October 25, 2007

A bit more news came out regarding the Aastra lawsuit mentioned yesterday. In a Globe story:

Mr. Del Sorbo was an investment adviser to Aastra for about seven years, according to the lawsuit. During May and June, rising interest rates caused paper losses in the company’s bond and preferred share holdings. As a result, the company told Mr. Del Sorbo in June “that it wished to invest only in conservative, short-term, liquid securities with no exposure to interest rates and very low default risks,” the suit said.

As the portfolio was being reassessed, Mr. Del Sorbo talked about non-bank asset-backed commercial paper, “which he described as primarily baskets of residential mortgages with limited car loans and credit card debt, bundled together to produce a high-quality short-term investment product,” the suit said.

In July, Aastra put $8.5-million into an ABCP trust called Structured Investment Trust III, which was priced to yield 4.62 per cent.

That’s one of the issuers whose business was frozen under the Montreal Accord.

As it turns out, the underlying assets were about 94 per cent credit default swaps on long-term bonds, the lawsuit said. The claims have not been proven in court.

John Tobia, Aastra’s general counsel, would only say that “from our perspective, the pleadings speak for themselves.”

Finding Structured Investment Trust III on the DBRS website is a little tricky (they’re not exactly unique keywords, are they?), but one can quickly find the May 11 Press Release:

The Trust is a vehicle that is designed to purchase structured securities including CDOs.

The press release also states that Coventree is the sponsor, and a quick trip to Coventree’s site yields the conduit’s page which has links to the full rating report and the Information Memorandum. Coventree’s site also has Monthly Conduit Reports which are password protected; I can’t be bothered to get a password because, well, because I’m not putting $8.5-million into the thing. However, the Information Memorandum states:

The Financial Agent prepares a monthly Investor Report and makes this report available on-line to purchasers of Notes on a password-protected basis at http://www.nereusfinancial.com/. The Investor Reports contain information about the specific Purchased Securities held by SIT from time to time. Purchased Securities are obtained by SIT from Originators in major international credit default, CDO and associated markets. In order to secure optimum execution and terms, in accordance with prevailing practice in these markets, the identities of Originators are shared with the Rating Agency but are otherwise kept confidential by the Financial Agent.

It’s right there, in the summary, page 4, under the heading “Investor Information”. If anybody didn’t know what was in the thing, it’s because they couldn’t be bothered to find out.

Aastra’s counsel is quoted as stating that “from our perspective, the pleadings speak for themselves.”, but oddly, I don’t see the pleadings disclosed on their website; I guess they don’t really have a lot to say. Or maybe it’s just an oversight. Or something.

Speculation is building regarding next week’s Fed meeting, with a cut of 25bp being forecast by some. The November Fed Funds contract implies that this forecast has some general acceptance; trading at 95.54 today implying a projected effective rate of 4.46%. The actual trading rates for this month have been choppy, but it appears that the current 4.75% target is holding and being defended.

Meanwhile, the credit crunch continues, with another SIV indicating it is having difficulty financing:

MBIA Inc., owner of the world’s largest bond insurer, said a $1.8 billion structured investment vehicle it runs through its asset management business is having trouble raising money and is seeking funding alternatives.

MBIA has invested $15.8 million in the capital notes of Hudson-Thames Capital Ltd. and said it has no obligation to provide the SIV with liquidity support or guarantees. MBIA today reported its first quarterly loss ever after marking down the value of mortgage-related debt it guarantees by $342.1 million.

In what may or may not be interpreted as a positive sign (depending on what answer you want) US ABCP outstanding declined by only USD 4.6-billion in the past week – practically a rounding error. November could be interesting, however: there are persistent, if unofficial and unconfirmed reports that there will be a big whack of MTN paper maturing, that may well be very difficult to roll.

One of the more entertaining things I’ve read recently is an ‘I toldja so’ puff-piece by Nouriel Roubini – for instance:

In March, when this author wrote a long (30 pages), serious semi-academic research analysis – with Christian Menegatti – of why the housing recession had not bottomed out and why home prices would sharply fall further, this scholarly analysis was summarily and cheaply dismissed in the most crass terms (“the paper is really just a longer-than-usual blog”) by a popular blogger who had barely bothered even to read it. At least Daniel Gross – a very smart blogger – had the decency to literally eat pages of his own writings – as he had promised he would – when one [of] his financial predictions failed.

Cassandra’s Revenge!

I’ve updated the post regarding the BoE Financial Stability Report and will add more as I work through it. It’s good stuff, it really is; beautifully researched. If I made a special note of everything it contains that is interesting, my post would be longer than the report itself; those with an interest in this sort of thing are strongly encouraged to read the full publication.

As far as preferreds are concerned … PerpetualDiscounts continued to decline, much to my chagrin. One participant on Financial Webring Forum noted today:

I suppose this may have answered my question I had been pondering for some time about the recent MAPF sectoral allocation shift toward discount issues. The low coupon discounts seem like a bit of a trap to me, and although I hadn’t ruled out that you’d simply lost your mind, I suspect you know what you’re doing……………….

Well, it’s nice to know he presumed I had a mind to start with! As it is, I fear that results for the fund for this month will be summed up as “Too Soon”. As has been noted here in the past, sectoral shifts within the fund do not reflect an attempt at market timing; merely an analysis of the curve that shows that one sector has gotten out of whack with another. Over time, this works quite well; but not this time.

