It’s an ill wind that blows nobody any good:
U.S. banks are looking to capitalize on a dearth of financing for Europe’s commercial property market that’s driven lending margins to five times the level prior to the 2008 crisis.
Citigroup Inc. (C), Morgan Stanley (MS), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) are following insurers and distressed investors allocating capital to the region as local banks, which overextended during the last boom, are forced to contract amid new regulations. Europe faces an $82 billion shortfall between the amount of real-estate debt maturing through this year and the funding available to replace it, according to real-estate broker DTZ.
The scarcity of capital means lenders can charge as much as 3.75 percentage points over benchmarks for the safest pieces of commercial mortgage debt, about five times the spread in 2007, according to Alvarez & Marsal, an adviser on real estate transactions. Those margins will enable banks to revive the market for commercial mortgage-backed bonds, which parcel loans and slice them into securities of varying risk, after it largely shut in 2008.
Meanwhile, the Fed may find selling is harder than buying:
MSCI applied scenarios devised by the Fed itself for stress-testing the nation’s 19 largest banks.
MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation. MSCI puts the Fed’s mark-to-market loss at less than half that, or $216 billion, if the economy performs in line with consensus forecasts of gradually rising growth, inflation and interest rates.
The potential losses are unprecedented in the Fed’s 100- year history. Bernanke began describing in detail the risk of lower payments to taxpayers for the first time today in his monetary policy testimony before the Senate Banking Committee saying that “remittances to the Treasury could be quite low for a time” if interest rates “were to rise quickly.” Bernanke didn’t describe the overall interest-rate risk to the portfolio or potential mark-to-market losses. He said the Fed is “confident” it has tools to tighten monetary policy.
But at least the money is going into something other than mortgages:
Money is pouring into leveraged loan funds at an incredible pace. It’s a natural home for investors who are leery of buying bonds at this point in the cycle, when rates could be on the rise, but who still want credit exposure. Leveraged loans are usually floating rate. And that means protection from higher interest rates, unlike bonds, which will fall in price as rates rise.
…
Among the biggest users of the leveraged loan market are private equity firms who use the financing for buyouts. The leveraged loan boom will help refinance balance sheets of portfolio companies, and fuel more new takeovers.
And the shadow trading sector is getting bigger:
Earlier today, JPMorgan Chase & Co. announced that it will reduce headcount in its consumer banking arm by 3,000 to 4,000 people this year.
Morgan Stanley and Citigroup Inc. have also unveiled plans in recent months to shed staff. As early as this week, Goldman Sachs Group Inc. will begin its annual exercise to cull 5 per cent of its employees, with deeper cuts possible in equity trading, Reuters reported.
…
But [Thomas DiNapoli, the comptroller of New York State] also noted that the industry employed 1,000 fewer people at the end of 2012 than it did a year earlier, adding that he believes “the industry will continue to restructure and downsize until a new business paradigm is established.”If that doesn’t sound like a lot of fun, that’s probably an accurate assessment. Some traders have already decamped for hedge funds, where they don’t have to contend with the same regulatory constraints or reduced appetite for risk.
Best wishes for Graham Beck, who started working at Burns Fry in 1985, moved to the the preferred share desk in 1991 and today announced his imminent retirement from BMO Nesbitt Burns. As he says: a lot has happened in 22 years; and I’ll add that that extends to the names of his employer as well as the preferred share market!
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets off 1bp and DeemedRetractibles up 15bp. Volatility was minimal. Volume was extremely high.
| 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 | 0.6332 % | 2,615.8 |
| FixedFloater | 4.10 % | 3.43 % | 24,539 | 18.43 | 1 | 0.7829 % | 3,966.5 |
| Floater | 2.54 % | 2.85 % | 84,540 | 20.04 | 5 | 0.6332 % | 2,824.4 |
| OpRet | 4.81 % | 3.37 % | 45,674 | 0.33 | 5 | -0.1701 % | 2,591.1 |
| SplitShare | 4.59 % | 4.37 % | 43,142 | 4.26 | 2 | -0.3979 % | 2,932.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1701 % | 2,369.3 |
| Perpetual-Premium | 5.25 % | -0.20 % | 91,892 | 0.09 | 29 | 0.0407 % | 2,351.9 |
| Perpetual-Discount | 4.84 % | 4.91 % | 130,597 | 15.59 | 4 | 0.0406 % | 2,649.3 |
| FixedReset | 4.91 % | 2.76 % | 280,102 | 3.36 | 78 | -0.0093 % | 2,496.5 |
| Deemed-Retractible | 4.88 % | 2.88 % | 140,017 | 0.66 | 44 | 0.1470 % | 2,437.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.K | Floater | 1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-02-26 Maturity Price : 18.48 Evaluated at bid price : 18.48 Bid-YTW : 2.86 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IAG.PR.A | Deemed-Retractible | 203,763 | TD crossed 200,000 at 25.18. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 4.67 % |
| RY.PR.G | Deemed-Retractible | 157,510 | Desjardins crossed 10,000 at 25.90 and 143,200 at 25.83. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-24 Maturity Price : 25.75 Evaluated at bid price : 25.86 Bid-YTW : 2.67 % |
| BNS.PR.P | FixedReset | 137,462 | Desjardins crossed 96,400 at 25.13. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 3.43 % |
| HSE.PR.A | FixedReset | 134,034 | National crossed blocks of 45,000 and 52,000, both at 26.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-03-31 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 2.53 % |
| BNS.PR.L | Deemed-Retractible | 79,987 | Nesbitt crossed 70,000 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-04-26 Maturity Price : 25.75 Evaluated at bid price : 25.90 Bid-YTW : 2.61 % |
| CU.PR.E | Perpetual-Premium | 77,736 | Nesbitt crossed blocks of 40,000 and 25,400, both at 26.40. YTW SCENARIO Maturity Type : Call Maturity Date : 2021-09-01 Maturity Price : 25.00 Evaluated at bid price : 26.36 Bid-YTW : 4.15 % |
| There were 81 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| HSE.PR.A | FixedReset | Quote: 26.60 – 27.12 Spot Rate : 0.5200 Average : 0.3053 YTW SCENARIO |
| PWF.PR.E | Perpetual-Premium | Quote: 25.45 – 25.99 Spot Rate : 0.5400 Average : 0.3551 YTW SCENARIO |
| RY.PR.H | Deemed-Retractible | Quote: 26.40 – 26.71 Spot Rate : 0.3100 Average : 0.1954 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 24.66 – 24.94 Spot Rate : 0.2800 Average : 0.1760 YTW SCENARIO |
| BNA.PR.E | SplitShare | Quote: 25.51 – 25.99 Spot Rate : 0.4800 Average : 0.3787 YTW SCENARIO |
| RY.PR.T | FixedReset | Quote: 26.47 – 26.74 Spot Rate : 0.2700 Average : 0.1705 YTW SCENARIO |