There’s a bit of news regarding high-trigger CoCo issuance:
Nykredit Realkredit A/S, Europe’s biggest issuer of mortgage-backed covered bonds, is planning to use its first sale of contingent convertible notes to bolster its rating after meeting capital requirements.
The Copenhagen-based lender, which is preparing a 500 million euro ($685 million) issue of Tier 2 CoCos that will be written down and canceled if a 7 percent capital adequacy requirement is breached, will use the securities “to get the best possible issuer rating relative to costs,” Chief Financial Officer Soeren Holmsaid in an interview.
What? Cancelled if 7% capital adequacy is breached? Yes, it’s true:
The notes are subordinated Tier 2 instruments without a coupon deferral feature and subject to a 7% capital adequacy trigger. On breach of the trigger, the notes will be automatically written down to zero and the notes cancelled, resulting in loss of principal and future interest for investors. The capital adequacy trigger is based on Nykredit Realkredit’s individual or consolidated common equity Tier 1 (CET1) ratio or Nykredit Holding’s consolidated CET1 ratio. The notes are rated three notches below Nykredit Realkredit’s ‘a’ Viability Rating (VR) in accordance with Fitch’s criteria for “Assessing and Rating Bank Subordinated and Hybrid Securities” dated 31 January 2014 at www.fitchratings.com. The notes are notched twice for loss severity to reflect the principal write-down feature, and once for non-performance risk, to reflect the moderate incremental risk due to the 7% CET1 ratio trigger, partly offset by the large capital buffer above this trigger point, compared with the risk reflected in the bank’s VR.
The interesting part is that they’re cheaper to issue than Innovative Tier 1 Capital (the cool guys are now calling this AT1):
Nykredit Realkredit A/S said it won’t follow its biggest Danish competitor in using additional Tier 1 instruments to refinance hybrid debt as contingent convertible bonds offer a cheaper path to supporting ratings.
“The rating impact outranks the need for regulatory capital for now,” Soeren Holm, chief financial officer at Copenhagen-based Nykredit, said in a phone interview on Friday. “We plan to use CoCo instruments for the refinancing. Standard & Poor’s includes all of them in full when setting our capital ratio.”
Well, Fitch can say what it likes, but I find the reliance on definitions of regulatory capital to be very alarming. There’s lots of room there for management discretion and regulatory discretion in times of trouble, and that means things can get pretty tricky when trying to analyze these things in a chaotic environment. We’ve seen regulatory discretion in Canada (albeit in the other direction) when OSFI solved MFCs problem by agreeing to pretend there wasn’t a problem during the recent credit crisis.
Aren’t you glad you don’t have these neighbors?
[1] The parties to this action live across the road from each other in Toronto’s tony Forest Hill neighbourhood. The video footage played at the hearing shows that both families live in stately houses on a well-manicured, picturesque street. They have numerous high end automobiles parked outside their homes.
[2] The Plaintiff, John Morland-Jones, is an oil company executive; the Defendant, Gary Taerk, is a psychiatrist. They do not seem to like each other, and neither do their respective spouses, the Plaintiff, Paris Morland-Jones and the Defendant, Audrey Taerk.
[3] In this motion, the Plaintiffs seek various forms of injunctive relief on an interlocutory basis. It all flows from the Plaintiffs’ allegation that the Defendants have been misbehaving and disturbing their peaceful life in this leafy corner of paradise.
…
[23] In my view, the parties do not need a judge; what they need is a rather stern kindergarten teacher
…
[27] There is no serious issue to be tried in this action. The Plaintiff’s motion is therefore dismissed.
It would appear that John Morland-Jones is an old UCC-boy who lives at the corner of Burton Road & Vesta. A nice neighborhood indeed! I see that Dr. Gary Taerk is with Toronto General Hospital which, given my experience with TGH personnel, sounds about right.
My suggestion to the TMX that they start reporting closing quotes (mentioned yesterday) has garnered twenty-five votes, so it looks like all eight of my Assiduous Readers have helped me out. Thanks! The Official Response is:
Hello,
This issue around Closing Prices on our 15-minute delayed website is currently under investigation. We hope to have it resolved as quickly as possible.
The problem is related to our use of Canadian Consolidated Quotes (“CCQ”) as a default when retrieving a quote. This view consolidates traded from all Canadian markets.
To correct this problem in the short-term, please check quotes on Toronto Stock Exchange or TSX Venture Exchange markets only instead of the CCQ. You can do this by adding TSX or TSXV suffix (:TSX or :TSV) in the “Get Quote” box when you enter a ticker.
Example: http://web.tmxmoney.com/quote.php?qm_symbol=RY:TSX
http://web.tmxmoney.com/quote.php?qm_symbol=PMI:TSVThanks again for your patience.
If you have any suggestions for new functionality/features, please feel free to use the “Suggest an Idea” box on TMXmoney.com.
I posted a comment but it has been deleted – perhaps because it included links. So I’ve sent them an eMail:
Sirs,
As of December, 2010, quotes accessed after market hours could be affected by order cancellations on the Toronto Stock Exchange after 4pm. See the discussion of the GWO.PR.J on 2010-12-2 at https://prefblog.com/?p=13456 (more information at https://prefblog.com/?p=13796 ).
In addition, this problem has also affected the historical information available via tmxdatalinx.com
Has there been a change in procedures in the interim? If so, just precisely what is the source of closing quotations provided via tmxmoney.com and tmxdatalinx.com?
Sincerely,
More on the junk bond liquidity premium:
It’s getting harder to trade bonds. Hours, sometimes days can go by before investors can complete a transaction. That’s not dissuading them from piling into the most-illiquid debt out there.
