Archive for November, 2008

XTD.PR.A Enters Protection Plan

Monday, November 24th, 2008

TDb Split Corp. has announced:

during the week ending November 21, 2008, the share price of TD Bank has declined by approximately 23% resulting in an overall total decrease in the share price of TD Bank of 38% since the inception date of the Company. TD Bank was $69.03 as at the inception date of the Company on August 7, 2007 and closed on November 24, 2008 at $42.90. This very sharp and accelerated decline in TD Bank has resulted in the Company’s net asset value being reduced significantly and has required the Company to implement the Priority Equity Portfolio Protection Plan in accordance with the prospectus. As detailed in the prospectus, this strategy is intended to provide that the Priority Equity Share Repayment amount will be paid in full to holders of the Priority Equity shares on the termination date on December 1, 2014.

The Priority Equity Portfolio Protection Plan provides that if the net asset value of the Company declines below a specified level, the Manager will liquidate a portion of the common shares of TD Bank held by the Company and use the net proceeds to acquire (i) qualifying debt securities or (ii) certain securities and enter into a forward agreement (collectively, the “Permitted Repayment Securities”) in order to cover the Preferred Share Repayment Amount in the event of further declines in the net asset value of the Company. Under the Priority Equity Portfolio Protection Plan, the amount of the Company’s net assets, if any, required to be allocated to Permitted Repayment Securities (the “Required Amount”) will be determined such that (i) the net asset value of the Company, less the value of the Permitted Repayment Securities held by the Company, is at least 125% of (ii) the Preferred Share Repayment Amount, less the amount anticipated to be received by the Company in respect of its Permitted Repayment Securities on the Termination Date.

The Company’s net asset value as at November 24, 2008 was $11.96 per unit which includes $8.84 per unit in shares of TD Bank and $3.12 per unit in cash and permitted repayment securities (current value). The permitted repayment securities have an estimated forward value of $3.90 per unit at maturity in 2014. This leaves the Priority Equity Shareholder exposed to $6.10 per share ($10.00 par value – $ 3.90 in cash and equivalent notional value of Permitted Repayment Securities) in TD Bank holdings.

The portfolio is continually rebalanced and adjusted based on market conditions to provide both security for Priority Equity shareholders and upside potential for Class A shareholders. The Company may buy or sell additional shares of TD Bank, the Permitted Repayment Securities, and/or option positions based on market conditions and provided that the Company remains in compliance with the Priority Equity Portfolio Protection Plan.

XTD.PR.A is a small issue, with only 1.75-million shares outstanding, according to the TSX. This is the first mention of this issue on PrefBlog. XTD.PR.A is not tracked by HIMIPref™.

New Issue: Royal Bank Fixed-Reset 6.25%+350

Monday, November 24th, 2008

Yet another new issue!

Issue: Royal Bank Non-Cumulative 5-Year Rate Reset Preferred Shares, Series AN

Size: 9-million shares @$25.00 (=$225-million); Greenshoe for 4-million shares (=$100-million)

Dividend: 6.25% until first Exchange Date; reset every Exchange Date at 5-Year Canadas + 350bp. First Dividend 2009-5-24 for $0.71490. Floaters pay 3-month Bills +350, reset quarterly.

Exchangeable: Every Exchange Date to and from Series AO (“Floaters”).

Exchange Date: 2014-2-24 and every five years thereafter.

Redeemable: Every Exchange Date at $25.00. Floaters redeemable every Exchange Date at $25.00 and at $25.50 at all other times.

Closing: 2008-12-8

canadianBondIndices.com Not Really Gone

Monday, November 24th, 2008

The very useful website canadianBondIndices.com (linked in the right hand panel, under “Canadian Fixed Income Data”) is temporarily unavailable.

I am advised that this is a mere technical issue with a change in DNS provider and that the site should be available again in the near future.

Treasury Gives Tail Protection to Citigroup

Monday, November 24th, 2008

A Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup has been released (just before 11pm):

Washington, DC — The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. 

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

  • We will work to support a healthy resumption of credit flows to households and businesses.
  • We will exercise prudent stewardship of taxpayer resources.
  • We will carefully circumscribe the involvement of government in the financial sector.
  • We will bolster the efforts of financial institutions to attract private capital.

A term sheet gives the details. The most interesting are:

Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves)

Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%).

Institution is prohibited from paying common stock dividends, in excess of $.01 per share per quarter, for 3 years without UST/FDIC/FRB consent. A factor taken into account for consideration of the USG’s consent is the ability to complete a common stock offering of appropriate size.

and the politically popular:

An executive compensation plan, including bonuses, that rewards longterm performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG

Well, they had to do something, or Monday would be carnage.

