Archive for March, 2009

The Preferred Approach

Saturday, March 28th, 2009

I was quoted in the Globe and Mail by Rob Carrick, who wrote a piece about fixed-resets and preferreds in general with the title “The Preferred Approach“:

Preferred share specialist James Hymas agrees that rising rates would be negative for perpetual preferreds, while rate reset shares would have some protection. Still, he prefers perpetuals. One reason is that perpetuals yield roughly a full percentage point more than the new reset preferred shares.

An example is Canadian Imperial Bank of Commerce series 30 preferred shares, which were issued in 2005 at the usual $25 price and have fallen to about $16, thereby pushing the yield up to 7.4 per cent (price and yield move in opposite directions).

“I would recommend straight perpetuals at this point because you are getting paid more than enough extra income to compensate for the added risk of a fixed rate,” said Mr Hymas, who is president of Hymas Investment Management.

Perpetual preferred offer not only a higher yield than the rate reset version, but also a chance for capital gains as financial market conditions “normalize,” in Mr. Hymas’s words.

He figures that perpetuals issued by banks could rise back to the $23 range under normal conditions, which suggests potential gains of 25 to almost 45 per cent, depending on the individual share issue.

Mr. Hymas said perpetuals also solve the problem of reinvestment risk, where you have money in a high-yield investment that matures and has to be rolled into something paying much less. If the bank rate reset shares being issued today are redeemed in five years, as many expect they will be, then investors will be unlikely to find such high yields again. Meantime, perpetuals bought today can be expected to roll along.

As for rising interest rates, Mr. Hymas said yields on corporate bonds and preferred shares – they have many similarities – typically fall as the economy emerges from recession, while government bond rates rise.

Meantime, there’s the risk that business conditions will deteriorate and force banks to not only break the taboo against common share dividend cuts, but also slash preferred share dividends.

Mr. Hymas plays down this threat. “Such an event is currently so remote that I don’t think the probability is measurable.”

March 27, 2009

Friday, March 27th, 2009

There is growing support for the idea that Commercial Banking is different from Investment Banking (the “utility banking” and “casino banking” of the Turner Review) and should not be housed under the same roof – and this from one of the conglomerators:

what he would tell Obama if given the chance, [Bank of America Corp. Chief Executive Officer Kenneth] Lewis said it would be that “commercial banks are the fabric of any community in which they operate and we probably need to separate the commercial banks from the investment banking activities.”

The remarks may reopen the debate on whether the U.S. should reinstitute laws put in place after the Great Depression designed to insulate lenders from the risks of investment banking. Bank of America, the biggest U.S. bank by assets, bought Merrill Lynch & Co. in January, helping the largest U.S. brokerage avoid the financial collapse that drove Bear Stearns Cos. out of business.

Mr. Lewis later clarified his remarks:

“I was talking about the rhetoric, not physically separating the two,” Lewis said in an interview with Bloomberg Television. “We have an investment bank, we have a commercial bank as well that is the fabric of every community in which it operates.”

Lewis’s earlier comments caused credit-default swaps on Merrill Lynch to climb 85 basis points, or 0.85 percentage point, to 550 basis points as of 1:48 p.m. in New York, according to broker Phoenix Partners group. The swaps earlier touched 595 basis points, according to Credit Derivatives Research LLC. Contracts on Bank of America rose 10 basis points to 375 basis points, Phoenix prices show. An increase typically signals weakened investor confidence.

How much credence can be put into this restatement is something I cannot determine. Was it a genuine clarification of an off-hand remark taken out of context? Or was it the result of pressure from the board, his newly acquired investment bankers and the market? Time will tell!

Glass-Steagall went too far in enforcing a strict separation of the two functions. I have no problems with the commercial banks underwriting issues for their clients, or in selling them. I do, however, feel that the Basel Capital rules should be revised to offer a choice to the regulated entities regarding which regime they wish to be subject to, and to allow crossing the line – but on a more expensive basis.

Bank of America should have a regulated competitive advantage over Merrill Lynch in the “hold and arbitrage business”; Merrill Lynch should have a competitive advantage over Bank of America in the “Originate and Distribute” business.

Decent volume in the preferred share market today, but not much price action. That’s what we like, eh? Nice … calm … markets.

