Archive for July, 2014

EQB.PR.A To Be Redeemed

Thursday, July 24th, 2014

Equitable Group Inc. has announced:

The Company likewise intends to redeem its currently outstanding Non-cumulative 5-year Rate Reset Preferred Shares Series 1 on September 30, 2014 in accordance with the terms of such shares.

EQB.PR.A was originally issued as ETC.PR.A, a FixedReset, 7.25%+453, announced 2009-8-17. It has not been tracked by HIMIPref™ as it does not have a credit rating.

July 23, 2014

Thursday, July 24th, 2014

The SEC has announced:

The Securities and Exchange Commission today adopted amendments to the rules that govern money market mutual funds.

The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.

With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

  • Liquidity Fees – Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions. Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund. If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions. However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.
  • Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.

SEC Chair Mary Jo White’s statement inadvertently explains why these measures won’t work:

During the last financial crisis, institutional prime money market funds experienced an unprecedented run when the Reserve Primary Fund “broke the buck” and declared it would no longer redeem investors’ shares dollar-for-dollar. In one week, investors pulled approximately $300 billion from prime money market funds, or 14 percent of the assets in those funds. This phenomenon, together with other events in the fall of 2008, caused the short-term financing markets to dry up, severely limiting the ability of companies to borrow funds, manage cash, and continue fueling the American economy. As part of a program of extraordinary support across the financial system, a temporary guarantee program was provided through Treasury to stop the run on institutional prime funds, and the Federal Reserve established liquidity facilities.

OK, so you’ve got a tense situation and suddenly BANG! A blue-chip company defaults leading to a run on the entire industry. But this run is actually worse than was experienced before, because not only are corporate treasurers worried about whether or not there will be default in the fund(s) that they own, but they will also be worried that the run itself will trigger redemption gates and fees on their fund – and you don’t put your corporate cash assets in MMFs so that you can pay fees and be subject to gates.

Ms. White counters this with the party line:

While many strongly favor this reform, others have expressed a concern that it could do harm by potentially triggering destructive “pre-emptive” runs. This concern is important, but addressing it need not — and should not — mean foregoing an important reform. What we have done in response to this concern is to make significant modifications to the original proposal that, while preserving the fundamental utility of fees and gates, mitigate the pre-emptive run risk and dampen the effects if they were to occur.

  • The recommendation, among other measures, increases the thresholds for imposing a fee or gate to a higher level of remaining liquid assets. A money market fund that imposes a fee or gate with substantial remaining internal liquidity is in a better position to bear those redemptions without a broader market impact because it can satisfy those redemption requests with cash, without selling assets, and this is less likely to generate a run in other funds.
  • The recommendation makes the imposition of a fee or gate more discretionary, rather than the result of strict triggers. The absence of such triggers make it less likely that informed investors will be able to “front run” the exercise of a fee or gate, thereby precipitating a run.
  • And the recommendation lessens the liquidity impact for investors of a fee or gate by, among other things, permitting only a short maximum gate. This change will also diminish the incentive of an investor to run in order to preserve liquidity.

Well, I guess we’ll just have to wait for the next crisis to see who’s right on this one. They come along every twenty years or so; it will give some interest to the twilight of my career. Until then I will argue that the only thing that has proved to be effective against a bank run is solvency backed up by central bank lending. And solvency in a crisis, when a certain proportion of holdings has either defaulting or is trading at stressed levels, requires capital. And these new rules ain’t got no capital.

Commissioner Kara M. Stein explained in her statement how solvency and liquidity were attained last time:

The Federal Reserve created several programs to support the liquidity of financial institutions, borrowers, and investors.[3] And the Treasury Department guaranteed nearly $2.4 trillion in money market fund assets through its Temporary Guarantee Program.[4]

[3] See, e.g., Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIF), and the Term Asset-Backed Securities Loan Facility (TALF). For descriptions of these programs, see http://www.federalreserve.gov/newsevents/reform_cpff.htm (reflecting $739 billion in CPFF loans and $738 billion in purchases of commercial paper), http://www.federalreserve.gov/newsevents/reform_amlf.htm (reflecting $217 billion in AMLF loans), http://www.federalreserve.gov/newsevents/reform_mmiff.htm (reflecting $0 in total loans as the MMIF facility was never used), and http://www.federalreserve.gov/newsevents/reform_talf.htm (reflecting $71.1 billion in TALF loans).

[4] See Press Release, Treasury Announces Temporary Guarantee Program for Money Market Funds (Sept. 29, 2008), available at http://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx.

Footnote [3] addresses liquidity, is an entirely normal feature of central bank crisis management and requires no apology or correction. Footnote [4] addresses solvency, is an unpleasant and unwelcome crisis measure by the government and reflects a situation that certainly should be corrected with new procedures and attitudes, but which is unaddressed by the new rules.

However, Ms. Stein makes some effort to redeem herself (at par):

However, after careful study, I am concerned that gates are the wrong tool to address this risk. As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital. More importantly, a run in one fund could incite a system-wide run because investors in other funds likely will fear that they also will impose gates. I share the concerns of many commenters and economists that while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole.[7]

Even further, while a run by investors in one fund may be halted when the gate for that fund is used, that does not mean the impact on the wholesale funding markets will stop. To the contrary, a fund that drops a gate likely would need to build liquidity to meet redemption requests when the gate is lifted. This means the fund is likely to stop re-investing maturing securities during the gated period, or will invest primarily in government securities, thereby cutting off funding to issuers. This effect could be amplified by investors, who likely will redeem assets from other funds if one fund imposes a gate. And if investors are not able to redeem before the gate comes down, they will be harmed as they are deprived of access to their capital.[8] Ultimately, this contagion could freeze the wholesale funding markets in much the same way as occurred during the recent financial crisis.

[7] See, e.g., Comment Letters from the Federal Reserve Bank of Boston (Sept. 12, 2013), The Systemic Risk Council (Sept. 16, 2013), Samuel Hanson, David Scharfstein, and Adi Sunderman (Sept. 16, 2013), Goldman Sachs Asset Management (Sept. 17, 2013 and July 21, 2014), Deutsche Investment Management Americas (Sept. 17, 2013), Committee on Capital Markets Regulation (Sept. 17, 2013), The Squam Lake Group (Sept. 17, 2013), and Americans for Financial Reform (Sept. 17, 2013). See also Federal Reserve Bank of New York, Staff Report No. 670, Gates, Fees, and Preemptive Runs (Apr. 2014).

