June 29, 2011

Yellow Media has announced:

that the Federal Minister of Industry, under the Investment Canada Act, has approved the sale of Trader Corporation to funds advised by Apax Partners. Completion of the sale remains subject to satisfaction of other customary conditions. Yellow Media Inc. currently expects the transaction to close by the end of July 2011.

This release – or perhaps some encouragement from the company – provoked DBRS to comment:

DBRS notes that the Trader sale is expected to accelerate the Company’s de-leveraging efforts. The decision to sell Trader remains a critical component in achieving improved leverage – to around 2.0 times debt-to-EBITDA from 2.74 times currently. As stated in our March 25, 2011, press release, DBRS believes that a stronger financial profile remains prudent given the uncertainty that the Company’s business risk profile faces with its multi-year transition from print to digital.

Despite Yellow Media’s leading position in the directories business, its principal segment following the sale of Trader, DBRS notes that this division continues to face significant risks as it transforms from a print-placement and listing organization into an online/digital media and marketing service provider.

While DBRS notes that the Company has achieved reasonable results through the early stages of this transition (as of Q1 2011, more than 25% of Directories revenue is digital) including relatively steady normalized EBITDA and cash flow from operations, DBRS is increasingly concerned (and will continue to monitor) the potential for weakening in Yellow Media’s future business risk profile as the digital transition continues. As such, as the digital component becomes an ever-larger portion of the Directories segment’s business profile, more meaningful evidence that additional challenges are being dealt with successfully will be required in order to maintain the present ratings.

For some reason known only to the elect, Yellow preferreds had an excellent day, returning from +6.76% (YLO.PR.A) to +9.96% (YLO.PR.C).

They also downgraded Anglo-Irish due to the government’s ursurpation of the proper role of bankruptcy court:

DBRS Inc. (DBRS) has today downgraded the non-guaranteed senior debt and deposit ratings of Anglo Irish Bank Corporation Limited (Anglo Irish or the Bank), including its Issuer Rating, to CCC from B (low). All non-government guaranteed ratings remain Under Review with Negative Implications, where they were placed on 10 September 2010. Today’s rating action does not impact the various Government guaranteed debt and deposits rating of Anglo Irish which remain at ‘A’ with a Negative trend.

As noted in DBRS’s press release on 4 April 2011, DBRS viewed non-guaranteed senior bondholders of Anglo Irish at an increased risk of adverse actions given the state of the Irish banking system and the wind-down mode of Anglo Irish. Today’s rating action reflects the recent statements by the Minister for Finance which, in DBRS’s opinion, firmly underline the Government’s intent to pursue burden sharing by senior bondholders of what the Irish Government defines as ‘non-going concern’ banks, such as Anglo Irish. As such, DBRS sees the probability of adverse actions towards senior bondholders as significantly increased.

DBRS notes that the Irish Government has stated that it will only pursue such actions should it receive approval from the European Central Bank (ECB). However, at this time the ECB and other E.U. members have been firm in their position that no such actions be taken towards senior bondholders of banks.

The Greek austerity plan passed:

Greek Prime Minister George Papandreou clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt-laden nation.

Papandreou won by 155 votes to 138, a wider margin than last week’s confidence ballot, as some opposition lawmakers abstained rather than oppose a package that is the condition for further rescue funds.

The yield on Greece’s two-year government bond dropped to 26.94 percent today from 28.54 percent yesterday. The euro traded at $1.4359 at 5:15 p.m. in Athens, compared with $1.4421 when the vote started.

Clouds of gas engulfed the square outside parliament as lawmakers voted on a package whose defeat could have led to the euro area’s first sovereign default. Greece needs to cover 6.6 billion euros of maturing bonds in August and government officials have said they may lack the money to pay wages and pensions by mid-July.

German banks are cooperating with the Greek plans:

German and French lenders are the biggest foreign holders of Greek debt and their participation is key to the European Union goal of getting banks to roll over at least 30 billion euros ($43 billion) of bonds. German firms and the finance ministry are discussing the idea of rolling over bonds maturing until 2020, and not just those running through 2014, as had been first envisaged, said the people, who declined to be identified because the talks are confidential.

“If Greece goes into default, then we would have a disruption in Europe that could more quickly impact other countries in a way that goes far beyond what Lehman Brothers meant for us,” said [Deutsche Bank CEO Josef] Ackermann, 63.

Ackermann, who is also chairman of the Institute of International Finance, which represents more than 400 financial companies, said they are “working around the clock” with special teams, rating companies and bodies overseeing credit- default swaps to test whether any agreement would trigger a credit event. He warned that any agreement is “highly complex” and could force investors to write down their Greek holdings by an estimated 30 percent to 45 percent if done incorrectly.

It’s a black day for Canadian capital market participants:

The proposed merger of TMX Group Inc. (X-T44.611.052.41%) with London Stock Exchange Group PLC is dead.

TMX said a majority of the votes cast by proxy before Wednesday’s deadline in fact supported the deal, but it was clear the two exchange operators wouldn’t get the two-thirds required in a vote scheduled for Thursday.

TMX Group chief executive officer Tom Kloet said the company will now focus on other alternatives, including a rival bid from Maple Group Acquisition Corp., a collection of Canadian financial institutions and pension funds. The bid by Maple, worth about $50 a share, had been conditional on the defeat of the TMX-LSE merger.

The oligarchs are again triumphant; I had been hoping for a little bit of competition in Canada. However, I can still cling to the hope that the Competition Bureau will take the obvious step of killing the Maple bid, leaving the TMX to have to scramble for a partner.

