September 4, 2008

I posted a little while ago about Central Banks and the Eligibility Premium … today there was a dramatic illustration (maybe!) about the suddenly enormous importance of access to central bank lending facilities in a Bloomberg story on European bank risk:

The Frankfurt-based central bank will cut 12 percent from the value of asset-backed securities it accepts as collateral, ECB President Jean-Claude Trichet said at a press conference today, an increase from as little as 2 percent previously. Hard- to-value assets will have an additional premium of 5 percent, Trichet said. Unsecured bank bonds will have a 5 percent haircut. The new rules apply from Feb. 1, 2009.

Credit-default swaps on the Markit iTraxx Financial index of subordinated debt of 25 European banks and insurers climbed 9 basis points to 174, the highest since April 1, according to JPMorgan Chase & Co. prices at 3:02 p.m. in London.

I am by no means convinced that this is direct cause and effect; and I am by no means convinced that the CDS market has any connection with reality; but both possibilities are subject to discussion!

Moody’s has discovered another CPDO programming error:

Moody’s Investors Service said it may cut the ratings of 854 million euros ($1.2 billion) of constant proportion debt obligations after disclosing a second error in the way it assesses the securities.

Moody’s review was “prompted by the identification of a coding error in a model used for monitoring CPDOs,” the New York-based firm said in a statement today. Moody’s will probably downgrade the affected CPDOs by one or two levels, it said.

Their last whoopsee was discussed on PrefBlog on May 21. CPDOs in general have been introduced to Assiduous Readers in connection with disputes over credit quality.

Pity poor Lehman! I confess I haven’t been following the story very closely as it twists in the wind, but given that its Price/Book Ratio is reported as 0.49 with an Enterprise Value of NEGATIVE 210-billion [a misprint?], my suspicion is that it has a lot of highly illiquid assets that investors are assigning a value far below the value management thinks they’re worth. So … they’re going to try to spin them off:

Lehman Brothers Holdings Inc. may shift about $32 billion of commercial mortgages and real estate to a new company that will be spun off in a move similar to the good-bank-bad-bank model used in the 1980s banking crisis, two people briefed on the discussions said.

The bad bank, nicknamed Spinco for now, would have about $8 billion of equity coming from Lehman, the people said, speaking on condition of anonymity because the plan is one of several under consideration. Spinco would borrow the remaining $24 billion from Lehman or outside investors.

Korea Development Bank has been in discussions to buy a 25 percent stake in Lehman for $6 billion, according to the people familiar with the talks. That would replace most of the capital Lehman would put into the bad bank.

The OSC has a survey on product suitability (hat tip: Financial Webring Forum). Assiduous Readers now have their long desired chance to tell the regulators that investments should be sold to the public only if they go up. The committee has indicated that anonymous submissions will not only be read, but actually be taken seriously.

Sadly, there is no corresponding survey regarding Advisor Suitability. Force publication of composite performance – publish it on the regulatory website, disk storage of all that data is cheap enough – and most problems disappear instantly.

On a happier note, I’ve decided I like commodity crashes better than financial crises:

The Standard & Poor’s/TSX Composite Index fell 2.5 percent to 12,814.14 in Toronto. Canada’s equity benchmark, which derives about two-thirds of its value from energy, materials and financial stocks, has fallen 7 percent in three days and is 15 percent below its June 18 record.