See Kevin McCoy, Primary Fund Shareholders Put in a Bind, USA Today, Nov. 11, 2008 (discussing hardships faced by Reserve Primary Fund shareholders due to having their shareholdings frozen); John G. Taft, STEWARDSHIP: LESSONS LEARNED FROM THE LOST CULTURE OF WALL STREET (2012), at 2 (“Now that the Reserve Primary Fund had suspended redemptions of Fund shares for cash, our clients had no access to their cash. This meant, in many cases, that they had no way to settle pending securities purchases and therefore no way to trade their portfolios at a time of historic market volatility. No way to make minimum required distributions from retirement plans. No way to pay property taxes. No way to pay college tuition. It meant bounced checks and, for retirees, interruption of the cash flow distributions they were counting on to pay their day-to-day living expenses.”).

… and I will award Ms. Stein full marks for:

I also am not sufficiently persuaded by the argument that many investors with a low tolerance for gates will seek alternative financial products that are better aligned with their risk-return preferences. While this could happen, it seems just as likely that those same investors will continue to invest in money market funds because they believe they will be able to redeem before a gate is imposed, or that sponsor support will prevent the gate from ever being used. While the rule requires disclosure of sponsor support, it unfortunately does little to address the moral hazard that is created by it.

In addition to which, Ms. Stein is a whole lot younger and better looking than the average SEC commissioner. I wonder if she’s married, and if she’d like to meet a nice Canadian preferred share specialist.

Commissioner Michael S. Piwowar makes an argument I don’t buy:

As a threshold matter, there is no evidence that money market funds themselves pose any threat to the stability of the U.S. financial system. Rather, if there were any systemic risk related to the money markets, it would be over-reliance by financial institutions, particularly banks, on the money markets for short-term funding. In fact, it has been argued that the reason Treasury instituted the guarantee program in 2008 was to reduce financial pressure on banks that had guaranteed the commercial paper of off-balance sheet conduits established by the banks with the approval of the Federal Reserve.[5] As I have said before, if the banking regulators are concerned by banks’ over-reliance on short-term funding from money market funds, then they have the authority to address this bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed this authority.

[5] See Peter Wallison, Money Market Funds Were a Victim, Not a Cause, Of the Financial Crisis (May 2, 2014) available at [LINK]

Wallison’s linked article states:

It was always a bit implausible that Treasury would set up an insurance system just to protect the shareholders of MMFs against what many were calling a “run.” What interest could Treasury possibly have in whether MMF shareholders suffer losses?

But there’s another and more plausible reason for what Treasury did. By the mid-2000s, MMFs were a major financing source for $1.3 trillion in commercial paper that had been issued by off-balance sheet entities established and guaranteed by the largest U.S. banks. These entities, known as asset backed commercial paper conduits (ABCP conduits) had been set up with the approval of the Fed and had invested in prime and subprime mortgage-backed securities. Supporting long term assets like mortgages with short term commercial paper is profitable, but risky. If the mortgages begin to lose value, the financing sources may not roll over, and what would the banks do then?

These facts provide a completely different perspective than the conventional view of the of the Treasury’s action. It was not to save the shareholders of the MMFs — there was literally no reason for the Treasury to do that — but to ease the financial pressures on the banks that had guaranteed the commercial paper of their off-balance sheet conduits. It follows that in any future crisis — unless the banks are again allowed by the Fed to establish ABCP conduits — there is no likelihood that the Treasury will seek to use taxpayer funds to protect the shareholders of MMFs, even if one or more of those MMFs break the buck.

I don’t buy it. There’s been considerable commentary – reported at various times on PrefBlog, like f’rinstance in the post BIS Releases March 2009 Quarterly Review – that it was the European banks that were put at risk by a US MMF collapse, which in turn could have fed into global systemic collapse; or, if not collapse, then perhaps something even worse than what actually happened. So let’s just ignore Piwowar and his threshold matters.

And even PrefBlog’s favourite whipping boy, Commissioner Luis A. Aguilar, had a useful link, although I can’t say he actually proved his point:

Some observers, including staff at the Federal Reserve Bank of New York, have suggested the possibility that fees and gates may themselves cause pre-emptive runs, by encouraging investors to redeem their shares before fees and gates are imposed.[29] However, as discussed at length in today’s release, the Federal Reserve staff’s conclusion that fees and gates may cause pre-emptive runs is based on a model whose assumptions and features are different than the reforms we are adopting today.[30] Accordingly, as noted in the release, the Federal Reserve paper’s findings regarding the risks of pre-emptive redemptions are not likely to apply.[31]

[29] See, e.g., Federal Reserve Bank of New York Staff Report, Gates, Fees, and Preemptive Runs (Apr. 2014), available at http://www.newyorkfed.org/research/staff_reports/sr670.html.

[30] Id. For example, the Federal Reserve Bank of New York Staff Report relies upon a model that assumes that fees or gates are imposed only when a fund’s liquid assets are fully depleted. In contrast, under today’s reforms, fees or gates may be imposed while the fund still has substantial liquid assets, and thus investors may be dissuaded from pre-emptively redeeming from funds with substantial internal liquidity because the fund is more likely to be able to readily satisfy redemptions without adversely impacting the fund’s pricing. Adopting Release, supra note 1, at 63-66. Another important difference is that our reforms include a floating NAV for a significant portion of money market funds, which may have the effect of altering the behavior of investors under a model that took such a combination of effects into account. Id. at 65. Another significant difference is that our reforms include a floating NAV for institutional prime money market funds, which constitute a sizeable portion of all money market funds, but the model assumes a stable NAV. The floating NAV requirement may encourage those investors who are least able to bear risk of loss to redirect their investments to other investment opportunities (e.g., government money market funds), and this may have the secondary effect of removing from the funds those investors most prone to redeem should a liquidity event occur for which fees or gates could be imposed.

[31] Adopting Release, supra note 1, at 65-66.

Isn’t the US system great? You never see anything like this in Canadian regulatory discussion. The banks wouldn’t approve.

There has been a mass rebranding of the DEX bond indices to FTSE TMX Canada bond indices.

Has anyone here ever seen anything like this? Concrete paviors with a 3:1 plan ratio. I took this picture on Yorkville Avenue between Yonge and Bay.

All the stuff I can find on the internet merely talks about the aspect ratio – that is, the longest dimension divided by the vertical length, what I would call the depth, but what they call the thickness, noting only that 3:1 or less is required for vehicular traffic.

All I can find regarding the plan ratio simply notes that 2:1 or 3:1 can be set in an interlocking herringbone pattern … fine, but why not a 4:1 plan ratio? Would that make the aspect ratio silly, or unsafe, or uneconomic, or what? Certainly if a plan ratio of 4:1 was to be used for vehicular traffic, and therefore requiring a maximum 3:1 aspect ratio, then the depth would be greater than width and the installers would feel pretty silly. But are there other reasons?

