PrefBlog

New Year’s is prediction season!

Bond returns will probably be ho-hum next year — just as they have been in 2015 — according to the biggest investors.

JPMorgan Chase & Co., Fidelity Investments, Pacific Investment Management Co. and Goldman Sachs Group Inc. are all cautioning investors not to be too optimistic. Goldman Sachs predicts benchmark U.S. 10-year yields will climb to 3 percent by the end of 2016 from 2.30 percent Wednesday.
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The odds of at least one more increase in 2016 are 94 percent, futures contracts indicate, threatening to push bond yields higher worldwide.
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An investor would lose 3.2 percent if Goldman Sachs’s yield forecast proves to be accurate, data compiled by Bloomberg show.

There is another interesting column on risk in Bloomberg, penned by Justin Fox:

Twenty years ago, Dutch journalist Sheila Sitalsing sat down with a demographer at the country’s statistics office to talk about how aging would change the Netherlands. His prediction, she recounts in a column that’s the most-read thing on the website of the Dutch newspaper de Volkskrant, was that aging would “change the atmosphere and the mentality of the country.” For example:

Things that come with being young — taking risks, seizing opportunities, daring to do things, diving into the deep end without thought and without water wings, doing drugs, making noise, calling after girls on the street corner, embracing the strange and the new — would become less common. The atmosphere would be determined by the concerns of the old: avoiding risk, being careful, preserving what you have, saying goodbye, keeping quiet, suspicion of the foreign, avoiding fuss and noise — absolutely no fuss and noise! — and seizing every possible occasion to complain at length about alleged fuss and noise.

Among other things, I was impressed that (in Holland, twenty years ago) it was possible to say anything about cat-calling girls in terms other than the deepest deprecation, and still get published!

It was a superb no-more-tax-loss-selling day for the Canadian preferred share market today, with PerpetualDiscounts up 111bp, FixedResets winning 169bp and DeemedRetractibles gaining 37bp. The Performance Highlights table is as ridiculously long as you might expect, with only a single loser. Volume was, again, pathetically low.

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 18.95 to be $0.62 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.19 cheap at its bid price of 12.60.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.25 to be 0.60 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.33 to be 0.67 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.39 to be $1.85 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.50 and appears to be $0.80 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.85, looks $0.64 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.10 and is $0.59 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.35%, with one outlier above -0.50%. There are two junk outliers above -0.50%.

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

Looks like we may be looking at a Tobin Tax:

Chinese securities regulators are preparing some of the world’s strictest regulations on a trading practice at the heart of the global debate over high-speed computerized markets.

The draft rules are designed to prevent traders from flooding exchanges with orders they don’t fill by charging market participants fees for habitual cancellations. The proposal, which could come into force next year, echoes a plan by U.S. presidential hopeful Hillary Clinton to discourage high-speed trading strategies that she says could destabilize markets.

As regulators around the world grapple with the most effective ways to police computer-driven markets, they have focused on how to stop traders from using bogus orders to unfairly move prices in their favor. Critics contend that the tactic makes markets less fair and enables some traders to engage in a manipulative practice known as spoofing. Opponents of the proposed taxes on canceled orders say they would harm legitimate market makers and raise costs for the average investor.
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China’s proposals on algorithmic trading, revealed around the same time in October as Clinton’s, state that “frequently placing and withdrawing orders where the ratio of trades concluded is abnormally low” would be prohibited, according to a translation by law firm Linklaters LLP. Traders who cancel more than 40 percent of their submitted orders in any given day would be charged a fee of 2 yuan (31 cents) per transaction.
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Other measures suggested by the CSRC include forcing traders who use automated orders to provide a detailed description of their strategies to regulators and wait for a review before they’re allowed to execute trades. That proposal has raised concern among some international investors who don’t want to disclose their proprietary trading algorithms, according to Calvin Tai, the head of global clearing at Hong Kong’s stock exchange.

