Some Assiduous Readers may feel that I have a knee jerk reaction to increased rule-making … but it isn’t always the case! The proposed rules on US Municipal bond new issues isn’t all that bad:
Some institutional investors claimed that underwriters and their related accounts “buy bonds in the primary offering for their own account even though other orders remain unfilled,” the Municipal Securities Rulemaking Board said in a statement today. The board is an industry self-regulatory group dominated by securities dealers.
The board proposal would require underwriters to “give priority to customer orders over orders for its own account” or from affiliates. It wouldn’t prohibit sales to related accounts, though underwriters “shall have the burden of justifying that such allocation was in the best interests of the syndicate” and in accord with principles of “fair dealing,” the board said in a draft interpretive notice.
…
The board’s announcement doesn’t mention complaints by issuers, who incur extra costs if bonds are sold at lower prices and higher interest rates than needed.“The proposed changes help make the case for competitive rather than negotiated bond sales,” said Robert Doty, president of American Government Financial Services, a Sacramento, California-based adviser to issuers.
In competitive sales, issuers take the best price offered by bankers, whereas in negotiated sales, they rely on the advice of their underwriter and sometimes a financial adviser. Local governments’ and not-for-profits’ negotiated deals accounted for 86 percent of the $391.3 billion of new municipal bonds sold last year, according to Thomson Reuters data.
“Bond pricing in 2009 is the least efficient in years,” bankers at Ziegler Cos. said in a July 27 letter sent to clients who issue bonds. After underwriters set prices low enough to attract more orders than there are bonds, “investors rush to buy the cheap securities, and many flip them the next day for a quick profit,” the Chicago-based firm said.
Conflict of interest is an often overrated fault, but acting as both advisor and counterparty to an issuer … well, I call that a step over the line. By me, advising on price is an advisory matter and the brokerage is an agent; they are more than welcome to backup their advice with money and say something like …. ‘well, we can try and sell it at 5.50%, but if you go to 5.60% we’ll guarantee it’, and provide a backstop for the success of the underwriting. The key part of the word “backstop”, however, is “back” and third party orders should take priority. Once they start giving preferential – or even pro-rata – fills to related accounts, however, they are no longer agents but principals; they should make it very clear from the beginning just how they are acting.
Frankly, I’m a little surprised this issue hasn’t surfaced before, or that clients have allowed it! The source document states:
The Municipal Securities Rulemaking Board (the “MSRB”) is requesting comment on draft amendments to Rule G-11, on new issue syndicate practices, Rule G-8, on books and records, and Rule G-9, on preservation of records. The draft amendments to Rule G-11 would expand the rule to cover all primary market offerings, not just those for which syndicates are formed. They would also provide that, in general, unless otherwise agreed to by the issuer, the syndicate manager or the sole underwriter (as the case may be) shall give priority to customer orders over orders for its own account, orders from an affiliate for its account, or orders for their respective related accounts.
The UK FSA has published its rules on bonuses. Many of the principles insist on giving the employer a great deal of discretion:
Non-financial performance metrics should form a significant part of the performance assessment process.
…
The measurement of performance for long-term incentive plans, including those based on the performance of shares, should be risk-adjusted.
These changes will make lawyers very, very happy.
The CIT drama continues with a SEC filing:
As a first step of the restructuring plan, on July 20, 2009, the Company commenced a cash tender offer for its outstanding $1 billion in floating rate senior notes due August 17, 2009 and amended the offer on August 3, 2009. A description of the terms of the offer and the amendment are contained in Form 8-K’s filed by the Company on July 21, July 24 and August 3, 2009.
If the tender offer is successfully completed, the Company intends to use the proceeds of the Credit Facility to complete the tender offer and make payment for the August 17 notes. Further, the Company and a Steering Committee of the bond holder lending group do not intend for the Company to seek relief under the U.S. Bankruptcy Code, but rather will pursue restructuring efforts as part of the comprehensive restructuring plan to enhance the Company’s liquidity and capital position. If the pending tender offer is not successfully completed, and the Company is unable to obtain alternative financing, an event of default under the provisions of the Credit Facility would result and the Company could seek relief under the U.S. Bankruptcy Code.
