We’re learning more about the discount window:
Details of Fed lending released last week show that Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. The House subcommittee that oversees the Fed plans hearings on the central bank’s discount window lending to offshore financial institutions next month.
By lending to Dexia, the Fed kept money flowing into local government projects throughout the U.S. as well as the money market funds that invested in them. Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority.
“If Dexia went bankrupt, it could have been a catastrophe for municipal finance and money funds,” said Matt Fabian, a Concord, Massachusetts-based senior analyst and managing director at Municipal Markets Advisors, an independent research company. “The market has extensive exposure to foreign banks.”
It will be remembered that illiquidity is different from insolvency – I fully support the loan of funds to illiquid banks, as long as this is done at a penalty rate. It is capital injections to insolvent banks that arouses my ire.
Speaking of illiquidity and insolvency, Portugal needs help:
Portugal has asked the European Union for a bailout after a domestic political crisis helped push borrowing costs to record levels, making it the third euro region country to seek a rescue.
“I tried everything but we came to a moment that not taking this decision would bring risks we can’t afford,” Prime Minister Jose Socrates said in a televised statement from Lisbon today. “The government decided to make the European Commission a request for financial aid.”
…
Portuguese bond yields have surged since Socrates offered to resign on March 23 following a parliamentary rejection of proposed budget cuts.
…
Portugal has been trying to avoid requesting aid for the first time since 1983, when it received external help from the Washington-based IMF. Its credit rating was nevertheless cut by Moody’s Investors Service for the second time in three weeks yesterday, taking it to Baa1. That’s the same level as Ireland, Russia, Mexico and Thailand.Portugal has struggled to convince investors it can avoid a bailout partly because its economy has barely grown in the past decade. It has expanded at an average annual rate of less than 1 percent in the period, ranking among Europe’s weakest growth rates. Unemployment rose to 11.1 percent in the fourth quarter, the highest since at least 1998, as the economy contracted for the first time in a year.
Portugal reported a budget deficit last week equal to 8.6 percent of the 2010 gross domestic product, higher than the 7.3 percent the government had previously forecast.
DBRS has made some changes to its split-share rating methodology:
With the release of the updated methodology, DBRS’s approach to rating split share transactions is largely unchanged. The primary rating factors are the downside protection and dividend coverage available to the preferred shares; the credit quality, diversification and volatility of the portfolio; and the size of capital share distributions and net asset value (NAV) level where distributions are suspended.
The updates to the methodology are minor in nature, including changes to the criteria for portfolio holdings, the addition of a currency hedging section and adjustments to other rating factors for assigning initial preferred share ratings and for the surveillance of existing ratings.
I was very please to see the following explicitly stated:
DBRS views the strategy of writing covered calls as an additional element of risk for preferred shareholders because of the potential to give up unrealized capital gains that would increase the downside protection available to cover future portfolio losses. Furthermore, an option-writing strategy relies on the ability of the investment manager. The investment manager has a large amount of discretion to implement its desired strategy, and the resulting trading activity is not monitored as easily as the performance of a static portfolio. Relying partially on the ability of the investment manager rather than the strength of a split share structure is a negative rating factor.
Every day I get a little more relieved that I don’t work for a big firm:
But the events at that 2009 party have become the subject of two lawsuits and an internal investigation by the firm.
The catalyst for it all was a 13-page complaint about the party penned the next day by Sarah Diebel, then a junior lawyer with the firm. She delivered it to an MDC partner in accordance with the firm’s sexual harassment policy.
In the letter, Diebel described the party as a “night of debauchery” where “free booze flowed” and where the firm’s partners became “extremely intoxicated.”
She described at length how partners behaved inappropriately, and at one point singled out Cowling and another lawyer for “rubbing their butts up against me and other women.”
Diebel later concluded: “While I like to dance, I don’t like being groped.”
Puerile garbage like that results in lawsuits, resignations, firings and, worst of all, being discussed seriously by adults more than a day afterwards? Grow up, people, and stop pretending this high-school crap is the end of the world.
