January 9, 2008

Carnage continued for the shadow-banks as Countrywide hit another low. Accrued Interest looks at their bond prices and figures that estimated recovery on debt is 60%. Their CDS levels agree:

Credit-default swaps on $10 million of Countrywide debt cost $3 million plus $500,000-a-year for a five-year contract. The upfront cost increased from $2.8 million yesterday, according to broker Phoenix Partners Group.

Meanwhile MBIA, a monoline insurer that has fallen on hard times, is cutting its dividend and issuing deeply subordinated notes that it will consider capital:

MBIA Inc., the world’s largest bond insurer, will cut its dividend and raise $1 billion in a sale of notes to boost capital and preserve its AAA credit rating.

MBIA’s decision to raise more capital and shave its dividend is the second step in an effort to shore up its finances. The company last month said private-equity firm Warburg Pincus LLC agreed to purchase $500 million of new shares at $31 each and to backstop a rights offering of another $500 million.

MBIA said the so-called surplus notes will rank below all other debt, enabling them to be treated as capital. The interest will be fixed until 2013 and then switch to a floating rate.

There is no word as yet regarding what the rate is going to be on the surplus notes. In what may be regarded as a “carrot & stick” approach to getting what you want out of financial markets, Berkshire Hathaway is considering investing in the sector in addition to supporting its start-up insurer. This news was cheered by investors.

E*Trade is also taking desperate measures:

E*Trade Financial Corp., the worst performer in the Standard & Poor’s 500 Index last year, sold $3 billion of mortgage-backed securities and municipal bonds to bolster its finances.

The sale was completed at a loss of less than $5 million, the New York-based online brokerage said in a statement today. E*Trade also said it’s “aggressively” reducing risks from real- estate loan holdings and shuttered the institutional equities trading division.

Meanwhile, Goldman Sachs calls for a recession (but there’s lots of divergent views) while Philadelphia Fed President Charles Prosser warns of inflation:

The below-trend growth of the economy in the first half of 2008 will likely mean slower payroll employment growth for the first two to three quarters of the year. With slower job growth for a time, the unemployment rate may rise somewhat above 5 percent during the course of the year.   

At the same time we also face risks of higher inflation…I am concerned that developments on the inflation front will make the Fed’s policy decisions more difficult in 2008. Recent data suggest that inflation is becoming more broad-based. Recent increases do not appear to be solely related to the rise in energy prices. Consequently I see more worrisome signs of underlying price pressures…

And all this in a US election year!

PerpetualDiscounts continued their streak – up on each one of the past 10 trading days, commencing December 24 (which was the last day of tax loss selling). A lot of the big movers today were affected by the index rebalancing announced recently … I don’t know whether this was an influence or not, but it was a noticable correlation.

