Fitch Ratings (my favourite CRA) didn’t win an account recently – so they decided to win some political brownie points instead:
The recently closed CSMC Trust Mortgage Corp 2012-CIM3 (‘CIM3’) transaction has insufficient credit enhancement to achieve a ‘AAA’ rating, according to Fitch Ratings.
While asked to provide feedback, Fitch was ultimately not selected to rate the transaction, the ninth new issue prime RMBS transaction completed in 2012. Fitch believes it has a more conservative credit stance regarding this transaction. In fact, at 5.85%, the credit enhancement available to the ‘AAA’ rated A-2 class is more than 15% lower than any Fitch rated prime RMBS transaction issued since 2008. Fitch’s estimated credit enhancement (‘CE’) for the senior class A-1 and A-2 notes was 8%.The collateral attributes of the CIM3 pool are consistent with those Fitch would consider representative of a high credit quality prime portfolio. That said, the 5.85% CE available to the A-2 class is not sufficient in Fitch’s view to fully address the risks associated with the pool, including concentrations in geographies whose property prices remain well above what Fitch believes are sustainable values.
A key component of Fitch’s analysis is to reduce home prices to their sustainable value prior to applying its market value decline (MVD) stresses. Six of the top ten MSA’s represented in the transaction were applied base MVD’s over 20% including Washington-Arlington-Alexandria that accounts for 17.3% of the pool.
They didn’t say who won the deal but Bloomberg did:
The AAA ratings assigned by Standard & Poor’s in a mortgage-bond deal by Credit Suisse Group AG (CSGN) are too high, Fitch Ratings said for the second time this year.
…
Rating companies have stepped up their public criticism of competitors’ grades on securitized debt after investors and lawmakers accused them of lowering standards to win business as issuers practiced so-called ratings shopping during the credit boom. A report by a Senate panel last year described the industry as engaging in “a race to the bottom,” before the bubble began to burst in 2007 and sparked a global financial crisis.
I am perplexed to learn that the SEC is studying decimalization:
The Securities and Exchange Commission today announced that its staff will host a roundtable early next year to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.
The roundtable will be held on Feb. 5 at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.
This has been given some focus by the SEC Report to Congress on Decimalization:
One of the IPO Task Force’s conclusions is that changes in the market structure of U.S. capital markets toward a low-cost, frictionless environment characterized by electronic trading has favored highly liquid, very large capitalization stocks at the expense of smaller capitalization stocks. According to the IPO Task Force Report, the impact of decimalization has been twofold. First, market structure changes associated with decimalization favor short-term trading strategies over long-term fundamental strategies. For smaller public company stocks with lower liquidity, the lack of fundamental strategies results in trading volume that is too low “to make money for the investment bank’s trading desk.” The IPO Task Force Report argues that this lack of profitability undermines the incentive for underwriters to take smaller companies public.
Second, the IPO Task Force Report states that “decimalization . . . put the economic sustainability of sell-side research departments under stress by reducing the spreads and trading commissions that formerly helped to fund research analyst coverage.” The IPO Task Force Report also argues that analyst coverage has significantly shifted away from smaller capitalization stocks towards highly liquid, larger capitalization stocks, reflecting the change in financial institution focus.9 In particular, the IPO Task Force Report suggests that analyst coverage of smaller public companies has become unprofitable both because of the Global Analyst Research Settlement in 2003, which prohibited the direct compensation of research analysts through investment banking revenue, and the advent of decimalization, which reduced spreads that formerly helped fund analyst coverage. Thus, the IPO Task Force Report concludes, less analyst coverage of smaller capitalization companies means that less information on these stocks is generated, which, in turn, reduces market interest in these stocks.
In many ways this echoes my criticism of the concept of exchange trading for bonds: transparency sounds wonderful, but it leads to a shallower and more brittle market than OTC. However, my perception is that the big problem for smaller companies is the immense cost of prospectus preparation and compliance with regulation for public companies; I think the SEC would be better advised to fix that first, prior to fiddling with market mechanics.
The Nobel Foundation is reaching for yield:
The Nobel Foundation, which this year lopped 20 percent off its cash prizes, is planning to invest more money through hedge funds to boost its returns and restore the award to its previous size.
“When we look at the analysis we see that we can get more return with less risks by doing that,” Executive Director Lars Heikensten said in an interview at the Nobel Foundation’s Stockholm headquarters yesterday. “If we can choose hedge funds that we trust, then we can get better returns for given risks.” The fund “probably shouldn’t” be fully invested in debt securities, he said.
