Archive for October, 2008

October 31, 2008

Friday, October 31st, 2008

The Apocalyptionists will be upset! Not only did DTCC close out Lehman’s CDS book without loss:

it successfully closed out over $500 billion in market participants’ exposure from the Lehman Brothers, Inc. (Lehman) bankruptcy which occurred the week of Sept. 22. This was the largest close-out in DTCC’s history. DTCC reports it does not expect there to be any impact to its retained earnings or to market participants’ clearing fund deposits as a result of closing out these pending trade obligations.

“The liquidation of Lehman was complex, involved multiple asset classes, and required a methodical approach to mitigate potential losses from outstanding trading obligations,” said Donald F. Donahue, DTCC chairman and CEO. “Without question, our ability to manage risk and see exposure from a central vantage point was instrumental in helping us ensure that market risk – and systemic risk – was avoided.

… but settlement of CDS obligations on Lehman itself proceeded seamlessly …

On Oct. 21, DTCC also completed, without incident, the automated credit event processing of Lehman Brothers Holdings Inc. (LBHI) involving $72 billion of credit default swaps. DTCC calculated and bilaterally netted all amounts due on credit default swaps written on LBHI. This resulted in approximately US$5.2 billion owed from net sellers of protection on LBHI to net buyers of protection. The portion of this net funds settlement allocable to trades between major dealers was handled through the normal settlement procedures of CLS Bank International, DTCC’s settlement partner for the Warehouse and the world’s central settlement bank for foreign exchange.

DTCC also announced:

it will begin to publish aggregate market data from its Trade Information Warehouse (Warehouse), the worldwide central trade registry it maintains on credit derivatives. Starting Tuesday, November 4 and continuing weekly, DTCC will post on its website www.dtcc.com/derivserv the outstanding gross and net notional values (“stock” values) of credit default swap (CDS) contracts registered in the Warehouse for the top 1,000 underlying single-name reference entities and all indices, as well as certain aggregates of this data on a gross notional basis only. The data is intended to address market concerns about transparency.

According to their 2007 Annual Report:

While the total outstanding of credit default swaps (CDS) has grown to $45.5 trillion in 2007 from $3.7 trillion in 2003, our Deriv/SERV platform has been credited with significantly reducing the risk previously associated with unconfirmed trades. Today, over 90% of CDS trades are matched and confirmed through Deriv/SERV, compared with 15% late in 2003.

I have added the warehouse information address to the links, under “US Fixed Income Data”.

The Treasury guarantee of bank debt – reported on October 27 as seeming cheap – is mired in confusion:

Almost three weeks after the government threw its guarantee behind new bank bonds, no U.S. finance company has braved the market.

While Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. were the three largest U.S. banks issuing debt last year, they haven’t sold dollar-denominated corporate bonds since August.

Banks are hamstrung because they’re waiting for the “fine print,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. Because they don’t know if the debt will be guaranteed under all circumstances, bonds are difficult to price, he said.

Mind you, the Commercial Paper programme – that is busily grossing up the Fed’s balance sheet – is working great!

Interest rates on U.S. commercial paper fell to about the lowest in four years after the Federal Reserve said it absorbed more than 9 percent of the market.

Interest rates on the highest-ranked 30-day commercial paper dropped 39 basis points to 2.02 percent, about the lowest in four years, according to yields offered by companies and compiled by Bloomberg. Yields on overnight and seven-day paper fell to the lowest levels in at least 13 years, Bloomberg data show.

Naked Capitalism reprints a Financial Times article regarding the effect of changes in bankruptcy law on the recent investment bank collapses:

The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors.

Lawyers said under the old rules, creditors of companies facing financial difficulties were wary of settling trades or seeking extra collateral because they knew such demands could precipitate a bankruptcy filing and potentially freeze their claims.

However, when the financial health of Bear, Lehman and AIG took a sharp turn for the worse this year, their trading counterparties – mainly hedge funds and other banks – were not deterred from seeking to settle their trades or forcing the three companies to put up more collateral.

Such pressure exacerbated the liquidity squeeze that ultimately forced the three companies to hoist the white flag. Bear was sold to JPMorgan in a cut-price deal in March, while Lehman filed for bankruptcy last month and AIG was rescued by a $120bn government loan.

Calculated Risk provides a thoroughly fascinating graph (via Dealbreaker and Abnormal Returns) [click for big]:

And, just to make Hallowe’en a little scarier, the FDIC closed down another bank:

As of October 17, 2008, Freedom Bank had total assets of $287 million and total deposits of $254 million. Fifth Third agreed to assume all the deposits for a premium of 1.16 percent. In addition to assuming the failed bank’s deposits, Fifth Third will purchase approximately $36 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund will be between $80 million and $104 million. Fifth Third’s acquisition of all deposits was the “least costly” resolution for the FDIC’s Deposit Insurance Fund compared to alternatives. The last failure in Florida was First Priority Bank, Bradenton, which was closed on August 1, 2008. Freedom Bank is the seventeenth FDIC-insured institution to be closed this year.

A small bank, but look at the proportions! They had $287-million in assets, and Fifth Third is buying $36-million of them. That leaves the FDIC with $251-million and they’re expecting a loss of between $80-million and $100-million. Now that’s a whacking!

And that’s the end of another month – and it was a pretty horrible one for prefs, believe me! I’ll be doing all the usual posts shortly, but a brief examination is sufficient to conclude that CPD lost 7.21% on the month … a huge number for such a thoroughly diversified fund. MAPF, on the other hand, traded like gangbusters – an absolutely massive trading month – and, while still having lost money, will have out-performed CPD substantially.

The key to portfolio management is to arrange your portfolio into various asset classes that will meet your long terms goals without subjecting the portfolio as a whole to extreme short term risk. Then – and this is where I come in – you attempt to outperform within each asset class.

What a day on the market! Hefty volume, some very chunky crosses and a sharp move upwards! If only there had been more days like that this month!

PerpetualDiscounts were up 1.6586% to yield 6.90% (pre-tax price-weighted mean YTW). At the standard 1.4x equivalency factor, this is equivalent to 9.66% interest; long corporates ar at 7.5%, so the pre-tax interest-equivalent spread is 216bp … starting to narrow, but the bonds are wide!