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 5.34% 5.34% 61,308 14.92 2 +0.0205% 1,067.2
Fixed-Floater 4.95% 5.36% 73,343 15.05 9 -0.4889% 1,029.7
Floater 5.27% 5.31% 92,209 15.04 3 -1.3567% 835.3
Op. Retract 4.84% 1.84% 79,984 3.14 15 -0.2054% 1,040.9
Split-Share 5.26% 5.46% 101,718 4.32 15 -0.2236% 1,039.3
Interest Bearing 6.30% 6.43% 60,416 3.65 4 -0.0500% 1,069.4
Perpetual-Premium 5.79% 5.09% 65,508 5.14 12 -0.1715% 1,019.7
Perpetual-Discount 5.46% 5.48% 347,750 14.00 54 +0.1071% 938.9
Major Price Changes
Issue Index Change Notes
BNA.PR.C SplitShare -4.2803% Asset coverage of 3.6+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.88% based on a bid of 20.35 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.25% to 2010-9-30) and BNA.PR.B (6.83% to 2016-3-25). The loss isn’t too much of a surprise, really, considering its recent huge gain. This issue will soon be deleted from the index.
TOC.PR.B Floater -3.4783% This issue will soon be deleted from the index.
IGM.PR.A OpRet -3.3007% Now with a pre-tax bid-YTW of 3.96% based on a bid of 26.66 and a call 2009-7-30 at 26.00.
CIU.PR.A PerpetualDiscount -2.3333% Now with a pre-tax bid-YTW of 5.69% based on a bid of 20.51 and a limitMaturity. This issue will soon be deleted from the index.
BCE.PR.Z FixFloat -2.1783%  
CL.PR.B PerpetualPremium -1.8384% Now with a pre-tax bid-YTW of 5.44% based on a bid of 25.63 and a call 2011-1-30 at 25.00.
CU.PR.A PerpetualDiscount -1.3178% Now with a pre-tax bid-YTW of 5.51% based on a bid of 25.46 and a limitMaturity. This issue will soon be deleted from the index.
PWF.PR.K PerpetualDiscount -1.1319% Now with a pre-tax bid-YTW of 5.46% based on a bid of 22.71 and a limitMaturity.
BAM.PR.N PerpetualDiscount -1.0298% Now with a pre-tax bid-YTW of 6.57% based on a bid of 18.26 and a limitMaturity.
BAM.PR.J OpRet +1.0800% Now with a pre-tax bid-YTW of 5.31% based on a bid of 25.27 and a softMaturity 2018-3-30 at 25.00. This issue will soon be added to the index.
CM.PR.I PerpetualDiscount +1.1015% Now with a pre-tax bid-YTW of 5.59% based on a bid of 21.11 and a limitMaturity.
MFC.PR.B PerpetualDiscount +1.1057% Now with a pre-tax bid-YTW of 5.13% based on a bid of 22.86 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.2211% Now with a pre-tax bid-YTW of 5.58% based on a bid of 24.04 and a limitMaturity.
FTU.PR.A SplitShare +1.4957% Asset coverage of 1.7+:1 as of December 31, according to the company. Now with a pre-tax bid-YTW of 6.53% based on a bid of 9.50 and a hardMaturity 2012-12-1 at 10.00. This issue will soon be deleted from the index
Volume Highlights
Issue Index Volume Notes
RY.PR.B PerpetualDiscount 153,300 RBC crossed 150,000 at 22.35. Now with a pre-tax bid-YTW of 5.32% based on a bid of 22.41 and a limitMaturity.
SLF.PR.E PerpetualDiscount 128,590 Scotia crossed 125,000 at 21.40. Now with a pre-tax bid-YTW of 5.29% based on a bid of 21.45 and a limitMaturity.
MFC.PR.B PerpetualDiscount 77,750 Now with a pre-tax bid-YTW of 5.13% based on a bid of 22.86 and a limitMaturity.
W.PR.J PerpetualDiscount 53,071 Scotia crossed 50,000 at 23.71. Now with a pre-tax bid-YTW of 5.96% based on a bid of 23.60 and a limitMaturity.
BSD.PR.A InterestBearing 85,358 Dundee crossed 83,500 for cash at 9.32. Asset coverage of just under 1.7:1 as of January 4, according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.44% (mostly as interest) based on a bid of 9.28 and a hardMaturity 2015-3-31 at 10.00.

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

Update 2008-01-10: A troublemaker in the comments points out that the PerpetualPremium index had a massive change in average YTW, changing from 3.83% on 1/8 to 5.09% on 1/9.

This is due to CL.PR.B, which had a price change of 26.11 to 25.63, resulting in a yield-to-worst change of from -9.03% to +5.44%.

Index composition as of Jan 8 and Jan 9 has been uploaded for inspection.

3 Responses to “January 9, 2008”

  1. like_to_retire says:

    I know the YTW and current yield cross just below PAR, but your math must be extremely twitchy to result in an increase of the YTW for Perpetual Premiums from yesterday to today of 3.83% to 5.09%……. ltr

  2. […] PrefBlog Canadian Preferred Shares – Data and Discussion « January 9, 2008 […]

  3. […] MBIA announced its deeply subordinated bond issue (noted on January 9 will carry a yield of 14%: MBIA’s yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point. […]

Leave a Reply

You must be logged in to post a comment.