HPF.PR.B was down over 7% today, presumably due to yesterday’s downgrade. I suppose there are some non-PrefBlog-reading investors out there who considered the downgrade a surprise.

Good volume today, which is certainly meaningful. Just precisely what it means changes every time, of course, but in a month or so the technical analysts will be pleased to tell us what we obviously should have done.

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 4.90% 4.86% 475,262 15.58 1 0.0000% 1,043.7
Fixed-Floater 4.88% 4.80% 101,651 15.77 7 +0.0651% 1,039.5
Floater 4.49% 3.85% 69,348 10.76 3 +0.5925% 1,045.5
Op. Retract 4.86% 3.57% 79,980 3.36 15 +0.0683% 1,027.7
Split-Share 5.18% 5.13% 86,233 4.11 15 +0.0049% 1,040.8
Interest Bearing 6.22% 6.23% 61,323 3.62 4 -0.0238% 1,063.5
Perpetual-Premium 5.75% 5.63% 100,741 9.85 17 +0.1047% 998.8
Perpetual-Discount 5.57% 5.61% 320,031 14.51 47 -0.3591% 906.3
Major Price Changes
Issue Index Change Notes
IAG.PR.A PerpetualDiscount -3.6127% Now with a pre-tax bid-YTW of 5.81% based on a bid of 20.01 and a limitMaturity.
SLF.PR.E PerpetualDiscount -3.0993% Now with a pre-tax bid-YTW of 5.69% based on a bid of 20.01 and a limitMaturity.
GWO.PR.G PerpetualDiscount -2.2621% Now with a pre-tax bid-YTW of 5.74% based on a bid of 22.90 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.8947% Now with a pre-tax bid-YTW of 5.42% based on a bid of 23.30 and a limitMaturity.
BAM.PR.N PerpetualDiscount -1.4846% Now with a pre-tax bid-YTW of 6.48% based on a bid of 18.58 and a limitMaturity. Closed at 18.58-81, 3×5, while the virtually identical (and now even more distressed) BAM.PR.M closed at 19.83-85, 1×12. I’ve seen a lot of things in the preferred share market that make no sense at all; but if this doesn’t take the cake, it’s at least worth a few pop-tarts.
RY.PR.D PerpetualDiscount -1.4016% Now with a pre-tax bid-YTW of 5.52% based on a bid of 20.40 and a limitMaturity.
RY.PR.G PerpetualDiscount -1.3410% Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.60 and a limitMaturity.
ELF.PR.F PerpetualDiscount -1.3363% Now with a pre-tax bid-YTW of 6.03% based on a bid of 22.15 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.2677% Now with a pre-tax bid-YTW of 5.62% based on a bid of 20.25 and a limitMaturity.
RY.PR.A PerpetualDiscount -1.1572% Now with a pre-tax bid-YTW of 5.43% based on a bid of 20.50 and a limitMaturity.
BNS.PR.L PerpetualDiscount -1.0466% Now with a pre-tax bid-YTW of 5.44% based on a bid of 20.80 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.0134% Now with a pre-tax bid-YTW of 5.75% based on a bid of 21.93 and a limitMaturity.
GWO.PR.E OpRet +1.0392% Now with a pre-tax bid-YTW of 4.49% based on a bid of 25.28 and a call 2011-4-30 at 25.00.
FTS.PR.F PerpetualDiscount +1.1021% Now with a pre-tax bid-YTW of 5.91% based on a bid of 21.10 and a limitMaturity.
CM.PR.P PerpetualPremium (for now!) +1.1594% Now with a pre-tax bid-YTW of 5.58% based on a bid of 24.43 and a limitMaturity.
POW.PR.A PerpetualDiscount +1.2180% Now with a pre-tax bid-YTW of 5.85% based on a bid of 24.10 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.2264% Now with a pre-tax bid-YTW of 6.05% based on a bid of 19.81 and a limitMaturity. Somebody should call up E-L Financial and tell them they’re distressed!
BAM.PR.B Floater +1.3361%  
BNS.PR.K PerpetualDiscount +1.8519% Now with a pre-tax bid-YTW of 5.48% based on a bid of 22.00 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
MFC.PR.B PerpetualDiscount 422,515 Now with a pre-tax bid-YTW of 5.39% based on a bid of 21.85 and a limitMaturity.
SLF.PR.C PerpetualDiscount 208,485 Nesbitt crossed 150,000 at 21.01, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 5.39% based on a bid of 20.90 and a limitMaturity.
PWF.PR.F PerpetualDiscount 129,350 Now with a pre-tax bid-YTW of 5.71% based on a bid of 23.06 and a limitMaturity.
BMO.PR.H PerpetualDiscount 103,200 Desjardins crossed 100,000 at 24.90. Now with a pre-tax bid-YTW of 5.34% based on a bid of 24.79 and a limitMaturity.
BNS.PR.M PerpetualDiscount 82,100 Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.89 and a limitMaturity.

There were thirty other index-included $25.00-equivalent issues trading over 10,000 shares today.

2 Responses to “October 25, 2007”

  1. […] Regular readers will know that I am currently enraged by the persistent difference in price between BAM.PR.M and BAM.PR.N! […]

  2. […] There is another very similar – in its essentials – situation occuring in the SIV area. MBIA and its problems in finding financing for its conduit, Hudson-Thames was mentioned here on October 25. Now we learn that: MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV’s short-term debt since August, Chief Financial Officer Chuck Chaplin said. […]

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