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.48% 5.58% 71,924 14.88 6 +0.5903% 954.3
Floater 6.77% 6.87% 47,375 12.68 2 +4.9676% 511.4
Op. Retract 5.32% 6.26% 138,218 4.04 14 -0.0610% 994.5
Split-Share 6.31% 10.59% 58,596 3.95 12 +1.5057% 932.8
Interest Bearing 7.84% 13.20% 62,801 3.31 3 +1.0131% 903.1
Perpetual-Premium 7.26% 7.38% 55,115 12.05 1 -2.2273% 854.4
Perpetual-Discount 6.83% 6.90% 181,966 12.72 70 +1.6586% 796.4
Fixed-Reset 5.38% 5.09% 744,899 15.18 10 -0.3484% 1,071.9
Major Price Changes
Issue Index Change Notes
TD.PR.Y FixedReset -5.1667%  
RY.PR.H PerpetualDiscount -3.4576% Now with a pre-tax bid-YTW of 6.59% based on a bid of 21.50 and a limitMaturity. Closing quote 21.50-70, 26×7. Day’s range 21.70-22.85.
RY.PR.G PerpetualDiscount +3.0000% Now with a pre-tax bid-YTW of 6.45% based on a bid of 17.51 and a limitMaturity. Closing Quote 17.51-74, 1×9. Day’s range of 16.91-54.
GWO.PR.G PerpetualDiscount +3.0685% Now with a pre-tax bid-YTW of 7.02% based on a bid of 18.81 and a limitMaturity. Closing Quote 18.81-99, 1×8. Day’s range of 18.39-99.
PWF.PR.G PerpetualDiscount +3.0928% Now with a pre-tax bid-YTW of 6.45% based on a bid of 23.00 and a limitMaturity. Closing Quote 23.00-50, 3×2. Day’s range of 22.30-23.49.
BMO.PR.J PerpetualDiscount +3.1153% Now with a pre-tax bid-YTW of 6.82% based on a bid of 16.55 and a limitMaturity. Closing Quote 16.55-73, 25×18. Day’s range of 16.30-74.
LFE.PR.A SplitShare +3.2917% Asset coverage of 1.8+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 7.92% based on a bid of 9.10 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 9.10-79, 14×4. Day’s range of 8.80-10.
PWF.PR.E PerpetualDiscount +3.4306% Now with a pre-tax bid-YTW of 6.86% based on a bid of 20.20 and a limitMaturity. Closing Quote 20.20-50, 2×1. Day’s range of 19.50-20.50.
CM.PR.G PerpetualDiscount +3.5039% Now with a pre-tax bid-YTW of 7.32% based on a bid of 18.61 and a limitMaturity. Closing Quote 18.61-73, 3×9. Day’s range of 17.96-40.
FIG.PR.A InterestBearing +3.5806% Asset coverage of 1.3+:1 based on Capital Unit NAV of 4.88 and 0.71 Capital Units per Preferred. Now with a pre-tax bid-YTW of 10.75% based on a bid of 8.10 and a hardMaturity 2014-12-31 at 10.00. Closing quote of 8.10-23, 1×2. Day’s range of 8.23-24.
ENB.PR.A PerpetualDiscount +3.6364% Now with a pre-tax bid-YTW of 6.13% based on a bid of 22.80 and a limitMaturity. Closing Quote 22.80-22, 1X5. Day’s range of 22.24-00.
BAM.PR.H OpRet +3.8095% Now with a pre-tax bid-YTW of 10.57% based on a bid of 21.80 and a softMaturity 2012-3-30 at 25.00. Compare with BAM.PR.I (10.86% to 2013-12-30), BAM.PR.J (9.58% to 2018-3-30) and BAM.PR.O (10.75% to 2013-6-30). Closing quote of 21.80-00, 6×5. Day’s range of 21.00-50.
RY.PR.D PerpetualDiscount +4.0428% Now with a pre-tax bid-YTW of 6.45% based on a bid of 17.50 and a limitMaturity. Closing Quote 17.50-74, 7×5. Day’s range of 17.00-51.
BCE.PR.C FixFloat +4.3929%  
RY.PR.E PerpetualDiscount +4.4118% Now with a pre-tax bid-YTW of 6.36% based on a bid of 17.75 and a limitMaturity. Closing Quote 17.75-92, 2×9. Day’s range of 16.91-90.
SLF.PR.C PerpetualDiscount +5.6063% Now with a pre-tax bid-YTW of 6.97% based on a bid of 16.20 and a limitMaturity. Closing Quote 16.20-39, 5×7. Day’s range of 15.50-38.
PWF.PR.F PerpetualDiscount +6.2599% Now with a pre-tax bid-YTW of 6.55% based on a bid of 16.20 and a limitMaturity. Closing Quote 20.20-99, 5×9. Day’s range of 19.50-90.
BNA.PR.A SplitShare +8.0000% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.0+:1 based on BAM.A at 21.10 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 15.42% based on a bid of 21.60 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B (10.94% to 2016-3-25) and BNA.PR.C (13.77% to 2019-1-10). Closing quote 21.60-22.89. Day’s range 20.10-00.
BAM.PR.B Floater +9.1510%  
POW.PR.B PerpetualDiscount +10.5263% Now with a pre-tax bid-YTW of 6.57% based on a bid of 20.58 and a limitMaturity. Closing Quote 20.58-91, 1×1. Day’s range of 18.55-20.95 (!).
Volume Highlights
Issue Index Volume Notes
WN.PR.A Scraps (would be PerpetualDiscount but there are credit concerns) 390,142 TD crossed 23,700 at 17.75, then Scotia crossed 350,800 at 17.89. Now with a pre-tax bid-YTW of 8.39% based on a bid of 17.66 and a limitMaturity
SLF.PR.B PerpetualDiscount 375,500 Nesbitt crossed 262,500 at 16.50, anonymous bought 12,400 from Nesbitt at 16.70, then Nesbitt crossed 75,000 at 16.50. Now with a pre-tax bid-YTW of 7.17% based on a bid of 17.00 and a limitMaturity
YPG.PR.B Scraps (Would be OpRet but there are credit concerns) 375,423 Scotia crossed 359,200 at 13.64. Now with a pre-tax bid-YTW of 14.16% based on a bid of 14.00 and a softMaturity 2017-6-29 at 25.00.
CL.PR.B PerpetualPremium (until midnight!) 193,220 Scotia crossed 176,200 at 21.98. Now with a pre-tax bid-YTW of 7.38% based on a bid of 21.51 and a limitMaturity.
PWF.PR.G PerpetualDiscount 192,500 Scotia crossed 189,100 at 23.49. Now with a pre-tax bid-YTW of 6.45% based on a bid of 23.00 and a limitMaturity.
W.PR.J PerpetualDiscount 175,167 Scotia crossed 162,300 at 17.24. Now with a pre-tax bid-YTW of 8.30% based on a bid of 17.10 and a limitMaturity.
TD.PR.R PerpetualDiscount 168,455 Scotia crossed 158,500 at 21.99. Now with a pre-tax bid-YTW of 6.44% based on a bid of 21.90 and a limitMaturity.
BAM.PR.N PerpetualDiscount 164,013 Scotia crossed 133,700 at 12.94. Now with a pre-tax bid-YTW of 9.50% based on a bid of 12.75 and a limitMaturity.
IAG.PR.A PerpetualDiscount 146,300 Scotia crossed 145,200 at 16.73. Now with a pre-tax bid-YTW of 7.07% based on a bid of 16.51 and a limitMaturity.
BPP.PR.M Scraps (Would be Floater but there are credit concerns) 137,399 Trades by appointment … but today somebody made an appointment! Scotia crossed 137,300 at 16.99.
EPP.PR.A Scraps (would be PerpetualDiscount but there are credit concerns) 127,641 Scotia crossed 123,000 at 14.99. Now with a pre-tax bid-YTW of 8.42% based on a bid of 14.66 and a limitMaturity.
POW.PR.C PerpetualDiscount 126,300 Scotia crossed 124,700 at 20.48. Now with a pre-tax bid-YTW of 7.17% based on a bid of 20.48 and a limitMaturity.
DC.PR.A Scraps (would be OpRet but there are credit concerns) 124,425 Scotia crossed 123,100 at 14.98. Now with a pre-tax bid-YTW of 15.05% based on a bid of 14.01 and a softMaturity 2016-6-29 at 25.00.
BAM.PR.K Floater 117,550 Scotia crossed 116,800 at 11.88.
GWO.PR.H PerpetualDiscount 117,535 Scotia crossed 95,100 at 17.68. Now with a pre-tax bid-YTW of 7.24% based on a bid of 17.01 and a limitMaturity.
CM.PR.E PerpetualDiscount 104,725 Scotia crossed 100,700 at 19.68. Now with a pre-tax bid-YTW of 7.28% based on a bid of 19.41 and a limitMaturity.
DW.PR.A Scraps (would be OpRet but there are credit concerns) 103,360 Scotia crossed 98,500 at 20.49. Now with a pre-tax bid-YTW of 8.02% based on a bid of 20.26 and a limitMaturity.
BAM.PR.B Floater 102,306 Scotia crossed 88,100 at 10.04.

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

Big Developments for CDS Market

Friday, October 31st, 2008

The Federal Reserve Bank of New York has released a package of material with a statement that it “welcomes further industry commitments on Over-the-Counter Derivatives”:

The Federal Reserve Bank of New York welcomes the letter released today by major market participants to further strengthen the operational infrastructure for over-the-counter (OTC) derivatives. Consistent with the objectives of the March 2008 Policy Statement of the President’s Working Group on Financial Market Developments, market participants outline in this letter concrete plans for building a stronger integrated operational infrastructure capable of supporting the important and rapidly growing OTC derivatives market.

