February 20, 2008

Monolines, monolines! Accrued Interest muses on an Ambac breakup and concludes:

The challenges of making the split are numerous. There will likely be lawsuits by structured finance holders who logically want to keep the stronger muni business around to support their policies. So we’ll see how it plays out. Since government regulators seem keen on providing aide to the muni market pronto, Ambac may get some legal cover if they manage to push this plan forward.

If they don’t, then a New York imposed plan seems inevitable. I think its time for Ambac (and MBIA) shareholders to start thinking about how to make the best of a bad situation.

While William Ackman, long a gadfly to the monolines as noted on January 31, has proposed an actual structure for such a breakup:

Ackman’s plan has two separate boards of directors, one for the municipal insurer and the other for the structured finance unit. Each board would include policyholders. The municipal insurer would pay dividends to its structured-finance parent only when the board was satisfied the unit could remain AAA rated. The structured finance insurer would send dividends to the holding company only after its board determined the money wasn’t needed to cover claims.

KKR Financial (last mentioned on August 20) continues to experience financing difficulties:

KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.’s only publicly traded fixed-income fund, delayed repaying debt a second time in six months after failing to find buyers for commercial paper backed by mortgages.

Lenders to the fund agreed to the delay as KKR Financial seeks to restructure, the San Francisco-based company said yesterday in a regulatory filing. KKR Financial, whose stock has fallen 50 percent in the past year, didn’t say how much debt is affected.

Assiduous Reader madequota has remarked on the disconnect between the (government) bond market and preferreds, which echoes the equity/credit disconnect remarked by Naked Capitalism quoting, inter alia, John Dizard of the Financial Times:

At the moment, the most striking “arbitrage” is between the valuation of risk in the credit markets and the equity markets. Credit markets are discounting the end of the world, while equity strategists whose e-mails I spend half the morning deleting are saying that we are forming a tradeable bottom, which sounds faintly obscene.

As far as prefs are concerned, I’m more surprised by the long corporate/perpetual discount disconnect … according to the DEX long term bond indices long corporate yields are now around 6.00%, up 40bp from their bottom in early January, while long governments are now at about 4.60%, up 20bp from January’s bottom. In sharp contrast to this, PerpetualDiscounts are now at their YTD bottom, yielding 5.39% (about 7.55% interest-equivalent). Currently, the long corporate/Perpetual-Discount-Interest-Equivalent (LC/PDIE) spread is about 155bp.

This may be compared to previous LC/PDIE spreads of 113bp at the end 2006, 109 bp at the beginning of May, 2007, and 210bp at the end of October 2007. So, using these three data points to determine value, in the best of all “Look Mummy I Got A Spreadsheet” tradition, we could say (if we were willing to place our reputation on such a thing) that the LC/PDIE spread is simply moving back to a normal level and we’ve still got about 45bp to go – which is about 6.3% price appreciation.

As I’ve noted before, the end is in sight for my preparation of historical HIMIPref™ Preferred Share indices and soon I will be an enthusiastic member of the “Look Mummy I Got A GREAT BIG Spreadsheet” school of securities analysis. Until then (and after then, as well, if you really want to know) I will proudly state that I don’t have a clue where overall prices are going. I just compare risk to expected return as best I can (of the asset classes, through a cycle) and try to outperform my benchmarks. It works for me.

New York’s Auction Rate Securities, regarding which I noted my lack of panic yesterday and which were in the vanguard of a spate of failed municipal auctions on February 13 have now found that headlines are helping:

Interest rates on $100 million of bonds issued by the Port Authority of New York and New Jersey were set at 8 percent in a weekly auction after surging to 20 percent on Feb. 12.

Rates had soared from 4.3 percent when too few buyers bid for the so-called auction-rate debt and Goldman Sachs Group Inc., which runs the auction, refused to put up its own capital to buy unwanted securities. That caused the yield to be set at a level predetermined in bond documents. Rates fell yesterday as the prospect of high yields enticed investors, according to data compiled by Bloomberg.

