October 27, 2011

BAM is starting a Dubai property fund:

Brookfield Asset Management Inc. and a Dubai government investment arm will start a $1 billion fund to buy real estate assets in the emirate after prices dropped by more than half since 2008.

The eight-to-10-year fund will be started with $100 million each from Toronto-based Brookfield and the Investment Corporation of Dubai, the companies said today in a statement. It will target a “wide class of assets in both freehold and non-freehold areas.” Local, regional and international investors will also be invited to join the fund that will be capped at $1 billion.

The Europeans are now faced with Job #2: persuading people to invest:

Europe’s banks will need to raise 106 billion euros ($147 billion) in fresh capital under tougher rules being introduced in response to the euro area’s sovereign debt crisis, the region’s top banking authority said.

Seventy banks were tested, the European Banking Authority said late yesterday, with Spanish banks needing 26.2 billion euros and Italian banks 14.8 billion euros in core tier 1 capital. The lenders have until Dec. 25 to submit their plans for raising the money to national supervisors. The extra reserves are needed to meet a temporary requirement for lenders to hold 9 percent in core reserves, after sovereign debt writedowns.

European leaders are meeting to hammer out an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain. The summit is part of an attempt to solve the two-year- old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the euro.

U.K. banks won’t be required to raise extra capital, according to the EBA figures, whereas German banks will have to find 5.2 billion euros.

The Americans aren’t learning anything from all this:

The congressional supercommittee seeking a long-term debt-reduction deal remains at an impasse with a deadline near, and the prospect of failure is prompting concern about further downgrades of the nation’s credit rating.

With the committee heading into what may be a make-or-break week for striking a deal over a package of at least $1.2 trillion in U.S. deficit cuts, members are deadlocked over Democrats’ insistence on tax increases, according to committee aides in Washington who spoke on condition of anonymity.

Senate Finance Committee Chairman Max Baucus proposed a deficit-reduction plan worth almost $3 trillion with about half comprised of tax increases, according to a congressional aide. The remainder would be spending cuts, including in Medicare and Medicaid, as well as fee increases, the aide said. Republicans rejected the plan, which Senate Democrats wanted to pair with extensions of a payroll tax break and jobless benefits scheduled to expire at the end of this year, the aide said.

But the Irish are paying close attention:

Greece’s difficulty paying its debts may turn out to be Ireland’s opportunity.

Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken.

“There’s a political problem for the government,” said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.”

Ken Rogoff thinks the whole thing is just another band-aid:

European leaders’ agreement to expand a bailout fund to stem the region’s debt crisis only buys time as the problem worsens, Harvard University economist Kenneth Rogoff said.

“They don’t have any idea what the end game is here,” Rogoff said as a compensated speaker at the Bloomberg FX11 Summit in New York today. “It’s pretty darn clear the euro does not work.”

And there is some confusion regarding just what the plan might be:

A key component of the European program agreed in the wee hours in Brussels on Thursday is getting Greece’s debt down to a manageable 120 per cent of GDP. That effort involves Greek bondholders taking a 50 per cent loss on their investment, up from a previous agreement to take a haircut of 20 per cent.

This constitutes a default by any reasonable definition. But Europe’s leaders are trying very hard to frame these losses as voluntary, which would avoid triggering a broad Greek CDS redemption. The European plan says leaders will “invite” private investors to develop a “voluntary bond exchange with a nominal discount of 50 per cent on notional Greek debt held by private investors.”

So is it nudge-wink-voluntary or is it compulsory? If the former, there would appear to be some opportunity for non-European hedge funds to make a killing by buying Greek debt and refusing the invitation.

Here in Canada, we’re approaching a decision on the latest job creation scheme:

The Supreme Court of Canada appears close to releasing a much-awaited decision on whether the federal government has the authority to create a new national securities regulator.

The top court has asked parties involved in the case for permission to organize a media lock-up to release the ruling, according to information on the court’s web site. The electronic “docket” does not reveal a planned released date, but federal officials expect a decision by the middle of next month.

OSFI has released a NVCC roadshow. It is notable for the first defence I have seen from them for low-trigger contingent capital – indeed, the first acknowledgement from them that I know of that high-trigger contingent capital even exists:

The BCBS considered and rejected Co-Cos for the minimum capital requirements, buffers & Global systemically important bank (G-SIB) surcharge
– Key concern was the unreliability of early triggers
– Early trigger could exacerbate distress & hurt confidence
– Triggers can be subject to manipulation or arbitrage

It would be most interesting to see a full-fledged debate on this, but we won’t get one from the clowns at OSFI. The presentation is also notable for a bare-faced falsehood (emphasis added):

