PrefBlog

I never get tired of mocking the salesmen who pretend to be rough-tough investment analysts. Today’s winners are Alan Roseman and Laura Schwartz, incompetents who feel that “follow the leader” is a dandy investment strategy:

Laura Schwartz, who headed ACA Management LLC’s asset management business in early 2007, testified today that Goldman and Paulson, which is run by billionaire John Paulson, led her to believe that the hedge fund wanted to invest, rather than take a short position, in a mortgage-backed security that lost $1 billion in the crash of the credit markets.
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ACA’s former chief executive officer, Alan Roseman, testified yesterday that Paulson’s long position was “critical” to ACA’s participation in Abacus. The SEC claims Tourre and Paulson misled ACA, believing the firm’s presence on the transaction would lend Abacus credibility and attract investors.

Fabulous Fab testifies today:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president facing civil fraud claims over a mortgage bond debacle that made his client $1 billion, may say when he takes the witness stand today that he’s a scapegoat who was only trying to do his best for the firm.

Tourre, now a 34-year-old graduate student, is scheduled to testify before a jury in Manhattan federal court this afternoon about his role in structuring and selling a 2007 mortgage-backed investment that lost a group of investors about $1 billion when the mortgage market crashed. It will be his first chance to make good on a promise, made before Congress in April 2010, to fight the U.S. Securities and Exchange Commission’s allegations that he “categorically” denied.

Tourre’s questioning turns out to be mostly about this stupidity, but:

On cross-examination by Tourre’s lawyer, John “Sean” Coffey, Schwartz told jurors that ACA wouldn’t have changed its standards for selecting a portfolio of mortgage-backed securities whether it was getting input from a long or a short investor. She also said she had worked on deals in which investors took both long and short positions on portfolios.

Tourre’s lawyers are trying to show that Paulson’s participation didn’t increase the risk that Abacus would fail and that it didn’t make a difference to ACA.

Well, of course it didn’t. That’s elementary. What a colossal waste of time and money this trial is.

It was another down day for the Canadian preferred share market, with PerpetualDiscounts losing 34bp, FixedResets off 11bp and DeemedRetractibles down 33bp. The lengthy Performance Highlights table is comprised entirely of losers, all but one a Straight Perpetual of some kind. Volume was high.

PerpetualDiscounts now yield 5.35%, equivalent to 6.96% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, unchanged from July 18.

Nothing happened today.

It was an off-day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 7bp and DeemedRetractibles losing 15bp. There was again a surprising amount of volatility considering the overall small movement. Volume was high.

Westcoast Energy, proud issuer of W.PR.H and W.PR.J, was confirmed at Pfd-2(low) by DBRS:

The rating confirmations reflect Westcoast’s strong business risk profile, underpinned by low-risk, fee-based, mostly regulated operations typically accounting for nearly 90% of earnings. Its financial ratios profile has also remained reasonable for the rating category.

In June 2013, DBRS placed Spectra Energy Capital, LLC (Spectra, rated BBB (high); 100% owner of Westcoast) under review with negative implications. This rating action follows the announcement that Spectra intends to drop down all of its remaining U.S. Transmission and Storage Assets to Spectra Energy Partners (SEP; a master limited partnership controlled by Spectra) by the end of 2013 (for details, refer to DBRS press release, June 12, 2013). Since DBRS rates Westcoast on a stand-alone basis, given its demonstrated independent access to Canadian debt markets and track record of maintaining a prudent financial risk profile, this rating action does not affect current ratings for Westcoast.

DBRS expects Westcoast’s significant capex program, $1 billion in 2012 and a projected $900 million for 2013, to remain elevated in the medium term, resulting in negative free cash flows and a pressuring of its credit ratios, as incremental financing will likely come from increased long-term debt issuance. While the Company’s capex program is substantial, spending is allocated to low-risk transmission, gathering and processing projects in the liquids-rich gas basins of western Canada, which will continue to support Westcoast’s relatively strong business risk profile. DBRS believes the Company will benefit over the medium to long term from strong exploration and unconventional drilling activity in western Canada, given the Company’s planned expansion projects, with long-term contractual commitments being placed into service in stages through 2014. Increasing earnings and cash flow from expansions placed in service to date have resulted in relatively strong credit ratios. Although Westcoast’s credit metrics are underpinned by mostly low-risk and regulated operations, consolidated metrics will likely continue to be pressured over the medium term as a result of its significant growth capex, but will likely remain within the parameters of the current ratings.