Clinton, the front-runner to win the Democratic nomination for president, called for a fee on canceled orders in October and explicitly linked the idea to curbing high-frequency traders. Her plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said at the time.

There is nothing intrinsically wrong with an exchange fee for cancelled orders. A 96% cancellation rate will obviously strain the system more than will a lower rate and require increased investment by all serious participants, in bandwidth and a ticker-plant. However, when charges such as China’s $0.31/transaction become exorbitant it becomes clear that this is just a revenue grab that will lead to migration of the markets to more trader-friendly nations, as well as having all the usual effects of ‘stamp charges’ on market liquidity. Compare the $0.31/transaction fee to the Toronto Stock Exchange’s Maker-Taker fees, which net out to $0.0004 / share. [I’ll save you the trouble: that means the Exchange would charge as much for a cancelled order as for an execution of 775 shares].

As I stated on April 3, 2014:

However, it is quite apparent that Tobin taxes harm market quality. One possibility where the AR PL and I might have a meeting of minds is the potential for an exchange to impose a fee for the placement of an order – generally, once you’re permitted to place orders on the exchange, the only fees remaining are charged for executed transactions.

Schwab is upset about the number of orders:

High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years earlier. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions.
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Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely.

However, I would support a charge for order entry (or simply order cancellation, assuming that executed orders get charged by other means) only to the extent that it is imposed by the exchanges to recover costs or as a source of competitive advantage. If, once you count amortization of all the required infrastructure, it costs $1 to process 1,000,000 orders, then by all means, charge $0.000001 to process an order. If you want to make a profit and the market will bear it, then by all means, charge $0.000002 to process an order. If your customers complain that they have to process all these orders too, then by all means offer them a kiddie feed at reduced price, transmitting orders only when they have been extant for 10 milliseconds.

But don’t start imposing fees with grandiose visions of Better Living Through Higher Taxation. We all know where that ends up.

Fortis Inc., proud issuer of FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the A (low) Issuer Rating, A (low) Unsecured Debentures rating and Pfd-2 (low) Preferred Shares rating of Fortis Inc. (Fortis, the Parent or the Company) with Stable trends. This action is based on DBRS’s view of the Company’s financial performance to date in 2015 (YTD 2015). The confirmations reflect Fortis’ improved business risk profile following the completion of the Waneta Expansion hydro generation project (Waneta Expansion), no material changes in its regulated subsidiaries and its reasonable consolidated and non-consolidated financial profiles.
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Fortis maintained reasonable consolidated and non-consolidated ratios in YTD 2015 and remained consistent with the current rating. These ratios are expected to improve by the end of 2015 and in the medium term since (i) $230 million non-consolidated debt was reduced after September 30, 2015, with proceeds from the sale of Fortis Properties; (ii) all regulated utilities are expected to maintain their leverage in line with the regulatory capital structure in their respective jurisdictions; and (iii) Fortis’ equity injection to its utilities is expected to be modest and manageable over the next few years.

The cessation of tax-loss selling pressure led to a superb day for the Canadian preferred share market, with PerpetualDiscounts up 94bp, FixedResets winning 121bp and DeemedRetractibles gaining 87bp. The Performance Highlights table is enormous, naturally enough, with only one loser. Volume was very extremely awfully low.

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 18.86 to be $0.91 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.19 cheap at its bid price of 12.30.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.68 to be 0.45 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.00 to be 0.54 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.21 to be $1.60 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 21.95 and appears to be $0.96 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.43, looks $0.70 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.39 and is $0.80 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.37%, with one outlier above -0.50%. There are two junk outliers above -0.50%.

Click for Big

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

Nothing happened today.

The last day of tax-loss selling season was mixed for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 22bp and DeemedRetractibles down 11bp. A lot of churn is still revealed by the Performance Highlights table. Volume was, somewhat surprisingly, above average even though the trading day was foreshortened due to the desire of the most highly paid professionals on earth to get away early.