And are there any advantages or disadvantages to a 3:1 plan ratio relative to a 2:1 plan ratio?

2014-07-23 18.00.19
Click for Big

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 10bp and both FixedResets and DeemedRetractibles gaining 7bp. Volatility was anemic. Volume was average.

PerpetualDiscounts now yield 5.09%, equivalent to 6.62% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread is now about 240bp, unchanged from July 9.

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 3.07 % 3.06 % 19,911 19.52 1 0.0000 % 2,584.9
FixedFloater 4.19 % 3.41 % 30,232 18.61 1 1.4752 % 4,145.6
Floater 2.85 % 2.94 % 46,485 19.87 4 0.3412 % 2,785.5
OpRet 4.00 % -9.33 % 80,344 0.08 1 0.0000 % 2,733.9
SplitShare 4.25 % 4.00 % 48,216 4.01 6 0.1197 % 3,120.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,499.9
Perpetual-Premium 5.52 % -4.81 % 83,982 0.09 17 -0.0139 % 2,429.9
Perpetual-Discount 5.23 % 5.09 % 109,792 15.21 20 0.0958 % 2,584.9
FixedReset 4.40 % 3.59 % 203,446 8.57 77 0.0702 % 2,559.6
Deemed-Retractible 4.98 % -0.29 % 123,904 0.09 43 0.0713 % 2,554.3
FloatingReset 2.66 % 2.12 % 95,384 3.82 6 -0.1834 % 2,520.8
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset 1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.29
Bid-YTW : 4.00 %
BAM.PR.G FixedFloater 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 22.78
Evaluated at bid price : 22.70
Bid-YTW : 3.41 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.A FixedReset 97,601 RBC crossed 25,000 at 25.36. Nesbitt bought 10,000 from TD at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 23.24
Evaluated at bid price : 25.30
Bid-YTW : 3.61 %
ENB.PF.E FixedReset 57,200 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 23.10
Evaluated at bid price : 24.97
Bid-YTW : 4.11 %
GWO.PR.P Deemed-Retractible 53,510 TD crossed 50,000 at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.72
Bid-YTW : 5.07 %
BNS.PR.Q FixedReset 47,000 RBC crossed 29,900 at 25.45. Desjardins crossed 15,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.43
Bid-YTW : 3.17 %
PVS.PR.D SplitShare 35,234 Recent new issue and ticker change.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 4.95 %
BNS.PR.P FixedReset 33,400 RBC crossed 30,000 at 25.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 2.83 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.G FixedFloater Quote: 22.70 – 23.70
Spot Rate : 1.0000
Average : 0.6944

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 22.78
Evaluated at bid price : 22.70
Bid-YTW : 3.41 %

FTS.PR.F Perpetual-Discount Quote: 24.52 – 24.82
Spot Rate : 0.3000
Average : 0.2092

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 24.23
Evaluated at bid price : 24.52
Bid-YTW : 5.06 %

FTS.PR.H FixedReset Quote: 21.45 – 21.82
Spot Rate : 0.3700
Average : 0.2874

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 21.45
Evaluated at bid price : 21.45
Bid-YTW : 3.51 %

GWO.PR.H Deemed-Retractible Quote: 24.10 – 24.40
Spot Rate : 0.3000
Average : 0.2263

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.37 %

PWF.PR.G Perpetual-Premium Quote: 25.40 – 25.58
Spot Rate : 0.1800
Average : 0.1132

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-22
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : -14.46 %

IFC.PR.C FixedReset Quote: 25.77 – 25.94
Spot Rate : 0.1700
Average : 0.1103

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 2.88 %

BCE Exchange Offer for BAF Preferreds

Wednesday, July 23rd, 2014

BCE Inc. has announced:

that BCE will privatize Bell Aliant by acquiring the interest of its affiliate’s public minority shareholders, while supporting Bell Aliant’s ongoing growth and competitiveness with significant investments in Atlantic Canada infrastructure and employment.

BCE expects the privatization transaction to be completed by November 30, 2014, subject to more than 50% of Bell Aliant common shares held by public minority shareholders being tendered to the offer, notification under the Competition Act, and other conditions set forth in the support agreement, a copy of which is available under Bell Aliant’s SEDAR profile at www.sedar.com. CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant, and no transfers of wireless spectrum licences.

BCE will also offer holders of preferred shares of Bell Aliant Preferred Equity Inc. (Prefco) the opportunity to exchange their Prefco preferred shares for BCE preferred shares with the same financial terms as the existing Prefco preferred shares, subject to terms and conditions of the offer. Completion of the Bell Aliant privatization is not conditional upon completion of the preferred share exchange.

The Special Committee of the independent directors of Prefco has unanimously determined that the preferred share offer is fair to preferred shareholders and, on the Special Committee’s recommendation, the Board of Directors of Prefco is recommending that shareholders accept the offer and tender their preferred shares. The Special Committee has received an opinion from Scotia Capital that, subject to the assumptions, limitations and qualifications set out in such opinion, the consideration to be received pursuant to the BCE preferred shares offer is fair from a financial point of view to the preferred shareholders. Completion of the preferred share exchange offer is conditional upon completion of the common share offer, holders of at least two-thirds of the outstanding preferred shares tendering their preferred shares to the offer, and the other conditions set forth in the support agreement.

The offers are expected to be commenced in mid-August and to expire in the second half of September. Tender offer circulars containing the full details of the common share offer and the preferred share offer (together with directors’ circulars for each offer) and other related documents setting forth full details of the terms and conditions of the offers will be mailed to shareholders.

It is not clear to me just what the position of untendered BAF preferred shares will be, in terms of the corporate structure, but will await shareholder documents.

Affected issues are:

These issues will be nicely complementary to BCE.PR.K, A FixedReset, 4.15%+188, which commenced trading July 5, 2011 with a ridiculous re-opening 2011-12-12.

DBRS has confirmed BCE at Pfd-3(high):

Following the transaction, DBRS expects Bell Aliant to be transferred to Bell Canada from BCE. As such, DBRS expects Bell Canada’s 2014 year-end gross debt-to-EBITDA to be approximately 2.35 times (x) versus DBRS’s previous expectation of approximately 2.10x. In its rating report dated April 7, 2014, DBRS stated that it expects Bell Canada to reduce its gross debt-to-EBITDA ratio to below 2.0x by mid-2015 and that failure by the Company to deleverage as expected could result in a negative rating action. DBRS is now more comfortable with a gross debt-to-EBITDA ratio of slightly above 2.0x over the medium term given the benefits to the business risk profile of the combined entity, the Company’s strong coverage ratios and its solid operating performance.