Fearless forecast? Geez, you know, it’s hard to say. But in early Asian trading:

Suncorp-Metway Ltd., Australia’s third-largest insurer, dropped 4.9 percent in Sydney after increasing its forecast for bad loans. Standard Chartered Plc fell 5.1 percent in Hong Kong following a Financial Times report that the U.K. lender will sell $3 billion of stock to replenish capital. Financial shares declined as the U.S. agreed to protect $306 billion of loans and securities on Citigroup Inc.’s books against losses. BHP Billiton Ltd., Australia’s largest oil company, climbed 6.4 percent in Sydney after crude prices climbed.

November 21, 2008

Friday, November 21st, 2008

Across the Curve notes some dealer research that claims:

The NY Fed data released yesterday afternoon shows another huge reduction in Agency debt and MBS held for overseas investors. Of the $1.7tn in GSE debt and MBS held by overseas accounts, $885bn is held in these accounts. The decline in holdings for the week ending Nov 19th was $11.7bn, which is the 3rd largest drop on record, second only to Oct 15th (-18.6bn) and Oct 8th (-24.4bn).

I can’t find the NY Fed Release, but I do have a piece by Brad Setser:

At the end of July, China stopped buying Agencies and corporate bonds and started to pile into Treasuries. Over the last three months of data (i.e. the third quarter), the US data indicates that China has bought $81.1 billion in Treasuries ($45 billion short-term) and added $17.4 billion to its bank accounts — that is a flow of nearly $100 billion into the safest US assets China can find. Conversely, China sold $16 billion of Agencies, $1.8 billion of corporate bonds and a bit less than a billion of equity.

In the second quarter, by contrast, China bought only $13 billion of Treasuries and added only $2 billion to its US bank account while buying $17 billion of Agencies and $20 billion of corporate bonds.

That is a huge swing — and frankly a destabilizing swing. The notion that sovereign investors are always and at all times a stabilizing force in the market should be put to rest. China has clearly kept the RMB dollar stable — and been a big source of demand for Treasuries. But it has been a seller of other assets in a time of stress.

I noted in an update to the most recent post on Effective Fed Funds that the FDIC has finalized the new rule on debt guarantees – Accrued Interest predicts a flood of new US Bank paper – with Goldman Sachs first to go.

There’s a short piece in the WSJ Deal Blog regarding preferred share issuance by SEC regulated companies

BDCs believe that there may be a substantial opportunity to issue preferred stock either in privately negotiated transactions or otherwise because preferred stock can be customized to some extent to the needs of potential investors. The 1940 act limits the ability of BDCs to issue senior securities, including preferred stock, by imposing a requirement that they maintain a ratio of assets to senior securities of 200%, or 2 to 1. Therefore, if a BDC, for example, has $10 in assets, it cannot have a total of borrowing or outstanding preferred stock of more than $5. If a BDC is already close to its asset coverage limit, it would be limited in its ability to issue preferred stock.

We finally get a decent inflation number and Bang! there are deflation fears. This is a completely crazy market.

Falling car prices and cheaper women’s clothing weighed on the consumer price index. Gasoline was still higher than a year ago, but was rising at a slower pace than in previous months, also bringing the annual inflation rate down, the agency said.

Core inflation, which excludes the most volatile items such as energy and some food, was 1.7 per cent higher on the year – the same as in September, and close to analysts’ expectations. On a month-over-month seasonally adjusted basis, core inflation showed no growth.

I think Econbrowser‘s James Hamilton has the anti-deflation recipe about right:

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 New York Times reports (to no-one’s great surprise) that Citibank is talking earnestly to Treasury & the Fed. A Sunday Night Special is widely anticipated.

Devastation. After another appalling day, PerpetualDiscounts now yield 8.22% pre-tax dividend, equivalent to 11.51% pre-tax interest at the standard equivalency factor of 1.4x. Long Corporates still yield 7.50% and are still up on the month … the pre-tax interest-equivalent spread is now 401bp.

There are complaints from retail that the preferred share market is way, way too exciting.

