PrefBlog

To my surprise, an adult was quoted regarding the role of underwriters in capital markets:

In both cases, banks that profited by bringing the securities to market were later accused of misrepresenting the risks and contributing to losses. Their defense was that they were serving clients who wanted to buy the securities, as well as helping finance entrepreneurs and homeowners. They said they attracted undue criticism for essentially playing the role of middlemen and that they shouldn’t be held responsible for investors’ decisions to buy the securities.

“They’re intermediaries, and they’re not supposed to make up their minds for their customers as to what’s good for them, they’re supposed to supply them with what they want,” said Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs partner.

Smith said bond prospectuses “point out repeatedly that just because the market price goes down, that’s not something we can be responsible for.”

However, I have no doubt but that a few lawyers and boxtickers at the SEC are excitedly preparing indictments against the salesmen who sell their clients things “they know are about to fall”.

Canadian Western Bank has announced an issuer bid for CWB.PR.A:

Canadian Western Bank (the “Bank”) today announced the Toronto Stock Exchange (TSX) and the Office of the Superintendent of Financial Institutions Canada (OSFI) have approved the Bank’s normal course issuer bid (NCIB) to purchase, for cancelation, up to 826,120 Non-Cumulative 5-Year Rate Reset Preferred Shares Series 3 (“preferred shares”). The number of preferred shares to be purchased under the NCIB represents approximately 10% of the 8,390,000 preferred shares issued and outstanding as at February 27, 2013.

Purchases under the NCIB may begin on March 1, 2013 and will end no later than February 28, 2014. The price paid for any preferred shares purchased will be the market price of such shares on the TSX at the time of acquisition. Purchases will be effected through the facilities of the TSX and all preferred shares purchased pursuant to the NCIB will be canceled. Apart from block purchase exceptions, the maximum number of preferred shares that may purchased per trading day is 1,538, an amount equal to 25% of the average daily trading volume of the preferred shares on the TSX for the six month period ended January 31, 2013.

Management believes the purchase of preferred shares below a certain price threshold represents an appropriate use of available funds and is also consistent with strategies to enhance shareholder value while ensuring the Bank maintains its solid regulatory capital position.

Since CWB has no history of following up on issuer bids, this announcement doesn’t get its own post – it has to slum it in the daily commentary. I don’t see any reason why they might follow this up with actual cash dollars anyway – at today’s closing bid of 26.65, the issue yields only 1.98% until the 2014-4-30 call date.

ALB.PR.B was confirmed at Pfd-2(low) by DBRS:

Current downside protection available to holders of the Class B Preferred Shares is 56.3% as of February 14, 2013.

The Pfd-2 (low) rating of the Class B Preferred Shares is based primarily on the downside protection and dividend coverage available, as well as on the strong credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class B Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the Canadian banks may result in significant reductions in downside protection from time to time.

(3) The entire Portfolio is concentrated in the Canadian financial services industry.

The Class B Preferred Shares will be redeemed by the Company on February 28, 2016.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 5bp and DeemedRetractibles up 15bp. Volatility was low. Volume was well above average.

PerpetualDiscounts now yield 4.91%, equivalent to about 6.38% interest at the standard conversion rate of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a significant widening from the 200bp reported February 20.

It’s an ill wind that blows nobody any good:

U.S. banks are looking to capitalize on a dearth of financing for Europe’s commercial property market that’s driven lending margins to five times the level prior to the 2008 crisis.

Citigroup Inc. (C), Morgan Stanley (MS), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) are following insurers and distressed investors allocating capital to the region as local banks, which overextended during the last boom, are forced to contract amid new regulations. Europe faces an $82 billion shortfall between the amount of real-estate debt maturing through this year and the funding available to replace it, according to real-estate broker DTZ.

The scarcity of capital means lenders can charge as much as 3.75 percentage points over benchmarks for the safest pieces of commercial mortgage debt, about five times the spread in 2007, according to Alvarez & Marsal, an adviser on real estate transactions. Those margins will enable banks to revive the market for commercial mortgage-backed bonds, which parcel loans and slice them into securities of varying risk, after it largely shut in 2008.

