PrefBlog

The Greek tragedy continues:

Greece pledged a last-ditch effort to prevent the collapse of a second rescue package from creditors, aiming to complete talks this week on a financial lifeline that’s been in the works for six months.

Greek Premier Lucas Papademos said he would try to meet German-led demands for a bigger debt writedown by investors and deeper budget cuts by his government.
…
Papademos said “some difficulties” beset the debt-swap talks and hinted that donor governments may have to put up more money. Greek Finance Minister Evangelos Venizelos said today in Athens that a formal debt-swap offer must be made by Feb. 13.

Greek Needs
Merkel’s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table. Greece’s initial rescue of 110 billion euros in 2010 was fully taxpayer-funded.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. As recently as Jan. 23, creditors wanted an average coupon of about 4.25 percent, two people familiar with the talks said then.
…
In turn, Greece’s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos’s interim Cabinet.

I suggest they call in Canadian defence minister Peter MacKay for a consultation. He’s good at putting things in writing!

But there’s a fascinating twist to the Greek negotiations:

In discussions late last week in Athens, creditors lowered their demands for an average coupon on the new 30-year securities they would receive to as little as 3.6 percent from 4.25 percent after European officials demanded they take steeper losses, people familiar with the matter said at the time.

While the lower coupon would lead to an estimated loss of 70 percent or more for investors, adding a so-called gross domestic product warrant — which would pay bondholders more if the Greek economy rebounds — would trim the loss in net present value terms by an estimated 0.5 to 3 percentage points, said two people, who declined to be identified because the talks are confidential.

I bet some people are watching the negotiations with keen interest:

California (STOCA1)’s cash may be exhausted by March, Controller John Chiang said in a letter to lawmakers.

The nation’s most-populous state needs $3.3 billion to deal with liquidity needs for March and the first two weeks of April, Chiang said in the letter to state Senator Mark Leno and Assemblyman Bob Blumenfield, who leads the Joint Legislative Budget Committee
…
State receipts were $2.6 billion lower than forecast through Dec. 31, while expenditures were an equal amount higher, Chiang said.

BRF.PR.A was affirmed at P-3(high) by S&P:

• We are assigning our ‘BBB’ long-term corporate credit rating and ‘A-2’ short-term rating to the newly formed Brookfield Renewable Energy Partners L.P. (BREP).
• We are also affirming our ‘BBB’ issue-level rating on the approximately C$1.1 billion rated unsecured debt at BRP Finance ULC and ‘BB+’ global scale and ‘P-3(High)’ Canada scale ratings on Brookfield Renewable Power Preferred Equity Inc.’s preferred stock that BREP assumed as part of the combination.
• In addition, we are withdrawing our ratings, including our ‘BBB’
  long-term corporate credit rating, on both Brookfield Renewable Power Inc. (BRPI) and Brookfield Renewable Power Fund (BRPF) at the companies’ request as a consequence of combination of the two companies.

• We base the rating on our view that the combined credit risk profile of BREP’s portfolio being at least as good as BRPI’s portfolio combined with BRPF.
• The stable outlook reflects our view of the company’s satisfactory business risk profile, which reflects its diversified electricity generation asset portfolio.

The DBRS report on CZP.PR.A’s parent has been updated:

DBRS has today updated its report on Capital Power Income L.P. (the Partnership or CPILP). CPILP’s ratings were downgraded on November 16, 2011, following the close of the acquisition of CPILP by Atlantic Power Corporation (ATP, not rated by DBRS) (the Transaction) on November 7, 2011. At that time, an Issuer Rating of BB was assigned based on the assessment of the new combined entity and a recovery rating of RR4 (indicating an expected recovery of 30% to 50%) was assigned to the Senior Unsecured & Medium-Term Notes.

Post acquisition, CPILP is expected to generate reasonable cash flows from its diverse long-term power contracts. However, the overall credit quality of CPILP has deteriorated due to its weakened financial profile, complex financial structure and subordination implications. These factors have offset increases in the average power purchase agreement (PPA) term, asset base and market capitalization as well as benefits from the greater diversification of fuel source, geography and counterparty risk of the combined entity.

In the medium to long term, CPILP’s cash flow stability will be largely dependent upon its ability to continue to improve operating performance, enhance revenue by ensuring it renegotiates and renews PPAs expiring in the near term at economically acceptable terms and secure long-term energy supply and operating contracts. DBRS estimates cash flow-to-debt and EBITDA interest coverage ratios to average approximately 11% and 2.7 times respectively in the near to medium term. These metrics remain adequate for the current BB rating. DBRS expects that existing outstanding CPILP debt will be refinanced at the ATP level as they mature.

