Archive for February, 2009

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BMT.PR.A Downgraded to Pfd-4 by DBRS

Wednesday, February 18th, 2009

DBRS has announced that it:

today downgraded the Preferred Shares issued by BMONT Split Corp. (the Company) to Pfd-4, with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In August 2004, the Company raised gross proceeds of approximately $88 million by issuing 1.525 million Preferred Shares at $27.45 each and 3.05 million Capital Shares at $15.27 each, with a redemption date of August 5, 2009 (the Redemption Date) for both classes of shares. The net proceeds from the offering were invested in a portfolio of common shares (the BMO Shares) of Bank of Montreal (BMO). The initial split share structure provided downside protection of approximately 50% to the Preferred Shares.

The holders of the Preferred Shares receive fixed cumulative quarterly distributions yielding 4.5% per annum. The current dividend income from the BMO Shares provides dividend coverage of approximately 1.8 times. In the past, excess dividends net of all expenses of the Company have been paid as dividends to holders of the Capital Shares. On January 8, 2009, the Board of Directors of the Company announced that excess dividends would be invested in short-term debt securities or BMO Shares until the scheduled redemption of the Company’s shares on the Redemption Date.

The NAV of the BMO Shares has declined significantly, dropping from $54.89 per share to $30.77 in the last year, a decline of 44%. The current downside protection available to the Preferred Shareholders is approximately 11% (as of February 13, 2009). The downgrade of the Preferred Shares is primarily based on the lower level of asset coverage available to cover the Preferred Shares principal.

There are less than six months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Shares. If the Redemption Date was to be extended past August 5, 2009, then negative rating action would likely be required.

BMT.PR.A is tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved. It is included in the “Scraps” subIndex due to volume concerns – now there are two reasons!

Posted in Issue Comments | 1 Comment »

RBS.PR.A Downgraded to Pfd-4(low) by DBRS

Wednesday, February 18th, 2009

DBRS has announced that it:

today downgraded the Preferred Shares issued by R Split III Corp. (the Company) to Pfd-4 (low), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In April 2007, the Company raised gross proceeds of $140 million by issuing 2.273 million Preferred Shares at $29.22 each and 4.546 million Capital Shares at $16.19 each, with a final redemption date of May 31, 2012 (the Redemption Date) for both classes of shares. The net proceeds from the offering were invested in a portfolio of common shares (the RBC Shares) of Royal Bank of Canada (RBC). The initial split share structure provided downside protection of approximately 50% to the Preferred Shares.

The holders of the Preferred Shares receive fixed cumulative quarterly distributions yielding 4.5% per annum. The current dividend income from the RBC Shares provides dividend coverage of approximately 1.4 times. The Company’s dividend policy is to pay holders of the Capital Shares the excess dividend income after paying Preferred Shares dividends and other Company expenses.

The NAV of the RBC Shares has declined significantly, dropping from $50.19 per share to $29.92 in the last year, a decline of more than 40%. The current downside protection available to the Preferred Shareholders is approximately 2% (as of February 13, 2009).

As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low) with a Stable trend. A main constraint to the rating is that volatility of the common share price and changes in dividend policies of RBC may result in reductions in asset coverage or dividend coverage from time to time.

RBS.PR.A is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved.

Posted in Issue Comments | 1 Comment »

ES.PR.B Downgraded to Pfd-4(low) by DBRS

Wednesday, February 18th, 2009

DBRS has announced that it:

today downgraded the Class B, Preferred Shares (the Preferred Shares) issued by Energy Split Corporation (the Company) to Pfd-4 (low) from Pfd-3 (high). The rating remains Under Review with Negative Implications, where it was placed on October 24, 2008.

Investors in the Company’s Preferred Shares and Capital Shares gain exposure to a portfolio of selected oil and gas royalty trusts (the Portfolio) through a forward purchase and sale agreement (the Forward Agreement) with the Bank of Nova Scotia (the Counterparty). The Counterparty pays the Corporation the economic return provided by the Portfolio, which is held by an underlying fund (the Royalty Fund). In return, a portfolio of common shares of Canadian public companies acquired from proceeds of the Company’s initial offering is pledged to the Counterparty. The Forward Agreement is structured to provide tax-efficient distributions to the Company’s shareholders based on the performance of the Portfolio.