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 0.00 % 0.00 % 0 0.00 0 -0.1041 % 867.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1041 % 1,403.0
Floater 4.56 % 5.51 % 66,707 14.65 3 -0.1041 % 1,083.8
OpRet 5.24 % 4.85 % 130,797 3.88 15 0.2041 % 2,068.1
SplitShare 6.73 % 9.08 % 49,017 4.81 6 0.5726 % 1,655.3
Interest-Bearing 6.17 % 9.38 % 34,411 0.74 1 -0.2020 % 1,933.6
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.0265 % 1,504.6
Perpetual-Discount 7.21 % 7.40 % 155,161 12.15 71 -0.0265 % 1,385.7
FixedReset 6.15 % 5.87 % 600,009 13.68 32 0.0081 % 1,810.3
Performance Highlights
Issue Index Change Notes
CM.PR.J Perpetual-Discount -2.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 15.00
Evaluated at bid price : 15.00
Bid-YTW : 7.51 %
BAM.PR.M Perpetual-Discount -2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 13.13
Evaluated at bid price : 13.13
Bid-YTW : 9.13 %
LFE.PR.A SplitShare -1.98 % Asset coverage of 1.1-:1 as of March 13 according to the company.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 7.20
Bid-YTW : 15.63 %
CM.PR.K FixedReset -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 21.58
Evaluated at bid price : 21.58
Bid-YTW : 5.00 %
BAM.PR.B Floater -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 7.96
Evaluated at bid price : 7.96
Bid-YTW : 5.51 %
HSB.PR.C Perpetual-Discount -1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 17.35
Evaluated at bid price : 17.35
Bid-YTW : 7.41 %
TD.PR.R Perpetual-Discount -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 21.10
Evaluated at bid price : 21.10
Bid-YTW : 6.77 %
PWF.PR.M FixedReset -1.60 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 24.55
Evaluated at bid price : 24.60
Bid-YTW : 5.47 %
BNS.PR.R FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 21.33
Evaluated at bid price : 21.33
Bid-YTW : 4.71 %
ENB.PR.A Perpetual-Discount -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 22.66
Evaluated at bid price : 22.90
Bid-YTW : 6.07 %
PWF.PR.G Perpetual-Discount -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 19.16
Evaluated at bid price : 19.16
Bid-YTW : 7.88 %
PWF.PR.I Perpetual-Discount -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 20.65
Evaluated at bid price : 20.65
Bid-YTW : 7.42 %
NA.PR.K Perpetual-Discount -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 20.77
Evaluated at bid price : 20.77
Bid-YTW : 7.17 %
TD.PR.S FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 21.06
Evaluated at bid price : 21.06
Bid-YTW : 4.46 %
POW.PR.C Perpetual-Discount -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 18.61
Evaluated at bid price : 18.61
Bid-YTW : 7.83 %
BNS.PR.Q FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 21.36
Evaluated at bid price : 21.66
Bid-YTW : 4.42 %
BAM.PR.N Perpetual-Discount -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 13.22
Evaluated at bid price : 13.22
Bid-YTW : 9.07 %
SLF.PR.D Perpetual-Discount -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 14.36
Evaluated at bid price : 14.36
Bid-YTW : 7.81 %
NA.PR.N FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 22.92
Evaluated at bid price : 22.99
Bid-YTW : 4.55 %
BMO.PR.M FixedReset 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 22.43
Evaluated at bid price : 22.50
Bid-YTW : 4.18 %
TD.PR.O Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 18.65
Evaluated at bid price : 18.65
Bid-YTW : 6.63 %
DFN.PR.A SplitShare 1.13 % Asset coverage of 1.5+:1 as of March 13 according to the company.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.35
Bid-YTW : 9.08 %
HSB.PR.D Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 7.59 %
W.PR.H Perpetual-Discount 1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 19.55
Evaluated at bid price : 19.55
Bid-YTW : 7.21 %
GWO.PR.J FixedReset 1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 24.80
Evaluated at bid price : 24.85
Bid-YTW : 5.15 %
BNA.PR.C SplitShare 1.45 % Asset coverage of 1.7-:1 as of February 28 according to the company.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 11.17
Bid-YTW : 15.74 %
CM.PR.A OpRet 1.48 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-11-30
Maturity Price : 25.25
Evaluated at bid price : 25.38
Bid-YTW : 3.76 %
SLF.PR.A Perpetual-Discount 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 15.15
Evaluated at bid price : 15.15
Bid-YTW : 7.91 %
PWF.PR.K Perpetual-Discount 1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 15.40
Evaluated at bid price : 15.40
Bid-YTW : 8.23 %
GWO.PR.H Perpetual-Discount 1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 16.20
Evaluated at bid price : 16.20
Bid-YTW : 7.55 %
RY.PR.W Perpetual-Discount 2.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 6.58 %
SLF.PR.B Perpetual-Discount 2.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 15.23
Evaluated at bid price : 15.23
Bid-YTW : 7.95 %
SBN.PR.A SplitShare 2.97 % Asset coverage of 1.6+:1 as of March 19 according to Mulvihill.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.66
Bid-YTW : 8.33 %
BMO.PR.H Perpetual-Discount 3.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 19.86
Evaluated at bid price : 19.86
Bid-YTW : 6.77 %
Volume Highlights
Issue Index Shares
Traded
Notes
CIU.PR.B FixedReset 182,555 New issue settled today.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 6.20 %
PWF.PR.K Perpetual-Discount 60,402 Desjardins crossed 43,400 at 15.24.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 15.40
Evaluated at bid price : 15.40
Bid-YTW : 8.23 %
RY.PR.L FixedReset 53,415 Nesbitt bought 40,000 from National at 23.81.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 23.79
Evaluated at bid price : 23.83
Bid-YTW : 4.99 %
CM.PR.L FixedReset 49,542 National bought 40,000 from Nesbitt at 25.04.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 25.06
Evaluated at bid price : 25.11
Bid-YTW : 6.25 %
TD.PR.I FixedReset 38,473 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-27
Maturity Price : 24.97
Evaluated at bid price : 25.02
Bid-YTW : 6.05 %
TD.PR.M OpRet 36,506 Desjardins crossed 10,000 at 25.87 and bought 20,000 from National at 25.86.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2013-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 4.22 %
There were 34 other index-included issues trading in excess of 10,000 shares.

CIU.PR.B Soars to Hefty Premium on Decent volume

Friday, March 27th, 2009

The CIU Inc. Fixed-Resets, 6.70%+481 announced last week had a superb opening day, trading 182,555 shares in a range of 25.25-85 before closing with a quote of 25.61-85, 5×15.

