Since the politicians won’t bail out Ireland and Portugal, the central bank is doing it:
European Central Bank President Jean- Claude Trichet said the ECB has resumed bond purchases and will offer banks more cash to stop the region’s debt crisis from engulfing Italy and Spain and hurting the economy.
…
ECB purchases of Irish and Portuguese bonds during the press briefing haven’t stamped out investor concern on the 21- month crisis spreading to Italy and Spain, whose yields soared to euro-era highs this week. European officials are trying to put a firewall around Europe’s third and fourth-largest economies to avoid them being forced into seeking external aid.
…
Italian and Spanish 10-year bonds declined, pushing the yields as high as 6.23 percent and 6.33 percent respectively. Irish and Portuguese bonds rose as people with knowledge of today’s transactions said the ECB bought those securities after being absent from the market for 18 weeks. That debt was at 10.4 percent and 11.3 percent as of 5 p.m. in London.
Gee, isn’t it great when a central bank takes on credit risk?
But don’t lose faith in Europe! It’s all America’s fault:
And Mr. Trichet pointed the finger at the U.S. debt ceiling showdown for stoking market tensions in Europe.
“It’s clear the world is intertwined,” he told reporters after the bank opted to leave its key interest unchanged at 1.5 per cent. “What happens in the U.S. influences the rest of the world.”
There are indications Italy is serious about austerity:
The Italian government, seeking to earn the confidence of investors who have driven its bond yields to euro-era highs, will speed up austerity measures and will target a balanced budget a year earlier than planned.
The country will adopt a balanced-budget amendment, liberalize its labor market, and speed asset sales, Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti said in a joint Rome press conference today.
While yields on Italian and Spanish debt fell today, borrowing costs have surged since a July 21 European Union summit aimed at heading off contagion from Europe’s debt crisis to the euro zone’s third- and fourth-largest economies. Italian 10-year bond yields are up 76 basis points since the summit, while Spanish yields are up 33 basis points.
…
Berlusconi said the government now won’t wait until 2013-2014 to eliminate tax loopholes and deductions worth 25 billion euros ($36 billion), though he didn’t say when they would be enacted. He also said he agreed with French President Nicolas Sarkozy to hold a meeting of Group of Seven finance ministers within days.Spanish borrowing costs are below those of Italy for the first time since May 2010 on speculation Italy’s higher debt load makes it less able to withstand contagion from the region’s fiscal crisis. The nation’s debt is set to reach 120 percent of gross domestic product this year, second highest in the euro region after Greece.
The U.S. had its AAA credit rating downgraded for the first time by Standard & Poor’s, which slammed the nation’s political process and said lawmakers failed to cut spending enough to reduce record deficits.
S&P dropped the ranking one level to AA+, after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s $14.3 trillion debt limit was lifted. The U.S. was awarded the top credit ranking by New York-based S&P in 1941. It kept the outlook at “negative.”
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S&P said it may lower the long-term rating to AA within the next two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” during the period result in higher general government debt.
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S&P also changed its assumption that the 2001 and 2003 tax cuts would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.
The downgrade process was, apparently, enlivened by a $2-trillion arithmetical error that you can be sure the politicians will harp on (Treasury’s started already). The S&P release highlights:
- We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
- We have also removed both the short- and long-term ratings from CreditWatch negative.The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
- More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
- Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
- The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
The Fed has issued guidance to banks:
Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).
For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.
That’s how Europe can solve its banking problems! Just allow loans-gone-bad to be risk-weighted at their original rates!
I remember the DBRS downgrade of Canada in Spring, 1994, which the ancients among us will remember as a horrible bear market for bonds, full of nervousness. The downgrade was announced at about 5pm; we were getting pricing data from two brokerages, one of which prepared their run prior to the announcment, the other after. Only a few minutes, but there were literally dollars of difference in the long bond prices! Bids just disappeared as the dealers went short in preparation for overnight selling.
Yellow Media’s sell-side analysts continue to follow the stock:
Canaccord Genuity believes the carnage isn’t over yet. In a new research report today, analyst Aravinda Galappatthige cut his price target to a mere 60 cents, a far cry from his previous guess of $2.75. Not surprisingly, he downgraded Yellow Media to a “sell” from a “hold.”
“The steep decline in our target is due to common equity at now only 20 per cent of the enterprise value of the company,” Mr. Galappatthige explained. “Consequently, even moderate cuts to earnings before interest, taxes, depreciation and amortization and free cash flow, which lowers enterprise value, have the potential to have a magnified impact on equity.”
…
“Yellow Media is in the midst of transforming its business from a directory publisher to a broader, online-centric, marketing solutions company serving mainly small and medium enterprises. While we do expect to see some success for the company in this process, we believe print declines will hit double-digit rates starting fiscal 2011 and more than offset online growth, given that print currently makes up approximately 75 per cent of revenues. Moreover, if the print declines worsen – to 15-20 per cent levels, as we are seeing in most international markets, we believe Yellow Media’s EBITDA and FCF could be impacted significantly.”CIBC World Markets Inc. analyst Robert Bek today also took a knife to his price estimate, slashing it to $1.25 from $5.50.
