PrefBlog

Canadian GDP was uninspiring:

Canada’s economic growth picked up at the start of the year, but the results fell short of expectations and follow an extended period of stagnation as the country struggles with higher interest rates.

Real gross domestic product rose at an annualized rate of 1.7 per cent in the first quarter, Statistics Canada said Friday in a report, undershooting analyst expectations of 2.2 per cent and Bank of Canada estimates of 2.8 per cent. Statscan also revised fourth-quarter growth down to 0.1 per cent annualized from 1 per cent.

Friday’s GDP report was the last major economic release before the Bank of Canada’s policy announcement on June 5, one of the most anticipated decisions in recent memory.

Investors are leaning toward an interest rate cut next week, which would mark the start of a policy easing cycle. To help it curb inflation, the Bank of Canada hiked its benchmark interest rate to 5 per cent from emergency lows of 0.25 per cent over a series of decisions in 2022 and 2023.
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Interest rate swaps, which capture market expectations of monetary policy, were pricing in a near 80-per-cent chance that the central bank trims its policy interest rate by a quarter-percentage-point, according to Bloomberg data as of Friday morning.

Ninepoint Partners LP was mentioned here on December 23, 2023 due to its efforts to introduce Canadian Large Cap Leaders Split Corp., which has made a decent start in its life as a SplitShare Corporation. Now they’re being mentioned again for a less happy reason:

Ninepoint Partners LP will stop paying cash distributions on three private debt funds that collectively manage $2-billion in assets and will also skip the current redemption window on its flagship private debt fund, preventing investors from cashing out in the second quarter.
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“After reviewing our various liquidity options, Ninepoint Partners and our subadvisors have determined that the best path forward to preserve liquidity and balance the long-term goals of these three affected funds is to redirect future distribution into additional units rather than cash distributions starting July 1, 2024,” Ninepoint said in a statement to The Globe.

In its memos to investment advisers, Ninepoint did not specify why it has halted cash distributions on the three funds. The asset manager wrote that it has been “reviewing various options with the aim of creating liquidity for the fund,” adding that, “at this time, liquidity generated will be used to honour ongoing commitments to portfolio companies, satisfy the fund’s redemption provisions, and meet operational requirements.”

Ninepoint is also changing some redemption protocols. Typically, its private debt investors are able to cash out once a quarter, up to a maximum of 5 per cent of total fund assets. This quarter, it is skipping redemptions altogether on the $1.2-billion fund it co-manages with Third Eye.

“Currently, the fund is unable to make redemption payments due to having insufficient net cash for this purpose,” Ninepoint wrote in a memo to advisers. “The fund must balance redemptions with its obligations to allocate sufficient resources to effectively execute its long-term strategy, ultimately benefiting all unitholders.”

Holy Smokes. Cutting off redemptions is bad enough, but they’ve cut off distributions too, which sounds much more serious. I’d like to get a look at their books … are they carrying a big proportion of defaulting bonds? Or a big proportion of Pay-In-Kind bonds, which are really zero-coupon bonds dressed up? Or do they, for some reason, sincerely believe that stopping distributions in order to fund redemptions is a good idea? Stay tuned! Thanks to Assiduous Reader pugwash for the heads-up!

Meanwhile, in US political news (no, I’m not going to write about what you think I’m going to write about):

Salem Media Group, the right-wing talk radio network owner, issued a public apology and said it would stop distributing a discredited 2020 election conspiracy theory film after a Georgia man wrongly accused of voter fraud sued the company for defamation.

The Georgia man, Mark Andrews, said in his 2022 lawsuit that “2000 Mules,” a film and book by far-right activist Dinesh D’Souza contained a string of bogus claims about the 2020 election, leading to threats of violence against him and his family.

Andrews said the film, which has been repeatedly promoted by Donald Trump and widely circulated in right-wing media as supposed proof that the 2020 election was stolen, had severely damaged his reputation.
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In the “2000 Mules” film, Andrews was featured on video with his face blurred depositing his ballot, along with those belonging to his family, into a drop box in what the film purported was a so-called “mule” operation.

“What you are seeing is a crime,” a voiceover from D’Souza declared. “These are fraudulent votes.”

Salem said in its Friday statement that it “relied on representations” that D’Souza had made.

“We have learned that the Georgia Bureau of Investigation has cleared Mr. Andrews of illegal voting activity in connection with the event depicted in 2000 Mules,” the company said.

… and:

Donald Trump’s former lawyer Rudy Giuliani is one step closer to being disbarred.