S&P has a different view on the independence of the Spectra and Westcoast ratings and has the issues on Credit Watch Negative.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 8bp and DeemedRetractibles gaining 2bp. Volatility was high, with a surprisingly (considering the overall market) lengthy Performance Highlights table fairly evenly split between winners and losers. Volume was low.

First, the Loblaws REIT facilitated the Shoppers’ deal:

For too long, Loblaw shares traded at a valuation discount to Shoppers that made the math of any acquisition difficult. That finally changed when Loblaw announced its intention to create a real estate investment trust last December to hold the real estate housing the company’s grocery stores.

Loblaw’s price-earnings ratio jumped from 13 times earnings to more than 15, and then soared again in recent weeks to more than 17. Shoppers, meantime, was trading in the 14-15 times earnings range, down from much higher levels a few years earlier when growth was headier. Now the transaction, with synergies, could be solidly additive to earnings per share.

Such valuation advantages can be fleeting, so Mr. Weston moved fast when the opportunity arose and Shoppers opened the door to finally consummating a transaction.

The transaction and the cheers from shareholders and analysts should cement the influence of the new guard in the Weston empire, as their push for a REIT proved the catalyst.

Weston Chief Financial Officer Richard Dufresne, a former investment banker, and Khush Dadyburjor, who runs corporate development, were among those who pushed hardest for the REIT. They were up against concern among some of the old guard inside Loblaw and its parent company, George Weston Ltd., that the REIT was simply financial engineering that would bring no real advantage for the company, according to one person familiar with the transaction.

Loblaw’s ability to finally buy one of the most coveted assets in Canadian retailing should end any doubts about the REIT, and put the dealmakers firmly in charge. (That assumes of course, that the Shoppers transaction does not turn out to be a bust.)

Now, there’s a massive REIT coming out in the States:

The initial public offering of Brixmor Property Group, the second-largest U.S. shopping center landlord, may be the biggest for a retail real estate investment trust since Simon Property Group Inc.’s IPO 20 years ago.

The sale of shares in New York-based Brixmor, a Blackstone Group LP (BX) unit, probably “will raise $700 million or more,” according to Renaissance Capital LLC, a Greenwich, Connecticut-based research firm. That would be the largest IPO by a shopping-focused REIT since Simon’s $840 million share sale in 1993, data from the National Association of Real Estate Investment Trusts show.
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Brixmor owns 522 shopping centers with 87 million square feet (8.1 million square meters) of space. The assets that form Brixmor’s core were acquired in Blackstone’s $9 billion purchase of U.S. shopping centers from Australia’s Centro Properties Group in 2011. Brixmor is second to Kimco Realty Corp. (KIM) among U.S. shopping-center landlords by number of properties.

Hmmm … looks like the little guy’s getting in ….

DBRS confirmed PDV.PR.A at Pfd-3:

On July 20, 2012, DBRS downgraded the rating of the Preferred Shares to Pfd-3 from Pfd-3 (high) due to a drop in downside protection in the months leading up to the rating action. Since then, the NAV of the Company has recovered slowly, with downside protection available to holders increasing from 37% in July 2012 to 40% in January 2013, and stabilizing at that level over the past few months. The current dividend coverage ratio is approximately 0.88 times, so income received on the Portfolio is unable to fully cover Preferred Share distributions. As a result, the rating of the Preferred Shares has been confirmed at Pfd-3.

DBRS will continue to closely monitor changes in the credit quality of the Preferred Shares and provide rating updates as required.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets down 23bp and DeemedRetractibles flat. The Performance Highlights table is fairly lengthy, with a notable contingent of losing FixedResets. Volume was enormous. Massive. Humungous.