Its vital statistics may be summed up as:

CIU.PR.B FixedReset YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-01
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 6.20 %

An encouraging sign! I can imagine the brokers are now beating the bushes desperately, looking for more potential issuers with a decent credit rating and the ability to offer cumulative dividends!

One interesting thing about this issue is that it still looks cheap against CIU.PR.A, which closed today at 17.55-90, 15×10, to yield a beggarly 6.64% at the bid, supported by the quite extraordinary premium the market is placing on cumulativity of dividends. This implies that the market is evaluating the value of reset feature at only 44bp … not too much!

OCC Releases 4Q08 Bank Trading Report

Friday, March 27th, 2009

The Office of the Comptroller of the Currency has released its Quarterly Report on Bank Trading and Derivatives Activities. Credit trading has been a disaster:

A commercial banks was reasonably strong in the fourth quarter, the quarter was particularly difficult for number of reasons, and banks reported a sizable trading loss of $9.2 billion. Market liquidity suffered in the fourth quarter of 2008 and general economic conditions worsened, resulting in escalated write-downs in legacy credit positions, including CDOs, leveraged loans and mortgage-related exposures. These write-downs flowed through trading revenues and dwarfed the underlying strength in trade profitability from wide bid-ask spreads.

Trading results in the fourth quarter also suffered due to an unfavorable combination of rising overall corporate credit spreads and declining credit spreads for the bank dealers themselves. Rising counterparty credit spreads increase the risk of derivatives receivables. Banks account for this increased risk by lowering the fair value of those receivables. Banks report the rising credit costs associated with a write-down of receivables values as trading losses. While these higher credit costs are a part of operating a derivatives business, they can (and in the fourth quarter did) mask otherwise profitable trading operations. Typically, when credit spreads increase, much of the negative impact on bank trading results from write-downs of receivables can be offset by writedowns of derivatives payables. However, in the fourth quarter, government support for the banking industry resulted in lower bank credit spreads. As a result, the fair value of bank derivatives payables increased, and therefore banks reported additional trading losses.

This “net” current credit exposure is the primary metric used by the OCC to evaluate credit risk in bank derivatives activities. A more risk sensitive measure of credit exposure would also consider the value of collateral held against counterparty exposures. While banks are not required to report collateral held against their derivatives positions in their Call Reports, they do report collateral in their published financial statements. Notably, large trading banks tend to have collateral coverage of 30-40% of their net current credit exposures from derivatives contracts.

Continued turmoil in credit markets has led to deterioration in derivatives-related and loan credit metrics. The fair value of derivatives contracts past due 30 days or more totaled $363 million, up $302 million from the third quarter. Past due contracts were 0.05% of net current credit exposure in Q4, up from 0.01% in the third quarter. During the fourth quarter of 2008, U.S. commercial banks charged-off a record $847 million in derivatives receivables, or 0.10% of the net current credit exposure from derivative contracts, up from the 0.02% in the prior quarter. [See Graph 5c.] For comparison purposes, Commercial and Industrial (C&I) loan net charge-offs rose to $5.5 billion from $3.0 billion and were 0.4% of total C&I loans for the quarter, nearly double the ratio of the third quarter.

The report has many fascinating graphs.

March 26, 2009

Friday, March 27th, 2009

It would appear hedge funds have hired an insufficient number of ex-regulators! Geithner wants to change this:

Treasury Secretary Timothy Geithner will ask Congress to bring large hedge funds, private- equity firms and derivatives markets under federal supervision for the first time as part of a revamp of U.S. financial rules.

Geithner’s framework would set up an independent overseer for systemically vital firms. While the Bush administration had proposed that the Federal Reserve take on that authority, Geithner won’t specify which agency should have the job. Bernanke has also called for a systemic-risk regulator, and said the central bank should have some role.

The administration’s framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff.

I will certainly agree that enormous bets by the shadow-banking system have had huge knock-on effects. However, I will note that:

  • enormous bets by the banking system itself – and the equally regulated large brokerages – had effects that didn’t need to be transmitted.
  • if a system can be destabilized by an outside force, it has too much exposure too that outside force

It is well within the purview of extant regulators to clean up their acts and impose concentration limits – by asset class and by counterparty – on their future employers. While they’re at it, they can also impose collateral requirements on these firms trading desks that would have required these firms to have collateralized their AIG exposure themselves, if there was insufficient money at AIG. This would have forced AIG to go under – or to cease writing new business – long before it became a systemic threat.

It would appear the biggest of AIG’s counterparties were brokerages, regulated by the SEC:

Lenders owed money from AIG’s derivative contracts were led by Paris-based Societe Generale with $11 billion, followed by Goldman Sachs with $8.1 billion; Frankfurt’s Deutsche Bank, with $5.4 billion; Merrill Lynch, at $4.9 billion; and Zurich-based UBS, which received $3.3 billion. The totals exclude amounts from securities-lending programs.

Of the biggest U.S. banks, JPMorgan Chase & Co. received $400 million from AIG, and Morgan Stanley got $200 million. Both are based in New York. Bank of America was given $700 million.

While the amounts for banks were large and total write-off could have spoiled a quarterly report, to call them a systemic risk seems a bit of a stretch. But what were the brokerages doing, having that kind of concentration risk? What was the SEC doing, allowing them to have that kind of concentration risk?

To address the problem this way, however, would force the regulators to give up their touching faith in the sanctity of a Credit Rating Agency’s opinions; and it would force regulators to admit that their response to the rise of systemic risk was inadequate. Ain’t gonna happen.