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 5.24% 5.20% 73,008 15.35 6 -3.4129% 1,001.3
Floater 9.64% 9.89% 55,135 9.54 2 -1.9786% 365.4
Op. Retract 5.37% 6.43% 136,904 3.90 15 -0.3542% 991.1
Split-Share 7.57% 16.01% 63,696 3.78 12 -1.4877% 807.5
Interest Bearing 9.31% 19.62% 57,563 2.91 3 +2.3765% 775.3
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 8.10% 8.22% 180,013 11.23 71 -2.9944% 677.6
Fixed-Reset 5.73% 5.40% 883,611 14.61 12 -1.9556% 1,027.1
Major Price Changes
Issue Index Change Notes
LBS.PR.A SplitShare -16.7694% Asset coverage of 1.3+:1 as of November 20, according to Brompton Group. Now with a pre-tax bid-YTW of 14.92% based on a bid of 6.75 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 6.75-7.28, 32×11. Day’s range of 6.53-00 (?).
TD.PR.S FixedReset -11.3924% Closing quote of 21.00-22.50, 15×39. Day’s range of 22.20-23.80.
BAM.PR.M PerpetualDiscount -11.3475% Now with a pre-tax bid-YTW of 12.27% based on a bid of 10.00 and a limitMaturity. Closing quote 10.00-24, 16×2. Day’s range 9.99-11.50.
GWO.PR.I PerpetualDiscount -10.5263% Now with a pre-tax bid-YTW of 9.04% based on a bid of 12.75 and a limitMaturity. Closing quote 12.75-13.70, 7×51. Day’s range of 12.02-14.25 (!).
BAM.PR.N PerpetualDiscount -9.9099% Now with a pre-tax bid-YTW of 12.27% based on a bid of 10.00 and a limitMaturity. Closing quote 10.00-45, 6×1. Day’s range of 9.51-11.40.
BMO.PR.H PerpetualDiscount -9.4438% Now with a pre-tax bid-YTW of 8.56% based on a bid of 15.63 and a limitMaturity. Closing quote 15.63-16.99 (!) 4×3. Day’s range of 15.61-17.94 (!).
GWO.PR.H PerpetualDiscount -8.6207% Now with a pre-tax bid-YTW of 9.39% based on a bid of 13.25 and a limitMaturity. Closing quote 13.25-50, 1×9. Day’s range of 12.27-14.69 (!).
BNS.PR.N PerpetualDiscount -7.8727% Now with a pre-tax bid-YTW of 8.07% based on a bid of 16.50 and a limitMaturity. Closing quote 16.50-00, 11×11. Day’s range of 15.02-18.35 (!).
BNS.PR.K PerpetualDiscount -7.8701% Now with a pre-tax bid-YTW of 8.26% based on a bid of 14.75 and a limitMaturity. Closing quote 14.75-50, 1×1. Day’s range of 14.75-16.50.
SBC.PR.A SplitShare -7.7778% Asset coverage of 1.4-:1 as of November 20, according to Brompton Group. Now with a pre-tax bid-YTW of 13.94% based on a bid of 7.47 and a hardMaturity 2012-11-30 at 10.00. Closing quote of 7.47-23, 3×1. Day’s range of 7.60-25.
HSB.PR.D PerpetualDiscount -7.7419% Now with a pre-tax bid-YTW of 8.96% based on a bid of 14.30 and a limitMaturity. Closing Quote 14.30-34, 10×1. Day’s range of 14.01-15.02.
TD.PR.Q PerpetualDiscount -7.6410% Now with a pre-tax bid-YTW of 7.89% based on a bid of 18.01 and a limitMaturity. Closing Quote 18.01-00, 11×11. Day’s range of 17.25-19.90 (!).
TD.PR.R PerpetualDiscount -6.9054% Now with a pre-tax bid-YTW of 7.80% based on a bid of 18.20 and a limitMaturity. Closing Quote 18.20-94, 3×3. Day’s range of 18.00-19.89.
HSB.PR.C PerpetualDiscount -6.6805% Now with a pre-tax bid-YTW of 8.14% based on a bid of 16.02 and a limitMaturity. Closing Quote 16.02-40, 2×1. Day’s range of 16.15-85.
CM.PR.P PerpetualDiscount -6.8565% Now with a pre-tax bid-YTW of 8.72% based on a bid of 16.03 and a limitMaturity. Closing Quote 16.03-49, 3×1. Day’s range of 16.01-90.
CM.PR.D PerpetualDiscount -6.8333% Now with a pre-tax bid-YTW of 8.72% based on a bid of 16.77 and a limitMaturity. Closing Quote 16.77-00, 10×7. Day’s range of 16.75-18.00.
BMO.PR.J PerpetualDiscount -6.7909% Now with a pre-tax bid-YTW of 8.11% based on a bid of 14.00 and a limitMaturity. Closing Quote 14.00-25, 10×69. Day’s range of 13.60-15.28.
TD.PR.Y FixedReset -6.7797% Closing quote of 22.00-23.20, 8×15. Day’s range of 21.00-23.50 (!).
BCE.PR.R FixFloat -6.4783% Closing quote of 21.51-21, 10×4. Day’s range of 21.75-23.00.
BAM.PR.K Floater -6.2667% Closing quote of 7.03-50, 1×8. Day’s range of 7.00-80. The craziness continues … this now pays almost 2.5x Canada Prime when bought at the bid price.
BMO.PR.K PerpetualDiscount -6.0606% Now with a pre-tax bid-YTW of 8.55% based on a bid of 15.50 and a limitMaturity. Closing Quote 15.50-65, 10×9. Day’s range of 15.00-17.00 (!).
RY.PR.F PerpetualDiscount -5.7933% Now with a pre-tax bid-YTW of 7.85% based on a bid of 14.31 and a limitMaturity. Closing Quote 14.31-80, 2X1. Day’s range of 14.50-16.25.
NA.PR.K PerpetualDiscount -5.7068% Now with a pre-tax bid-YTW of 8.21% based on a bid of 18.01 and a limitMaturity. Closing Quote 18.01-90, 3X3. Day’s range of 17.55-19.10.
CM.PR.E PerpetualDiscount -5.6977% Now with a pre-tax bid-YTW of 8.78% based on a bid of 16.22 and a limitMaturity. Closing Quote 16.22-48, 1×3. Day’s range of 16.02-17.45.
BMO.PR.L PerpetualDiscount -5.5000% Now with a pre-tax bid-YTW of 8.61% based on a bid of 17.01 and a limitMaturity. Closing Quote 17.01-99. Day’s range of 16.75-18.94.
TD.PR.P PerpetualDiscount -5.4251% Now with a pre-tax bid-YTW of 7.87% based on a bid of 16.91 and a limitMaturity. Closing Quote 16.91-40, 20×3. Day’s range of 16.50-18.30.
RY.PR.B PerpetualDiscount -5.3293% Now with a pre-tax bid-YTW of 7.50% based on a bid of 15.81 and a limitMaturity. Closing Quote 15.81-04, 3×2. Day’s range of 15.75-17.17.
CM.PR.I PerpetualDiscount -5.1930% Now with a pre-tax bid-YTW of 8.85% based on a bid of 13.51 and a limitMaturity. Closing Quote 13.51-95, 4×6. Day’s range of 13.51-40.
RY.PR.A PerpetualDiscount -5.1462% Now with a pre-tax bid-YTW of 6.91% based on a bid of 16.22 and a limitMaturity. Closing Quote 16.22-50, 1×9. Day’s range of 16.50-30.
BCE.PR.G FixFloat -5.0633% Closing quote of 21.00-22.74, 8×1. Day’s range of 21.00-22.01.
NA.PR.N FixedReset +11.2704% Closing quote of 22.51-23.85, 3×10. Day’s range of 21.66-23.85 (!)
FIG.PR.A