The commitments presented in this letter will help address weaknesses in the OTC derivatives market. Although efforts by the Federal Reserve and other U.S. and European regulators over the past three years have led market participants to significantly improve many operational elements of the OTC derivatives infrastructure, financial market events have demonstrated that broader action is warranted to address additional market design elements.

They state that they have the following central priorities:

  • Institute a Central Counterparty (CCP) for Credit Default Swaps (CDS).
  • Reduce Levels of Outstanding Trades via Portfolio Compression
  • Enhance Market Transparency.
  • Continue Operational Improvements.

Three documents were released together with the press release.

Participants October 31 Letter. This doesn’t look like just another set of soothing words. Not only is the Fed endorsing it, but the signatories have, shall we say, a certain amount of clout:

Bank of America,
N.A. HSBC Group
Barclays Capital
JP Morgan Chase
BNP Paribas
Merrill Lynch & Co.
Citigroup
Morgan Stanley
Credit Suisse
The Royal Bank of Scotland Group
Deutsche Bank AG
Société Générale
Dresdner Kleinwort
UBS AG
Goldman, Sachs & Co.
Wachovia Bank, N.A.
International Swaps and Derivatives Association, Inc. (ISDA)
Managed Funds Association (MFA)
Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA)

After a certain amount of self-congratulatory bumpf, the letter states seven priorities for the near future:

• Global use of central counterparty processing and clearing to significantly reduce counterparty credit risk and outstanding net notional positions.
• Continued elimination of economically redundant trades through trade compression.
• Electronic processing of eligible trades to enhance T+0 confirmation issuance and execution.
• Elimination of material confirmation backlogs.
• Risk mitigation for paper trades.
• Streamlined trade life cycle management to process events (e.g. Credit Events, Succession Events) between upstream trading and confirmation platforms and downstream settlement and clearing systems.
• Central settlement for eligible transactions to reduce manual payment processing and reconciliation.

It’s going to start soon:

Each Major Dealer in the OMG commits to (i) support a clearing platform and (ii) utilize such platform to clear all eligible products where practicable. Pending regulatory approval, index clearing will begin by Nov 30, 2008 with single names
to follow within the first quarter of 2009.

The Participants’ letter isn’t just about CDSs, many types of OTC derivative are addressed. Most of the plans are along the lines of … ‘Well, we’re going to try to do things a lot more like the way they’d be done if anybody had ever, you know, thought about it’. But the OTC derivatives was never planned … it just growed.

But have no fear – the Fed is here! Another document is a Summary Table of Committments, providing a comparison of the commitments made in July with those currently made and an explanation for each item. This type of thing has an unfortunate propensity to degenerate into a regulatory box-ticking exercise, but we can always hope for the best!

Of most interest to PrefBlog’s Assiduous Readers will be the DTCC Announcement that:

it will begin to publish aggregate market data from its Trade Information Warehouse (Warehouse), the worldwide central trade registry it maintains on credit derivatives. Starting Tuesday, November 4 and continuing weekly, DTCC will post on its website www.dtcc.com/derivserv the outstanding gross and net notional values (“stock” values) of credit default swap (CDS) contracts registered in the Warehouse for the top 1,000 underlying single-name reference entities and all indices, as well as certain aggregates of this data on a gross notional basis only. The data is intended to address market concerns about transparency.

The link has been added to the right-hand sidebar, under “US Fixed Income”.

All very encouraging … it doesn’t look like Accrued Interest will get the public Exchange he wants so badly!

TDS.PR.B Announces Microscopic Redemption

Friday, October 31st, 2008

TD Split Inc. has announced:

that it has called 397 Preferred Shares for cash redemption on November 14, 2008 representing approximately 0.04% of the outstanding Preferred Shares as a result of holders of 397 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that each remaining holder of Preferred Shares will have approximately 0.04% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $28.10 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including November 14, 2008.

TDS.PR.B is tracked by HIMIPref™ but was relegated to the “Scraps” index in October 2006 due to volume concerns.

PFD.PR.A Announces Result of Special Meeting

Friday, October 31st, 2008

JovFunds has announced:

that the adjourned special meeting of the preferred shareholders of Charterhouse was held on October 30, 2008.

Preferred shareholders of Charterhouse approved a special resolution to merge Charterhouse into a newly formed open-ended mutual fund trust and, in the event the merger is implemented, suspend the annual retraction of preferred shares or payment of annual retraction proceeds. Preferred shareholders of Charterhouse also approved a special resolution to amend the articles of incorporation of Charterhouse to permit it to suspend the annual retraction of preferred shares or payment of retraction proceeds if, prior to the scheduled annual redemption date, the board of directors elects to redeem all outstanding preferred shares of Charterhouse in connection with the orderly liquidation of Charterhouse.

The meeting has been previously referenced on PrefBlog. PFD.PR.A is not tracked by HIMIPref™.

October 30, 2008

Thursday, October 30th, 2008

There is news of a substantial drop in LIBOR:

The swap agreements with central banks, which also followed rate cuts from China to Norway, led to a drop in three-month rates in Asia. The London interbank offered rate, or Libor, for three- month loans in dollars slid 23 basis points to 3.19 percent today, its 14th consecutive drop, according to the British Bankers’ Association. The overnight dollar rate tumbled 41 basis points to 0.73 percent, the lowest level since at least January 2001.

The three-month Libor for dollars remains 219 basis points above the Fed’s rate, up from 82 basis points the day Lehman failed. It was 192 basis points yesterday before the rate cut.

The re-intermediation (novo-intermediation? It hasn’t really been done before) by the Fed in the US commercial paper markets (discussed last weekend) has continued big-time with the Fed’s latest H.4.1 release showing an increase of nearly $200-billion in deposits from banks, offset by a decline of $36-billion in Treasury balances, an increase of $145-billion in commercial paper holdings and an increase of $22-billion in foreign currency assets.

I expressed concern yesterday that the Excess Reserves / Discount Window spread, at 60bp, was too small to encourage reintermediation by the the banks – I’d like to see that bumped to 85bp just for starters. But I’m less concerned about the spread on the Commercial Paper Funding Facility – at 235bp for regular commercial paper, it’s high enough to encourage reintermediation by the banks as soon as they’re feeling a little braver.

Derek DeCloet has a column in today’s Globe cackling with glee over hedge funds that didn’t hedge; in this category comes a fund from Deephaven which is being deep-sixed:

Deephaven Capital Management LLC, the hedge-fund unit of stockbroker Knight Capital Group Inc., froze a $1.6 billion fund after investors asked to get back 30 percent of their money.

Withdrawals from the Deephaven Global Multistrategy Fund were suspended so managers wouldn’t be forced to sell assets in falling stock and debt markets, the Minnetonka, Minnesota-based firm said today in a letter to investors. Lenders and trading partners also imposed stricter financing requirements, according to the letter.

If it was an actual hedge fund, of course, they would be buying just as much as selling. But perhaps I quibble.

Treasury today released guidance on tax breaks for Fannie & Freddie preferred share investors (as long as they’re banks):

The Treasury Department and the Internal Revenue Service today issued Revenue Procedure 2008-64 (Rev. Proc. 2008-64), which provides that certain gains and losses from indirect ownership of Fannie Mae and Freddie Mac preferred stock can be treated as ordinary income and loss.

The Emergency Economic Stabilization Act of 2008 (EESA) provided banks and certain financial institutions ordinary treatment for gains and losses on direct investments in preferred stock of Fannie Mae and Freddie Mac. It also directed the Treasury Department to issue guidance with respect to the treatment of these gains or losses when realized indirectly through certain investment vehicles.

