PrefBlog

Germany is preparing for the inevitable:

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

Meanwhile, the ECB is losing credibility daily:

Juergen Stark resigned from the European Central Bank’s Executive Board after protesting the bank’s bond purchases on a conference call earlier this week, said a euro-area central bank official familiar with the meeting.

During the Sept. 4 call, Stark, 63, expressed his strong opposition to the program, which was expanded last month when the ECB started buying Italian and Spanish bonds, said the official, who spoke on condition of anonymity because the discussions are confidential. Stark was supported by the central banks of Austria and the Netherlands, the person said. The resignation of Stark, the ECB’s chief economist, is a blow to the bank, the official said, noting he is the second German ECB member after Axel Weber to leave over the bond program.

Stark’s resignation, less than two months before President Jean-Claude Trichet’s term ends, suggests policy makers are increasingly split over the best way to fight Europe’s debt crisis.

All in all, it was an interesting day:

Treasuries rallied, pushing 10-year note yields to a record low, as a surge in European bank and sovereign-credit risk to all-time highs on speculation Greece may default bolstered the refuge appeal of U.S. government debt.
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Yields on 10-year notes dropped six basis points, or 0.06 percentage point, to 1.92 percent at 4:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained 17/32, or $5.31 per $1,000 face amount, to 101 27/32.

The Standard & Poor’s 500 Index tumbled 2.7 percent. The Stoxx Europe 600 Index fell 2.6 percent. Gold futures for December delivery gained 0.6 percent to $1,869.20 an ounce. Prices rose to a record $1,923.70 on Sept. 6.

The 10-year yields had a weekly drop of seven basis points after falling to 1.8942 percent, the lowest level on record in Federal Reserve data going back to 1953. The yields earlier advanced four basis points to 2.02 percent.

The WSJ opined on YLO.PR.A a few days ago:

From March to December 2012, Yellow Media has an option to convert the preferred stock to common stock. Importantly, Yellow Media gets to exchange the securities at a rate of C$2 per common share so long as the stock trades below that level. With the common stock now trading at about 84 Canadian cents, the company stands to issue common stock valued at just C$111 million, rather than paying C$264 million in cash.

The company said in early August that it still plans to purchase the preferred shares with cash. Unlike private equity, which typically enjoys outright control, Yellow Media’s shareholders can’t force the company to make preferred investors take the hit. But Yellow Media shouldn’t be scared to act itself.

YLO.PR.A was down $4.47 on the week (from 17.07 to 12.60), a drop of over 25%, presumably related to this opinion. The other issues were down as well, but less dramatically.

YLO has been deleted from the S&P/TSX 60 and is now merely a member of the Completion index.

YLO had no TMX-reported insider trading nor any SEDI-reported filings again today. I’m going to keep checking, but this will be the last negative report for a while, anyway.

DBRS confirmed CCS at Pfd-3(high).

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets up 5bp and DeemedRetractibles gaining 1bp. Volatility was good. Volume was below average.

The news from Greece just keeps getting worse:

Credit-default swaps on Greek government debt surged to a record, signaling there’s a 91 percent probability the nation won’t meet debt commitments, after its economy shrank more than previously reported.

Five-year contracts on the country’s sovereign bonds jumped 240 basis points to a record 3,045 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Gross domestic product shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Hellenic Statistical Authority said. Greece’s financial situation is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers last night, the parliament’s HIB bulletin said.

But Greece swears up and down it will stay in the Euro:

Greece ruled out quitting the euro on Thursday, shrugging off warnings by its biggest creditor Germany and yet another set of bad economic figures showing it is struggling under the weight of EU/IMF-imposed austerity.

Anger at Greece’s failure to meet fiscal targets that are a condition for its international bailout is nearing breaking point in Berlin and other European capitals, with senior German politicians now talking openly about the possibility of Athens exiting the euro zone.

But Athens ruled out any chance of quitting the single currency, pledging to make every effort to qualify for a €109-billion bailout agreed by euro zone leaders in July, the second rescue package for the debt-laden country in little more than a year.

“There is no threat of Greece exiting the euro zone,” government spokesman Ilias Mosialos said. “We are proceeding with reforms quickly.”

It’s reminiscent of old times! ‘We will not devalue! We will not devalue! We will not devalue! Well, we just devalued, but we had to and that was the last time! We will not devalue!’

