PrefBlog

Interesting article in the Globe about global real estate flows:

In June, Citigroup Inc. paid a record HK$5.4-billion ($697-million) for a Hong Kong office tower that will bring most of its 5,000 employees under one roof. Canada’s Manulife Financial Corp. last year paid HK$4.5-billion for a similar-size tower and development in the city’s Kowloon district.

“Canadians are buying everywhere,” said Ross Moore, director of Canada research at CBRE Group Inc., the biggest commercial broker. “They are shopping the world. What’s happened in the last five to 10 years is the big pension funds pretty well own everything of quality in Canada. They love real estate and have all this money coming in and they have to put it somewhere.”

Toronto-based Brookfield Asset Management Inc. has started investing in European warehouse properties and Indian offices after accumulating the biggest holdings of office buildings in both the U.S. and Canada. The real estate unit of Ontario Teachers’ Pension Plan has been investing in Brazil as well as the U.K. and Australia. Canadian Pension Plan Investment Board has bought London residential, retail and office properties.

Europe’s trying everything to stimulate:

The European Central Bank cut interest rates and will start buying assets, in a bid to boost the flow of funding for the euro-area economy while stopping short of broad-based quantitative easing.

ECB President Mario Draghi’s plan to buy asset-backed securities and covered bonds pushed the euro below $1.30 for the first time since July 2013 as he said the inflation outlook had worsened. Germany’s Jens Weidmann opposed the rate cut and ABS plan, according to two officials.

The ECB “will purchase a broad portfolio of simple and transparent securities,” Draghi said at a press conference in Frankfurt today. “Some of our council were in favor of doing more than presented.”
…
The European Commission is considering allowing banks to hold a wider range of asset-backed securities to meet liquidity requirements than foreseen by global regulators, according to an EU document obtained by Bloomberg News. Banks will be allowed to use securitizations backed by assets from car loans to small business and consumer debt under the EU rule, whereas the Basel Committee on Banking Supervision sought to limit securitizations to those backed by residential mortgage debt.

… and contagion is important:

Draghi’s stimulus is helping keep a lid on borrowing costs in the U.S. even as the growth outlook continues to improve. The nation’s joblessness fell to 6.2 percent in July from 6.7 percent in December, yet yields on the benchmark 10-year Treasury note have also tumbled from 3.03 percent at year-end. The securities yielded 2.45 percent at 10:59 a.m. in New York, up 0.05 percentage point from yesterday.

Instead of girding for rising interest rates as the economy strengthens, investors have been pouring cash into long-dated U.S. debt.

They’ve funneled $3.9 billion into BlackRock Inc. (BLK)’s iShares 7-10 Year Treasury Bond exchange-traded fund this year, the most among U.S. fixed income ETFs, Bloomberg data show. The fourth-biggest winner has been the iShares 20+ Year Treasury Bond ETF (TLT), with $1.7 billion of deposits.

Analysts keep cutting their predictions for how much borrowing costs will rise, too. They now forecast a 2.89 percent yield on the 10-year Treasury note at year-end, down from a July call of 3 percent, according to a Bloomberg survey.

Today’s mail brought me a wonderful book, Contingent Convertibles [CoCos], by George M. von Furstenberg. I’ve only skimmed it, but it does include a phrase that most of us will have hoped was obvious:

A [Conversion Price] should be part of the cocos covenant so that the number of common shares issued at conversion is known already from the time the cocos are initially offered.

Sadly, that ain’t how they’ll work in Canada.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 14bp, FixedResets down 10bp and DeemedRetractibles off 6bp. Volatility was high. Volume was low.

The CPPIB is spending more on outside managers:

Five years ago, the investment arm of the Canada Pension Plan had total costs of $665-million, according to a new report from the Fraser Institute. In the CPPIB’s most recent fiscal year, overhead had ballooned to $1.4-billion.

To be sure, part of that increase reflected the swelling size of the fund, which is constantly taking in new money, thanks to pension contributions from millions of Canadian workers. But even against the backdrop of its surging assets, the CPPIB is not showing any tendency to rein in its spending. Its costs amounted to 0.58 per cent of its assets back in 2008-09; in the most recent fiscal year, they stood at 0.84 per cent.
…
The fund likes to focus attention on its relatively modest operating expenses. A more realistic accounting, though, has to encompass other costs, such as hiring external investment managers and the expenses involved in actually implementing the fund’s strategies.