Rev. Proc. 2008-64 provides banks and certain other financial institutions the benefit of ordinary treatment on gains and losses that they are experiencing on certain indirect investments in this preferred stock.

And, just to ensure everybody is cheerful, there is news of a lock-up in the Japanese bond market:

Japanese yen corporate bond sales dried up in the second half of October as the seizure in global credit markets, plunging equity values and volatility in the Asian nation’s currency deterred investors.

Toyota Finance Corp. was the last company to sell yen bonds when it issued 42 billion yen ($428 million) of three- and five- year notes on Oct. 15, data compiled by Bloomberg show. The Tokyo-based lessor reduced that sale from a planned 50 billion yen after market turmoil pushed up borrowing costs, a company official said at the time.

“The credit market is dead,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan, part of Canada’s fifth-biggest bank. “Investors don’t want to buy anything because there’s so much credit risk right now.”

An active day for prefs – and there were many lower-quality issues trading in good volume that weren’t included in the tally.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.51% 5.65% 68,044 14.86 6 +1.5931% 948.7
Floater 7.10% 7.20% 44,033 12.29 2 +0.1245% 487.2
Op. Retract 5.32% 6.25% 139,562 4.05 14 +0.3423% 995.1
Split-Share 6.40% 11.19% 59,283 3.97 12 +0.2109% 919.0
Interest Bearing 7.91% 12.82% 62,873 3.25 3 +1.9088% 894.0
Perpetual-Premium 7.10% 7.21% 51,203 12.26 1 +0.0000% 873.8
Perpetual-Discount 6.94% 7.01% 176,473 12.58 70 +0.4196% 783.5
Fixed-Reset 5.36% 5.06% 767,762 15.22 10 +0.6165% 1,075.6
Major Price Changes
Issue Index Change Notes
LBS.PR.A SplitShare -5.8683% Asset coverage of 1.7+:1 as of October 23, according to Brompton Group. Now with a pre-tax bid-YTW of 10.98% based on a bid of 7.86 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 7.86-34, 3×1. Day’s range of 7.81-80.
HSB.PR.C PerpetualDiscount -5.3305% Now with a pre-tax bid-YTW of 7.29% based on a bid of 17.76 and a limitMaturity. Closing quote 17.76-18, 3×2. Day’s range 17.99-19.19.
PWF.PR.E PerpetualDiscount -4.7782% Now with a pre-tax bid-YTW of 7.10% based on a bid of 19.53 and a limitMaturity. Closing Quote 19.53-89, 3×1. Day’s range of 19.53-51.
CU.PR.B PerpetualDiscount -4.2581% Now with a pre-tax bid-YTW of 6.86% based on a bid of 22.26 and a limitMaturity. Closing quote 22.26-74, 1X3. Day’s range 22.00-23.50.
W.PR.J PerpetualDiscount -2.8571% Now with a pre-tax bid-YTW of 8.35% based on a bid of 17.00 and a limitMaturity. Closing quote 17.00-24, 8X3. Day’s range 16.56-50.
TD.PR.M OpRet +2.1199% Now with a pre-tax bid-YTW of 4.68% based on a bid of 25.05 and a softMaturity. Closing quote 25.05-39, 18×5. All three trades were at 24.95.
POW.PR.A PerpetualDiscount +2.2277% Now with a pre-tax bid-YTW of 6.86% based on a bid of 20.65 and a limitMaturity. Closing quote 20.65-94. Day’s range 20.49-65.
PWF.PR.F PerpetualDiscount +2.2593% Now with a pre-tax bid-YTW of 6.96% based on a bid of 19.01 and a limitMaturity. Closing quote 19.01-75, 2X8. Day’s range 18.81-25.
SLF.PR.A PerpetualDiscount +2.3016% Now with a pre-tax bid-YTW of 7.14% based on a bid of 16.89 and a limitMaturity. Closing quote 16.89-17.98, 15X2. Day’s range 16.41-00.
FTN.PR.A SplitShare +2.396% Asset coverage of 1.9+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 8.96% based on a bid of 8.12 and a hardMaturity 2015-12-1 at 10.00. Closing quote 8.12-24, 33X2. Day’s range of 7.99-24
BNA.PR.B SplitShare +2.4419% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.1-:1 based on BAM.A at 21.86 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 11.12% based on a bid of 17.62 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (20.08% to 2010-9-30) and BNA.PR.C (13.59% to 2019-1-10). Closing quote 17.62-00, 5X20. Day’s range 17.52-00.
LFE.PR.A SplitShare +2.4419% Asset coverage of 1.8+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 8.83% based on a bid of 8.81 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 8.81-43, 3X3. One trade at 9.00
CM.PR.E PerpetualDiscount +2.4731% Now with a pre-tax bid-YTW of 7.42% based on a bid of 19.06 and a limitMaturity. Closing Quote 19.06-17, 4X5. Day’s range of 18.65-25.
CU.PR.A PerpetualDiscount +3.0928% Now with a pre-tax bid-YTW of 6.42% based on a bid of 23.00 and a limitMaturity. Closing Quote 23.00-75, 7X5. Day’s range of 23.00-75.
WFS.PR.A SplitShare +3.3333% Asset coverage of 1.4-:1 as of October 23, according to Mulvihill. Now with a pre-tax bid-YTW of 16.32% based on a bid of 7.75 and a hardMaturity 2011-6-30 at 10.00. Closing quote of 7.75-96, 1×1. Day’s range of 7.50-75.
CM.PR.D PerpetualDiscount +3.4648% Now with a pre-tax bid-YTW of 7.48% based on a bid of 19.41 and a limitMaturity. Closing Quote 19.41-55, 2X10. Day’s range of 18.99-25.
BSD.PR.A InterestBearing +3.6036% Asset coverage of 0.9+:1 as of October 24 according to Brookfield Funds. Now with a pre-tax bid-YTW of 17.66% based on a bid of 5.75 and a hardMaturity 2015-3-31 at 10.00 … though as pointed out by Assiduous Reader prefhound, use of $10.00 maturity value is, at the very least, something of a leap of faith. Closing quote of 5.75-89, 36X4. Day’s range of 5.65-36
POW.PR.D PerpetualDiscount +3.6600% Now with a pre-tax bid-YTW of 7.20% based on a bid of 17.56 and a limitMaturity. Closing Quote 17.56-71, 1×1. Day’s range of 17.00-72.
CM.PR.K FixedReset +4.3956%  
BCE.PR.I FixFloat +4.4776%  
Volume Highlights
Issue Index Volume Notes
CM.PR.I PerpetualDiscount 217,527 Nesbitt crossed 200,000 at 15.50. Now with a pre-tax bid-YTW of 7.65% based on a bid of 15.51 and a limitMaturity
CM.PR.G PerpetualDiscount 140,300 Nesbitt crossed 50,000 at 17.76, then 78,400 at 18.00. Now with a pre-tax bid-YTW of 7.58% based on a bid of 17.98 and a limitMaturity
ALB.PR.A SplitShare 132,872 CIBC crossed 128,600 at 23.55. Asset coverage of 1.5+:1 as of October 23 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 9.28% based on a bid of 22.62 and a hardMaturity 2011-2-28 at 25.00. Closing quote of 22.62-54, 1×2. Day’s range of 22.56-23.57.
CM.PR.J PerpetualDiscount 108,995 Nesbitt crossed 88,800 at 15.00. Now with a pre-tax bid-YTW of 7.57% based on a bid of 15.00 and a limitMaturity.
TD.PR.O PerpetualDiscount 76,800 Nesbitt crossed 60,000 at 18.25. Now with a pre-tax bid-YTW of 6.64% based on a bid of 18.41 and a limitMaturity.

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

October 29, 2008

Wednesday, October 29th, 2008

Deflation? Econbrowser‘s James Hamilton doesn’t think so!