Trichet is showing signs of strain:

Trichet, 68, lost his cool yesterday with a reporter who asked whether Germany should abandon the euro and return to the mark as Europe’s debt crisis roils markets and spooks voters.

“I would like very much to hear the congratulations for an institution which has delivered price stability in Germany for almost 13 years,” Trichet said in Frankfurt in an uncharacteristically raised voice. “It’s not by chance we have delivered price stability,” he said. “We do our job, it’s not an easy job.”

If it works, this is bad news for YLO:

Google Inc. (GOOG), owner of the world’s most-used search engine, has acquired Zagat Survey LLC, the review and ratings service, to add features aimed at local businesses and advertisers.

Zagat brings an array of reviews of hotels, restaurants, shopping and other categories, the company said in a blog post today. The service, which offers both printed and online reviews and ratings, was founded more than 30 years ago.

But will small businesses want to buy all their advertising through a place that allows bad reviews?

There was no insider trading of YLO issues reported by the TMX today; nor was there anything new filed on SEDI.

DBRS confirmed three more SplitShare Corporations.

The TRE cease trading order was extended.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets up 9bp and DeemedRetractibles winning 10bp. Not much volatility. Volume was below average.

There were no surprises in the BoC release:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated
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Slower global economic momentum will dampen domestic resource utilization and inflationary pressures. The Bank expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well-contained as labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

There are rumours that the completely voluntary and not coerced in any way whatsoever Greek bond exchange offer might be in trouble:

Private sector participation in a Greek debt swap has so far reached the 75-percent mark, far below a 90 percent target, newspaper Imerisia reported on Wednesday without naming its sources.

Greece last month turned the screws on investors, saying it may not go ahead with the debt swap—a key part in a second bailout package to stave off the country’s bankruptcy—if holders of less than 90 percent of the bonds take part.
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A Greek finance ministry official said it was too early to provide a take-up figure. “The process is ongoing, it is premature to give a percentage,” the official told Reuters on condition of anonymity.

Greece has asked bondholders to declare their interest in taking part in the debt swap by Friday. Greece expects to submit a final bond swap offer to investors in October, with a view to complete the exercise by the end of the same month.

As I have often noted, bankruptcy laws evolved over a period of 300 years. To their vast astonishment, the Europeans are finding that the re-write may take a little time:

There were no insider trading reports for YLO today, but I did learn that overlapping NCIBs are allowed which seems a little strange to me. The TMX reported no insider buying of YLO issues today.

It was a good day overall for the Canadian preferred share market, with PerpetualDiscounts losing 4bp, FixedResets gaining 10bp and DeemedRetractibles winning 26bp. Volatility picked up, skewed to the upside. Volume was a little above average.

PerpetualDiscounts now yield 5.29%, equivalent to 6.88% at the standard equivalency factor of 1.3x. Long-term Corporates now yield about 4.9% (maybe a little less?) so the pre-tax interest-equivalent spread is now about 200bp, the same as it was on August 31 as both yields have declined about the same amount.

The US has a new plan to balance its books, remarkably similar to Europe’s:

Bank of America Corp. and JPMorgan Chase & Co. (JPM) were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.

The UK government may have caught a sanity germ:

U.K. Prime Minister will seek a “significant watering down” of a planned overhaul in banking regulations because the new rules may hurt growth and spur lenders to quit the country, the Sunday Telegraph reported.

Cameron told senior cabinet officials that any proposals from the Independent Commission on Banking to split banks’ retail and investment units or require lenders to raise capital must be reviewed, the newspaper reported, citing unidentified officials. The government is concerned that HSBC Holdings Plc (HSBA) and possibly other banks may move operations away from the U.K. if planned “ring-fencing” rules are implemented, according to the Sunday Telegraph.

With respect to liquidity, here’s a report from the front lines:

Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said.

Interbank borrowing for more than six months is also becoming problematic because banks are reluctant to lend to competitors with “big positions in weaker countries’ debt, for instance,” he said today on Dutch television program “Buitenhof.”
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A demise of the euro would have “catastrophic” consequences for the Dutch economy, which sends about three- fourths of its exports to other euro-zone states, and “would cause a recession that would make the 1930s a trifle by comparison,” Zalm said.

