April 5, 2013

The US jobs number was disappointing:

Payrolls grew by 88,000 workers last month, the smallest in nine months, after a revised 268,000 gain in February that was higher than first estimated, Labor Department figures showed today in Washington. The median forecast of 87 economists surveyed by Bloomberg projected an advance of 190,000. The jobless rate fell to 7.6 percent from 7.7 percent.

The US is looking serious on Too-Big-To-Fail:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.

Some US politicians are trying to ban hedging:

State Senator Mike Folmer, a Republican, in February introduced a bill that would bar publicly funded entities from engaging in the derivatives, which can be used to protect against swings in interest rates. The ban would deny Philadelphia, which had entered into $3.5 billion of swaps, access to a useful tool, said Rob Dubow, finance director of the fifth-most populous U.S. city.

The Pennsylvania State Association of Boroughs supports a ban on swaps, said Christopher Cap, executive vice president. Elam Herr, assistant executive director of Pennsylvania State Association of Township Supervisors, said it may back Folmer’s bill.

The best known example is Oakland’s attempt to effectively default on what was effectively a loan:

Between debating the location of a proposed dog park and discussing taxi permit fees one night last month, the city council in Oakland, California, turned to severing ties with Goldman Sachs Group Inc. (GS)

The vote for the city administrator to begin the process of firing the fifth-biggest U.S. bank by assets came during an eight-hour meeting Dec. 18. It culminated months of efforts by the city to exit a 1998 interest-rate swap without paying a $14.8 million termination fee. Goldman, which underwrote $83 million of Oakland debt last year, has denied the request.

Oakland entered into a so-called synthetic fixed-rate swap with the bank in 1998. It issued bonds to help finance pension obligations and used variable-rate instead of fixed-rate securities, according to reports filed with the city council.

The city was lured by the prospect of upfront cash, said Zennie Abraham, economic adviser to then-Mayor Elihu Harris. California voters had just approved Proposition 218, which limited cities’ ability to raise taxes, said Abraham.

“A lot of the city staff got enamored with the city getting a huge check,” Abraham said. “That was dangled in our face.”

The city realized a $15 million windfall from entering the contract. Oakland agreed to pay a fixed 5.6775 percent until 2021, while the bank was on the hook for a variable rate equal to the Bond Markets Association Index — 3.09 percent at the time the bonds were issued in 1998.

Nothing wrong with swaps or any other derivatives. But when they’re used to cover up borrowing, a la Greece … well, somebody should get fired.

The feds are continuing to explain bail-in bonds:

While the term “bail-in” has been used in both cases, Canadian officials are now scrambling to distance their plan from any that would use consumer deposits for capital. Amid questions about the plan, a spokeswoman for Finance Minister Jim Flaherty said in a statement that no consumer bank deposits – of any kind – would be drawn upon in the Canadian bail-in scenario.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Department of Finance spokeswoman Kathleen Perchaluk said.

Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.

Analysts, however, say it would take extreme circumstances for the concept of a bail-in to ever come into play.

These deposit notes and bonds are not financial products available to the average investor or depositor, and do not include funds held in consumer deposits.

This may turn out very well for the preferred share market; it is impossible for the bar to be set any lower for deposit notes and bonds than it is for preferred shares, so what’s the difference? I mean really? An announcement of intention from OSFI that it will seek to convert preferred shares first in the event of non-viability?

This simply shows up the moronic nature of OSFI’s decision to go for a “low trigger” on preferred share contingent capital conversion … if they were high trigger, then the bonds could be low trigger (preferably lower trigger, rather than non-viability trigger) and then the bonds would be clearly senior and there would be a clear hierarchy. However, this would lower the importance of OSFI’s discretion when the next crisis occurs, and hence lower the importance of OSFI officialdom.

I have long argued, for instance, that all contingent capital should convert upon the common stock price breaching a certain level (taken as a VWAP over a period of time). For instance, let us assume RY’s common share price is $50. Then preferred shares should convert when the common trades below $25, at a conversion price of $25. The bonds could convert with a trigger price = conversion price = $10-15. This would be a much better system than the current mess.

With excellent timing, DBRS Requests Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities:

DBRS is requesting comments on a proposed methodology released today that would be used in the rating of capital securities issued by banks that are either subordinated or that have unique convertibility terms (including contingent capital features). Market participants are asked to submit comments on the proposal to DBRS_Bank_Methodology_Comments@DBRS.com on or before May 10, 2013. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

Note that the proposed criteria as titled represents a merger of three outstanding DBRS banking criteria: (i) Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments; (ii) Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks; and (iii) Rating Bank Preferred Shares & Equivalent Hybrids.

While we are open to any comments, we draw attention to three major areas, two of which are written as changes in the proposed document and one consideration for change, which has not been included in the document at this time:

(1) Present criteria dictate that bank preferred shares are typically rated three to five notches below the issuer’s intrinsic assessment. Based on further assessing the impact of notching versus POD (“probability of default”) levels, the request for comment document changes this to a standard three notches. We are also asking for comments on whether DBRS should retain the flexibility to have certain bank preferred ratings notched up by one notch versus the standard notching where there are unique positive characteristics for individual banks, or if this ability should be removed. The wording in the proposed criteria as released still provides this ability.

