Very strange things happening with CIT:
Even if CIT succeeds in getting 90 percent of the $1 billion of floating-rate notes due Aug. 17 swapped at a discount, the advisers will seek a so-called pre-packaged bankruptcy that would allow the company to restructure out of court, Jeffrey Werbalowsky, chief executive officer of Houlihan Lokey Howard & Zukin, told bondholders today, according to the person, who declined to be identified because the call was private.
Should the CIT offer to exchange the notes for as much as 82.5 cents on the dollar fail, Houlihan, the investment-banking firm advising the bondholders, will recommend the steering committee let CIT file for bankruptcy before paying the August maturity, the person said.
I don’t get it. There’s something going on here I don’t follow. Perhaps it’s some kind of CDS game, but this one controlled by bondholders who have also sold protection?
Me, I think what should be considered is:
- Pick a proportion of the outstanding bonds with the highest coupons.
- Make an exchange offer. For every $100 bond, a tendor gets:
- 100 CIT shares
- A warrant to exchange these shares back into bonds
Meanwhile, there are more rumblings in Washington:
Senate Banking Committee Chairman Christopher Dodd said the U.S. shouldn’t reject aiding CIT Group Inc., the 101-year-old commercial lender seeking to avert bankruptcy, while weighing alternatives to federal bailouts.
“There’s an exhaustion that’s settled in” to government rescues and policymakers should “look at alternative ideas to that rapid, massive injection of resources” into companies, Dodd said today in an interview in Washington.
“I wouldn’t rule out the possibility of government intervention financially” at CIT, said Dodd, a Connecticut Democrat. “Maybe there are some alternative ideas that would allow the company to survive in an altered state, but still allow it to provide the assistance and support they have to smaller business.”
…
Dodd said he would support having the government unwind CIT if the proposed authority were available. Obama’s plan would let the government disassemble failed firms in an orderly way instead of allowing them to go bankrupt and cause disruptions.
The world-wide push to ensure that investments other than government bills be restricted to institutions continues in Hong Kong:
The Securities and Futures Commission and the Hong Kong Monetary Authority said in a joint news briefing Wednesday that the 16 banks will offer to pay the 29,000 eligible minibond holders 60% of their original investment. Investors over 65 years of age will be repaid 70% of the principal amount.
…
Those eligible account for more than 90% of all minibond holders in the territory, the regulators said. Institutional and professional investors are excluded from the deal.
Few of the articles I’ve seen even explain what a “minibond” is, but I did find Dictum Non Meum Pactum: Lehman’s Minibond Transactions:
This article examines problems pertaining to complex financial instruments highlighted by the September 2008 bankruptcy filing of Lehman Brothers Holding Inc. It deals mainly with sales to Hong Kong and Singapore retail buyers of structured notes branded ‘Minibonds’. These were debt issues arranged by Lehman and sold with its help through local bank and securities dealer distributors. Structuring securities was important in Lehman’s global activities and the firm’s sales to retail buyers in Asia were prolific. The analysis focuses on the even-handedness of the sale of complex instruments managed by Lehman in Hong Kong, and the supervisory regime under which such sales are made. It also asks whether certain common law jurisdictions might reconsider the formation of complex financial contracts and seek a more generally moral market for their use.
…
Most minibonds were referenced to credit risks, that is, the return on each issue was a function of the credit standing from time-to-time of specified borrowers, all well-known Chinese or international companies or banks. Recent issues had between six and eight reference names; earlier series were linked to one entity or as many as 150 separate companies. The last completed issue was series 36 in May 2008, which paid quarterly coupons of 5.0–5.5 per cent providing that during the three year term of the notes none of seven reference entities entered bankruptcy or an involuntary reorganisation, or defaulted on its borrowings. In each case, the notes would be redeemed immediately at a discount to their face value. Lehman could also exercise a free call option to redeem the notes early without compensating the holder for reinvestment losses. The notes were unlisted, intentionally illiquid, and at any time their value would be opaque. Taken together, these features mean that a non-retail intermediary would see minibonds as inherently costly and without utility as investments or for hedging purposes. Most non-retail actors seeking similar speculative exposure would negotiate with an arranger or issuer and never accept uncompensated credit risk or incomplete disclosure of core terms. The outcome might be a loss, but any purchase would result from balanced negotiation. Retail buyers lack all such leverage.
