Archive for May, 2013

May 17, 2013

Friday, May 17th, 2013

Nothing happened today either, just like yesterday.

It was a day of modest gains for the Canadian preferred share market, with PerpetualPremiums gaining 2bp and both FixedResets and DeemedRetractibles up 5bp. Volatility was minimal. Volume was quite low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3243 % 2,563.2
FixedFloater 3.86 % 3.07 % 31,903 18.89 1 0.0000 % 4,259.7
Floater 2.71 % 2.94 % 80,917 19.84 4 0.3243 % 2,767.6
OpRet 4.82 % 2.27 % 67,547 0.13 5 -0.0543 % 2,615.2
SplitShare 4.80 % 4.01 % 104,633 4.10 5 0.3881 % 2,984.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0543 % 2,391.3
Perpetual-Premium 5.20 % 3.33 % 96,734 0.53 32 0.0206 % 2,379.2
Perpetual-Discount 4.84 % 4.88 % 189,506 15.62 4 0.0914 % 2,686.2
FixedReset 4.88 % 2.72 % 250,644 3.14 81 0.0458 % 2,520.2
Deemed-Retractible 4.87 % 3.30 % 134,236 0.76 44 0.0529 % 2,462.3
Performance Highlights
Issue Index Change Notes
BNA.PR.E SplitShare 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 4.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.G Perpetual-Premium 137,414 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-09-01
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.45 %
TRP.PR.A FixedReset 79,275 Nesbitt crossed 40,000 at 25.48; TD crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-17
Maturity Price : 23.86
Evaluated at bid price : 25.49
Bid-YTW : 3.14 %
GWO.PR.R Deemed-Retractible 55,171 RBC crossed 34,200 at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 4.57 %
BAM.PR.O OpRet 28,850 YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.17
Bid-YTW : 4.59 %
BAM.PF.C Perpetual-Discount 27,835 RBC crossed 10,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-17
Maturity Price : 24.49
Evaluated at bid price : 24.88
Bid-YTW : 4.92 %
BMO.PR.M FixedReset 25,370 Nesbitt crossed 20,000 at 25.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 1.67 %
There were 19 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.F FixedReset Quote: 25.12 – 25.48
Spot Rate : 0.3600
Average : 0.2680

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 3.04 %

BMO.PR.K Deemed-Retractible Quote: 26.11 – 26.34
Spot Rate : 0.2300
Average : 0.1471

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-16
Maturity Price : 26.00
Evaluated at bid price : 26.11
Bid-YTW : -1.44 %

TCA.PR.X Perpetual-Premium Quote: 50.60 – 51.00
Spot Rate : 0.4000
Average : 0.3184

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 50.60
Bid-YTW : 3.33 %

BNS.PR.P FixedReset Quote: 25.68 – 25.89
Spot Rate : 0.2100
Average : 0.1352

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.68
Bid-YTW : 2.81 %

BNA.PR.C SplitShare Quote: 25.02 – 25.23
Spot Rate : 0.2100
Average : 0.1419

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 4.31 %

TRP.PR.C FixedReset Quote: 25.54 – 25.72
Spot Rate : 0.1800
Average : 0.1177

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-17
Maturity Price : 23.61
Evaluated at bid price : 25.54
Bid-YTW : 2.79 %

May 16, 2013

Friday, May 17th, 2013

Nothing happened today.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1942 % 2,555.0
FixedFloater 3.86 % 3.07 % 31,650 18.89 1 -0.2430 % 4,259.7
Floater 2.72 % 2.94 % 81,452 19.83 4 -0.1942 % 2,758.7
OpRet 4.82 % 2.31 % 68,442 0.13 5 0.1010 % 2,616.6
SplitShare 4.78 % 4.00 % 103,987 4.05 5 0.1803 % 2,972.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1010 % 2,392.6
Perpetual-Premium 5.20 % 3.77 % 97,064 0.78 32 0.0492 % 2,378.7
Perpetual-Discount 4.85 % 4.88 % 191,854 15.62 4 -0.0406 % 2,683.7
FixedReset 4.88 % 2.68 % 254,173 3.34 81 0.0344 % 2,519.1
Deemed-Retractible 4.87 % 3.34 % 135,107 1.00 44 0.0221 % 2,461.0
Performance Highlights
Issue Index Change Notes
MFC.PR.H FixedReset 1.02 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.77
Bid-YTW : 2.55 %
HSE.PR.A FixedReset 1.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-16
Maturity Price : 23.66
Evaluated at bid price : 25.83
Bid-YTW : 2.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.G Perpetual-Premium 187,424 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-09-01
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.45 %
GWO.PR.N FixedReset 70,464 Scotia crossed blocks of 20,000 and 40,000, both at 24.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.65
Bid-YTW : 3.05 %
TRP.PR.D FixedReset 43,984 Scotia crossed 25,000 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.98
Bid-YTW : 3.32 %
RY.PR.A Deemed-Retractible 43,160 RBC crossed blocks of 16,200 and 20,000, both at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-24
Maturity Price : 25.25
Evaluated at bid price : 25.48
Bid-YTW : 3.39 %
BNS.PR.Z FixedReset 36,821 RBC crossed 18,500 at 25.35.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 2.95 %
BNS.PR.Q FixedReset 32,455 National crossed 25,000 at 25.35.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 3.00 %
There were 33 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TCA.PR.Y Perpetual-Premium Quote: 50.80 – 51.50
Spot Rate : 0.7000
Average : 0.4113

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 50.80
Bid-YTW : 3.84 %

BAM.PR.C Floater Quote: 17.79 – 17.99
Spot Rate : 0.2000
Average : 0.1232

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-16
Maturity Price : 17.79
Evaluated at bid price : 17.79
Bid-YTW : 2.97 %

CU.PR.C FixedReset Quote: 26.45 – 26.75
Spot Rate : 0.3000
Average : 0.2361

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 2.45 %

VNR.PR.A FixedReset Quote: 26.40 – 26.64
Spot Rate : 0.2400
Average : 0.1790

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 3.09 %

TRI.PR.B Floater Quote: 23.55 – 23.89
Spot Rate : 0.3400
Average : 0.2845

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-16
Maturity Price : 23.25
Evaluated at bid price : 23.55
Bid-YTW : 2.21 %

