Apple’s CFO is doubtless celebrating his $1.5-billion trading win:
Investors are nursing losses of up to 9 per cent on Apple’s record-breaking $17bn bond offering, less than six weeks after the securities landed in their portfolios.
The technology giant tapped the white-hot bond market for the largest debt fundraising to date on April 30, but a sharp turn in interest rates has caused a sell-off in corporate bonds and wiped hundreds of millions of dollars off the value of the offering.
Apple sold $3bn of bonds maturing in 2043, locking in a low interest rate of 3.9 per cent for the next 30 years, but the market price of these bonds had fallen to 90.36 per cent of face value in late trading on Monday, according to Trace data.Investors in the offering paid 99.418 per cent of face value for the new bonds, but institutional and retail demand was so high that they traded as high as 101.97 in the secondary market.
So I have a question for the Europeans: how much bonus is appropriate for this man?
You know, some people just ask to be cheated (emphasis added):
Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.
Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.
…
Companies and asset managers typically ask banks to buy or sell currencies at a specified WM/Reuters fix later in the day, most commonly the 4 p.m. London close. That arrangement is open to abuse, as it gives traders a window in which they can adjust their own positions and try to move the benchmark to boost their profit, three of the dealers said.
What a pack of idiots. Anybody who complains under those circumstances should simply lose his license. It should be obvious that you can only front-run if you have a fiduciary relationship, which is not generally the case in such circumstances; if you don’t, you are at perfect liberty to take advantage of the counterparty’s stupidity. More gently, it can be called ‘positioning prior to a trade’, in precisely the same way as government bond primary dealers short bonds of tenor X before an auction of tenor X. However, the clients will typically not want a fiduciary relationship, because then they wouldn’t be able to boast about what hard-nosed BSDs they are.
There is continued chatter about a takeover of CIT Group:
CIT Group Inc. (CIT) Chief Executive Officer John Thain, whose commercial lending firm has drawn takeover speculation, said the logic of selling to a larger bank is “obvious.”
“The big banks are awash in deposits and they can’t generate attractive assets,” Thain said today in a Bloomberg Television interview with Erik Schatzker and Sara Eisen. “We, in all our businesses, are able to generate very high-yielding, attractive assets, so the logic of that is obvious.”
I confess, I still don’t fully understand why the logic of this wasn’t obvious in 2008.
Inflation? What inflation?
Some Federal Reserve policy makers are citing the lowest inflation rate in at least five decades as an alarm bell for the economy. Economists at UBS Securities LLC say the figure isn’t as troubling as it appears.
Consumer prices climbed 1.1 percent in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel — matching the smallest increase since records began in 1960. That’s down from 1.9 percent in the year ended April 2012.
…
Fed officials meeting June 18-19 in Washington will weigh how much changes in inflation and the labor market will influence the pace of their $85 billion in monthly asset purchases. James Bullard, president of the St. Louis Fed, this week said inflation below the central bank’s 2 percent target may warrant prolonging bond buying.
DBRS placed Spectra Energy under Review-Negative:
This rating action follows the announcement that Spectra Energy Corp (Spectra Energy, Spectra Capital’s 100% owner and guarantor of all series of notes outstanding under the Senior Indenture of Spectra Capital) intends to drop down all of its remaining U.S. Transmission and Storage Assets to Spectra Energy Partners (SEP, a master limited partnership controlled by Spectra Energy) by the end of this year, subject to market conditions. By completing this drop-down, Spectra Energy expects to provide its investors with higher dividend growth of approximately 12 cents per year compared with the current rate of eight cents per year. Management expects to provide more details concerning this transaction in its Q2 earnings call scheduled for August 6, 2013.
Spectra is an American company and does not directly issue Canadian preferred shares, but it is the parent of Westcoast Energy, which does (W.PR.H & W.PR.J). Westcoast has heavy capex that will keep cash flows negative for a while, but DBRS did not explicitly state a dependence upon parental support in their last review. Still, it’s worth mentioning.
GMP Capital, proud issuer of GMP.PR.B, was confirmed at Pfd-3(low), Trend Negative by DBRS:
The Company’s risk exposures are somewhat mitigated by low capital and liquidity requirements, its strong market position in its chosen niches, its integrated business model and a flexible expense base accompanied by a strong entrepreneurial culture. Nevertheless, the market tone continues to be very negative and is particularly unfriendly for broker-dealers. Additionally, the Company is more aggressively capitalized than it had been in earlier cycles following the $115 million issue of preferred shares in Q1 2011 and over $72 million in share buybacks during 2011, resulting in a total debt-to-capitalization ratio of over 30%, which is in the upper range of what is acceptable in this rating category. Without strong earnings, total debt-to-cash flow is increasing, and fixed charge coverage ratios have fallen to levels that are in the lower bounds of what is perceived as acceptable for this rating category. DBRS does recognize that the current environment represents a low point in the cycle and thus metrics are expected to be in the weaker end of the ranges; however, an extended period of weakness without the Company being able to generate more positive results remains a concern. DBRS notes favourably the Company’s decision to preserve capital in the current uncertain environment by cutting its common share dividend in half in 2012 and not utilizing its share buyback program in the past year. DBRS expects GMP to continue a prudent approach to retaining capital given the tough market environment.
It was another unfriendly day for the Canadian preferred share market … on the bright side, the losses are slowing down! PerpetualPremiums were down 23bp (a lot of these are now PendingPerpetualDiscounts!), FixedResets gained 7bp and DeemedRetractibles were off 7bp. There is another lengthy performance highlights table but (brace yourselves!) there were a significant number of gains on this list. Volume was quite high.
