PrefBlog

IOSCO would like to protect incompetent traders from evil High Frequency players, but has not yet found a plausible excuse:

In a new consultation paper, the International Organization of Securities Commissions lays out what it knows about high frequency traders, and the upshot is not much — but the regulatory body is voicing some significant concerns. Chief among them is that the technological advantage of high-frequency traders gives them an unfair edge, causing other investors to drop out of markets, and whether their speed and sophistication make it too hard for regulators to ensure they aren’t gaming markets.

The full report notes that the comment period closes August 12, 2011.

In a similar vein, Europe is hoping to punish rating agencies for being independent:

The head of the European Commission says the practices of the three top credit rating agencies will come under scrutiny and that Europe could benefit from having its own agency.

Rating agencies have had a central role in warning about Europe’s debt crisis, though many politicians have criticized them for fanning fears.

Jose Manuel Barroso said the Commission “will come up with some proposals in the autumn” on regulating the agencies, but did not give any detail.

He said the agencies sometimes anticipate risks but can also “overrate” them.

There was a nice jobs number in the US … nice for bonds:

American employers added jobs at the slowest pace in nine months in June and the unemployment rate unexpectedly climbed to 9.2 percent, sending global stocks tumbling on concern the world’s biggest economy is faltering.

Employers increased payrolls by 18,000 workers, less than the most pessimistic forecast in a Bloomberg News survey of economists, which called for growth of 105,000. The increase followed a 25,000 gain that was less than half the initial estimate. Hiring by companies was the weakest since May 2010.

What a difference a day makes!

[Yesterday]

Treasuries ended a two-day rally as a private report said U.S. companies added more jobs than forecast and economists said government data tomorrow will show nonfarm payrolls gained, fueling bets economic growth is accelerating.

Ten-year yields rose from a one-week low as stocks climbed after the European Central Bank signaled it will ease Portugal’s access to emergency funds. ADP Employer Services said U.S. firms’ payrolls increased by 157,000 jobs in June, and unemployment claims fell for the first time in three weeks. The U.S. said it will sell $66 billion in notes and bonds next week.

DBRS confirmed GWO:

Like its major peers, the Company is anchored by its Canadian operations which benefit from an oligopolistic industry structure which limits the worst of price competition. Increasing scale in the U.S. retirement saving administration and focused niches in Europe, primarily in the United Kingdom, represent stable sources of earnings contributions. The Company avoided the adverse reserve development which was experienced by a number of competitors on account of Guaranteed Minimum Withdrawal Benefits (GMWB) segregated funds inasmuch as GWO did not begin to offer the product until it had arrived at an efficient and effective hedging strategy which complemented its conservative product design.
…
Fixed charge coverage ratios at GWO nevertheless remain healthier than those of its peers, reflecting stronger profitability, albeit lower than historical. GWO also continues to employ a higher proportion of innovative/hybrid capital instruments which keep its adjusted debt ratio (giving equity treatment to certain capital instruments) relatively low. The Company is actively retiring capital instruments issued at its operating companies in order to have a higher proportion of capital issuance at the holding company level which will serve to reduce its double leverage ratio. In short, DBRS considers the Company’s financial leverage and capital position to be consistent with the current rating category as long as it continues to operate conservatively. However, financial flexibility is limited at this rating category.

As an integral component of the Power Financial group of companies, GWO benefits from its parent’s financial support and its strong governance and risk management controls and procedures, which reinforce the conservative bottom-line focus of the Company.

DBRS also confirmed BMO:

BMO’s capital ratios were solid and the quality of capital was strong relative to its Canadian bank peers at the end of Q2 2011. However, the acquisition of M&I resulted in a reduction in the pro forma Basel II tangible common equity (TCE) and Tier 1 ratios to 9.4% and 11.9% (based on April 30, 2011), respectively, which are at the low end of BMO’s Canadian bank peer group, albeit still well in excess of regulatory requirements. On a Basel III basis (also based on April 30, 2011), the pro forma TCE and Tier 1 ratios were 6.9% and 9.2%, respectively.

BMO’s long-term Deposits & Senior Debt rating at AA is composed of an intrinsic assessment of AA (low) and a support assessment of SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 status results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings.

What happened to Yellow this week? TD Newcrest doesn’t like the common any more, which is important to some:

TD Newcrest analyst Scott Cuthbertson threw in the towel on Yellow Media Inc. (YLO-T2.40-0.29-10.78%), slashing his price target by half to $2 and downgrading it to “sell” after having recommended investors hold it since the beginning of March 2010, when the stock traded around $6.

It was an uneven day in the Canadian Preferred Share Market, with PerpetualDiscounts flat (exactly!), FixedResets up 1bp and DeemedRetractibles winning 16bp. Volatility was muted. Volume was low.

Europeans want a rating agency that follows political instructions:

Europe’s leaders are accusing the world’s largest credit-rating agencies of bias in assessing the debt of troubled countries, renewing calls for the creation of a European rating agency.