The last sentence is, of course, complete nonsense. Any buyer can just leave the offer on the table. However, I am reminded that preferred shares are WAY more complex than most people (including professionals) think and also have credit risk. Perhaps I should start lobbying for legislation that will make it illegal for anybody to buy a pref unless they have subscribed to all four of my video seminars and taken out a subscription to PrefLetter. It’s worth a thought!
The essay’s title, by the way, is a play on “Dictum Meum Pactum” (My Word is My Bond), the motto of the London Stock Exchange.
On a somewhat brighter note, it looks like the Fed will not get systemic risk authority:
The Obama administration’s plan to expand the Federal Reserve’s powers to oversee financial firms is failing to win supporters in Congress as some lawmakers back a proposal to give the responsibility to several regulators.
“It’s going to be shared authority,” House Financial Services Committee Chairman Barney Frank, whose panel will write the measure, told reporters July 21, without providing details.
Frank and lawmakers leading discussion on regulatory reform fault the central bank for slow action on lending abuses and want the Fed to focus on monetary policy. Support is emerging for a council of the Fed, Treasury Department, Federal Deposit Insurance Corp. and other regulators. The Senate Banking Committee will consider the systemic-risk plan today.
I’m not sure that shared authority is really all that much better, frankly. Committees are all about responsibility-avoidance and finger-pointing. It seems to me that a separate authority with close ties to international organizations would be better, much as it pains me to recommend a new bureaucratic structure.
The Bank of Canada has released its Monetary Policy Report – July 2009 with no real surprises.
One the one hand, it appears there are lots of bozos in Congress who want to move the capital markets to Dubai:
“Naked” credit-default swaps may be banned under provisions in the main U.S. House legislation overhauling oversight of the $592 trillion derivatives industry, House Financial Services Committee Chairman Barney Frank said.
“The question of banning naked credit-default swaps is on the table,” Frank, a Massachusetts Democrat, said during an interview on Bloomberg Television today. The legislative proposal will be released next week, Frank said.
…
Credit-default swaps do “perform a useful function” in the economy, Frank said, and there may be “alternatives to banning naked credit-default swaps” if most derivatives are moved to a regulated exchange.“If we can get rules where almost every derivative is traded on an exchange, and those that aren’t because they are just too unique” are backed by extra capital, he said, “then that may do it.”
… but it might just be a bargaining chip to get the Holy Exchange Trading in place.
DBRS confirmed CIBC but the trend is still negative:
The trend remains Negative (where it was originally placed on April 2, 2008), reflecting DBRS’s view that the effectiveness of changes, including changing senior management at the Bank, increasing the depth of its senior risk management team, and revamping risk management process and procedures, has yet to be tested, particularly to generate consistent and sustainable earnings. Overshadowing these actions is CIBC’s exposures in the structured credit runoff business. With respect to the structured credit runoff portfolio, management believes it has taken actions to limit the losses on both earnings and capital. CIBC’s ability to improve business practices, reputational-related risk management, and the outcome from the run-off portfolio will have an impact on the trend.
…
Over the last decade, the Bank has repeatedly tightened risk management as a result of negative events surfacing, followed by increased concentration risk developed through rapid expansion of select business lines. DBRS remains concerned the actions taken by CIBC over the past year could potentially be a repetition of this pattern.
Today was just the sort of day I like – not much movement in the major subindices, but lots of volume and lots of price volatility.