Audit fees and expenses are going up:
Accounting firm Ernst & Young LLP has been accused by regulators of failing to properly scrutinize the books of failed forestry company Sino-Forest Corp., marking a rare case of auditors facing allegations of wrongdoing by the Ontario Securities Commission.
The case was announced Monday just as lawyers for Sino-Forest’s shareholders were also revealing they had reached a record $117-million settlement with E&Y late last week. The settlement is the largest class-action lawsuit payment by an audit firm in Canadian history.
Both developments are expected to have a broad impact on the work of auditors, especially those working for companies like Sino-Forest who trade on Canadian stock exchanges but have all their operations based in another country.
The Canadian preferred share market drifted very slightly upward today, with PerpetualPremiums and DeemedRetractibles up 2bp while FixedResets gained 4bp. There was a surprising amount of volatility, heavily skewed to the upside. Volume was below average.
| 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 | 0.0799 % | 2,472.7 |
| FixedFloater | 4.16 % | 3.51 % | 26,315 | 18.27 | 1 | 0.4399 % | 3,866.9 |
| Floater | 2.79 % | 3.00 % | 57,798 | 19.66 | 4 | 0.0799 % | 2,669.8 |
| OpRet | 4.59 % | 0.27 % | 37,728 | 0.56 | 4 | 0.3326 % | 2,600.0 |
| SplitShare | 4.68 % | 4.81 % | 68,941 | 4.43 | 2 | -0.3854 % | 2,844.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3326 % | 2,377.4 |
| Perpetual-Premium | 5.25 % | 1.86 % | 72,080 | 0.23 | 30 | 0.0233 % | 2,319.9 |
| Perpetual-Discount | 4.85 % | 4.89 % | 125,425 | 15.59 | 4 | 0.0305 % | 2,619.6 |
| FixedReset | 4.96 % | 2.98 % | 212,356 | 4.32 | 75 | 0.0446 % | 2,447.5 |
| Deemed-Retractible | 4.91 % | 2.63 % | 118,517 | 0.88 | 46 | 0.0195 % | 2,406.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| ELF.PR.H | Perpetual-Premium | -1.42 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-17 Maturity Price : 25.00 Evaluated at bid price : 25.68 Bid-YTW : 5.23 % |
| IAG.PR.G | FixedReset | 1.01 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.02 Bid-YTW : 3.27 % |
| POW.PR.G | Perpetual-Premium | 1.12 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-04-15 Maturity Price : 26.00 Evaluated at bid price : 27.16 Bid-YTW : 4.46 % |
| GWO.PR.N | FixedReset | 1.19 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.88 Bid-YTW : 3.49 % |
| MFC.PR.G | FixedReset | 1.38 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-19 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.56 % |
| BAM.PR.O | OpRet | 1.53 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.90 Bid-YTW : 0.27 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PR.G | FixedReset | 72,795 | RBC sold 10,000 to Scotia at 26.63, then crossed blocks of 22,500 and 20,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 1.98 % |
| BAM.PF.C | Perpetual-Discount | 52,449 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-03 Maturity Price : 24.23 Evaluated at bid price : 24.60 Bid-YTW : 4.94 % |
| BMO.PR.Q | FixedReset | 33,023 | RBC crossed 24,800 at 25.10. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 3.02 % |
| BNS.PR.R | FixedReset | 32,890 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 3.52 % |
| CM.PR.D | Perpetual-Premium | 30,850 | RBC crossed 20,000 at 25.95. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-01-02 Maturity Price : 25.00 Evaluated at bid price : 25.92 Bid-YTW : -29.40 % |
| TD.PR.I | FixedReset | 29,405 | RBC bought 16,300 from anonymous at 26.87. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 26.88 Bid-YTW : 1.98 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BNA.PR.C | SplitShare | Quote: 24.05 – 24.30 Spot Rate : 0.2500 Average : 0.1592 YTW SCENARIO |
| ELF.PR.H | Perpetual-Premium | Quote: 25.68 – 25.94 Spot Rate : 0.2600 Average : 0.1711 YTW SCENARIO |
| BMO.PR.L | Deemed-Retractible | Quote: 26.62 – 26.86 Spot Rate : 0.2400 Average : 0.1835 YTW SCENARIO |
| W.PR.H | Perpetual-Premium | Quote: 25.69 – 25.95 Spot Rate : 0.2600 Average : 0.2118 YTW SCENARIO |
| ENB.PR.A | Perpetual-Premium | Quote: 25.95 – 26.15 Spot Rate : 0.2000 Average : 0.1527 YTW SCENARIO |
| ELF.PR.F | Perpetual-Premium | Quote: 25.45 – 25.65 Spot Rate : 0.2000 Average : 0.1533 YTW SCENARIO |