It’s looking like the UK may be heading for a financial crisis:

Brown, who had the backing of 30 percent of the electorate in a ComRes Ltd. poll last week, must now cope with what amounts to a vote of no confidence by investors in his ability to end the recession. Bank of England Governor Mervyn King, his ally for much of the past decade, warned a day earlier that there’s no more money for further spending.

The European Commission this week forecast Britain’s budget deficit would touch 9.6 percent of gross domestic product in the year ending March 2010, triple the EU limit.

When the 1995 gilt auction failed, investors were concerned that John Major’s Conservative government was on course to lose the general election and was about to announce tax cuts it couldn’t afford. Now, it’s low interest rates that are to blame, according to Robert Stheeman, the head of the Debt Management Office, which manages gilt sales for the Treasury.

The Bank of England cut its benchmark lending rate to 0.5 percent this month, the lowest ever, and started a program to boost the money supply.

“Yields at these levels are not at all attractive,” Stheeman said yesterday. Opposition lawmakers seized on the comments from Stheeman and King to suggest Brown’s reputation for smooth handling of the economy is in tatters.

This evening’s seminar on SplitShares went quite well, I thought, despite going about fifteen minutes overtime. Geez, you know, I spend all my prep time worrying that I’ll only have fifteen minutes’ worth of material, and the last half of the seminar trying desperately to get back on schedule! The video will, eventually, be available on the Internet for your viewing pleasure.

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 0.00 % 0.00 % 0 0.00 0 -0.0347 % 868.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0347 % 1,404.5
Floater 4.56 % 5.41 % 66,526 14.81 3 -0.0347 % 1,084.9
OpRet 5.25 % 5.06 % 130,597 3.88 15 -0.1652 % 2,063.9
SplitShare 6.75 % 9.32 % 49,036 4.78 6 -0.3225 % 1,645.8
Interest-Bearing 6.06 % 9.05 % 34,757 0.73 1 0.5076 % 1,937.5
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.1742 % 1,505.0
Perpetual-Discount 7.20 % 7.33 % 156,235 12.16 71 -0.1742 % 1,386.0
FixedReset 6.13 % 5.80 % 620,969 13.75 31 0.1131 % 1,810.2
Performance Highlights
Issue Index Change Notes
LFE.PR.A SplitShare -3.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 7.39
Bid-YTW : 14.96 %
NA.PR.M Perpetual-Discount -2.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 20.55
Evaluated at bid price : 20.55
Bid-YTW : 7.43 %
HSB.PR.D Perpetual-Discount -1.91 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 16.40
Evaluated at bid price : 16.40
Bid-YTW : 7.68 %
CM.PR.E Perpetual-Discount -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 18.50
Evaluated at bid price : 18.50
Bid-YTW : 7.58 %
SLF.PR.B Perpetual-Discount -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 14.89
Evaluated at bid price : 14.89
Bid-YTW : 8.13 %
BMO.PR.H Perpetual-Discount -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 19.26
Evaluated at bid price : 19.26
Bid-YTW : 6.99 %
BNS.PR.N Perpetual-Discount -1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 19.17
Evaluated at bid price : 19.17
Bid-YTW : 6.99 %
CM.PR.A OpRet -1.54 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2011-07-30
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 5.09 %
ELF.PR.G Perpetual-Discount -1.40 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 13.40
Evaluated at bid price : 13.40
Bid-YTW : 9.13 %
RY.PR.A Perpetual-Discount -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 17.00
Evaluated at bid price : 17.00
Bid-YTW : 6.65 %
MFC.PR.B Perpetual-Discount -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 15.73
Evaluated at bid price : 15.73
Bid-YTW : 7.47 %
RY.PR.G Perpetual-Discount -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 16.65
Evaluated at bid price : 16.65
Bid-YTW : 6.86 %
GWO.PR.I Perpetual-Discount -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 14.80
Evaluated at bid price : 14.80
Bid-YTW : 7.66 %
RY.PR.F Perpetual-Discount -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 16.41
Evaluated at bid price : 16.41
Bid-YTW : 6.89 %
MFC.PR.C Perpetual-Discount -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 15.00
Evaluated at bid price : 15.00
Bid-YTW : 7.58 %
ELF.PR.F Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 14.76
Evaluated at bid price : 14.76
Bid-YTW : 9.25 %
BNS.PR.P FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 22.71
Evaluated at bid price : 22.81
Bid-YTW : 4.37 %
DFN.PR.A SplitShare -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.30
Bid-YTW : 9.32 %
CM.PR.G Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 7.51 %
PWF.PR.A Floater -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 13.16
Evaluated at bid price : 13.16
Bid-YTW : 3.35 %
TD.PR.O Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 18.45
Evaluated at bid price : 18.45
Bid-YTW : 6.70 %
IAG.PR.C FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 21.51
Evaluated at bid price : 21.51
Bid-YTW : 6.22 %
POW.PR.C Perpetual-Discount -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 18.82
Evaluated at bid price : 18.82
Bid-YTW : 7.74 %
PWF.PR.F Perpetual-Discount 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 17.60
Evaluated at bid price : 17.60
Bid-YTW : 7.62 %
GWO.PR.F Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 19.45
Evaluated at bid price : 19.45
Bid-YTW : 7.65 %
BNS.PR.Q FixedReset 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 21.86
Evaluated at bid price : 21.90
Bid-YTW : 4.28 %
TD.PR.R Perpetual-Discount 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 21.45
Evaluated at bid price : 21.45
Bid-YTW : 6.66 %
SBN.PR.A SplitShare 1.57 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.41
Bid-YTW : 8.96 %
BMO.PR.M FixedReset 1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 22.20
Evaluated at bid price : 22.26
Bid-YTW : 4.11 %
PWF.PR.I Perpetual-Discount 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 20.90
Evaluated at bid price : 20.90
Bid-YTW : 7.33 %
BNS.PR.R FixedReset 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 21.62
Evaluated at bid price : 21.66
Bid-YTW : 4.52 %
BAM.PR.B Floater 1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 8.10
Evaluated at bid price : 8.10
Bid-YTW : 5.41 %
PWF.PR.H Perpetual-Discount 1.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 17.80
Evaluated at bid price : 17.80
Bid-YTW : 8.27 %
BAM.PR.H OpRet 1.95 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-03-30
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 8.05 %
PWF.PR.G Perpetual-Discount 2.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 19.40
Evaluated at bid price : 19.40
Bid-YTW : 7.78 %
GWO.PR.G Perpetual-Discount 3.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 16.90
Evaluated at bid price : 16.90
Bid-YTW : 7.76 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.P FixedReset 51,994 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 25.29
Evaluated at bid price : 25.34
Bid-YTW : 5.96 %
TD.PR.I FixedReset 48,560 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 24.94
Evaluated at bid price : 24.99
Bid-YTW : 5.97 %
TD.PR.E FixedReset 45,550 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 25.21
Evaluated at bid price : 25.26
Bid-YTW : 6.11 %
TD.PR.G FixedReset 36,575 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 25.25
Evaluated at bid price : 25.30
Bid-YTW : 6.09 %
BNS.PR.X FixedReset 30,325 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-26
Maturity Price : 25.27
Evaluated at bid price : 25.32
Bid-YTW : 6.14 %
LFE.PR.A SplitShare 28,755 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 7.39
Bid-YTW : 14.96 %
There were 31 other index-included issues trading in excess of 10,000 shares.