Meanwhile, the Fed may find selling is harder than buying:

MSCI applied scenarios devised by the Fed itself for stress-testing the nation’s 19 largest banks.

MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation. MSCI puts the Fed’s mark-to-market loss at less than half that, or $216 billion, if the economy performs in line with consensus forecasts of gradually rising growth, inflation and interest rates.

The potential losses are unprecedented in the Fed’s 100- year history. Bernanke began describing in detail the risk of lower payments to taxpayers for the first time today in his monetary policy testimony before the Senate Banking Committee saying that “remittances to the Treasury could be quite low for a time” if interest rates “were to rise quickly.” Bernanke didn’t describe the overall interest-rate risk to the portfolio or potential mark-to-market losses. He said the Fed is “confident” it has tools to tighten monetary policy.

But at least the money is going into something other than mortgages:

Money is pouring into leveraged loan funds at an incredible pace. It’s a natural home for investors who are leery of buying bonds at this point in the cycle, when rates could be on the rise, but who still want credit exposure. Leveraged loans are usually floating rate. And that means protection from higher interest rates, unlike bonds, which will fall in price as rates rise.
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Among the biggest users of the leveraged loan market are private equity firms who use the financing for buyouts. The leveraged loan boom will help refinance balance sheets of portfolio companies, and fuel more new takeovers.

And the shadow trading sector is getting bigger:

Earlier today, JPMorgan Chase & Co. announced that it will reduce headcount in its consumer banking arm by 3,000 to 4,000 people this year.

Morgan Stanley and Citigroup Inc. have also unveiled plans in recent months to shed staff. As early as this week, Goldman Sachs Group Inc. will begin its annual exercise to cull 5 per cent of its employees, with deeper cuts possible in equity trading, Reuters reported.
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But [Thomas DiNapoli, the comptroller of New York State] also noted that the industry employed 1,000 fewer people at the end of 2012 than it did a year earlier, adding that he believes “the industry will continue to restructure and downsize until a new business paradigm is established.”

If that doesn’t sound like a lot of fun, that’s probably an accurate assessment. Some traders have already decamped for hedge funds, where they don’t have to contend with the same regulatory constraints or reduced appetite for risk.

Best wishes for Graham Beck, who started working at Burns Fry in 1985, moved to the the preferred share desk in 1991 and today announced his imminent retirement from BMO Nesbitt Burns. As he says: a lot has happened in 22 years; and I’ll add that that extends to the names of his employer as well as the preferred share market!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets off 1bp and DeemedRetractibles up 15bp. Volatility was minimal. Volume was extremely high.

More bad news out of Europe, even before the Italian election returns:

he euro zone will not return to growth until 2014, the European Commission said on Friday, reversing its prediction for an end to recession this year and blaming a lack of bank lending and record joblessness for delaying the recovery.

The 17-nation bloc’s economy, which generates nearly a fifth of global output, will shrink 0.3 per cent in 2013, the Commission said, meaning the euro zone will remain in its second recession since 2009 for a year longer than originally foreseen.

I was interested to see in an unrelated article that preferred share ETFs are the benchmark du jour for asset gathering:

There are eight minimum/low volatility exchange-traded funds listed in Canada and it’s fair to say the concept hasn’t caught on like wildfire given that assets under management are collectively less than $150-million.

By comparison, the BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR/TSX) grew from zero to $160-million in the span of exactly three months. Judging by the amount of assets that have flocked to ETFs dedicated to the preferred share market, growth in that group is all but certain.

It has now been about three and a half months since the 2012-11-14 inception of ZPR and the fund is now at $243-million. Not bad!

It was a surprisingly negative day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets losing 31bp and DeemedRetractibles down 16bp. As indicated in the longer-than-usual volatility highlights, it looks like a relatively modest amount of selling pressure found few bids in the last half hour. Overall volume was extremely high, but block trading details are not yet available.