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 18.50 to be $0.97 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.03 cheap at its bid price of 12.20.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.50 to be 0.47 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 21.63 to be 0.52 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $1.54 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 21.72 and appears to be $1.04 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.11, looks $0.50 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.20 and is $0.86 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.45%, with one outlier above -0.50%. There are two junk outliers above -0.50% and one below -2.50%.

Click for Big

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

Canadian preferred shares appear to have been hit over the past few months by tax loss selling, but we’re not the only targets:

Investors pulled more money from U.S. mutual funds last week than they have in any seven-day period in the past two and a half years.

Net redemptions reached $28.6 billion in the week ended Dec. 16, according to a statement from the Investment Company Institute, a trade group. It was the biggest weekly outflow since June 2013, ICI data show.

Some of the redemptions might reflect year-end tax-loss selling, which are sales made for tax purposes, ICI Senior Economist Shelly Antoniewicz said in the statement.

Investors withdrew $11.1 billion from stock funds, $12 billion from bond funds and $5.6 billion from funds that buy a mix of stocks and bonds. Municipal bond funds attracted $647 million, the only category that saw inflows.

Mutual funds have experienced net redemptions every month since July, according to ICI data. In each of the first six months of the year, funds gathered money.

On September 21 I discussed the characterization of the Canadian dollar as a petrodollar. Now it turns out that, as far as one measure is concerned, we’re the petrodollariest in the world!

No other major currency is as closely tied to the value of its key commodity export as the loonie is to crude right now. The correlation between the Canadian dollar and the benchmark West Texas Intermediate oil price is about 0.56, meaning the two have a strong positive relationship. That’s the closest association among 16 of the world’s most-traded currencies including the Australian and New Zealand dollars, Norway’s krone and Brazil’s real.

With oil futures trading below $45 a barrel through 2016, the loonie may continue to struggle. The currency has declined 16 per cent over the past year, touching an 11-year low of $1.4001 per U.S. dollar last week. The drop comes as the price of WTI fell to the lowest since 2009 after the Organization of Petroleum Exporting Countries announced this month it was abandoning production limits, and with U.S. crude stockpiles forecast to climb to the highest since 1930.
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The 120-day correlation coefficient between 16 major currencies tracked by Bloomberg and their country’s main export commodity — based on 2014 World Bank data — show that the Mexican peso and oil had the second strongest correlation, at 0.41. The correlation between the Australian dollar and iron ore was 0.13, while the link between New Zealand’s currency and whole milk powder was 0.11. A reading of 1 means that gauges move in lockstep; minus 1 means they move in opposite directions.

Crude fell below $34 a barrel on Dec. 21. WTI futures for delivery in March are trading at about $37, compared to $39 for those settling in June.

The Canadian dollar has already fallen below Scotiabank’s 2016 target of $1.39 and there is “clear risk of an overshoot” toward $1.42-$1.43 through the first quarter, [chief foreign-exchange strategist for Bank of Nova Scotia] Mr. [Shaun] Osborne said.

There’s an interesting piece on the bond market, examined through the lens of the Litvak case:

Earlier this year, Sally Yates, the agency’s No. 2 official, ordered policy changes to push prosecutors to bring criminal charges against company executives suspected of financial wrongdoing. Her memo almost admitted that the U.S. Department of Justice had lapsed in its duty to put criminals behind bars. In a September speech, Yates said: “This memo is designed to ensure that all attorneys across the department are consistent in our best efforts to hold to account the individuals responsible for illegal corporate conduct. It’s the only way to truly deter corporate wrongdoing.”

The case against Litvak was supposed to be the opening salvo against dishonest conduct among bond traders. The Justice Department and U.S. Securities and Exchange Commission have built more than a dozen other cases using the one against Litvak as a model.