It was a calm day for the Canadian preferred share market, with PerpetualDiscounts up 1bp, FixedResets gaining 9bp and DeemedRetractibles winning 13bp. All entries on the Performance Highlights table were winners. Volume was above average.

PerpetualDiscounts now yield 4.90%, equivalent to 6.37% interest at the standard equivalency factor of 1.3x; note that this measure is plagued by the fact that there are only seven PerpetualDiscounts left in the index and that after the month-end index rebalacing there will only be four! The figures should be taken with a grain of salt – or perhaps a truckload. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread (in this context it is referred to as the Seniority Spread) is now aout 180bp, slightly narrower than the 185bp reported on January 18.

Greece is kicking against the pricks:

European leaders sparred with Greece over a second rescue program, clouding progress toward a permanent aid fund and tougher budget rules designed to stabilize the euro.

Greece faced criticism that its economic makeover is faltering, and it fended off German and Dutch calls for a European overseer to take command of its budget after its deficits surpassed targets for two years.
…
Greece is making progress on one component of the package, nearing an agreement for bondholders to accept deeper losses on a 50 percent cut in the face value of more than 200 billion euros of debt.

European concerns that Greece can deliver budget cuts and economic reforms are holding up other parts of the package, which Greece needs to meet a 14.5 billion-euro bond payment due on March 20.

However, it is beginning to dawn on the Europeans that when the party’s over, somebody has to pay the bills:

Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover.

“Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”

DBRS downgraded Portugal:

DBRS, Inc. (DBRS) has downgraded the Republic of Portugal’s long-term foreign and local currency debt to BBB (low) from BBB. The trend on both ratings remains Negative. The downgrade reflects weaker growth prospects in Portugal, which are likely to make achieving ambitious deficit-reduction targets very challenging. Moreover, the unstable economic environment in Europe, uncertainty over the Greek debt exchange, and ongoing tensions in financial markets intensify downside risks to Portugal’s growth outlook and prospects for debt stabilisation.

The Negative trends reflect our assessment that the ratings have yet to stabilise and that further deterioration in the growth or fiscal outlook could result in a further ratings downgrade. Growth prospects are particularly important to debt stabilisation in Portugal, given the size of the fiscal consolidation programme and the high and rising public debt burden.

The outlook for the Portuguese economy has deteriorated since DBRS’s last review in October 2011. The Bank of Portugal estimates that the economy will contract by 3.1% in 2012 – the second consecutive year of recession – and expand by just 0.3% in 2013.
…
It is not clear when Portugal will be able to reenter the long-term debt markets. According to the EU-IMF programme, Portugal is expected to return to the markets in time to cover a EUR 9.7 billion bond redemption in September 2013.

Sarkozy had some good news for the City:

France plans to unilaterally impose a 0.1 percent tax on financial transactions starting in August, President Nicolas Sarkozy said, brushing aside opposition from the nation’s banks.

“What we want to do is provoke a shock, to set an example,” Sarkozy said late yesterday on French television from Paris. “There’s no reason why deregulated finance, which brought us to the current situation, can’t participate in the restoration of our accounts.”

A France-only levy is opposed by the country’s financial community and its feasibility has been questioned by the Bank of France.
…
The financial transactions tax is among measures Sarkozy unveiled to shrink the French budget deficit and spur growth. He’s also increasing sales taxes and levies on financial incomes to fund a 13 billion-euro cut in payroll charges aimed at reducing labor costs and making France more competitive.

S&P downgraded Encana, which has no preferreds outstanding:

• On Jan. 18, 2012, Standard & Poor’s revised its natural gas price assumptions following a decline in spot and forward North American natural gas prices. Notably, we lowered our long-term price assumptions based on our view that although prices will likely stabilize or modestly
  improve in 2012 due to production curtailment, fundamental supply characteristics will constrain pricing.

• As a result, we are lowering our long-term corporate credit and senior unsecured debt ratings on Calgary, Alta.-based Encana Corp. to ‘BBB’ from ‘BBB+’.
• We are also lowering our senior unsecured debt rating on subsidiary Encana Holdings Finance Corp. to ‘BBB’ from ‘BBB+’.
• We are affirming our ‘A-2’ Canada scale commercial paper rating on Encana.
• The ratings reflect our assessment of the company’s strong internal growth prospects from its large reserve base and undeveloped land holdings, low operating-cost structure, and strong liquidity.
• The stable outlook reflects our view that Encana’s cash flow from asset sales combined with its increasing liquids production while maintaining competitive operating costs will allow the company to maintain its funds from operations-to-debt at more than 30% through 2013.