The professional responsibility board in Washington, DC, recommended Friday that the ex-New York mayor and federal prosecutor lose his law license because of his involvement in a bogus 2020 election fraud lawsuit.

Giuliani’s law license had already been suspended due to his work boosting Trump’s false assertions about his electoral loss. It is up to the DC Court of Appeals to decide whether to permanently disbar Giuliani.

… and this is also a Good Thing. Though the mills of God grind slowly; yet they grind exceeding small!

DBRS has downgraded CI Financial Corp.; there are no preferreds outstanding, but I thought it was interesting:

DBRS Limited (Morningstar DBRS) downgraded the credit ratings of CI Financial Corp.’s (CI or the Company) Senior Unsecured Debentures and the Issuer Rating of CI’s principal subsidiary, CI Investments Inc. (CII), to BBB (low) from BBB. The trends on the credit ratings remain Negative.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect the persistently high debt-to-EBITDA ratio and deteriorating fixed-charge coverage ratio, as the Company continues to prioritize buying back shares over deleveraging, a strategy that is expected to continue. The Negative trends also reflect deteriorating credit fundamentals, including weakened earnings with the revenue from the asset management business continuing to decline relative to prior years. Moreover, wealth management earnings growth has not been able to offset the very high level of expenses, including those related to deferred acquisition costs. Moreover, the planned structural debt reduction financed by U.S. dollars-denominated debt is considered in the context of future acquisition-related expenses, higher technology investments, and integration-related costs together with the shortened debt maturity profile.

Equities got whacked today, attributed to a weak bond market:

In afternoon trading, the benchmark U.S. 10-year yield was up 7.2 basis points to 4.613% after earlier hitting 4.638%, the highest level since May 1.

The move in U.S. Treasuries pressured Canadian yields higher, even though swaps markets continue to price in about 60% odds the Bank of Canada will cut interest rates next week. The Canada five-year bond yield, followed particularly closely because of its impact on fixed mortgage rates, rose to as high as 3.848% – coming within a mere 6 basis points of hitting fresh highs of the year.
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Minneapolis Fed President Neel Kashkari said in an interview with CNBC late on Tuesday that the U.S. central bank should wait for significant progress on inflation before cutting interest rates. He added that the Fed could potentially even raise rates if inflation fails to come down further.

His comments, which had pushed yields higher, echoed remarks from other Fed officials, including Governor Christopher Waller.

Meanwhile, the sale of $44 billion in U.S. seven-year debt Wednesday resulted in a high yield of 4.65%, higher than the expected rate at the bid deadline, suggesting that investors sought a premium to purchase the note. The bid-to-cover ratio, a measure of demand was 2.43, lower than last month’s 2.48 and the average of 2.55. The seven-year note sale, which followed equally lackluster auctions of U.S. two-year and five-year notes on Tuesday, raised concerns about future demand for government debt.

All ten major sectors on the Toronto market lost ground, including a decline of 2.39% for heavily-weighted financial.

PerpetualDiscounts now yield 6.51%, equivalent to 8.46% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.13% on 2024-5-24 and since then the closing price of ZLC has changed from 14.88 to 14.59, a decrease of 195bp in price, implying an increase of yields of 16bp (BMO reports a duration of 12.35, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.29%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 315bp from the 345bp reported May 22.

Hurray for T+1!

Settlements, the complex undertaking that ensures money and securities properly change hands every time stocks or bonds are bought or sold, previously had to be completed within two business days of the trade itself. As of Monday, however, settlements now have a single business day to be completed.

While the shift from what was known as T+2 to the new T+1 regime might seem insignificant or even irrelevant for retail investors, experts argue the opposite is true. Sale proceeds will hit investment accounts faster as trades start settling more quickly and interest charges on any money borrowed to buy securities will kick in one business day earlier than before.

Ultimately, the move to T+1 will increase market efficiency and lower risks of trades failing to settle because of market volatility, which should allow for lower trading fees.
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“A longer settlement period may have a particularly adverse effect in times of a steep market decline,” reads an excerpt from a 23-year-old Canadian Capital Markets Association report that advocated for a T+1 regime to be adopted. “Indeed, the earlier shortening of the settlement period from T+5 to T+3 was in part a response to the 1987 market decline.”

It’s about time. I’ve wanted T+1 for about 25 years now, but I suppose we had to wait for all the old guys who ran the settlements industry to die and make way for people more familiar with these new-fangled computer thingamajigs. And I love the way the article talks about the “complex undertaking” of settlements … it amazes me that an industry that routinely tells clients we can forecast the future has taken so long to modernize.