The Credit Facility contains provisions (i) requiring the Company and the Steering Committee to work together in good faith to promptly develop a mutually acceptable restructuring plan for the Company and its Subsidiaries and (ii) requiring the Company to adopt a restructuring plan acceptable to the majority in number of the Steering Committee by October 1, 2009. The agreement also calls for a draft of the restructuring plan on a “best efforts basis” by August 14, 2009. As a result, the Company currently expects to complete and begin executing on the restructuring plan prior to the required October 1 deadline.
In a successful effort to prove that they are morons, they copy-protected the PDF, so I copy-pasted from the MS-Word version. Just so you know.
Bloomberg had an interesting piece on the market for US RMBS:
Investors are overestimating potential yields in part because they are failing to consider how many loans are becoming delinquent for the first time and in part because they are arriving at incorrect conclusions on how long it will take to liquidate seized homes, the [Amherst Securities Group LP] New York-based analysts led by Laurie Goodman wrote in a report yesterday. Those issues can influence both the size of foreclosure losses and how quickly bonds get paid down.
“Do your homework, and sell securities which are being evaluated incorrectly by the marketplace,” the analysts wrote.
…
For example, the most-senior classes of 2006 and 2007 securities backed by prime-jumbo mortgages have rallied to more than 80 cents on the dollar, from as low as 55 cents, according to Amherst. So-called super-senior bonds backed by “option” adjustable-rate mortgages have jumped to about 48 cents, from the “low 30s,” the analysts wrote.Investors also have been doing too little analysis of the differences, such as the level of home equity, among borrowers with currently non-delinquent mortgages backing non-agency bonds, which lack guarantees from government-supported Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae, they said.
What? Homework? Analysis? Who has time for that stuff, anyway, in between client meetings and sales? Just buy what the smiley-boy at the dealer’s tells you is good.
PerpetualDiscounts had yet another good day today, with a total return of +62bp to bring the median YTW down to 5.84%, equivalent to 8.18% interest at the standard pre-tax equivalency factor of 1.4x for taxable holders. Long Corporates now yield a hair over 6.0%, so the pre-tax interest-equivalent spread is now about 215bp, narrowing in from the 230bp recorded on August 5 and returning to its month-end level.
Volume continued strong, with PerpetualDiscounts dominating the volume highlights table.
| 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 | 6.6046 % | 1,392.4 |
| FixedFloater | 6.30 % | 4.56 % | 49,673 | 17.85 | 1 | 1.5294 % | 2,437.4 |
| Floater | 3.27 % | 3.25 % | 124,343 | 19.08 | 2 | 6.6046 % | 1,739.5 |
| OpRet | 4.87 % | -9.57 % | 145,125 | 0.09 | 15 | 0.1535 % | 2,270.4 |
| SplitShare | 5.69 % | 6.48 % | 96,070 | 4.10 | 3 | 0.2107 % | 2,038.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1535 % | 2,076.1 |
| Perpetual-Premium | 5.74 % | 5.31 % | 86,827 | 2.65 | 4 | 0.0199 % | 1,865.9 |
| Perpetual-Discount | 5.82 % | 5.84 % | 173,684 | 14.10 | 67 | 0.6240 % | 1,765.2 |
| FixedReset | 5.50 % | 4.07 % | 507,015 | 4.15 | 40 | 0.0277 % | 2,101.2 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BMO.PR.K | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.82 Evaluated at bid price : 22.97 Bid-YTW : 5.73 % |
| GWO.PR.F | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 24.63 Evaluated at bid price : 24.92 Bid-YTW : 6.00 % |
| TD.PR.P | Perpetual-Discount | -1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 23.10 Evaluated at bid price : 23.27 Bid-YTW : 5.68 % |
| PWF.PR.F | Perpetual-Discount | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 21.81 Evaluated at bid price : 22.21 Bid-YTW : 5.94 % |
| TCA.PR.Y | Perpetual-Discount | 1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 45.86 Evaluated at bid price : 48.61 Bid-YTW : 5.74 % |
| POW.PR.B | Perpetual-Discount | 1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.54 Evaluated at bid price : 22.80 Bid-YTW : 5.93 % |
| BMO.PR.H | Perpetual-Discount | 1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.70 Evaluated at bid price : 23.59 Bid-YTW : 5.59 % |