The cases won’t be easy victories for the government. Lying doesn’t necessarily violate securities law. It’s only fraud when that deception is considered important to a buyer. The question becomes: Is it important that the buyer knew how much Litvak paid for bonds he later sold? “The government may not like how these markets work, and it may look bad from the outside looking in, but it is how they do work,” says Charles Geisst, a Wall Street historian at Manhattan College in New York.
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As the SEC sees it, just because something is common practice on Wall Street doesn’t mean it conforms to securities laws. The agency has built its own algorithms to comb through trading data to look for red flags instead of waiting for complaints. The SEC has uncovered brokers charging buyers higher fees, traders hiding their positions, and dealers running deceptive auctions. “We’ve identified billions of dollars of potentially problematic trades,” says Michael Osnato Jr., head of the regulator’s Complex Financial Instruments unit. “We have opened promising investigations thus far based on these efforts and expect more to follow soon.”

The Litvak ruling will shape how the SEC pursues some of these violations. The intensive monitoring of debt backed by mortgages and other assets represents a first for the agency. Before the credit crisis, the SEC viewed the market participants as sophisticated investors who didn’t need close supervision. That assumption came undone when plummeting prices in the debt markets kicked off the crisis. “The government’s new interest is reflective of the fact that they’ve had very little interest in this market historically,” says James Cox, a professor at Duke University School of Law. “They just hadn’t looked at it.”

The SEC doesn’t understand any markets, really, other than bank accounts that accrue interest daily. But hey! Markets went down, therefore nefarious activity was behind it, therefore somebody’s got to go to jail – it doesn’t matter who, really. The persecution of Litvak has been discussed on PrefBlog many times before, most recently on December 8.

Speaking of the way the market operates, I see there’s a dust-up with Dominion Diamond Corp. I have no knowledge of this company, but one part of the article drew my attention as a possible winner of “2015 Statements Best Illustrating Intellectual Bankruptcy of Equities Markets”:

Dominion enjoys considerable financial flexibility, according to Edward Sterck, a London-based analyst with Bank of Montreal’s investment arm. The miner has amassed net cash of $284-million (U.S.), equal to about 40 per cent of its market capitalization, he wrote in a research note.

He said that while Dominion’s near-term mine plan has been subject to frequent changes, its longer-term outlook has remained consistently positive.

Mr. Sterck projects an attractive bump in free cash flow over the years to come as new production comes into play, but added that “the problem is that the increased cash flows do not really begin in earnest until mid-2016, so why should investors hold the stock now?”

Ummmm … because increased cash flows begin in earnest in mid-2016?

Meanwhile, there has been a sudden change in the living rooms of preferred share investors … they now look like this:

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It was a strong day for the Canadian preferred share market, with PerpetualDiscounts gaining 30bp, FixedResets winning 166bp and DeemedRetractibles up 37bp … it appears that bargain hunters have decided not to wait until the precise end of tax-loss selling season after all! The performance highlights table is as lengthy as one might guess from the raw numbers. Volume continued to be enormously high … which leads to interesting speculation as to what might happen when tax-loss selling season ends.

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 18.73 to be $0.96 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.18 cheap at its bid price of 12.10.

Click for Big

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 20.26 to be 0.48 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 21.50 to be 0.48 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.82 to be $1.53 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.58 and appears to be $0.81 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.32, looks $0.59 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.51 and is $0.67 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.52%, with one outlier below -2.50%. There are four junk outliers above -0.50%.

Click for Big

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

Nothing much happened today.

Neil Irwin of the NYT makes a good point in his review of The Big Short (movie to be released Wednesday 23rd):

A lot of people thought a decade ago that there might be a housing bubble. Few of them understood the connections between housing prices and poor lending practices; the connection from poor lending practices to complex, highly rated securities; the connection between those securities to the balance sheets of major banks; and the peril to the economy if just a few of them faltered.

At each link in that chain, there were people aware that something was wrong, but who lacked the ability to put those pieces together and connect bad lending in Florida suburbs with the existential risk being taken by companies like Bear Stearns and Lehman Brothers.

The impossible job for the regulators (and journalists, and credit rating agencies) of the future is to better understand how the pieces within the infinitely complex economy and financial system connect with one another.