Reminder: SplitShares Seminar Today, March 26

Thursday, March 26th, 2009

Just a reminder! The next seminar in the series on the theory and practice of preferred share investing will be held this evening, March 26, 2009, at 6pm

These seminars are aimed at active and potential preferred share investors who wish to review relative valuation techniques in preferred share analysis.

All seminars will be presented by James Hymas, who has written extensively on the subject of preferred share investment and has been referred to as a "top expert" on the subject.

Questions are encouraged throughout the seminars, as well as in informal discussion at the end of the session.

Each seminar is two hours in length; coffee and tea will be served. The cost of attendance is $100, but a discount of $50 will be given to participants who have an annual subscription to PrefLetter with at least one issue remaining at the time of the seminar.

All seminars will be video-recorded for future distribution.

Thursday, March 26

SplitShares: Theory & Practice

"SplitShares" are popular with investors who:

  • wish to obtain tax-advantaged income
  • want an investment with a fixed-term

These issues are characterized by:

  • Fund owns portfolio of stocks (usually financials)
  • Fund finances portfolio with two classes of stock
    • Capital Units get increased expected returns at expense of safety
    • Preferred shares get increased safety at the expense of expected return
  • Cumulative Dividends
  • There is a set wind-up date for the fund

This seminar will review the theory of SplitShare Preferred evaluation, including:

  • Credit Quality
  • Embedded calls
  • Embedded puts
  • The importance of ex-Dividend dates
  • Investment characteristics relative to bonds

Examples of relative valuation in current markets will be supplied and discussed.

Attendence is limited; a reservation will avoid disappointment.

Location: Days Hotel & Conference Center, (at Carlton & College, downtown Toronto) Yorkville Room (see map).

Time: March 26, 2009, 6pm-8pm.

Reservations: Please visit the PrefLetter Seminar Page.

March 25, 2009

Wednesday, March 25th, 2009

Encouraging news regarding Wall Street’s structure is being reported:

Smaller firms are emerging from the wreckage of the world’s largest financial companies, which are conserving capital following more than $1.2 trillion of writedowns and credit losses since the start of 2007. They’re luring traders with a shot at $500,000 commissions for two days’ work as banks that accepted federal bailouts retrench and slash bonuses.

“I don’t mean to dance on anybody’s graves here, but it’s just this incredible opportunity to reassemble a securities firm that does business the right way,” said Lee Fensterstock, chief executive officer of one of the firms, Broadpoint Securities Group Inc. in New York. “That business is going to lead with brain as opposed to capital. We’re not planning to run big balance sheets or big leveraged positions.”

Let’s just hope this trickles down to Bay Street! Since the banks took over the industry in 1990, there has been a marked evolution towards bond traders and salesmen being jumped-up tellers more than anything else.

In shocking news, a UK bond auction has failed:

The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds. The yield on the 4.5 percent gilt due 2049 rose 10 basis points to 4.55 percent.

“This sinks Brown below the waterline,” said Bill Jones, professor of politics at Liverpool Hope University. Brown’s “whole strategy is based on borrowing and now he can’t get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view.”

The auction failure comes as the Bank of England uses newly printed money to purchase government and corporate debt in an attempt to drive down borrowing costs. The Treasury gave the central bank authority March 5 to purchase as much as 150 billion pounds of securities.