Going forward, the Company intends to deleverage through growth in operating income and the application of free cash flow toward debt reduction toward 2.0x over the next two to three years. This could be accelerated with the use of a dividend reinvestment plan funded by treasury stock issuance. Weaker-than-expected operating performance and/or failure to deleverage in the expected time frame could result in pressure on the ratings.

DBRS expects the transaction to be completed in November 2014. DBRS notes that the CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant and no transfers of wireless spectrum licenses. DBRS will re-evaluate its ratings confirmation if there is an increase in BCE’s offer price and/or a change in the terms of financing.

DBRS has placed BAF Under Review with Positive Implications:

DBRS has today placed the ratings of Bell Aliant Regional Communications, Limited Partnership’s (Bell Aliant) Under Review with Positive Implications following BCE Inc.’s tender offer to acquire the minority interest in Bell Aliant for $3.95 billion (BCE Inc./Bell Canada currently own 44.1% of Bell Aliant).

As part of the transaction, BCE Inc. will assume Bell Aliant’s $2.89 billion net debt and $618 million preferred shares. The Positive Implications of the Under Review status reflect the stronger credit profile of BCE Inc./Bell Canada. DBRS will proceed with its review as more information about the form and final structure of the transaction becomes available.

Similarly, S&P’s rating of BCE is unaffected at P-2(low):

Standard & Poor’s Ratings Services today said that its ratings and outlook on Montreal-based diversified telecom and media service provider BCE Inc. (BBB+/Stable/–) and its related entities are not affected by the company’s tender offer to acquire the remaining (55.9%) minority interest float in Bell Aliant Inc. for approximately C$3.95 billion. BCE plans to fund the transaction with about C$2.95 billion of BCE Inc. common shares and about C$1 billion of debt.

And S&P’s rating of BAF is on CreditWatch Positive:

  • •Montreal-based BCE Inc. has announced a tender offer to acquire the remaining minority interest float in Atlantic-Canada based Bell Aliant Inc.
  • •BCE will fund the C$3.95 billion purchase with about C$2.95 billion of
    equity and about C$1 billion of debt.

  • •As a result, we are placing our long-term ratings on Bell Aliant and its related entities, including our ‘BBB’ corporate credit rating on the company, on CreditWatch with positive implications.


We expect to rate any Bell Aliant debt that remains after the acquisition on a consolidated basis with BCE — the ratings on which are unchanged following this announcement …. The transaction is subject to support from more than 50% of Bell Aliant’s minority shareholders as well as approval from the Competition Bureau of Canada, and we expect it to close in fourth-quarter 2014 following these approvals.

Update, 2014-8-15: DBRS has assigned a provisional rating of Pfd-3(high) to the proposed new preferreds:

DBRS has today assigned a provisional rating of Pfd-3 (high) to BCE Inc.’s (BCE) proposed Series AM, Series AO and Series AQ Preferred Share Issuance. As part of BCE’s tender offer to acquire the minority interest in Bell Aliant Inc., BCE has offered to exchange all of the issued and outstanding Series A Preferred Shares, Series C Preferred Shares and Series E Preferred Shares at Bell Aliant Preferred Equity Inc. (Bell Aliant) on the basis of (a) one BCE Series AM Preferred Share for each Series A Preferred Share, (b) one BCE Series AO Preferred Share for each Series C Preferred Share and (c) one BCE Series AQ Preferred Share for each Series E Preferred Share. The assignment of final ratings is subject to the completion of the preferred share exchange as indicated above.

The following ratings are based on BCE’s Take Over Bid Circular and Offer and information provided to DBRS as of August 14, 2014.
— Series AM Preferred Shares rated Pfd-3 (high), Stable trend
— Series AO Preferred Shares rated Pfd-3 (high), Stable trend
— Series AQ Preferred Shares rated Pfd-3 (high), Stable trend

BCE expects to issue 11,500,000 Offeror Series AM Preferred Shares, 4,600,000 Offeror Series AO Preferred Shares and 9,200,000 Offeror Series AQ Preferred Shares, assuming that all of the Bell Aliant Preferred Shares are acquired upon completion of the offer and any compulsory acquisition or subsequent acquisition transaction.

The newly issued BCE Preferred Shares will have the same financial terms (including, without limitation, the dividend rate) as Bell Aliant’s existing Preferred Shares. These newly issued BCE Preferred Shares will rank equally with other BCE First Preferred Shares that may be outstanding in the event of an insolvency or winding up of BCE. If BCE becomes insolvent or is wound up, BCE’s assets must be used to pay debt, including inter-company debt, before payments may be made on BCE Preferred Shares, BCE Converted Preferred Shares and other preferred shares. Please refer to BCE’s Take Over Bid Circular and Offer for further details.

July 22, 2014

Tuesday, July 22nd, 2014

There are musings about a possible drop in Canadian policy rates:

The Bank of Canada says it’s just going with the flow: If economic data in the months ahead get stronger than currently expected, it will ready for higher interest rates; if economic conditions unexpectedly worsen, the central bank says it is prepared to cut its benchmark interest rate from its already ultra-low setting of 1 per cent. For now, the central bank is totally neutral.

Craig Alexander, chief economist at Toronto-Dominion Bank, doesn’t really believe it. His latest commentary is inspired by a question about whether the central bank really could surprise and cut interest rates. Mr. Alexander politely considers the question, saying the possibility “is not ridiculous given some of the recent economic developments.” Then he goes about demolishing the idea almost entirely.

Mr. Alexander’s report sets the backdrop:

The Bank of Canada has been on hold for an unprecedented 45 months, and TD Economics expects the overnight rate to remain unchanged for at least another year. Futures markets are in agreement, as they anticipate the next move in rates will be a hike, but not until the fourth quarter of 2015. This consensus view is predicated on the belief that the economy will deliver only moderate growth, gradually eating up the available economic slack and closing the output gap in early 2016. The economic backdrop augurs that inflation will remain close to the Bank’s 2% target, implying no rush to reduce the degree of monetary stimulus, but also no need to lower rates.

There’s not much action in the US bond market:

Trading in U.S. government bonds has dropped 25 percent in the past few weeks from the comparable period last year, according to Federal Reserve data. Investment-grade (NTMBIV) and junk-bond trading have plunged 17 percent and 8 percent, respectively, since the end of the second quarter, according to Financial Industry Regulatory Authority data.

This means that, for one, it’s harder for investors to shuffle their portfolios even if they want to because there are fewer people out there looking to sell or buy. And, two, this eats into bond dealers’ already waning trading revenues.