InterestBearing +13.3333% See cancellation of rights offering. Now with a pre-tax bid-YTW of 17.76% based on a bid of 5.95 and a hardMaturity 2014-12-31. Closing quote of 5.95-08, 4×1. Day’s range of 4.62-6.10.
LFE.PR.A SplitShare +17.4950% Asset coverage of 1.6-:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 21.11% based on a bid of 5.91 and a hardMaturity 2012-12-1 at 10.00. Retraction formula is (96%NAV) – C [I think] but they want 20 days notice! Closing quote of 5.91-7.46, 16×2. Day’s range of 6.01-7.75.
Volume Highlights
Issue Index Volume Notes
SLF.PR.A PerpetualDiscount 365,840 Dundee bought 10,000 from anonymous at 13.70. RBC crossed two blocks of 100,000 and one of 134,800, all at 13.50. Now with a pre-tax bid-YTW of 9.01% based on a bid of 13.20 and a limitMaturity.
BNA.PR.B SplitShare 120,800 Scotia crossed 75,000 at 17.75, then another 40,000 at the same price. Now with a pre-tax bid-YTW of 10.53% based on a bid of 18.02 and a hardMaturity 2016-3-25.
PWF.PR.K PerpetualDiscount 111,400 RBC crossed 100,000 at 14.75. Now with a pre-tax bid-YTW of 8.38% based on a bid of 15.00 and a limitMaturity.
RY.PR.L FixedReset 94,320 Anonymous bought 11,000 from Nesbitt at 24.80.
BNS.PR.P FixedReset 91,535 Nesbitt crossed 75,000 at 23.50.