“It doesn’t help to have your central bank say it’s buying government debt and then when you’re selling it you can’t find enough buyers,” Kit Juckes, head of fixed-income research at Royal Bank of Scotland Group Plc in London, said in an interview today on Bloomberg Radio. “It doesn’t impress.”

Watch out, Kit Juckes, head of fixed-income cheerleading at Royal Bank of Scotland Group PLC in London! You work for a nationalized firm! No bonus for YOU!

Equities were having a nice day, until the Treasury 5-Year auction drew weak interest. Across the Curve is not impressed by the Fed’s implementation of its somewhat offsetting buy-back programme.

The political incitement to riot continues; politicians can be proud that their efforts have not just resulted in the bleating of sheep, but much more direct action.

Kudos to the Hospitals of Ontario Pension Plan, which delivered superb performance in 2008:

The Hospitals of Ontario Pension Plan (HOOPP) announced an investment rate of return for 2008 of -11.96 per cent, closing the year 97% funded.

“HOOPP weathered the financial market storm better than most in 2008, but it’s our long-term ability to pay pensions that counts…and we want to assure our members that their pensions are secure. Whether markets are up or down, by focusing first and foremost on our obligations HOOPP continues to provide a pension our members can count on,” said John Crocker, President and CEO. “HOOPP’s joint governance structure ensures that our Board of Trustees is continuously engaged and able to take action as required to keep our pension promise.”

An example of this active Board involvement is HOOPP’s change in investment strategy in late 2007 to reduce risk by adjusting the asset mix to better match the maturing plan’s pension liabilities. This change minimized losses by significantly reducing public equity exposure and increasing investments in Canadian bonds.

Can you imagine? Paying attention to liabilities when investing the assets? Incredible! Revolutionary! John Crocker is a GENIUS!!!

The Chief Investment Officer, John Keohane, was promoted from his position as Vice-President of Portfolio Strategy & Derivatives. John Crocker was promoted from CIO.

Assiduous Readers may remember my thesis that outperformance is very easy for large institutional funds. All you need is a captive investment team that can concentrate on performance and is rewarded for performance, without having to worry about sales and story-telling. OMERS & Teachers are such plans. Even the Caisse qualifies, although just barely. Unfortunately, this thesis will never be stringently tested by academics; there’s too much risk that it might be found that markets are not efficient, which would mean forty years’ work down the drain.

There is a lot of blather about replacing the USD as the international reserve currency of choice; this is mere political mischief making. Replacing the USD is easy, you can do it tomorrow, if you like. Simply ask for international payments to be made in some other currency and accept no substitutes. Accrued Interest has ridiculed the Chinese position on US investments, which is a rather dangerous view to take: trends don’t have to execute completely overnight to cause a lot of problems … Americans will become very upset over time if they discover in ten years that their mortgage rates are set in Peking.

A dull day, price-wise, but volume was good. PerpetualDiscounts now yield 7.30%, equivalent to 10.22% interest at the standard equivalency factor of 1.4x. Long Corporates continue to be DULL and BORING, trading in a tight range around 7.5%, so the pre-tax interest-equivalent spread is now 272bp; high by any standards but those of the past six months.

