PrefBlog

As I have often complained, there is a growing trend in securities administration la-la-land to treat creditors according to who they are rather than what they have. The receiver’s response to a Lehman creditor is another example:

Defunct brokerage Lehman Brothers Inc., which hasn’t paid institutional creditors a dime of its $25 billion hoard after four years in liquidation, is being urged to settle fights with affiliates and pay up.
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Elliott Management Corp., a New York hedge fund, demanded in June that brokerage trustee James Giddens sell securities and pay an initial $3.2 billion soon. Giddens responded this week, saying Elliott is a “claims trader” and doesn’t share other customers’ interests. Yesterday, two creditor groups sided with Elliott, with an unofficial group in favor of giving Giddens just 60 days to resolve claims with a European affiliate. The official group didn’t set a deadline.
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By March 30, Giddens had $25.4 billion of securities in hand, Elliott said. By selling securities, he could pay almost 26 cents on the dollar of allowed claims totaling $12.2 billion, while still reserving enough money for disputed claims, the hedge fund said.

Goldman Sachs Group Inc. (GS) disagreed, saying customers should get the securities in their accounts, which may be worth more than money poured from a cash pool.

Giddens shouldn’t be treating traders differently from other customers, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.

“There is really no basis in law,” he said. “In the long run, this will hurt liquidity in the marketplace.”

One problem, of course, is that receiverships are a very nice meal ticket for all involved, except the creditors. The company can’t fight back!

DBRS confirmed Brookfield Renewable Energy Partners, proud guarantor of BRF.PR.A:

DBRS has today confirmed the ratings of Brookfield Renewable Energy Partners L.P. (BREP or the Company) and its related security instruments, including the Company-guaranteed Senior Unsecured Debentures and Notes at BBB (high) and Class A Preference Shares, Series 1 at Pfd-3 (high). All trends are Stable. The ratings reflect BREP’s lower-risk renewable generation mix supported by a high level of long-term contracted output, geographical diversification and operating efficiency. Constraints on the ratings include earnings and cash flow volatility resulting from fluctuation in hydrology and wind resources, high dividend payout ratios despite continued high growth-capital spending, and structural subordination to project-level debt. DBRS expects BREP to fund any material acquisition in the future and refinance maturing project debt with non-recourse project-level debt and equity to maintain a reasonable financial profile for the assigned rating category.

The credit metrics of BREP are within range for the current rating profile. Operating cash flow remains well in excess of maintenance capital expenditure requirements. However, significant growth capex and dividends have resulted in free cash flow deficits, which have been funded with a reasonable mix of debt and equity. As a result, leverage has remained relatively stable.

Additionally, DBRS confirmed IGM Financial, proud issuer of IGM.PR.B:

DBRS has today confirmed the ratings of IGM Financial Inc.’s (IGM, or the Company) Unsecured Debentures at A (high) and the First Preferred Shares at Pfd-2 (high). Trends for both are Stable.

IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual funds 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 Mackenzie and Investment Planning Counsel Inc.

In addition to strong profitability, the Company has a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than 1x in 2011, which is conservative, and the Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating, at just over 25%. While IG’s redemption rates are better than the industry average, the continuing net mutual fund redemptions at Mackenzie are not yet a major concern in determining IGM’s rating.

As a member of the Power Financial Corporation (Power) group of companies, IGM benefits from the additional financial flexibility of having a strategic shareholder and the associated strong governance and risk avoidance management model typical of Power subsidiaries.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles gaining 10bp and FixedResets winning 11bp. Volatility was average. Volume was average.

The Fed will continue its monetization policy:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

There is also language about employment levels:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

Some people take this as an abandonment of the inflation mandate:

Gold jumped to a six-month high near $1,770 (U.S.) an ounce on Thursday, rising 2 per cent after the U.S. Federal Reserve launched an aggressive stimulus program and vowed it will keep buying assets until the outlook for jobs improves substantially.

The metal received a huge boost after the U.S. central bank tied its unconventional bond-buying directly to economic conditions, marking a significant shift in the direction of U.S. monetary policy.

Market watchers said the Fed was essentially shifting its focus to maximum employment at the expense of maintaining stable prices. The two objectives are often called the Fed’s dual mandate.

“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” said Axel Merk, chief investment officer at Merk Funds, which has around $600 million in currency mutual-fund assets.

“The price of gold will do very well in the years to come,” Merk said.

Mr. Merk writes quite a bit about gold.

The equity guys were pleased:

U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level since 2007, as the Federal Reserve said it will buy mortgage-backed securities to bolster the economy.

The S&P 500 rallied 1.6 percent to 1,459.99 at 4 p.m. in New York.

“It was a very powerful statement,” Kevin Caron, a market strategist at Stifel Nicolaus & Co. in Florham Park, New Jersey, said in a telephone interview. The firm oversees about $127 billion. “The Fed is going all in here, especially with their commitment to continue asset purchases until they see the desired result in the form of a lower unemployment rate. This statement removes a lot of uncertainty about the Fed’s commitment to maintaining price stability.”