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

BIG.PR.A to be Redeemed on Schedule; New Issue to Recapitalize

Friday, November 21st, 2008

Big 8 Split Inc. has announced:

that its Board of Directors has approved a proposal to reorganize the Company. The reorganization will permit holders of Class A Capital Shares to extend their investment in the Company beyond the redemption date of December 15, 2008 for up to an additional 5 years. The Class A Preferred Shares will be redeemed on the same terms originally contemplated in their share provisions.

Holders of Class A Capital Shares who do not wish to extend their investment and all holders of Class A Preferred Shares will have their shares redeemed on December 15, 2008. The Board has retained TD Securities Inc. to provide financial advice to the Company in this regard.

The reorganization will involve (i) the extension of the originally scheduled redemption date, (ii) a special retraction right to enable holders of Class A Capital Shares to retract their shares as originally contemplated should they not wish to extend their investment and (iii) the creation of new preferred shares to be known as the Class B Preferred Shares, Series 1 in order to provide continuing leverage for the Class A Capital Shares. The reorganization will be subject to receipt of all necessary regulatory approvals.

A special meeting of holders of Class A Capital Shares has been called and will be held on November 21, 2008 to consider and vote upon the reorganization. Details of the proposed reorganization will be outlined in an information circular to be prepared and delivered to holders of Class A Capital Shares in connection with the special meeting.

Big 8 Split was established to generate dividend income for the Preferred Shares while providing holders of the Capital Shares with a leveraged opportunity to participate in capital appreciation from a portfolio of common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc. Information concerning Big 8 Split Inc. is available on our website at www.tdsponsoredcompanies.com.

The Capital Shares and Preferred Shares of Big 8 Split are listed on the Toronto Stock Exchange
under the symbols BIG.A and BIG.pr.A respectively.

The preliminary prospectus on SEDAR has all the interesting parts – like dividend rate – left blank.

The NAVPU has declined from $72.98 on 2008-1-3 to $41.80 on 2008-11-13, which means the capital unit NAV has gone from $47.98 to $16.80. Ouch! About 4.3% of outstanding units were retracted in 2007 … they were the lucky ones!

BIG.PR.A has not been tracked by HIMIPref™.

Update, 2008-11-24: Reorganization approved.

Basel Committee Outlines Plan

Friday, November 21st, 2008

The Basel Committee has announced:

a comprehensive strategy to address the fundamental weaknesses revealed by the financial market crisis related to the regulation, supervision and risk management of internationally-active banks.

The key building blocks of the Committee’s strategy are the following:

  • strengthening the risk capture of the Basel II framework (in particular for trading book and off-balance sheet exposures);
  • enhancing the quality of Tier 1 capital;
  • building additional shock absorbers into the capital framework that can be drawn upon during periods of stress and dampen procyclicality;
  • evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks to help contain leverage in the banking system;
  • strengthening supervisory frameworks to assess funding liquidity at cross-border banks;
  • leveraging Basel II to strengthen risk management and governance practices at banks;
  • strengthening counterparty credit risk capital, risk management and disclosure at banks; and
  • promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles.

[Chairman of the Basel Committee ] Mr Wellink further noted that the Basel Committee expects to issue proposals on a number of these topics for public consultation in early 2009, focusing on the April 2008 recommendations of the Financial Stability Forum. The other topics will be addressed over the course of 2009

Interesting. It looks like a repudiation of OSFI’s debasement of Bank Capital, an intent to look at the internationally controversial leverage ratio (or Assets to Capital Multiple, in Canada), and … I don’t know: a threat (? depends on what “leveraging” means) to regulate bonuses (? depends on what “governance” means).

OSFI should take careful note of the intent “to issue proposals on a number of these topics for public consultation”. That’s how the professionals do things, guys.

November 20, 2008

Friday, November 21st, 2008

Lasse Heje Pedersen writes a good review piece on VoxEU, Liquidity risk and the current crisis:

the meaning of liquidity risk is clear.

  • Market liquidity risk is the risk that the market liquidity worsens when you need to trade.
  • Funding liquidity risk is the risk that a trader cannot fund his position and is forced to unwind.

For instance, a levered hedge fund may lose its access to borrowing from its bank and must sell its securities as a result. Or, from the bank’s perspective, depositors may withdraw their funds, the bank may lose its ability to borrow from other banks, or raise funds via debt issues.