Detroit’s gone bust:

Detroit (9845MF) became the most populous U.S. city to file for bankruptcy, seeking court protection from creditors while it tries to eliminate a budget deficit and cut long-term debt.
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Michigan’s largest city has seen its population decline to 707,000, down 7 percent since 2010, according to U.S. Census data. Median household income was less than $28,000, compared with $49,000 statewide, and more than 36 percent of residents lived in poverty as of 2011, Census data show. The median home value of $71,000 was barely half the $137,000 value statewide.

The city listed assets and debt of more than $1 billion in a Chapter 9 petition filed today in court in Detroit. Chapter 9 of the U.S. Bankruptcy Code is reserved for municipalities and differs from the rules used by bankrupt companies in Chapter 11.
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Among the biggest drains on the city’s general fund, which pays for police, fire and other basic services, are health benefits paid to 18,500 retired city workers, mostly former police and firefighters, according to Orr’s May report. Without changes, the city will pay $163 million for retiree health-care costs in the next fiscal year, which starts July 1, the report found.

The Globe has more colour:

Among the points [Michigan Governor Rick Snyder] cited:

• Citizens wait an average 58 minutes for police to respond, and just 8.7 per cent of cases are solved. “The city’s police cars, fire trucks and ambulances are so old that breakdowns make it impossible to keep up the fleet or properly carry out their roles.”
• Only one-third of the city’s ambulances were in service in the first quarter.
• Some 40 per cent of the street lights were dead in the first three months of the year.
• “Large swathes of largely abandoned structures,” some 78,000, are creating public safety problems.
• The city has more than $18-billion in financial obligations, and even if it could raise taxes, the people can’t afford to pay them.

Big news! The new regime for insurers is on its way!

Global insurers identified as too big to fail will have to hold higher reserves and draw up recovery and resolution plans to limit the economic fallout should they go bust, the industry’s watchdog said.

The International Association of Insurance Supervisors, which collected data from 50 insurers in 14 jurisdictions, including the U.S., to help the Financial Stability Board draw up a list of systemically important firms, released its assessment methodology and policy measures today. The list of insurers will be announced by the Basel, Switzerland-based FSB in coming days.
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“Since the financial crisis, supervisors across the sector have worked diligently to address risks to the global financial system from systemically important financial institutions,” Peter Braumueller, chair of the IAIS executive committee, said in a statement. “The measures and framework put forward by the IAIS today complete a major piece of this reform in a manner specifically designed for the insurance sector.”

The companies on the FSB insurer list will be included based on criteria such as size, global activity and the amount of non-insurance businesses they have. The designation of systemically important means the failure of the company could threaten the financial system.

The IAIS would impose tougher capital standards on the systemically important insurers to increase their capacity to absorb losses and require them to design recovery and resolution plans to meet cases of severe financial distress. The FSB said in June it will follow up next year with a list of too-big-to-fail reinsurers.
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The IAIS said non-traditional activities, including alternative risk transfers such as insurance-linked securities and financial guarantee insurance, as well as capital-markets businesses, banking, third-party asset management and industrial activities, are deemed the most risky and are the most important categories for assessing the systemic importance of an insurer. The firm’s interconnectedness was the next most significant consideration, the watchdog said.

The IAIS has said that traditional insurance and reinsurance are unlikely to cause or amplify systemic risk.

The list of GSIIs has been released:

Allianz SE
American International Group, Inc.
Assicurazioni Generali S.p.A.
Aviva plc
Axa S.A.
MetLife, Inc.
Ping An Insurance (Group) Company of China, Ltd.
Prudential Financial, Inc.
Prudential plc

It was a down day for the Canadian preferred share market, with PerpetualDiscounts losing 14bp, FixedResets off 1bp and DeemedRetractibles down 8bp. Volatility was low. Volume was high.

PerpetualDiscounts now yield 5.34%, equivalent to 6.94% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.6%, so the pre-tax interest-equivalent spread is now about 235bp, a small (and perhaps spurious) narrowing from the 240bp reported July 10.