The holders of the Preferred Shares receive fixed preferred tax-efficient quarterly distributions yielding 4.5% per annum. The holders of the Capital Shares are entitled to leveraged tax-efficient distributions that are in excess of distributions paid to the Preferred Shares and all operating expenses of the Corporation.

The NAV of the Company has declined significantly in the last six months, dropping from $39.56 per share to $20.93, a decline of 47%. As a result, all of the downside protection available to the Preferred Shares has been eroded. Based on the most recent NAV, holders of the Preferred Shares would experience a loss of approximately 0.3% of their initial issuance price if the Forward Agreement were terminated and proceeds distributed. The Company’s dividend policy has been to pay quarterly distributions to the Capital Shares equal to the excess income available from the quarter after paying Preferred Shares dividends and other Company expenses. Due to the large amount of excess income available to the Company, the current policy allows for a very high level of payouts ($0.75 per Capital Share for each of the last two quarters) compared to what would be expected based on the current level of asset coverage available to the Preferred Shares. As a result, the Preferred Shares rating remains Under Review with Negative Implications.

As a result of the significant decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low). A main constraint to the rating is that volatility of the market price and changes in distribution policies of the oil and gas trusts in the Portfolio may result in reductions in asset coverage or dividend coverage from time to time.

ES.PR.B is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved.

Posted in Issue Comments | 1 Comment »

MST.PR.A Downgraded to Pfd-3(high) by DBRS

Wednesday, February 18th, 2009

DBRS has announced that it:

today downgraded the Preferred Securities issued by Multi Select Income Trust (the Trust) to Pfd-3 (high), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In September 2004, the Trust raised gross proceeds of approximately $144 million by issuing 7.2 million Preferred Securities at $10 each and an equal number of Capital Units at $10 each, with a final redemption date of September 30, 2009 (the Redemption Date) for the Trust. The net proceeds from the offering were invested in a broadly diversified portfolio of Canadian income trusts (the Portfolio). The initial split share structure provided downside protection of approximately 50% to the Preferred Securities.

The holders of the Preferred Securities receive fixed quarterly distributions yielding 6.5% per annum. There is a Preferred Security Test that does not permit any cash distributions to the Capital unitholders if the NAV of the portfolio is less than 1.5 times the repayment price for the Preferred Securities.

The NAV of the Portfolio has declined significantly, dropping from $19.51 per security to $13.99 in the last year, a decline of 28%. The current downside protection available to holders of the Preferred Securities is approximately 29% (as of February 12, 2009). The downgrade of the Preferred Securities is primarily based on the lower level of asset coverage available to cover the Preferred Securities principal.

There are less than eight months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Securities. If the Redemption Date was to be extended past September 30, 2009, then negative rating action would likely be required.

MST.PR.A is tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb. 13 left the issue under review and unresolved. It was moved from the InterestBearing subIndex to Scraps in February 2008 on volume concerns.

Posted in Issue Comments | 1 Comment »

How to Hedge Interest Rate Risk?

Wednesday, February 18th, 2009

An Assiduous Reader writes in and says:

A question: How does a retail investor hedge out interest rate risk on perpetual preferreds?

Is there any simple, or reasonably efficient, way to do this?

Well … they can’t, really, which is one reason why I recommend that no more than 50% of a fixed income portfolio be in preferreds.

However, investors should be aware that the Modified Duration of a PerpetualDiscount is simply the inverse of its yield (see http://www.prefblog.com/?p=2582). With yields at about 7%, this means a MD of about 14 years. Many investors will blithely purchase 30-year strips while fussing about the interest rate sensitivity of perps.

I’ve written an essay on Perpetual Misperceptions (see http://www.prefblog.com/?p=1308) … there will be many more!

Perpetuals do have interest rate risk and – more importantly – inflation risk, but I suggest this be addressed in the rest of their portfolios; common stock in resource companies, for instance, or a shorter-than-otherwise-indicated duration in their bond portfolios. At one point – I haven’t done the calculation recently, it’s probably even better now – a taxable investor could swap his Universe iShares into perps and Short-Term iShares on a duration neutral basis and pick up a point in yield. (see http://www.prefblog.com/?p=2399)

Posted in Reader Initiated Comments | 2 Comments »

February 17, 2009

Tuesday, February 17th, 2009

Well, did everybody have a lovely Moron Day? It’s very important to celebrate the fact that there is absolutely no point to a February long weekend. It’s like booking a holiday in Hamilton.

