PrefBlog

DBRS has released their Split Share Funds Quarterly Report – Q4 2011:

Of the 34 split share unique issuers currently rated by DBRS, 19 experienced losses in net asset value (NAV) in Q4 2011, with the average NAV declining approximately 0.4% over the quarter. Funds with exposure to Canadian life insurance companies experienced the heaviest losses, while the biggest gainers were the more diversified funds with holdings in Canadian banks and energy companies. DBRS confirmed the ratings on six preferred shares issued by five split share companies and trusts and downgraded the rating on one preferred share in the fourth quarter. The rating confirmations were based on the performance and structural features of the issuers, which benefi t the preferred shares. Other key rating factors include the credit quality and diversifi cation of each portfolio, the amount of distributions paid to the holders of capital shares, and the expected maturity date of the preferred shares of each issuer.

It was a strong day on the Canadian preferred share market, with PerpetualDiscounts up 12bp, FixedResets gaining 16bp and DeemedRetractibles winning 27bp on the basis of good performance from insurance issues, which dominated the good part of the Performance Highlights table. Volume was quite good.

Austria may have experienced a Chretien moment:

It is evident, but again that Austria must be more independent from the financial markets.

-Werner Faymann, Austrian Chancellor (translation by Bing)

Remember Chretien back in 1994? ‘We aren’t doing this [austerity programme] because the bond markets think we should! We are doing this because we don’t want to care what the bond markets think!’ or words to that effect. It was the only intelligent thing ever said by a senior politician about national debt. Ever. Until Faymann.

Wikipedia is going dark on Wednesday to protest the US Stop Online Piracy Act. Good for them!

It was a mixed day on light volume for the Canadian preferred share market, with PerpetualDiscounts losing 32bp, FixedResets off 4bp and DeemedRetractibles gaining 5bp. Not much volatility, with only four entries in the Performance Highlights table. As noted, volume was light.

Greece got a a little closer to default:

Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.

Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement today. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.

Greek officials and the nation’s creditors agreed in October to implement a 50 percent cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. More than two months after the accord was announced, the two sides still need to agree on the coupon and maturity of the new bonds to determine losses for investors. The IIF has aimed to implement the swap this month.

The entire idea of a voluntary and partial restructuring is hoplessly insane. Let’s hope that this ends with a lot of egg on Merkozy’s face.

Certainly indications are that the politicians have blown it:

France’s AAA rating will fall by one level at S&P, Finance Minister Francois Baroin told France 2 television today. Slovakia, Italy and Austria are among other countries to be downgraded, European officials said. Germany will keep its top rating, a person familiar with the matter said. S&P may release its report later today.

The decisions came at the end of a week in which signs grew that Europe’s woes may be cresting as borrowing costs fell, evidence of economic resilience emerged and the European Central Bank said it had quelled a credit crunch at banks. The immediate impact on French and Italian borrowing costs was limited, with the yield on 10-year government bonds rising 3 basis points and 1 basis point, respectively.

“It’s a reduction of one level, it’s the same level as the U.S.,” Baroin said. “It’s not a catastrophe.”

France was not alone:

France and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded. The first gauge of the report’s impact will come in two days when France sells as much as 8.7 billion euros ($11 billion) in bills.

“In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone,” S&P said in a statement.

Dimon had some observations on the ECB’s funding initiative:

“It eliminates bank liquidity or funding problems for at least the next year, that’s a pretty powerful statement,” Dimon said today after his company reported a drop in fourth-quarter net income. “That was the biggest single risk of an uncontrollable surprise right there, so if that’s taken off the table, that’s a good thing.”
…
Banks in Europe are still shedding so-called risk-weighted assets, or RWAs, because regulators are requiring them to increase their ratios of equity capital to RWAs, Dimon said.

“They’re still reducing RWA by not rolling things over, you can see them selling aircraft loans, trade finance, they’re not participating as much in revolvers, there are certain conduits they’re not doing anymore,” Dimon said. “But that’s now just to create capital, not because they have a funding problem.”

It was a relatively quiet day for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets down 2bp and DeemedRetractibles losing 9bp. Volatility was low, with SLF FixedResets doing a bit of catch-up. Volume was above-average.