Existing instruments are akin to NVCC because:
– NVCC creates no new regulatory discretion.
– At non-viability, authorities are assessing how best to resolve the failed bank. NVCC is just a new resolution option in the toolkit:
– Liquidation, Assisted Purchase, Bridge Bank, Recapitalization (i.e. Bail-out), NVCC, and others.
– The NVCC triggers are very late and very remote. The decision point is the same as in existing securities, i.e. the PF, or PD, is the same or lower.
– NVCC instruments will likely behave similar to existing sub debt and preferred shares.
– Innovative Tier 1 instruments have similar regulatory triggers

They spout this bilge about “no new regulatory discretion” and then on the very next page they say Canadian authorities would only elect to trigger NVCC where there was a high level of confidence that the conversion plus additional measures would restore the viability of the failed FI. “Elect”. “confidence”. If that’s not discretion, I’d like to know what the hell is.

There’s one element of the presentation that is also a bit fishy (emphasis added):

Can OSFI pull the trigger too early?
– NVCC triggers narrowly defined by design to constrain authorities from acting prematurely
– Non-viability is an expectation of insolvency
– Backstop trigger designed to avoid Troubled Asset Relief Program (TARP) scenario – Viable FIs cannot be forced to accept a bail-out
– Triggers designed to permit authorities with flexibility to take certain actions (i.e. liquidity assistance) where an FI may require public sector support without triggering NVCC conversion
– Superintendent’s actions can be subject to legal challenge & judicial review
– Importantly, OSFI strongly believes the hierarchy must be respected – therefore, creditors should not be exposed to loss before non-viability

I’d like to see how they work that out: I read the advisory as granting the Superintendent full discretion … but perhaps the “can be subject” is just a weasel phrase. Gravity can be subject to challenge too, but you won’t get too far.

The Financial Stability Board has released a report titled Shadow Banking: Strengthening Oversight and Regulation. Lots of cool charts at the back.

The Globe published a long piece on YLO, How did Yellow Media’s stock go from $17 to 17 cents?. One part echoes my thoughts:

While his online competitors may be giants such as Google, Tellier claims he has a secret weapon: trust. Yellow Media’s bread and butter is still small business owners, many of whom are at a loss when it comes to arcane aspects of online advertising such as bidding on Google keywords. While many advertisers are realizing that Yellow’s books may no longer be the best place for their ads, that doesn’t mean they’ve soured on the company entirely. This is where its sales force comes in—a network of representatives that have established relationships with customers, something Google lacks. “Businesses would prefer to have a single point of contact to demystify this digital universe,” Tellier says. “We think the market dynamic is in our favour.”

There’s also a hopeful thought:

But after Yellow announced the new, more stringent credit agreement with the banks in late September, Tellier admitted the prospects for the company’s transition—whether digital businesses will be able to compensate for declining print revenues—are far from certain. The same might be said of his tenure as CEO.

I don’t have a lot of faith in the man’s competence. What the company needs is somebody with a little operational expertise.

YLO common has been active this week, going from $0.26 on October 21 to $0.495 yesterday to $0.39 today – total volume for the four days this week has been about 70-million shares. Seventy million! That’s more than 13% of the float! Even allowing for the fact that the day traders will have flipping like mad, it’s still impressive. Returns and volumes for the preferreds have been equally dramatic. YLO will report on 11Q3 on November 3.

Preferred shares from CZP, the latest ugly duckling, caught a bounce today – Assiduous Readers may insert the words “dead cat” if they wish, according to taste. All this comes from the DBRS warning of a possible 3-notch downgrade; S&P was less explicit, but just as gloomy. There will be more of this in future, as a few of those junky FixedReset chickens of the past few years come home to roost.

CZP Issues
2011-10-25 to 2011-10-26
Ticker Quote
10/26 – 10/27
CZP.PR.A 13.50-95 14.30-00 8.62% Limit Maturity +5.93%
CZP.PR.B 19.00-40 21.15-38 7.30% Limit Maturity +11.32%