Those costs are now nearly twice as large as the fund’s operating expenses, according to the report’s authors, Philip Cross and Joel Emes. Much of the additional outlay reflects payments to external money managers, which have soared from $25-million six years ago to $782-million last year.

The Fraser Institute’s news release links to the study, titled Accounting for the True Cost of the Canada Pension Plan, which notes that the CPPIB’s assets under management are about $183-billion.

The CPPIB is making a horrible mistake in going to outside managers. Assiduous Readers will remember that I believe that it is possible to outperform benchmarks – any benchmark – over the long term, and that the reason for this is that most investors – including most professionals – are idiots. At least when it comes to actual investing, they’re idiots. They’re really, really good at sales!

In order to outperform, you need a dedicated staff and this staff has to be completely focussed on the nitty-gritty of investment analysis. The organization must have no sales exposure at all if it is to be successfule – which means that the organization must run its own money and only its own money. This necessarily means that consistent outperformance is restricted to organizations with huge amounts of assets, but that’s life. The moronic proposals for an Ontario superfund (discussed on April 21, 2009 and elsewhere on PrefBlog) will lead to a change of culture in the superfund management, from a culture of returns, returns returns! to a culture of clients, clients clients! which are polar opposites with respect to the personalities of the individuals concerned and with respect to the effect on investment performance.

CalPERS is run on the hub and spoke model. Its performance is a disaster. The UofT retirement fund is hub-and-spoke – and it’s a disaster. When you run an investment organization according this model, you are paying for salesmen to have lunch with each other. We are going to pay dearly for the CPPIB’s increasing appetite for good investment stories.

CU Inc. issued long paper today:

CU Inc. announced today that it will issue $1,000,000,000 of 4.085% Debentures maturing on September 2, 2044, at a price of $100.00 to yield 4.085%. This issue was sold by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc., Scotia Capital Inc. and CIBC World Markets Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

The company has a PerpetualDiscount outstanding, CIU.PR.A, which has a 4.60% coupon and is bid at 22.96 to yield 5.02%. Call it a round 5% for luck. This implies the interest-equivalent yield for CIU.PR.A is 6.5%, which, given the number on the bond issue, imply a Seniority Spread for this company of about 240bp.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 7bp and DeemedRetractibles up 6bp. Volatility was average. Volume was a little low, although Fortis issues got a bit of boost from the new issue announcement.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, unchanged from the figure reported August 27.

Auto dealers in Georgia are competing with new technology using tried and true methods:

Tesla Motors Inc. (TSLA), which has fought U.S. dealers over its direct sales of electric cars, faces a new challenge in Georgia where auto retailers want the Peach State to bar distribution of sedans from the company’s store.

Tesla sells vehicles in violation of the state’s rules limiting the annual volume of cars it can sell directly to the public, the Georgia Automobile Dealers Association said in a petition filed with the Georgia Department of Revenue.

The group, which represents 500 dealerships, asked that Tesla’s license be revoked and the agency block sales of Tesla’s Model S sedan at its shop in Marietta, near Atlanta.
…
The carmaker’s license in Georgia allows it only to sell vehicles made “in accordance with custom design specifications of the customer” and retail fewer than 150 a year, the group said in the petition. Tesla sold 173 sedans at its suburban Atlanta outlet, its only store in the state, from October to June, according to the petition, a copy of which was obtained by Bloomberg News from the revenue department.

It was a good day for economic news:

The dollar climbed 0.7 percent to 105.10 yen at 4 p.m. in New York and gained 0.8 percent to $1.6472 per British pound. Yields on 10-year Treasury notes increased seven basis points, the most in more than a month, to 2.42 percent. The Standard & Poor’s 500 Index lost less than 0.1 percent after the biggest monthly rally since February, as energy companies tumbled 1.3 percent. Gold slid 1.7 percent and Brent crude slumped to a 16-month low.