“Though the Band-Aid has been ripped off this story, we still believe investors should watch on the sidelines as an equity recovery is tenuous, at best,” he wrote. “Our (new price target) is probably half way to fair value, but downside risks are material, including the potential for a restructuring if conditions worsen.”
In the comments to the recent YLO post, newbiepref instructs me on a feature of the TSX website: Insider Trades by Symbol, through which I see that YLO (almost certainly YLO, but it could be some other insider) bought all four of its preferred share issues today. The total value was only $160,000 (about 2/3 of it in YLO.PR.A) but even so they’re taking these things off the balance sheet at about half-price, on average. Nice work if you can get it!
These are small quantities, to be sure, but it will be remembered that quantities are restricted under the terms of their Normal Course Issuer Bid:
In accordance with the rules of the Toronto Stock Exchange, the maximum numbers of securities that can be purchased on a daily basis by Yellow Media Inc. are 641,849 common shares, 5,248 first preferred shares, series 1, 3,134 first preferred shares, series 2, 3,068 first preferred shares, series 3 and 1,385 first preferred shares, series 5, subject to the block purchase exception
They hit the limits precisely – to the very share! – for three of the four issues; they were sloppy with YLO.PR.B and bought only 3,100 of the allowable 3,134. As discussed in the commented post, they’re not buying the common any more, probably because of bank loan covenants.
It was a weak day for the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets off 3bp and DeemedRetractibles losing 18bp. Good volatility; let’s hope things heat up a little more next week! Volume was average.
| 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 | -1.4129 % | 2,357.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.4129 % | 3,544.9 |
| Floater | 2.57 % | 2.33 % | 33,461 | 21.45 | 4 | -1.4129 % | 2,544.9 |
| OpRet | 4.85 % | 2.36 % | 54,724 | 0.15 | 9 | 0.2096 % | 2,454.4 |
| SplitShare | 5.30 % | 5.63 % | 65,658 | 2.60 | 4 | -0.6105 % | 2,496.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2096 % | 2,244.3 |
| Perpetual-Premium | 5.68 % | 5.29 % | 138,886 | 1.19 | 14 | -0.1030 % | 2,096.2 |
| Perpetual-Discount | 5.38 % | 5.41 % | 116,119 | 14.74 | 16 | -0.0368 % | 2,215.0 |
| FixedReset | 5.15 % | 3.15 % | 212,595 | 2.61 | 58 | -0.0320 % | 2,325.3 |
| Deemed-Retractible | 5.07 % | 4.74 % | 273,955 | 8.04 | 46 | -0.1829 % | 2,176.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.B | Floater | -3.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 17.99 Evaluated at bid price : 17.99 Bid-YTW : 2.94 % |
| BAM.PR.K | Floater | -2.73 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 18.14 Evaluated at bid price : 18.14 Bid-YTW : 2.91 % |
| SLF.PR.F | FixedReset | -1.58 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.77 Bid-YTW : 3.65 % |
| BNA.PR.D | SplitShare | -1.43 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2014-07-09 Maturity Price : 25.00 Evaluated at bid price : 26.25 Bid-YTW : 5.86 % |
| PWF.PR.P | FixedReset | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 23.44 Evaluated at bid price : 25.79 Bid-YTW : 3.30 % |
| MFC.PR.B | Deemed-Retractible | -1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.50 Bid-YTW : 6.06 % |
| HSE.PR.A | FixedReset | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 23.46 Evaluated at bid price : 25.90 Bid-YTW : 3.44 % |
| PWF.PR.K | Perpetual-Discount | 2.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 23.46 Evaluated at bid price : 23.73 Bid-YTW : 5.24 % |
| IAG.PR.C | FixedReset | 3.48 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 28.25 Bid-YTW : 0.98 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.D | Deemed-Retractible | 238,663 | Nesbitt crossed three blocks of 50,000 each, all at 24.75; RBC crossed 50,000 and 25,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.68 Bid-YTW : 4.65 % |
| RY.PR.A | Deemed-Retractible | 125,260 | Nesbitt crossed 50,000 at 24.73 and two blocks of 25,000 each, both at 24.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.66 Bid-YTW : 4.61 % |
| MFC.PR.B | Deemed-Retractible | 86,600 | RBC crossed 10,000 at 22.75 and 64,300 at 22.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.50 Bid-YTW : 6.06 % |
| CM.PR.I | Deemed-Retractible | 75,298 | TD crossed 44,700 at 25.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.14 Bid-YTW : 4.60 % |
| W.PR.J | Perpetual-Discount | 61,000 | National crossed 60,000 at 24.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-05 Maturity Price : 24.55 Evaluated at bid price : 24.80 Bid-YTW : 5.69 % |
| MFC.PR.D | FixedReset | 54,900 | Nesbitt bought 10,000 from RBC at 27.45, then crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 27.41 Bid-YTW : 3.39 % |
| There were 32 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IAG.PR.F | Deemed-Retractible | Quote: 25.70 – 26.79 Spot Rate : 1.0900 Average : 0.7000 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 25.25 – 25.80 Spot Rate : 0.5500 Average : 0.3069 YTW SCENARIO |
| GWO.PR.M | Deemed-Retractible | Quote: 25.80 – 26.45 Spot Rate : 0.6500 Average : 0.4234 YTW SCENARIO |
| SLF.PR.F | FixedReset | Quote: 26.77 – 27.29 Spot Rate : 0.5200 Average : 0.3184 YTW SCENARIO |
| TCA.PR.X | Perpetual-Premium | Quote: 50.51 – 51.00 Spot Rate : 0.4900 Average : 0.3407 YTW SCENARIO |
| NA.PR.O | FixedReset | Quote: 27.51 – 27.94 Spot Rate : 0.4300 Average : 0.3109 YTW SCENARIO |
Hello James,
Mucho action this week…
Tell us more about your 1994 Canadian downgrade experience if you can. Did the bonds go down big time the following business day? How reacted the TSX at the time? Am I correct that Canada’s credit ratings have since then been fully restored to AAA?