PerpetualDiscounts now yield 5.11%, equivalent to 6.64% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.30%, so the interest-equivalent pre-tax spread (in this context, the “Seniority Spread”) is now about 235bp, a significant widening from the 225bp reported June 5.
The BAM Straight Perpetual 4.90% new issue closes tomorrow with the symbol BAM.PF.D. It will not be pretty.
| 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 | 0.5333 % | 2,554.8 |
| FixedFloater | 4.05 % | 3.38 % | 42,277 | 18.54 | 1 | 0.0000 % | 4,055.6 |
| Floater | 2.62 % | 2.92 % | 84,185 | 19.94 | 5 | 0.5333 % | 2,758.5 |
| OpRet | 4.85 % | 2.09 % | 62,232 | 0.08 | 5 | 0.1321 % | 2,616.2 |
| SplitShare | 4.64 % | 4.05 % | 105,526 | 4.03 | 6 | 0.4440 % | 2,980.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1321 % | 2,392.2 |
| Perpetual-Premium | 5.37 % | 4.95 % | 90,105 | 14.30 | 32 | -0.2303 % | 2,314.1 |
| Perpetual-Discount | 5.14 % | 5.11 % | 397,255 | 15.20 | 6 | -0.8884 % | 2,483.5 |
| FixedReset | 4.94 % | 3.09 % | 238,725 | 3.72 | 82 | 0.0706 % | 2,489.6 |
| Deemed-Retractible | 5.02 % | 4.69 % | 148,558 | 6.99 | 44 | -0.0743 % | 2,401.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| ELF.PR.H | Perpetual-Premium | -2.75 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 24.68 Evaluated at bid price : 25.10 Bid-YTW : 5.55 % |
| BAM.PF.C | Perpetual-Discount | -1.88 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 21.72 Evaluated at bid price : 22.01 Bid-YTW : 5.51 % |
| POW.PR.D | Perpetual-Premium | -1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 24.05 Evaluated at bid price : 24.33 Bid-YTW : 5.21 % |
| CU.PR.F | Perpetual-Discount | -1.44 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 22.83 Evaluated at bid price : 23.21 Bid-YTW : 4.86 % |
| ELF.PR.F | Perpetual-Premium | -1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 24.26 Evaluated at bid price : 24.56 Bid-YTW : 5.47 % |
| GWO.PR.G | Deemed-Retractible | -1.28 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.66 Bid-YTW : 5.36 % |
| SLF.PR.B | Deemed-Retractible | -1.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.44 Bid-YTW : 5.54 % |
| PWF.PR.A | Floater | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 23.16 Evaluated at bid price : 23.46 Bid-YTW : 2.22 % |
| IAG.PR.G | FixedReset | 1.30 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 3.57 % |
| BAM.PR.X | FixedReset | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 23.12 Evaluated at bid price : 24.65 Bid-YTW : 3.42 % |
| BNA.PR.E | SplitShare | 1.53 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 25.85 Bid-YTW : 4.05 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.H | Deemed-Retractible | 229,569 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-07-12 Maturity Price : 26.00 Evaluated at bid price : 26.11 Bid-YTW : 3.74 % |
| ENB.PR.Y | FixedReset | 163,809 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 23.09 Evaluated at bid price : 24.98 Bid-YTW : 3.75 % |
| GWO.PR.I | Deemed-Retractible | 109,784 | RBC bought blocks of 60,000 and 17,500 from Scotia at 23.00, then crossed 17,500 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.19 Bid-YTW : 5.35 % |
| PWF.PR.S | Perpetual-Premium | 104,678 | TD bought 10,000 from National at 24.70; RBC crossed 50,000 at 24.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 24.31 Evaluated at bid price : 24.69 Bid-YTW : 4.90 % |
| BNS.PR.A | FixedReset | 92,801 | TD crossed 66,300 at 25.88 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-07-12 Maturity Price : 25.50 Evaluated at bid price : 25.88 Bid-YTW : -15.93 % |
| TRP.PR.A | FixedReset | 49,618 | Desjardins crossed 35,700 at 25.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-06-12 Maturity Price : 23.75 Evaluated at bid price : 25.10 Bid-YTW : 3.33 % |
| There were 56 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRP.PR.D | FixedReset | Quote: 25.29 – 25.70 Spot Rate : 0.4100 Average : 0.2346 YTW SCENARIO |
| ELF.PR.H | Perpetual-Premium | Quote: 25.10 – 25.63 Spot Rate : 0.5300 Average : 0.3546 YTW SCENARIO |
| GCS.PR.A | SplitShare | Quote: 25.00 – 25.34 Spot Rate : 0.3400 Average : 0.1968 YTW SCENARIO |
| BAM.PF.A | FixedReset | Quote: 25.42 – 25.69 Spot Rate : 0.2700 Average : 0.1759 YTW SCENARIO |
| RY.PR.Y | FixedReset | Quote: 26.25 – 26.54 Spot Rate : 0.2900 Average : 0.1993 YTW SCENARIO |
| TCA.PR.Y | Perpetual-Premium | Quote: 50.71 – 50.95 Spot Rate : 0.2400 Average : 0.1637 YTW SCENARIO |
[…] mentioned the review of Spectra on June 12, but was more concerned about […]
[…] PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard equivalency factor of 1.3x. Long Corporates now yield 4.65%, so the pre-tax interest-equivalent spread is now about 270bp, hugely elevated from post-Crunch norms and from the 235bp reported June 12. […]