PrefBlog

Moody’s downgraded the UK:

Britain lost its top credit rating by Moody’s Investors Service, which cited the continuing weakness in the nation’s growth outlook and the challenges that presents to the government’s fiscal consolidation program.

The rating on the U.K. was lowered one level to Aa1 from Aaa and the outlook on the nation’s debt changed to stable, Moody’s said in a statement today. With the U.K.’s high and rising debt burden, a deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement.

Yen Lee, a successful IT entrepreneur, has some hard truths about Canadians:

Canadians in general are looking for safe day jobs. Because Vancouver and Canada in general have not had the history of the home runs, like the Googles and the Yahoos and the Facebooks. And so, because they don’t see the upside, all they see is the risk involved with a start-up—because start-ups in Canada are sub-scale and don’t end up being big enough to exit. And that leaves the folks who are willing, that have a desire to be disruptive, the folks with an appetite for risk; those folks in Canada usually end up in the U.S.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 10bp, FixedResets gaining 4bp and DeemedRetractibles off 4bp. Volatility was minor. Volume was above average.

Poor little Encana’s having a temper tantrum:

A lawyer for Encana Corp. is demanding the deletion of an Internet posting containing audio of an Encana executive swearing.

On Feb. 14, during a quarterly results conference call, microphones caught someone – Encana has not said who – muttering an angry expletive. The audible whisper followed a question from Canaccord Genuity analyst Phil Skolnick, who asked: “But in terms of new investment guidelines which were updated, do you think that prohibits a company like Encana from being acquired?”
…
Encana apologized after the conference call. The swearing does not appear in a transcript of the call, nor in a company replay of the audio.

The company now wants the clip off the Internet, too. On Thursday, Chirbit founder Ivan Reyes said he has received a takedown request from Encana.

I wouldn’t have posted anything about this yesterday because somebody swearing during a conference call is stupid, but not interesting. A major corporation getting its shorts in a knot over a triviality and displaying the collective brainpower of a fourteen year old girl, however, is fascinating. Especially when the fourteen year old girl hasn’t even heard of the Streisand effect. One can only assume that Encana management is not very bright.

Speaking of less-than-intelligent corporate management, there’s a bit more news about Scotia Capital’s persecution of David Berry:

“IIROC will not be appealing the decision,” said Elsa Renzella, IIROC’s director, enforcement litigation.
…
One interpretation behind the decision not to appeal is that IIROC wanted to wash its hands of the whole affair after at least initially bending over backwards to accommodate the bank.

How accommodating was IIROC? At the time, it said the following: “We are pleased that Scotia Capital recognized in this settlement that, even though supervision was not an issue, it would not be appropriate to retain profits generated by the wrongdoing of its employees.”

In normal circumstances, it would be tough for a bank to get such an overwhelming level of support, given that the Berry/IIROC matter had not been heard and given that almost six years later the three-person panel said that “the preponderance of evidence suggests” that Berry’s immediate superiors knew of his tactics.
…
And given the dynamics of Scotiabank upper management, a reasonable expectation would be that an attempt will be made to settle the matter [of Berry’s $100-million unjust dismissal lawsuit].

The dynamics: the bank is undergoing a change, with chief executive Rick Waugh seemingly set to leave in the near term. If the pundits have called it right, it seems Brian Porter, who was named president late last year, will replace Waugh.

Porter was Berry’s ultimate boss at the time the supposed transgressions occurred. If the matter is not settled and if Porter were put on the stand, the session would be well attended.

Berry was vindicated on January 17.

There’s an interesting US court case about Mutual Fund Fees:

>According to a 1982 legal precedent known as the Gartenberg standard, the courts will deem a fund’s management fee excessive only if it is “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” In part because it is often difficult to isolate the portion of management fees covering the crucial work of picking stocks and bonds from other more mundane administrative costs, proving that has been virtually impossible.