The ECB actions are working:

Spain sold 10 billion euros ($13 billion) of bonds, twice the target for the sale, while Italy placed 12 billion euros of bills, easing concerns the countries would struggle to finance their debts and sending bonds higher.

Spain sold a new benchmark three-year note due July 2015 to yield 3.384 percent, the Bank of Spain said in Madrid. That compared with 5.187 percent the last time similar maturity debt was sold in December. Italy’s Treasury sold one-year bills at 2.735 percent, less than half the 5.952 percent paid on similar- maturity securities on Dec. 12.

Italian Prime Minister Mario Monti and Spanish premier Mariano Rajoy are imposing austerity measures to convince investors they can put their nations’ finances in order and avert being engulfed by the sovereign debt crisis. The European Central Banks lent 489 billion euros of three-year funds last month, a move that Madrid-based Banco Bilbao Vizcaya Argentaria SA said would allow banks to buy more government debt.

It’s not clear to me whether they’re doing the right thing or not. If it’s a liquidity crisis – fine. If it’s a solvency crisis – not so fine.

However, capitalism will soon collapse under the weight of its internal contradictions – at least in Europe:

Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.

Saba Capital Management LP, founded by former Deutsche Bank AG (DBK) credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions who declined to be identified because they weren’t authorized to speak publicly about the trades. Officials at the three firms declined to comment.

They’ve amassed the stakes as the government lobbies investors to accept a swap that would cause losses of more than 50 percent for bondholders. For the deal to avoid triggering credit-default swaps that could cause losses for more of the region’s banks, the agreement has to be voluntary. Hedge funds may not agree to the deal.

And the pressure is ratchetting up in all directions:

Lawmakers from Chancellor Angela Merkel’s party are stepping up pressure on Greece as it struggles to meet the terms of its second bailout, saying that a Greek exit from the euro region would be manageable.

The comments by senior members of Merkel’s Christian Democratic Union, made before a meeting of the CDU leadership that begins today, keep the focus on the Greek government as it strives to reach a debt-swap deal with private creditors that Merkel has said must be struck to win more aid. They are also a challenge to the chancellor’s public stance as she steers European efforts to keep the 17-member single euro area intact.

Remember how obvious it was in 2006 that US housing was about to collapse? Remember thinking to yourself that the only thing keeping it up was evil bonus-seeking bankers? Remember 2006?:

Newly released transcripts of all the Federal Reserve policy meetings in 2006, Ben Bernanke’s first year as chairman, show that the Fed was getting increasingly dire signals about the housing market – right down to anecdotes of builders giving away cars to try to draw reluctant buyers. But the economists around the table were consumed by trying to estimate what (small) percentage of consumer spending that would affect, missing the tremendous structural upheaval that a housing price decline would go on to create, with banks failing, the financial system seizing and job losses soaring.

Brookfield Office Properties, proud issuer of BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L, BPO.PR.N, BPO.PR.P and BPO.PR.R, has issued five-year paper at 4.30%:

DBRS has today assigned a rating of BBB (high), with a Stable trend, to the $200 million 4.30% senior unsecured notes due January 17, 2017 (the Notes), issued by Brookfield Office Properties Inc. (Brookfield).

The Notes are direct senior unsecured obligations of Brookfield and rank equally and rateably with all other unsecured and unsubordinated indebtedness of Brookfield. Brookfield intends to use the proceeds from the Notes to repay indebtedness and for general corporate purposes.

S&P comments:

• We assigned our ‘BBB-‘ rating to Brookfield Office Properties Inc.’s C$200 million 4.30% senior unsecured notes due January 2017.
• The company intends to use proceeds from the offering to reduce existing debt.
• Our ratings on Brookfield acknowledge the company’s good-quality office portfolio, long-term leases, and in-place rents that are, on average, below current market rents.

… and 4.30% is pretty close to the Yield-to-Worst on most of those issues. Make of it what you will.

Well, it looks like the party’s over in the Canadian preferred share market, with whoever it was who has been doing all that buying in the past week having achieved his desired position. PerpetualDiscounts were down 9bp, FixedResets off 3bp and DeemedRetractibles lost 19bp. There was significant volatility, with the insurance issues that have done so well lately featuring on the bad side of the Performance Highlights table. Volume was average.