July 17, 2014

The Canadian Bond Investors Association has been mocked on PrefBlog on March 10 – at that time I said:

Yes, it will be a better world, as soon as there are more rules, more red tape, more regulators and more lawyers. It never occurs to any of these clowns that they have a choice regarding what to buy; if big enough, they can even approach issuers themselves with a proposal for a private placement.

… and again on March 14 (it was a good week):

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

… and now they are back in the news with more pathetic whimpering:

Royal Bank provided investors with insufficient information on short notice before its July 11 sale of C$1 billion ($930 million) in subordinated notes that can convert to equity, the first in Canada to comply with new international banking rules, The Canadian Bond Investors Association said in a letter yesterday to provincial securities regulators. Toronto-based Royal Bank said it met all requirements.

This time, however, there was an immediate rejoinder:

“The buyers could have gone on strike and not bought this,” said David Beattie, senior credit officer at Moody’s Investors Service, said by phone from Toronto.

Royal Bank “met all legal and regulatory requirements in issuing this transaction,” Sandra Nunes, a spokeswoman for the company, said in an e-mail yesterday. “The deal was well oversubscribed, and it has performed well in the secondary market.”

Since the July 11 sale at a yield of 152 basis points, or 1.52 percentage points, more than Canadian government debt, the spread on the Royal Bank bonds has narrowed to about 146 basis points, according to data compiled by Bloomberg.

My Lord. The fact that the obvious was pointed out (by David Beattie) is almost as astonishing as the fact that Bloomberg – which covers the world – did a better job than the Globe and Mail on reporting the issue. However, the Bloomberg / G&M comparison is old news. However, the G&M article is enhanced by a comment from “ontario7”, who must be some kind of genius:

If you don’t like the way bond is structured, then don’t buy it.

And look as the quoted spread! The issue has an initial coupon of 3.04%, so the spread is being quoted over five-year Canadas. Like I said, the sub-debt market consists of the sleazy selling to the stupid, so it’s no wonder the CBIA is confused.

So anyway, I looked up the CBIA admission of incompetence (bolding added):

In order to foster robust capital markets, the CBIA strongly advocates that issuers follow best practices, especially when marketing new issuers and new structures. Best practices for new debt structures include furnishing all material documents on a timely basis and with a minimum of three business days before pricing. They also include providing public investor calls with a scheduled opportunity for questions and answers and allowing rating agencies to provide preliminary reports. We believe these best practices are important for institutional investors to meet their fiduciary duty to clients. We believe that securities regulators share this view, and in fact demand this of investment managers they register.

The RBC NVCC issue of July 11, 2014 fell short of a number of these best practices. The syndicate provided only a brief, pre-recorded net roadshow to investors less than two days ahead of the deal and provided no opportunity to ask questions on the public call. When the deal came to market, no final rating agency comments were available to potential investors and only “expected” ratings were listed on the term sheet. The CBIA believes this is not in line with best practices when a deal of this significance is in the market involving an instrument that is new to institutional investors.

In our April 8, 2013 letter, the CBIA requested improved disclosure procedures during the new issue process. In our letter we wrote:

“Investors are often afforded insufficient time to review key terms and conditions of bond indentures when an issue comes to market.”

Further, we offered:

“As a minimum more time is required for review of indentures. For new issuers we believe that a minimum of three working days should be allowed for investors to review final form indentures and prospectus supplements and to disclose concerns with legal counsel.”

In summary, we ask that the Canadian securities regulators look at the new issue process for this security and whether it was appropriate in the circumstances.

So, in other words, the CBIA is able to chant the slogan “We believe these best practices are important for institutional investors to meet their fiduciary duty to clients”, but is unable to make the giant leap to the awesome concept that if you don’t feel you have enough information regarding a security to meet your fiduciary duty to clients YOU DON’T FUCKEN BUY THE SECURITY. The new issue was discussed on PrefBlog.

To be fair however, they did write an entirely sensible letter addressed to the Ministry of Finance, Bank of Canada and OSFI regarding bail-in debt:

We are writing to respectfully urge the Department of Finance to expedite the process for providing clarity on the “Bail-In” framework.