(2) A second change relates to the notching process that DBRS would use for contingent capital instruments. The proposed criteria within this April 5th, 2013 document provide more detail relative to the current DBRS criteria.

(3) As is the case with the present criteria, the request for comment document continues to present that normal subordinate debt instruments issued by banks that are defined by DBRS as systemically important would generally receive the identical notching benefit of typically a one-notch uplift due to external / government support that is given to deposits and senior unsecured debt. In recent times, there appears to be growing skepticism regarding governments’ willingness to support subordinated debt when dealing with systemically important banks. Our final decision on this issue could maintain the status quo; or it could result in all subordinate debt being notched from the intrinsic assessment level; or there could be a combination of the above based on the relevant legal framework, resolution schemes, and government policies for each country and banks involved.

BBO.PR.A was placed on Review-Negative by DBRS last September; the rating has now been affirmed at Pfd-2(low) and the Review removed:

DBRS has today confirmed the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) at Pfd-2 (low) and has removed the rating from Under Review with Negative Implications.

On September 6, 2012, DBRS placed the rating of the Preferred Shares Under Review with Negative Implications, primarily due to the drop in downside protection below required levels in the prior months. However, since then, downside protection has recovered and stabilized, fluctuating between 49% and 51%, and the dividend coverage ratio has improved. As a result, the Preferred Shares have been confirmed at Pfd-2 (low) and removed from Under Review with Negative Implications.

Complicating matters is the fact that BBO reports its NAV per Capital Share, rather than per Unit, which is made clear by their January Fact Sheet.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 9bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was above 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 -0.4309 % 2,603.3
FixedFloater 4.10 % 3.46 % 31,830 18.34 1 0.0000 % 3,963.1
Floater 2.67 % 2.88 % 79,744 20.07 4 -0.4309 % 2,810.9
OpRet 4.80 % 0.33 % 53,527 0.21 5 -0.0772 % 2,611.0
SplitShare 4.81 % 3.99 % 137,333 4.16 5 0.0332 % 2,953.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0772 % 2,387.6
Perpetual-Premium 5.19 % 2.03 % 88,849 0.90 32 -0.0260 % 2,375.0
Perpetual-Discount 4.86 % 4.85 % 167,918 15.73 4 -0.1221 % 2,674.7
FixedReset 4.89 % 2.59 % 284,181 3.25 80 -0.0944 % 2,520.0
Deemed-Retractible 4.86 % 2.08 % 130,845 0.48 44 0.0176 % 2,457.1
Performance Highlights
Issue Index Change Notes
TD.PR.P Deemed-Retractible -1.50 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-05
Maturity Price : 26.00
Evaluated at bid price : 26.23
Bid-YTW : -9.64 %
Volume Highlights
Issue Index Shares
BNS.PR.P FixedReset 261,217 TD crossed 24,000 at 25.20; National crossed 40,000 at the same price. Then Jacob Securities, seen for the first time yesterday, crossed 75,000 at the same price again.

I think Jacob Securities has got either a new client or a new trader, possibly both.

Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : -3.30 %

BAM.PR.G FixedFloater 206,430 Nesbitt crossed two blocks of 100,000 each, both at 23.25.
Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.34
Evaluated at bid price : 23.15
Bid-YTW : 3.46 %
TRP.PR.A FixedReset 163,445 Desjardins crossed blocks of 50,000 shares, 77,200 and 30,000, all at 25.60.
Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.88
Evaluated at bid price : 25.65
Bid-YTW : 3.02 %
BNS.PR.X FixedReset 105,079 Nesbitt crossed blocks of 53,600 and 20,000, both at 26.00. RBC crossed 10,000 at the same price.
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 1.95 %
TRP.PR.D FixedReset 75,260 Scotia crossed 50,000 at 26.00.
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.35 %
BNS.PR.Q FixedReset 62,050 TD crossed 49,900 at 25.23.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 2.86 %
There were 38 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PR.P Deemed-Retractible Quote: 26.23 – 26.65
Spot Rate : 0.4200
Average : 0.2359

Maturity Type : Call
Maturity Date : 2013-05-05
Maturity Price : 26.00
Evaluated at bid price : 26.23
Bid-YTW : -9.64 %

FTS.PR.F Perpetual-Premium Quote: 25.58 – 25.93
Spot Rate : 0.3500
Average : 0.2331

Maturity Type : Call
Maturity Date : 2014-12-01
Maturity Price : 25.25
Evaluated at bid price : 25.58
Bid-YTW : 4.34 %

ABK.PR.C SplitShare Quote: 32.10 – 32.42
Spot Rate : 0.3200
Average : 0.2241

Maturity Type : Call
Maturity Date : 2014-03-10
Maturity Price : 31.64
Evaluated at bid price : 32.10
Bid-YTW : 2.72 %

TRI.PR.B Floater Quote: 24.01 – 24.55
Spot Rate : 0.5400
Average : 0.4451

Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.70
Evaluated at bid price : 24.01
Bid-YTW : 2.16 %

IGM.PR.B Perpetual-Premium Quote: 26.66 – 26.90
Spot Rate : 0.2400
Average : 0.1488

Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.66
Bid-YTW : 3.94 %

BAM.PR.J OpRet Quote: 26.82 – 27.09
Spot Rate : 0.2700
Average : 0.1941

Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.82
Bid-YTW : 2.00 %

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