PrefBlog

The European governments need the banks, because the banks buy their debt. Guess who the banks depend on?

European banks turning to their governments to raise required capital could trigger a downward spiral of declining sovereign-debt prices and further losses for the lenders.

The European Banking Authority ordered the region’s banks on Dec. 8 to raise 115 billion euros ($154 billion) by June. Faced with dwindling profits and unable to tap capital markets to sell new shares, firms may be forced to seek government help. About 70 percent of the capital requirement falls on lenders in Spain, Greece, Italy and Portugal, countries struggling to convince the world they can pay their debts.

“If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Then the banks’ losses will rise because they hold the government debt. That’s a vicious cycle. It’s hard to know which one to stabilize first, the sovereign bonds or the banks.”

Moody’s blue:

European leaders unveiled a blueprint after meetings on Dec. 8 and 9 for a closer fiscal accord to save the euro, adding 200 billion euros to their bailout fund and tightening rules to curb future debts. They also agreed to start a 500 billion-euro rescue fund next year.

The agreement offered few new measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s said in its Weekly Credit Outlook. “In the absence of any decisive policy initiatives that stabilize credit-market conditions effectively, our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” the company said.

Bad news from Sino-Forest:

The company won’t be able to publish the earnings within the 30-day period stated on Nov. 15, Hong Kong- and Mississauga, Ontario-based Sino-Forest said today in a statement. There’s no assurance if or when the results will be released, it said. Sino-Forest also said a report by an independent committee into the fraud allegations now won’t be issued until 2012, instead of the year-end as previously stated.

Sino-Forest said it decided it won’t make a $9.78 million interest payment on its 2016 convertible notes that’s due Dec. 15. The company said it retained Houlihan Lokey and Bennett Jones LLP as its financial and legal advisers to assist in the evaluation of its options.

“In these circumstances, the board has determined that it must consider all strategic options available,” the company said in the statement. “The company may consider obtaining other sources of capital, including through the recapitalization of the company or the sale of some or all of its business.”

A lot of the fuss could be – could! – simply hysteria. That’s just people talking. But not being able to produce financials, another delay in the special committee report and skipping an interest payment … that’s real.

The Republicans are going to love this:

China may use tax cuts to shore up expansion in the second-largest economy next year as export growth weakens and the threat of bad loans from stimulus spending narrows the government’s options.

Another thing that’s real is Sun Life retreating from the US:

Sun Life Financial Inc. (SLF), Canada’s third-largest insurer, plans to stop selling variable annuities and individual life insurance products in the U.S. and will cut 800 jobs there as it shifts focus to Canada and Asia. The stock had its biggest gain in more than two years.

Sun Life expects to record costs of about C$75 million ($73 million) to C$100 million from the changes, a portion of which will be in the fourth quarter, the Toronto-based company said today in a statement. The insurer will also take a writedown of about C$97 million.

Variable annuities, which provide guaranteed incomes to customers regardless of market performance, have led to losses at Sun Life and bigger rival Manulife Financial Corp. (MFC) after equities plunged. Sun Life’s U.S. insurance unit had losses of C$569 million in the third quarter, and C$279 million in the first nine months of 2011.

The common soared, but the preferreds were actually down on good volume!

DBRS commented:

Over the past several years, volatility has highlighted SLF’s economic exposure to the capital markets from guarantees written on variable annuities and embedded interest rate guarantees associated with life insurance products. However, the Company’s ability to mitigate these market fluctuations is limited by the disadvantageous accounting and regulatory capital treatment faced by Canadian life insurance companies, especially with regard to these long-tailed products. Since U.S.-based competitors have not faced the same disadvantage, the ability of Canadian companies to compete on a level playing field in these increasingly commoditized product lines has deteriorated. Despite recent efforts to de-risk, re-price and hedge these products, the cost to the Company in terms of capital allocation charges and earnings volatility, combined with cost and product disadvantages, has been deemed by the management team under new Sun Life CEO Dean Connor to be unsustainable. As of December 30, 2011, sales of these products will therefore cease.
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While reduced exposure to the U.S. variable annuity and individual life markets makes good sense from a capital and earnings perspective, DBRS recognizes that the Canadian life insurance industry continues to move away from its core and unique expertise in life underwriting in favour of more commoditized and more competitive wealth management products that require less regulatory capital.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets down 1bp and DeemedRetractibles losing 12bp. Volatility was good, mostly on the down side. Volume was low.

Moody’s downgraded some French banks:

BNP Paribas SA (BNP), Societe Generale SA and Credit Agricole SA (ACA) had their credit ratings cut by Moody’s Investors Service, which cited funding constraints and deteriorating economic conditions amid Europe’s debt crisis.

Moody’s cut the long-term debt ratings for BNP Paribas and Credit Agricole by one level to Aa3, the fourth-highest investment grade. Societe Generale’s rating was cut to A1, the fifth highest. Moody’s also cut the standalone assessments of financial strength of the three banks, while saying there’s a “very high” chance they will get state support if needed.

“Liquidity and funding conditions have deteriorated significantly,” the ratings company said in a statement. The likelihood that they “will face further funding pressures has risen in line with the worsening European debt crisis.”

The US MMFs have awesome influence:

The eight largest prime U.S. money- market mutual funds cut holdings in French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese banks.

French bank holdings declined by $11.7 billion to $5.56 billion, according to an analysis of fund disclosures by the Bloomberg Risk newsletter. The eight funds have reduced French bank debt by $76.8 billion in the past 12 months.

Senator Snowe is upset with Amazon:

Amazon.com Inc. (AMZN) should end its price- checking promotion because it gives consumers an incentive to gather price data from small retailers and leave stores without spending money, said Senator Olympia Snowe.