If the U.S. were ever to arrive at such a situation, here’s what I’d recommend. First, have the Federal Reserve buy up the entire outstanding debt of the U.S. Treasury, which it can do easily enough by just creating new dollars to pay for the Treasury securities. No need to worry about those burdens on future taxpayers now! Then buy up all the commercial paper anybody cares to issue. Bye-bye credit crunch! In fact, you might as well buy up all the equities on the Tokyo Stock Exchange. Fix that nasty trade deficit while we’re at it! Print an arbitrarily large quantity of money with which you’re allowed to buy whatever you like at fixed nominal prices, and the sky’s the limit on what you might set out to do.

Of course, the reason I don’t advocate such policies is that they would cause a wee bit of inflation. It’s ridiculous to think that people would continue to sell these claims against real assets at a fixed exchange rate against dollar bills when we’re flooding the market with a tsunami of newly created dollars. But if inflation is what you want, put me in charge of the Federal Reserve and believe me, I can give you some inflation.

The Fed announced:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

The cut to 1.00% Fed Funds was widely anticipated. Remember that interest on excess reserves is Fed Funds less 35bp … the Fed is earning a spread of only 60bp on excess reserves to Discount Window. I would have been much more comfortable had the discount rate been lowered only 25bp to 1.50%.

There are indications that CDS rates are being used to price loans:

Nestle SA, the biggest food producer, Nokia Oyj, the largest mobile-phone maker, FirstEnergy Corp., the Ohio-based owner of electric utilities, and at least three other companies bowed to banks’ demands to link the interest rate on credit lines to the swaps, which are used to bet on borrowers’ likelihood of default.

[First Energy] would pay Libor plus 3 percentage points to draw on the line, according to company filings. Based on yesterday’s levels, FirstEnergy would be charged an additional 1.70 percentage points, reflecting the levels of its credit- default swaps, and another 1.35 percent to account for the bank’s own spread, according to [First Energy Assistant Treasurer Randy] Scilla.

This is a worrisome development. Events of the past year have shown that the ease of shorting corporate debt with CDSs has led to huge volatility, with some credits (e.g., CIT Group) trading at amazing levels … 2500bp or more, while maintaining an “A(low)” rating that seems entirely justified. While I in favour of market based pricing in a general way, we have seen (in the pricing of AAA sub-prime tranches) that total reliance on market pricing implies total reliance on infinite liquidity … and we ain’t there, by a long shot.

Simply put, there isn’t enough depth in the CDS market to ensure that there will be sufficient supply of protection writers when the cowboys take a run at these companies.

On the other hand, the facilities arranged – so far – with these CDS-linked rates are commercial paper back-up lines. Together with the Big Scare due to the recent lock-up of the the CP market, we may see a reduced corporate reliance on money market paper, with a massive term extension – at least to five year notes – to handle the funding instead. This part is a Good Thing, because it will decrease the term mismatch between assets and liabilities on corporate balance sheets.

So right now, it is unclear how this will play out, as is the case with so much of the structural change that taking place in financial markets right now.

Speaking of shorts how about that VW, eh?:

Porsche, a rival seeking to build one of Europe’s great car dynasties, revealed it had increased its holdings in VW, giving it an economic stake equal to about 75 percent of the company’s voting shares.

Volkswagen’s stock soared to as high as 1,005 euros a share, about $1,258, on Tuesday before closing at 918 euros. The shares ended last week at 210 euros.

On Sunday, Porsche said it raised its stake in Volkswagen to 42.6 percent from 35 percent, and that it had taken options for another 31.5 percent.

Porsche said it made the announcement to give investors who sold the stock short “the opportunity to close their positions unhurriedly and without bigger risk.”

The opposite happened. The risk soared, and the short sellers were forced to act quickly.

Volkswagen is one of the 30 companies in the DAX index, Germany’s most prominent stock index, and index funds own a significant number of shares.

Those funds, however, may sell shares Wednesday. On Tuesday night the German stock exchange said it would reduce from 27 percent to 10 percent the weighting of VW in the index. To rebalance, the funds will have to sell VW and buy the 29 other companies.

The re-weighting of VW in DAX is a disgrace:

“This adjustment is an extraordinary measure,” Deutsche Boerse said in a statement yesterday. The reduction will take place on Nov. 3, and the weightings of other DAX companies will also be adjusted at that time.

Changing the rules because some short-sellers are getting toasted? That’s not your job, guys! If you want to create a capped index – as the Toronto Exchange did after the Nortel fiasco – that’s fine … but the occasional gruesome loss is part of the risk of being short, and the occasional bonus profit is part of the reward of being long.

As Dealbreaker so eloquently states:

That’s the other shoe dropping right there. Shares drop 50%, it’s a regulatory failure. Shares spike 400%, its a regulatory failure.

When are we going to let risk be risk? These are all big boys playing with Volkswagen. Had it gone right, they would have made big profits.

BCE has announced its 3Q08 Operating Results, and it doesn’t seem – to me – to help the chances for a successful conclusion of the takeover much.

BCE’s cash from operating activities was $1,649 million this quarter, up 2.7% from last year. BCE’s free cash flow [footnote 3] of $89 million this quarter was lower than $425 million in Q3 2007 due to the expenditure of $741 million for AWS spectrum licences partly offset by a reduction of $293 million in common dividends paid.

[Footnote 3 – extract] We define free cash flow as cash from operating activities after capital expenditures, total dividends and other investing activities.

BCE is also looking at a significant mark-to-market hit on its pension obligations.