“The Big Short” is a powerful reminder of how hard that will be.

It was really just another example of the Law of Unintended Consequences, writ large.

Brookfield Investments Corporation, proud issuer of BRN.PR.A, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) today confirms Brookfield Investments Corporation’s (BIC or the Company) Senior Preferred Shares rating at Pfd-2 (low) with a Stable trend. The confirmation follows the announcement that (1) Brookfield Asset Management (BAM or the Guarantor), BIC’s 100% shareholder, will provide a full and unconditional subordinated guarantee on BIC’s outstanding Senior Preferred Shares, and (2) BIC will rely on continuous disclosure exemption and no longer file its financial statements. DBRS understands that the guarantee will apply to all BIC’s Preferred Shares outstanding other than those held by BAM and its affiliates. Claims under the guarantee will be subordinated to all outstanding senior indebtedness of BAM and will effectively rank pari passu with Preferred Shares issued by BAM.
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The proposed change will result in BIC’s discontinuing any public disclosure of its financial performance and investment composition. DBRS understands that BAM and BIC intend to maintain similar asset size, composition and financing sources in the foreseeable future. In view of this and so long as BAM’s guarantee remains valid, DBRS will no longer issue separate rating reports on BAM and will report the rating of BIC’s Preferred Shares as a guaranteed issue in future BAM rating reports.

Faircourt Split Trust, proud issuer of FCS.PR.C, has been confirmed at Pfd-3(low) by DBRS:

Based on yields of underlying securities as of December 15, 2015, the Portfolio currently receives dividends to cover 14% of Preferred Security distributions. As of December 14, 2015, downside protection available to holders of the Preferred Securities was 30.2%.
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The asset coverage test does not permit any cash distributions to the [Capital] unitholders if, after giving effect to the proposed distribution, the total assets of the Portfolio would be less than 1.4 times the outstanding principal amount of the Preferred Securities.

The Preferred Share distributions will result in an average annual grind on the net asset value (NAV) of 4.4% in the next 3.5 years.
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According to the terms of the Trust’s Declaration of Trust, the Trust has the ability to borrow up to 10% of Total Assets (as defined in the Declaration of Trust) under a loan facility in order to meet its investment objectives. Under the terms of the Company’s Trust Indenture, the loan facility is considered Senior Indebtedness, and all amounts owing under the loan facility will be paid in priority to the 6.00% Preferred Securities. There is currently no loan facility in place and, therefore, there are currently no amounts owing under a loan facility; however, to the extent that the Trust borrows under a loan facility, the rating on the 6.00% Preferred Securities could be negatively affected. DBRS will continue to monitor the situation in connection with the ongoing surveillance of the rating on the 6.00% Preferred Securities, and will take appropriate ratings action as necessary.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 70bp, FixedResets up 67bp and DeemedRetractibles gaining 37bp. The Performance Highlights table continues to show a lot of churn. Volume remained extremely high.

Nothing much happened today in the financial world, although what with the solstice and all, a few preferred share new issue salesmen may have been sacrificed by their clients.

In the real world, though there was marvellous news regarding private space ventures:

Elon Musk’s SpaceX showcased his dream of reusable spacecraft by making a Falcon 9 booster the first piece of an orbital rocket to land back on Earth, minutes after lofting satellites toward orbit.

Space Exploration Technologies Corp. pulled off the soft, vertical touchdown after the two-stage rocket propelled its payload of 11 Orbcomm Inc. satellites aloft. It was the company’s first flight since a fiery blast destroyed a Falcon 9 rocket in June, minutes after lift off.

“Welcome back, baby!” Musk wrote in a Twitter post on his way to the landing zone.

Monday’s mission helped validate Musk’s vision for lower-cost spaceflight and provides SpaceX a boost in his race with fellow billionaire Jeff Bezos to develop craft that can survive fiery blasts and return to Earth to be reused. Instead of ditching the booster, SpaceX used thrusters and sophisticated navigation to steer it from space to Landing Zone 1, a former U.S. Air Force rocket and missile testing range.