It was another mixed day for the Canadian preferred share market as PerpetualDiscounts – those few that are left – continue to bounce around like mad. PerpetualDiscounts won 66bp, FixedResets gained 8bp and DeemedRetractibles were down 3bp. Volatility was skewed to the upside. Volume was average.

There is some indication that the Europeans are beginning to realize that their voluntary debt exchange idea is stupid:

Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts.
…
“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”

Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.

Fitch is not impressed:

Spain, Italy, Belgium, Cyprus and Slovenia had their debt ratings cut by Fitch Ratings, which said these nations do not accure [sic] “the full benefits of the euro’s reserve currency status.”

Ireland had its ratings affirmed by Fitch. The outlook on all six nations is negative.

But fear not! Soon credit rating agencies in Canada will have a lot more forms to fill out and boxes to tick and regulatory employment will increase so everything will be fine!

Canadian securities regulators are preparing to impose new rules on agencies that assess the creditworthiness of the millions of dollars in debt issued by corporations, governments and other instructions.

The Canadian Securities Administrators said Friday that credit ratings agencies in this country who want their opinions to be eligible for use under securities laws will need to apply to become a “designated rating organization.”

The Volcker Rule continues re-shuffle the deck:

Citigroup Inc. (C), the third-biggest U.S. lender, will close a proprietary-trading desk that makes bets with the firm’s own money and most of the unit’s staff will leave before rules banning the practice take effect.

Citigroup is shutting the Equity Principal Strategies business and most staff will leave the bank after Feb. 6, according to a memo by Derek Bandeen, head of equities for the New York-based bank, and obtained by Bloomberg News.
…
“Pursuant to various regulatory initiatives and changes, we have made the strategic decision to exit the Principal Strategies business,” Bandeen said in the memo. “The team, led by Sutesh Sharma, have been aware of this for some time and have worked diligently to wind down the positions over the last few months.”

Sharma intends to form a hedge fund, two people familiar with the matter said in August. His Citigroup team managed about $2 billion, one of the people said.

It was another mixed day for the Canadian preferred share market, as the (relatively tiny) PerpetualDiscounts index shot ahead 54bp, FixedResets lost 6bp and DeemedRetractibles gained 9bp. Volatility was good, skewed to the upside; volume was above average.

All I can say is: it’s about time:

The federal government says it is abandoning plans to create a national securities regulator following a stinging courtroom defeat.

Finance Minister Jim Flaherty on Thursday delivered his most elaborate public reaction since last month’s critical ruling by the Supreme Court of Canada.

Mr. Flaherty told The Canadian Press that he recognizes that the day-to-day regulation of financial markets is a provincial responsibility — as determined by the high court.

Another bank is going to limit cash bonuses for investment bankers:

Bank of America Corp., the U.S. lender seeking to preserve capital, will freeze base salary levels and limit cash bonuses to $150,000 for some investment bankers, said two people with knowledge of the plans.

The cap on cash payments applies to those getting as much as $1 million in total year-end bonuses, with the rest coming in shares of the Charlotte, North Carolina-based lender, said the people, who asked for anonymity because the matter is private. Employees are being told of their payments today and can sell some of the stock starting on Feb. 15, the people said.

So my question is: when we will see the first public offering underwritten by a hedge fund? A hedge fund based in Singapore? But at the moment, the mood among investment bankers leans to fear more than greed:

In London, with financial sector jobs on the chopping block, bankers lucky enough to have a job are staying put even if they are dismayed when they hear about their bonus.

A new survey of almost 1,400 bankers and fund employees shows that far fewer employees are likely to try to swap jobs if they don’t like their bonuses. The research, done by recruiting firm Astbury Marsden, found that only one-third of workers in London who were surveyed said they would seek a new job. A year ago, the figure was 48 per cent.

They are facing a job market where finding a new spot is tough. According to the firm’s earlier research, competition for roles is rising fast. In 2011, there were 3.16 qualified candidates for financial job in London, up from 2.17 in 2010.