Anyway, DBRS has responded to a policy questionaire on Credit Rating Agencies. There’s the usual blather about how wonderful it is to tick extra boxes thoughtfully prepared by IOSCO, following which we get to the more interesting stuff:

[CRA asks] Is a requirement to disclose all information provided by an issuer and used by a CRA in determining and monitoring a credit rating an appropriate way to address the lack of transparency of asset-backed securities? Should the CSA impose a disclosure obligation directly on issuers of asset-backed securities? Should a disclosure obligation apply regardless of whether such securities have a rating?

To ensure timely and consistent disclosure of useful information in the market, it is critical that disclosure be conducted by the party who is in the best position to determine that the information serves the purpose for which the disclosure is intended. DBRS suggests that the appropriate party for the proposed disclosure requirement would be the originator or the issuer of the information. Similarly, it is not an appropriate role for CRAs to monitor issuers to ensure that other parties meet their responsibilities in respect of the investing public.

As proposed, there may be an inconsistency in the information disclosed if the requirement is crafted in such a way that the information is geared to CRAs for their purposes only. Different CRAs have different information requirements. Moreover, what CRAs receive from issuers and need for rating purposes may be different from what investors require for their purposes. A credit rating is only one factor and not the sole determinant in risk measurement and investment decision making.

The interesting part about this proposal is that essentially it suggests that Regulation FD (National Policy 51-201 in Canada) be rescinded for Asset Backed Paper. Assiduous Readers will remember that I have suggested these policies – which mean that the CRAs get preferential access to material non-public information, that I would go to jail for using in the course of investing – be rescinded in their entirety.

In limiting their proposal to ABS, the regulators are fighting the last war. I have no idea where the next embarrassing scandal is going to come from, but I’ll bet a nickel that it won’t be ABS.

Across the Curve notes that Treasuries were very strong today, just in time for a basketful of new issuance:

The yield on the 2 year note dropped 9 basis points to 0.87 percent. The yield on the 3 year note declined 14 basis points to 1.23 percent. The yield on the 5 year note tumbled 19 basis points to 1.68 percent. The yield on the 10 year note plummeted 22 basis points to 2.67 percent. The yield on the Long Bond danced to the same music and fell 16 basis points to 3.51 percent.
…
Some spoke of the package of securities which the Treasury will announce on Thursday when they will announce the 2 year, the 5 year and the debut performance of the 7 year note. I think they will bring $42 billion, $32 billion and $15 billion respectively. That would be $89 billion of coupons which would be record shattering. (Until next month.)

Canadas were strong too, with the 2-year yield down 8bp and everything else in the low double-digits. Stocks got hammered, both in the US:

U.S. stocks tumbled to a three-month low, extending a global slump, as a record contraction in New York manufacturing spurred concern the government’s stimulus package won’t be enough to curb the deepening recession.

Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. each lost 12 percent. Exxon Mobil Corp. was the biggest drag on the Standard & Poor’s 500 Index as oil slid almost 7 percent. General Motors Corp., the largest U.S. carmaker, sank 13 percent as it took its case for more government support to the Treasury Department. Banks led declines in Europe and Asia on concern they may face ratings downgrades and more losses.

… and in Canada …

Canadian stocks fell the most in four weeks as financial and energy companies tumbled on concern the deepening global recession will cause more losses at banks and insurers, and cut demand for the nation’s commodity exports.

Manulife Financial Corp. dropped 11 percent to a six-year low as equities tumbled worldwide, stoking concern insurers face further losses on their stock portfolios. EnCana Corp. slid 5.2 percent after oil prices slumped below $35 a barrel on a report that manufacturing in New York contracted at the fastest pace on record.