Until now. In December U.S. District Judge Renee Marie Bumb in Newark, New Jersey, allowed a case known as Kasilag et al. vs. Hartford Investment Financial Services to proceed, denying Hartford’s motion to dismiss.
…
According to Kasilag’s complaint, in 2010 Hartford earned $157.6 million in investment management fees from six of its sub-advised funds and paid $57.6 million for subadvisory services to Wellington and Hartford Investment Management Company (HIMCO), a Hartford subsidiary hired as a sub-adviser.
…
A key argument plaintiffs put forth in the Hartford case is that competitor Vanguard offers similar funds run by Wellington for much less. Both the Vanguard Health Care and the Hartford Healthcare funds are run by Wellington. Vanguard has a total expense ratio of 0.35 percent, compared with the 1.49 percent charged by Hartford Healthcare’s A share class. That’s on top of the 5.5 percent front-end commission paid to brokers who sell it; Vanguard’s fund is no-load. Wellington declined to comment on the Hartford case.

It was a highly uninteresting day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 1bp and DeemedRetractibles off 1bp. Volatility was minimal. Volume was high.

The lawyers and do-gooders at IIROC are continuing their efforts to destroy the Canadian corporate bond market:

>Four years ago, the head of the investment industry’s self-regulator said that a plan to create surveillance to protect fixed income investors was a priority. At last, the final step needed to make that happen appears to be here.

The regulator has been taking things in bites. First, in 2009, there was a demand for better disclosure of what people were paying banks and securities firms to trade debt. Then, in 2011, a rule demanding that all securities firms “ensure clients received fair prices on debt transactions.”
…
So now, the Investment Industry Regulatory Organization of Canada is amping up trade reporting requirements to create something at least resembling the kind of surveillance that has long been there in equity markets, where a computer system watches every trade to ensure investors are getting the best available price at any given point.

The new rule will require securities dealers to report every trade, once it’s done. IIROC will use that to build a database that is the start of a real surveillance mechanism. It’s still not the real-time computerized flagging of trades that aren’t done at the best possible price, but it’s perhaps the biggest step yet toward that happening.

As the linked article in the Globe shows, the IIROC honcho who started this mess was Susan Wolburgh Jenah who, as far as I can tell from her official biography, has never traded a security in her life.

To my chagrin, the proposed rule cites a paper promoted by the CFA Institute and published as part of their Codes, Standards and Position Papers and comes complete with an “Issue Brief”. The paper itself is titled An Examination of Transparency in European Bond Markets and I must say I consider it very disappointing in terms of rigour; however, a full rebuttal will require enough work and length that it will be more suitable to PrefLetter than PrefBlog.

The basic problem with this idea is that it makes it less lucrative for bond dealers to hold inventory. This means fewer offerings of individual bonds to retail and it means small size markets being called for institutional players. This in turn leads to a migration of bond issues to the private placement market and decreased functionality of the capital markets in general. Essentially, the problem that fairness brings to bond markets is the same as that of socialisn: in a socialist economy, everything’s cheap but nothing’s available; in a “fair” bond market, all the spreads are narrow, but the market makers won’t back up their quotes – when given – with significant risk capital.

It was a mixed day for the Canadian bond market, with PerpetualPremiums down 11bp, FixedResets up 9bp and DeemedRetractibles off 9bp. Volatility was low. Volume was extremely high.

PerpetualDiscounts now yield 4.90%, equivalent to 6.37% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.35%, so the pre-tax interest-equivalent spread is now about 200bp, a small rebound from the 195bp reported February 6.

We’ll begin with a condensed version of ‘The Old Order Passeth’:

RDA Holding Co., publisher of the 91-year-old Reader’s Digest magazine, filed for bankruptcy to cut $465 million in debt and focus on North American operations as consumers shift from print to electronic media.

The company is the latest in a line of iconic businesses to have recently sought court protection from creditors, after Hostess Brands Inc., maker of Twinkies and Wonder Bread, and Eastman Kodak Co., inventor of Kodachrome and the Instamatic camera.

Reader’s Digest, founded by DeWitt and Lila Wallace, went public in 1990. An investor group led by private-equity firm Ripplewood Holdings LLC bought it in 2007 for $1.6 billion and the assumption of about $800 million in debt. The company also filed for bankruptcy in August 2009, citing a drop in advertising spending and the debt load incurred in its acquisition.

The company listed assets and debt of more than $1 billion each in Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in White Plains, New York. Under a restructuring agreement supported by Wells Fargo & Co., $465 million of remaining senior notes will all convert to equity. The company expects to have about $100 million in debt when it exits Chapter 11, about an 80 percent reduction.