Bernanke used his Monetary Policy Report to clarify his ‘tapering’ comments:

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions–which have tightened recently–were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

Industrial Alliance is buying a conglomerator:

Consistent with its strategy to beef up its asset management arm, insurer Industrial Alliance is scooping up Jovian Capital, a holding company that owns stakes in a number of small asset managers, for $94-million. The deal adds roughly $7-billion of assets to the insurer’s existing $45-billion portfolio.
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At first glance, Jovian may seem like a bit of an odd choice. The company hasn’t produced positive cash flow in the past few years, and it posted a $7.5-million loss from continuing operations in 2012.

Plus, last year some shareholders were outraged after Jovian’s management team cut themselves a $12-million compensation cheque amidst the weak performance. Shareholders wanted this cash for themselves.

Jovian is the sponsor of Jov Leon Frazer Preferred Equity fund, which has struggled since inception.

The Bank of Canada is maintaining the overnight rate at 1%:

Inflation has been low in recent months and is expected to remain subdued in the near term. The weakness in core inflation reflects persistent material excess capacity, heightened competitive pressures on retailers, relatively subdued wage increases, and some temporary sector-specific factors. Total CPI inflation has also been restrained by declining mortgage interest costs. As the economy gradually returns to full capacity and with inflation expectations well-anchored, both core and total CPI inflation are expected to return to 2 per cent around mid-2015.

Against this backdrop, the Bank has decided to maintain the target for the overnight rate at 1 per cent. As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 per cent inflation target.

TransAlta is taking drastic action:

TransAlta Corp., the worst-performing power generation stock in North America the past year, is betting a spinoff of its wind and hydroelectric power plants will increase the company’s value and help reverse two years of losses.

Canada’s largest publicly traded electricity generator gained 9.7 percent since the company said on June 26 it plans an initial public offering of some renewable energy assets. TransAlta has expanded its wind and hydro power capacity to about 25 percent from 15 percent in 2008 with developments in eastern Canada and parts of the U.S., even as power prices in its main markets of Alberta and Washington State declined.

“Investors are willing to pay more for renewables,” Jeremy Rosenfield, an analyst at Dejardins Capital Markets in Montreal, said by phone July 4.

The spinoff could help boost TransAlta’s shares to C$15.50 from C$14.54 at 4:05 p.m. in Toronto today, said Benjamin Pham, a BMO Capital Markets analyst, in a June 27 note. TransAlta’s renewable portfolio has been undervalued for years, he said.

“The structure of the spinoff is designed to permit TransAlta to retain control of its renewable energy fleet while unlocking value to the benefit of shareholders and to accelerate development and acquisition opportunities,” he said.

TransAlta is expected to raise C$200 million ($190 million) to C$250 million in the IPO when it closes in August, the company said in a statement. It will retain an 80 percent to 85 percent stake in the unit.

It hasn’t done their preferreds much good – TA.PR.D, TA.PR.F and TA.PR.H got whacked today. I have no idea why.

It looks like Parakeet Poluz has been given his script:

Stephen Poloz has spelled out what he expects to see from the economy before the Bank of Canada hikes interest rates, and the timeline appears to be a long one.

The new central bank governor sees holding the benchmark overnight rate at its current low level as long as there is significant excess capacity in the economy, the outlook for inflation remains muted, and households continue to get a better handle on their personal debts.

Also, the Conservatives have to get re-elected. That’s very important.

Interesting piece on the decline of the work ethic:

“Absenteeism is often explained around levels in workplace stress,” says Wolfgang Lehmann, a professor of sociology at the University of Western Ontario.

He partly attributes the rise in absenteeism, which has increased from 8 days lost per worker in 2000 to 9.3 days in 2011, to the stressful impact of layoffs, as well as the strain of caring for both children and elderly parents.

But that’s only part of a complex web of factors, and while it might seem obvious that sunny skies tempt workers to shirk their duties, it’s just another small piece of a puzzle that includes an employee’s gender, education level, and personal happiness.
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Regardless of occupation or demographics, two factors that drive absenteeism are good benefits and bad management, according to Howard Seiden, an expert on workplace absenteeism at the University of Toronto.

“It’s not just a gender thing, or an age thing – it’s an unhappiness thing,” Dr. Seiden says. “People who aren’t happy and don’t like their jobs look for reasons not to come to work.”

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 4bp and DeemedRetractibles down 9bp. Volatility was average – CU issues did well. Volume was high.