Preferreds fell in sympathy with common, but to nowhere near the same extent, a refreshing change from the horror of 4Q08. The fall was led by split-shares, perhaps due to their direct exposure to equity prices, perhaps in response to the mass downgrade.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 5.26 % 3.71 % 23,435 17.94 2 0.2295 % 861.9
FixedFloater 7.24 % 6.84 % 75,672 14.15 7 0.1557 % 1,386.4
Floater 5.09 % 4.26 % 29,125 16.93 4 1.5760 % 1,031.7
OpRet 5.25 % 4.69 % 137,502 3.98 15 -0.2719 % 2,048.8
SplitShare 6.40 % 9.92 % 68,561 4.04 15 -1.9390 % 1,741.6
Interest-Bearing 7.09 % 8.32 % 32,578 0.83 2 -0.9742 % 1,995.5
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.5982 % 1,553.2
Perpetual-Discount 6.93 % 7.05 % 194,387 12.49 71 -0.5982 % 1,430.5
FixedReset 6.05 % 5.71 % 616,023 13.96 27 -0.0696 % 1,819.3
Performance Highlights
Issue Index Change Notes
LFE.PR.A SplitShare -6.88 % Asset coverage of 1.3+:1 as of January 30 according to the company. Currently rated Pfd-2(low) by DBRS, having somehow evaded the crackdown.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.12
Bid-YTW : 11.70 %
PPL.PR.A SplitShare -5.97 % Asset coverage of 1.3+:1 as of January 30, according to the company. Downgraded to Pfd-3 by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.50
Bid-YTW : 9.92 %
FFN.PR.A SplitShare -5.72 % Asset coverage of 1.1-:1 as of January 30 according to the company. Downgraded to Pfd-5(high) by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 6.76
Bid-YTW : 13.73 %
POW.PR.B Perpetual-Discount -4.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 7.47 %
IAG.PR.A Perpetual-Discount -3.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 7.33 %
CM.PR.E Perpetual-Discount -3.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 19.17
Evaluated at bid price : 19.17
Bid-YTW : 7.41 %
WFS.PR.A SplitShare -2.99 % Asset coverage of 1.1+:1 as of February 5, according to the company. Downgraded to Pfd-4(low) by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2011-06-30
Maturity Price : 10.00
Evaluated at bid price : 8.10
Bid-YTW : 15.64 %
FIG.PR.A Interest-Bearing -2.76 % Asset coverage of 1.1-:1 as of February 10, based on Capital units at $1.29 and 0.53 Capital Units per preferred. Downgraded to Pfd-5 by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-31
Maturity Price : 10.00
Evaluated at bid price : 7.41
Bid-YTW : 13.00 %
SLF.PR.B Perpetual-Discount -2.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.20
Evaluated at bid price : 16.20
Bid-YTW : 7.56 %
SLF.PR.A Perpetual-Discount -2.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.08
Evaluated at bid price : 16.08
Bid-YTW : 7.54 %
BAM.PR.J OpRet -2.38 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 18.06
Bid-YTW : 10.38 %
GWO.PR.H Perpetual-Discount -2.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.51
Evaluated at bid price : 16.51
Bid-YTW : 7.50 %
POW.PR.D Perpetual-Discount -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 17.74
Evaluated at bid price : 17.74
Bid-YTW : 7.16 %
FBS.PR.B SplitShare -1.94 % Asset coverage of 1.0+:1 as of February 12, according to TD. Downgraded to Pfd-4 by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2011-12-15
Maturity Price : 10.00
Evaluated at bid price : 7.06
Bid-YTW : 19.24 %
GWO.PR.G Perpetual-Discount -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 7.36 %
MFC.PR.C Perpetual-Discount -1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.19
Evaluated at bid price : 16.19
Bid-YTW : 7.10 %
BMO.PR.H Perpetual-Discount -1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 21.07
Evaluated at bid price : 21.07
Bid-YTW : 6.33 %
SLF.PR.C Perpetual-Discount -1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 15.03
Evaluated at bid price : 15.03
Bid-YTW : 7.56 %
DF.PR.A SplitShare -1.74 % Asset coverage of 1.4-:1 as of January 30, according to the company. Downgraded to Pfd-3(low) by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 9.01
Bid-YTW : 7.50 %
PWF.PR.F Perpetual-Discount -1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 7.19 %
BNA.PR.B SplitShare -1.58 % Asset coverage of 1.9-:1 as of January 30 according to the company.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2016-03-25
