Canada’s primary lender of taxpayer-backed mortgages is coming under tighter oversight, as new legislation will require Canada Mortgage and Housing Corp. to report to the national banking regulator.
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One of the most anticipated aspects relates to the government’s decision to change the oversight structure for CMHC, which is expected to see its portfolio of mortgages grow well beyond $500-billion this year.Under the current structure, CMHC is primarily overseen by Human Resources Minister Diane Finley. The budget legislation would give the finance minister a greater role in oversight and would make the Office of the Superintendant of Financial Institutions the main watchdog for CMHC.
The covered bond legislation didn’t get as much attention, but DBRS commented:
The federal government today announced a legislative framework for governing covered bonds in Canada. There are no rating implications as a result of this announcement. As anticipated, the legislation does not allow any insured mortgages to be included as covered bond collateral. The legislation, which will also require Canada Mortgage & Housing Corp. (CMHC) to establish and maintain a registry for covered bonds, better defines who can issue covered bonds (banks and co-operative credit societies), and specifies bankruptcy and insolvency protection for covered bonds. There was also no mention of whether the current 4% regulatory limit on covered bonds will change.
Because many of the principles in the legislative framework were anticipated, there were a significant number of covered bond issuances by Canadian banks since the beginning of calendar 2012. At the end of March 2012, $63 billion was outstanding versus $50 billion at December 2011, with Bank of Nova Scotia being the most active, accounting for $5.5 billion of the change. Given the solid reputation of Canadian banks globally, the increased funding diversification and access to new buyers of debt, almost all of the issuances during this time period were U.S. dollar denominated. Given that several of the banks still have insured mortgages, DBRS believes some of the Canadian banks will continue to fund using these instruments before the bill receives royal assent.
Moody’s Investors Service has today downgraded the Province of Ontario’s issuer and debt ratings to Aa2 with stable outlook from Aa1 with negative outlook, affecting approximately CAD202 billion in debt securities.
“The downgrade of Ontario’s rating reflects the growing debt burden and the risks surrounding the province achieving its medium-term fiscal plan given the subdued growth outlook, extended timeframe back to balance and ambitious expenditure targets,” said Moody’s Assistant Vice President Jennifer Wong, lead analyst for the Province of Ontario.
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Expense growth targets appear particularly ambitious in light of growth in expenses averaging 7% annually in the five years to 2011-12 and continued pressures on health expenses, the province’s largest expense item, due to demographic pressures.
DBRS took a more sanguine view:
DBRS has today confirmed the long and short-term debt ratings of the Province of Ontario (Ontario or the Province) at AA (low) and R-1 (middle), both with a Stable trend. Overall, DBRS views the continuation of the fiscal recovery plan and the increasing emphasis on cost containment as an encouraging step in the right direction. However, as demonstrated by the recent budget negotiations, the political environment remains fragile and DBRS believes that implementing the tough measures required to achieve fiscal targets and limit debt growth will be very challenging and will require a significant pickup in fiscal resolve.
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Ontario’s debt trajectory remains largely consistent with last year’s plan. In 2011-12, DBRS-adjusted debt is estimated to have grown by 9.3%, resulting in a debt-to-GDP ratio of 39.2%, the third-highest among all provinces. Debt growth is expected to slow in 2012-13, with the debt-to-GDP ratio forecast to reach 41.3% before eventually reaching a peak of somewhat below 45% within the next two to three years. However, DBRS cautions that this is dependent on the Province achieving its fiscal targets, which entail considerable execution risk, especially given the constraints of a minority government.
Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s on concern the nation will have to provide further fiscal support to the banking sector as the economy contracts.
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“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”Yields on 10-year Spanish bonds surpassed 6 percent on seven trading days this month, boosting concern that borrowing costs may reach levels that prompted bailouts for Greece, Ireland and Portugal. The rate was 5.83 percent.
Towers Watson produced their Pension Finance Watch for March:
The Towers Watson Pension Index tracks the performance of a hypothetical pension plan invested in a 60% equity/40% fixed income portfolio. This portfolio recorded a 1.3% return for March. We also track two other investment portfolios with different levels of equity exposure. Monthly returns on the 80% and 40% equity portfolios were 1.9% and 0.7%.
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Similar to bond prices, values for pension obligations move in the opposite direction of interest rates. Our liability index (based on projected benefit obligations) decreased 2.3% for March, reflecting the offsetting impacts of interest accumulation and the increase in the discount rate.The changes in asset and liability values resulted in a 3.6% increase in the Towers Watson Pension Index to 66.2.
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The index reflects the PBO funded ratio (market value of assets/projected benefit obligation) for a benchmark pension plan. The asset value changes from month to month based on the investment performance of the 60% equity portfolio, assumed contributions and benefit payments. Liability values increase with benefit accruals and interest cost, offset by benefit payments, and are adjusted to reflect changes in financial assumptions.