Europe is getting more interesting by the day:

Finland is stepping up efforts to find a compromise with Europe on its collateral demands amid International Monetary Fund opposition to forcing Greece to give euro members extra security for new loans.
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Europe’s efforts to contain its debt crisis risk unraveling as individual nations’ demands for collateral, Greece’s deteriorating economic predicament and wavering commitment to austerity packages from euro members such as Italy throw any recovery in doubt.
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Finland’s anti-bailout party, which calls itself “The Finns,” last month polled as the country’s most popular, according to broadcaster YLE. The party saw its backing surge fourfold in the April election, making it parliament’s third- biggest. The party’s leader Timo Soini has railed against the costs of funding bailouts and rejects Europe’s ambition of preventing a Greek default.

“The European Union is breaking its own rules and Finland shouldn’t have anything to do with it,” Soini said last week. “This is a disaster. Finland should stay outside and oppose these measures.”

The Finns aren’t the only ones opposing a bail-out:

The Social Democrats, Germany’s main opposition party, took 36.1 percent to win yesterday’s election in Mecklenburg-Western Pomerania, while Merkel’s Christian Democratic Union had 23.3 percent, ZDF television projections showed. The result in the eastern state where Merkel’s election district is located means her national coalition has been defeated or lost votes in all six German state elections so far this year as voters resist her bid to prevent a euro-region breakup by putting more taxpayer money on the line for bailouts.

“Merkel’s CDU got beat in her home state, adding to the sense that opposition to any solution to a deepening crisis is growing,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, wrote in an e-mailed note.

Ackerman had some cheerful things to say about the markets:

The chief executive officer of Deutsche Bank AG (DBK), Josef Ackermann, said market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression. Investors drove yields higher on the bonds of Greece, Portugal, Spain and Italy yesterday on doubts Europe’s leaders will be able to stop the sovereign debt contagion.
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The Bloomberg Europe Banks and Financial Services Index of 46 stocks dropped almost 10 percent in the past two sessions, to the lowest level since March 31, 2009. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 13 basis points to 259, according to JPMorgan Chase & Co. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, rose to 0.77 percentage point, the widest gap since April 2009.
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Many European banks “obviously” wouldn’t be able to shoulder writedowns on sovereign debt held in their banking books based on market values, Ackermann said. Greek two-year notes traded yesterday at less than 50 percent of face value.

However, Greece is going to accellerate its reforms, so everything will be all right. Just don’t panic, OK! Dear God, don’t panic! STOP PANICKING THIS MINUTE, YOU NASTY SPECULATORS!:

Greece said it will accelerate austerity measures pledged in return for international financing as pressure mounted from European partners before the payment of a sixth tranche of bailout loans.

“Greece isn’t a pariah in the European Union or an open wound,” Finance Minister Evangelos Venizelos said from Athens on state-run NET Radio today. “Greece is an equal member of the European Union with deficit and debt problems. Greece can overcome these problems with these reforms.”

Venizelos said he received approval from the Cabinet today to immediately transfer state assets to a special fund for sale, place civil servants in a “reserve” system to retrain them and cut expenses, as well as merge and shut down dozens of government agencies that are a drag on spending.

Ackerman was also in the news for the latest IIF counter-attack against excessive regulation:

The study includes a series of scenarios and a considerable number of variables in determining the impact of the sum of financial regulatory measures. It estimated that all the measures combined will significantly boost the capital needs of banks relative to a base scenario – an additional capital requirement for banks in the leading industrial economies of $1.3 trillion by 2015, according to its central scenario, and this could push bank lending rates up by over 3 ½ percentage points on average for the next five years. The result could be 3.2 percent lower output by 2015 in these economies than would otherwise be the case. This would lead to about 7.5 million fewer jobs being created. The negative economic effects would likely fade in 2016 and beyond but, the maximum drag of reform on the global economy would be at a time when it is apparently least well placed to handle it.

Naturally, the regulators immediately countered:

Group of Seven finance ministers and central bankers will discuss financial regulation at a meeting Friday in Marseille, a Canadian Finance Department official told reporters Tuesday on a conference call.
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The official said overly indebted countries in Europe and overly indebted households in the U.S. are the more important headwinds facing the global economy. Canada is relatively pleased with the progress the G20 is making on completing its regulatory program, and Finance is dismissive of the argument that demanding the banks to keep bigger financial cushions is hurting the economy.

If we had better financial regulation in 2007 and 2008, we might not be in the situation we are in now, the Canadian official said.