The complaints were sparked after Moody’s downgraded Portugal by four notches Tuesday to “junk” status, and Standard & Poor’s warned Monday it would consider it a “selective default” if banks and insurers roll over about $42-billion of Greek debt – a move that could derail efforts to restructure Greece’s debt.

German Finance Minister Wolfgang Schaeuble said Wednesday he was surprised by the decision to downgrade Portugal, saying he “can’t decipher” the basis for the evaluation.

“We need to break the oligopoly of rating agencies,” he told reporters in Berlin.

Meanwhile Satyajit Das has a nice piece in the Globe, unsuccessfully attempting to make the numbers add up:

Under the sketchy proposal, for every €100 of maturing bonds, the banks will subscribe to new 30-year securities, but only equal to €70 (70 per cent). The banks will keep €50 and invest the other €20 in 30-year high-quality zero-coupon bonds (via a special purpose vehicle) to secure repayment of the new bonds. The new 30-year Greek debt will carry an interest rate of 5.5 per cent per annum with a bonus element linked to Greek growth of up to an additional 2.5 per cent.

Of the €340-billion in outstanding Greek bonds, banks hold 27 per cent, institutional and retail investors hold 43 per cent and the International Monetary Fund and European Central Bank hold 30 per cent. It is not clear whether non-bank investors are willing to participate in the arrangements. The ECB has previously resisted any debt restructuring, including maturity extension.

The French plan assumes holders of bonds would agree to roll over 50 per cent of their holdings to provide Greece net funding of €30-billion ($41-billion). But under the French banking federation’s own figures, this would be impossible unless all the €60.5-billion (excluding central bank holdings) maturing by mid-2014 is rolled over. This is inconsistent with the proposal’s assumption of investor acceptance of 80 per cent.
…
Greece must find €50 for every €100 debt exchanged under the proposal. Given it has no access to commercial funding, this would have to come from the EU, IMF, EFSF or ECB.

Greece’s cost would be between 7.7 per cent and 11.20 per cent per annum, as it only receives €50 of the €70 face value of the new bonds. Assuming the remaining funding is at 6 per cent, then Greece’s blended rate for every €100 of finance would be 6.85-8.60 per cent per annum, compared to the 7-8 per cent per annum considered sustainable by markets.

Most importantly, the overall level of debt, considered unsustainable, of Greece would remain unchanged.

Speaking of numbers that don’t add up, there’s more Sino-Forest related news:

John Paulson lost 11 percent in his biggest fund in June, according to an investor, as the firm sold off Sino-Forest Corp. (TRE) after a short-seller’s allegations.

The drop left Paulson’s Advantage Plus Fund, which uses strategies designed to profit from corporate events such as takeovers and bankruptcies, down 18 percent this year, said the client, who asked not to be named because the information is private. The fund’s gold-denominated share class declined 11 percent in June and 12 percent in 2011.

The crows are feasting on Nortel’s unexpectedly fat corpse:

Two and half years on, the breakup of Nortel Networks Corp. is all but complete save for one last but significant obstacle — how to allocate an unexpectedly large pile of cash of more than US$10-billion.

That job falls on the shoulders of Ontario Chief Justice Warren Winkler, who Wednesday was appointed mediator for all outstanding claims, which could swell in light of the colossal sum raised through last week’s US$4.5-billion patent sale to a consortium of technology giants.
…
Unsecured holders of Nortel’s suddenly hot bonds will also expect to be paid out at 100¢ on the dollar. Bonds maturing in 2013 and 2016 carry coupons of more 10% and are trading well above par. Each class of bond is up more than 650% since hitting bottom in February 2009.

JPMorgan was naughty:

Typically, when investors purchase municipal securities, the municipalities temporarily invest the proceeds of the sales in municipal reinvestment products until the money is used for the intended purposes. Under relevant Internal Revenue Service (IRS) regulations, the proceeds of tax-exempt municipal securities generally must be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

The SEC alleges that from 1997 through 2005, JPMS’s fraudulent practices, misrepresentations and omissions undermined the competitive bidding process, affected the prices that municipalities paid for reinvestment products, and deprived certain municipalities of a conclusive presumption that the reinvestment instruments had been purchased at fair market value. JPMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The employees involved in the alleged misconduct are no longer with the company.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, JPMS, acting as the agent for its affiliated commercial bank, JPMorgan Chase Bank, N.A., at times won bids because it obtained information from the bidding agents about competing bids, a practice known as “last looks.” In other instances, it won bids set up in advance for JPMS to win (“set-ups”) because the bidding agent deliberately obtained non-winning bids from other providers, and it facilitated bids rigged for others to win by deliberately submitting non-winning bids.

Dan Hallett has another nice piece in the Globe, How rising rates may affect bond portfolios.

RBC may be going into the ETF business:

Royal Bank of Canada (RY-T54.57-0.24-0.44%), which owns Canada’s largest mutual fund player, is the second domestic bank to jump into the fast-growing exchange traded fund (ETF) business.

Its fund arm, RBC Global Asset Management, has filed a preliminary prospectus to list eight, target-date maturity corporate bond ETFs on the Toronto Stock Exchange. These ETFs wind up in a specified year ranging from 2013 to 2020, and the cash is distributed to unitholders.