We learnt during the Panic of 2007 just how important US-domiciled Money Market Funds were to European bank financing. So this is interesting:

Institutions pulled out of U.S. prime money-market funds at the fastest pace in 15 months, shifting to funds that invest only in U.S. government-backed securities out of concern the European debt crisis would worsen.

Institutional funds eligible to buy corporate debt lost $39 billion to net withdrawals in the week ended June 28 and $75 billion in the past two weeks, falling to $1.04 trillion, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits, rising to $599 billion.

Dan Hallett has a nice piece in the Globe titled Distribution rate does not equal yield.

Canadian inflation popped up:

Canadian inflation gave economists an unpleasant surprise Wednesday when data from May showed it shot up to its highest level in more than eight years, putting all eyes on the Bank of Canada ahead of its July interest-rate decision.

Annual inflation hit a higher-than-expected 3.7% for the month, and while gasoline was the main culprit, core inflation also jumped, from 1.6% in April to 1.8% in May. The core figure, which factors out volatile items like food and gas, came in well above the Bank of Canada’s 1.4% target for the second quarter.

There’s some criticism of Mayor Ford over his refusal to walk over and say hello at the Pride ceremonies … at the same time, Mayor Bloomberg is rubbing his hands with glee at the business that’s going to come with New York’s gay marriage law. Mayor Bloomberg seems to understand that cities are all about doing business – and is gunning for New York to grab market share away from Toronto.

It was a downish day in the Canadian preferred share market, with PerpetualDiscounts losing 19bp, FixedResets up 1bp and DeemedRetractibles down 5bp. Volatility picked up, all to the downside. Volume was fair-to-good.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.35%, having had a rough couple of days, and so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 185bp, a narrowing from the 195bp reported June 22 due to the move in long-term corporate yields.

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 -0.4479 % 2,434.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.4479 % 3,661.7
Floater 2.49 % 2.23 % 42,854 21.70 4 -0.4479 % 2,628.8
OpRet 4.87 % 2.78 % 63,030 0.25 9 -0.0944 % 2,434.2
SplitShare 5.25 % 1.97 % 58,121 0.66 6 -0.0959 % 2,503.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0944 % 2,225.8
Perpetual-Premium 5.69 % 5.34 % 151,538 1.29 12 0.0397 % 2,077.3
Perpetual-Discount 5.47 % 5.52 % 121,225 14.59 18 -0.1943 % 2,183.0
FixedReset 5.18 % 3.31 % 211,247 2.71 57 0.0093 % 2,305.6
Deemed-Retractible 5.09 % 4.90 % 284,776 8.15 47 -0.0457 % 2,148.3
Performance Highlights
Issue Index Change Notes
ELF.PR.F Perpetual-Discount -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 22.37
Evaluated at bid price : 22.75
Bid-YTW : 5.93 %
HSB.PR.C Deemed-Retractible -1.20 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.69
Bid-YTW : 5.28 %
GWO.PR.N FixedReset -1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 3.76 %
HSB.PR.D Deemed-Retractible -1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.50
Bid-YTW : 5.28 %
BAM.PR.O OpRet -1.07 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 3.11 %
BAM.PR.K Floater -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 2.77 %
ELF.PR.G Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 20.93
Evaluated at bid price : 20.93
Bid-YTW : 5.79 %
BMO.PR.H Deemed-Retractible 1.06 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 3.69 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.A Deemed-Retractible 151,474 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 5.70 %
TD.PR.O Deemed-Retractible 94,848 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.90 %
PWF.PR.I Perpetual-Premium 62,250 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 5.75 %
BMO.PR.M FixedReset 57,470 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-25
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 3.22 %
BMO.PR.P FixedReset 46,400 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.87
Bid-YTW : 3.38 %
TD.PR.Y FixedReset 44,375 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-31
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 3.38 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BMO.PR.K Deemed-Retractible Quote: 25.76 – 26.47
Spot Rate : 0.7100
Average : 0.4344

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 4.74 %

BAM.PR.K Floater Quote: 18.91 – 19.50
Spot Rate : 0.5900
Average : 0.3746

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-06-29
Maturity Price : 18.91
Evaluated at bid price : 18.91
Bid-YTW : 2.77 %

GWO.PR.N FixedReset Quote: 24.31 – 24.73
Spot Rate : 0.4200
Average : 0.2850

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 3.76 %

NA.PR.L Deemed-Retractible Quote: 25.15 – 25.48
Spot Rate : 0.3300
Average : 0.2264

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 4.88 %

BNS.PR.Q FixedReset Quote: 26.20 – 26.49
Spot Rate : 0.2900
Average : 0.1870

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-25
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.24 %

MFC.PR.E FixedReset Quote: 26.31 – 26.59
Spot Rate : 0.2800
Average : 0.1798

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.31
Bid-YTW : 3.93 %

4 Responses to “June 29, 2011”

  1. nitromicro says:

    As an assiduous reader, I purchased YLO prefs on Tuesday at $13.07. I found the over 12% dividend return of the YLO.PR.C too good to pass up. While the credit quality is low, the regular share dividends will be cut long before the prefs are affected. The opportunity for significant capital gains and the high rate of potential/expected dividends on these prefs made the risks worthwhile. I put a little less than 2% of my available funds into YLO.PR.C and I have a long investment horizon.

  2. […] PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.4% (well … a little under) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 170bp, a significant narrowing from the 185bp reported June 29. […]

  3. jiHymas says:

    It’s a very attractive speculation, certainly, and everything you say about the size of your position and investment horizon makes a lot of sense.

    I discussed the YLO preferreds in the June, 2011, edition of PrefLetter.

  4. […] the pre-tax interest-equivalent spread is now about 175bp, a narrowing from the 185bp reported on June 29 due to a decline of PerpetualDiscount […]

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