The index was hovering around 90% as recently as mid-2008.
Telus has squared its rot for a good boo-hoo-hoo:
Telus Corp. … is weighing whether to use a legal tactic to prevent a U.S. hedge fund from exercising its voting power to defeat the company’s share-consolidation plan.
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Telus is trying to eliminate its dual-share structure and give non-voting shareholders a vote. But New York-based Mason, which has amassed roughly 18.7 per cent of Telus’s common voting shares, is trying to defeat the plan – a stance that has fuelled an escalating fight between the money manager and the company.
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But while the fund purports to champion the interests of the voting class, Telus has accused it of being an opportunistic investor out to earn a quick buck by using a trading strategy that exploits the historical price gap between the two classes of shares.
I think that it’s scandalous that the securities of a Canadian company be used as a vehicle to earn a quick buck! This is Canada, for heaven’s sake! Our country, where we play cooperative games with our dollies!
It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets up 5bp and DeemedRetractibles winning 10bp. Volatility remained low. Volume was quite low.
| 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 | 0.6041 % | 2,519.4 |
| FixedFloater | 4.52 % | 3.87 % | 32,031 | 17.60 | 1 | -0.4739 % | 3,484.9 |
| Floater | 2.87 % | 2.89 % | 46,953 | 20.00 | 3 | 0.6041 % | 2,720.3 |
| OpRet | 4.74 % | 2.67 % | 52,245 | 1.11 | 5 | 0.2219 % | 2,513.6 |
| SplitShare | 5.24 % | -0.14 % | 73,308 | 0.64 | 4 | -0.0099 % | 2,698.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2219 % | 2,298.5 |
| Perpetual-Premium | 5.47 % | 2.12 % | 77,527 | 0.10 | 23 | -0.0026 % | 2,220.7 |
| Perpetual-Discount | 5.19 % | 5.22 % | 151,189 | 15.07 | 10 | -0.1200 % | 2,406.4 |
| FixedReset | 5.02 % | 3.08 % | 193,000 | 2.18 | 67 | 0.0493 % | 2,399.0 |
| Deemed-Retractible | 4.97 % | 3.78 % | 195,402 | 1.98 | 46 | 0.0968 % | 2,310.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| ELF.PR.G | Perpetual-Discount | -2.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-26 Maturity Price : 21.72 Evaluated at bid price : 22.00 Bid-YTW : 5.43 % |
| IAG.PR.E | Deemed-Retractible | 1.27 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.23 Bid-YTW : 5.44 % |
| IAG.PR.A | Deemed-Retractible | 1.63 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.68 Bid-YTW : 5.37 % |
| BAM.PR.C | Floater | 2.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-26 Maturity Price : 18.21 Evaluated at bid price : 18.21 Bid-YTW : 2.90 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.H | FixedReset | 87,418 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-26 Maturity Price : 23.23 Evaluated at bid price : 25.41 Bid-YTW : 3.63 % |
| CM.PR.M | FixedReset | 77,117 | RBC crossed 25,000 at 27.25; Nesbitt crossed 50,000 at 27.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 27.10 Bid-YTW : 2.64 % |
| RY.PR.R | FixedReset | 67,015 | RBC crossed blocks of 50,000 and 10,000, both at 26.30. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.36 Bid-YTW : 2.92 % |
| BNS.PR.T | FixedReset | 59,360 | RBC crossed 50,000 at 26.62. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 26.56 Bid-YTW : 3.00 % |
| CM.PR.L | FixedReset | 58,520 | Nesbitt crossed 50,000 at 27.01. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.90 Bid-YTW : 2.57 % |
| TRP.PR.A | FixedReset | 51,968 | RBC crossed blocks of 25,000 and 18,700, both at 26.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.10 Bid-YTW : 3.02 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| FTS.PR.C | OpRet | Quote: 25.75 – 26.94 Spot Rate : 1.1900 Average : 0.8444 YTW SCENARIO |
| ELF.PR.G | Perpetual-Discount | Quote: 22.00 – 22.91 Spot Rate : 0.9100 Average : 0.6154 YTW SCENARIO |
| BMO.PR.P | FixedReset | Quote: 26.80 – 27.15 Spot Rate : 0.3500 Average : 0.2154 YTW SCENARIO |
| IGM.PR.B | Perpetual-Premium | Quote: 25.90 – 26.30 Spot Rate : 0.4000 Average : 0.3211 YTW SCENARIO |
| IAG.PR.C | FixedReset | Quote: 26.16 – 26.50 Spot Rate : 0.3400 Average : 0.2738 YTW SCENARIO |
| GWO.PR.F | Deemed-Retractible | Quote: 25.70 – 25.93 Spot Rate : 0.2300 Average : 0.1666 YTW SCENARIO |