If we have learned one thing from the current crisis, it is that trading through organised exchanges with centralised clearing is better than trading over-the-counter derivatives because trading derivatives increases co-dependence, complexity, counterparty risk, and reduces transparency. Said simply, when you buy a stock, your ownership does not depend on who you bought it from. If you buy a “synthetic stock” through a derivative, on the other hand, your ownership does depends on who you bought it from – and that dependence may prevail even after you sell the stock (if you sell through another bank). Hence, when people start losing confidence in the bank with which they trade, they may start to unwind their derivatives positions and this hurts the bank’s funding, and a liquidity spiral unfolds.

Banning short selling is a bad idea

Tobin taxes are a bad idea

TD Bank pre-announced some losses that will show up in the fourth quarter:

Credit trading losses of approximately $350 million (after-tax) for the quarter in Wholesale Banking, leading to a net loss of $228 million on an adjusted basis for that segment

The first significant item relates to the credit trading business in TDBFG’s Wholesale Banking segment. As previously disclosed, due to global liquidity issues, the widening in the pricing relationship between asset and credit protection markets (basis) has negatively impacted credit trading-related revenues for the first three quarters of 2008. The dramatic absence of liquidity in global credit markets in September and October has produced an unprecedented widening of the basis, causing larger losses in Wholesale Banking in the fourth quarter.

Hmmm … basis widening? It sounds like the Credit Default Swap Basis they’re talking about. So – I think – what happened is this:

  • TD has a large corporate bond inventory (that they trade)
  • The hedge it by buying protection (via Credit Default Swaps) … not necessarily on each individual name, it might be, f’rinstance IG 11)
  • TD might even have deliberately put on a big negative basis trade
  • Funding cash bonds has become a chancy thing. Liquidity is NIL (or close enough). The CDS basis becomes even more negative.
  • On a mark-to-market basis, TD Bank loses money

Like I said, maybe. There’s not a lot of detail in the press release.

Teck Cominco eliminated its dividend. The market wasn’t very happy.

Preferred share investors shaken by the carnage can console themselves that they have a front-row seat on history while avoiding the brunt of the unwind. I will lift two quotes from the excellent Across the Curve today … Treasuries & Swaps:

The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.

… and CMBS:

Cash AAAs widened 325 basis points. The email author wanted to put the recent carnage into stark relief for the non aficionados in the room. He noted that GSMS 07-GG 10- A4 is a benchmark deal. Two weeks ago it traded at 83. Today it traded at 48.

CMBX AAAs wider by 130 basis points.

Look at the CMBS basis move! Cash moved 325bp … the CDS index moved by 130. The basis moved nearly 200bp! While I am not a specialist in the field, I would suggest that a move of 2 (two) basis points in the basis would be a pretty good day … in normal times.

The longer term moves? Bloomberg reports:

Yields on the safest category of AAA rated commercial- mortgage bonds rose 3.34 percentage points, the biggest gain ever, to a record 15.29 percentage points more than interest- rate swaps, according to Bank of America Corp. data.

The spread on the AAA commercial-mortgage securities, which entered this year at 0.82 percentage point, has climbed from 5.88 percentage points on Nov. 4.

The move in basis is indicative that even those who are willing to take some risk and lever up a position in CMBS … can’t get, or can’t trust, funding. So they have to take a synthetic position by selling protection. Lots of money to be made there, buying cash bonds and protecting them … if you can trust your financing … and your counterparties.

So, after a horrible day that was the fourth horrible day in a row (defining “horrible” as a loss of more than 1%), PerpetualDiscounts yield 7.95% as pre-tax dividends, equivalent to 11.13% pre-tax interest. Long Corporates are still at 7.50% so the Pre-Tax Interest-Equivalent Spread is … (drum-roll, please) … 363bp. Incredible.

Holy smokes. On a day like this, what would I do without Dealbreaker?

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 5.06% 5.00% 70,972 15.62 6 -1.6230% 1,036.7
Floater 9.43% 9.67% 54,872 9.72 2 -4.0215% 372.8
Op. Retract 5.35% 6.35% 135,628 3.90 15 -0.4634% 994.6
Split-Share 7.42% 15.33% 61,279 3.80 12 -7.2657% 819.7
Interest Bearing 9.48% 18.65% 55,109 2.79 3 -8.1449% 757.3
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 7.85% 7.95% 179,463 11.50 71 -4.7611% 698.5
Fixed-Reset 5.60% 5.27% 887,144 14.83 12 -0.4732% 1,047.6
Major Price Changes
Issue Index Change Notes
LFE.PR.A SplitShare -40.8235% Asset coverage of 1.6-:1 as of November 14 according to the company. Now with a pre-tax bid-YTW of 26.33% based on a bid of 5.03 and a hardMaturity 2012-12-1 at 10.00. Retraction formula is (96%NAV) – C [I think] but they want 20 days notice! Capital Units closed at $4 today. Preferred Closing quote 5.03-7.56, 16×9. Day’s range 7.56-45. So the good news is: it’s not as bad as it looks. The bad news is: I had to check.
FIG.PR.A