It was a mostly-up day for the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets up 10bp and DeemedRetractibles gaining 12bp. Plenty of skew in those results, with all entries on the Performance Highlights table being positive! Volume was well above average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.8008 % 2,070.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.8008 % 3,113.4
Floater 3.48 % 3.49 % 158,172 18.54 2 0.8008 % 2,235.1
OpRet 4.84 % 2.56 % 66,278 1.53 8 0.0243 % 2,456.2
SplitShare 5.37 % 1.71 % 58,784 0.34 4 -0.1332 % 2,497.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0243 % 2,246.0
Perpetual-Premium 5.68 % 4.00 % 107,788 1.86 13 0.0151 % 2,130.5
Perpetual-Discount 5.35 % 5.45 % 107,999 14.71 17 -0.0392 % 2,257.5
FixedReset 5.14 % 3.11 % 204,146 2.45 61 0.1049 % 2,333.7
Deemed-Retractible 5.06 % 4.44 % 213,363 4.07 46 0.1199 % 2,207.7
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-27
Maturity Price : 15.05
Evaluated at bid price : 15.05
Bid-YTW : 3.51 %
BAM.PR.R FixedReset 1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-27
Maturity Price : 23.43
Evaluated at bid price : 25.80
Bid-YTW : 4.01 %
GWO.PR.J FixedReset 1.22 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 3.26 %
BMO.PR.H Deemed-Retractible 1.25 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.93 %
SLF.PR.B Deemed-Retractible 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.95
Bid-YTW : 5.96 %
SLF.PR.D Deemed-Retractible 1.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.68
Bid-YTW : 6.31 %
BAM.PR.X FixedReset 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-27
Maturity Price : 22.70
Evaluated at bid price : 23.90
Bid-YTW : 3.87 %
IAG.PR.A Deemed-Retractible 2.75 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.77
Bid-YTW : 5.85 %
Volume Highlights
Issue Index Shares
NA.PR.M Deemed-Retractible 152,215 Desjardins crossed blocks of 124,900 at 26.80 and 24,300 at 26.70.
Maturity Type : Call
Maturity Date : 2013-05-15
Maturity Price : 26.00
Evaluated at bid price : 26.69
Bid-YTW : 3.80 %
BNS.PR.Z FixedReset 55,811 Recent secondary offering.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 3.44 %
SLF.PR.G FixedReset 51,404 Nesbitt bought blocks of 20,100 and 17,800 from Scotia, both at 25.00.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 3.66 %
TD.PR.K FixedReset 41,305 TD bought 10,000 from National at 27.10, then crossed 19,700 at the same price.
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.14
Bid-YTW : 2.99 %
BNS.PR.L Deemed-Retractible 37,800 RBC crossed 16,800 at 25.19.
Maturity Type : Call
Maturity Date : 2016-04-27
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 4.32 %
GWO.PR.G Deemed-Retractible 31,955 RBC crossed 21,200 at 24.75.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.77
Bid-YTW : 5.40 %
There were 43 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.F Perpetual-Discount Quote: 25.12 – 25.94
Spot Rate : 0.8200
Average : 0.4739

Maturity Type : Limit Maturity
Maturity Date : 2041-10-27
Maturity Price : 24.83
Evaluated at bid price : 25.12
Bid-YTW : 4.94 %

IAG.PR.A Deemed-Retractible Quote: 22.77 – 23.48
Spot Rate : 0.7100
Average : 0.4375

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.77
Bid-YTW : 5.85 %

BAM.PR.J OpRet Quote: 25.87 – 26.36
Spot Rate : 0.4900
Average : 0.3464

Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 4.87 %

BAM.PR.N Perpetual-Discount Quote: 21.86 – 22.26
Spot Rate : 0.4000
Average : 0.2709

Maturity Type : Limit Maturity
Maturity Date : 2041-10-27
Maturity Price : 21.55
Evaluated at bid price : 21.86
Bid-YTW : 5.48 %

GWO.PR.N FixedReset Quote: 24.26 – 24.70
Spot Rate : 0.4400
Average : 0.3132

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.26
Bid-YTW : 3.65 %

GWO.PR.I Deemed-Retractible Quote: 22.37 – 22.70
Spot Rate : 0.3300
Average : 0.2236

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.37
Bid-YTW : 5.96 %

2 Responses to “October 27, 2011”

  1. prefhound says:

    What I’m missing in this whole Europe thing is “who buys Greek debt” from here on in? No bank in its right mind would or should. Some gets “voluntarily” rescheduled to a 30-year maturity at 50 cents on the dollar, but still requires interest payments at some level. That 50 cents IS voluntary because the market value is 34 cents (today; less tomorrow).
    The EFSF presumably buys anything that is rolled over plus the 10% of GDP annual deficits (mostly, but not only, interest) as far as the eye can see — so ends up “owning” Greece (like China “owns” the US). Both are cases where the debt is so huge it’s not clear who the ultimate loser is — the debt owner or ower.
    Is the EFSF the only buyer? If so, it is hard to see how market yields can be set with a single buyer. At least Argentina didn’t need to borrow after default — it got lucky and earned huge current account surpluses (that are evaporating now) — because it could devalue. Greece is never going to turn into Germany or even France or Italy and has zero competitive edge without major devaluation. In a shrinking economy there is less and less to tax — even if citizens could be made to pay.
    Unless somebody else is (eventually) going to buy Greek debt, how can Greece stay in the Euro?

  2. […] the low-trigger contingent capital so beloved by OSFI (see the discussion of the NVCC Roadshow on October 27) was shot down in short order: B. Bail-in debt and capital instruments that absorb losses at the […]

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