Adding to the summer doldrums is a declining volume of corporate-debt sales. Companies have sold an average $22.7 billion of dollar-denominated bonds each week this month, compared with an average $36.2 billion per week in June, according to data compiled by Bloomberg. Investors typically transact more frequently in bonds that have been sold within the prior few months.

How much of this is economics and how much is regulation? What are the implications for capital markets if liquidity remains low for an extended period? Does anybody know? Does anybody care?

Meanwhile, there is politics being played with the Jackson Hole guest list:

As the Federal Reserve Bank of Kansas City prepares to host next month’s annual gathering of central bankers in Wyoming, seasoned Fed watchers from the financial markets, including the chief U.S. economists of the biggest American banks, aren’t being invited, according to past participants.

The exclusion of Wall Street may reflect a dispute between some regional Fed bank presidents who are more worried by loose monetary policy than Fed governors in Washington including Yellen, said Pippa Malmgren, founder of DRPM Group in London and another frequent delegate who won’t be attending this year.

“I fully support disinviting the chief economists of the largest beneficiaries of quantitative easing,” Malmgren said, referring to the Fed’s program of monthly bond purchases, which is on course to end this year.

“This weakens the support for the Yellen camp and gives her opponents more chance to make their case” during the meeting, said Malmgren, a former adviser to U.S. President George W. Bush.

It seems very odd to me that the Fed isn’t inviting its best salesmen to their trade show.

I moaned yesterday about an incomprehensible tax dodge being controversially used by Renaissance Capital. Matt Levine explains it.

DBRS has confirmed W.PR.H and W.PR.J at Pfd-2(low):

Westcoast is expected to continue its significant expansion projects in the medium term to take advantage of the strong exploration and unconventional drilling activity in Western Canada. The Company invested $946 million in capex in 2013, including $528 million of expansion capital, with an additional $950 million in capex planned for 2014. Increasing earnings and cash flow from expansions placed into service to date have resulted in relatively strong credit ratios. Although a major portion of capital spending is expected to be funded through the Company’s operating cash flow, incremental financing is likely from increased long-term debt issuance. While the capex program is substantial, spending is allocated to low-risk gathering and processing (G&P) and pipeline segments, and underpinned by long-term contractual commitments, which will continue to support Westcoast’s relatively strong business risk profile. DBRS expects the Company to fund its capital expenditure prudently and maintain credit metrics in line with the current rating category.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets down 22bp and DeemedRetractibles off 6bp. Volatility was average. Volume was quite high, probably due to portfolio shuffling after the new issue announcements from BMO, FixedReset, 3.80%+222 and TD, FixedReset, 3.80%+227.

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 3.07 % 3.06 % 20,715 19.53 1 0.4115 % 2,584.9
FixedFloater 4.25 % 3.47 % 29,444 18.50 1 -1.8860 % 4,085.3
Floater 2.85 % 2.94 % 46,229 19.89 4 -0.2709 % 2,776.0
OpRet 4.00 % -9.46 % 81,590 0.08 1 0.4704 % 2,733.9
SplitShare 4.26 % 3.99 % 44,640 4.02 6 0.0000 % 3,116.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.4704 % 2,499.9
Perpetual-Premium 5.52 % -3.41 % 84,586 0.08 17 -0.0193 % 2,430.2
Perpetual-Discount 5.23 % 5.15 % 110,342 15.21 20 0.0043 % 2,582.5
FixedReset 4.40 % 3.59 % 201,271 8.57 77 -0.2235 % 2,557.8
Deemed-Retractible 4.98 % -1.15 % 124,714 0.09 43 -0.0572 % 2,552.4
FloatingReset 2.65 % 0.72 % 98,833 0.16 6 -0.1308 % 2,525.4
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset -2.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.13 %
BAM.PR.G FixedFloater -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 22.54
Evaluated at bid price : 22.37
Bid-YTW : 3.47 %
ENB.PR.Y FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 22.78
Evaluated at bid price : 24.02
Bid-YTW : 4.01 %
CIU.PR.C FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 21.64
Evaluated at bid price : 22.06
Bid-YTW : 3.31 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.S FixedReset 427,622 RBC bought 13,300 from anonymous at 25.73. Desjardins crossed 85,000 at 25.75. Nesbitt crossed 50,000 at 25.75; Scotia crossed 200,000 at 25.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.36
Evaluated at bid price : 25.62
Bid-YTW : 3.66 %
CM.PR.K FixedReset 327,845 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.67 %
CM.PR.O FixedReset 161,825 Scotia crossed 20,000 at 25.48. Desjardins crossed 30,000 at 25.50. RBC crossed 50,000 at 25.50 and 13,400 at 25.46.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.29
Evaluated at bid price : 25.40
Bid-YTW : 3.65 %
TD.PR.Y FixedReset 143,000 TD crossed 69,700 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 3.15 %
TD.PR.I FixedReset 126,172 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.62 %
ENB.PF.E FixedReset 103,688 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.10
Evaluated at bid price : 24.96
Bid-YTW : 4.11 %
CM.PR.M FixedReset 101,649 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.83 %
There were 44 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.I Perpetual-Premium Quote: 25.37 – 25.60
Spot Rate : 0.2300
Average : 0.1518

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-21
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : -13.24 %

GWO.PR.P Deemed-Retractible Quote: 25.65 – 25.89
Spot Rate : 0.2400
Average : 0.1619

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.65
Bid-YTW : 5.12 %

RY.PR.T FixedReset Quote: 24.97 – 25.19
Spot Rate : 0.2200
Average : 0.1430

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 1.33 %

CM.PR.G Perpetual-Premium Quote: 25.46 – 25.72
Spot Rate : 0.2600
Average : 0.1837

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-21
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : -17.44 %

MFC.PR.F FixedReset Quote: 23.02 – 23.41
Spot Rate : 0.3900
Average : 0.3188

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.13 %

GWO.PR.Q Deemed-Retractible Quote: 24.85 – 25.05
Spot Rate : 0.2000
Average : 0.1289

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 5.30 %

New Issue: TD FixedReset, 3.80%+227, NVCC Compliant

Tuesday, July 22nd, 2014

The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 3 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 3 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 3 Shares will yield 3.80% annually, payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending July 31, 2019. Thereafter, the dividend rate will reset every five years at a level of 2.27% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on July 31, 2019 and on July 31 every 5 years thereafter, TD may redeem the Series 3 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption, holders of the Series 3 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares”), subject to certain conditions, on July 31, 2019, and on July 31 every five years thereafter. Holders of the Series 4 Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury bill yield plus 2.27%.