CM.PR.D Perpetual-Premium Quote: 25.74 – 25.92
Spot Rate : 0.1800
Average : 0.1265

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-15
Maturity Price : 25.00
Evaluated at bid price : 25.74
Bid-YTW : -25.02 %

DC.PR.A Arrangement Approved By Shareholders

Friday, May 17th, 2013

Dundee Corporation has announced:

that, further to its earlier press releases (December 14, 2012, April 15, 2013 and May 15, 2013), the proposed corporate restructuring, through a tax efficient statutory plan of arrangement (the “Arrangement”), has received the requisite shareholder approval at the Corporation’s annual and special meeting of shareholders held today (the “Meeting”). The Arrangement was approved by 98.66% of the Class A Subordinate Voting Shares of the Corporation voted at the Meeting, 100% of the Class B Common Shares of the Corporation voted at the Meeting and 98.26% of the First Preference Shares, Series 1 of the Corporation voted at the Meeting. As required under Canadian securities laws, the Arrangement was also approved by 98.57% of the Class A Subordinate Voting Shares of the Corporation voted at the Meeting, excluding shares held by “interested parties” and “control persons” of the Corporation.

The details of the Arrangement were discussed on PrefBlog in an earlier post.

DC.PR.A is tracked by HIMIPref™ but relegated to the Scraps index as none of the agencies rate the issue.

AZP.PR.A & AZP.PR.B Put On Watch-Negative By S&P

Thursday, May 16th, 2013

Standard & Poor’s has announced:

  • •Power developer Atlantic Power Corp.’s key credit measures have continued to deteriorate. In addition, Atlantic Power has announced that, based on current projections, it may not be able to comply with the interest coverage ratio covenant in its senior revolving credit facility beginning in the third quarter of 2013.
  • •We are placing the ‘BB-‘ corporate credit rating on Atlantic Power Corp. on CreditWatch with negative implications.
  • •We expect to resolve the CreditWatch listing after the potential covenant violation issues are resolved. In the interim, we will also reassess our financial projections for the company given recent developments to ascertain whether near-term forecasted credit ratios remain commensurate with a ‘BB-‘ or lower rating. We expect to complete this review over the next two to three weeks.


To maintain ratings, we would expect average cash flow after debt service (CFADS) to debt and CFADS to interest coverage to be at least 17% and 2.4x, respectively. A downgrade could occur if the company’s CFADS to debt and CFADS to interest coverage drops below the aforementioned levels.

So S&P now rates these issues as P-4(low) [Watch-Negative].

In the company’s 13Q1 Earnings Release of May 8 they say:

Examples of such statements in this press release include, but are not limited, to statements with respect to the following:

compliance with the Company’s senior credit facility and the Company’s ability to obtain requested waivers and/or amendments to the senior credit facility;

but one of the subsequent developments was

Utilized portion of proceeds from the sale of the Florida Projects to fully repay $64 million of outstanding borrowings under the Company’s senior credit facility

The earnings release also noted:

  • • 2013 annual guidance of $250 to $275 million in Project Adjusted EBITDA reaffirmed
  • • 2013 annual Payout Ratio guidance of 65% to 75%, including cash flow from discontinued operations, reaffirmed

The section of concern is:

The Company, as previously indicated, still expects to have approximately $140 to $150 million of net cash available to invest in growth projects by mid-2013 after retaining at least $50 million of unrestricted cash and while preserving $210 to $225 million of access under its revolving credit facility. As more fully described in the Company’s quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2013, the Company has initiated discussions with the lenders under its revolving credit facility to obtain a waiver of, or an amendment to, the revolving credit facility with respect to, among other things, compliance with certain ratios. The closing of the Gregory and Delta-Person asset sales in the third quarter of 2013 are expected to add further to the available net cash balance. Consistent with previous expectations, the Company plans to begin investing this cash in the second half of this year.

The 10Q for 2013Q1 states:

We must meet certain financial covenants under the terms of our senior credit facility, which are generally based on ratios as described in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012. As of May 6, 2013, we were in compliance with these ratios. After further review of our currently forecasted results for the remainder of the year, we anticipate that, it is likely we will not meet the covenant in our senior credit facility requiring that our ratio of Consolidated EBITDA to Consolidated Interest Expense (as described in the senior credit facility) exceeds 2.25, with respect to the quarter-end testing date for one or more of the remaining quarterly periods in the balance of the 2013 fiscal year. We are currently in discussions with our lenders to obtain a waiver of compliance with this ratio for the balance of the fiscal year and/or an amendment to the senior credit facility. We anticipate receiving a waiver for this possible default or an amendment to the applicable ratio, although no assurance can be given that we will be successful in this regard. In addition to securing such waiver and/or amendment, we plan to seek a broader amendment of our senior credit facility to take into account changes in the business development plans at Atlantic Power, which would also take into account the potential for a breach of our Leverage Ratio in early 2014, as more fully described in ‘‘Item 1A. Risk Factors’’, and intend to initiate discussions with our lenders in this regard. In the unlikely event that we’re not successful in obtaining such waiver or amendment, based on our available cash resources, we expect to have the ability to cash collateralize the outstanding letters of credit under the senior credit facility and terminate the senior credit facility prior to any default (which would eliminate such facility as a source of liquidity).

We believe that we will be able to generate sufficient amounts of cash and cash equivalents to maintain our operations and meet obligations as they become due for the next 12 months.

The preferred share issues were confirmed at Pfd-4 by DBRS last August, as reported on 2012-8-14.

Following the acquisition of APLP, ATP’s financial profile weakened significantly, predominately due to higher leverage and weaker cash flow ratios. ATP’s balance sheet is expected to continue to be pressured by the ongoing high level of capex associated with the Canadian Hills and Piedmont Green Power projects in 2012. In the medium to long term, APT’s financing strategy is to reduce the consolidated debt-to-capital ratio (currently at 67%) to 50%. Should the Company successfully execute its deleveraging strategy and build a strong track record of maintaining a good financial profile, this will have a positive credit implication.