Scotia announced the redemption of sub-debt on its pretend-maturity:

Scotiabank (TSX: BNS) (NYSE: BNS) today announced that the Bank intends to redeem all outstanding 6.65% debentures due January 22, 2021 for 100% of their principal amount plus accrued interest to the redemption date. The redemption will occur on January 22, 2016. Formal notice will be delivered to the debenture holders in accordance with the terms and conditions set forth in the related trust indenture.

The redemption has been approved by the Office of the Superintendent of Financial Institutions and will be financed out of the general funds of Scotiabank.

This will assist new issue salesmen to sell ten-year sub-debt as if it should have a spread off five-year Canadas, although from what I understand this doesn’t work as well as it used to:

Investors who leaped into Basel-compliant bonds issued by Canadian banks to great fanfare are likely regretting their haste. A year on, the reward for taking on the risk of bailing out a bank has become much richer.

Relative yields of the bonds have widened 25 basis points this year, the worst performance among Canadian five-year corporate bonds, according to RBC Dominion Securities research. The debt is designed to convert to equity if a bank gets into financial distress, in line with new Basel rules to prevent another financial crisis. The first issue of the debt, called contingent capital bonds, in Canada was by Royal Bank of Canada in July, 2014.

RioCan REIT, proud issuer of REI.PR.A and REI.PR.C, was confirmed at Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has today confirmed RioCan Real Estate Investment Trust’s (RioCan or the Trust) Senior Unsecured Debentures rating and Senior Unsecured Debentures, Series I rating at BBB (high) and its Preferred Trust Units rating at Pfd-3 (high), all with Stable trends. The confirmations reflect RioCan’s near-term enhanced financial flexibility to fund its development pipeline and DBRS’s expectation that financial metrics will return to BBB (high) levels. The confirmations follow RioCan’s announcement to sell its U.S. portfolio of 49 retail properties located in the Northeastern United States and Texas for a total sale price of USD 1.9 billion or $2.7 billion to Blackstone Real Estate Partners VIII (Blackstone; the Transaction).
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DBRS notes that a positive rating action could occur should RioCan increase the size of its portfolio and reduce its geographic concentration while maintaining EBITDA interest coverage (including capitalized interest) above 3.0 times, such that it is more consistent with the A (low) rating category.

Valener Inc., proud issuer of VNR.PR.A, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. Valener’s preferred share rating is based on the credit quality of Gaz Métro Limited Partnership (the Partnership), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A”) of Gaz Métro inc. The one-notch differential in the ratings of Valener and the Partnership reflects the structural subordination at Valener.
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As the Company has no bonds/debentures issued, and is not expected to issue any long-term debt in the foreseeable future, its leverage solely consists of its credit facility outstanding. As at September 30, 2015, Valener utilized approximately $120 million of the $200 million credit facility which matures on September 30, 2020. Valener’s debt-to-capital ratio was reasonable at approximately 14.3% as at September 30, 2015. Valener is expected to fund future growth investments in a prudent manner to maintain leverage within the 20% threshold. If Valener is unable to do so on a sustained basis, this could result in a negative rating action. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-interest at 38.8 times, cash-flow fixed coverage at 10.4 times and cash flow-to-debt at 49.7% in F2015.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts off 7bp, FixedResets down 9bp and DeemedRetractibles losing 36bp. The Performance Highlights table is very long considering the placid overall numbers. Volume was very high.

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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.60 to be $1.22 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.02 cheap at its bid price of 11.85.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 19.80 to be 0.68 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 18.28 to be 0.55 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.40 to be $1.30 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.78 and appears to be $1.09 rich.

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FTS.PR.M, with a spread of +248bp, and bid at 19.48, looks $0.51 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.31 and is $1.05 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.44%, with one outlier above -0.50%. There are five junk outliers above -0.50%.

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