlement that Berry was trading at a price that ignored an extant market … the short was done at $25.00 while every other transaction was done at $25.00 and covered on the open market later on at a lower price. It is possible (and has been agreed by Scotia & RS) that there was some rulebreaking. It’s not clear to me that this is anything other than “Gotcha Regulation” – at least, to the extent that Scotia is taking umbrage at the (alleged) misconduct.

BNA.PR.C Dividend Asserted

Sunday, February 25th, 2007

Well, this dividend has been described as mysterious, but I am in receipt of a communication from a hard-working (on Sunday afternoon!) corporate spokesman to the effect that:

  • The dividend was declared
  • The record date was 2/22
  • The pay date is 3/7
  • The amount is $0.1406
  • She is unsure why Bloomberg & the TSE are not reporting it
  • She will find out whether future dividends will be posted on the website

Dividend information on HIMIPref™ has been changed to reflect this information. Well, that’s that.

February 23, 2007

Friday, February 23rd, 2007
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 4.11% 4.13% 25,807 17.16 1 +0.0797% 1,044.4
Fixed-Floater 4.82% 3.67% 82,206 8.11 7 -0.1619% 1,038.9
Floater 4.47% -21.65% 55,328 0.09 5 +0.2472% 1,050.2
Op. Retract 4.71% 2.20% 74,930 2.06 18 +0.1107% 1,031.6
Split-Share 5.09% 0.69% 243,722 2.79 14 -0.0904% 1,044.7
Interest Bearing 6.45% 4.20% 61,918 2.36 5 -0.0854% 1,041.7
Perpetual-Premium 5.03% 3.83% 215,324 4.99 51 +0.0169% 1,053.8
Perpetual-Discount 4.53% 4.55% 1,093,810 16.31 11 -0.0946% 1,059.9
Major Price Changes
Issue Index Change Notes
AL.PR.E Floater +1.3303%  
Volume Highlights
Issue Index Volume Notes
CM.PR.G PerpetualPremium 55,655 Now with a pre-tax bid-YTW of 4.31% based on a bid of 26.80 and a call either 2011-5-31 at $25.75, or 2012-5-31 @ $25.50. Take your pick, it’s on the bubble and the yields are identical (well … to two decimal places, anyway).
CM.PR.D PerpetualPremium 51,800 Desjardins crossed 50,000 at $27.00. Now with a pre-tax bid-YTW of 3.15% based on a bid of $26.87 and a call 2008-5-30 at $26.00. This is the Commerce issue with the second-highest dividend (after CM.PR.C, which I consider a lock to be called in the summer)
BAM.PR.H OpRet 50,552 Scotia crossed 50,000 at $27.30. Who would buy at this level? The pre-tax bid-YTW is 2.54% based on a bid of $27.25 and a call 2008-10-30 at $25.75 … maybe, just maybe, it will make it to its soft maturity 2012-3-30 at $25.00, to have yielded 3.99%, but even then, the equivalency factor of 1.4 translates to a 5.60% interest-equivalent … OK, but is it really worth the risk? I’ve seen some dealer commentary to the effect that, sure, opRets are too expensive for individuals, but they’re fine for corporations that don’t pay tax on the dividends. Well, perhaps.
SLF.PR.E PerpetualDiscount 46,148 Recent new issue. Now with a pre-tax bid-YTW of 4.51% based on a bid of $24.85 and a limitMaturity.
BMO.PR.J PerpetualDiscount 43,280 Recent new issue. Now with a pre-tax bid-YTW of 4.52% based on a bid of $25.11 and either a call 2016-3-26 at $25.00, or a limitMaturity, take your pick.

There were eleven other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

BNA.PR.C Dividend Status Still Mysterious

Friday, February 23rd, 2007

I have not yet been able to determine the status of the “current” dividend.

As I intended yesterday, I attempted to make contact with the company today (via both eMail and telephone), but was unsuccessful.

The TSE and Bloomberg are both still not showing any trace of the dividend. Checking the TSE data, by the way, costs me a buck a throw, so I hope you guys are grateful!

I will continue checking.