May 15, 2013

Thursday, May 16th, 2013

As noted by the Globe & Mail, the CD Howe Institute has released a paper by Paul R. Masson titled The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now:

In this Commentary, I argue that short-term rates are therefore too low in Canada, a situation that is starting to build in pervasive problems for the economy. Below-equilibrium interest rates for an extended period distort investment decisions, leading to excessive risk taking and inefficient and ultimately unprofitable investments. They also encourage the formation of asset bubbles whose collapse could lead to a recurrence of the recent financial crisis.

Some of the symptoms of inefficient investment and asset price bubbles are already evident in Canada, in the housing sector for instance. The cumulative effect of artificially low interest rates also risks fuelling an underlying inflationary process. Therefore, I recommend that the Bank of Canada start now to reverse some of the monetary stimulus and begin raising interest rates.

Raising interest rates is never popular, but keeping rates low for too long builds in pervasive problems for the economy. Interest rates in nominal terms are at record low levels and negative in real terms, even though Canada’s GDP is only slightly below capacity. At the same time, there are symptoms of distortions created by low interest rates in financial markets: unfunded pensions, losses by insurance companies, excessive household debt, high house prices, and a bias toward high-yielding equities. Extremely low interest rates mean that the Bank of Canada has a long way to go before they approach a neutral setting. The time has come for the Bank to start raising interest rates gradually to lessen the continued build-up of financial imbalances.

This is a timely report because Assiduous Reader AG has sent me a link to a alarmist report on client communications at UBS:

UBS is planning a mass mailing to many of its brokerage clients alerting them that they have been reclassified as “aggressive” investors following a recent change in its market outlook that some people inside the firm say reflects growing bearishness in the bond market, particularly over the long term, the FOX Business Network has learned.

In late January, UBS (UBS) changed its “strategic asset allocation guidelines,” or the broad parameters used to classify its brokerage clients depending on their mix of stocks, bonds and other investments in their portfolio, people at the company tell FOX Business.

According to brokers inside UBS, new guidelines will reflect a growing belief among the firm’s market strategists that the bull market in bonds has largely run its course, and that those investors who believed they had constructed a “conservative” portfolio by being heavily invested in bonds could be reclassified as “aggressive.” Some also believe the move may be an attempt by the firm to lessen its liability in the event clients who are holding large positions in bonds decide to take legal action against UBS.

Mike Ryan, the chief investment strategist for UBS, said so-called “non consent” letters will be sent out to investors in the coming weeks alerting them of their changed classification – but he says it has little to do with a firm-wide bias against bonds. Rather, UBS is changing “its long-term view” reflecting what it views as a “volatile market…not just in fixed income.”

The concerns regarding legal liability are dumbfounding, but seem reasonable enough. One ambulance-chaser writes:

On February 14, 2013, FINRA, the Financial Industry Regulatory Authority, sent a very sober Valentine’s Day card to bond investors in the form of an Investor Alert. The Alert probably should have been sent much earlier. It acknowledges what most brokerages already know: 1) that the bond bubble is about to burst; 2) that investors should beware of ever increasing risks in bond investing; and 3) that the life’s savings of bond investors is at risk of evaporating. Most bond investors are risk adverse, so this comes as very unwelcome news. Making matters even worse, most bond investors will never see this warning since most bond investors are also unsophisticated investors who are unaware of things like FINRA Investor Alerts.

Brokerage firms are taking very different approaches to pass this information along to investors. As reported in the Investment News on February 1, 2013, TD Ameritrade is sending a warning to its investors that the popping of the bond bubble is not a question of “if” but a question of “when”.

Fox Business reports UBS has taken the unprecedented step of changing the objectives of all of its bond investors from “conservative” to “aggressive.” www.foxbusiness.com/investing/2013/02/01/ubs-set-to-classify-bond-buyers-as-aggressive/ . This is akin to reclassifying Titanic passengers as Olympic swimmers in the hours prior to hitting the iceberg – you can call them what you want but it does not increase their chances of survival when the impending tragedy strikes.

Investors have rights to obtain recovery if the bond bubble bursts. They can seek recovery if their portfolios were over-concentrated in bonds prior to the bubble bursting. Additionally, bond investments will be seen as unsuitable since the investment would be for a much greater risk than most bond investors agreed to take. The bubble bursting will not be much of a Valentine’s Day present, but at least investors have recourse.

The handwringing over FINRA’s notice seems somewhat overwrought. As well as I can determine, the reference is to the Investor Alert Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio:

Currently, interest rates are hovering near historic lows. Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops as interest rates rise along the way. If you have money in a bond fund that holds primarily long-term bonds, expect the value of that fund to decline, perhaps significantly, when interest rates rise.

So, taking these three straws in the wind in reverse order, the FINRA statement is nothing more than a well-timed reminder of the price volatility of long-dated instruments. It is not so long ago since the first quarter of 2007, when a huge number of Straight Perpetuals were sold to highly unsophisticated investors who were astonished when the price declines reached 40% at the nadir. In a recent speech reported on PrefBlog on May 10, Bernanke went so far as to say:

In light of the current low interest rate environment, we are watching particularly closely for instances of “reaching for yield” and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals. It is worth emphasizing that looking for historically unusual patterns or relationships in asset prices can be useful even if you believe that asset markets are generally efficient in setting prices. For the purpose of safeguarding financial stability, we are less concerned about whether a given asset price is justified in some average sense than in the possibility of a sharp move. Asset prices that are far from historically normal levels would seem to be more susceptible to such destabilizing moves.

Also to be considered are factors such as the leverage and degree of maturity mismatch being used by the holders of the asset, the liquidity of the asset, and the sensitivity of the asset’s value to changes in broad financial conditions.

In other words, the Fed is perfectly well-aware that its policies encourage risk-taking – that is the whole point of monetary policy in the first place – but is desirous, insofar as possible, that this risk-taking take place within a rational framework; that the risk-takers understand that they are taking risks.

When one who has been oblivious to risk is suddenly confronted with the fact that risk not only exists but has worked significantly against him, panic ensues. We saw plenty of that in the crisis.

So I regard the FINRA statement as being nothing more than a reminder of the nature of risk: Don’t buy Fund A simply because the yield is reported as 3% as opposed to 2% on what you hold now! Be aware of interest rate risk, and how it is measured by duration, at the very least!