The CBIA formally commented to the Office of the Superintendent of Financial Institutions in a letter dated January 23, 2012 (attached). We stated that clarity on a regulatory regime guiding the “bail-in” of senior unsecured bank instruments and a full picture of the regulatory landscape are important to have in place ahead of NVCC issuance to allow proper risk assessment and pricing considerations. While there has been progress on some areas addressed in our letter, the critical issue of bail-in debt has not been addressed, thus leaving institutional fixed income investors in an uncomfortable position when evaluating NVCC instruments.

A worthy effort, but good luck with that. OSFI has been dragging its heels on the Life Insurance Regulatory Framework for literally years now, and Assiduous Readers will be well aware of how that has distorted pricing of preferred shares amongst Bank issues, insurance issues and unregulated issues.

There’s an interesting discussion of Maple bonds and liquidity from 2010:

EUROWEEK: How much of a concern is the lack of liquidity in the secondary market?

Lumb, CBA: You need to have at least three managers to make sure investors are confident of being able to trade some of their positions. Historically, the Maple market has always needed more managers than most. Having one just would not work.

DeRosa, MetLife: We see the liquidity in the bond market becoming increasingly more robust. Our efforts to augment our relationships with investors and dealers will help somewhat, as will our outreach to investors on the merits of our programme.

Costanzo, TD Securities: Secondary liquidity is key to any market’s success. If no one needed a secondary market, issuers would simply call investors directly and do a trade between themselves. But banks are involved in the process to commit balance sheet and provide a secondary market. That’s one of our core roles. What will be key to the continued development of the Maple market will be getting more international investors on board. This will provide an increased flow in the bonds as international investors will have different motivations to buy/sell — i.e. currency fluctuations — and therefore further the diversification and depth of the market. For this to happen, international investors need to have a reason to be involved. Canada is already very highly regarded by the global investment community. The currency story continues to be an attractive one. It would prove an even more attractive investment if yields were higher and more like the levels attainable in the Kangaroo market, which are currently about 300bp higher.

Marjaee, MFC Global: Secondary liquidity is a big issue. It was much better for some issues last year. There is still illiquidity when it comes to some subordinated bonds, especially when there is uncertainty about whether something will be called or extended. The recent deals have had hard maturities. We like that. It leaves no options on the table for the issuer, especially if the issue is priced to the shorter date and expectations have been created for the deal to be called. Liquidity has been good with the CBA issue.

Regrettably, the Maple bond market remains tiny. Even more regrettably, the regulatory push to reduce liquidity is succeeding:

CanPX, Canada’s government-mandated bond-market information service, will make trade prices freely available on its website amid a review by regulators concerned that smaller investors don’t have access to the data.

The for-profit joint venture of Canada’s major bond dealers and interdealer brokers has begun posting the previous day’s price and yield highs, lows and closing levels for all 340 corporate securities it tracks, CanPX said in a statement.

The move follows the Canadian Securities Administrators’ announcement last month it would review transparency in the C$390 billion ($363 billion) corporate bond market. The group, a coalition of Canada’s provincial and territorial securities regulators, questioned whether the private-sector model led by CanPX was working, and if more active regulation is needed.

A good chunk of government bonds have gone abroad:

Foreigners made their largest purchase of Canadian securities in two years in May, led by demand for provincial and federal government bonds.

The net purchases worth C$21.4 billion ($19.9 billion) in May included C$15.9 billion of bonds, and were more than double the April total, Statistics Canada said today in Ottawa.

Demand for bonds was led by a net C$6.3 billion purchase of provincial debt, the biggest since April 2009. Non-Canadian investors also bought C$6.9 billion of federal government debt, the most since May 2012 after sales of C$15.4 billion over the five prior months.

But government bonds did very well today:

Treasury (USGG2YR) 10-year notes rallied the most since March as reports of a Malaysian plane being shot down in eastern Ukraine and Israel’s military starting ground operations in the Gaza strip boosted refuge demand.

Thirty-year bond yields fell to the lowest level in more than a year after a Malaysian Boeing 777 with 295 aboard crashed near the Russian-Ukraine border added to to haven appeal linked to expanded sanctions against Russia for support of separatist rebels. The difference between five- and 30-year yields narrowed to the least since 2009 a day after Federal Reserve Chair Janet Yellen told lawmakers monetary stimulus is still needed, while increases in interest rates may occur sooner if the economy accelerates.