Jonathan Chevreau comments:

The entry of Canada’s largest bank, RBC, into exchange-traded funds is bound to legitimize the fast-growing ETF industry, just as the banks made mutual funds a household name in the late 1980s.

Yes, sir, that’s what ETFs need! Legitimacy!

Canada nestled deeper into Israel’s pocket:

The committee recommends that police forces across Canada be better trained to deal with anti-Semitism; that universities host conferences to counter events such as “Israeli Apartheid Week”; and that there should be a clear definition of what anti-Semitism entails.
…
The CPCCA countered that it did not want to limit reasonable criticism of Israel. But it also explained that “anti-Semitism is being manifested in a manner which has never been dealt with before. … This problem is especially prevalent on campuses where Jewish students are ridiculed and intimidated for any deemed support for the ‘Nazi’ and ‘apartheid’ State of Israel, which is claimed to have no right to exist.”

Don’t engage in vigorous debate! Not in Canada! The people with whom you vehemently disagree might be fwightened! Some of us believe that criticism of Israel, no matter how vociferous and ignorant, is not anti-Semitism – but perhaps the CPCCA considers that at anti-Semitic viewpoint. At least we can all be joyful that the CPCCA does not want to limit what it deems to be reasonable criticism of Israel. Golly, thanks guys!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 15bp, FixedResets winning 10bp, and DeemedRetractibles up 1bp. Volatility was good. Volume was fair.

Portugal’s downgrade is contagious:

Portugal’s downgrade to junk may stifle corporate bond sales in Europe, killing off a mini- revival in issuance spurred by investor optimism about Greece’s efforts to avoid default.

“The primary window has almost slammed shut just as spectacularly as it had flung open,” said Suki Mann, senior credit strategist at Societe Generale SA in London.

Notes sold by Enel SpA (ENEL), Italy’s largest power operator, and Fiat SpA (F) fell in their first day of trading today, while two issuers pulled deals. Enel and Fiat led 5.4 billion euros ($7.7 billion) of company bond sales in Europe this week, the biggest round of issuance by non-financial borrowers since May, according to data compiled by Bloomberg.

Ireland may be next!

Ireland’s credit rating may be cut to junk by Moody’s Investors Service after Portugal yesterday lost its investment grade rating, according to analysts.

Moody, which slashed Portugal to Ba2 from Baa1, in April lowered Ireland’s credit rating to the lowest investment grade Baa3 and left country’s outlook on negative.

The ratings company cut Portugal’s rating in part because the nation may not be able to return to debt markets in the second half of 2013. Ireland has been locked out of markets since September, and the yield on 10-year Irish bonds climbed to 12.44 percent today, a euro-area record for the country that agreed to a rescue package with the European Union and International Monetary Fund last November.

Synthetic ETFs are really getting a working-over:

U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the proper tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

The Serious Fraud Office, which prosecutes white collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England’s Financial Policy Committee have warned of a lack of transparency in the ETF market.
…
“From the investor’s point of view, I think there are question marks over whether synthetic ETFs really are appropriate for all types of the retail marketplace,” FSA Chief Executive Officer Hector Sants said June 24.

Concerns about synthetic ETFs were last discussed on PrefBlog when the BoE June 2011 Financial Stability Report focussed on them.

It was a mixed day for the Canadian preferred share market, as PerpetualDiscounts gained 20bp, FixedResets were up 4bp and DeemedRetractibles lost 8bp. Volatility was quite good. Volume was average; Nesbitt scored a shut-out on the highlights table.

PerpetualDiscounts now yield 5.44%, equivalent to 7.07% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.35% so the pre-tax interest-equivalent spread is now about 175bp, a narrowing from the 185bp reported on June 29 due to a decline of PerpetualDiscount yields.

FixedResets and new issuers got some ink in the Globe:

BCE Inc. (BCE-T38.220.230.61%), which has long history with these shares, is one of the latest firms to tap into this demand, closing a $345-million offering on Tuesday. These shares pay a fixed yield of 4.15 per cent for the first five years, and then investors have the choice to either take a rate equal to the Government of Canada 5-year yield plus 1.88 per cent, or a floating three-month T-bill rate plus 1.88 per cent.

Yet BCE isn’t alone. Intact Financial also just sold $225-million of these securities, as did Canaccord Financial. These two issues were a bit more surprising because both deals were the first time these firms offered this type of security.

Still, it makes a lot of sense. Much like Intact and Canaccord, firms such as GMP Capital and Bell Alliant also recently sold their first issue of rate reset preferred shares. If sales continue to be strong, don’t be surprised if more first-time issuers jump on the bandwagon.

Moody’s says Portugal is junk after a four-notch downgrade:

Moody’s Investors Service on Tuesday cut Portugal’s credit rating by four levels to Ba2, two notches into junk territory, saying there is great risk the country will need a second round of official financing before it can return to capital markets.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets winning 15bp and DeemedRetractibles gaining 5bp. Volatility was muted. Volume was average and dominated by FixedResets – perhaps due to portfolio reshuffling with the closing of the BCE.PR.K new issue.