GWO is buying in Ireland:

Great-West Lifeco Inc. is buying Ireland’s largest life, pensions and investment manager in a $1.75-billion deal.

Winnipeg-based Great-West says it has reached a deal with the government of Ireland to acquire, through subsidiary Canada Life Ltd., all of the shares of Irish Life Group Ltd.

Irish Life – which the government took over last year as part of its €4-billion ($5.4-billion Canadian) bailout of parent Irish Life & Permanent, has about $50-billion of assets under management and more than one million customers.
…
Great-West’s Irish subsidiary, Canada Life (Ireland), will be combined with
Irish Life over an 18 month period.

The merged businesses should deliver about €40-million per year in cost savings, Great-West said in a news release Tuesday.

As previously reported, PWF is issuing a Straight Perpetual, 4.80%, $300-million to fund a purchase of GWO subscription receipts.

RBC today demonstrated the Acquire and Dismantle Model of Canadian Banking:

On February 1, 2013, Royal Bank of Canada announced it completed the acquisition of Ally Financial Inc.’s Canadian auto finance business (Ally Credit Canada Limited) and Canadian deposit business (ResMor Trust Company).

As a result of the acquisition, RBC Royal Bank has performed a comprehensive review of Ally’s‡ product portfolio, and implemented some changes that may impact your account(s):

• Effective February 15, 2013, you will not be able to open new accounts with Ally.
• You can continue to manage your existing Ally account(s) through Ally’s call centre and website.

As a part of the product consolidation, all Ally High Interest Savings Accounts (HISA) will be closed on April 30, 2013.

Be sure to write your MP, copy to OSFI, and thank him for protecting Canada from the evils of competition.

Justine Hunter of the Globe writes a piece about the intellectual poverty of the political-media establishment:

To move to surplus from what is now expected to be a $1.2-billion deficit in the current fiscal year, the government is relying on tax hikes, $800-million worth of asset sales, and stringent – perhaps optimistic – containment of spending growth.

In the wake of the Irish Life deal discussed above, DBRS confirmed GWO, although the last line of the press release may provoke some hollow laughs:

DBRS has today confirmed the ratings on Great-West Lifeco Inc. (GWO or the Company) and its affiliates following the announcement of the acquisition from the Government of Ireland of Irish Life Group (Irish Life) by the U.K. operation of GWO’s Canada Life Assurance Company (Canada Life) subsidiary for EUR 1.3 billion. All trends remain Stable.
…
With a relatively low acquisition cost estimated at just 72% of Irish Life reported embedded value of EUR 1.8 billion and obvious expense synergies generated from merging Canada Life’s operation, accounting for 5% of the market, with that of Irish Life, representing 25% of the Irish life insurance market, the value proposition for GWO is compelling. Expected expense synergies between the acquired operations of Irish Life and the existing Irish operations of Canada Life will more than offset the increased financing expenses so that the acquisition is expected to be accretive to GWO before restructuring and acquisition-related costs. In addition, GWO could potentially benefit from revenue enhancements as it introduces different management approaches related to investment strategies and the use of reinsurance, which could enhance margins in the future.

The potential for adverse development post-acquisition is relatively small as there are limited guaranteed policy liabilities. Close to 80% of assets are unit-linked for the strict account of the policyholder. Combined with the Irish Life investment management operation, a substantial proportion of the Irish Life revenues take the form of investment management and administrative fees. The remaining assets are largely sovereign government bonds and, therefore, not likely to be a source of adverse credit experience.

Additionally, DBRS confirmed PWF:

DBRS has today confirmed its ratings on Power Financial Corporation (PWF or the Company) following the confirmation of Great-West Lifeco Inc.’s (GWO) ratings in the wake of its announced acquisition of Irish Life Group (Irish Life) from the Government of Ireland for EUR 1.3 billion. The trends remain Stable.

To partially fund this acquisition, GWO will be raising $1.25 billion in common equity, for which PWF will subscribe for $550 million, which will reduce its direct ownership stake in GWO to an estimated 67.0% from the current level of 68.2%. The Company in turn will raise up to $250 million in perpetual preferred shares, with the balance of funds to be provided from cash on hand, which is estimated at close to $1 billion as of year-end 2012.