| BAM.PR.M | Perpetual-Discount | 1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 17.83 Evaluated at bid price : 17.83 Bid-YTW : 6.78 % |
| CM.PR.I | Perpetual-Discount | 1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 20.14 Evaluated at bid price : 20.14 Bid-YTW : 5.89 % |
| BNS.PR.J | Perpetual-Discount | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.68 Evaluated at bid price : 23.69 Bid-YTW : 5.54 % |
| IAG.PR.A | Perpetual-Discount | 1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 19.28 Evaluated at bid price : 19.28 Bid-YTW : 6.06 % |
| BAM.PR.G | FixedFloater | 1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 25.00 Evaluated at bid price : 17.26 Bid-YTW : 4.56 % |
| GWO.PR.G | Perpetual-Discount | 1.61 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.54 Evaluated at bid price : 22.72 Bid-YTW : 5.80 % |
| BAM.PR.J | OpRet | 1.65 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 24.65 Bid-YTW : 5.74 % |
| PWF.PR.K | Perpetual-Discount | 1.72 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 5.88 % |
| W.PR.J | Perpetual-Discount | 1.74 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 23.72 Evaluated at bid price : 24.03 Bid-YTW : 5.88 % |
| MFC.PR.C | Perpetual-Discount | 1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 19.98 Evaluated at bid price : 19.98 Bid-YTW : 5.73 % |
| RY.PR.W | Perpetual-Discount | 1.99 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 21.66 Evaluated at bid price : 22.01 Bid-YTW : 5.57 % |
| NA.PR.L | Perpetual-Discount | 2.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 21.34 Evaluated at bid price : 21.34 Bid-YTW : 5.72 % |
| MFC.PR.B | Perpetual-Discount | 2.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 5.70 % |
| PWF.PR.E | Perpetual-Discount | 2.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 22.53 Evaluated at bid price : 23.26 Bid-YTW : 5.93 % |
| GWO.PR.I | Perpetual-Discount | 2.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 19.81 Evaluated at bid price : 19.81 Bid-YTW : 5.77 % |
| BAM.PR.K | Floater | 5.63 % | A real move, as it traded 3,945 shares in a range of 11.52-07 before closing at 11.83-48, 5×2. This may be related to the announcements regarding the real estate vulture fund and the BPO equity issue … or it may not be. Take your pick. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 11.83 Evaluated at bid price : 11.83 Bid-YTW : 3.36 % |
| BAM.PR.B | Floater | 7.57 % | Traded 12,091 shares in a range of 11.37-21 before closing at 12.22-30, 1×23. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 12.22 Evaluated at bid price : 12.22 Bid-YTW : 3.25 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| SLF.PR.C | Perpetual-Discount | 111,000 | Nesbitt crossed blocks of 53,300 and 35,000 shares at 19.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 19.20 Evaluated at bid price : 19.20 Bid-YTW : 5.88 % |
| TD.PR.S | FixedReset | 106,800 | TD crossed 99,000 shares at 25.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-30 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 4.16 % |
| RY.PR.R | FixedReset | 106,600 | TD crossed 92,200 at 27.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.62 Bid-YTW : 3.74 % |
| MFC.PR.B | Perpetual-Discount | 102,181 | RBC crossed 51,600 at 20.43; Nesbitt crossed 37,000 at 20.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 5.70 % |
| BMO.PR.L | Perpetual-Premium | 102,050 | Nesbitt crossed 20,000 at 25.00; RBC crossed 67,500 at 25.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-24 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 5.80 % |
| SLF.PR.A | Perpetual-Discount | 97,998 | Nesbitt crossed 50,000 at 20.20; Desjardins crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-08-12 Maturity Price : 20.21 Evaluated at bid price : 20.21 Bid-YTW : 5.97 % |
| There were 47 other index-included issues trading in excess of 10,000 shares. | |||
[…] August 12 I mentioned some proposed changes to rules in the States that would draw some clearer lines between […]
[…] How ’bout that preferred share market, eh? PerpetualDiscounts dominated the volume table while roaring up another 60bp today, taking their yield down to 5.63%, equivalent to 7.88% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 6.0% – well, maybe just a hair less – so the pre-tax interest-equivalent spread is now 188bp, a decisive break through the ‘credit-crunch-normal’ level of about 200bp and considerably tighter than the 215bp recorded on August 12. […]