I have long taken the view that if sub-debt becomes contingent capital, then so will preferred shares; otherwise, issues’ seniority could leapfrog when an institution gets into trouble and that makes no sense. So I was gratified to hear this view echoed for the first time I’ve seen:
Canada is recommending that subordinated debt and preferred shares sold by banks be convertible to common shares to bolster capital in the event of a crisis. The conversion would be triggered if the banking regulator determines a troubled bank is about to fail, or if the government is forced to purchase shares in the bank.
It’s a shame that OSFI hasn’t actually published the proposal; or, indeed, done any work at all that I can see on the proposal.
An older paper on Contingent Capital is Rethinking Capital Regulation by Kashyap, Rajan & Stein, referenced but not previously linked in HM Treasury Discusses Contingent Capital.
Korea is imposing foreign exchange position limits:
Foreign banks will be required to cut currency derivatives holdings to 250 percent of equity capital and domestic banks to 50 percent, with three months to meet the new ceiling and two years to cover existing positions. The limit on derivatives to cover corporate settlements will be cut to 100 percent of the total, from 125 percent.
“We are not limiting portfolio investment,” said Kim Yi Tae, director at the finance ministry’s foreign exchange market division. “We’re not putting regulations on trade financing, only on bank lending in foreign currencies and on forwards.”
…
The new rules are to reduce systemic risks, which should serve as a safety net to avert a crisis, the government and central bank said in yesterday’s statement.
The ‘systemic risk’ rationale sounds a little thin to me. If that was the problem, they could simply impose higher risk-weights on FX positions. But prescriptive rules are always more attractive to politicians and bureaucrats than market-based solutions.
Call risk is hitting the Asian junk market:
The biggest junk bond market rally in more than a decade is increasing the risk investors in Asian high-yield debt will be roiled by early redemptions, according to Morgan Stanley and Credit Agricole CIB.
Cheaper funding alternatives such as loans make companies more likely to buy back callable notes, unsettling investors who may be forced to reinvest at lower rates or in more volatile assets. Thirty-five percent of liquid Asian junk bonds are callable — most this year — and about 20 percent are trading above or close to their call price, according to Morgan Stanley research.
Junk? Greece is junk says Moody’s:
Greece’s credit rating was cut four steps to non-investment grade, or junk, by Moody’s Investors Service, which cited the country’s economic “risks.”
The rating was lowered to Ba1 from A3, Moody’s said in a statement today from London. The outlook is stable, it said. Greece is already rated junk by Standard & Poor’s.
…
S&P cut Greece’s credit rating to non-investment grade on April 27, the first time a euro member lost its investment-grade since the euro’s 1999 debut. S&P warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt.
Fannie & Freddie continue to demonstrate that no matter what degree of incompetence at which we assess Wall Street, it will always be out-done by the politicians:
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
Quick! Trump up another charge against Goldman Sachs!
It was another very good day for Canadian preferred shares, with PerpetualDiscounts up 22bp and FixedResets gaining 29bp, on slightly elevated volume. There were no losers on the Performance Highlights table!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 2.69 % | 2.76 % | 37,144 | 20.60 | 1 | -0.0470 % | 2,092.7 |
| FixedFloater | 5.22 % | 3.33 % | 26,438 | 19.84 | 1 | 0.0000 % | 3,067.2 |
| Floater | 2.42 % | 2.80 % | 81,737 | 20.24 | 3 | -0.0422 % | 2,238.2 |
| OpRet | 4.89 % | 3.84 % | 94,219 | 0.93 | 11 | 0.0177 % | 2,320.0 |
| SplitShare | 6.37 % | 4.88 % | 99,830 | 0.08 | 2 | 0.3524 % | 2,178.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0177 % | 2,121.4 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2237 % | 1,893.0 |
| Perpetual-Discount | 5.99 % | 6.04 % | 203,270 | 13.82 | 77 | 0.2237 % | 1,791.8 |
| FixedReset | 5.42 % | 3.97 % | 390,680 | 3.49 | 45 | 0.2928 % | 2,183.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSB.PR.C | Perpetual-Discount | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 20.97 Evaluated at bid price : 20.97 Bid-YTW : 6.11 % |
| CM.PR.P | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 22.73 Evaluated at bid price : 23.36 Bid-YTW : 5.95 % |
| CIU.PR.A | Perpetual-Discount | 1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 5.81 % |
| BMO.PR.H | Perpetual-Discount | 1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 22.47 Evaluated at bid price : 23.01 Bid-YTW : 5.79 % |
| IAG.PR.F | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 23.34 Evaluated at bid price : 23.50 Bid-YTW : 6.30 % |
| BAM.PR.M | Perpetual-Discount | 1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 17.67 Evaluated at bid price : 17.67 Bid-YTW : 6.75 % |
| PWF.PR.M | FixedReset | 1.76 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 27.25 Bid-YTW : 3.63 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| SLF.PR.A | Perpetual-Discount | 64,050 | Desjardins crossed blocks of 25,000 and 17,000, both at 19.84. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 19.80 Evaluated at bid price : 19.80 Bid-YTW : 6.02 % |
| BMO.PR.P | FixedReset | 49,125 | Scotia crossed 25,000 at 26.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 3.99 % |
| HSB.PR.D | Perpetual-Discount | 41,308 | RBC crossed blocks of 10,100 and 12,000, both at 20.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 20.55 Evaluated at bid price : 20.55 Bid-YTW : 6.11 % |
| IAG.PR.E | Perpetual-Discount | 33,710 | Desjardins bought 15,000 from Scotia at 24.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 24.24 Evaluated at bid price : 24.44 Bid-YTW : 6.15 % |
| MFC.PR.E | FixedReset | 32,350 | RBC crossed 25,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 3.91 % |
| SLF.PR.G | FixedReset | 31,375 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-06-14 Maturity Price : 24.81 Evaluated at bid price : 24.86 Bid-YTW : 4.27 % |
| There were 33 other index-included issues trading in excess of 10,000 shares. | |||