| 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 | 0.4432 % | 1,169.3 |
| FixedFloater | 7.36 % | 5.53 % | 36,447 | 16.60 | 1 | -0.2026 % | 2,087.2 |
| Floater | 3.26 % | 3.87 % | 77,751 | 17.70 | 3 | 0.4432 % | 1,460.8 |
| OpRet | 4.96 % | -4.19 % | 145,134 | 0.09 | 15 | 0.4681 % | 2,226.3 |
| SplitShare | 6.04 % | 4.06 % | 96,810 | 4.13 | 4 | 0.2369 % | 1,939.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4681 % | 2,035.7 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0104 % | 1,811.4 |
| Perpetual-Discount | 6.13 % | 6.18 % | 156,187 | 13.62 | 71 | 0.0104 % | 1,668.2 |
| FixedReset | 5.52 % | 4.19 % | 594,418 | 4.21 | 40 | 0.0243 % | 2,087.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.K | Perpetual-Discount | -2.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 19.51 Evaluated at bid price : 19.51 Bid-YTW : 6.38 % |
| PWF.PR.L | Perpetual-Discount | -2.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 20.33 Evaluated at bid price : 20.33 Bid-YTW : 6.31 % |
| NA.PR.L | Perpetual-Discount | -1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 6.08 % |
| TD.PR.R | Perpetual-Discount | -1.82 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 23.49 Evaluated at bid price : 23.67 Bid-YTW : 5.94 % |
| BNS.PR.N | Perpetual-Discount | -1.81 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 21.39 Evaluated at bid price : 21.71 Bid-YTW : 6.07 % |
| CIU.PR.A | Perpetual-Discount | -1.68 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 19.26 Evaluated at bid price : 19.26 Bid-YTW : 6.08 % |
| IAG.PR.A | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 17.55 Evaluated at bid price : 17.55 Bid-YTW : 6.64 % |
| CM.PR.E | Perpetual-Discount | -1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 22.43 Evaluated at bid price : 22.62 Bid-YTW : 6.22 % |
| PWF.PR.E | Perpetual-Discount | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 21.81 Evaluated at bid price : 22.14 Bid-YTW : 6.23 % |
| BAM.PR.K | Floater | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 10.25 Evaluated at bid price : 10.25 Bid-YTW : 3.87 % |
| GWO.PR.H | Perpetual-Discount | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 19.16 Evaluated at bid price : 19.16 Bid-YTW : 6.41 % |
| POW.PR.C | Perpetual-Discount | 1.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 22.14 Evaluated at bid price : 22.45 Bid-YTW : 6.51 % |
| MFC.PR.C | Perpetual-Discount | 1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 18.01 Evaluated at bid price : 18.01 Bid-YTW : 6.34 % |
| POW.PR.A | Perpetual-Discount | 1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 21.38 Evaluated at bid price : 21.65 Bid-YTW : 6.52 % |
| CM.PR.P | Perpetual-Discount | 1.57 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 22.15 Evaluated at bid price : 22.60 Bid-YTW : 6.10 % |
| RY.PR.C | Perpetual-Discount | 1.66 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 5.83 % |
| W.PR.J | Perpetual-Discount | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 22.29 Evaluated at bid price : 22.56 Bid-YTW : 6.25 % |
| BAM.PR.O | OpRet | 1.80 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 24.28 Bid-YTW : 5.96 % |
| BAM.PR.J | OpRet | 1.81 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 22.50 Bid-YTW : 7.06 % |
| SLF.PR.D | Perpetual-Discount | 2.34 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 18.37 Evaluated at bid price : 18.37 Bid-YTW : 6.13 % |
| SLF.PR.E | Perpetual-Discount | 2.40 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 18.38 Evaluated at bid price : 18.38 Bid-YTW : 6.20 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.P | FixedReset | 165,950 | Nesbitt crossed 100,000 at 26.05; RBC crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.84 % |
| SLF.PR.A | Perpetual-Discount | 131,637 | Nesbitt sold 20,000 to RBC at 18.75 and 11,400 to Desjardins at the same price before crossing 50,000 at the same price again. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 18.71 Evaluated at bid price : 18.71 Bid-YTW : 6.43 % |
| TD.PR.S | FixedReset | 119,224 | Nesbitt crossed 10,000 at 25.39, then 100,000 at 25.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 25.25 Evaluated at bid price : 25.30 Bid-YTW : 4.30 % |
| SLF.PR.D | Perpetual-Discount | 103,766 | Nesbitt crossed 99,400 at 18.40. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 18.37 Evaluated at bid price : 18.37 Bid-YTW : 6.13 % |
| TD.PR.R | Perpetual-Discount | 75,327 | Desjardins bought 48,500 from Scotia at 23.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 23.49 Evaluated at bid price : 23.67 Bid-YTW : 5.94 % |
| POW.PR.A | Perpetual-Discount | 72,687 | RBC crossed 36,400 at 21.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-23 Maturity Price : 21.38 Evaluated at bid price : 21.65 Bid-YTW : 6.52 % |
| There were 61 other index-included issues trading in excess of 10,000 shares. | |||