PrefBlog

Europeans are encountering Money Market angst:

Investors in Europe risk losing a haven as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley break a taboo that’s stopped 88 billion euros ($113 billion) of money-market funds from ever losing principal.

The banks are preparing to abandon the policy that investors get one euro back for every one they put in as government bond yields near record lows make it harder for the funds to generate returns.

A money-market fund failing to repay investors in full is said to “break the buck” and is forced to shut down. To avoid this, banks propose to change rules governing the investment vehicles so they can pass on losses to investors by reducing the number of shares outstanding in a fund, without closing.
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Benchmark German bond yields are close to record lows, with the rate on Germany’s two-year bond at minus 0.001 percent, up from minus 0.023 on March 28, data compiled by Bloomberg show. France’s two-year security is yielding 0.145 percent, up from a record-low 0.03 percent in December.

Since the ECB cut the deposit rate to zero in July, money- market funds that are restricted to buying short-term debt generated almost no extra cash, putting pressure on their goal to provide a sanctuary for investors. The seven-day yield on funds that buy euro government securities was zero percent for the week ended March 22, according to research firm iMoneyNet Inc.

Prime funds, which take more risk and can also invest in bonds issued by the highest-rated banks and companies, made 0.02 percent. Since Jan. 4, euro money funds have seen assets under management fall by 7.1 billion euros to 87.9 billion euros, Westborough, Massachusetts-based iMoneyNet data show.

Here’s some good energy business news, amidst all the unhappy headlines:

Canada is pulling ahead of the U.S. in a contest to be the first exporter of liquefied natural gas from the North American shale bonanza to Asia’s $150 billion LNG market.

An LNG terminal being built at a cove north of Vancouver financed by a Houston private-equity firm is scheduled to begin shipping the fuel across the Pacific Ocean in mid-2015, eight months before the first continental U.S. plant is slated to start. Canada’s government has approved twice as much LNG export capacity as its southerly neighbor, evincing a friendlier attitude toward selling domestic gas to the highest bidder and positioning the nation as the go-to source of gas in North America for overseas buyers.
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After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the federal government suspended reviews of all other applications so it could study the potential impacts of overseas sales on domestic energy prices. There are now 19 proposed U.S. LNG projects awaiting export permits, with the longest on hold for 28 months.

In contrast, Canada, which has seen a similar surge in gas production, issued its third LNG export license in February for a project led by Royal Dutch Shell Plc (RDSA) in British Columbia. All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S., according to data compiled by Bloomberg.

This is better than the usual story:

Canada stands to lose out on more than $50-billion over a three-year period because of oil pipeline constraints, one of the country’s major banks projected today as it urged President Barack Obama to approve the controversial Keystone XL project.

That figure from CIBC World Markets represents lost opportunities, in terms of producer revenues and government royalties.

Economist Peter Buchanan forecasts that this “money left on the table” will be about $20-billion this year, $15.2-billion in 2014 and $16.5-billion a year later.

DBRS updated its report on Husky, proud issuer of HSE.PR.A:

DBRS has today updated its report on Husky Energy Inc. (Husky or the Company). Husky’s credit quality is supported by its: (1) conservative financial profile, (2) integrated operations and (3) medium- to long-term exploration and production (E&P) growth potential.

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term, with minimal impact on credit metrics.
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DBRS also notes that the Company has updated its financial and operational targets from those initially set out in December 2010. DBRS believes that these targets are largely achievable, contingent upon Husky’s ability to execute its medium- to longer-term growth projects. DBRS expects that the Company will continue to manage its financial profile conservatively, in order to achieve the stated targets.

It was a slow drift upwards for the Canadian preferred share market, with both PerpetualPremiums and FixedResets gaining 3bp and DeemedRetractibles up 4bp. Volatility was low. Volume was a hair below average, with low-Issue Reset Spread BNS FixedResets seeing a fair bit of shuffling.

PerpetualDiscounts now yield 4.86%, equivalent to 6.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a bit below 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) increase from the 205bp reported March 27.

This may sound like a joke, but it’s actually a big deal:

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
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Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Previously, you had to issue a press release; in Canada, that generally (maybe always?) means you have to go through MarketWire or NewsWire, the two major agencies that distribute press releases.

Those two companies – the list is probably a little longer in the States! – have a history: if you issue through these places, you know you’re not going to get in trouble with the regulators for selective disclosure, whereas if you go to Honest Jimmy’s Press Release Distribution Service … you might. So what the established companies are really selling is safe harbor …. and boy-oh-boy, do they ever charge through the nose for it!

Now there are more safe harbours … FREE safe harbours! In the great scheme of things, potential savings from reduced press release costs probably won’t boost Royal Bank’s stock price much … but for smaller companies, every penny counts!

