I mentioned the proxy battle over Trinorth Capital on June 11 … Management won. No concession or acknowledgement from the self-proclaimed Concerned Shareholders yet … I’m not holding my breath. However, management can now get back to doing what it does best: suspending dividends on their funds.
Speculation regarding Bernanke’s reappointment is mounting, with Larry Summers mentioned as a possible candidate. I can’t find great fault with Bernanke’s macro-economic handling of the crisis; it turned out that letting Lehman go was a mistake, but I, for one, didn’t forsee just how horribly things would turn out after that. Of greater concern is interference in private companies (the BAC/MER merger), but I think that one can be hung on Paulson.
Tara Perkins of the Globe passes on some speculation regarding the MFC/OSC Disclosure Kerfuffle:
The Ontario Securities Commission (OSC) appears to be examining whether Manulife properly disclosed, prior to last fall, how much risk it would face if markets tanked, noted Genuity Capital Markets analyst Mario Mendonca. Before then, Manulife only disclosed what would happen to it if stock markets fell by 10 per cent. Markets dropped more than 20 per cent in the fourth quarter.
It’s possible, although it would be most unfair if MFC was singled out for this practice when the effects of a 10% drop is all that’s disclosed by any insurer. I’m not saying, mind you, that I am against such improved disclosure; the effect of equity market declines on guarantees can be decidedly non-linear.
Who says that Dealbreaker is all fun ‘n’ games? Today there’s a very informative, yet entertaining, essay on Credit Default Swaps in Kazakhstan:
Emerging Markets and derivatives are like alcohol and barbiturates: each on its own has attractions but create a recipe for choking on one’s own vomit when combined.
…
There’s always some crazy eventuality that an emerging market can generate that defies the most thoughtfully drafted contract.
Mark Carney showed Canadian regulators’ traditional contempt for investors with some selective disclosure in Washington:
Bank of Canada Governor Mark Carney said his country’s recession is now as deep as in the U.S., according to a person who heard his remarks today in Washington.
Carney, 44, spoke at the Woodrow Wilson International Center for Scholars. No cameras or recording devices were allowed at the event, according to organizers.
Debt-Decoupling, a moral hazard feature of Credit Default Swaps is complicating restructuring efforts:
In the cover story for the The Deal magazine published Monday, Richard Morgan tells about the dire situation Gannett Co. (NYSE:GCI) finds itself in after nearly three-quarters of bondholders, hedged with credit default swaps, declined an exchange offer that expired May 5. Thanks to the CDSs, they stand to get a better payoff if Gannett defaults.
Morgan followed that story up with a report on McClatchy Co. (NYSE:MNI) in The Deal Pipeline on Monday (subscription required). It too tried to do an exchange offer on some troubled bonds, but reported last week that only a small minority of holders went for the offer, valued at around 33 cents on the dollar. Thanks to their CDS hedges, the bondholders can expect 100 cents if McClatchy defaults.
It’s an incentive some call perverse, and also one that couldn’t have existed before the CDS market sprang up. As Morgan writes, CDSs began the decade as a $900 billion market but ended last year with a notional value of $42 trillion. That’s a lot bigger than the $25 trillion market for outstanding corporate bonds, municipal bonds and structured investment vehicles that CDSs were designed to reference.
Dealbreaker remarks:
One of the primary complaints about the CDS market was the use of CDS by market participants as purely speculative tools. In this case, the players that hold the debt are hedging their exposure through CDS and capitalizing on a negative basis play. If hedging debt exposure through CDS becomes the next true villain in the attack on derivatives, there is really no hope for this market.
The “negative basis” refers to the fact that a long-bond plus protection-buy position will yield more than available elsewhere in the market with equivalent risk – this is due to funding pressures, since it’s hard (risky, anyway) nowadays to lever up a physical bond position 10:1; you can only do that by selling CDSs, driving down the spread. The newspapers’ woes are similar to problems highlighted by the Lyondell bankruptcy:
The potential for dispute and complexity in workouts and bankruptcies by reason of the existence of CDS was illustrated recently in the U.S. bankruptcy proceeding of the U.S. subsidiary of LyondellBasell, the world’s third-largest petrochemicals group. The U.S. company, LyondellBasell Chemical Company, filed for bankruptcy in New York in January 2009 after attempts to restructure its $26 billion debt were unsuccessful.70 The bankruptcy triggered a “default” under LyondellBasell Chemical Company’s CDS (i.e. CDS naming this company as the reference entity), but because its European parent and affiliates were not in bankruptcy, CDS covering bonds of those companies were not triggered.
Creditors sought to sue LyondellBasell’s parent company in Europe on guarantees and other obligations. These creditors included bondholders, and the U.S. company believed that the bondholders were seeking to enforce claims with the goal of triggering protection payments under their credit default swap contracts, which could have led to other parts of the corporate group being pushed into insolvency in Europe. Ultimately, U.S.-based LyondellBasell Chemical Company was able to persuade the U.S. bankruptcy court that such actions in Europe could undermine the chances of completing a successful bankruptcy in the U.S. The bankruptcy court issued a 60-day injunction prohibiting enforcement actions in Europe.
“The threat of CDS holders trying to force companies into an insolvency in order to trigger their recovery rights against their CDS counterparty will almost certainly be an issue in the wave of debt restructurings this year,” predicted LyondellBasell’s attorneys.