BNA.PR.C had a busy day today, perhaps a little inventory clean-out, perhaps just happenstance. Last night’s close was 24.91-95, but it traded as low as $24.68. Not many changed hands at that price, but the market was thin! In the afternoon National sold two lots of 10,000 shares apiece to RBC, the first one at $24.90, the second at $24.80, which knocked the closing quote down to $24.68-85.

So the bid’s off $0.23 on the day! It’s certainly behaving as if it has just gone ex-dividend, anyway!

HIMIPref™ Indices : February 1998

Friday, February 23rd, 2007

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

HIMI Index Values 1998-02-27
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,588.4 0 0 0 0 0 0
FixedFloater 1,537.4 9 2.00 4.53% 15.7 312M 5.10%
Floater 1,495.7 5 1.80 4.73% 15.4 169M 5.13%
OpRet 1,318.9 31 1.22 4.45% 4.1 89M 6.01%
SplitShare 1,350.4 3 1.66 5.13% 7.3 202M 5.42%
Interest-Bearing 1,318.9 0 0 0 0 0 0
Perpetual-Premium 1,239.1 5 1.00 3.90% 1.6 120M 7.17%
Perpetual-Discount 1,197.9 1 1.00 5.29% 14.8 848M 5.33%

Index Constitution, 1998-02-27, Pre-rebalancing

Index Constitution, 1998-02-27, Post-rebalancing

GWO.PR.E / GWO.PR.X : Issuer Bid Update

Friday, February 23rd, 2007

With the release of the Great-West Lifeco full year financials we can have a look at the progress of the issuer bid on their retractible preferreds – a bid which, I repeat ad nauseum, casts considerable doubt as to whether these issues will survive past their first redemption date.

GWO Retractible Shares Outstanding
Issue 4Q05 1Q06 2Q06 3Q06 4Q06
GWO.PR.E 7,978,900 7,978,900 7,978,900 7,978,900 7,978,900
GWO.PR.X 23,499,915 23,499,915 23,022,915 22,422,215 22,282,215

…which allows us to calculate the changes…

GWO Changes in Retractible Shares Outstanding
Issue 4Q05 1Q06 2Q06 3Q06 4Q06
GWO.PR.E N/A 0 0 0 0
GWO.PR.X N/A 0 -477,000 -600,700 -140,000

We can also look at some graphs of GWO.PR.X data over the past year:

These shares pay $1.20 p.a.; if we assume that the average “accrued dividend” was $0.15, then the average price Great-West actually paid ($27.39) can be reduced to $27.24 flat-bid-price equivalent – which I find surprisingly high, given that the FBP was well below this level from about May 15 to August 31, as shown on the FBP graph. This was the same period in which average volume declined from its high for the year of about 8,000 shares per day to about 4,000.

All that aside, it seems that GWO has shown a clear intention to get these shares off its books at the first opportunity – the only surprise is that they are willing to buy them at such a paltry YTW. Why not stick the money in something else and save it for the (extremely big!) redemption at $26.00?  

Update : I forgot the links to aid navigation! The issuer bid was last discussed January 25; it remains to be seen how the cash required for the Putnam Purchase will affect the buyback.

HIMIPref™ Programming Change : Error Code #4644

Thursday, February 22nd, 2007

In response to a complaint from an extremely annoying person (and you know who you are!), reporting has been enhanced for Error Code #4644.

This error arises when the user attempts to run a trade report for a portfolio that should include some actual value (which is to say, any portfolio that is not using the issueMethod with desiredSwapIssues set to zero; such a portfolio should have zero value, as its purpose in life is to form a grid of all trading possibilities in the HIMIPref™ universe, with no regard for other holdings).

The error message connected with code #4644 was, admittedly, a little obscure. The message has now been upgraded to specify the accountName, accountNumber and other information similar to that provided on the portfolioReportBox. It is anticipated that this detail will make it more clear to the user what is to be done; the new error code for this condition is #5419.