The expected closing date is July 31, 2014. TD will make an application to list the Series 3 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

Later, they added:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”), the size of the offering has been increased to 20 million Series 3 Shares. The gross proceeds of the offering will now be $500 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is July 31, 2014. TD will make an application to list the Series 3 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

ImpliedVolatility_TD_FR_140722
Click for Big

It is difficult to come to any conclusions regarding the Implied Volatility. The two issues with the highest Issue Reset Spreads, TD.PR.I and TD.PR.K, have been called for redemption and otherwise the issues available for calculation are not well distributed – the low-spread issues are not NVCC-compliant, while the higher-spread issues are.

New Issue: BMO FixedReset, 3.80%+222, NVCC Compliant

Tuesday, July 22nd, 2014

Bank of Montreal has announced:

a Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 31 (the “Preferred Shares Series 31”). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets.

The Preferred Shares Series 31 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending November 25, 2019, as and when declared by the board of directors of the Bank, payable in the amount of $0.2375 per share, to yield 3.80 per cent annually.

Subject to regulatory approval, on or after November 25, 2019, the Bank may redeem the Preferred Shares Series 31 in whole or in part at par. On November 25, 2019, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.22 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 31 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 32 (“Preferred Shares Series 32”) on November 25, 2019, and on November 25 of every fifth year thereafter. Holders of the Preferred Shares Series 32 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 2.22 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 32 into an equal number of Preferred Shares Series 31 on November 25, 2024, and on November 25 of every fifth year thereafter.

The anticipated closing date is July 30, 2014. The net proceeds from the offering will be used by the Bank for general corporate purposes.

The Implied Volatility calculation for BMO FixedResets is very interesting – it appears that the slope of the three NVCC-compliant issues is much less than the 40% calculation that is obtained when all issues, including those which are not NVCC-compliant and therefore virtually certain to be called on one of the next two possible dates – are thrown into the mix.

ImpliedVolatility_BMO_FR_140722
Click for Big

Of course, the range of Issue Reset Spreads for the NVCC compliant issues is very small, and the issue price has been used for the new issue calculations, so one cannot draw many conclusions just yet, but … we will see!

July 21, 2014

Monday, July 21st, 2014

Matt Levine of Bloomberg has some sensible things to say about institutions victimized by evil derivatives:

This is a general rule to keep in mind when reading about governments and companies that were victimized by swaps that they didn’t understand: Governments and companies don’t understand anything. Governments and companies don’t have brains. Governments and companies do have human agents, and those human agents have brains, and they are capable of understanding many things. Different agents might or might not be capable of understanding the particular formulas at issue here. But most agents are capable of understanding (1) that getting a low low teaser rate now probably means paying a high high rate later, (2) that there are ways of saying that that don’t sound like that, (3) that their interests and the interests of the government or company they work for are not perfectly aligned, and (4) that those interests are likely to drift further apart over time.

A story about an incomprehensible tax dodge is noteworthy for two things:

Executives from Renaissance, founded by billionaire mathematician James Simons, are scheduled to testify about the transactions tomorrow in Washington, as are representatives of Barclays and Deutsche Bank.

Renaissance, based in East Setauket, New York, compiled one of the best records in investing history by using advanced mathematics and computer algorithms to identify mispriced securities. Its Medallion fund, open almost exclusively to Renaissance employees, returned more than 35 percent annualized over more than two decades.

“billionaire mathematician”. You don’t hear those two words together very often! The other point is that they’ve been able to do so well – outperformance is entirely possible for those who know what they’re doing.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 5bp and DeemedRetractibles winning 10bp. Volatility was almost non-existent. Volume was extremely 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 3.09 % 3.07 % 20,709 19.50 1 0.0000 % 2,574.3
FixedFloater 4.17 % 3.40 % 28,801 18.65 1 -0.0876 % 4,163.9
Floater 2.84 % 2.92 % 45,010 19.92 4 -0.2162 % 2,783.5
OpRet 4.02 % -4.07 % 78,744 0.08 1 -0.0783 % 2,721.1
SplitShare 4.26 % 3.95 % 44,048 4.02 6 0.3336 % 3,116.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0783 % 2,488.2
Perpetual-Premium 5.52 % -5.34 % 82,168 0.09 17 0.0300 % 2,430.7
Perpetual-Discount 5.23 % 5.13 % 111,916 15.24 20 0.0703 % 2,582.4
FixedReset 4.38 % 3.54 % 200,305 6.57 77 0.0522 % 2,563.5
Deemed-Retractible 4.97 % 0.36 % 123,261 0.10 43 0.1027 % 2,553.9
FloatingReset 2.65 % 0.72 % 98,280 0.16 6 0.0131 % 2,528.7
Performance Highlights
Issue Index Change Notes
PVS.PR.B SplitShare 1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 4.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.K FixedReset 203,248 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.48 %
ENB.PF.E FixedReset 104,420 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 4.11 %
BMO.PR.S FixedReset 84,556 Nesbitt crossed 25,000 at 25.76; RBC bought 10,000 from Scotia at 25.79.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 3.27 %
TD.PF.A FixedReset 74,550 Desjardins crossed 58,600 at 25.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.30
Evaluated at bid price : 25.50
Bid-YTW : 3.56 %
CM.PR.K FixedReset 65,000 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.66 %
ENB.PF.C FixedReset 54,685 TD crossed 10,000 at 25.12.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.17
Evaluated at bid price : 25.15
Bid-YTW : 4.09 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 21.80 – 22.51
Spot Rate : 0.7100
Average : 0.5664

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 21.45
Evaluated at bid price : 21.80
Bid-YTW : 3.35 %

IAG.PR.F Deemed-Retractible Quote: 26.02 – 26.41
Spot Rate : 0.3900
Average : 0.2665

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 26.02
Bid-YTW : 5.07 %

BAM.PR.E Ratchet Quote: 24.30 – 24.60
Spot Rate : 0.3000
Average : 0.2191

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 23.86
Evaluated at bid price : 24.30
Bid-YTW : 3.07 %

PWF.PR.A Floater Quote: 20.00 – 20.30
Spot Rate : 0.3000
Average : 0.2266

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.65 %

BAM.PR.M Perpetual-Discount Quote: 21.36 – 21.51
Spot Rate : 0.1500
Average : 0.0903

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-21
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 5.62 %

IAG.PR.A Deemed-Retractible Quote: 23.14 – 23.47
Spot Rate : 0.3300
Average : 0.2736

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.14
Bid-YTW : 5.61 %

July 18, 2014

Saturday, July 19th, 2014

It seems that the Canadian economy is picking up a bit:

Consumers are still driving growth in Canada’s economy, with indicators showing faster inflation led by higher food and clothing costs and increased auto wholesales adding to recent housing-market strength.