The 10-year yield dropped eight basis points, or 0.08 percentage point, to 2.45 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader Prices. The 2.5 percent notes maturing in May 2024 added 22/32, or $6.88 percent $1,000 face amount, to 100 15/32. The yield fell as much as nine basis points, the most since March 13.

U.S. 30-year yield fell seven basis points to 3.27 percent, touching the lowest level since June 2013.

According to CBid, closed at a startling 1.48% today.

Parakeet Poluz is hinting that low rates may be here to stay:

Bank of Canada Governor Stephen Poloz says the central bank may discuss the interest rate that would keep the economy at full output, a rate he said has been lowered following the global recession.

The central bank is researching what economists call a neutral interest rate, and will discuss the issue in the next quarterly economic forecast paper due in October, Poloz said in an interview aired today on CBC Radio’s “The Current” program.

Despite the fireworks in the government bond market, it was a relatively poor day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets flat and DeemedRetractibles off 4bp. Volatility was good. 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 3.14 % 3.14 % 21,072 19.40 1 0.7158 % 2,534.0
FixedFloater 4.17 % 3.39 % 29,131 18.66 1 0.0000 % 4,163.9
Floater 2.84 % 2.93 % 45,730 19.92 4 0.1352 % 2,791.8
OpRet 4.01 % -8.29 % 79,620 0.08 1 0.2350 % 2,729.6
SplitShare 4.26 % 3.97 % 46,056 4.03 6 -0.0266 % 3,111.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2350 % 2,496.0
Perpetual-Premium 5.52 % -3.71 % 80,166 0.09 17 0.0069 % 2,429.9
Perpetual-Discount 5.23 % 5.16 % 107,143 15.22 20 -0.0851 % 2,581.0
FixedReset 4.38 % 3.59 % 199,468 4.60 77 0.0000 % 2,563.4
Deemed-Retractible 4.98 % 0.21 % 123,742 0.11 43 -0.0360 % 2,552.0
FloatingReset 2.66 % 2.08 % 103,091 3.84 6 0.0065 % 2,529.0
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 21.47
Evaluated at bid price : 21.82
Bid-YTW : 3.41 %
TD.PR.P Deemed-Retractible 1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-16
Maturity Price : 25.75
Evaluated at bid price : 26.21
Bid-YTW : -17.99 %
BAM.PR.R FixedReset 1.37 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 3.61 %
FTS.PR.H FixedReset 2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 21.47
Evaluated at bid price : 21.80
Bid-YTW : 3.49 %
Volume Highlights
Issue Index Shares
ENB.PF.E FixedReset 839,123 New issue settled today.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 4.16 %
CM.PR.M FixedReset 302,941 Called for redemption July 31.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.30 %
TD.PR.I FixedReset 241,143 Called for redemption July 31.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.63 %
TD.PR.K FixedReset 188,914 Called for redemption July 31.
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.97 %
ENB.PF.C FixedReset 159,117 TD crossed 115,600 at 25.09.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.18
Evaluated at bid price : 25.16
Bid-YTW : 4.13 %
BNS.PR.M Deemed-Retractible 111,653 Nesbitt crossed 109,200 at 25.88.
Maturity Type : Call
Maturity Date : 2014-08-26
Maturity Price : 25.50
Evaluated at bid price : 25.83
Bid-YTW : -8.69 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
SLF.PR.H FixedReset Quote: 25.70 – 26.10
Spot Rate : 0.4000
Average : 0.2685

Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 2.68 %

BNS.PR.B FloatingReset Quote: 25.41 – 25.60
Spot Rate : 0.1900
Average : 0.1176

Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 2.09 %

TD.PF.A FixedReset Quote: 25.35 – 25.53
Spot Rate : 0.1800
Average : 0.1098

Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.25
Evaluated at bid price : 25.35
Bid-YTW : 3.64 %

CU.PR.C FixedReset Quote: 26.00 – 26.24
Spot Rate : 0.2400
Average : 0.1847

Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.74 %

VNR.PR.A FixedReset Quote: 25.64 – 25.91
Spot Rate : 0.2700
Average : 0.2154

Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 3.53 %

GWO.PR.N FixedReset Quote: 21.37 – 21.55
Spot Rate : 0.1800
Average : 0.1255

Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.37
Bid-YTW : 4.78 %

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