The error most often arises when the portfolio has been set up improperly, or if the holdings file has been inadverdantly wiped. The portfolio settings may be edited via the portfolioListReport, or the holdings file may be mainMenu|File|Holdings File|Synchronize With Transactions, which (alas) is not yet documented in the glossary or the User Manual. *sigh*

This programming change is not considered significant enough to warrant the upload of a new HIMIPref™ version; it will be available when the next version is uploaded.

DBRS Confirms TCA.PR.X / TCA.PR.Y at Pfd-2(low)

Thursday, February 22nd, 2007

DBRS today confirmed that TransCanada Pipeline’s preferred issues will remain rated Pfd-2(low), as foreshadowed when equity financing was announced.

The rating confirmations reflect the realization of TCPL’s intention as stated at the time of the proposal to finance the acquisitions with substantial amount of equity to maintain its current credit standing. The recent subscription receipt issuance of C$1.5 billion will result in TCPL’s key credit metrics being maintained at similar levels as at December 31, 2006. DBRS estimates consolidated debt-to-capital ratio of approximately 63% to 64% and cash flow debt ratio of 0.17 times on a pro-forma basis (DBRS adjusted). These credit ratios are based on TC Pipe being consolidated into TCPL as in the prior year. The equity issuance removes the previous concern of potential weakening of TCPL’s financial profile during the interim debt financing of the acquisitions at closing.

February 22, 2007

Thursday, February 22nd, 2007
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 4.11% 4.13% 25,821 17.17 1 -0.0398% 1,043.6
Fixed-Floater 4.82% 3.75% 83,765 6.25 7 -0.1339% 1,040.6
Floater 4.48% -19.51% 55,890 3.36 5 -0.0621% 1,047.6
Op. Retract 4.71% 2.21% 75,053 2.06 18 -0.0521% 1,030.5
Split-Share 5.09% 0.56% 247,360 2.68 14 +0.0424% 1,045.6
Interest Bearing 6.45% 3.27% 61,399 2.36 5 +0.2939% 1,042.6
Perpetual-Premium 5.03% 3.89% 217,077 5.02 51 -0.0622% 1,053.6
Perpetual-Discount 4.53% 4.55% 1,110,515 16.32 11 -0.0140% 1,060.9
Major Price Changes
Issue Index Change Notes
CM.PR.P PerpetualPremium -1.1735% Now with a pre-tax bid-YTW of 4.07% based on a bid of $26.95 and a call 2012-11-28 at $25.00.
Volume Highlights
Issue Index Volume Notes
MFC.PR.C PerpetualDiscount 80,725 Scotia crossed 50,000 at 24.90. This issue went ex-dividend today. Now with a pre-tax bid-YTW of 4.52% based on a bid of $24.85 and a limitMaturity.
GWO.PR.F PerpetualPremium 53,285 TD crossed 47,800 at $28.10. This is the highest priced issue in the PerpetualPremium index and helps to justify a prejudice against premia by sporting a pre-tax bid-YTW of 1.84% based on a bid of $27.87 and a call 2008-10-30 at $26.00. Obviously, there are people who are prepared to slap their money down and bet on a call 2012-10-30 at $25, which will yield 3.84% (pre-tax) … but I’m not one of them! At an annual dividend of $1.475, there’s just too much chance GWO will refinance … but as I’ve said before, I’d be a lot happier if I knew exactly why CL.PR.B still exists!
CM.PR.J PerpetualDiscount 100,455 Recent new issue. Now with a pre-tax bid-YTW of 4.53% based on a bid of $24.91 and a limitMaturity.
BAM.PR.K Floater 40,333 Scotia crossed 40,000 at $24.95.
GWO.PR.X Retractible 39,759 Desjardins crossed 13,000 at $27.55, Scotia crossed 25,000 at $27.57. This is one of the issues subject to the issuer bid, which may (MAY!) have been de-railed by Great-West’s Putnam Purchase. Now with a pre-tax bid-YTW of 2.59% based on a bid of $27.55 and a call 2009-10-30 at $26.00 … buyers are hoping for a softMaturity 2013-09-29 at $25.00, yielding 3.21%. The latter figure is the interest-equivalent for Ontario fat cats of a whopping 4.49%. I note that Great-West LIFE (which is GWL, the insurance company, not GWO, the parent, so this is not a precise comparison) has some 5.995% 12/31/12 Tier 1 paper outstanding, indicated at 49bp over Canadas, or about 4.53%, so I fail to see any great attraction in this (preferred) issue, which is one step further away from the actual cash coming in the door.