Even after today’s slight loss, PerpetualDiscounts are up 25bp on the month-to-date, a lack of correlation much more to my tastes than was the case during the dark days of July.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.59% 4.36% 63,992 16.40 6 +0.0472% 1,114.4
Floater 4.37% 4.43% 51,870 16.46 2 -0.9039% 899.9
Op. Retract 4.94% 4.27% 123,141 3.15 14 -0.1786% 1,053.5
Split-Share 5.34% 5.81% 53,117 4.34 14 +0.0037% 1,045.6
Interest Bearing 6.26% 6.67% 50,245 5.24 2 -0.3549% 1,128.1
Perpetual-Premium 6.17% 5.54% 61,148 2.23 1 -0.1578% 1,005.3
Perpetual-Discount 6.03% 6.09% 190,213 13.76 70 -0.0274% 883.4
Major Price Changes
Issue Index Change Notes
BAM.PR.K Floater -1.8325%  
HSB.PR.D PerpetualDiscount -1.6315% Now with a pre-tax bid-YTW of 6.23% based on a bid of 20.50 and a limitMaturity.
BAM.PR.J OpRet -1.4675% Now with a pre-tax bid-YTW of 6.43% based on a bid of 23.50 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.19% to 2012-3-30), BAM.PR.I (5.45% to 2013-12-30) and BAM.PR.O (7.39% to 2013-6-30). Look at those last two comparators! I love it! There’s nearly a two-point yield pick-up to shorten term six months!
CM.PR.H PerpetualDiscount -1.3179% Now with a pre-tax bid-YTW of 6.51% based on a bid of 18.72 and a limitMaturity.
RY.PR.W PerpetualDiscount -1.1192% Now with a pre-tax bid-YTW of 6.09% based on a bid of 20.32 and a limitMaturity.
BNS.PR.L PerpetualDiscount +1.1352% Now with a pre-tax bid-YTW of 5.82% based on a bid of 19.60 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.0471% Now with a pre-tax bid-YTW of 6.01% based on a bid of 19.30 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
TD.PR.P PerpetualDiscount 133,600 Nesbitt crossed 100,000 at 23.25, then bought 15,000 from anonymous and 11,000 from Desjardins at the same price. Now with a pre-tax bid-YTW of 5.73% based on a bid of 23.17 and a limitMaturity.
BAM.PR.O OpRet 33,505 Now with a pre-tax bid-YTW of 7.39% based on a bid of 22.90 and optionCertainty 2013-6-30 at 25.00. See above for comparators … the recent frequent appearance of this issue in the volume highlights suggests to me that the underwriters are – slowly! – getting this off their books at this yield.
BNS.PR.O PerpetualDiscount 30,600 Anonymous bought 10,000 from CIBC at 24.89. Now with a pre-tax bid-YTW of 5.70% based on a bid of 24.87 and a limitMaturity.
RY.PR.D PerpetualDiscount 22,215 Now with a pre-tax bid-YTW of 6.05% based on a bid of 18.78 and a limitMaturity.
RY.PR.E PerpetualDiscount 20,460 Now with a pre-tax bid-YTW of 6.06% based on a bid of 18.74 and a limitMaturity.

There were seventeen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

7 Responses to “September 4, 2008”

  1. adrian2 says:

    Isn’t the Volume Highlights supposed to be ordered in descending volume order? Any comments on L.PR.A 72,700 shares traded yesterday and 3%+ haircut (underwriter dump?).


  2. jiHymas says:

    You’re right – volume highlights is supposed to be ordered in descending volume order. But there are two nuances:

    1) I only report issues that are not in the indices if their adjusted volume is more that 100,000 shares. L.PR.A is not in the index (credit concerns).

    2) I adjust the actual volume to account for par value differences; thus, a $10 p.v. split share will have its actual volume divided by 2.5 for ranking and reported purposes.

  3. adrian2 says:

    According to HIMIPref™ Index Rebalancing: June 2008, L.PR.A was added to the scraps index.

    Also, I’m talking about a $25 par value, so the volume should not need adjustment.

  4. jiHymas says:

    Well, yeah, you’re right about the scraps index … but I don’t report the scraps index. One way or another, it’s not (what I consider to be) a fully investment-grade credit [Pfd-3 issues are “spice” … a small quantity in a portfolio might be good, but more is not necessarily better] and I won’t put it on the lists except in the case of massive [100,000+] volume.

    And yes, the second nuance I stated does not applie in this case; I just thought that if I was going to talk about adjustments to raw data, I’d better mention it.

  5. […] of 8.26% based on a bid of 22.40 and a softMaturity 2015-7-30 at 25.00. Assiduous Reader adrian2 gets his wish and the Loblaws issue – very poorly received when issued in June – makes it on the board despite […]

  6. […] of 8.31% based on a bid of 22.35 and a softMaturity 2015-7-30 at 25.00. Assiduous Reader adrian2 gets his wish and the Loblaws issue – very poorly received when issued in June – makes it on the board (again!) […]

  7. […] forced liquidation of CPDOs (they’ve been out of the news for a while, since 2008-9-4): CIT was a favoured ingredient of CDOs and I assume the same could be said for CPDOs – although […]

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