The ambulance-chaser’s assertions are ludicrous and simplistic, but probably a decent enough piece of marketing. I will fault it for its completely unwarranted inference that:

It acknowledges what most brokerages already know: 1) that the bond bubble is about to burst; 2) that investors should beware of ever increasing risks in bond investing; and 3) that the life’s savings of bond investors is at risk of evaporating.

The first is completely nuts. The brokerages know nothing. One of the great myths of finance is that brokerages have some kind of clue about what’s going to happen in the future and it continues to surprise me that this myth has survived the Credit Crunch.

Brokerages are trading operations. Their objective is to buy something from me for a nickel and sell it to you for a dime. They do not care, nor should they care, about which of us will be happier about the trade after a year has passed.

And the idea that the entire life’s savings of bond investors is at risk of evaporating is nonsensical. It will take a very severe bond market indeed to make even long-bond investors lose half their money. If we consider a current-coupon thirty-year Treasury at 3%, the price only breaches $50 at yields of 7%. Could it happen? Of course. Will it happen? That’s a much more difficult question; I suggest it’s unlikely as long as inflation expectations remain anchored at somewhere below 4%. If it does happen, can such a situation be described as the evaporation of life’s savings? Well, you tell me. Better yet, tell the judge.

However, I will reserve most of my ire for the UBS plans regarding bond investors – and I will take the time to note that I can find no commentary indicating that they actually followed through on these plans, nor any that would indicate the details of such plans. It seems reasonable to assume, for instance, an account holding solely short-term bonds would receive a different classification from one exclusively invested in long-term, but such refinements are not discussed in the stem article.

It seems likely that the plans, such as they were, were indeed “an attempt by the firm to lessen its liability in the event clients who are holding large positions in bonds decide to take legal action against UBS.”, which simply illustrates a prevalent attitude today that anybody who suffers the loss of so much as a nickel in the markets is obviously an innocent victim of cunning stockbrokers who knew precisely what was going to happen but didn’t care. I can only be grateful that there are still some vestiges of sanity left in the world:


Click for Big

But there are other problems, for instance:

new guidelines will reflect a growing belief among the firm’s market strategists that the bull market in bonds has largely run its course

This is nonsensical. This represents a market call by the firm’s “market strategists” and to reclassify investors on such a basis is saying that they represent the benchmark for prudent investment and that riskiness is measured by the degree of deviation from their recommendations. Not just nonsensical, but egomaniacal. Not just egomaniacal but narcissist.

UBS, in fact, is a poster-child for total cluelessness regarding market direction.

Particularly irritating is one of the other possible rationales for the putative decision:

Rather, UBS is changing “its long-term view” reflecting what it views as a “volatile market…not just in fixed income.”

Classifying investment risk as a function of volatility is a sign of ignorance whole-heartedly endorsed by regulators and incompetent investors because they read it in a book.

Investment risk is, as I have argued on many occasions, a function of the probability of meeting your investment goals.

Say your investment goal is to make $3,000 p.a. and you have $100,000. Then, I suggest, one of the least risky investments you can make is to plunk the whole damn thing into a thirty year treasury; nothing else is as likely to continue paying you the $3,000 p.a. for thirty years. Naturally, it would be better to plunk the money into a diversified portfolio with the same broad characteristics because, as is known to everybody except regulators and incompetent portfolio managers, risk is a vector. There are different kinds of risk, and to talk of risk as a scalar quantity is to destroy the point of the conversation.

I will go further. Even safer than the thirty year Treasury recommended for the purpose above would be a US Government perpetual bond, if any existed. This would be somewhat more volatile than the thirty-year bond in price terms, but would reduce the risk of the portfolio by addressing the question of ‘What happens after thirty years?’.

Naturally, different portfolio objectives will lead to different perspectives on the riskiness of various methods used to accomplish those goals. If I have $100,000 and my portfolio objective is to use the money to buy a house in one month’s time, then investing the whole thing in a government perpetual would be insanely risky. Far better would be a one-month treasury bill.

And if my portfolio objective is to make $3,000 p.a. AFTER INFLATION, then holy-smokes, the thirty-year treasury bond just got risky again. How about that?

And, in my favourite example ever, if you have $1 and your portfolio objective is to make $1-million before next Tuesday, then your least risky investment is a lottery ticket. The chances of success, while miniscule, are higher than with anything else – although a prudent person will be well-advised to redefine his portfolio objectives until a significant chance of success can be reasonably estimated.

To talk of “risk” in the absence of clearly defined desirable rewards is just craziness. I should work this up into a proper article some day.

Speaking of market forecasting, the Bank of Canada published a paper by Ian Christensen and Fuchun Li titled A Semiparametric Early Warning Model of Financial Stress Events:

The authors use the Financial Stress Index created by the International Monetary Fund to predict the likelihood of financial stress events for five developed countries: Canada, France, Germany, the United Kingdom and the United States. They use a semiparametric panel data model with nonparametric specification of the link functions and linear index function. The empirical results show that the semiparametric early warning model captures some well-known financial stress events. For Canada, Germany, the United Kingdom and the United States, the semiparametric model can provide much better out of-sample predicted probabilities than the logit model for the time period from 2007Q2 to 2010Q2, while for France, the logit model provides better performance for non-financial stress events than the semiparametric model.

Me, I just use a Magic 8-Ball: Reply Hazy. Try Again Later.