The world’s largest online retailer is offering a 5 percent discount to entice users to try a new mobile application that compares prices with physical retailers. The app, called Price Check, allows shoppers to look up Amazon’s prices by scanning products at a store using their phones.

“Amazon’s promotion — paying consumers to visit small businesses and leave empty-handed — is an attack on Main Street businesses that employ workers in our communities,” Snowe, a Maine Republican, said in a statement yesterday. “Small businesses are fighting everyday to compete with giant retailers, such as Amazon, and incentivizing consumers to spy on local shops is a bridge too far.”

That’s right, Senator, competition is un-American.

However, the issue highlights something I’ve been pondering for the past ten-odd years: what is the future of retail? I have a friend who retails computers: he pays more for his inventory than a retail customer can buy for at the big guys. And we’re seeing more and more of this type of thing all of the time.

My suspicion is that retail stores will eventually become show-rooms. For anything that’s not perishable, you’ll go into a store, look at the merchandise and if you like it – you’ll place an order. Then you pick it up a week later – or, perhaps, have it delivered for an extra five bucks.

There’s aways a possibility that retail will disappear completely – for non-perishable items – but I don’t think that will happen. You can’t covet what you don’t know about and people always want to see things. So manufacturers (like Apple) and distributors (like Amazon) will (i) obviously, pay a commission on sales, and (ii) pay a fee for shelf space (which has been the case for years in the grocery industry and, I’m sure, lots of other places). Maybe it’s a relatively low shelf-space fee, then a huge commission on the first sale or two, then the regular commission on more; just to keep the retailers honest.

Doesn’t this make sense? Why should I pay an extra $100 for a television, just so that Future Shop can keep fifty of each model stacked behind their enormous store on expensive urban land? Is it really worth that much to get same-day delivery of my television?

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets down 3bp and DeemedRetractibles winning 8bp. Volatility was OK. Volume was very low.

Three cheers for BMO!

The consortium, known as Maple Group, wants to buy TMX for $3.8-billion. It also wants to buy privately-held Alpha, TMX’s biggest competitor in the stock market business in Canada, then combine Alpha and TMX into an entity that would be home to more than 80 per cent of all share trading in Canada.

However, the parties are nowhere close on a value for Alpha, according to people familiar with the situation. Maple is offering something in the range of $100-million to $200-million, while Alpha is looking for something in the range of $450-million to $600-million, the people said. The expectation is that the parties will likely have to go to binding arbitration to set a price.
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Should regulators block the Alpha deal, Maple has said it will drop plans to buy TMX. On the other side, if TMX thinks Maple is paying too much for Alpha, TMX can back out of the deal to merge with Maple.

What’s more, the Alpha situation is complicated by an interlocking web of conflicts of interest.
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Another Alpha shareholder, Bank of Montreal, is not a member of Maple but it is advising TMX on its plan to merge with Maple

DBRS downgraded Spain to AA(low) Trend Negative.

BSD.PR.A was confirmed at Pfd-4(low) by DBRS:

Despite a deterioration in the Portfolio metrics since the previous rating review, specifically with respect to the Preferred Security downside protection (currently at 23.9%, down from 30.6% since December 31, 2010) and dividend yield, DBRS remains comfortable with the current assessment of the Portfolio and the confirmation of the Pfd-4 (low) rating. DBRS will continue to monitor the performance of Brookfield Soundvest Split Trust to determine the required level of downside protection for the assigned rating, and take appropriate action as needed.

The redemption date for the Preferred Securities is March 31, 2015.

Due to collywobbles at TMX DataLinx, the preferred share report has been prepared using Yahoo! data again.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets up 6bp and DeemedRetractible gaining 8bp. Volatility was muted, although Floaters bounced back from yesterday’s debacle. Volume was low.

FortisBC Energy (formerly Terasen; now owned by Fortis, proud issuer of FTS.PR.C & FTS.PR.E (OperatingRetractible), FTS.PR.F (PerpetualPremium), and FTS.PR.G & FTS.PR.H (FixedReset)) has issued 30-year paper at 4.25%.

DBRS has confirmed BIG.PR.B and BIG.PR.C at Pfd-2:

On December 9, 2010, DBRS confirmed the ratings on the Preferred Shares at Pfd-2. However since that time, the net asset value and downside protection available to the Preferred Shares has declined due to general market instability. This decline has affected several sectors, including the financial services industry, which is the primary investment sector for Big 8 Split Inc. Downside protection has decreased to 56.7% from 62.6% since December 2010 (the S&P/TSX Composite Bank Index declined 5.9% and the S&P/TSX Composite Insurance Index declined 18.8% over the same period). In addition, based on the current dividend yield on the Portfolio, the current Preferred Share dividend coverage ratio is approximately 1.5 times. Despite the recent downturn, DBRS remains comfortable confirming the current Pfd-2 ratings of the Preferred Shares, primarily because of the sufficient level of downside protection and dividend coverage available in the transaction, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The BoC maintained the overnight rate:

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.

Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.
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On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October. Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar.

Although total CPI inflation has been slightly higher than projected, the Bank continues to expect the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy. Core inflation has also been slightly firmer than projected and is expected to ease as the output gap persists well into 2013.

Floaters didn’t do very well today – maybe a little bit of capitulation by the prophets of the inflation apocalypse?

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 15bp, FixedResets up 7bp and DeemedRetractibles gaining 9bp. Volatility was OK; volume was average.

PerpetualDiscounts now yield 5.19%, equivalent to 6.75% at the standard equivalency factor of 1.3x. Long corporates are now a little under 4.80%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 195bp, a significant tightening from the 210bp reported November 30 as PerpetualDiscounts have come in.