Maturity Price : 25.00
Evaluated at bid price : 21.21
Bid-YTW : 8.03 %
SLF.PR.D Perpetual-Discount -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 15.03
Evaluated at bid price : 15.03
Bid-YTW : 7.56 %
BNS.PR.Q FixedReset -1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 21.96
Evaluated at bid price : 22.00
Bid-YTW : 4.54 %
PWF.PR.K Perpetual-Discount -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.88
Evaluated at bid price : 16.88
Bid-YTW : 7.43 %
MFC.PR.B Perpetual-Discount -1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 17.04
Evaluated at bid price : 17.04
Bid-YTW : 6.97 %
NA.PR.M Perpetual-Discount -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 7.14 %
IGM.PR.A OpRet -1.36 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-06-29
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 5.57 %
NA.PR.P FixedReset -1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-17
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 6.49 %
RY.PR.F Perpetual-Discount -1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 6.44 %
ALB.PR.A SplitShare -1.26 % Asset coverage of 1.1-:1 as of February 12 according to the company. Downgraded to Pfd-4 by DBRS on Friday.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2011-02-28
Maturity Price : 25.00
Evaluated at bid price : 19.60
Bid-YTW : 18.12 %
RY.PR.G Perpetual-Discount -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 6.51 %
CM.PR.H Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 16.69
Evaluated at bid price : 16.69
Bid-YTW : 7.29 %
GWO.PR.I Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 15.41
Evaluated at bid price : 15.41
Bid-YTW : 7.45 %
SBN.PR.A SplitShare -1.09 % Asset coverage of 1.6+:1 as of February 5 according to Mulvihill.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 9.05
Bid-YTW : 7.35 %
PWF.PR.E Perpetual-Discount -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 19.35
Evaluated at bid price : 19.35
Bid-YTW : 7.20 %
CM.PR.R OpRet -1.05 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-04-29
Maturity Price : 25.15
Evaluated at bid price : 25.50
Bid-YTW : 4.66 %
BNS.PR.K Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 6.57 %
BAM.PR.O OpRet 1.22 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 20.80
Bid-YTW : 10.11 %
ELF.PR.F Perpetual-Discount 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 8.83 %
ELF.PR.G Perpetual-Discount 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 14.25
Evaluated at bid price : 14.25
Bid-YTW : 8.49 %
CM.PR.K FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 22.25
Evaluated at bid price : 23.00
Bid-YTW : 4.87 %
BCE.PR.G FixedFloater 1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 25.00
Evaluated at bid price : 15.00
Bid-YTW : 7.05 %
TRI.PR.B Floater 1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 13.00
Evaluated at bid price : 13.00
Bid-YTW : 4.08 %
BAM.PR.K Floater 2.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 7.80
Evaluated at bid price : 7.80
Bid-YTW : 6.85 %
BAM.PR.B Floater 2.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 8.05
Evaluated at bid price : 8.05
Bid-YTW : 6.63 %
Volume Highlights
Issue Index Shares
Traded		 Notes
RY.PR.R FixedReset 106,339 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 6.00 %
TD.PR.G FixedReset 97,040 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 6.05 %
IAG.PR.C FixedReset 64,906 RBC bought two lots of 10,000 each from Scotia and 25,700 from Desjardins, all at 22.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 21.86
Evaluated at bid price : 21.90
Bid-YTW : 6.53 %
CM.PR.L FixedReset 50,779 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 6.23 %
BNS.PR.X FixedReset 49,742 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 6.14 %
BNS.PR.T FixedReset 42,024 Recent new issue. An amusing limit-scenario – the reset is to 5-Year GOCs +414bp … so, given today’s yields, an investor should not presume it will be called even though it is trading at a premium.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-02-17
Maturity Price : 25.21
Evaluated at bid price : 25.26
Bid-YTW : 6.13 %
There were 32 other index-included issues trading in excess of 10,000 shares.