Junk-bond investors are earning practically nothing extra to own older, smaller bond issues that don’t typically trade as often as bigger, newer debt offerings, according to Barclays Plc (BARC) data. The gap has collapsed to almost zero from a 1.05 percentage point premium for the less-liquid notes in the fourth quarter of 2011.
That means bondholders aren’t really being compensated for the risk that there might be no one who wants to buy their obscure securities if demand dries up and they’re forced to sell. They’re not worrying about that now, though, with volatility at historic lows and cash flowing into credit markets amid a sixth year of unprecedented Federal Reserve stimulus.
…
Unlike stocks, junk bonds are traded over the phone away from exchanges. Wall Street’s biggest banks have traditionally facilitated corporate-debt trades using their own money. They’re reducing this role now in the face of regulations making them hold more capital against debt holdings.In the past, dealers would purchase bigger clumps of bonds than they could immediately sell, allowing investors to get out of positions even if a broker didn’t have a client on the other side looking to buy. That’s changed, and junk-debt trading has fallen as a proportion of the total amount outstanding.
The amount of below investment-grade bonds in the market has swelled by 54 percent since 2009, yet trading volumes have only increased by 34 percent in that period, according to Bank of America (BAC) Merrill Lynch and Financial Industry Regulatory Authority data.
It was a day of small gains for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets gaining 3bp and DeemedRetractibles winning 5bp. Average volatility was augmented by some good bouncing by Floaters. 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 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 | 0.6887 % | 2,487.6 |
| FixedFloater | 4.50 % | 3.75 % | 31,758 | 17.91 | 1 | 0.1900 % | 3,811.8 |
| Floater | 2.93 % | 3.03 % | 50,631 | 19.62 | 4 | 0.6887 % | 2,685.9 |
| OpRet | 4.37 % | -10.75 % | 34,435 | 0.12 | 2 | 0.0973 % | 2,715.3 |
| SplitShare | 4.81 % | 4.22 % | 61,608 | 4.19 | 5 | 0.0318 % | 3,109.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0973 % | 2,482.9 |
| Perpetual-Premium | 5.51 % | -7.47 % | 96,916 | 0.09 | 15 | -0.0599 % | 2,404.3 |
| Perpetual-Discount | 5.30 % | 5.33 % | 107,909 | 14.91 | 21 | 0.0405 % | 2,543.1 |
| FixedReset | 4.53 % | 3.48 % | 195,447 | 4.32 | 75 | 0.0251 % | 2,559.0 |
| Deemed-Retractible | 4.97 % | -3.74 % | 147,160 | 0.09 | 42 | 0.0540 % | 2,526.6 |
| FloatingReset | 2.66 % | 2.33 % | 156,824 | 4.03 | 6 | 0.0330 % | 2,495.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.A | Floater | -1.96 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 2.70 % |
| MFC.PR.F | FixedReset | -1.30 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.61 Bid-YTW : 3.84 % |
| PWF.PR.L | Perpetual-Discount | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.81 Evaluated at bid price : 24.09 Bid-YTW : 5.33 % |
| BAM.PR.X | FixedReset | 1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 22.28 Evaluated at bid price : 22.77 Bid-YTW : 3.92 % |
| FTS.PR.J | Perpetual-Discount | 1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.29 Evaluated at bid price : 23.62 Bid-YTW : 5.03 % |
| BAM.PR.K | Floater | 1.65 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.29 Evaluated at bid price : 17.29 Bid-YTW : 3.06 % |
| BAM.PR.B | Floater | 1.70 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 3.05 % |
| BAM.PR.C | Floater | 1.80 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 17.49 Evaluated at bid price : 17.49 Bid-YTW : 3.03 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.S | FixedReset | 392,113 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 3.60 % |
| RY.PR.Z | FixedReset | 190,555 | Nesbitt crossed 50,000 at 25.58. Scotia crossed blocks of 49,800 and 50,000, both at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.57 Bid-YTW : 3.51 % |
| TRP.PR.A | FixedReset | 152,778 | Nesbitt crossed 139,100 at 23.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 23.30 Evaluated at bid price : 24.00 Bid-YTW : 3.67 % |
| RY.PR.C | Deemed-Retractible | 146,648 | Desjardins crossed 142,900 at 25.69. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-20 Maturity Price : 25.50 Evaluated at bid price : 25.68 Bid-YTW : -4.46 % |
| HSB.PR.E | FixedReset | 81,906 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.38 Bid-YTW : 0.96 % |
| TRP.PR.C | FixedReset | 73,976 | Nesbitt crossed 50,000 at 23.34. Scotia crossed 15,200 at 23.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-05-21 Maturity Price : 22.77 Evaluated at bid price : 23.15 Bid-YTW : 3.45 % |
| There were 30 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 21.09 – 22.45 Spot Rate : 1.3600 Average : 0.8239 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 19.51 – 20.30 Spot Rate : 0.7900 Average : 0.5880 YTW SCENARIO |
| MFC.PR.C | Deemed-Retractible | Quote: 22.46 – 22.90 Spot Rate : 0.4400 Average : 0.3015 YTW SCENARIO |
| ENB.PR.A | Perpetual-Premium | Quote: 25.42 – 25.74 Spot Rate : 0.3200 Average : 0.1962 YTW SCENARIO |
| PWF.PR.L | Perpetual-Discount | Quote: 24.09 – 24.47 Spot Rate : 0.3800 Average : 0.2646 YTW SCENARIO |
| MFC.PR.F | FixedReset | Quote: 23.61 – 23.89 Spot Rate : 0.2800 Average : 0.2088 YTW SCENARIO |