U.S. manufacturing expanded in August at the fastest pace in three years as orders grew by the most in a decade, bolstering the case for the Federal Reserve to raise interest rates sooner than anticipated. Gauges of factory output in Europe and China signal slower growth, boosting speculation that policy makers will need to boost stimulus measures. European money markets are pricing in about a 50 percent probability that the European Central Bank will cut interest rates by 10 basis points this week, according to BNP Paribas SA.
…
There’s about a 44 percent chance Fed policy makers will raise the benchmark interest-rate target by June 2015, futures data compiled by Bloomberg showed today. A 36 percent likelihood was seen on Aug. 18.
…
Bond yields across the euro area have tumbled, enhancing the appeal of payments available from Treasuries, since ECB President Mario Draghi said at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming, on Aug. 22 that the central bank will use “all the available instruments needed to ensure price stability.”

And, with the 75th anniversary of Canada’s declaration of war on Germany almost upon us, we are getting a flavour of what it was like to live through the Munich Crisis:

[Outgoing president of the European commission, José Manuel] Barroso told the closed meeting that Putin had told him Kiev would be an easy conquest for Russia, according to the Italian newspaper, La Repubblica. According to the account, Barroso asked Putin about the presence of Russian troops in eastern Ukraine. Nato says there are at least 1,000 Russian forces on the wrong side of the border. The Ukrainians put the figure at 1,600.

“The problem is not this, but that if I want I’ll take Kiev in two weeks,” Putin said, according to La Repubblica.

The Kremlin did not deny Putin had spoken of taking Kiev, but instead complained about the leak of the Barroso remarks.

Petro Poroshenko, the Ukrainian president, attended the EU summit and painted an apocalyptic picture of the conflict, with EU leaders dropping their usual public poise in a heated debate.

Dalia Grybauskaite, the Lithuanian president, declared Russia was “at war with Europe”. The German chancellor, Angela Merkel, the main mediator with Putin, was said to be furious with the Russian leader, warning that he was “irrational and unpredictable”, while David Cameron was said to have raised the issue of Britain discussing policy options regarding Putin.

Cameron likened the west’s dilemma with Putin to relations between the then British prime minister, Neville Chamberlain, with Adolf Hitler in Munich in 1938, when Anglo-French appeasement encouraged the Nazi leader to launch the second world war the following year.

“We run the risk of repeating the mistakes made in Munich in 1938. We cannot know what will happen next,” Cameron was reported as saying. “This time we cannot meet Putin’s demands. He has already taken Crimea and we cannot allow him to take the whole country.”

DBRS confirmed Aimia, proud issuer of AIM.PR.A and AIM.PR.C:

DBRS has today confirmed Aimia Inc.’s (Aimia or the Company) Issuer Rating at BBB and the ratings of its Senior Secured Debt and Preferred Shares at BBB and Pfd-3, respectively, all with Stable trends. The confirmation of the ratings is based on the Company’s relatively stable operating performance and credit metrics through 2013 and progress made to date with the Aeroplan program transformation and financial cards agreement with TD Bank Group (TD; rated AA with a Stable trend by DBRS) and Canadian Imperial Bank of Commerce (CIBC; rated AA with a Stable trend by DBRS). The ratings continue to be based on the strength of Aimia’s brands and its strong relationship with key commercial partners. The ratings also reflect the Company’s high exposure to consumer spending and redemption patterns, as well as the significant but moderating degree of revenue concentration.
…
DBRS expects Aimia’s financial profile to remain commensurate with the current rating category, based on strong and stable free cash flow-generating capacity and steady leverage. DBRS believes free cash flow will decline modestly due to slightly higher capex requirements and continued growth in the Company’s dividend payments. Free cash flow is expected to continue to be applied primarily toward small tuck-in acquisitions, most likely in the data analytics business. DBRS anticipates that Aimia will use cash on hand to repay approximately $150 million of debt maturing in 2014. As such, when combined with the expected decline in adjusted EBITDA, key credit metrics should remain appropriate for the current rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 1.75x to 2.25x and adjusted EBITDA coverage around 7.0x).

The Canadian preferred share market opened the month on a sour note, with PerpetualDiscounts losing 17bp, FixedResets down 6bp and DeemedRetractibles off 2bp. Volatility was low. Volume was practically non-existent.