It isn’t over, any more than the Great Credit Crunch is over, but at least things are starting to normalize.

Another solidly strong day for the preferred market, but volume was light … and if it hadn’t been for Nesbitt, doing yeoman’s work with some crosses, it would have been even lighter. I just wish I understood the prices being paid for some of those operating retractible issues though … it would seem that some players, for one reason or another, are assigning virtually zero probability to pre-last-minute calls. All the negative YTWs really screw up calculation of averages for the index!

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 5.51% 5.55% 42,768 14.59 2 +0.9582% 1,081.7
Fixed-Floater 5.01% 5.67% 75,086 14.68 7 -0.1315% 1,024.0
Floater 4.95% 5.01% 72,059 15.43 3 -0.0303% 853.5
Op. Retract 4.81% 1.77% 78,379 2.87 15 +0.0728% 1,046.6
Split-Share 5.28% 5.47% 98,909 4.10 15 -0.0745% 1,044.0
Interest Bearing 6.22% 6.35% 59,183 3.35 4 +0.2525% 1,084.2
Perpetual-Premium 5.72% 4.53% 361,792 4.96 16 +0.1563% 1,031.1
Perpetual-Discount 5.34% 5.38% 282,681 14.84 52 +0.1519% 962.1
Major Price Changes
Issue Index Change Notes
BCE.PR.C FixFloat -1.6667%
BAM.PR.G FixFloat -1.6307%
BNA.PR.B SplitShare -1.0531% Went ex-dividend today. Asset coverage of 3.3+:1 according to the company. Now with a pre-tax bid-YTW of 7.38% based on a bid of 21.36 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (5.15% to call 2008-10-31 at 25.25) and BNA.PR.C (7.11 to 2019-1-10).
BCE.PR.G FixFloat +1.0101%  
BNA.PR.C SplitShare +1.0643% Went ex-dividend today. See BNA.PR.B, above. 
GWO.PR.F PerpetualPremium +1.0861% Now with a pre-tax bid-YTW of 5.11% based on a bid of 26.06 and a call 2012-10-30 at 25.00.
FFN.PR.A SplitShare +1.3712% Asset coverage of 2.0+:1 as of February 15 according to the company. Now with a pre-tax bid-YTW of 4.72% based on a bid of 10.35 and a hardMaturity 2014-12-1 at 10.00.
MFC.PR.C PerpetualDiscount +1.5267% Now with a pre-tax bid-YTW of 5.05% based on a bid of 22.61 and a limitMaturity.
BCE.PR.B Ratchet +1.7995%  
PWF.PR.L PerpetualDiscount +2.1945% Now with a pre-tax bid-YTW of 5.41% based on a bid of 23.75 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
PWF.PR.D OpRet 172,400 Nesbitt crossed 172,400 at 26.55. Now with a pre-tax bid-YTW of -14.50% based on a bid of 26.50 and a call 2008-3-21 at 26.00.
BMO.PR.J PerpetualDiscount 108,400 Nesbitt crossed 50,000 at 21.50, then another 30,000 at the same price. Now with a pre-tax bid-YTW of 5.27% based on a bid of 21.48 and a limitMaturity.
BMO.PR.I OpRet 102,100 Nesbitt crossed 100,000 at 25.14. Now with a pre-tax bid-YTW of -0.91% based on a bid of 25.10 and a call 2008-3-21 at 25.00.
BNS.PR.L PerpetualDiscount 57,355 Now with a pre-tax bid-YTW of 5.21% based on a bid of 21.79 and a limitMaturity.
RY.PR.E PerpetualDiscount 35,525 Now with a pre-tax bid-YTW of 5.15% based on a bid of 21.94 and a limitMaturity.

There were twelve other index-included $25-pv-equivalent issues trading over 10,000 shares today.

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