DBRS has released a commentary titled Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings:
- Sovereign credit ratings serve as a general benchmark for all other DBRS credit ratings. DBRS uses a case-by-case approach when rating non-sovereign entities or transactions, and avoids using a static “sovereign ceiling” concept, because this would imply that ratings are capped at the sovereign rating. DBRS does not institute a maximum number of notches between the sovereign rating and non-sovereign ratings.
- Financial institution and corporate ratings are typically constrained by the sovereign rating, although both could have a higher credit rating that that of the central government, with the level of operations outside of the country of domicile typically being a key consideration. Structured Finance ratings are addressed on a case-by-case basis and in many instances can be higher than the sovereign rating.
- In certain cases, country risks, which do not necessarily result in sovereign rating changes, may also affect non-sovereign ratings.
- Within the Euro zone, non-sovereign ratings may enjoy a lower degree of influence from sovereign-related stresses, since there is far lower exchange rate risk, less regulatory risk and existing support mechanisms from European institutions.
It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts were up 10bp, FixedResets gained 6bp, but DeemedRetractibles got knocked back for 16bp. Not much volatility, with only two issues on the Performance Highlight list. Volume was above average.
PerpetualDiscounts now yield 5.61%, equivalent to 7.28% at the now standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest equivalent spread is now about 180bp. Given the change in the equivalency factor, this is not really comparable to prior figures; the raw data for February 23 was 5.61% for PerpetualDiscounts and 5.50 for Long Corporates, so the change is really zero.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1549 % | 2,389.9 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1549 % | 3,594.4 |
| Floater | 2.51 % | 2.27 % | 46,275 | 21.55 | 4 | -0.1549 % | 2,580.5 |
| OpRet | 4.87 % | 3.58 % | 59,276 | 0.40 | 9 | 0.0086 % | 2,392.3 |
| SplitShare | 5.09 % | 2.79 % | 230,587 | 1.05 | 5 | 0.2252 % | 2,482.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0086 % | 2,187.5 |
| Perpetual-Premium | 5.74 % | 5.54 % | 131,810 | 6.19 | 10 | -0.0536 % | 2,033.3 |
| Perpetual-Discount | 5.51 % | 5.61 % | 127,283 | 14.41 | 14 | 0.1032 % | 2,118.8 |
| FixedReset | 5.21 % | 3.48 % | 197,756 | 3.00 | 54 | 0.0635 % | 2,279.6 |
| Deemed-Retractible | 5.23 % | 5.24 % | 379,719 | 8.28 | 53 | -0.1605 % | 2,080.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| SLF.PR.B | Deemed-Retractible | -1.40 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.18 Bid-YTW : 5.69 % |
| CIU.PR.B | FixedReset | 1.30 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-01 Maturity Price : 25.00 Evaluated at bid price : 27.35 Bid-YTW : 3.76 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| SLF.PR.D | Deemed-Retractible | 81,904 | RBC crossed blocks of 26,000 and 48,600, both at 21.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.85 Bid-YTW : 6.03 % |
| FTS.PR.H | FixedReset | 62,609 | RBC crossed 58,000 at 25.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-01 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 3.91 % |
| RY.PR.F | Deemed-Retractible | 60,741 | TD crossed 50,000 at 23.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.68 Bid-YTW : 5.13 % |
| BNS.PR.O | Deemed-Retractible | 56,070 | RBC crossed 50,000 at 25.66. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-26 Maturity Price : 25.00 Evaluated at bid price : 25.78 Bid-YTW : 5.14 % |
| CM.PR.D | Deemed-Retractible | 55,580 | Desjardins crossed 40,000 at 25.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.61 Bid-YTW : 1.90 % |
| TRP.PR.C | FixedReset | 52,676 | RBC bought 17,500 from Scotia at 25.45 and crossed 20,900 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-29 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : 4.08 % |
| There were 40 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.B | Deemed-Retractible | Quote: 22.59 – 22.88 Spot Rate : 0.2900 Average : 0.1765 YTW SCENARIO |
| MFC.PR.C | Deemed-Retractible | Quote: 21.93 – 22.22 Spot Rate : 0.2900 Average : 0.1862 YTW SCENARIO |
| GWO.PR.F | Deemed-Retractible | Quote: 25.05 – 25.34 Spot Rate : 0.2900 Average : 0.1990 YTW SCENARIO |
| ELF.PR.F | Deemed-Retractible | Quote: 22.45 – 22.79 Spot Rate : 0.3400 Average : 0.2679 YTW SCENARIO |
| TRP.PR.A | FixedReset | Quote: 25.55 – 25.99 Spot Rate : 0.4400 Average : 0.3679 YTW SCENARIO |
| CM.PR.K | FixedReset | Quote: 26.62 – 26.95 Spot Rate : 0.3300 Average : 0.2589 YTW SCENARIO |
I am questioning whether life company perpetual pfds should be included in the “deemed retractible” category. Do the new capital rules apply to the lifecos as well as the banks? The lifeco perpetual pfds initially traded up following the regulator comments about capital rules, but have recently significantly underperformed the bank perpetuals. Also, the banks themselves have made comments that support the assumption that they will be redeeming their perpetual prefs, whereas I have not seen similar comments from MFC, SLF, or GWO. How confident are you that the new capital rules apply to the lifecos, and their perpetual pfds will be redeemed?
Do the new capital rules apply to the lifecos as well as the banks?
No. Only the rules for banks have so far been released. I include the insurers and insurance holding company preferreds in DeemedRetractibles solely due to a view that OSFI is seeking to encourage convergence in the capital rules (as much as is possible, anyway, given the different nature of the business) and that it is more prudent to assume convergence than it would be to assume non-convergence.
I have not seen similar comments from MFC, SLF, or GWO
I think that OSFI would regard such commentary in advance of even a draft advisory in very poor light. I would not expect them to speculate at all, except something along the lines of ‘Reguatory changes may impact our capital but the extent is indeterminable at this time’ (this is not a quote, or even a paraphrase of a specific quote, it’s just how they generally talk, in order to walk the line between anticipating OSFI and making disclosure to shareholders).
How confident are you that the new capital rules apply to the lifecos, and their perpetual pfds will be redeemed?
Confident enough to include them in the DeemedRetractible index! Not confident enough to bet the farm! Call it somewhere in between.
Note that this issue was discussed at length in both the January and February edition of PrefLetter, and probably the upcoming March edition as well.
Thank-you