It was a poor day for the Canadian preferred share market, with PerpetualDiscounts getting thumped for a loss of 20bp, FixedResets losing 1bp and DeemedRetractibles down 7bp. Not much volatility. Volume was good.
The National Bank issues subject to the issuer bid closed bid within a few pennies of the tender price. If you haven’t tendered or sold by now, you may have problems – get cracking right away! Most dealers will have a cut-off day for instructions at least one day prior to next Monday’s expiration.
PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 5.6%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now 160bp, a sharp tightening from the 170bp reported on March 30, due to an increase in long corporate yields being unmatched by PerpetualDiscounts.
| 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 | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0119 % | 2,411.8 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0119 % | 3,627.3 |
| Floater | 2.49 % | 2.27 % | 43,017 | 21.57 | 4 | 0.0119 % | 2,604.1 |
| OpRet | 4.91 % | 3.45 % | 55,554 | 2.11 | 8 | -0.0222 % | 2,413.0 |
| SplitShare | 5.19 % | -2.45 % | 121,475 | 0.69 | 6 | 0.1974 % | 2,501.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0222 % | 2,206.5 |
| Perpetual-Premium | 5.78 % | 5.27 % | 130,753 | 0.95 | 8 | 0.2248 % | 2,054.3 |
| Perpetual-Discount | 5.54 % | 5.52 % | 133,856 | 14.45 | 16 | -0.1958 % | 2,137.3 |
| FixedReset | 5.16 % | 3.35 % | 210,830 | 2.96 | 57 | -0.0088 % | 2,294.3 |
| Deemed-Retractible | 5.22 % | 5.13 % | 337,934 | 8.21 | 53 | -0.0704 % | 2,094.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| IAG.PR.E | Deemed-Retractible | -1.24 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 5.72 % |
| ELF.PR.G | Deemed-Retractible | -1.07 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.28 Bid-YTW : 7.33 % |
| TDS.PR.C | SplitShare | 1.62 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2011-12-15 Maturity Price : 10.00 Evaluated at bid price : 10.64 Bid-YTW : -3.39 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.F | FixedReset | 146,000 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 4.21 % |
| NA.PR.P | FixedReset | 145,370 | Issuer bid. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 27.96 Bid-YTW : 2.25 % |
| NA.PR.O | FixedReset | 110,650 | Issuer bid. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 27.96 Bid-YTW : 2.24 % |
| BNS.PR.O | Deemed-Retractible | 98,595 | RBC crossed 50,000 at 25.78; TD crossed blocks of 30,000 and 15,000 shares at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-26 Maturity Price : 25.00 Evaluated at bid price : 25.74 Bid-YTW : 5.00 % |
| BMO.PR.L | Deemed-Retractible | 60,670 | Nesbitt crossed 50,000 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-24 Maturity Price : 25.00 Evaluated at bid price : 26.10 Bid-YTW : 5.13 % |
| BNS.PR.Q | FixedReset | 58,161 | Desjardins crossed 35,000 at 25.96. TD crossed 15,000 at 25.97. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 25.95 Bid-YTW : 3.32 % |
| There were 38 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.E | OpRet | Quote: 26.45 – 27.09 Spot Rate : 0.6400 Average : 0.4786 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 24.50 – 24.80 Spot Rate : 0.3000 Average : 0.2142 YTW SCENARIO |
| PWF.PR.L | Perpetual-Discount | Quote: 23.57 – 23.86 Spot Rate : 0.2900 Average : 0.2168 YTW SCENARIO |
| PWF.PR.E | Perpetual-Discount | Quote: 24.53 – 24.79 Spot Rate : 0.2600 Average : 0.1912 YTW SCENARIO |
| BMO.PR.P | FixedReset | Quote: 26.77 – 26.96 Spot Rate : 0.1900 Average : 0.1269 YTW SCENARIO |
| TD.PR.Q | Deemed-Retractible | Quote: 25.61 – 25.83 Spot Rate : 0.2200 Average : 0.1624 YTW SCENARIO |
[…] PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard equivalency factor of 1.3x. Long Corporates yield about 5.6% (maybe a little more) so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 170bp, a reversal of the sharp tightening reported on April 6. […]