Let’s all reach for yield!
German insurers, which came through the subprime mortgage crisis largely unscathed, are seeking to boost investment returns by buying junk loans to corporate borrowers.
Senior secured loans, which are repaid first in a default, are originated by banks for borrowers considered high yield or high risk as they usually have a significant level of debt relative to equity. The loans are then are sold on to investors.
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Leveraged loan prices plunged to 59.2 cents on the dollar in mid-December 2008 as investors dumped risky debt two months after the collapse of Lehman Brothers Holdings Inc. They averaged 95.12 cents on Aug. 22, which was the highest since June 2011, according to the S&P/LSTA U.S. Leveraged Loan 100 Index. The measure, which tracks the 100 largest dollar- denominated first-lien leveraged loans, has climbed from 90.75 at year-end.
The OSC is giving itself more money:
Canada’s largest securities commission says it is facing a financial shortfall this year and needs a major increase in the annual fees it charges to public companies and those registered to work in the securities industry.
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The fee increase will total 15.5 per cent in each of the next three years for issuers – companies that have issued securities in Ontario. Compounded over three years, that means fees will be 54 per cent higher by 2015 than they are today.
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Registrants – firms and individuals registered to work in the securities industry – would face increases of 7.9 per cent annually over the next three years, the OSC said. Compounded, that means an increase of about 25 per cent by 2015.
I am sure we will all sleep better at night now. But I’m considering visiting their offices on Monday:
A key figure in the multimillion-dollar Portus financial scandal, a complicated investment scheme that collapsed in 2005, has reached a tentative settlement with officials at the Ontario Securities Commission.
An agreement between Portus co-founder Boaz Manor and the OSC’s enforcement branch, announced Friday, will be put before a panel of commissioners at a hearing scheduled for Monday afternoon.
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Earlier this week, the OSC reached settlements with two lesser figures in the Portus saga — Michael Labanowich and John Ogg. Hearings for those settlements are scheduled for Monday morning, before the hearing for the Manor settlement.
Ain’t it great what a little lobbying can do?
SEC Chairman Mary Schapiro this week abandoned a four-year effort to adopt tougher rules for money funds as three fellow commissioners said they wouldn’t support her proposal. The announcement marks a victory for the fund industry, which had lobbied against the plan.
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Schapiro has argued the funds’ stable $1 share price encourages investors to flee at the first sign of trouble. That’s because those who react quickly can sell their shares at $1 each even if the net asset value has dropped below that level.Schapiro’s staff this month produced a list for Congress of more than 300 instances over the past 40 years in which fund companies have sought permission from the SEC to support funds. The list was presented as evidence that funds weren’t as stable as the funds industry maintained.
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Schapiro’s plan would have given fund managers a choice of switching to a floating share price that reflected the market value of holdings, or establishing a capital buffer to protect against credit losses and redemption restrictions to discourage investor flight.
I was gratified by a reference to a speech by Eric Rosengren, boss of the Boston Fed, titled Our Financial Structures – Are They Prepared for Financial Instability?:
As recent studies have highlighted, it is quite common for money market mutual funds that have impaired assets to obtain support from their sponsors.[12] Whether this is a cash infusion or a purchase at face value of an impaired asset,[13] this support can represent draws on capital[14] at times when the sponsoring organization is facing other capital pressures.
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In the absence of such reforms for all money market mutual funds, an alternative for funds with depository institution or depository institution affiliated sponsors would be to include likely money market mutual fund support in the sponsor’s stress tests. Based on the historical experience of their money market funds, the historical experience of similar funds, and their money market funds’ exposures, sponsors could calculate the likely capital support needed from the organization in a stress scenario.Again, this is an admittedly partial approach, in the absence of more comprehensive reforms that I hope will occur. But this approach would at least make more banking organizations more resilient (it would not be just money market mutual fund structures that would need capital – any financial structure that broke down during stress would need more capital) but it would also make clearer to money market mutual fund investors that banks had capital that could support funds during stressful periods. It would thus make clear that money market mutual funds with well capitalized sponsors are likely to be less risky than those that do not have well capitalized sponsors.