It was a modestly negative day for the Canadian preferred share market, with PerpetualPremiums off 11bp, FixedResets down 12bp and DeemedRetractibles flat. Volatility was minimal. Volume was a little below average.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight – and perhaps spurious – narrowing from the 225bp reported May 8.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3899 % 2,559.9
FixedFloater 3.85 % 3.06 % 32,010 18.91 1 0.7755 % 4,270.0
Floater 2.72 % 2.94 % 82,509 19.85 4 0.3899 % 2,764.0
OpRet 4.83 % 2.35 % 68,946 0.13 5 0.0054 % 2,613.9
SplitShare 4.79 % 4.09 % 105,021 4.05 5 -0.0627 % 2,967.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0054 % 2,390.2
Perpetual-Premium 5.20 % 3.04 % 91,044 0.79 32 -0.1122 % 2,377.6
Perpetual-Discount 4.85 % 4.89 % 193,673 15.62 4 0.1219 % 2,684.8
FixedReset 4.88 % 2.68 % 253,218 3.35 81 -0.1186 % 2,518.2
Deemed-Retractible 4.87 % 3.33 % 133,098 0.92 44 0.0026 % 2,460.5
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-15
Maturity Price : 23.57
Evaluated at bid price : 25.51
Bid-YTW : 3.01 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.G Perpetual-Premium 1,121,508 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-15
Maturity Price : 24.67
Evaluated at bid price : 25.07
Bid-YTW : 4.49 %
RY.PR.P FixedReset 126,907 National crossed 49,500 at 25.74. RBC crossed 50,000 at the same price and bought 19,200 from Nesbitt at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.69
Bid-YTW : 2.45 %
TRP.PR.A FixedReset 59,965 Scotia crossed 50,000 at 25.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-15
Maturity Price : 23.85
Evaluated at bid price : 25.47
Bid-YTW : 3.14 %
FTS.PR.G FixedReset 57,039 Nesbitt crossed two blocks of 25,000 each, both at 25.12.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-09-01
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 2.95 %
RY.PR.L FixedReset 55,186 National crossed 50,000 at 25.62.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.63
Bid-YTW : 2.14 %
RY.PR.W Perpetual-Premium 49,020 Desjardins crossed blocks of 14,500 and 24,000, both at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-14
Maturity Price : 25.25
Evaluated at bid price : 25.41
Bid-YTW : -4.25 %
There were 27 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CU.PR.C FixedReset Quote: 26.40 – 26.65
Spot Rate : 0.2500
Average : 0.1661

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 2.50 %

TD.PR.O Deemed-Retractible Quote: 25.72 – 25.99
Spot Rate : 0.2700
Average : 0.1880

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-14
Maturity Price : 25.50
Evaluated at bid price : 25.72
Bid-YTW : -3.32 %

PWF.PR.R Perpetual-Premium Quote: 26.67 – 26.96
Spot Rate : 0.2900
Average : 0.2154

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.67
Bid-YTW : 4.55 %

SLF.PR.D Deemed-Retractible Quote: 24.60 – 24.79
Spot Rate : 0.1900
Average : 0.1241

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 4.72 %

ENB.PR.F FixedReset Quote: 25.65 – 25.83
Spot Rate : 0.1800
Average : 0.1158

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.41 %

ENB.PR.B FixedReset Quote: 25.71 – 25.88
Spot Rate : 0.1700
Average : 0.1089

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.71
Bid-YTW : 3.21 %

CU.PR.G Closes at Small Premium On Excellent Volume

Thursday, May 16th, 2013

Canadian Utilities has announced:

it has closed its previously announced public offering of Cumulative Redeemable Second Preferred Shares Series DD, by a syndicate of underwriters co-led by RBC Capital Markets and BMO Capital Markets, and including TD Securities Inc., Scotiabank, CIBC, Canaccord Genuity Corp., and GMP Securities L.P. Canadian Utilities Limited issued 9,000,000 Series DD Preferred Shares for gross proceeds of $225 million. The Series DD Preferred Shares will begin trading on the TSX today under the symbol CU.PR.G. The proceeds will be used for capital expenditures, to repay indebtedness and for other general corporate purposes.

CU.PR.G is a Straight Perpetual, 4.50%, announced April 30. It will be tracked by HIMIPref™ and has been assigned to the PerpetualPremium index.

The issue traded an impressive 1,121,508 shares today in a range of 25.00-19 before closing at 25.07-08, 115×5. The small premium is not surprising – it has a very close relation on the market in the form of CU.PR.F, which differs in terms only in that the redemption schedule differs by three months.

Vital statistics are:

CU.PR.G Perpetual-Premium YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-15
Maturity Price : 24.67
Evaluated at bid price : 25.07
Bid-YTW : 4.49 %

DC.PR.A To Be Exchanged Upon Shareholder Approval

Wednesday, May 15th, 2013

In December, 2012, Dundee Corporation announced:

that its Board of Directors has approved, in principle, to proceed with a corporate restructuring, through a tax efficient plan of arrangement (the “Arrangement”) that will distribute to shareholders of the Corporation a 50% interest in Dundee Realty Corporation, the Corporation’s 70% owned real estate subsidiary. The Corporation itself will retain a 20% interest in Dundee Realty, with Mr. Michael Cooper, the President and Chief Executive Officer of Dundee Realty, retaining the remaining 30%.

The Corporation expects that the Arrangement, when completed, will result in the establishment of a new public company, with a capital structure that emulates that of Dundee Corporation. The Arrangement will be subject to regulatory, court and shareholder approvals, as well as the listing of the distributed company’s shares on the Toronto Stock Exchange.

The Arrangement as currently proposed provides that the share structure of the new company to be distributed will emulate that of Dundee Corporation, with the Class A and Class B shares as well as the First Preference Shares, Series 1 receiving their proportionate interest in the distributed company.

Upon completion of the Arrangement, Mr. Ned Goodman, President and Chief Executive Officer of the Corporation, will continue as Chairman of the Board of Directors, and Mr. Michael Cooper will continue as President and Chief Executive Officer. Mr. Goodman and Mr. Cooper will provide our shareholders with continuity in the quality of management of our real estate operations that they have experienced to date.

Dundee then announced on April 15:

that it has entered into an arrangement agreement (the “Arrangement Agreement”) with DREAM Limited, Dundee Realty Corporation (“Dundee Realty”) and Sweet Dream Corp., the 30% shareholder of Dundee Realty owned by Michael Cooper, in connection with the previously announced (December 14, 2012) corporate restructuring, through a tax efficient plan of arrangement (the “Arrangement”).

