March 25, 2013

Cyprus has reached an agreement for an orderly bank default:

Cyprus dodged a disorderly default and unprecedented exit from the euro currency by bowing to demands to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the Mediterranean island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second largest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

So yet again governments are finding that 500 years of bankruptcy law has become inconvenient and are rewriting it on the back of a napkin.

It is interesting to compare the current plan with past assurances:

Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers.

An earlier WSJ blog post about the previous deal noted:

The euro zone has to far carefully avoided burning senior bondholders during a bank restructuring. Doing so was seen as too destabilizing for the bloc’s credit-starved financial system. On top of that, in many countries senior bondholders have the same status as bank depositors when it comes to getting repaid.

However, the thinking on senior bondholders has become to change. In July, when the euro zone negotiated a bailout for Spain’s banks, the European Central Bank argued that they should be “bailed in” in cases where a bank is so sick it needs to be closed. At the time, the European Commission insisted senior bondholders would remain protected and the euro zone’s commitment to do so wasn’t tested, since none of the Spanish cajas were ultimately wound down.

With Cyprus, the euro zone once again sidestepped the question. Officials involved in the rescue talks say that “bailing in” senior bondholders wouldn’t have made sense given that, by the end of September, Laiki and Bank of Cyprus had only some €184 million of senior bonds between them—peanuts next to the €10 billion the two banks need in new capital.

With relatively little money to gain, officials decided that breaking two taboos — taxing depositors and burning senior bondholders — in one go, didn’t seems like a good idea.

Over the next few weeks, we’ll start to understand how this will affect investor confidence:

The European Union’s decision to recapitalize Cypriot banks by inflicting losses on depositors and senior bondholders is triggering investor concern that bank funding across the region will be hurt.

With the exception of Denmark in 2011, senior bank bondholders, like depositors, have avoided losses in the financial crisis. In February 2011, Amagerbanken A/S collapsed and senior creditors initially lost about 40 percent. It was the first time senior bank bondholders in the EU underwent a so-called haircut in an orderly resolution and the event left most Danish lenders shut out of wholesale funding markets.

The cost of insuring against losses on financial debt surged last week amid concern senior bondholders will be included in future bank bailouts. The Markit iTraxx Financial Index of credit-default swaps jumped 34 basis points to 176, the highest in four months. The gauge was at 174.5 basis points at 2:40 p.m. in London.

There’s a lot of concern:

“We’re in an environment where in both North America and Europe we have some serious policy decisions that have to take place,” Ron Florance, the Scottsdale, Arizona-based managing director of investment strategy at Wells Fargo Private Bank, which has $169 billion assets under management, said in a phone interview. “When a policy misstep is bad it’s real bad, and the discussions last week were really bad decisions. That’s been resolved, but it always puts people on edge.”

Stocks turned lower as Dutch Finance Minister Jeroen Dijsselbloem said troubled lenders in the euro area must now fend for themselves as part of future euro rescues. German advisers cut the nation’s 2013 economic growth forecast to 0.3 percent, from its previous estimate of 0.8 percent, citing “the sharp decline” of gross domestic product in the fourth quarter of 2012.

It’s an ill wind that blows nobody any good:

U.S. hedge funds Pine River Capital Management LP, Millennium Management LLC and SAC Capital Advisors LLC are taking advantage of the struggle of European startup funds to grab their pick of the region’s traders.

The three firms, which manage a combined $46 billion, have over the past year all hired employees from hedge funds started by former European bankers, according to regulatory records and people with knowledge of the matter. They joined from firms including Edoma Partners LLP, Occitan Capital Partners LLP and Portman Square Capital LLP, London hedge funds that have either shut down, posted losses or failed to meet their fundraising goals, said the people, who declined to be identified because the companies are private.

Rather than betting that Europe’s sovereign debt crisis is over, the U.S. funds are selectively hiring top traders, some who quit their jobs at banks last year as their employers cut back on risk-taking and bonuses. The search has been made easier as the crisis forced lenders to cut jobs, pushed funds into losses and prompted investors to pull money from unprofitable managers, recruiters and executives said.

Meanwhile the BRICS are discussing a long-overdue global governance change:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility was basically non-existent; volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0386 % 2,637.6
FixedFloater 4.13 % 3.48 % 28,276 18.31 1 0.0000 % 3,937.4
Floater 2.53 % 2.83 % 85,296 20.17 5 0.0386 % 2,847.9
OpRet 4.81 % 0.92 % 57,125 0.24 5 0.0465 % 2,603.2
SplitShare 4.28 % 4.03 % 638,858 4.19 4 0.0199 % 2,939.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0465 % 2,380.4
Perpetual-Premium 5.20 % -3.42 % 92,631 0.10 31 0.0592 % 2,367.6
Perpetual-Discount 4.75 % 4.84 % 165,777 15.54 5 0.0727 % 2,671.7
FixedReset 4.89 % 2.57 % 287,959 3.29 80 0.0456 % 2,514.0
Deemed-Retractible 4.85 % 3.25 % 136,138 0.65 44 0.0924 % 2,452.9
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.68
Evaluated at bid price : 23.95
Bid-YTW : 2.18 %
Volume Highlights
Issue Index Shares
PWF.PR.S Perpetual-Discount 191,803 Recent new issue.
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.76 %
TRP.PR.B FixedReset 126,305 Nesbitt crossed 99,400 at 24.95.
Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.51
Evaluated at bid price : 24.96
Bid-YTW : 2.54 %
HSB.PR.E FixedReset 82,455 Nesbitt crossed 72,400 at 26.45.
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.36
Bid-YTW : 2.14 %
FTS.PR.H FixedReset 69,580 Nesbitt crossed 62,500 at 25.98.
Maturity Type : Call
Maturity Date : 2015-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 2.52 %
POW.PR.G Perpetual-Premium 57,980 TD crossed blocks of 25,000 and 26,500, both at 27.05.
Maturity Type : Call
Maturity Date : 2017-04-15
Maturity Price : 26.00
Evaluated at bid price : 27.06
Bid-YTW : 4.22 %
SLF.PR.E Deemed-Retractible 54,680 RBC crossed 48,600 at 25.00.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.94
Bid-YTW : 4.55 %
There were 32 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 23.95 – 24.50
Spot Rate : 0.5500
Average : 0.3882

Maturity Type : Limit Maturity
Maturity Date : 2043-03-25
Maturity Price : 23.68
Evaluated at bid price : 23.95
Bid-YTW : 2.18 %

RY.PR.C Deemed-Retractible Quote: 25.82 – 26.05
Spot Rate : 0.2300
Average : 0.1445

Maturity Type : Call
Maturity Date : 2013-11-24
Maturity Price : 25.50
Evaluated at bid price : 25.82
Bid-YTW : 3.19 %

PWF.PR.F Perpetual-Premium Quote: 25.42 – 25.65
Spot Rate : 0.2300
Average : 0.1586

Maturity Type : Call
Maturity Date : 2013-04-24
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : -5.93 %

IAG.PR.F Deemed-Retractible Quote: 26.88 – 27.05
Spot Rate : 0.1700
Average : 0.0986

Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.88
Bid-YTW : 3.88 %

FTS.PR.E OpRet Quote: 26.25 – 26.44
Spot Rate : 0.1900
Average : 0.1283

Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.25
Bid-YTW : -3.89 %

PWF.PR.H Perpetual-Premium Quote: 25.85 – 26.05
Spot Rate : 0.2000
Average : 0.1504

Maturity Type : Call
Maturity Date : 2013-04-24
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : -23.58 %

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