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 0.00 % 0.00 % 0 0.00 0 1.8015 % 868.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.8015 % 1,405.0
Floater 4.55 % 5.51 % 64,173 14.66 3 1.8015 % 1,085.3
OpRet 5.25 % 4.81 % 130,377 3.88 15 0.1433 % 2,067.3
SplitShare 6.73 % 9.29 % 49,658 4.79 6 0.8849 % 1,651.2
Interest-Bearing 6.09 % 9.73 % 34,556 0.73 1 -0.3036 % 1,927.7
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 -0.0613 % 1,507.6
Perpetual-Discount 7.19 % 7.30 % 153,880 12.19 71 -0.0613 % 1,388.5
FixedReset 6.14 % 5.80 % 645,016 13.75 31 -0.0131 % 1,808.1
Performance Highlights
Issue Index Change Notes
GWO.PR.F Perpetual-Discount -1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 19.25
Evaluated at bid price : 19.25
Bid-YTW : 7.72 %
NA.PR.L Perpetual-Discount -1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.26
Evaluated at bid price : 17.26
Bid-YTW : 7.15 %
BNS.PR.O Perpetual-Discount -1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 6.80 %
PWF.PR.G Perpetual-Discount -1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 19.01
Evaluated at bid price : 19.01
Bid-YTW : 7.94 %
BMO.PR.K Perpetual-Discount -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 18.02
Evaluated at bid price : 18.02
Bid-YTW : 7.40 %
RY.PR.B Perpetual-Discount -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.40
Evaluated at bid price : 17.40
Bid-YTW : 6.86 %
TD.PR.Y FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 4.41 %
SLF.PR.D Perpetual-Discount -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 14.56
Evaluated at bid price : 14.56
Bid-YTW : 7.70 %
BNS.PR.R FixedReset -1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 4.61 %
BNS.PR.K Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.57
Evaluated at bid price : 17.57
Bid-YTW : 6.97 %
RY.PR.E Perpetual-Discount -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 16.69
Evaluated at bid price : 16.69
Bid-YTW : 6.85 %
RY.PR.D Perpetual-Discount -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 16.67
Evaluated at bid price : 16.67
Bid-YTW : 6.85 %
IAG.PR.A Perpetual-Discount -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 14.60
Evaluated at bid price : 14.60
Bid-YTW : 7.94 %
BNS.PR.J Perpetual-Discount -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 6.87 %
ELF.PR.G Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 13.59
Evaluated at bid price : 13.59
Bid-YTW : 8.99 %
HSB.PR.C Perpetual-Discount 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.76
Evaluated at bid price : 17.76
Bid-YTW : 7.23 %
PWF.PR.H Perpetual-Discount 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.46
Evaluated at bid price : 17.46
Bid-YTW : 8.43 %
MFC.PR.B Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 15.95
Evaluated at bid price : 15.95
Bid-YTW : 7.36 %
BAM.PR.O OpRet 1.24 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 22.07
Bid-YTW : 8.35 %
MFC.PR.C Perpetual-Discount 1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 15.20
Evaluated at bid price : 15.20
Bid-YTW : 7.48 %
RY.PR.A Perpetual-Discount 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 17.24
Evaluated at bid price : 17.24
Bid-YTW : 6.55 %
DFN.PR.A SplitShare 1.45 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.40
Bid-YTW : 9.06 %
BAM.PR.M Perpetual-Discount 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 13.36
Evaluated at bid price : 13.36
Bid-YTW : 8.97 %
NA.PR.N FixedReset 1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 22.62
Evaluated at bid price : 22.69
Bid-YTW : 4.50 %
BMO.PR.M FixedReset 1.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 21.85
Evaluated at bid price : 21.90
Bid-YTW : 4.18 %
GWO.PR.H Perpetual-Discount 1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 15.86
Evaluated at bid price : 15.86
Bid-YTW : 7.71 %
BAM.PR.B Floater 1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 7.96
Evaluated at bid price : 7.96
Bid-YTW : 5.51 %
ACO.PR.A OpRet 1.92 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-12-31
Maturity Price : 25.50
Evaluated at bid price : 26.00
Bid-YTW : 3.53 %
BAM.PR.N Perpetual-Discount 2.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 13.31
Evaluated at bid price : 13.31
Bid-YTW : 9.01 %
PWF.PR.A Floater 2.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 13.31
Evaluated at bid price : 13.31
Bid-YTW : 3.31 %
SBN.PR.A SplitShare 2.48 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.28
Bid-YTW : 9.29 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.X FixedReset 91,100 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 25.15
Evaluated at bid price : 25.20
Bid-YTW : 6.17 %
MFC.PR.D FixedReset 57,705 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 24.58
Evaluated at bid price : 24.63
Bid-YTW : 6.46 %
TD.PR.I FixedReset 52,885 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 5.95 %
CM.PR.L FixedReset 48,927 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 24.95
Evaluated at bid price : 25.00
Bid-YTW : 6.19 %
BMO.PR.O FixedReset 45,240 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 24.95
Evaluated at bid price : 25.00
Bid-YTW : 6.32 %
TD.PR.E FixedReset 42,685 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-25
Maturity Price : 25.13
Evaluated at bid price : 25.18
Bid-YTW : 6.13 %
There were 34 other index-included issues trading in excess of 10,000 shares.

Sum or Product? Always Read the Prospectus!

Wednesday, March 25th, 2009

An Assiduous Reader writes in and says:

I am a private investor and have been unable to get a satisfactory answer from any investment advisors/bank personnel on a question about the new flurry of rate re-set preferreds. They all refer to the rate being re-set in 5 years at a level of x% above government of canada bonds (let’s use a 4.5% re-set as an example). If in 2014 the appropriate GoC bond yield is 5%, and assuming the pfd is not called at that time, then everyone I have spoken to says the pfd rate will be re-set to 9.5%. However, a literal application of the description in the prospectus would be 5% GoC plus 4.5%, which would be a re-set rate of 5.225% (5+[5x.045]). The prospectus refers to a percent, not basis points. Could the banks be this misleading? What am I missing? I would greatly appreciate it if you are able to respond to me.

Well … I’m not sure what is meant by “literal application of the descriptions in the prospectus – no quotations were supplied. However, I looked at the TD prospectus supplement for 2009-2-27 and found the following language (emphasis added):

“Annual Fixed Dividend Rate” means, for any Subsequent Fixed Rate Period, the rate of interest (expressed as a percentage rate rounded down to the nearest one hundred–thousandth of one percent (with 0.000005% being rounded up)) equal to the Government of Canada Yield on the applicable Fixed Rate Calculation Date plus 4.15%.

Additionally, the front page of the Supplement states (emphasis added):

The Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period will be determined by the Bank on the Fixed Rate Calculation Date (as defined herein) and will be equal to the sum of the Government of Canada Yield (as defined herein) on the Fixed Rate Calculation Date plus 4.15%. See “Details of the Offering”.

… and …

During each Subsequent Fixed Rate Period, the holders of the Series AI Shares will be entitled to receive fixed quarterly non-cumulative preferential cash dividends, as and when declared by the Board of Directors, subject to the provisions of the Bank Act, payable on the last day of January, April, July and October in each year, in an amount per share per annum determined by multiplying the Annual Fixed Dividend Rate applicable to such Subsequent Fixed Rate Period by $25.00.

Prospectuses may always be found on SEDAR; usually a few days after the new issue announcement.

I do not think that an argument that “plus 4.15% [full stop]” means “plus 4.15% of the 5-Year GOC rate” can be successful. On balance of probabilities – which would be the test in a civil action – if they wanted to say such a thing, they would have said “Annual Fixed Dividend Rate is … 104.15% of the 5-Year GOC rate”, or similar. This would follow examples such as the BCE fixed floaters, which have such language as:

“Selected Percentage Rate” for each Fixed Dividend Rate Period means the rate of interest, expressed as a percentage of the Government of Canada Yield, determined by the board of directors of BCE as set forth in the notice to the holders of the Series R Preferred Shares, which rate of interest shall be not less than 80% of the Government of Canada Yield.