The Arrangement will result in the establishment of a new public real estate company, DREAM Limited, to which the Corporation will, directly or indirectly, transfer its 70% interest in the common shares and Class C preference shares (collectively, the “DRC Shares”) of Dundee Realty, the Corporation’s 70% owned real estate subsidiary. Following the completion of the Arrangement, Dundee is expected to own, directly or indirectly, Class A Subordinate Voting Shares of DREAM Limited representing approximately 28.57% of the total number of outstanding Class A Subordinate Voting and Class B Common Shares of DREAM Limited, and thereby retain an approximate indirect 20% interest in the DRC Shares. Pursuant to the Arrangement, holders of Dundee’s Class A Subordinate Voting Shares and Class B Common Shares will receive, directly or indirectly, their proportionate interest based on their Dundee share ownership in DREAM Limited. Holders of Dundee’s First Preference Shares, Series 1 will receive, for each share held, (i) a new Dundee preference share with an expected liquidation amount of $18.67 and an annual dividend of 5%, and (ii) a preference share of DREAM Limited with an expected liquidation amount of $6.33 and an increased annual dividend of 5.5%. Holders of the Corporation’s First Preference Shares, Series 2 are not participating in the Arrangement.

Dundee has now announced:

that it has agreed to amend the arrangement agreement (the “Arrangement Agreement”) with DREAM Limited, Dundee Realty Corporation (“Dundee Realty”) and Sweet Dream Corp., the 30% shareholder of Dundee Realty owned by Michael Cooper, in connection with the previously announced plan of arrangement (the “Arrangement”).

Following discussions with holders of Dundee’s First Preference Shares, Series 1, Dundee determined to revise the terms of the preference shares of DREAM Limited to reflect market terms for the security. Under the Arrangement, as amended, holders of Dundee’s First Preference Shares, Series 1 will receive, for each share held, (i) a new Dundee preference share with an expected liquidation amount of approximately $18.67 and an annual dividend of 5%, as previously announced, and (ii) a preference share of DREAM Limited with an expected liquidation amount of approximately $6.33 and an increased
dividend of 7.0% (increased from 5.5% previously announced). In addition, the preference shares of DREAM Limited will be redeemable, at the option of the holder, at any time after December 31, 2013 until December 31, 2014 at 102% of the liquidation amount, at any time after December 31, 2014 until December 31, 2015 at 101% of the liquidation amount and at any time after December 31, 2015 at 100% of the liquidation amount.

All other terms of the Arrangement remain the same as disclosed in Dundee’s management information circular dated April 16, 2013 mailed to shareholders.

May 14, 2013

Tuesday, May 14th, 2013

There was a most interesting story on Bloomberg about the travails of the brokerage business:

Alex Freemon was so eager to be a stockbroker after graduating from the Georgia Institute of Technology last year that he said he was happy to go door to door selling mutual funds for Edward Jones & Co.

The brokerage flew him to St. Louis, where he practiced knocking on a model door in a classroom of would-be brokers at the company’s headquarters, then sent him back to Atlanta to walk the streets for 10 hours a day for about $30,000 a year plus commissions. Freemon said he quit in March after realizing he would have to spend five years struggling to meet sales goals before he could focus on helping clients make financial plans.

Breaking into the brokerage business is getting tougher as declining fees make small accounts less profitable and government restrictions on unsolicited calls make phone sales taboo. That’s leaving big firms struggling to replace a retiring generation of advisers who helped accumulate trillions of dollars of assets and generated steady profits for years.

“The only way you can do it is if your dad is rich and he’s got country-club buddies he can send you or you’re a psycho who can work 20 hours a day,” said Josh Brown, who helps oversee about $350 million at Fusion Analytics Investment Partners LLC in New York.

The shift to discount brokerages is happening as individual investors return to the stock market. Charles Schwab Corp. (SCHW)’s client assets rose 14 percent in the first quarter, as the Standard & Poor’s 500 Index (SPX) headed toward a record 1633.77 yesterday. That’s more than twice the 6 percent increase for Bank of America Corp. (BAC)’s wealth-management unit.

Brokers also are leaving the biggest firms to join or start smaller money-management businesses, known as registered investment advisers, that don’t take commissions. From 2009 to 2012, the ranks of investment advisers increased 7 percent while the number of brokers fell 9 percent, according Aite Group LLC, a financial-research company based in Boston.

Luis Aguilar, the SEC Commissioner I most often quote unfavourably here, was weeping and wailing about credit rating agencies today:

Although AAA-rated securities have historically had less than 1% probability of incurring defaults, over 90% of the AAA ratings given to subprime RMBS securities that originated in 2006 and 2007 were later downgraded by the NRSROs to junk status.[Footnote]

Footnote reads: Id. (Financial instruments bearing below BBB- (or Baa3) ratings are referred to as “below investment grade” or as having “junk” status). [nb: “Id.” refers to the US Senate Report

I find it very interesting to see just how carefully he chooses his words: he discusses the incidence of default of AAA securities, then discusses the downgrades-to-junk of subprime paper – and even then, only of 2006/07 cohorts.

As those familiar with the ratings of Split Share Corporations are aware, a good rule of thumb is that ratings for structured notes will be volatile, but defaults are highly mitigated by a relatively low severity of default. I continue to be fascinated by the question of just what proportion of AAA actually defaulted (broken down by cohort and security type) and what the severity of these defaults was, but I have never seen any figures … the regulators and other hand-wringers are too busy whipping up hysteria about the Evil Credit Rating Agencies to worry about picayune facts. Why is this information being suppressed by people who should know better such as SEC Commissioner Luis Aguilar?

What’s a Grecian Urn? An upgrade from Fitch!

Greece won an upgrade by one level from Fitch Ratings, which cited the country’s progress in rebalancing the economy and bringing its deficits under control.

