August 28, 2007


Just when you thought you were safe …

I was most impressed today by the DG.UN suspension of redemptions, a made-in-Canada $1.4-billion whoopsee, when in comes news of S&P’s downgrade of Cheyne, a $6-billion oopsy-daisy. According to S&P’s actual release (emphasis added):

Cheyne Finance is a SIV structure managed by Cheyne Capital Management Ltd. who has responsibility for purchasing assets, managing the portfolio, and overseeing the issuance of CP and medium-term notes.
Current pressure on market prices and the associated recent deterioration in the net asset value (NAV) of this vehicle have reached a level where the ratings have come under pressure.

The portfolio is predominantly invested in real estate securitizations, and we note that the portfolio has not suffered any downgrades to these underlying assets.
We have been notified today that the vehicle breached its major capital loss
test and so an enforcement event has occurred. In accordance with the program documents, the portfolio manager upon consultation with the security trustee may begin an orderly liquidation of assets and by Aug. 30 it will estimate the expected proceeds from future liquidations.

Both the “Issuer Credit Rating” and the rating on the Senior Notes has been downgraded from AAA to A-[Watch Negative]. Those of you who are in furious disagreement with my defense of the ratings agencies and eager to see me with egg all over my face (which I know is practically all of you, you’re not fooling anybody) will be most pleased!

What makes this event notable is the bolded disclosure above that this event results from a decline in market prices of the underlying security, not simply an inability to roll the paper at sensible prices. I eagerly await more information regarding Euromoney’s Best CDO Manager of 2006.

The good part about these events with Cheyne is that some actual liquidation of the underlying portfolio will take place. This will lead to at least some delevering of the financial system – this calling on bank lines stuff merely transfers debt. Some equity guys will be wiped out, but that’s what equity guys are for.

There’s more ghoulish news about liquidity exposures, this time from the Times:

State Street, the American bank, has been identified as having $22 billion (£10.9 billion) of exposure to asset-backed commercial paper conduits, the off-balance sheet vehicles that have caused severe problems for rivals in recent weeks amid turmoil in credit markets.

According to regulatory filings, the Boston-based bank has credit lines to at least six conduits, which account for 17 per cent of its total assets. That proportion makes State Street the most highly exposed bank to conduits among its European and American peers.

17% of assets is a very lot. On a positive note, their most recent 10-Q filing discloses that the bank had a Tier 1 Capital ratio of 12%, which is quite good, equal to TD Bank’s ratio as of last year-end, which was the best of the big 5. Even if we divide their 12% by 1.17 to get a ballpark idea of capital adequacy in the event all their lines get called on, we’re still in excess of 10%, which is still quite reasonable. But holy smokes, that’s a lot of lines!

Meanwhile, credit card delinquencies are rising while housing prices are falling, not a great combination.

The Fed’s trying to help! More banks got an exemption allowing them to lend discount money to their broker subsidiaries and I think we can count on this sort of thing being earnestly debated at this weekend’s Jackson Hole conference.

However, I can now provide links to another panic: the Panic of ’07 (not this ’07, the last one), brought to my attention by the WSJ Economics blog, which has some interesting-sounding links to papers I haven’t yet read. If I do read them and they’re good, I’ll post again. Panics, panics panics! Collect them all at PrefBlog!

In other news, some brave Australians are putting together a $1.9-billion LBO, Brad Setser discusses a claim that sub-prime was dumped on the Chinese, jumbo mortgages have become much less available, which is hitting Californial real-estate where the average house needs a jumbo loan and European politicians are planning to do some credit-crunch grandstanding.

Given the gloomy tone of today’s post, nobody will be surprised that US Equities got hammered, mainly financials. Canadian equities got pasted as well, but here it was mainly commodity-related stocks. Treasuries steepened on a banner day with more of the same for Canadas.

Preferreds had quite a good day, ignoring the stock market and the credit concerns. But it’s always the way! No sooner do I point out what a lousy month the splitShares are having than they have a great day and make up half the difference between their returns and OpRet’s. It’s nice to see, but maybe I should just keep my mouth shut from now on.

BAM.PR.N had very high volume today, courtesy of two large blocks crossed by Scotia. I have no idea whether that’s cleaned out their inventory or not, but it’s about time we saw some big-time crosses! Volume in general picked up, which is good to see … equity refugees?

BMO.PR.G has been removed from the OpRet index because it no longer exists. It’s the end of an era … the world was different at the time of its first month-end in the index, February, 1998.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.80% 4.84% 22,933 15.82 1 +0.0410% 1,044.1
Fixed-Floater 4.98% 4.81% 112,352 15.85 8 +0.2382% 1,023.0
Floater 4.93% -0.46% 75,222 7.95 4 +0.0918% 1,038.1
Op. Retract 4.84% 4.12% 81,061 3.53 15 -0.0446% 1,022.5
Split-Share 5.07% 4.87% 96,148 3.85 15 +0.5090% 1,043.2
Interest Bearing 6.22% 6.72% 67,002 4.58 3 -0.2351% 1,037.3
Perpetual-Premium 5.53% 5.19% 93,897 6.20 24 +0.1018% 1,025.0
Perpetual-Discount 5.11% 5.15% 271,118 15.24 39 +0.1515% 971.6
Major Price Changes
Issue Index Change Notes
IGM.PR.A OpRet -1.0440% Now with a pre-tax bid-YTW of 4.75% based on a bid of 26.54 and a softMaturity 2013-6-29 at 25.00.
FIG.PR.A InterestBearing -1.0050% There go most of yesterday’s gains! Asset coverage of just over 2.3:1 as of August 27 according to Faircourt. Now with a pre-tax bid-YTW of 6.73% (almost all as interest) based on a bid of 9.85 and a hardMaturity 2014-12-31 at 10.00.
PWF.PR.K PerpetualDiscount +1.1859% Now with a pre-tax bid-YTW of 5.23% based on a bid of 23.89 and a limitMaturity.
LFE.PR.A SplitShare +2.3346% Makes up for yesterday’s loss and then some! Asset coverage of just over 2.6:1 as of August 15 according to the company. Now with a pre-tax bid-YTW of 4.23% based on a bid of 10.52 and a hardMaturity 2012-12-1 at 10.00.
Volume Highlights
Issue Index Volume Notes
BAM.PR.N PerpetualDiscount 257,600 Scotia crossed 150,000 at 20.00, then another 100,000 at the same price. Now with a pre-tax bid-YTW of 6.05% based on a bid of 20.00 and a limitMaturity. There was a good bid at the close, too, closing at 20.00-13, 33×10; the almost-identical, very very slightly inferior BAM.PR.M closed at 20.23-35, 2×11.
TD.PR.O PerpetualDiscount 114,700 Nesbitt was working the ‘phones today, obviously, crossing 30,000, then 50,000, then 30,000, all at 24.61. Now with a pre-tax bid-YTW of 4.97% based on a bid of 24.61 and a limitMaturity.
GWO.PR.E OpRet 45,151 Now with a pre-tax bid-YTW of 4.07% based on a bid of 25.75 and a call 2011-4-30 at 25.00.
BCE.PR.C FixFloat 40,125  
ALB.PR.A SplitShare 30,937 Now with a pre-tax bid-YTW of 4.38% based on a bid of 24.90 and a hardMaturity 2011-2-28 at 25.00.

There were fifteen other $25-equivalent index-included issues trading over 10,000 shares today.

One Response to “August 28, 2007”

  1. […] in assets from its sponsored conduits; Assiduous Readers will remember that PrefBlog reported on August 28 that State Street had the highest exposure to conduits of its American and European peers. However, […]

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