Another fairly active day on the preferred market, with players trying to figure out where things are supposed to be! There are plenty of instances of yield relationships between issuers being completely haywire.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.59% 5.83% 68,587 14.79 6 +1.0406% 933.8
Floater 7.10% 7.21% 44,772 12.28 2 -4.5766% 486.6
Op. Retract 5.34% 6.28% 137,967 4.04 14 -0.2956% 991.7
Split-Share 6.41% 11.21% 57,372 3.97 12 +0.5435% 917.0
Interest Bearing 8.06% 13.63% 62,856 3.24 3 +4.3511% 877.2
Perpetual-Premium 7.10% 7.21% 51,697 12.26 1 +0.4108% 873.8
Perpetual-Discount 6.97% 7.03% 175,239 12.55 70 -0.0609% 780.2
Fixed-Reset 5.39% 5.10% 786,445 15.18 10 +0.0482% 1,069.1
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -9.7943% Now trading in single digits! I don’t get it, really … 1.7x prime in perpetuity as a dividend from a company that, at the very least, is half-decent?
W.PR.H PerpetualDiscount -4.8451% Now with a pre-tax bid-YTW of 8.25% based on a bid of 16.89 and a limitMaturity. Closing quote 16.89-18.00, 3×1. Day’s range 16.90-50.
POW.PR.B PerpetualDiscount -3.6126% Now with a pre-tax bid-YTW of 7.35% based on a bid of 18.41 and a limitMaturity. Closing Quote 18.41-70, 1×1. Day’s range of 18.60-55.
TD.PR.S FixedReset -3.4985%  
BAM.PR.J OpRet +-2.8409% Now with a pre-tax bid-YTW of 9.59% based on a bid of 18.81 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (11.83% to 2012-3-30), BAM.PR.I (10.25% to 2013-12-30) and BAM.PR.O (10.87% to 2013-6-30).
BMO.PR.K PerpetualDiscount -2.6970% Now with a pre-tax bid-YTW of 7.11% based on a bid of 18.50 and a limitMaturity. Closing Quote 18.50-94, 15×3. Day’s range of 18.50-35.
CU.PR.A PerpetualDiscount -2.6614% Now with a pre-tax bid-YTW of 6.61% based on a bid of 22.31 and a limitMaturity. Closing Quote 22.31-23.74, 1×1. Day’s range of 22.00-23.50.
BNA.PR.B SplitShare -2.6048% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.1+:1 based on BAM.A at 22.25 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 11.55% based on a bid of 17.20 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (20.02% to 2010-9-30) and BNA.PR.C (13.51% to 2019-1-10). Closing quote 17.20-90, 10×8. Day’s range 17.50-90.
POW.PR.D PerpetualDiscount -2.5316% Now with a pre-tax bid-YTW of 7.47% based on a bid of 16.94 and a limitMaturity. Closing Quote 16.94-00, 1X3. Day’s range of 17.00-74.
PWF.PR.E PerpetualDiscount -2.3798% Now with a pre-tax bid-YTW of 6.76% based on a bid of 20.51 and a limitMaturity. Closing Quote 20.51-90 0X3. Zero? Well, that’s according to TMXMoney.com, anyway! Day’s range of 20.90-00.
SLF.PR.C PerpetualDiscount -2.3077% Now with a pre-tax bid-YTW of 7.42% based on a bid of 15.24 and a limitMaturity. Closing Quote 15.24-70, 9×4. Day’s range of 15.15-65.
SLF.PR.D PerpetualDiscount -2.0487% Now with a pre-tax bid-YTW of 7.39% based on a bid of 15.30 and a limitMaturity. Closing Quote 15.30-90, 2×4. Day’s range of 15.13-16.45.
CM.PR.G PerpetualDiscount +2.0115% Now with a pre-tax bid-YTW of 7.68% based on a bid of 17.75 and a limitMaturity. Closing Quote 17.75-95, 11×7. Day’s range of 17.00-99.
ELF.PR.G PerpetualDiscount +2.4306% Now with a pre-tax bid-YTW of 8.15% based on a bid of 14.75 and a limitMaturity. Closing Quote 14.75-50, 20×20. Day’s range of 14.37-55.
LFE.PR.A SplitShare +2.7794% Asset coverage of 1.8+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 9.51% based on a bid of 8.60 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 8.60-98, 15×2. Day’s range of 8.60-90.
IAG.PR.A PerpetualDiscount +3.1250% Now with a pre-tax bid-YTW of 7.08% based on a bid of 16.50 and a limitMaturity. Closing Quote 16.50-90, 9×9. Day’s range of 16.10-50.
RY.PR.H PerpetualDiscount +3.2962% Now with a pre-tax bid-YTW of 6.36% based on a bid of 22.25 and a limitMaturity. Closing Quote 22.25-85, 40×27. Day’s range of 21.60-22.85.
BCE.PR.R FixFloat +3.6596%  
BNS.PR.R FixedReset +3.6596%  
FIG.PR.A InterestBearing +4.4595% Asset coverage of 1.3-:1 as of October 27, according to the company, assuming 0.71 Capital Units per preferred. Now with a pre-tax bid-YTW of 11.73% based on a bid of 7.73 and a hardMaturity 2014-12-31 at 10.00. Closing quote of 7.73-01, 1×3. Day’s range of 7.57-25.
FTN.PR.A SplitShare +4.9178% Asset coverage of 1.9+:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 9.38% based on a bid of 7.93 and a hardMaturity 2015-12-1 at 10.00. Closing quote 7.93-09, 3×10. Day’s range of 8.00-24
CU.PR.B PerpetualDiscount +5.6818% Now with a pre-tax bid-YTW of 6.57% based on a bid of 23.25 and a limitMaturity. Closing Quote 23.25-50, 5×10. Today’s only board lot traded at 23.50.
BSD.PR.A InterestBearing +9.9010% Asset coverage of 0.9+:1 as of October 24 according to Brookfield Funds. Now with a pre-tax bid-YTW of 18.45% based on a bid of 5.55 and a hardMaturity 2015-3-31 at 10.00 … though as pointed out by Assiduous Reader prefhound, use of $10.00 maturity value is, at the very least, something of a leap of faith. Closing quote of 5.55-56, 40×1. Day’s range of 5.25-65
Volume Highlights
Issue Index Volume Notes
WN.PR.B Scraps (would be OpRet but there are credit concerns) 301,500 Now with a pre-tax bid-YTW of 5.81% based on a bid of 25.00 and a optionCertainty 2009-6-30 at 25.00.
TD.PR.M OpRet 170,400 Now with a pre-tax bid-YTW of 5.15% based on a bid of 24.53 and a softMaturity 2013-10-30 at 25.00.
BMO.PR.I OpRet 167,280 Called for redemption.
MFC.PR.A OpRet 127,930 Now with a pre-tax bid-YTW of 4.84% based on a bid of 24.05 and a softMaturity 2015-12-18 at 25.00.
TD.PR.N OpRet 75,700 Now with a pre-tax bid-YTW of 4.79% based on a bid of 24.80 and a softMaturity 2014-1-30 at 25.00.

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

XMF.PR.A Enters Protection Plan

Wednesday, October 29th, 2008

M-Split Corp has announced:

M-Split Corp. (“the Company”) was created to provide
exposure to the common shares of Manulife Financial Corporation (“Manulife”) through two classes of securities, the Priority Equity Shares and the Class A Shares (a “Unit”). As stated in the prospectus, holders of the Priority Equity Shares are to be provided with a stable yield and downside protection on the return of their initial investment. Class A Shares are to be provided with leveraged exposure to Manulife common shares including both increases and decreases in the value of the common shares of Manulife and the benefit of any increases in the dividends paid by Manulife on its common shares.

during October, the share price of Manulife has declined by approximately 39% resulting in an overall total decrease in the share price of Manulife of 43% since the inception date of the Company. Manulife was $ $41.08 as at the inception date of the Company on April 18, 2007 and closed on October 28 at $23.49.

As at close on October 28, 2008, the portfolio has approximately $5.68 in cash and equivalent notional value (value at maturity) of Permitted Repayment Securities per unit. This leaves the Priority Equity Shareholder exposed to $ 4.32 per share ($10.00 par value – $5.68 in cash and equivalent notional value of Permitted Repayment Securities) in Manulife holdings. The net asset value as at October 28 was $10.24 per unit which includes $5.70 amount per unit in shares of Manulife.

The protection programme is similar to the one in place for XCM.PR.A, which is still in place.

XMF.PR.A has 4.7-million shares outstanding, according to the Toronto Stock Exchange. It is not tracked by HIMIPref™.

MST.PR.A & SFO.PR.A : Capital Unit Distributions Suspended

Wednesday, October 29th, 2008

Sentry Select has announced:

In accordance with their respective declarations of trust, in order to preserve the capital available to repay the preferred securities upon their respective maturity dates, Sentry Select Capital Corp. (“Sentry Select”), the manager of Sentry Select 40 Split Income Trust and the trustee of Multi Select Income Trust (collectively, the “Trusts”) has suspended the payment of distributions (including the October distributions) for the Trusts until each Trust is permitted, according to its declaration of trust, to resume paying monthly distributions to holders of capital units.

This decision will not negatively impact the ability of either Trust to meet the obligations to preferred security holders. The respective maturity dates for the preferred securities are December 1, 2008 and September 30, 2009.

MST.PR.A is tracked by HIMIPref™ – it was moved to the scraps index from interestBearing in February due to volume concerns. Asset coverage was 1.6-:1 as of October 23 according to Sentry Select.

SFO.PR.A is not tracked by HIMIPref™

October 28, 2008

Tuesday, October 28th, 2008

The Fed is pushing hard for a CDS Clearinghouse:

The Federal Reserve has given U.S. futures exchanges until Oct. 31 to present written plans on how they’ll make the $55 trillion credit swaps market less risky, according to four people familiar with the discussions.

Federal Reserve officials are not aiming to pick a winner to operate a clearinghouse, the people said. Rather, the central bank is hoping to set up a framework for the eventual winner.

The four groups vying to operate clearing operations include partnerships of Chicago-based CME Group and Citadel Investment Group LLC, and Intercontinental Exchange, dealer-owned Clearing Corp. and credit-swap index owner Markit Group Ltd. Eurex AG and NYSE Euronext also have submitted proposals.