Greece was raised to B- from CCC and given a stable outlook, according to a statement from Fitch in London today. The ratings company said there is a “semblance of political and social stability” with the government showing more ownership over its adjustment program and a lower risk of exit from the euro area.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 7bp, FixedResets down 7bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.8760 % 2,550.0
FixedFloater 3.88 % 3.10 % 32,472 18.86 1 0.3276 % 4,237.2
Floater 2.73 % 2.96 % 82,046 19.79 4 -0.8760 % 2,753.3
OpRet 4.80 % -1.18 % 69,652 0.13 5 0.1549 % 2,613.8
SplitShare 4.79 % 4.04 % 105,718 4.06 5 0.0235 % 2,969.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1549 % 2,390.1
Perpetual-Premium 5.21 % 2.74 % 90,767 0.42 31 0.0688 % 2,380.2
Perpetual-Discount 4.85 % 4.89 % 196,002 15.62 4 -0.1015 % 2,681.5
FixedReset 4.88 % 2.61 % 253,918 3.35 81 -0.0658 % 2,521.2
Deemed-Retractible 4.87 % 3.28 % 132,930 0.52 44 0.0291 % 2,460.4
Performance Highlights
Issue Index Change Notes
TRI.PR.B Floater -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-14
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.22 %
BAM.PR.B Floater -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-14
Maturity Price : 17.85
Evaluated at bid price : 17.85
Bid-YTW : 2.96 %
MFC.PR.F FixedReset 1.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 2.93 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.O FixedReset 220,975 TD crossed blocks of 100,000 and 10,000 at 26.10; Nesbitt crossed 100,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 26.07
Bid-YTW : 2.07 %
BNS.PR.A FixedReset 59,600 RBC crossed 48,400 at 26.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-13
Maturity Price : 25.50
Evaluated at bid price : 26.00
Bid-YTW : -20.90 %
PWF.PR.S Perpetual-Premium 58,150 RBC crossed 50,000 at 25.38.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 4.64 %
TRP.PR.B FixedReset 45,723 National crossed 29,000 at 24.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-14
Maturity Price : 23.50
Evaluated at bid price : 24.85
Bid-YTW : 2.61 %
PWF.PR.F Perpetual-Premium 42,200 RBC bought 12,200 from anonymous at 25.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-13
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : -9.50 %
IAG.PR.A Deemed-Retractible 38,450 National crossed 35,000 at 24.70.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.72
Bid-YTW : 4.82 %
There were 34 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRI.PR.B Floater Quote: 23.50 – 23.90
Spot Rate : 0.4000
Average : 0.2496

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-14
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.22 %

ELF.PR.H Perpetual-Premium Quote: 26.12 – 26.45
Spot Rate : 0.3300
Average : 0.1971

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 4.90 %

IGM.PR.B Perpetual-Premium Quote: 26.84 – 27.10
Spot Rate : 0.2600
Average : 0.1796

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.84
Bid-YTW : 3.78 %

PWF.PR.M FixedReset Quote: 25.60 – 25.86
Spot Rate : 0.2600
Average : 0.1923

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 2.92 %

BNS.PR.Y FixedReset Quote: 24.70 – 24.90
Spot Rate : 0.2000
Average : 0.1469

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 2.80 %

IAG.PR.G FixedReset Quote: 26.43 – 26.65
Spot Rate : 0.2200
Average : 0.1711

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.43
Bid-YTW : 2.97 %

May 13, 2013

Monday, May 13th, 2013

Bloomberg highlighted a study by A. Joseph Warburton, Deniz Anginer and Viral V. Acharya titled The End of Market Discipline? Investor Expectations of Implicit State Guarantees:

We find that bondholders of major financial institutions have an expectation that the government will shield them from losses and, as a result, they do not accurately price risk. While bond credit spreads are sensitive to risk for most financial institutions, credit spreads lack risk sensitivity for the largest institutions. This expectation of public support constitutes a subsidy to large financial institutions, allowing them to borrow at government-subsidized rates. The implicit subsidy provided large institutions an annual funding cost advantage of approximately 28 basis points on average over the 1990-2010 period, peaking at more than 120 basis points in 2009. The total value of the subsidy amounted to about $20 billion per year, topping $100 billion in 2009. Passage of Dodd-Frank did not eliminate expectations of government support. The cost of this implicit insurance could be internalized by imposing a corrective tax. Requiring financial institutions to shoulder the full cost of their debt would help create a more stable and efficient financial system.

I don’t like the taxation idea – that’s just going to lead to a hopeless mess, and there won’t be anything in the kitty when it’s needed. I have previously advocated, and continue to advocate, a progressive increase in capital requirements based on size and, perhaps, other measures of systemic importance if these can be measured objectively. Thus, a $20-billion bank might have required CET1 Capital of 8%, but at $200-billion bank might have a 10% requirement. Such a regime has the same objectives as the surcharges for G-SIBs and D-SIBs, but is less prone to regulatory corruption.

The situation with respect to Chesapeake’s junk bond redemption (that I mentioned on March 18) has been resolved:

Prices on the second-biggest U.S. natural gas producer’s notes have fallen by as much as 9 cents on the dollar, erasing $117 million, after a judge ruled May 8 that Chesapeake could redeem the securities at par. Investors including the hedge-fund firm run by former Lehman Brothers Holdings Inc. President Bart McDade were betting the Oklahoma City-based company had missed a deadline and would have to pay as much as $400 million to retire the debt early.

A search for returns has highlighted the dangers implicit in wagering on disputes in which borrowers traditionally had the upper hand after yields on junk debt dropped to a record 5.98 percent and prices soared to an unprecedented 107.2 cents on the dollar on May 9.

Any company that drafts ambiguous deal documents may receive similar legal treatment to the “get out of jail free card” that U.S. District Judge Paul Engelmayer in Manhattan handed to Chesapeake, according to Brian Gibbons Jr., an analyst at debt researcher CreditSights Inc. in New York.

“The assumption now will be that indenture readers need to be on the lookout for sections of documents where they might
need ‘time to apply thoughtfully the canons of contractual interpretations,’” Gibbons wrote in a May 8 report. “The risks
are to be laid on the bondholder for bad drafting.”

Transmission of monetary policy is – somewhat surprisingly – getting media attention after a blog post by Mark Dow:

We’re all, to varying degrees, slaves to our experiences. Their formative experiences, almost to a man, were in the early 80s. This is when they built their knowledge and assembled their financial playbooks. They learned words like Milton Freidman, money multiplier, Paul Volcker, Ronald Reagan, and the superneutrality of money. Above all, they internalized one dictum: real men have hard money.

This understanding implies that an increase in bank reserves deposited at the Fed (i.e. “printing”) eventually feeds credit growth and thereby inflationary pressures; in other words, no base money increase, no credit growth. Only one problem: reality disagrees.

From 1981 to 2006 total credit assets held by US financial institutions grew by $32.3 trillion (744%). How much do you think bank reserves at the Federal Reserve grew by over that same period? They fell by $6.5 billion.