Similarly, other financial products that circumvent standard capital requirements – such as non 2a-7 “money market like” funds, stable value wrap products, and asset-backed commercial paper – could lead investors to expect that the sponsor holds capital for the support that these products could need in times of stress. While some firms are likely to argue they would not provide support for so-called capital efficient products, the high frequency of support of money market mutual funds and other off-balance-sheet items during the crisis makes such claims dubious.
I have long advocated consolidating banks’ balance sheets with their sponsored funds.
It was a mildly negative day for the Canadian preferred share market, with PerpetualPremiums down 5bp and FixedResets and DeemedRetractibles both off 1bp. Volatility was OK. Volume was virtually non-existent – I’m not reporting a single block today!
| 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 | 1.3900 % | 2,392.7 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.3900 % | 3,579.3 |
| Floater | 3.04 % | 3.08 % | 59,791 | 19.48 | 3 | 1.3900 % | 2,583.5 |
| OpRet | 4.79 % | 3.61 % | 28,056 | 0.82 | 5 | -0.2922 % | 2,535.9 |
| SplitShare | 5.48 % | 4.80 % | 70,397 | 4.65 | 3 | -0.2260 % | 2,800.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2922 % | 2,318.9 |
| Perpetual-Premium | 5.30 % | 3.73 % | 95,431 | 0.50 | 28 | -0.0465 % | 2,276.5 |
| Perpetual-Discount | 4.97 % | 4.98 % | 99,953 | 15.45 | 3 | -0.4166 % | 2,517.3 |
| FixedReset | 5.00 % | 3.10 % | 171,532 | 3.74 | 71 | -0.0060 % | 2,425.6 |
| Deemed-Retractible | 4.94 % | 3.49 % | 124,946 | 1.14 | 46 | -0.0093 % | 2,363.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.C | OpRet | -1.54 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-09-23 Maturity Price : 25.25 Evaluated at bid price : 25.50 Bid-YTW : -7.89 % |
| HSB.PR.C | Deemed-Retractible | -1.15 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-30 Maturity Price : 25.25 Evaluated at bid price : 25.70 Bid-YTW : 3.85 % |
| BAM.PR.K | Floater | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-24 Maturity Price : 17.21 Evaluated at bid price : 17.21 Bid-YTW : 3.08 % |
| BAM.PR.B | Floater | 2.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-24 Maturity Price : 17.47 Evaluated at bid price : 17.47 Bid-YTW : 3.03 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.Q | Deemed-Retractible | 24,319 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 4.90 % |
| BNS.PR.J | Deemed-Retractible | 23,523 | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-10-29 Maturity Price : 25.00 Evaluated at bid price : 25.96 Bid-YTW : 2.24 % |
| ENB.PR.N | FixedReset | 21,629 | YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.28 Bid-YTW : 3.89 % |
| BAM.PR.N | Perpetual-Discount | 12,703 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-24 Maturity Price : 23.73 Evaluated at bid price : 24.15 Bid-YTW : 4.97 % |
| POW.PR.D | Perpetual-Premium | 12,679 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.16 Bid-YTW : 4.98 % |
| SLF.PR.G | FixedReset | 12,419 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 3.50 % |
| There were 4 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: 25.50 – 25.90 Spot Rate : 0.4000 Average : 0.2619 YTW SCENARIO |
| HSB.PR.C | Deemed-Retractible | Quote: 25.70 – 26.25 Spot Rate : 0.5500 Average : 0.4200 YTW SCENARIO |
| BAM.PR.O | OpRet | Quote: 25.41 – 25.70 Spot Rate : 0.2900 Average : 0.2193 YTW SCENARIO |
| BAM.PR.Z | FixedReset | Quote: 25.96 – 26.19 Spot Rate : 0.2300 Average : 0.1702 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 24.07 – 24.25 Spot Rate : 0.1800 Average : 0.1214 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 26.35 – 26.64 Spot Rate : 0.2900 Average : 0.2320 YTW SCENARIO |