PrefBlog

There is a lot of confusion about Bombardier valuation:

On Monday, Mr. Tyerman cut his rating on the beleaguered stock to “sell” from “hold” and slashed his one-year price target on the company’s subordinated voting Class B shares to $1.10 from $1.35.
…
On Tuesday, Mr. Tyerman grounded his previous call. His new target has soared to $1.40, with a restored, turbulence-free rating of “hold.” He’s still got a downside target on the stock should Canada invest, but it is now $1.20, not 60 cents.
…
The reason for his change of course? Mr. Tyerman credits a “revised view of how a possible Canadian federal government investment in the C Series could play out,” apparently based on subsequent discussions with Bombardier. The analyst’s previously published view was that if Canada matched Quebec, the two governments would own a combined 99 per cent of the airliner project, leaving just 1 per cent of the economics of the plane for existing investors to share, and missing out on most of the upside if the poor selling plane actually becomes popular. That was based on Quebec securing 49.5 per cent ownership of the C Series program as part of its investment.

But Mr. Tyerman’s revised view is that the company “will retain more of the C Series economics than in our previous target,” or a one-third economic interest even if Canada were to put in a full $1-billion.

Huh. So the valuation of the common has been improved because of some feeling that the feds are going to get taken to the cleaners. Well, I suppose that’s even better than simply bailing them out in the first place, eh? Still, trouble with the C Series has returned Bombardier to its core competency:

Bombardier Inc. has increased lobbying of Canada’s federal government to an eight-year high, reinforcing its Ottawa connections as officials there prepare to review whether to join Quebec in helping bail out the struggling CSeries jet.

Canada’s largest aerospace company communicated 50 times with federal officials since Jan. 1, more than any full year in records dating to 2007, according to the government’s lobbyist registry. The total for 2014 was 48.
…
“Government relations have historically been at the heart of what Bombardier does,” Louis Hebert, a management strategy professor at the HEC Montreal business school, said in a telephone interview. “They are returning to their traditional competitive advantage.”

Industry Minister James Moore and staff of the industry department were the most frequent points of contact for Bombardier representatives, with at least 21 reported communications this year, the data show. Bombardier officials also met International Trade Minister Ed Fast and Finance Minister Joe Oliver.

Bombardier also spent more time lobbying Prime Minister Stephen Harper’s office this year, the records show. The company communicated with officials from Harper’s office seven times this year, compared with three times in 2014 and once in 2013.

Meanwhile, all the other piggies at the trough are jostling for position as the slops come into view:

Before the first dime of public money is spent, a strong made-in-Canada supply policy needs to be firmly in place. Without that, new jobs will not be created and existing ones will not be preserved. That policy needs to be paired with a review of a domestic playing field that leaves many Canadian companies at a disadvantage to cheap, subsidized imports.

At the same time, the government needs to reinvigorate the federal steel caucus, including MPs from all ridings where steel is manufactured.

It should also introduce a mechanism that adjusts import levels based on domestic capacity utilization. When Canadian steel production falls below a certain threshold, companies would be stabilized by the trigger of variable duties.

The BCSC has announced a new way to spend money:

The British Columbia Securities Commission (BCSC) today released the Smarter Investor Study, national research that examines client-advisor relationships in Canada, and introduces a new lens for understanding how personality affects Canadians’ investment decisions.

“Our Smarter Investor Study identifies five personality types within our sample group – confident, diligent, impulsive, reserved, and tumultuous,” said Brenda Leong, Chair and CEO of the BCSC. “What we found is that your personality plays a role when it comes to how you invest, particularly when you work with an advisor,”

Investors can find out their own personality and how it impacts their investing decisions by taking the Smarter Investor Quiz.
…
One key finding reveals that while Canadians in general-investors and non-investors alike-index at 62 on the 100-point scale. Those who work with an advisor are at 70 out of 100.

Other key findings include:

• •While 30% of Canadians 35 and older invest with an advisor, more than half are not sure what they pay and less than one in five knows how their advisor is paid or have never asked about compensation.
• •Six in 10 Canadians (61%) who invest with an advisor say that they always read the statements they received.
• •Less than half (46%) of Canadians who invest with an advisor report having checked into the advisor’s background before they began working with them.
• •Of those who say they did a background check, slightly more than half (53%) checked their advisor’s registration.
• •30% of Canadians 35 and older invest with an advisor. Of the 70% who do not, 19% are DIY investors (those who invest but do not work with an advisor). A further 52% do not have any investments.
• •Investors recognize that they have responsibilities. The study asked which of various responsibilities investors believed were either wholly or partially theirs when working with an advisor. The highest agreement for any one item was 76% (asking questions), while only 40% agreed that doing independent research was a part of their responsibility.

