US regulators are in disarray regarding the MetLife / GE Capital deal. It’s too complex to summarize, so you’ll have to read the whole article.
Financial Repression is alive and well … there may be many forced buyers of sovereigns:
Under Dodd-Frank, as well as under Europe’s new Market Infrastructure Regulation (EMIR), asset management firms must abide but the same central clearing rules as the banks. For that reason, they will need a hefty amount of both cash and AAA-rated sovereign bonds to pledge as collateral. The problem, though, is that many of them aren’t ready for the new rules to be implemented in just a few months.
As the FT noted, a recent report from Moody’s projected that the collateral shortfall could fall between $700-billion (U.S.) and $1.2-trillion. Those figures are based on projections from places like the Chicago Mercantile Exchange, which is heavily engaged in swap clearing and estimates that its margins for interest rate swaps will be about 3 to 4 per cent for 10-year U.S. interest rate swaps and 9 to 10 per cent for a 30-year swap, according to Moody’s.
The fear is that once asset managers realize how big their collateral shortfall is, they’ll race out to buy things like Treasury bonds, which will push their yields even lower. Moody’s also worries that asset managers may put these bonds into segregated custodian accounts that prevent them from being re-used, effectively removing them from the market.
The Financial Times article is here; the Moody’s report is for subscribers only:
New over-the-counter (OTC) derivatives regulations will likely cause a surge in demand for liquid, high-quality government securities that are eligible as collateral to meet these requirements, says Moody’s Investors Service in a new Special Comment published today.
Increased collateral requirements for derivatives transactions will result in a sounder credit environment for the market as a whole; however, Moody’s says that lower yields on government securities resulting from their increased demand from regulatory requirements may lead to a shift in bond and money market fund allocations into riskier, lower credit-quality investments to seek higher yields.
The new report, entitled “Managed Funds: New OTC Regulations Will Boost Demand for Eligible Collateral” is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
Moody’s says that the regulations require central clearing for standardised derivatives and global standards on margins for uncleared trades. As the new regulations come into effect by the end of 2012, the demand for government securities will increase and exert downwards pressure on yields, which will lower returns for the funds that are mandated to invest in these securities.
Moody believes that the new regulations will exacerbate conditions that are already exerting pressure on yields, such as (i) government benchmark yields have fallen, some to negative territory, with a flight to quality; (ii) the supply of higher-rated investment-grade corporate, supranational and agency bonds remains limited; and (iii) the use of higher credit-quality corporate and agency bonds as eligible collateral is beginning to be seen in the market, although the level of usage remains low.
Canaccord, proud issuer of CF.PR.A and CF.PR.C is experiencing some difficulty:
Canaccord, one of Canada’s biggest independent securities dealers, is closing 16 branches and keeping 16. Canaccord is also cutting loose 35 advisory teams in the offices that remain. Toronto-based Canaccord lost about $6.5-million in the most recent quarter handling accounts for individuals, but will now “operate in a near break-even basis in current market conditions,” the firm said.
Canaccord was put on Trend-Negative by DBRS last December:
Benefiting from revenue and expense synergies associated with larger and more diversified operating platforms, the Company is well-positioned to grow its revenues and earnings substantially when the global capital markets stabilize. In the meantime, the more stable wealth management and advisory revenues of Collins Stewart add favourable diversification to the Company’s overall business risk profile, which otherwise remains concentrated in the small and mid-cap Canadian equity markets. While the Pfd-3 (low) rating with a Stable trend assigned to the Canaccord preferred shares in June 2011 took into account anticipated volatility associated with broker-dealers, this material acquisition in the current uncertain economic and market environment introduces an additional degree of risk that cannot be ignored. The ambiguity regarding longer-term take-out financing was also a consideration in assigning a Negative trend at this time.
AltaGas, proud issuer of ALA.PR.A, was confirmed at Pfd-3 by DBRS:
DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) and the Issuer Rating of AltaGas Ltd. (AltaGas or the Company) at BBB and on the Preferred Shares – Cumulative at Pfd-3, all with Stable trends. The confirmation reflects: (1) continuing progress on the Company’s goal to grow and diversify earnings and cash flow while reducing its business risk; (2) mitigation of cost overrun risks on its major growth projects and (3) a reasonable financing plan for the 2011 to 2014 growth phase, supported by strong liquidity.
On August 30, 2012, AltaGas acquired SEMCO Holding Corporation (SEMCO), the sole shareholder of SEMCO Energy, Inc., a regulated public utility company with natural gas distribution and storage operations in Michigan and Alaska (see DBRS press release dated February 1, 2012, for details). DBRS expects the overall impact of the acquisition on AltaGas’s credit profile to be modestly positive, with improvement in AltaGas’s business risk profile through the addition of relatively low-risk, regulated natural gas distribution and storage assets in Michigan and Alaska being partly offset by a negative impact on key credit metrics.