The thugs at Telus have managed to stamp out an unfortunate bit of shareholder activism:

The debate over so-called empty voting has more fuel after a much-anticipated decision from a judge in the case of Telus Corp. and its fight against hedge fund Mason Capital, but there is still a lingering lack of clarity on just what is allowed.

Mason put on a trading position that would enable it to benefit from the failure of a Telus proposal to collapse the company’s dual class share structure on a one-for-one basis. Mason did it by buying shares of one class and selling short shares of the other class. The hedge fund’s hope is to force a conversion ratio that favours the shares that it bought, and it sought to call a shareholders meeting that would enshrine such a ratio in the articles of Telus.
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So how did Telus win? In large part because Mason’s shareholder requisition for a meeting did not properly identify the hedge fund as the real owner of the shares.

As far as I know, there’s no doubt in anybody’s mind that Mason owns a big chunk of Telus voting shares and wants to force a vote. But they didn’t fill out the forms properly. Gotcha! The particulars of the decision are that CDS, the registered shareholder, did not properly identify the beneficial owner.

[64] Assuming but not deciding that CDS can issue a requisition on behalf of aparticipant or beneficial shareholder, in my opinion the Requisition must identify thebeneficial shareholders behind the requisition so the directors can meet their dutiesunder ss. 167(2), (3) and (7). The subject Requisition fails to do so.

[65] In the circumstances, in my opinion, the directors were not obliged to send anotice of meeting as the Requisition does not comply with ss. 167(2) and (3).

Very little overall movement in the Canadian preferred share market today (although I retain a faint hope that the Fed will start buying Canadian preferred shares. Well, I did say it was a faint hope!), with PerpetualPremiums and DeemedRetractibles flat while FixedResets gained 1bp. Volatility was no great shakes. Volume was surprisingly low, considering that the new issues of ENB.PR.P and BPO.PR.T (today) and BAM.PF.B (yesterday) should be causing some portfolio shuffling. Maybe the Fed bought all the new issues?

The Great Regulatory Job Creation Scheme is gathering steam:

U.S. regulators are set to choose the first non-bank companies likely to be branded potential risks to the financial system, according to two people with knowledge of the plans.

The Financial Stability Oversight Council intends to request confidential data from as many as five U.S. firms at a meeting this month, said the people, who declined to be identified because the plans aren’t public. The request is a step toward deciding whether the companies should be subject to Federal Reserve supervision, including stress tests, higher capital levels and tougher liquidity requirements.

So the Fed will have to hire more regulators to administer the expanded mandate and then more regulators to replace the old regulators who have been hired by the affected companies at fat salaries. It’s win-win!

Wow! The US Mortgage almost-agencies have a radical new business model!

Edward J. DeMarco, the overseer of taxpayer-supported Fannie Mae (FNMA) and Freddie Mac, said the firms need to increase the fees they charge to guarantee mortgages in states where it’s costlier for them to deal with bad debt.

Can you imagine? Charging for services based on expected costs? I think Mr. DeMarco should get the Nobel Prize in Economics.

It was another day of little movement for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets gaining 4bp and DeemedRetractibles off 2bp. Volatility was minimal. Volume was average – which is a huge improvement from recent levels, probably helped along by the BAM.PF.B new issue.

PerpetualDiscounts (all three of them!) now yield 4.92%, equivalent to 6.40% interest at the standard equivalency factor of 1.3x. Update Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 200bp, sharply tighter than the 215bp reported September 5.

There’s a new wrinkle in the financial repression chronicles:

JPMorgan Chase & Co. (JPM) and Bank of America Corp. are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system.

Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.

The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.

Adding to the concern is the reaction of central clearinghouses, which collect from losers on derivatives trades and pay off winners. Some have responded to the collateral shortage by lowering standards, with the Chicago Mercantile Exchange accepting bonds rated four levels above junk.

The potential reward for revenue-starved banks is an expanded securities-lending market that could generate billions of dollars in fees. JPMorgan and Bank of America, which have the biggest derivatives businesses among U.S. bank holding companies with a combined $140 trillion of the instruments, are already marketing their new collateral-transformation desks, people with knowledge of the operations said.

As discussed on August 31, directed lending to the government is a form of financial repression.

The US has to force people to buy its bonds! The outlook isn’t getting any better:

Moody’s warned Tuesday it could strip the United States of its coveted triple-A credit rating if Congress fails to produce a budget that will bring down the federal debt burden.

“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government’s Aaa rating and negative outlook,” the ratings firm said in a statement.

If the negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, it said.

“If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.”

Moody’s said it was unlikely it would keep the Aaa rating with a negative outlook into 2014.

“The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock – such as would occur if the so-called ‘fiscal cliff’ actually materialized – which could lead to instability,” it said.

There was very little movement in the Canadian preferred share market today, with PerpetualPremiums and FixedResets both gaining 3bp; DeemedRetractibles were off 2bp. Volatility was average. Volume improved a little, but was still below what I would call ‘average’ levels; but on a brighter note, RBC owned the board today, with no other dealer mentioned in the Volume Highlights.