Note that legal manoeuverings regarding LyondellBasell have been phrenetic:
LyondellBasell Industries announced that LyondellBasell Industries AF S.C.A. has been voluntarily added to Lyondell Chemical Company’s reorganization filing under Chapter 11 of the U.S. Bankruptcy Code to protect the European holding company against claims by certain financial and U.S. trade creditors.
LyondellBasell Industries AF S.C.A. is a holding company incorporated in Luxembourg. It does not manufacture or sell products, and has no employees.
LyondellBasell is exercising an option available under U.S. law to prevent creditors from enforcing guarantees by LyondellBasell AF S.C.A. for pre-petition obligations of LyondellBasell’s U.S. businesses. It also prevents bondholders of Senior Notes due in 2015 from potentially pursuing remedies against LyondellBasell AF S.C.A. after an interest payment due on the notes in February was not paid. The company obtained a 60-day restraining order from the U.S. bankruptcy court in February to allow time for LyondellBasell to protect its European assets from these claims.
Extending Chapter 11 protection to LyondellBasell Industries AF S.C.A. is not an insolvency proceeding under any European law. No LyondellBasell manufacturing operation located outside of the United States has applied for or become involved in insolvency or bankruptcy proceedings in its respective home country.
… but they bought themselves enough time to get something done …
The European Commission Monday cleared U.S.-based industrial holding group Access Industries and German investor Andreas Heeschen’s ProChemie Holding to create a joint venture to take over troubled chemical company LyondellBasell Industries.
Both parties will have a 50% stake in LyondellBasell, parts of which are currently under bankruptcy protection, through a new holding company called ProChemie GmbH.
LyondellBasell was previously wholly owned by Access industries.
… the moral of the story being “Holding company guarantees are not necessarily worth much.”
The market drifted down just a tad today, with volume continuing high.
| 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 | 1.2473 % | 1,230.3 |
| FixedFloater | 7.09 % | 5.53 % | 34,655 | 16.27 | 1 | 0.0000 % | 2,126.6 |
| Floater | 3.10 % | 3.44 % | 78,738 | 18.66 | 3 | 1.2473 % | 1,536.9 |
| OpRet | 4.97 % | 3.72 % | 134,026 | 0.10 | 14 | 0.0564 % | 2,194.8 |
| SplitShare | 5.81 % | 6.32 % | 63,733 | 4.21 | 3 | -0.4550 % | 1,877.7 |
| Interest-Bearing | 5.96 % | 7.10 % | 21,891 | 0.50 | 1 | 0.1992 % | 1,999.1 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0327 % | 1,734.3 |
| Perpetual-Discount | 6.34 % | 6.36 % | 163,312 | 13.37 | 71 | -0.0327 % | 1,597.3 |
| FixedReset | 5.68 % | 4.81 % | 508,451 | 4.34 | 40 | -0.0724 % | 2,010.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| HSB.PR.D | Perpetual-Discount | -3.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 19.02 Evaluated at bid price : 19.02 Bid-YTW : 6.62 % |
| BNA.PR.C | SplitShare | -2.13 % | Asset coverage of 1.9-:1 as of May 31, according to the company. This issue has been volatile ever since the five year refunding issue was announced. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 15.61 Bid-YTW : 10.85 % |
| POW.PR.D | Perpetual-Discount | -1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 18.88 Evaluated at bid price : 18.88 Bid-YTW : 6.64 % |
| CU.PR.A | Perpetual-Discount | -1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 23.02 Evaluated at bid price : 23.28 Bid-YTW : 6.29 % |
| CIU.PR.A | Perpetual-Discount | -1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 18.26 Evaluated at bid price : 18.26 Bid-YTW : 6.38 % |
| SLF.PR.B | Perpetual-Discount | -1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 18.23 Evaluated at bid price : 18.23 Bid-YTW : 6.63 % |
| GWO.PR.G | Perpetual-Discount | -1.10 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 19.78 Evaluated at bid price : 19.78 Bid-YTW : 6.62 % |
| POW.PR.A | Perpetual-Discount | 1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 6.66 % |
| BNS.PR.L | Perpetual-Discount | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 6.03 % |
| BAM.PR.I | OpRet | 1.22 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 24.91 Bid-YTW : 5.60 % |
| MFC.PR.C | Perpetual-Discount | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 6.36 % |
| BAM.PR.K | Floater | 4.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 11.44 Evaluated at bid price : 11.44 Bid-YTW : 3.44 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.P | FixedReset | 167,895 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 23.13 Evaluated at bid price : 25.03 Bid-YTW : 5.09 % |
| RY.PR.I | FixedReset | 154,555 | RBC crossed 100,000 at 25.06; National bought 15,400 from Nesbitt at 25.04. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 24.98 Evaluated at bid price : 25.03 Bid-YTW : 4.74 % |
| MFC.PR.E | FixedReset | 80,170 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 25.18 Bid-YTW : 5.56 % |
| CM.PR.I | Perpetual-Discount | 79,961 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 18.42 Evaluated at bid price : 18.42 Bid-YTW : 6.50 % |
| SLF.PR.E | Perpetual-Discount | 62,659 | RBC crossed 40,000 at 16.90, then another 19,800 at 16.95. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 16.91 Evaluated at bid price : 16.91 Bid-YTW : 6.70 % |
| BNS.PR.Q | FixedReset | 57,990 | National bought two blocks from Nesbitt at 25.00; of 11,000 and 12,500 shares. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-06-23 Maturity Price : 24.91 Evaluated at bid price : 24.96 Bid-YTW : 4.58 % |
| There were 44 other index-included issues trading in excess of 10,000 shares. | |||