And if it rained lemonade we could all have a nice drink. So?

I believe that they’re probably both right: all else being equal, increased regulation on the contemplated scale will cause a depression, and that the IIF is being alarmist. I believe this because all else is not equal and never is. What is far more likely is that the banks, constrained by capital requirements, will simply reduce their lending business and there will be an increasing amount of disintermediation as corporations and governments go directly to the public markets. They might lend to small business, but they might also face increased competition in that sector from unregulated shadow banks.

So what will this lead to? It will lead to an ostensibly safer, but far more brittle financial system. Manulife got into trouble during the crisis, but were able to pump a huge amount of capital into their operating subsidiary on very short notice because the holdco was able to borrow billions from the banks on short notice. BofA was able to take over Merrill Lynch on short notice.

If capital regulation leads to lower bank flexibility in a crisis, watch out! We’ve all seen what a mess the politicians make of things when they make up new rules on the fly. It won’t be pretty.

YLO’s CFO has “stepped down”. That was sudden. There were no insider trading reports for YLO on SEDI today. Interestingly – and perhaps related to the hasty departure? – there was no insider trading of the preferreds reported by the TMX today either.

HSB is selling its Canadian retail brokerage:

As HSBC Holdings PLC (HCS-N26.440.100.38%) looks to shed costs from its global operations, the bank acknowledged it is in talks to sell part of its Canadian operations, but said a deal has not yet been reached.

After reports two weeks ago that the U.K.-based bank had opened the books on its Canadian retail brokerage to potential bidders, HSBC issued a statement Tuesday confirming the process. However, “no decision has yet been made to proceed with any transaction,” the bank said.

DBRS confirmed IGM on Friday:

DBRS has today confirmed the Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and the First Preferred Shares rating at Pfd-2 (high); the trends are Stable. IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual fund manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The rating is primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through the Company’s Mackenzie and Investment Planning Counsel Inc. (IPC) business segments.
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In addition to strong profitability, the Company’s credit rating also benefits from strong cash flows, which easily cover the upfront distribution costs of mutual fund sales; strong liquidity; and a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than one time which is very conservative and a sharp improvement from year ago levels following a large debt maturity and growth in retained earnings. Over the past 12 months, the Company’s ratio of debt plus preferred shares-to-total capitalization fell from 29.1% to 25.7%, which remains appropriate for the rating.

DBRS also confirmed twenty-two SplitShares:

The Preferred Shares were last confirmed in August 2010. Equity performance was generally positive from July 31, 2010, to March 31, 2011; however, net asset values (NAVs) dropped over the past few months as global equity markets were negatively affected by concerns over the European sovereign debt crisis and the U.S. debt ceiling deadline. High volatility levels intensified following the downgrade of the U.S. long-term debt rating below AAA by one major rating agency. Notwithstanding the current volatility and sharp drop in markets over the past few months, the current levels of protection available to the Preferred Shares are commensurate with the ratings assigned. The rating confirmations are also based on longer-term performance and structural features of the Issuers that benefit the Preferred Shares. Other key rating factors are the credit quality and diversification of each Portfolio; the amount of distributions paid to the Capital Shares; and the expected maturity date of the Preferred Shares of each Issuer.

Frankly, I’m a little surprised at some of the names in the confirmation list! FFN.PR.A still at Pfd-3(low)? NAVPU was only 13.10 at August 31, presumably a little less now. When it was last confirmed 2010-8-10 the NAVPU was 13.73.

Today’s red-hot investment idea is: buy stock in producers of mosquite repellant and producers of anti-mosquite-borne-disease drugs. Our beloved morons on Toronto City Council have decreed mandatory downspout disconnection, so today I finally got around to booking an appointment with a contractor who can do it without injuring himself or toppling the house over, like I would. I was told that a lot of people aren’t redirecting their downspouts, they’re just capping them – so (a) the eavestroughs will just overflow when full and (b) we’re going to have a lot of standing water in the future. It’s interesting to note the similarity to what I believe will be the unintended consequences of increased bank capital regulation, and the fact that regulators, in general, are incapable of thinking things through; but the situation does suggest my red-hot investment idea. Never say I don’t do enough for you guys!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp FixedResets losing 3bp and DeemedRetractibles gaining 7bp. Not much volatility. Volume was abysmal.