DBRS estimates that, with the SEMCO acquisition and related financing, combined with the $144 million common share offering completed on November 15, 2011, and the December 20, 2011, Pacific Northern Gas Ltd. (PNG) acquisition, total debt-to-capital ratio would rise from 47% as at September 30, 2011, to 55% on a pro forma basis as at June 30, 2012, and its cash flow-to-debt ratio would drop from 20% to 12%.
As noted previously, DBRS expects some deterioration in the Company’s key credit metrics during its growth phase from 2011 to 2014, with recovery expected toward the end of the period as cash shortfalls are to be primarily funded by debt. DBRS expects AltaGas to manage the construction period risks (e.g., cost overruns, completion delays, large financing requirements and potential deterioration of credit metrics) for all of its projects, and the PNG and SEMCO acquisitions, within the context of its current BBB rating and total debt-to-capital ratio in the low-to-mid-50% range, with cash flow-to-debt in the high-teens to low-20% range, as calculated by DBRS. If the Company’s ratios do not move closer to the above-noted ranges (from the pro forma levels) over the near to medium term, its credit ratings could come under negative pressure.
It was a mildly positive date for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets winning 6bp and DeemedRetractibles gaining 3bp. Volatility was negligible. Volume was high! Yes, high! It’s been a long time since it was last possible to say that!
| 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 | 0.1333 % | 2,447.2 |
| FixedFloater | 4.52 % | 3.88 % | 37,854 | 17.49 | 1 | 0.0000 % | 3,520.8 |
| Floater | 3.00 % | 3.00 % | 56,894 | 19.71 | 3 | 0.1333 % | 2,642.3 |
| OpRet | 4.66 % | 3.41 % | 53,091 | 1.45 | 4 | 0.1347 % | 2,550.1 |
| SplitShare | 5.45 % | 4.93 % | 71,505 | 4.57 | 3 | 0.0796 % | 2,813.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1347 % | 2,331.8 |
| Perpetual-Premium | 5.28 % | 2.83 % | 93,257 | 1.02 | 28 | 0.0465 % | 2,287.7 |
| Perpetual-Discount | 4.94 % | 4.93 % | 104,719 | 15.63 | 3 | 0.2783 % | 2,550.8 |
| FixedReset | 4.96 % | 3.06 % | 179,694 | 4.26 | 72 | 0.0580 % | 2,430.8 |
| Deemed-Retractible | 4.94 % | 3.56 % | 122,755 | 1.91 | 46 | 0.0255 % | 2,370.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.L | Perpetual-Premium | 1.06 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-31 Maturity Price : 25.25 Evaluated at bid price : 25.80 Bid-YTW : 4.36 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.A | OpRet | 101,251 | National crossed 35,000 at 25.58; so did TD. Desjardins crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 3.41 % |
| ENB.PR.P | FixedReset | 64,345 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-24 Maturity Price : 23.09 Evaluated at bid price : 24.98 Bid-YTW : 3.77 % |
| TD.PR.E | FixedReset | 63,400 | National sold 19,000 to Nesbitt at 26.83 and crossed 29,900 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.71 Bid-YTW : 2.45 % |
| RY.PR.Y | FixedReset | 47,541 | RBC crossed 40,000 at 26.95. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 2.71 % |
| RY.PR.I | FixedReset | 47,238 | RBC crossed 12,800 at 25.76. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 3.27 % |
| ENB.PR.N | FixedReset | 24,965 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-09-24 Maturity Price : 23.17 Evaluated at bid price : 25.20 Bid-YTW : 3.86 % |
| There were 42 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 21.01 – 21.59 Spot Rate : 0.5800 Average : 0.4039 YTW SCENARIO |
| GWO.PR.J | FixedReset | Quote: 26.01 – 26.45 Spot Rate : 0.4400 Average : 0.2896 YTW SCENARIO |
| VNR.PR.A | FixedReset | Quote: 26.00 – 26.50 Spot Rate : 0.5000 Average : 0.3718 YTW SCENARIO |
| RY.PR.X | FixedReset | Quote: 26.75 – 27.15 Spot Rate : 0.4000 Average : 0.2914 YTW SCENARIO |
| SLF.PR.C | Deemed-Retractible | Quote: 23.20 – 23.47 Spot Rate : 0.2700 Average : 0.1765 YTW SCENARIO |
| PWF.PR.I | Perpetual-Premium | Quote: 25.52 – 25.79 Spot Rate : 0.2700 Average : 0.1801 YTW SCENARIO |