The last major review of the clearinghouse on PrefBlog was my reaction to Accrued Interest‘s plan. On September 22 I deprecated his idea of trading only CDSs with a recovery lock.

On VoxEU, John Kiff, Paul Mills and Carolyne Spackman project a resurgence of covered bonds. While the essay suffers from the mind-set that the credit crunch happened because credit rating agencies are dumb and more rules will make them smart, the provide some interesting charts:

In a welcome piece of news, Bloomberg reports:

Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank’s efforts to unlock the market may be working.

Companies yesterday sold more than 1,500 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to data published by the Fed. Most of the difference was probably absorbed by the Fed, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

The source data from the Fed shows that the increase in issuance was almost entirely at the long-end, probably 90-day paper.

Accrued Interest looks at agency paper and likes it, despite the fact that position limits for Taiwanese insurers are being reduced:

The danger is that Asia doesn’t seem to agree. Selling of both Agency debt and MBS securities have been concentrated in Asia the last several days. We know that that Taiwanese insurance regulators are limiting allowable exposure to U.S. agency mortgage-backed securities, claiming the credit rating cannot be believed. If China or Japan were to come to the same conclusion, there would be real problems real fast.

The good news is that despite heavy selling from Asia, agency spreads (and MBS spreads for that matter) have moved wider slowly. Agency spreads are about 60bps wider this month, whereas corporate spreads have moved 117bps wider.

The Taiwanese rule change is:

Where previously there was no limit to investments in MBS issued by US federal housing loan agencies, namely Fannie Mae, Freddie Mac and Ginnie Mae, insurers will now be given a maximum ceiling of 50% of their offshore investment limit to such products by the three institutions. Maximum exposure to MBS and collateralised issues by any of the individual agencies will be set at 25%.

Now, this is the danger. On the weekend, I discussed the Fed’s balance sheet in terms of the Fed intermediating between the banks and credit risk, in the same manner as banks intermediate between Granny Oakum and credit risk. This is a natural thing and this is a good thing, but the Fed’s ability to do so is constrained by the ability to sell Treasury debt. Eight years of fiscal profligacy have eroded the available excess capacity … I don’t think we’re in trouble yet, but this is the type of thing that signifies trouble.

Just because equities were up so much today doesn’t mean we can relax! There are rumours that Barclays has foreclosed a hedge fund:

Barclays Plc, the U.K.’s second- largest bank, is seeking bids for $1.5 billion of bonds and $3.5 billion of credit-default swap contracts held by a hedge fund, according to people with knowledge of the auction.

The bank is selling bonds from European, Asian and U.S. issuers, according to the people, who asked not to be identified because the sales aren’t being made public. Barclays is also selling $970 million of assets, primarily high-yield, high-risk loans, the people said. Bids on both portfolios are due today.

Somewhat to my chagrin, I see that FixedReset issues are trading as if they were actually 5-year paper, rather than as perpetual paper with a five year call. The recently announced new issues offer a 5.60% coupon, with a continued reset to 5.60 if 5-year Canadas remain unchanged; rather than falling a lot, to offer equivalent perpetual yields, extant Fixed-Resets have fallen a little, to offer equivalent five-year yields with the assumption of a call at par.

In fact, yields to first call of the extant fixed resets are in excess of 5.60%, implying that the new issues will trade at an immediate (small) discount, rather than at the premium they would command otherwise. It’s a funny old world.