InterestBearing -19.8473% See cancellation of rights offering. Now with a pre-tax bid-YTW of 20.72% based on a bid of 5.25 and a hardMaturity 2014-12-31. Closing quote of 5.25-95, 2×3. Day’s range of 5.25-6.55.
POW.PR.B PerpetualDiscount -14.4082% Now with a pre-tax bid-YTW of 9.12% based on a bid of 14.97 and a limitMaturity. Closing quote 14.97-49, 10×3. Day’s range 14.90-17.49 (!).
BNA.PR.C SplitShare -12.2449% Asset coverage currently 1.5+:1 based on BAM.A at 15.93 and 2.4 BAM.A per preferred. Now with a pre-tax bid-YTW of 15.90% based on a bid of 10.75 and a hardMaturity 2019-1-10 at 25.00. Closing quote of 10.75-11.59, 2×7. Day’s range of 10.01-12.25 (!)
ALB.PR.A SplitShare -11.3953% Asset coverage of 1.5-:1 as of November 13 according to Scotia Managed Companies. Now with a pre-tax bid-YTW of 17.39% based on a bid of 19.05 and a hardMaturity 2011-2-28. Closing quote of 19.05-97, 1×1. Day’s range of 19.63-21.5 (!)
POW.PR.A PerpetualDiscount -11.3866% Now with a pre-tax bid-YTW of 8.15% based on a bid of 17.51 and a limitMaturity. Closing quote 17.51-19.00, 10×5. Day’s range of 19.50-75.
CM.PR.G PerpetualDiscount -9.9613% Now with a pre-tax bid-YTW of 8.43% based on a bid of 16.27 and a limitMaturity. Closing Quote 16.27-74, 4X2. Day’s range of 16.50-18.11.
ELF.PR.G PerpetualDiscount -9.8746% Now with a pre-tax bid-YTW of 10.56% based on a bid of 11.50 and a limitMaturity. Closing Quote 11.50-48, 5X5. Day’s range of 11.50-12.75.
RY.PR.F PerpetualDiscount -9.4216% Now with a pre-tax bid-YTW of 7.39% based on a bid of 15.19 and a limitMaturity. Closing Quote 15.19-16.25, 1×11. Day’s range of 16.50-76.
CM.PR.J PerpetualDiscount -9.1096% Now with a pre-tax bid-YTW of 8.62% based on a bid of 13.27 and a limitMaturity. Closing Quote 13.27-50, 5×2. Day’s range of 13.26-14.60.
FBS.PR.B SplitShare -9.0909% Asset coverage of 1.4-:1 as of November 13, according to the company. Now with a pre-tax bid-YTW of 18.49% based on a bid of 7.00 and a hardMaturity 2011-12-15 at 10.00. Closing quote of 7.00-40, 20×11. Day’s range of 7.25-90. Monthly retraction formula is (95%NAV) – C – $0.40 = about 7.20 … not supportive yesterday, but supportive now … but NAV has probably changed substantially!
W.PR.H PerpetualDiscount -9.0303% Now with a pre-tax bid-YTW of 9.35% based on a bid of 15.01 and a limitMaturity. Closing Quote 15.01-16.49. Day’s range of 16.50-51.
POW.PR.C PerpetualDiscount -8.6022% Now with a pre-tax bid-YTW of 8.70% based on a bid of 17.00 and a limitMaturity. Closing Quote 17.00-86, 6×1. Day’s range of 17.30-18.50.
PWF.PR.H PerpetualDiscount -8.5873% Now with a pre-tax bid-YTW of 8.85% based on a bid of 16.50 and a limitMaturity. Closing Quote 16.50-00, 10×22. Day’s range of 17.00-18.60.
BNS.PR.R Fixed-Reset -8.5106%  
SLF.PR.D PerpetualDiscount -8.4919% Now with a pre-tax bid-YTW of 8.91% based on a bid of 12.50 and a limitMaturity. Closing Quote 12.50-25, 8×8. Day’s range of 12.50-13.79.
RY.PR.G PerpetualDiscount -8.2840% Now with a pre-tax bid-YTW of 7.32% based on a bid of 15.50 and a limitMaturity. Closing Quote 15.50-70, 14×1. Day’s range of 15.12-17.00.
BAM.PR.B Floater -8.1250% Poor old BAM floaters can’t seem to catch a break. No matter how highly they’re touted.
BNS.PR.L PerpetualDiscount -8.1238% Now with a pre-tax bid-YTW of 8.01% based on a bid of 14.25 and a limitMaturity. Closing Quote 14.25-15.50, 1×27. Day’s range of 15.00-75.
W.PR.J PerpetualDiscount -8.0048% Now with a pre-tax bid-YTW of 9.28% based on a bid of 15.40 and a limitMaturity. Closing Quote 15.40-16.47, 1×4. Day’s range of 15.50-16.75.
NA.PR.N FixedReset +11.8916% Partial recovery from yesterday’s fiasco.
Volume Highlights
Issue Index Volume Notes
BNA.PR.B SplitShare 130,650 Desjardins crossed two blocks of 25,000 each at 18.00, then another 75,000 at the same price. See BNA.PR.C, above. Now with a pre-tax bid-YTW of 10.81% based on a bid of 17.73 and a hardMaturity 2016-3-25. Monthly Retraction formula of $25.00 – 5%NAV – $1 = $25.00 – 5%($38.23) – 1 = $22.09 Extremely Supportive!
FTS.PR.C Scraps (Would be OpRet but there are credit concerns) -6.4016% CIBC crossed 49,000 at 25.05, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 6.92% based on a bid of 23.54 and a softMaturity 2013-8-31 at 25.00
TD.PR.C FixedReset 88,150 Scotia crossed 12,000 at 24.95, then another 11,000 at the same price.
RY.PR.L FixedReset 71,100 Scotia crossed 15,000 at 24.95.
CM.PR.A OpRet 62,980 RBC crossed 57,000 at 25.25. Now with a pre-tax bid-YTW of 5.07% based on a bid of 25.25 and a softMaturity 2011-7-30 at 25.00.
BCE.PR.G FixFloat 46,012 CIBC crossed 41,000 at 22.75.