There were thirteen other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

New Issue : Dundee Wealth Management, Pfd-3, 4.75%

Thursday, February 22nd, 2007

Dundee Wealth Management has announced (via CCN Matthews) that:

it has entered into a “bought deal” agreement to sell to a syndicate of underwriters led by Scotia Capital Inc. and Dundee Securities Corporation, 6,000,000 4.75% Cumulative Redeemable First Preference Shares, Series 1 (the “Series 1 Shares”) at a price of $25.00 per Series 1 Share for gross proceeds to Dundee Wealth of $150 million. The underwriters also have an over-allotment option, exercisable at any time prior to 30 days after the closing date, to acquire an additional 900,000 Series 1 Shares at the issue price of $25.00 per Series 1 Share. The offering is expected to close on or about March 13, 2007.

DBRS has rated this issue Pfd-3.

I am advised that this issue is a 10-year retractible – but I have not yet been advised in writing! This issue is of sufficient size to be added to the HIMIPref™ database. I will provide more details and analysis when it becomes available.

Update & Bump : I have received a term sheet.

Annual dividends are $1.1875 per share per annum. The first dividend is intended to be payable June 30, 2007 and be $0.35625, based on the anticipated closing date of March 13, 2007.

The redemption schedule is:

If called during the 12 months commencing March 13, Redemption Price
2007 27.25
2008 27.00
2009 26.75
2010 26.50
2011 26.25
2012 26.00
2013 25.75
2014 25.50
2015 25.25
Or any time after March 13, 2016 $25.00

Any redemption before March 13, 2012 is limited to circumstances where the Series 1 Shares are entitled to vote separately as a class or series by law.

The shares are retractible for cash at the option of the holder on and after March 13, 2017 at $25.00.

Another Update & Bump!

I have prepared the following table with some comparatives:

Dundee Wealth New Issue & Comparitives
Price due to base-rate 24.63  26.51  25.17
Price due to short-term -0.55  -0.57  -0.53
Price due to long-term 1.71  1.77  1.64
Price to to Cumulative Dividends 0.00  0.00  0.00
Price due to SplitShareCorp 0.00  0.00  0.00
Price due to Retractibility 1.26  1.40  1.16
Price due to Liquidity 0.77  -0.11  0.03
Price due to Floating Rate 0.00  0.00  0.00
Price due to Credit Spread (2) 0.00  -0.33  0.00
Price due to Credit Spread (3) -0.94  0.00  -0.86
Price due to Credit Spread (High) 0.00  0.00  0.00
Price due to Credit Spread (Low) 0.00  -0.29  -0.24
Price due to error 0.02  0.04  0.07
Curve Price (Taxable Curve)  26.90  28.42  26.44
Quote 2/22  25.00
 27.82-86  25.55-70
YTW (after tax)  3.77%  3.34%  3.84%
YTW Date  2017-3-12  2014-4-30  2016-6-29
Credit Rating (DBRS)  Pfd-3  Pfd-2(low)  Pfd-3(low)
YTW (Pre-Tax) 4.75% 4.20% 4.83%
YTW Modified Duration (Pre-Tax) 7.98 5.98 7.40
YTW Pseudo-Convexity (Pre-Tax) 0.2 -11.9 0.2

Note that the BAM.PR.J has a soft-maturity 2018-3-30 at $25.00 to yield 3.35% – it’s right on the bubble, which is why the pseudoConvexityWorst is both large and negative.

This new issue looks attractive when valued in strict accordance to the yield curve. But as I warned in my post about the YPG New Issue:

As credit quality decreases, so does the quality of HIMIPref™’s yield curve analysis. I do not recommend that these prefs be considered for more than 5% of a diversified preferred share portfolio.