Posted in Market Action | No Comments »

WN.PR.A: 0.5% of Dividends are "Ineligible"

Tuesday, February 17th, 2009

An Assiduous Reader points out that I have been scooped by Financial Webring, which points out a highly unusual situation in the taxation status of WN.PR.A dividends:

George Weston Limited Preferred Shares Series I
Record Date Payment Date Dividend Declared
(per share)		 Eligible/Ineligible
Feb 28, 2007 Mar 15, 2007 $0.3625 Eligible
May 31, 2007 June 15, 2007 $0.35616 Eligible
May 31, 2007 June 15, 2007 $0.00634 Ineligible
Aug 31, 2007 Sept 15, 2007 $0.36085 Eligible
Aug 31, 2007 Sept 15, 2007 $0.00165 Ineligible
Nov 30, 2007 Dec 15, 2007 $0.36085 Eligible
Nov 30, 2007 Dec 15, 2007 $0.00165 Ineligible
Feb 29, 2008 Mar 15, 2008 $0.36085 Eligible
Feb 29, 2008 Mar 15, 2008 $0.00165 Ineligible
May 31, 2008 June 15, 2008 $0.36041 Eligible
May 31, 2008 June 15, 2008 $0.00209 Ineligible
Aug 31, 2008 Sept 15, 2008 $0.36072 Eligible
Aug 31, 2008 Sept 15, 2008 $0.00178 Ineligible
Nov 30, 2008 Dec 15, 2008 $0.36072 Eligible
Nov 30, 2008 Dec 15, 2008 $0.00178 Ineligible

The other preferreds (WN.PR.B, WN.PR.C, WN.PR.D & WN.PR.E) have no such division.

The Weston preferreds were last mentioned on PrefBlog when they were placed on Review-Developing by DBRS, where they remain.

Posted in Issue Comments | No Comments »

SLF Placed on Credit Watch Negative by S&P

Tuesday, February 17th, 2009

Standard & Poors has announced:

it placed its ratings, including its ‘AA-‘ counterparty credit rating, on Sun Life Financial Inc. (TSX: SLF; Sun Life Financial) and its insurance operating subsidiaries (Sun Life) on CreditWatch with negative implications. Its key insurance operating subsidiaries would include Sun Life Assurance Co. of Canada and Sun Life Assurance Co. of Canada (U.S.).

“The CreditWatch placement reflects the deteriorating business and macroeconomic conditions that in our opinion are putting increasing pressure on the group’s earnings, investments, and capital adequacy position,” said Standard & Poor’s credit analyst Donald Chu.
…
While we believe that the sale of Sun Life Financial’s 37% stake in CI for C$2.3 billion has allowed it to strengthen its balance sheets at an opportune time, we believe that its fixed-charge coverage ratio is under pressure, and that it has limited room to issue debt or hybrids within the current rating category.

SunLife was recently downgraded by Moody’s following its 4Q08 Results.

SunLife has the following preferreds outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E.

Posted in Issue Comments | 1 Comment »

February Edition of PrefLetter Released!

Sunday, February 15th, 2009

The February, 2009, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

As previously announced, PrefLetter is now available to residents of British Columbia and Manitoba, as well as Ontario and to entities registered with the Quebec Securities Commission.

Until further notice, the “Previous Edition” will refer to the February, 2009, issue, while the “Next Edition” will be the March, 2009, issue, scheduled to be prepared as of the close March 13 and eMailed to subscribers prior to market-opening on March 16.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: PrefLetter, being delivered to clients as a large attachment by eMail, sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Should you have a similar problem, I will:

  • eMail you another copy
  • place it on a website for download without eMail
  • try to get it to you as an image file
  • Fax you a copy
  • Mail the damn thing!

Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Posted in PrefLetter | No Comments »

Dudley Speaks on TIPS

Sunday, February 15th, 2009

William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, gave a speech at the Federal Reserve Bank of New York Inflation-Indexed Securities and Inflation Risk Management Conference, New York on 10 February 2009.