The consumer price index quickened to a two-year high of 2.4 percent in June, and a 13.3 percent jump in automobile receipts led a 2.2 percent rise in wholesale sales, according to reports today from Ottawa-based Statistics Canada. A July 15 realtor report showed home resales reached a four-year high with prices up 6.9 percent from a year earlier.

The figures suggest indebted consumers are continuing to shoulder the burden of growth as policy makers such as Bank of Canada Governor Stephen Poloz await a rebound in business investment to bring the economy to full output. Poloz kept his key lending at 1 percent two days ago and stressed weak exports and slack in the economy will hold down inflation through a temporary price surge.

Canada’s ratio of household debt to disposable income rose to a record last year before two quarterly declines through March. Credit-market debt such as mortgages fell to 163.2 percent of disposable income, compared with a revised 163.9 percent in the fourth quarter and a record 164.1 percent in the third quarter of last year, Statistics Canada said June 19.

Perhaps it’s due to the idea that our houses will make us all rich?

Meanwhile, the Bloomberg Nanos Canadian Confidence Index, which measures the economic mood of Canadians through a weekly survey, shows that people in this country have become upbeat – especially when they think about their property values. It found that perceptions related to the value of real estate in people’s neighbourhoods are 10 percentage points above the six-year average and seven points above the 2014 average.

“Consumer confidence in Canada is noticeably propelled by views on real estate,” Nanos Research Group chairman Nik Nanos observes.

And we’ll get even richer from our condominium rentals!

Toronto condominium sales jumped in the second quarter, as investors in Canada’s biggest city soaked up a wave of supply to feed demand for rentals.

Unit sales rose 10 percent to 6,553 in the three months ended in June from the same period a year ago, according to figures from the Toronto Real Estate Board. That follows a 9 percent annual gain in the first quarter.

The average selling price rose 5.5 percent to a record C$367,010 ($342,000), after a 5.6 percent advance in the first quarter.

“Many of these are bought by investors to rent out and there’s just not enough rental supply,” Paul Etherington, president of the board, said by phone today.“The prices will continue to go up in the future but I don’t see them going up as dramatically.”

About a quarter of new condominiums are purchased by investors who rent the units to residents in a city where the supply of purpose-built rentals is limited, he said.

Groupthink, and its perceived desirability among bond pseudo-managers, has reached global proportions:

Junk bond investors have had enough of borrowers in Europe eroding safeguards as sales of the high-yield, high-risk debt surge to a record $110 billion.

Representatives from at least six firms met in London last week with the Association for Financial Markets in Europe to discuss reinforcing language in documents governing bond sales that protect investors, according to Gary Simmons, director of the group’s high-yield division. Legal & General Investment Management, Castle Hill Asset Management and Pioneer Investments are among money managers listed as members, according to AFME.

Bondholders are seeking to challenge private-equity firms and bankers who arrange debt sales about changes to terms, including shortening the time during which securities can’t be repaid and diluting change of control clauses protecting bondholders in a takeover. The weakening of covenants has drawn warnings from policy makers, with Federal Reserve Chair Janet Yellen saying last month she was concerned about “reach-for-yield behavior.”

“In a hot market, pricing can get tighter but safeguards such as call protection and change of control should stay the same,” said Henry Craik-White, a senior investment analyst at ECM Asset Management who attended AFME’s meeting. “The correct approach is to reach out to the wider investor community and highlight the issues before they ruin the market for everybody.”

Well, golly, we wouldn’t want anybody to ruin the market for everybody, would we? That might mean that long-term performance for some firms might exceed the long-term performance of other firms, which would be disastrous. What would be the point of networking?

Brazil’s Caixa bank might be giving us a foretaste of the next crisis:

As Brazilian state-owned bank Caixa Economica Federal prepared to sell bonds this month, Marco Aurelio de Sa, the head of trading at Credit Agricole SA, told his clients to stay away.

The securities are too risky because Caixa is the lender most vulnerable to losses after a court ruling against the nation’s banks in May fueled concern they may also lose related lawsuits that would put them on the hook for an estimated 341.5 billion reais ($151 billion). The costs could force the government to re-capitalize Caixa, causing the bank to exercise a clause in the bonds to write off the principal and interest.

“Caixa could have serious capitalization issues if the Supreme Court rules against the banks, and then there’s a big risk the bond is written off,” de Sa, a 20-year emerging-market veteran, said in an e-mail. “Even if it’s a quasi-sovereign, the clauses are very clear on what could lead to a write-off. The returns aren’t enough to compensate for the risk. We didn’t recommend it to clients.”

But American investment grade credit remains popular:

They piled back into benchmark U.S. Treasuries (USGG10YR) yesterday after a civilian plane got shot down in eastern Ukraine and as Israeli troops entered Gaza. They accelerated withdrawals from the riskiest debt in the past week, yanking $2.3 billion from high-yield bond funds, the biggest outflow since June 2013, according to a Wells Fargo & Co. (WFC) report.

Wall Street’s largest bond dealers cut their net junk-bond holdings to $4.8 billion in the week ended July 9, the lowest level since the Federal Reserve began reporting the data in April 2013.

Buyers funneled $2.4 billion into investment-grade corporate debt funds, the 30th consecutive week of deposits, the Wells Fargo report shows. Money is flowing in even though analysts predict a rise in benchmark yields by year-end, which would eat into the notes’ returns.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets losing 5bp and DeemedRetractibles down 3bp. Volatility was negligible. 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 3.09 % 3.07 % 21,546 19.50 1 1.5886 % 2,574.3
FixedFloater 4.16 % 3.39 % 28,200 18.66 1 0.0877 % 4,167.5
Floater 2.84 % 2.92 % 45,489 19.94 4 -0.0810 % 2,789.6
OpRet 4.01 % -5.40 % 76,891 0.08 1 -0.2345 % 2,723.2
SplitShare 4.27 % 3.98 % 44,234 4.02 6 -0.1665 % 3,106.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2345 % 2,490.1
Perpetual-Premium 5.52 % -4.47 % 81,926 0.09 17 0.0023 % 2,429.9
Perpetual-Discount 5.23 % 5.14 % 115,766 15.19 20 -0.0192 % 2,580.5
FixedReset 4.39 % 3.58 % 202,893 4.60 77 -0.0485 % 2,562.2
Deemed-Retractible 4.98 % 0.41 % 123,249 0.10 43 -0.0296 % 2,551.3
FloatingReset 2.66 % 0.72 % 93,766 0.16 6 -0.0262 % 2,528.4
Performance Highlights
Issue Index Change Notes
BAM.PR.E Ratchet 1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.86
Evaluated at bid price : 24.30
Bid-YTW : 3.07 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.K Deemed-Retractible 394,115 Scotia crossed 160,000 at 26.10. TD crossed two blocks of 40,000 each, both at the same price. RBC crossed 73,500 and 75,000, both at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.75
Evaluated at bid price : 26.10
Bid-YTW : -2.24 %
BNS.PR.O Deemed-Retractible 280,388 Scotia crossed blocks of 80,000 and 50,000, both at 26.25; RBC crossed blocks of 74,800 and 75,000, both at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.75
Evaluated at bid price : 26.20
Bid-YTW : -17.23 %
HSB.PR.D Deemed-Retractible 277,787 Scotia crossed blocks of 108,900 and 100,000, both at 25.43. RBC crossed 40,000 at 25.43; TD crossed 25,000 at 25.43.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-17
Maturity Price : 25.25
Evaluated at bid price : 25.43
Bid-YTW : -0.75 %
CM.PR.O FixedReset 163,415 Scotia crossed 40,000 at 25.49. RBC crossed blocks of 50,000 and 25,000 at the same price; Nesbitt crossed 40,000 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : 3.60 %
ENB.PF.E FixedReset 123,673 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.10
Evaluated at bid price : 24.97
Bid-YTW : 4.15 %
RY.PR.H FixedReset 89,273 RBC bought 19,400 from Nesbitt at 25.55, then crossed 24,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.28
Evaluated at bid price : 25.39
Bid-YTW : 3.65 %
There were 35 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PVS.PR.B SplitShare Quote: 24.58 – 24.90
Spot Rate : 0.3200
Average : 0.1967

