PrefBlog

TransAlta has done a deal with Brookfield Renewable:

TransAlta Corp. has lined up Brookfield Renewable Partners LP for a $750-million investment that aims to accelerate its move to renewable power and return money to shareholders who have been waiting for a turnaround.

TransAlta will use $350-million to speed its move away from coal and gas power, and another $250-million for a major share buyback. TransAlta will use the rest for other energy projects and general corporate spending. The Brookfield fund, an offshoot of Brookfield Asset Management Inc., is buying new TransAlta convertible debt and preferred stock. Each will pay 7-per-cent annual interest that will be exchangeable, in 2024, into up to 49 per cent of TransAlta’s Alberta hydro assets, based on their profitability at the time.

Brookfield − which already owned nearly 5 per cent of TransAlta in one of Brookfield Asset Management’s many investment funds − also committed to increasing its ownership in TransAlta’s common stock to 9 per cent by buying on the open market, so long as it pays no more than $10 a share.

DBRS comments:

DBRS notes that TAC’s 2018 consolidated and non-consolidated financial ratios improved notably from 2017 levels, reflecting a significant reduction of debt and relatively stable cash flow. Although the Investment will raise the debt and equivalents modestly, the pro forma level of corporate debt and equivalents would still remain below the 2017 level. As a result, DBRS does not expect the Investment and the use of proceeds as currently proposed by TAC to have a material impact on TAC’s credit profile.

The International Association of Insurance Supervisors has announced:

The CSFWG will host an ICS Stakeholder Meeting in Orlando on 10 April. The stakeholder meeting is intended to provide a forum for constructive feedback on ICS Version 2.0. Stakeholders who wish to provide presentations on key issues related to the ICS should contact danita.pattemore@bis.org and becky.easland@bis.org by 22 March 2019 indicating the topics they wish to cover. Presentation materials should be provided no later than 29 March 2019. To register, please click here.

Assiduous Readers will remember that “ICS” is the Insurance Capital Standards that will determine the fate of insurance Deemed Maturities.

Canadian inflation continues to be firm:

The annual pace of inflation edged higher in February as gains in most spending categories offset lower gasoline prices, Statistics Canada said Friday.

The federal data agency said the consumer price index climbed 1.5 per cent last month compared to the same month a year ago. The move compared with a year-over-over increase of 1.4 per cent in January.
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Helping push costs higher was a 8.1 per cent increase in mortgage interest costs and a 14.3 per cent rise compared with a year ago in the cost of fresh vegetables. The cost of passenger vehicle insurance premiums also rose 6.3 per cent.

The cost of gasoline was down 11.9 per cent compared with the same month last year, as overall energy prices slipped 5.7 per cent.

However, Statistics Canada said tighter oil supplies and the temporary closure of several refineries for seasonal maintenance helped boost gasoline prices 1.9 per cent compared with January, the first month-over-month increase in gasoline since July 2018.

Excluding gasoline, the annual pace of inflation held steady at 2.1 per cent, the same as January.
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The report also said the average of the Bank of Canada’s three core inflation readings, which omit more-volatile items such as gas, edged down to 1.8 per cent compared with a reading of 1.9 per cent in January.

The bond market, however, was very strong today, with the Canada 5-Year yield down 8bp to 1.48%. Long Canadas are at 1.89%, so call them even with inflation before taxes.

The federal budget has brought at least one good thing with it – deferred annuities:

The federal government is permitting annuities that would allow retirees to move some savings out of their registered retirement funds to an annuity deferred until age 85.

The tax rules generally require an annuity purchased with registered funds to begin after the annuitant turns 71.

The Liberal government is amending the rules to permit seniors to purchase an advanced life deferred annuity (ALDA) under certain registered plans—an annuity whose commencement can be deferred until age 85. The plan was introduced Tuesday in the federal budget.
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Lifetime limits will be 25% of a specific amount of a qualifying plan, calculated as:
•the value of all property (other than most annuities, including ALDAs) held in the qualifying plan as at the end of the previous year; and
•any amounts from the qualifying plan used to purchase ALDAs in previous years.

If the value of an ALDA purchased in previous years exceeds the 25% limit for a particular year due a decline in qualifying plan assets, the retiree won’t be forced to surrender or dispose of the annuity, the budget says.

ALDAs will also have a lifetime limit of $150,000 from all qualifying plans, indexed to inflation for taxation years after 2020, rounded to the nearest $10,000.

There were no surprises in today’s FOMC statement:

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

The FOMC also issued a note titled Balance Sheet Normalization Principles and Plans.

The Grits latest subsidy effort is attracting some criticism:

The announced housing-affordability plan, which will have Crown agency Canada Mortgage and Housing Corp. provide up to 10-per-cent funding of mortgages for first-time buyers, is a can’t-lose political proposition for a government that hangs its hat on supporting the middle class (and expects that support to be returned at the ballot box).
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The plan will increase demand for homes – that’s precisely what it’s designed to do. The government argues that because CMHC will contribute a bigger incentive for buyers of newly built homes, the plan will also spur increased supply. But while the demand will be essentially immediate, it takes much longer for homes to be built to catch up. It doesn’t take a PhD in economics to figure out that higher demand, in the absence of matching supply, will inflate prices. The help the government is offering new buyers could very quickly be wiped out by rising prices; in markets where prices have been declining, this could undermine the improving affordability that buyers would have seen otherwise. And this isn’t just for first-time buyers – all buyers will feel the impact.

None of this is helpful in addressing Canada’s record-high household debt loads. Instead, it encourages more people at the margins of being able to afford a home to take on mortgage debt, while contributing to the bloated housing costs that got Canadian households into the current debt conundrum in the first place.

Tell me again how this is a good investment?

Yes, I’ve often said that that this country really needs is an increased supply of houses that can’t be sold without a government subsidy. Haven’t we all?

Like so many other idiotic government programmes (such as rent control and subsidized housing), this will have a deleterious effect on the economy due to the restriction of labour mobility. You buy a house for X, assisted by a 10% government subsidy. Ten years later, you get the offer of a slightly better job, but to take it will require moving. Moving means you have to pay back your interest-free loan. So you will have to buy a house that’s not as good as the one you’re in. And after adding up all the pros and cons, you decide to turn down the job and stay put. Hurrah for productivity!

On a brighter note, it appears the CMHC is reducing its impact on mortgage insurance – in 2017 there was 480-billion worth of insurance in force, compared to 557-billion in 2013; the CMHC insured about 31.9% of outstanding Canadian residential mortgages in 2017, compared to 45.6% in 2013.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 350bp, a slight (and perhaps spurious) narrowing from the 355bp reported on March 13.