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

FIG.PR.A : Capital Units Rights Offering Cancelled

Thursday, November 20th, 2008

Faircourt Asset Management has announced:

that due to recent market conditions, it has decided to cancel its previously announced rights offering. Due to the current market conditions it was determined by the Manager, not to be in the best interests of Unitholders to proceed with the proposed rights
offering.

The Rights offering was finalized and discussed on PrefBlog on November 18 which, if my calender is still working, was TWO DAYS AGO! This is an epic crash, to be sure.

As of November 19, NAV per Capital Unit was $2.46 according to Faircourt and at 0.71 Capital Units per Pref, asset coverage of the prefs was – yesterday – 1.2-:1.

CFS.PR.A Enters Protection Plan

Thursday, November 20th, 2008

Canadian Utilities & Financials Split Corp. has announced:

The leveraging and de-leveraging mechanism offers the ability to increase leverage when the Company’s portfolio appreciates in value and reduce leverage when the portfolio declines in value. Leverage is actively managed by RBC Dominion Securities Inc. (“RBC”) in its capacity as the Company’s Leverage Agent. The value of the Company’s portfolio has declined significantly in recent months, a period characterized by extreme and unprecedented market conditions and economic weakness, and has declined by more than 34% since its inception. As a result, under the terms of the prospectus, RBC is required to sell portfolio securities and invest the proceeds in cash or cash equivalents in order to provide additional assurance that the Company’s objective to repay the $10.00 issue price of the Preferred Shares at maturity will be met and that the Preferred Shares continue to have a high rating from DBRS. Following the sale of portfolio securities, the Class A Shares will continue to have exposure to the portfolio on a non-leveraged basis and distributions on the Class A Shares will be suspended beginning in December. Should the portfolio continue to decline in value, the removal of leverage will lessen the impact of any further decline on the performance of the Class A Shares.

The Company has the ability to re-establish leverage as the portfolio’s value increases. If the remaining portfolio subsequently appreciates in value and the net asset value per Class A Share grew to approximately $7.37, RBC will be instructed to re-invest the cash raised in securities of the portfolio which will restore leverage on the Class A Shares and likely result in the resumption of distributions to holders of Class A Shares.

CFS.PR.A is tracked by HIMIPref™, but is a tiny issue. It was moved from the SplitShare index to Scraps in August 2007 on volume concerns.