What is your take for Monday? Roubini said on Bloomber TV yesterday evening to expect the Dow / Nasdaq to keep going down on Monday while, paradoxally, US treasuries (the very cause of concerns targetted by S&P announcement) will keep going up for lack of other option.
I fear Roubini might be right but it seems to me ludicrous to end up as a result having a higher demand of the very instrument which is downgraded. Contrary to what Roubini’s said there is an option: remain / buy more stocks, prefs, foreign treasuries (CAD, AUSSIES, etc.) and gold. S&P’s downgrade is either meaningless, in which case nothing should happen or it is hurting US long treasuries (in which case their price should go down to increase their record low yields). Will Mr. Market defy logics one more time in your opinion?
I keep reading you even though I hadn’t posted for a while but the latest weeks’ developments woke me up.
Keep on with your good work!
Did the bonds go down big time the following business day? How reacted the TSX at the time?
Sorry, I really can’t remember details like that. My clearest memory of the spring of ’94 was a bond salesman with one of the banks talking tough on the ‘phone, saying how that if they didn’t think they could sell the Canada issues, they weren’t going to bid on them … wasn’t their job to finance the debt.
Am I correct that Canada’s credit ratings have since then been fully restored to AAA?
Yes. It took a bit of pain to get there, but Chretien & Martin did it, with a lot of help from the Mulroney/Crosby GST.
I fear Roubini might be right but it seems to me ludicrous to end up as a result having a higher demand of the very instrument which is downgraded.
It’s certainly not justifiable by one round of logic, but the second round is a little better …. the move from AAA to AA+ implies a miniscule increase in probability of actual default. One basis point of yield will cover it. However, what are the knock on effects going to be? Reduced government spending, which will reduce corporate profits? Or increased taxation, which will reduce corporate profits? Or nothing, which will mean an increased effect when they finally do take action?
Hi James: well, a quick read over insider trading and I see that Yellow has, again, done some significant buying of the common and PR.A. I am assuming that by taking the shares out of commission, this obviously lowers future dividends and ‘reduces’ the associated debt load.
Are they buying the PR.A because of its future call date, and ignoring the PR.B and PR.C as perpetuals ?
I guess this is a positive with today’s market downdraft: Yellow management took advantage of a fire sale (especially on the PR.A
Hi Mr Hymas
I think that those buy-backs on the PR.A does lend credibility to management claims that they want to redeem this issue for cash next year. But I have to admit that I am not totally convinced considering the current stock price. In your vast experience, do you have examples of companies that exchanged for cash despite the fact that it would have been more profitable to exchange for shares?
Mr. Mclachlan8
I am not sure that Yellow has purchased commons itself (after claiming that they would suspend buy-backs of commons less than a week ago)but it is worth noting that M. Tellier has bought 158 000 today and that the directors Lambert and Reisch have bought 200 000 and 150 000 according to SEDI. Some of those trades were probably routed through alpha.
Yellow has, again, done some significant buying of the common and PR.A
My guess is that all the prefs were bought by the company but, as newbiepref says, SEDI has same day disclosures regarding the common. I believe that YLO’s covenants with its bank lenders no longer allow it to purchase common.
Are they buying the PR.A because of its future call date, and ignoring the PR.B and PR.C as perpetuals ?
I can’t look inside their heads, but this would make sense. An explanation fitting the facts is that they want to redeem the A prefs for cash, as stated, and are buying them preferentially toreduce the refinancing risk – which is at least a minor worry.
I think that those buy-backs on the PR.A does lend credibility to management claims that they want to redeem this issue for cash next year
I agree. I will also note that at a conversion rate of 12.5 common per preferred and 0.15 dividend per common, conversion will increase the cash they pay out.
In your vast experience, do you have examples of companies that exchanged for cash despite the fact that it would have been more profitable to exchange for shares?
Well, it’s not exactly a common situation! The only possibility I can immediately remember is IQW.PR.C; the company simply didn’t exercise its redemption option, it was the holders that converted to common.
FYI, some insider bought 200,000 PR.A on Aug 8 in a single transaction.
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