Another day of heavy volume, with a number of dealers crossing significant blocks.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.60% 5.91% 69,804 14.56 6 -1.7991% 924.2
Floater 6.76% 6.76% 45,037 12.70 2 +3.0226% 510.0
Op. Retract 5.32% 6.16% 135,341 4.05 14 +0.7795% 994.6
Split-Share 6.43% 11.35% 57,579 3.96 12 -0.2786% 912.1
Interest Bearing 8.40% 14.74% 61,279 3.15 3 +1.2322% 840.7
Perpetual-Premium 7.13% 7.24% 52,016 12.23 1 -4.2395% 870.2
Perpetual-Discount 6.95% 7.03% 175,229 12.55 70 -0.2954% 780.7
Fixed-Reset 5.38% 5.10% 806,853 15.15 10 -0.2224% 1,068.6
Major Price Changes
Issue Index Change Notes
CU.PR.B PerpetualDiscount -5.7816% Now with a pre-tax bid-YTW of 6.95% based on a bid of 22.00 and a limitMaturity. Closing quote 22.00-23.50, 12×8. Day’s range 22.50-23.50.
BCE.PR.R FixFloat -4.5238%  
BAM.PR.N PerpetualDiscount -4.3887% Now with a pre-tax bid-YTW of 9.93% based on a bid of 12.20 and a limitMaturity. Closing Quote 12.20-44, 1X11. Day’s range of 12.00-13.00.
CL.PR.B PerpetualPremium (for now!) -4.2395% Now with a pre-tax bid-YTW of 7.24% based on a bid of 21.91 and a limitMaturity. Closing Quote 21.91-22.96, 3×7. Day’s range of 21.90-23.20.
ELF.PR.G PerpetualDiscount -4.0000% Now with a pre-tax bid-YTW of 8.35% based on a bid of 14.40 and a limitMaturity. Closing Quote 14.40-00, 2X2. Day’s range of 14.00-35.
ELF.PR.F PerpetualDiscount -2.9254% Now with a pre-tax bid-YTW of 8.2529% based on a bid of 16.26 and a limitMaturity. Closing Quote 16.26-99, 3X1. Day’s range of 16.00-99.
BCE.PR.I FixFloat -2.8916%  
GWO.PR.H PerpetualDiscount -2.8824% Now with a pre-tax bid-YTW of 7.46% based on a bid of 16.51 and a limitMaturity. Closing Quote 16.51-00, 3X3. Day’s range of 16.55-17.55.
SLF.PR.A PerpetualDiscount -2.8369% Now with a pre-tax bid-YTW of 7.34% based on a bid of 16.44 and a limitMaturity. Closing Quote 16.44-94, 3X9. Day’s range of 16.40-00.
SLF.PR.B PerpetualDiscount -2.8235% Now with a pre-tax bid-YTW of 7.38% based on a bid of 16.52 and a limitMaturity. Closing Quote 16.52-87, 5X8. Day’s range of 16.49-00.
PWF.PR.L PerpetualDiscount -2.6667% Now with a pre-tax bid-YTW of 7.04% based on a bid of 21.65 and a limitMaturity. Closing Quote 18.25-74, 1X1. Day’s range of 18.00-75.
PWF.PR.H PerpetualDiscount -2.4775% Now with a pre-tax bid-YTW of 6.69% based on a bid of 21.65 and a limitMaturity. Closing Quote 21.65-22.70, 7X11. Day’s range of 21.51-23.00.
RY.PR.W PerpetualDiscount -2.4324% Now with a pre-tax bid-YTW of 6.80% based on a bid of 18.05 and a limitMaturity. Closing Quote 18.05-20, 5X5. Day’s range of 18.04-70.
PWF.PR.F PerpetualDiscount -2.1295% Now with a pre-tax bid-YTW of 7.07% based on a bid of 18.71 and a limitMaturity. Closing Quote 18.71-50, 1X3. Day’s range of 18.65-19.90.
BNS.PR.R FixedReset -2.1295% According to me, yield-to-first-call is 7.48%, YTW is 5.37%. Is it through or wide of the new issues? Take your pick.
SLF.PR.E PerpetualDiscount -1.9520% Now with a pre-tax bid-YTW of 7.29% based on a bid of 15.66 and a limitMaturity. Closing Quote 15.66-95, 6X20. Day’s range of 15.57-94.
TD.PR.S FixedReset +2.0399% Yield-to-first-call, 5.95%. YTW, 4.75%. Through or wide?
PWF.PR.J OpRet +2.0833% Now with a pre-tax bid-YTW of 5.20% based on a bid of 24.50 and a softMaturity 2013-7-30 at 25.00
STW.PR.A InterestBearing +2.0925% Asset coverage of 1.4+:1 as of October 23 according to the company. Now with a pre-tax bid-YTW of 13.21% based on a bid of 9.27 and a hardMaturity 2009-12-31 at 10.00
POW.PR.D PerpetualDiscount +2.1752% Now with a pre-tax bid-YTW of 7.28% based on a bid of 17.38 and a limitMaturity. Closing Quote 17.38-87, 5×2. Day’s range of 16.84-17.88.
ALB.PR.A SplitShare +2.1768% Asset coverage of 1.5+:1 as of October 23 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 8.47% based on a bid of 23.00 and a hardMaturity 2011-2-28 at 25.00. Closing quote of 23.00-18, 50×1. Both of today’s trades were at 22.51 (odd-lot excepted).
BMO.PR.J PerpetualDiscount +2.5397% Now with a pre-tax bid-YTW of 7.13% based on a bid of 16.15 and a limitMaturity. Closing Quote 16.15-30, 6×1. Day’s range of 16.00-30.
BAM.PR.K Floater +5.0000%  
BAM.PR.I OpRet +5.1282% Now with a pre-tax bid-YTW of 10.25% based on a bid of 20.50 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (11.82% to 2012-3-30), BAM.PR.J (9.15% to 2018-3-30) and BAM.PR.O (10.99% to 2013-6-30).
POW.PR.B PerpetualDiscount +5.8172% Now with a pre-tax bid-YTW of 7.08% based on a bid of 19.10 and a limitMaturity. Closing Quote 19.10-49, 1×1. Day’s range of 18.98-19.99.
RY.PR.H PerpetualDiscount +7.7000% Now with a pre-tax bid-YTW of 6.56% based on a bid of 21.54 and a limitMaturity. Closing Quote 21.54-16, 3×4. Day’s range of 21.00-22.50.
IAG.PR.A PerpetualDiscount +14.0413% Now with a pre-tax bid-YTW of 7.30% based on a bid of 16.00 and a limitMaturity. Closing Quote 16.00-79, 10×2. Day’s range of 15.20-16.50.
Volume Highlights
Issue Index Volume Notes
GWO.PR.X OpRet 936,734 CIBC crossed 924,100 at 25.90. Now with a pre-tax bid-YTW of 4.09% based on a bid of 25.90 and a softMaturity 2013-9-29 at 25.00.
MFC.PR.A OpRet 310,500 CIBC crossed 200,000 at 24.10,then another 100,000 at the same price. Now with a pre-tax bid-YTW of 4.83% based on a bid of 24.05 and a softMaturity 2015-12-18 at 25.00.
MFC.PR.C PerpetualDiscount 286,655 Nesbitt crossed 100,000 at 15.60, then another 12,300 at the same price. RBC crossed 50,000 at 15.70, then Scotia crossed 100,000 at 15.70. Now with a pre-tax bid-YTW of 7.26% based on a bid of 15.78 and a limitMaturity.
GWO.PR.I PerpetualDiscount 229,040 RBC crossed 205,200 at 16.60. Now with a pre-tax bid-YTW of 7.04% based on a bid of 16.21 and a limitMaturity.
GWO.PR.F PerpetualDiscount 216,397 CIBC crossed 213,000 at 22.90. Now with a pre-tax bid-YTW of 6.70% based on a bid of 22.30 and a limitMaturity.
MFC.PR.B PerpetualDiscount 178,758 Nesbitt crossed 30,000 at 17.20, TD crossed 85,000 at 17.19, then CIBC crossed 50,000 at 17.19. Now with a pre-tax bid-YTW of 7.06% based on a bid of 16.75 and a limitMaturity.
BMO.PR.H PerpetualDiscount 173,600 CIBC crossed 171,000 at 19.15. Now with a pre-tax bid-YTW of 7.13% based on a bid of 19.01 and a limitMaturity.
DC.PR.A Scraps (Would be OpRet but there are credit concerns) 159,190 Scotia crossed 150,000 at 13.25. Now with a pre-tax bid-YTW of 16.33% based on a bid of 13.06 and a softMaturity 2016-6-29 at 25.00.
PWF.PR.D OpRet 118,735 CIBC crossed 115,000 at 25.15. Now with a pre-tax bid-YTW of 5.16% based on a bid of 25.05 and a softMaturity 2012-10-30 at 25.00.
SLF.PR.B PerpetualDiscount 111,707 CIBC crossed 100,000 at 16.99. Now with a pre-tax bid-YTW of 7.38% based on a bid of 16.52 and a limitMaturity.
NTL.PR.G Scraps (would be Ratchet, but there are credit concerns) 108,880 National crossed 61,500 at 3.00.

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

OSFI Finalizes Securitization Rule Revisions

Tuesday, October 28th, 2008

OSFI has released an Advisory re Securitization – Expected Practices.

It’s mostly motherhood, but there are some interesting highlights:

Effective immediately, GMD liquidity facilities provided by Canadian FREs will no longer result in zero capital usage (e.g. a 0% credit conversion factor will cease to apply under the standardized approach) and will, regardless of the approach (e.g. standardized approach; internal ratings based approach) used to measure risk arising from securitization exposures, receive the same credit conversion factors and capital treatment as global style liquidity facilities. In particular, when using an internal ratings-based approach, no reduction in risk exposure for a liquidity facility will apply if it is structured as a GMD liquidity facility and such facility shall be treated in a manner consistent with global style liquidity facilities. This guidance reflects that, while GMD liquidity facilities may not exhibit material credit risk, recent events have shown that other risks do exist (such as reputational risk) [Footnote] and that, consequently, a capital charge is appropriate.

Footnote: GMD facilities have been converted to global style facilities in support of sponsored conduits.

OSFI misses the point here. It was not the GMD facility that created reputational risk – it was the sponsorship. There has been no effect on the foreign banks that provided GMD facilities for the Canadian ABCP, because they weren’t sponsoring the conduits.

There is no need to increase the capital charge for GMD – this move simply represents OSFI caving to a few uninformed headline writers. I’d prefer to have an independent regulator, frankly.

In a related example:

Effective October 31, 2008, new securities issued by securitization SPEs, other than securities issued as a result of the “Montreal Accord”, must be rated by at least two recognized ECAIs to permit, in the case of any securitization exposure related to such securities, the use of a standardized or internal ratings-based approach, or an Internal Assessment Approach13, by a FRE14. In all cases where a securitization exposure arises from a re-securitization and the exposure is acquired after October 31, 2008, the securities issued by the re-securitization SPE (or such securitization exposure), other than securities issued as a result of the “Montreal Accord”, must be rated by two recognized ECAIs to permit a FRE to use a ratings-based or Internal Assessment Approach for such exposure. further, in the case of a re-securitization exposure acquired after October 31, 2008, the Supervisory Formula under CAR can only be applied based on the ultimate underlying assets (e.g. the third party loans or receivables giving rise to cash flows) and not based upon securities issued by any underlying securitization.

Now, me, I’d rather have one good credit analysis than two bad ones, but maybe that’s just me.

I do support their efforts on resecuritization:

While re-securitizations share many of the same issues and features as securitizations of unsecuritized assets, because additional risks exist, it may not be appropriate to apply the same risk assessment and capital adequacy measures to re-securitizations as are applied to other securitizations. For example, reliance on the credit ratings ascribed to the securitization exposures held by the re-securitization may be misleading unless a detailed analysis of the underlying assets in the underlying securitizations is performed (e.g. to ensure that those assets will perform as expected under stress test scenarios and that those underlying assets do not pose any concentration risks and provide sufficient diversity).

This is attempting to get at the correlation of default behaviour – copulas, in technical parlance – without actually using the word! But it’s a start.