The feds have clarified the budget’s bail-in musings that were mentioned here yesterday:

“The bail-in scenario described in the Budget has nothing to do with depositors’ accounts and they will in no way be used here,” Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk said in a statement Tuesday. “Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.”
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“The [Canadian] bail-in regime is to protect both taxpayers from having to bail out banks and depositors from having to take a financial hit like we’ve seen in Cyprus,” Ms. Perchaluk said. “If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.”

It’s a pity that the Globe’s reporter, Grant Robertson, has no idea of what bank regulation is all about and didn’t speak to anybody who does – he perpetuates the following confusion:

Under the proposed Canadian plan, banks would set aside contingent capital, such as shares, which could be quickly converted to cash to provide liquidity and stabilize their operations should a crisis hit.

However, it is charming that Spend-Every-Penny’s mouthpiece, Kathleen Perchaluk, has such faith in the CDIC. As mentioned on March 27 (and on other occasions!) the CDIC’s reserves are far too small to even begin to cope with the collapse of a major bank.

John Greenwood of the Financial Post not only knows more about bank regulation, but actually talked to people who knew more than him:

According to one senior fixed-income analyst, Ottawa has its eye on senior unsecured debt issued by banks. Popular with institutional fixed-income investors, the product is widely traded and makes up a big chunk of the domestic bond market.

So far it’s only a proposal in the budget and a vaguely worded one at that, but “everyone is taking the government at their word and hence the market is coming to terms with whether or not to buy it and at what price,” said the analyst, who asked not to be named.
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Critics worried that investors may not buy it at a price that the banks consider affordable and the banks themselves have said they have reservations. In any case, the banks haven’t issued any yet. One interpretation of the budget is that Ottawa is looking to nudge the process forward.

The last one probably won’t be a big worry. The bank-owned TMX will be “encouraged” by the bank regulator to include the so-called bonds in the index which will virtually guarantee a market.

It was a day of modest losses for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 1bp and DeemedRetractibles down 3bp. There was no volatility – none. Volume was below average.

Assiduous Reader KL was intrigued by my note on OSFI’s target for depositor recovery on March 27 and passed along a few links.

A US stockbroker pointed out (with assistance from a goldbug) that the federal budget contained (pages 154-155 of the PDF) the following:

The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

• Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.
• The Government proposes to implement a ―bail-in‖ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
• Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail”.

Both commentators assumed that the word “liabilities” in the second point means “deposits”, which could ultimately be the case, of course (particularly for uninsured deposits), but for now can be taken to mean “contingent capital” – Garth Turner has it right, just as a change of pace.

While there is no clarity yet, the budget announcement is probably a signal that the feds have bought into the Ban the Bond Movement and that soon all bank bonds will be contingent capital; hey, who needs bankruptcy law anyway?

The first and third points of the three-part process refers to OSFI’s inadequate provision for D-SIBs.

Speaking of totally inadequate government agencies, the Toronto Transit Commission’s CEO Report for 12Q4 just came to my attention, with the following commentary regarding streetcar service:

The last two weeks of Period 12 (December Board) saw high levels of insufficient workforce due to vacation, resulting in numerous cancellations due to no Operator. The resulting cancelled service contributed to delays, longer trip times, and ragged headways.

Is there any doubt but that the TTC is grossly mismanaged? Is there anybody employed at the TTC who could run a three-house paper route?

DBRS confirmed CU at Pfd-2(high) [Stable]:

DBRS has today confirmed the Issuer Rating and the ratings of the Unsecured Debentures, Cum. Preferred Shares and Commercial Paper of Canadian Utilities Limited (CU or the Company) at “A,” “A,” Pfd-2 (high) and R-1 (low), respectively, all with Stable trends. The confirmations reflect CU’s relatively stable business risk profile, strong financial profile and the credit quality of its primary subsidiary, CU Inc. (CUI; rated A (high)). The one-notch differential in the ratings of CU and CUI reflects structural subordination at CU.
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DBRS assesses CU’s financial profile based on a non-consolidated basis. CU is expected to continue to support the significant capital expenditure program at CUI (approximately $2 billion annually from 2013 to 2015) with debt and preferred shares issuances over the medium term. As of March 25, 2013, the Company has approximately $900 million of preferred shares outstanding (including a $175 million issuance in March 2013). Pro forma the $175 million issuance, $145 million of CU’s outstanding preferred shares are treated as debt by DBRS in the adjusted debt-to-capital calculation (with a pro forma adjusted debt-to-capital ratio of approximately 9%). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferred) is treated as debt. DBRS expects the Company to continue to maintain its non-consolidated adjusted debt-to-capital ratio in line with the 20% threshold on a non-consolidated basis. Should CU exceed the 20% threshold, this could result in negative rating implications

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets down 23bp and DeemedRetractibles off 1bp. Volatility was average. Volume was low.