Accoording to the full report, the research was undertaken by Innovative Research Group Inc. I looked at their website; they are very shy about identifying themselves:

Who we are

We come from the client’s side. We came to research because we needed it to help us achieve our goals and we remain focused on serving our clients’ needs first.

We’re team players. We build successful, long-term partnerships with our clients and guide them through the intricacies of research, strategy and problem solving.

The core INNOVATIVE team is composed of seasoned practitioners with a proven track record over a wide array of challenges, and dedicated specialists with a unique command of critical skills.

INNOVATIVE complements its core team through relationships with leading research academics and professionals, connecting our staff to the latest in research techniques.

That’s it. No names, no pack-drill, nothing. It is also of interest to learn that the Canada 2020 Panel important in the preparation of the paper is self-selected, at least in part.

I don’t see the point of this research, frankly, but I suppose it helps get rid of a little excess money.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 25bp, FixedResets gaining 16bp and DeemedRetractibles off 5bp. The Performance Highlights table is again lengthy, indicating continued churn in the market. Volume was above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.16 to be $0.57 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.80 cheap at its bid price of 13.20.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.35 to be 0.96 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.35 to be 0.69 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.30 to be $1.40 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.65 and appears to be $1.62 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.90, looks $0.73 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.20 and is $0.46 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.72%, with two outliers above 0.00% and none below -2.00%. The distribution is just barely bimodal, with bank NVCC non-compliant pairs averaging -0.53% and other issues averaging -0.71%; note that the relative values have reversed today! There are four junk outliers above 0.00% and one below -2.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

The West’s fear of competition is leading for calls to recruit more Secret Policemen to enforce the laws of foreign countries:

Moving money in small increments to avoid reporting requirements is called “smurfing,” after the little blue cartoon characters who as small individuals constitute a larger whole. A record $194 billion exited China in September, according to a Bloomberg gauge estimating capital flows. The Chinese use numerous tactics to transfer money abroad, and smurfing is routine, with some of the cash flowing into overheated property markets in Vancouver, Hong Kong, New York and Sydney.

Now, as Chinese citizens bypass the country’s limit of converting $50,000 a person per year by enlisting friends, relatives and even employees to send out cash on their behalf, banks and regulators around the world are being forced to decide: Is it okay to knowingly allow Chinese citizens to evade their government’s controls if it doesn’t break your own country’s laws?

In Vancouver, a Supreme Court case showed that one lender, Canadian Imperial Bank of Commerce, had assisted such transactions. The case arose when a CIBC financial adviser allowed a wealthy Chinese client to route two deposits of $50,000 through her private accounts to buy a home, leading to the dismissal of the banker for “commingling” her own funds with her client’s.
..
Elsewhere in China, examples include a company that ordered employees to use their accounts to wire money to Canada for private property purchases, according to Christine Duhaime, a Canadian lawyer specializing in financial crime.

China’s rules are being “made a mockery of,” she said. “I wouldn’t do it if I ran the banks.”

Coming up next – banks will be put in charge of Canada’s efforts to stamp out Falun Gong. After all, if the Chinese government says something’s the right thing to do, how could it possibly be wrong? Another Bloomberg story illustrates other ways of getting money out of China, for those interested in a new career. However, it’s an an ill wind that blows nobody any good:

The Royal Bank of Canada scrapped an internal limit on mortgage-loan size for immigrants in the spring to tap into surging demand for financing on multi-million-dollar houses from newcomers to Vancouver.

Wealthy buyers, mostly from China, are fuelling a booming mortgage business in Vancouver, where the median price for a detached home in the desirable west side jumped 31 per cent to $2.87-million in the last two years.

RBC, Canada’s largest bank, removed its $1.25-million cap on loans to borrowers with no local credit history in May, said Christine Shisler, the bank’s director of multicultural markets, who works with an immigrant clientele.

“We’re seeing a lot of affluent newcomers looking to buy high purchase-price homes,” she said. “Now we can actually service any mortgage amount.”

Nevertheless, it’s clear that anti-money-laundering laws, foisted on a gullible public on the basis of Fighting Crime and Eliminating Terrorism, are actually being used as a non-tariff impediment to real-estate transactions. So what else is new?

Regulators in six provinces have announced a Finalized Offering Memorandum Exemption:

The following are some of the key investor protection measures included in the offering memorandum exemption:

• •Non-reporting issuers will be required to, among other measures, provide investors with audited annual financial statements and an annual notice describing how the proceeds raised under the offering memorandum exemption were used.
• •Any marketing materials will be required to be incorporated by reference in the offering memorandum so that they are subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation.
• •Individual investors relying on the offering memorandum exemption will be subject to investment limits in most cases.
• •All investors will be required to sign a risk acknowledgement form.