It is also unclear to me as to whether OSFI would allow an issue paying a multiple of an index yield rather than a spread over the index yield to be a Tier 1 issue. It’s an interesting question, though!

It seems pretty clear to me that in the reader’s example, the applicable reset rate is 9.5%. If the prospectus was, in fact, sloppy enough to say “4.5% above…”, then there would in fact be ambiguity: but I suspect that this language comes from press releases and sales material, not directly from the prospectus.

But if anybody can find a counter-example, let’s hear about it! I’ve certainly seen some sloppy language in prospectuses that doesn’t seem to make a lot of difference … until one day, quite suddenly, it does.

New Issue: TD FixedReset 6.25%+433

Wednesday, March 25th, 2009

TD Bank has announced:

that it has entered into an agreement with a group of underwriters led by TD Securities Inc. for an issue of 8 million non-cumulative 5-Year Rate Reset Class A Preferred Shares, Series AK (the Series AK Shares), carrying a face value of $25.00 per share, to raise gross proceeds of $200 million. TDBFG intends to file in Canada a prospectus supplement to its September 29, 2008 base shelf prospectus in respect of this issue.

TDBFG has also granted the underwriters an option to purchase, on the same terms, up to an additional 3 million Series AK Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The maximum gross proceeds raised under the offering will be $275 million should this option be exercised in full.

The Series AK Shares will yield 6.25% annually, payable quarterly, as and when declared by the Board of Directors of TDBFG, for the initial period ending July 31, 2014. Thereafter, the dividend rate will reset every five years at a level of 4.33% over the then five-year Government of Canada bond yield.

Holders of the Series AK Shares will have the right to convert their shares into non-cumulative Floating Rate Class A Preferred Shares, Series AL (the Series AL Shares), subject to certain conditions, on July 31, 2014, and on July 31st every five years thereafter. Holders of the Series AL Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of TDBFG, equal to the three-month Government of Canada Treasury bill yield plus 4.33%.

The issue is anticipated to qualify as Tier 1 capital for TDBFG and the expected closing date is April 3, 2009. TDBFG will make an application to list the Series AK Shares as of the closing date on the Toronto Stock Exchange.

The first dividend will be payable July 31 and be for $0.50942 based on the anticipated April 3 closing.

It is noteworthy – to me! – that the 433bp spread on this issue is equal to the recent CM.PR.M FixedReset 6.50%+433. This means that I don’t have to fiddle around the HIMIPref™ software so much! Assiduous Readers may recall that design decisions made long before the advent of this flood of FixedResets has made the programmatic definition of differing spread rates a rather fiddlesome thing.

Update, 2009-3-31: TD has announced:

that a group of underwriters led by TD Securities Inc. has exercised its option in full to purchase an additional 3 million non-cumulative 5-Year Rate Reset Class A Preferred Shares, Series AK (the Series AK Shares) carrying a face value of $25.00 per share. This brings the total issue announced on
March 26, 2009, and expected to close April 3, 2009, to 14 million shares and gross proceeds raised under the offering to $350 million. TDBFG has filed in Canada a prospectus supplement to its September 29, 2008 short form base shelf prospectus in respect of this issue.

HIMIPref™ Indices: Median Average Trading Value

Tuesday, March 24th, 2009

I got curious about this.

The averageTradingValue for an individual issue is calculated as volume-average * flatBidPrice-Average

where

volume – average Report Summary
The volume-average attribute is calculated from volume-spot and the instrumentVolumeInfoDecay parameter using an adjusted exponential moving average. First, if the spot data exceeds the existing average by a factor of more than volumeAveragingCap then the calculation is performed as if the new data was equal to the product of the existing average and the cap factor. This ensures that volume spikes will not affect the system’s perception of the issue’s liquidity – spikes may occur, for instance, when a major shareholder sells a major block. Secondly, if existing average exceeds the spot data by a factor of more than this same volumeAveragingCap, then the damping factor used in the calculation will not be instrumentVolumeInfoDecay, but rather the square of this number. This helps avoid the system assuming greater liquidity in an issue than will otherwise be the case when volume is declining precipituously – immediately after issue, for instance, or after accumulation of a significant block by a “buy-and-hold” investor.

The volume figures for the HIMIPref™ indices are reported as the median averageTradingVolume for the index, where the median is calculated by ordering the constituent issues by averageTradingVolume and taking the median by constituent issue weight; e.g., half the index by weight will have a greater averageTradingValue, half will have less.

The reported volume for the FixedReset index has been boosted by the flood of new issues; a new issue’s AverageTradingValue is set by default to $2.5-million, which will usually increase a bit in the period immediately after issue and then decay until it reaches an equilibrium figure. These new issues, with the large AverageTradingValues, have influenced the reported average greatly by two mechanisms:

  • the median issue has almost always not reached equilibrium on calculation date
  • the issue chosen as the median has generally been in the middle of a gap, resulting in jumps when the weight of new issues changes the median

So, anyway, I thought I’d plot the reported figures and compare them with a mature market, PerpetualDiscounts. The influence of the tax-loss-selling-end-of-the-universe frenzy can be clearly seen in the latter plot.