Such figures are likely to embolden bank bosses as they face political and shareholder pressure to cut bonuses. The usual threat of “cut my bonus and I leave” is a lot less threatening in a market where jobs are disappearing.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 5bp and DeemedRetractibles up 1bp. There was a lengthy list of volatile issues, with a preponderance losers but no clear pattern. Volume was high.

The FOMC release was fascinating:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Equities liked the news:

The Fed extended its previous pledge to keep rates low at least until the middle of 2013 as inflation remains tame and more than two years of economic growth have failed to push unemployment below 8.5 percent. Some Fed officials have said further easing might be needed to put more Americans back to work and revive the housing market.

Stocks erased losses and Treasuries extended gains after the statement. The Standard & Poor’s 500 Index rose 0.1 percent to 1,315.66 at 12:34 p.m. in New York. The yield on the 10-year Treasury note fell to 1.98 percent from 2.06 percent late yesterday.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets down 12bp and DeemedRetractibles losing 16bp. The longer than usual Performance Highlights table was nearly all losers, most notably recent big gainers. Volume was above average.

The IMF has released the January 2012 Global Financial Stability Report:

Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems. European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped to improve market sentiment, but sovereign financing remains challenging and downside risks remain. If funding challenges result in a round of deleveraging by banks, this could ignite an adverse feedback loop to euro area economies. The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis, and some have homegrown challenges to the removal of financial tail risks, including overcoming political obstacles to achieving an appropriate pace of fiscal consolidation. Developments in the euro area also threaten emerging Europe and may spill over to other emerging markets. Further policy actions are needed to restore market confidence. This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy, possibly by establishing a “gatekeeper” charged with preventing disorderly bank deleveraging.

The euro area debt crisis has intensified further, requiring urgent action to prevent highly destabilizing outcomes.

That last sentence in the first paragraph is a good reason why I simply would not put any money into a European bank right now except as a total speculation; the politicization of European banking is getting intense. Can you imagine? If a bank wants to sell a wealth management unit, or halt lending in Greece, or something like that, they have to fill out a form and ask the regulator for permission? It may be good politics, but …

Cool graph:

Click for big

Extremely slow response from my websites today led me to learn a new command-line command: pathping

Tracing route to 2a.4b.5646.static.theplanet.com [70.86.75.42]

over a maximum of 30 hops:

0 j-7da53dda1cb54 [65.95.191.3]

1 bas2-toronto08_lo0_SYMP.net.bell.ca [64.230.200.160]

2 agg1-toronto12_4-3-0_100.net.bell.ca [64.230.58.190]

3 bx5-chicagodt_xe6-1-0.net.bell.ca [64.230.186.90]

4 te1-7.bbr01.eq01.chi01.networklayer.com [206.223.119.63]

5 ae20.bbr01.eq01.dal03.networklayer.com [173.192.18.136]

6 po31.dsr02.dllstx3.networklayer.com [173.192.18.227]

7 * * *

Computing statistics for 175 seconds…

Source to Here This Node/Link Hop RTT Lost/Sent = Pct Lost/Sent = Pct Address

0 j-7da53dda1cb54 [65.95.191.3] 0/ 100 = 0% |

1 11ms 0/ 100 = 0% 0/ 100 = 0% bas2-toronto08_lo0_SYMP.net.bell.ca [64.230.200.160] 0/ 100 = 0%

2 12ms 0/ 100 = 0% 0/ 100 = 0% agg1-toronto12_4-3-0_100.net.bell.ca [64.230.58.190] 0/ 100 = 0%

3 26ms 0/ 100 = 0% 0/ 100 = 0% bx5-chicagodt_xe6-1-0.net.bell.ca [64.230.186.90] 100/ 100 =100% |

4 – 100/ 100 =100% 0/ 100 = 0% te1-7.bbr01.eq01.chi01.networklayer.com [206.223.119.63]0/ 100 = 0%

5 – 100/ 100 =100% 0/ 100 = 0% ae20.bbr01.eq01.dal03.networklayer.com [173.192.18.136]0/100 = 0%

6 – 100/ 100 =100% 0/ 100 = 0% po31.dsr02.dllstx3.networklayer.com [173.192.18.227] 0/ 100 = 0%

7 – 100/ 100 =100% 0/ 100 = 0% j-7da53dda1cb54 [0.0.0.0] Trace complete.

Looks like Bell was having some major problems connecting with the world!

It was a very good day for the Canadian preferred share market, with PerpetualDiscounts winning 40bp, FixedResets gaining 15bp and DeemedRetractibles up 20bp. All entries on the Performance Highlights table are winners. Volume was average.