The increase in financial leverage is manageable, with the expected earnings accretion largely offsetting the additional financial costs and foregone investment income. In any event, the Company’s total debt ratio (including preferred shares) remains close to 17%, which is well within tolerance for financial leverage at a financial services holding company according to the DBRS holding company methodology, especially given the high quality of financial leverage used by the Company. Pro forma fixed-charge coverage ratios are expected to be in excess of 13 times, which is very strong.

The Irish Life transaction is consistent with the stated intention of PWF to facilitate strategic acquisitions by its subsidiaries of major properties that are in line with broader strategic goals of expanding in existing markets while achieving meaningful market shares and expense efficiencies.

And to round out the day, DBRS confirmed FTS:

DBRS has today confirmed the Issuer Rating and ratings of the Unsecured Debentures and Preferred Shares of Fortis Inc. (Fortis or the Company) at A (low), A (low) and Pdf-2 (low), respectively, with Stable trends. The confirmation reflects the Company’s strong mix of earnings generated from regulated utilities and reasonable financing strategies for the acquisition of CH Energy Group Inc. (CHG) (the Acquisition; approximately US$1.5 billion, including US$500 million assumed debt) and the Waneta hydropower project, of which Fortis has 51% ownership.

Upon completion of the Acquisition and Waneta project, Fortis’ non-consolidated leverage is expected to increase modestly, but should be maintained within the 20% range as a result of a prudent funding mix.
…
Fortis’ business risk profile is expected to improve moderately with the Acquisition, as approximately 97% of CHG’s earnings are generated from its regulated electric and gas businesses. This regulated earnings mix is higher than the Company’s consolidated mix of approximately 90% (remainder generated from higher-risk hotel properties and non-regulated generation businesses).

It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums losing 6bp, FixedResets down 2bp and DeemedRetractibles off 1bp. Volatility was good, but almost all in the low-volume Floater sector, so it’s not clear whether it means a row of beans. Volume was very high.

Has the tide turned for junk bonds?

The biggest buyers of junk bonds are in retreat as exchange-traded funds suffer unprecedented withdrawals with the debt facing its first losses in eight months.

The outflows sent the combined value of the five biggest junk-debt funds down 7 percent from a four-month high in January to $29.8 billion, according to data compiled by Bloomberg. State Street Corp.’s $11.9 billion fund reported withdrawals of about $988 million in the 12 days ended Feb. 13, the longest stretch since August 2011.

A pullback three times bigger than that for mutual funds which cater to individuals suggests investors such as hedge funds and banks are cherry picking rather than investing in the broader market, said Peter Tchir of TF Market Advisors. Almost six years after the first high-yield ETF was created, the funds have been drawing the interest of institutions seeking rapid entries and exits with securities that traditionally were traded over the counter.

The best story I’ve seen so far on the Russian meteorite explosion was in Cracked, an irreverent internet humour site.

It was an unevenly positive day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets winning 23bp and DeemedRetractibles up 6bp. Volatility picked up a bit. Volume was quite high.

DBRS has confirmed TCL.PR.D at Pfd-3, Trend Negative:

The confirmation considers the declines in organic revenue and operating income over the past year, while acknowledging improvement in key credit metrics as a result of debt reduction. The trends remain Negative (as of April 20, 2012), based on DBRS’s view that weakening demand, combined with overcapacity, will continue to place pressure on the Company’s revenues, margins and cash flow generation going forward. The ratings continue to be supported by Transcontinental’s leading market position, economies of scale, and healthy free cash flow generation, while also reflecting its deteriorating earnings profile, which is being structurally affected by a consumer shift toward digital forms of media.
…
In terms of financial profile, Transcontinental has remained prudent, preserving credit metrics by using much of its free cash flow over the past two years to repay debt. DBRS notes that our concern regarding Transcontinental’s credit risk profile is not based primarily on the Company’s debt level, but rather on its future income and cash-generating prospects. If the Company’s plans and performance lead to signs of stabilization in organic revenue and operating income over the near to medium term, the ratings outlook could stabilize. However, a continued and meaningful decline in organic revenue and operating income and/or in key credit metrics over this period could result in a downgrade.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 7bp, FixedResets down 8bp and DeemedRetractibles gaining 5bp. Volatility was low. Volume was on the high side of average.