The offering memorandum exemption was designed to facilitate capital-raising by allowing issuers to solicit investments from a wider range of investors than they would be able to under other prospectus exemptions, provided that certain conditions are met.

Provided all necessary ministerial approvals are obtained, the final amendments will come into force in Ontario on January 13, 2016 and in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan on April 30, 2016.

The final amendments do not modify the OM exemption that exists in any CSA jurisdiction other than the participating jurisdictions.

The list of amendments to NI 45-106 notes:

The participating jurisdictions have adopted investment limits for both eligible and non-eligible investors that are individuals (other than those that qualify as accredited investors or under the family, friends and business associates exemption). These limits will not apply to non-individual investors, whether eligible or non-eligible. The final amendments permit a higher investment threshold for eligible investors when a portfolio manager, investment dealer or exempt market dealer has made a positive suitability assessment.

The investment limits will apply to all securities acquired under the OM exemption as follows:

• • in the case of a non-eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $10,000,
• • in the case of an eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $30,000, and
• • in the case of an eligible investor that is an individual and that receives advice from a portfolio manager, investment dealer or exempt market dealer that the investment above $30,000 is suitable, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $100,000.

I’m not sure whether there are any possible implications for Malachite Aggressive Preferred Fund, but you can bet I’ll be asking my lawyer! Davies Ward Phillips & Vineberg LLP comments:

The OM Exemption reflects a balancing of interests: issuers are provided with the opportunity to tap into a larger pool of investors, but must have in place the financial and human resources to prepare an offering memorandum and produce audited annual financial statements. For non-reporting issuers, the OM Exemption can best be thought of as a stepping stone to becoming a public company.

One impediment for non-reporting issuers is that the offering memorandum and marketing materials filed with the Ontario Securities Commission will be publicly filed and therefore available to all of the issuer’s employees, customers, suppliers and competitors. In addition, small, early-stage issuers may not find the OM Exemption attractive due to the costs associated with preparing an offering memorandum and audited financial statements, ongoing disclosure obligations and potentially being designated as a market participant.

Reporting issuers, particularly junior issuers, may find the OM Exemption to be a cheaper and less time-consuming alternative to a prospectus offering.

The OM Exemption does not limit or affect the availability to issuers of other prospectus exemptions, such as the accredited investor or minimum amount exemptions.

Time will tell whether the OM Exemption is adopted and accepted by the capital markets. Although using the OM Exemption could help smaller issuers tap into a larger market, it comes at a cost that may be too high for some issuers to entertain.

I’ll be most interested in reading a comparison between this regime and the SEC’s crowdfunding initiative discussed on October 30; if anybody sees such a thing, be sure to let me know!

It would seem that the Fed’s proposed rules on ‘bail-in’ capital (discussed October 30) may well have the intended effect, according to S&P:

• •Following the release last week of the Federal Reserve’s notice of proposed rulemaking, Standard & Poor’s is reviewing the resolution regime for U.S. banks to consider its effectiveness and impact on our ratings.
• •We expect the outcome of the review will be that extraordinary government support will no longer be factored into the ratings on the eight U.S. global systemically important banks (GSIBs) and that this will result in lower ratings on these banks’ nonoperating holding companies (NOHCs). As a result, we are placing on CreditWatch with negative implications our NOHC ratings on the U.S. GSIBs: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co.
• •But, due to the construct of the U.S. resolution regime, in which NOHC creditors could ultimately provide capital support to the operating entity, we are taking no negative actions on these banks’ operating entities, and, on certain banks taking positive rating actions, despite
  the likely removal of extraordinary government support.

• •As part of our review of the U.S. resolution regime, we are also
  reviewing our current treatment of nondeferrable subordinated debt (NDSD) in the U.S. and considering whether it can absorb losses in advance of an entity’s nonviability or as part of a resolution without senior unsecured creditors being in default. A change in our treatment of NDSD would extend to all rated U.S. banks, and not just the GSIBs, but would have
  limited ratings impact

It was a mixed day for the Canadian preferred share market, with PerptualDiscounts off 10bp, FixedResets down 71bp and DeemedRetractibles gaining 1bp. MFC FixedResets were prominent on the bad side of a lengthy Performance Highlights table. Volume was a touch on the low side.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 12.90 to be $0.54 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.52 cheap at its bid price of 13.31.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.07 to be 0.63 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.28 to be 0.42 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.26 to be $1.27 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.01 and appears to be $0.70 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.70, looks $0.58 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.30 and is $0.31 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.72%, with one outlier above 0.00% and one below -2.00%. The distribution is just barely bimodal, with bank NVCC non-compliant pairs averaging -0.84% and other issues averaging -0.51%. There are four junk outliers above 0.00% and one below -2.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?