Oh, and I’ve just remembered an anecdote … back in the ’90’s I got a call from the (very big) trust company that had custody of one of the firm’s clients. They wanted us to try sending them a text file with settlement details rather than a fax, since they would then be able to save time getting the instructions into their system. The best part was that it wouldn’t cost us anything! The additional fee for electronic processing would be paid by the client – not real money at all!

The sales rep on the ‘phone was completely baffled as to why I would turn down the opportunity to reduce our processing time when it wouldn’t cost us anything.

An additional fee for electronic processing. That’s the Canadian financial industry for you! I won’t hold my breath waiting for the “lower trading fees” promised by the Globe’s article to trickle down to the client level any time soon.

TXPR closed at 603.86, up 0.95% on the day after setting a new 52-week high. Volume today was 2.90-million, above the median of the past 21 trading days.

CPD closed at 11.98, up 1.01% on the day after setting a new 52-week high. Volume was 79,120, above the median of the past 21 trading days.

ZPR closed at 10.39, up 0.68% on the day. Volume was 132,960, near the median of the past 21 trading days.

Five-year Canada yields were up to 3.75%.

TXPR closed at 599.43, up 0.92% on the day after setting a new 52-week high. Volume today was 1.92-million, below the median of the past 21 trading days.

CPD closed at 11.84, up 0.51% on the day. Volume was 158,970, highest of the past 21 trading days.

ZPR closed at 10.30, up 1.08% on the day. Volume was 151,060, above the median of the past 21 trading days.

Five-year Canada yields were up to 3.72%.

So it seems that money managers aren’t the only ones who appreciate the benefits of lying to their clients with the opacity of private equity valuations: large institutional investors want to get in on the action too:

Speaking at a panel discussion held by the Ontario Securities Commission debating the question “do public markets matter any more?” Mr. Flatt said public and private markets are symbiotic and that Brookfield operates in both. However, he also predicted that within the next 10 years, more than 30 institutional investors around the world – each with more than US$1-trillion in assets – will prefer private markets.

“They have to have things in the public markets, but the sums are so vast that they don’t want the distractions of the public markets on a day-to-day basis for all their capital, they just want to buy businesses,” Mr. Flatt said. “Public markets is just the ownership of a fractionalization of a business, but most people get confused because they think it is a casino.”

“That is why the private markets continue to grow, because these large funds have US$200-billion or US$500-billion or a trillion or two trillion, don’t want to have the distractions of the public markets for everything they own in their portfolio and be at the vagaries of the markets that go up and down on a daily basis,” he said.

Distractions? Distractions to whom? An actual investor will see opportunity in the chaos, distinguishing fundamental risk from emotion-driven price risk and profitting from the gaps.

By the size of the Assets Under Management that Mr. Flatt mentioned, it’s pretty clear that by “institutional investors” he means “Sovereign Wealth Funds”; and here I want to point out that there are two kinds of investment shops operating under the “single captive client” regime that I think is so superior (in general) to the alternatives.

The first kind does all their investment management in-house. The second kind farms out their investment management to third party firms. My admiration extends only to the former group; with the latter group, what you actually get is not performance driven management from people who know what they’re doing – the farming-out consists of one set of salesmen talking to another set of salesmen about things they don’t understand and writing each other cheques. There are a lot of firms who do some of both, of course; but Sovereign Wealth Funds, especially those who consider nepotism and cronyism as integral elements of Human Resource management, will not send their top guys to negotiate and monitor third party management.

[Law professor at Boston College Renee] Jones said public markets are shrinking and private markets are growing very rapidly, and the biggest concern that raises is about transparency.

“We are seeing more instances of mismanagement and misconduct and even fraud at these unicorns,” she said, using the term for private companies valued at more than US$1-billion. “That doesn’t just impact investors – it also impacts employees and even broader society.”

Indeed. I’m eagerly awaiting a massive report on the Thames Water fiasco and those of us with long memories will think back to the Alberta Heritage Fund, or whatever it was called, and its habit of recording spending on hospitals and their equipment as an investment and keeping it on the balance sheet. My God, imagine what they would have done with private equity!

PerpetualDiscounts now yield 6.55%, equivalent to 8.52% interest at the standard equivalency factor of 1.3x. Long corporates yielded 5.19% on 2024-5-10 and since then the closing price of ZLC has changed from 14.76 to 14.94, an increase of 122bp in price, implying a decrease of yields of 10bp (BMO reports a duration of 12.32, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 5.09%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 345bp from the 335bp reported May 15.