He addressed the problems of ex-ante vs. ex-post calculations of the costs of TIPS issuance:

Over the long run – and I mean the very long run – there should be roughly as many downward surprises in inflation performance as upward surprises. But within any relatively short period, such as the last decade, this certainly does not need to be the case. In other words, over such a short period, the outcome of an ex-post analysis can be heavily influenced by which of the two sides – the Treasury or investors – was the lucky recipient of the net inflation surprise that occurred over the period in question. For example, in countries such as the United Kingdom, where inflation declined following the inception of an inflation-linked debt program, ex-post studies generally suggest that these programs have reduced financing costs for these countries.
The fact that the Treasury saved or lost money ex-post is thus not a very reliable guide as to whether the strategic decision to implement a TIPS program has been a good idea. The relevant question is whether the Treasury obtained the financing it needed at a lower ex-ante cost. If the experiment were to be run thousands of times drawing from the underlying distribution of possible inflation outcomes, would Treasury’s costs have been lower, on average, with TIPS or with nominal Treasuries? To conclude on the basis of one coin flip or roll of the dice as ex-post analysis essentially does surely is not the best way to evaluate the respective costs of TIPS issuance versus nominal Treasuries.

… and examined the factors affecting TIPS pricing:

There are two primary factors underlying the relative cost differences:
1) the compensation investors require to hold a security that is less liquid than its nominal counterpart, termed the illiquidity premium, and
2) the insurance value they attach to obtaining protection against inflation risk, known as the inflation risk premium.

[footnote]In addition to these primary factors, TIPS yields also reflect the taxation difference between TIPS and nominal issues, the convexity difference between real and nominal yields and the price of the embedded deflation floor.

… and refers to some Fed analysis:

To determine the impact of the illiquidity premium and inflation risk premium on these results, we decomposed our ex-ante analysis, comparing the breakeven rate of inflation excluding the illiquidity premium in TIPS yields to the SPF forecast. This comparison yields an estimate of the premium investors were willing to pay for inflation protection at previous TIPS auctions. We found an average risk premium estimate of 47 basis points over our sample period. This suggests that the TIPS program does satisfy a real demand that is not met by nominal Treasuries.

It also suggests that if the Treasury were to take steps to shrink the illiquidity premium by, for example, improving secondary market trading in TIPS, this would shift the cost-benefit analysis more firmly in TIPS direction.

[Footnote] We used the illiquidity premium in TIPS yields estimated in D’Amico, Kim and Wei (2008). D’Amico, Kim and Wei calculated the liquidity component for five- and ten-year TIPS yields, which we used to adjust the auction prices for 5- and 10-year TIPS issues. For twenty- and thirty-year TIPS issues, we assumed that the liquidity component is equal to the component for a ten-year security, which in the event that these securities are less liquid than the ten-year note, understates this effect and thus underestimates the risk premium at this horizon. For further information, see Dudley, Roush and Steinberg Ezer (2008).

… and refers to some external studies of extremely hard to quantify benefits:

A few studies have found that an increase in supply in a particular segment of the Treasury yield curve has contributed to a rise in yields. As a result, by issuing securities in a segmented TIPS market, the Treasury may keep realized yields on bill and nominal coupon securities lower than they otherwise would have been.

and, importantly, hints at a process involving larger issues of longer dated TIPS:

I would be willing to make two modest suggestions here. First, it may make sense to emphasize longer-dated TIPS issuance rather than shorter-dated issuance. Analytically, the logic goes as follows. Inflation uncertainty is likely to increase at longer time horizons. Thus, investors are likely to pay a greater premium for inflation protection at longer-time horizons. This implies that the cost savings associated with TIPS are likely to be greater for longer maturities rather than shorter maturities.

This prediction is supported by empirical studies that have examined the premium that investors pay for inflation protection both in the United States and elsewhere. For example, a study by Brian Sack of Macroeconomic Advisors finds that forward breakeven inflation rates increase as maturity lengthens. In contrast, the level of survey-based measures of inflation expectations is quite constant beyond a time horizon of a few years. This means that the difference between forward breakeven inflation and inflation expectations climbs as the time horizon extends. This strongly suggests that the premium investors pay for inflation protection increases as maturities lengthen.

Second, it may make sense to structure the TIPS program in a way that would help reduce the illiquidity premium associated with TIPS relative to on-the-run nominal Treasuries. Some of the current illiquidity premium is likely to shrink as financial markets stabilize. However, further improvements may require a change in either the structure of the TIPS program or the secondary market trading environment.

The notion that issuance of 5-Year TIPS might be halted has been discussed on PrefBlog, as has a BoE Working Paper on the term-structure of inflation indexed bonds.

Posted in Interesting External Papers | 1 Comment »

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