How is that possible? I thought in a fractional reserve system base money had to grow for credit to expand?

The answer is structural. The financial deregulation that began in the early 80s (significantly, the abolition of regulation Q) and the consequent development of repo markets fundamentally changed the transmission mechanism of monetary policy. Collateral lending is now king. Today, length of collateral chains and haircut rates—neither of which are determined by the Fed—define the upper bounds of the money supply, not base money and reserve requirements.

Assiduous Readers will doubtless remember my mockery of HAMP in 2009. I just stumbled across some S&P Commentary dated 2013-4-26:

In June of last year, Standard & Poor’s Ratings Services contended that principal forgiveness was more likely to keep U.S. mortgage borrowers current than more commonly used modification tools (see “The Best Way to Limit U.S. Mortgage Redefaults May Be Principal Forgiveness,” June 15, 2012). Data gathered since then not only support this view but also demonstrate servicers’ growing adoption of this form of loss mitigation. (Watch the related CreditMatters TV segment titled, “Principal Forgiveness Remains The Best Way To Limit U.S. Mortgage Redefaults,” dated May 7, 2013.)

As of February of this year, more than 1.5 million homeowners have received a permanent modification through the U.S. federal government’s Home Affordable Modification Program (HAMP). Since the publication of our June 2012 article, there have been more than 400,000 additional modifications on outstanding mortgages (as of March 2013). This translates to roughly a 22% rate of growth in the number of modifications on an additional $2.4 billion in mortgage debt.

Under the HAMP Principal Reduction Alternative (PRA) program, which provides monetary incentives to servicers that reduce principal, borrowers have received approximately $9.6 billion in principal forgiveness as of March 2013. Interestingly, servicers have ramped up their use of principal forgiveness on loans that don’t necessarily qualify for PRA assistance. Indeed, among the top five servicers for non-agency loans, we’ve noted that principal forgiveness, as a percentage of average modifications performed on a monthly basis, has increased by about 200% since the latter half of 2011 (see Chart 1). We attribute part of this to the $25 billion settlement in February 2012 with 49 state attorneys general and these same five servicers: Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo). In fact, although principal reduction remains the least common type of loan modification among servicers, the percentage of non-agency modified loans that have received principal forgiveness has increased by 3% since June 2012 (see Chart 2). Since 2009, servicers have forgiven principal on approximately $45 billion of outstanding non-agency mortgages.

It was a modestly negative day for the Canadian preferred share market, with PerpetualPremiums down 10bp, FixedResets flat and DeemedRetractibles off 4bp. Volatility was average. Volume was below average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.2954 % 2,572.5
FixedFloater 3.89 % 3.11 % 33,575 18.84 1 0.5766 % 4,223.3
Floater 2.71 % 2.93 % 83,213 19.87 4 -0.2954 % 2,777.6
OpRet 4.81 % -0.88 % 67,362 0.13 5 -0.1083 % 2,609.8
SplitShare 4.79 % 4.10 % 105,817 4.06 5 -0.0548 % 2,968.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1083 % 2,386.4
Perpetual-Premium 5.22 % 2.29 % 91,536 0.42 31 -0.0977 % 2,378.6
Perpetual-Discount 4.85 % 4.88 % 199,117 15.64 4 0.1932 % 2,684.3
FixedReset 4.87 % 2.61 % 251,327 3.15 81 -0.0010 % 2,522.9
Deemed-Retractible 4.87 % 3.49 % 132,658 1.32 44 -0.0432 % 2,459.7
Performance Highlights
Issue Index Change Notes
HSB.PR.D Deemed-Retractible -1.77 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 4.06 %
CIU.PR.C FixedReset -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-13
Maturity Price : 23.44
Evaluated at bid price : 25.21
Bid-YTW : 2.61 %
BAM.PR.C Floater -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-13
Maturity Price : 17.81
Evaluated at bid price : 17.81
Bid-YTW : 2.97 %
MFC.PR.H FixedReset 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.81
Bid-YTW : 2.50 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.X FixedReset 72,455 RBC crossed blocks of 10,000 shares, 25,000 and 33,000, all at 26.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.21
Bid-YTW : 2.27 %
ELF.PR.H Perpetual-Premium 52,710 National crossed 32,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 4.96 %
ENB.PR.N FixedReset 46,025 Nesbitt crossed 30,000 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.34 %
PWF.PR.F Perpetual-Premium 39,950 Nesbitt crossed 24,200 at 25.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-12
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : -5.50 %
POW.PR.C Perpetual-Premium 37,608 Nesbitt crossed 23,000 at 25.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-12
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : -8.46 %
GWO.PR.R Deemed-Retractible 36,495 Fidelity Clearing Canada ULC (who?) bought 15,000 from RBC at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 4.57 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSB.PR.D Deemed-Retractible Quote: 25.52 – 25.99
Spot Rate : 0.4700
Average : 0.2938

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 4.06 %

BAM.PR.J OpRet Quote: 26.63 – 26.89
Spot Rate : 0.2600
Average : 0.1730

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.63
Bid-YTW : 3.08 %

IAG.PR.A Deemed-Retractible Quote: 24.64 – 24.88
Spot Rate : 0.2400
Average : 0.1766

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.64
Bid-YTW : 4.85 %

GWO.PR.L Deemed-Retractible Quote: 26.50 – 26.70
Spot Rate : 0.2000
Average : 0.1371

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.50
Evaluated at bid price : 26.50
Bid-YTW : 4.58 %

BAM.PR.C Floater Quote: 17.81 – 17.97
Spot Rate : 0.1600
Average : 0.1039

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-05-13
Maturity Price : 17.81
Evaluated at bid price : 17.81
Bid-YTW : 2.97 %

MFC.PR.F FixedReset Quote: 25.11 – 25.49
Spot Rate : 0.3800
Average : 0.3244

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 3.04 %

May PrefLetter Released!

Monday, May 13th, 2013

The May, 2013, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The May edition has no special appendix, but contains the usual detailed updates of the DeemedRetractible and FixedReset segments of the market.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the May, 2013, issue, while the “Next Edition” will be the May, 2013, issue, scheduled to be prepared as of the close June 14 and eMailed to subscribers prior to market-opening on May 13.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!