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 24.58
Bid-YTW : 4.92 %

BAM.PR.G FixedFloater Quote: 22.82 – 23.25
Spot Rate : 0.4300
Average : 0.3188

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 22.87
Evaluated at bid price : 22.82
Bid-YTW : 3.39 %

MFC.PR.F FixedReset Quote: 23.50 – 23.83
Spot Rate : 0.3300
Average : 0.2308

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.94 %

NEW.PR.D SplitShare Quote: 32.40 – 32.69
Spot Rate : 0.2900
Average : 0.1995

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-26
Maturity Price : 32.07
Evaluated at bid price : 32.40
Bid-YTW : 3.33 %

PVS.PR.D SplitShare Quote: 24.13 – 24.38
Spot Rate : 0.2500
Average : 0.1616

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.13
Bid-YTW : 5.13 %

RY.PR.H FixedReset Quote: 25.39 – 25.69
Spot Rate : 0.3000
Average : 0.2386

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-18
Maturity Price : 23.28
Evaluated at bid price : 25.39
Bid-YTW : 3.65 %

DBRS Upgrades PDV.PR.A To Pfd-3(high)

Saturday, July 19th, 2014

DBRS has announced that it:

has today upgraded the rating of the Preferred Shares issued by Prime Dividend Corp (the Company) to Pfd-3 (high) from Pfd-3.

In November 2005, the Company issued 2.2 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued was originally December 1, 2012, but was extended to December 1, 2018, after holders of 96.1% of Class A Shares and 90.2% of Preferred Shares voted in favour of the extension in November 2011.

On July 19, 2013, DBRS confirmed the rating of the Preferred Shares at Pfd-3 mainly based on the sufficient downside protection available to holders of the Preferred Shares. Since then, the NAV of the Company has increased, with downside protection increasing from 40% to 45% and remaining stable at that level over the past few months. The current dividend coverage ratio is approximately 0.8 times. As a result, the rating of the Preferred Shares has been upgraded to Pfd-3 (high) from Pfd-3.

Separately, the company has announced a change in Capital Unit dividend policy:

Prime Dividend Corp. (the “Company”) is pleased to announce a change in the distribution policy to the Class A shares that will result in an immediate increase to the July monthly dividend. Under the new policy the annualized rate will increase to 10% based on the current trading price. The Company believes the new policy will better reflect actual returns of the Company’s underlying portfolio and will allow further dividend increases as the Company’s trading price increases.

Under the new distribution policy, the monthly dividend payable on the Class A shares will be determined by applying a 10% annualized rate on the volume weighted average market price (VWAP) of the Class A shares over the last 5 trading days of the preceding month. As a result, Class A shareholders of record on July 31, 2014 will receive a dividend of $0.06458 per share based on the VWAP of $7.75 over the last 5 trading days in June, payable on August 8, 2014. Effectively, the actual amount of monthly distributions paid will vary with the market price, but the current yield will remain stable at 10% (based on the VWAP) under this new distribution policy.

In making this change, the Manager and the Board have considered the following in their analysis:
1. The net asset value per unit ($18.76 as at July 15, 2014) and the range over the previous years.
2. The amount of dividend income and additional income earned from the covered call writing program.
3. The resumption of dividend increases in many of the companies held in the portfolio, resulting in an increase in the average dividend rate.
4. The historically unprecedented low rate environment which has caused the distribution rate on the Class A shares to remain at the minimum level over the last 5 years under the previous floating rate distribution policy.
5. The net asset value attributable to the Class A shares which is approximately 10% higher than the trading price (as at July 15, 2014).

There will be no changes to the Preferred Share dividend policy or the Class A dividend threshold policy. Preferred shares will continue to receive prime plus 0.75% with a minimum rate of 5% annually.

This issue was last mentioned on PrefBlog when DBRS downgraded it to Pfd-3. PDV.PR.A is not tracked by HIMIPref™ as there are only about 1.4-million units outstanding … but I’ll bet a nickel the dividend policy change was made with an eye towards increasing that number!

RY.PR.T and RY.PR.X To Be Redeemed

Friday, July 18th, 2014

Royal Bank of Canada has announced:

its intention to redeem all of its issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AT (the “Series AT shares”) and AV (the “Series AV shares”) on August 24, 2014, for cash at a redemption price of $25.00 per share to be paid on August 25, 2014.

There are 11,000,000 Series AT shares outstanding, representing $275 million of capital and 16,000,000 Series AV shares outstanding, representing $400 million of capital. The redemption of the Series AT and AV shares will be financed out of the general corporate funds of Royal Bank of Canada.

Separately from the redemption price, the final quarterly dividend of $0.390625 for each of the Series AT and AV shares will be paid in the usual manner on August 22, 2014 to shareholders of record on July 24, 2014. After such dividend payment, the Series AT and Series AV shares will cease to be entitled to dividends.

There are no surprises here, due to the high Issue Reset Spreads on these two issues.

RY.PR.T is a FixedReset, 6.25%+406 which commenced trading 2009-3-9 after being announced 2009-2-26.

RY.PR.X is a FixedReset, 6.25%+442, which commenced trading 2009-4-1 after being announced 2009-3-24.