PrefBlog

Month end, and a funny day in the markets! American equities were hit, with a few companies exposed to sub-prime taking the brunt; Canadian equities stayed even, thanks to a CAD 5.8-billion takeover bid for Western Oil Sands by Marathon Oil.  

Treasuries were strong, while Canadas were up a tad, further widening the rate gap … and I do mean widening! For purposes of US/Canada spreads, the vocabulary was established long, long ago, and “widening” means “Canada did worse”. Always.

The differing behaviour is due to – you guessed it! – sub-prime, other junk and hedge funds. Bear Stearns suspended redemptions in another fund, while Macquarie Fortress announced a monthly return of -25% on its high-yield (not sub-prime!) funds.  Three French funds are toast, due to the classic:

“Like many actors, we have tried to revitalize the performance of our funds by investing in CDOs,” Arnaud Ploix, a spokesman for Paris-based Oddo, said in an interview today. “Like others, we noticed recent problems with short-term liquidity and were caught out by the subprime dilemma.”

Still … carnage means carrion, so there are some happy people out there (besides Deutsche Bank!). It’s probably a good time to short hedge funds! But you know things are getting interesting when three super-major dealers’ bonds trade as junk!

But take a break for some perspective:

High-yield, high-risk bonds lost 3.1 percent in July, their worst monthly performance since 2002, as concerns about an onslaught of debt to finance leveraged buyouts drove down prices.

Returning to our more normal and much more interesting apocalyptic screaming, there are musings that the USD 37.2-billion takeover of TXU is at risk, with the suddenly nervous financiers tempted to pay a billion bucks to get out of the deal. Observant readers will not that both amounts are oddly reminiscent of the BCE / Teachers’ agreement, but the musings are rebutted on another news service. Trial balloon? Chatter from clerks? Who knows? There would be a big reputational hit to take.

Meanwhile, back in the real economy (remember that?) US Inflation news was reasonably encouraging. There is no word yet on how third-tranche double-knockout inflation swaptions reacted to this story.

It looks like Murdoch will buy Dow Jones. It is not yet clear how much he will bid for Prefblog. Yo! Murdoch! Call me!

There was a dead-cat bounce for both American and Canadian equities today, with a concommittant decline in Treasuries and Canadas (although you’ll just have to take my word for it, since I can’t find a source. Doesn’t anybody out there have a blog?)

Another hedge fund went bust and a company that’s in the business of giving mortgages to sub-prime clients discovered they didn’t use enough “sub-“s when describing their clientele. You could almost hear the cheering from Deutsche Bank, which is short sub-primes, but corporate credits improved overall anyway – another dead-cat bounce.

Meanwhile, there’s some fear that over-regulation & lack of innovation will cost the US debt markets some underwriting, so we may see a hum-dinger when Congress regulates sub-prime … in the spirit of competitiveness, of course. But why would Congress listen to some Fed researchers?

The Eurobond market has traditionally been the domain of top-rated large banks and other financial issuers; together, they accounted for roughly 75 percent of Eurobond volume from 1995 to 2006. It is therefore not surprising that the market would serve as home to other highly rated issues such as structured securities. The market’s self-regulated environment offers another important advantage for structured products, because this debt is often sponsored by hedge funds, whose trading strategies are best suited to this type of environment.

The preferred market had a very quiet day – I don’t think any blocks were traded at all. All eyes are on equities and junk! This is the kind of market where strange things can happen and liquidity has an enormous value … so get your limit orders in now!

There were TWO other $25-equivalent index-included issues trading over 10,000 shares today.

The week ended with another thumping for US Equities and Canadian stocks went along for the ride, notably

BCE Inc., target of the largest buyout, retreated after Citi Investment Research cut its recommendation, citing growing risks to its financing.

One analyst puts the odds of a Telus bid at 25% or less, but the long term track record of this analyst was not disclosed.

Some say that a turning point in capital markets has definitely been reached but there is some doubt that Wall Street’s problems will reach Main Street. The US economy has, apparently, been growing at a fair clip but the nattering nabobs of negativism have their own interpretation of the underlying trends. All the uncertainty meant that Treasuries did superbly, while Canadas followed … mostly. Even New York City, almost bankrupt in 1975, was able to get in on the action and scoop up some financing that ain’t going into corporates no more.  

And … I must apologize … the tables and commentary that have something of direct relevance to actual preferred shares will have to wait. HIMIPref™ has been updated, but I have dinner scheduled with a dear friend, whom I intend to regale with stories about how I don’t own any junk bonds.

I will update everything tomorrow!

Update, 2007-07-29: OK, maybe it wasn’t the very next day. But it was a most enjoyable dinner! In the meantime, the National Post has reported that:

“We have our financing,” Claude Lamoureax, president and CEO of Teachers’ said yesterday. “Clearly right now, the spreads have widened but that’s why you pay the bank huge fees to take the risks.”
…
As Mr. Lamoureax said, in leveraged buyouts the banks “take the risks” and right now the investment banks are temporarily swallowing the billions of dollars worth of debt deals for Chrysler and Alliance.

As for whether Teachers’ bankers should be worried, Mr. Lamoureux said there are no worries with its bankers or anyone else.

“Right now, we have our financing in place. No trouble,” he said.

Either he refused to say just exactly how the financing was in place, or the reporter didn’t ask. The story doesn’t go any further than the above bland assurance.

I’ve thought the issue in the context of what a massive break-fee-loss would mean to Teachers, and come to the conclusion that I don’t know enough about the issue. It would seem to me reasonable that there might be provisions regarding financing in the consortium agreement, to the effect that, if the deal fails on financing, the loss would be borne by Teachers financial partners, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. After all, they’re the financial muscle for the deal! It may be that such a provision is why Mr. Lamoureux is so sanguine … but we will just have to sit back and wait and see! In the meantime, I highly doubt that I’ll be throwing chips down on that table!

There were nine other $25-equivalent index-included issues trading over 10,000 shares today.

The day ended, at long last, with not just a sound thumping for US Equities, but just about everybody else as well, including Canada.

Liquidity in the US Corporate markets was terrible (worse than yesterday), with marked spread-widening after yet another blown-up hedge fund, but there is some steepening developing with expectations the Fed will cut rates this year. The housing numbers are getting blamed for this in some quarters. Me, I’m not sure. There’s never just one reason. Weak (non-housing) economic news and Junk Bond Fatigue have also been blamed.

Still, at least Treasuries and Canadas had a good day, although the CAD got whacked.

More mundanely, the quarterly results from Loblaws seem to argue against any imminent reversal of the Weston downgrade. And I couldn’t resist checking the definitive BCE / Teachers’ Agreement:

6.4(9): The Purchaser acknowledges and agrees that its obtaining financing is not a condition to any of its obligations hereunder, regardless of the reasons why financing is not obtained or whether such reasons are within or beyond the control of the Purchaser. For the avoidance of doubt, if any financing referred to in this Section 6.4 is not obtained, the Purchaser will continue to be obligated to consummate the Arrangement, subject to and on the terms contemplated by this Agreement.

The PerpetualDiscount index had a nine-day winning streak snapped – but not by much, as the preferred market displayed its customary insouciance towards silly old market news. BCE issues, particularly, did quite well. The Ratchet Rate Index, comprised entirely of Bell Ratchets, kept its streak alive with ten-straight. The volume certainly wasn’t heavy today, but it wasn’t too much on the light side.

There were fifteen other $25-equivalent index-included issues trading over 10,000 shares today.