The OSFI Annual Report 2008-09 has been published. Standard corporate puffery, but this part was amusing:
Because the Canadian financial system withstood the first wave — global financial market turmoil — better than many systems, OSFI has received a lot more attention than we normally do, and fielded many questions as to why Canada has faired relatively well. Our answer has been that the strength of the Canadian system is due to Canada’s overall policy framework, the quality of OSFI’s supervision and regulation, cooperation and communication among Financial Institutions Supervisory Committee (FISC) partners (OSFI, the Bank of Canada, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada and the Department of Finance) and the risk management skills of Canada’s financial institutions. The contributions of all the players in the system have led to Canada’s success to date.
There is no acknowledgement of other answers to the question either here or by comparison with Australia. However, given the quality of Canada’s governance, it doesn’t need to be particularly rigorous, does it?
The SEC’s Department In Charge of Making Prospectuses Longer has proposed new rules regarding credit rating related disclosure:
We believe that today’s proposals could help reduce undue reliance on credit ratings by providing investors with information about what a credit rating is, and what it is not, and other information bearing on the reliability of ratings to place the credit rating in its proper context. In light of the importance of credit ratings to investors and their use by registrants in marketing securities, we believe it is appropriate to require that this information be included in a registrant’s prospectus so that all investors receive this information.
Finally! In the past, advisor/investor conversations about credit quality have been along the lines of “General Motors Microsoft’s always going to be around, Jack. I wouldn’t worry about it!”. But now that this information will at last be available to investors who have searched hopelessly for this kind of vital information, they may now read all about it and engage in learned discussions with their advisors. Then Prime Minister Layton will present Conrad Black with the Order of Canada, while City of Toronto Councillors make intelligent remarks in the background.
More alarmingly, the SEC is also proposing to treat CRAs as “experts”; this will require them to give consent to having their ratings included in a prospectus, and allow third parties to use the ‘experts defense’, that they are not liable for things not working out properly if they relied on an expert when making the decision. The more I think about this, the more insanely complicated the potential knock-on effects appear. The SEC notes:
Of course, we are mindful of the possibility that a risk of greater NRSRO liability as a result of subjecting NRSROs to Section 11 may undermine competition if credit rating agencies decide that they are unable to bear the risk of liability and thus exit the ratings business. Similarly, firms considering entering the ratings business may reconsider in the face of an increased risk of legal liability. The threat of liability may particularly affect smaller, less-established rating agencies that may find it more difficult to negotiate for indemnification or bear the risk of additional liability. It also is possible that, in response to the rescission of Rule 436(g), registrants would begin to take greater advantage of private placements instead of public offerings.
I hope they’re really careful with this one! The ‘experts defense’ was enthusiastically promoted by a Council of Institutional Investors [who?] white paper:
The accountability of NRSROs has deteriorated so much that institutional investors now are vulnerable if they rely on credit ratings in making investment decisions. To the extent rating agencies are not subject to liability, an institutional investor’s defense of reliance on ratings is weakened, because constituents can argue that ratings are less reliable when rating agencies are not accountable for fraudulent or reckless ratings.
I confess that I have not read the white paper thoroughly; it has a good discussion of the concept of “regulatory license” (in which a credit rating is considered a license to buy by a bozo) but by and large it draws its conclusions from flimsy premises (e.g., no subprime should ever have been AAA; Lehman should not have been A, et c.).
The situation with CIT Group is getting muddier:
Pacific Investment Management Co. and Baupost Group LLC resigned from CIT Group Inc.’s bondholder steering committee, reducing the group to four members, according to a person familiar with the situation.
Pimco, which manages the world’s largest bond fund, and Baupost weren’t part of the group as of about a month ago, said the person, who declined to be identified because the firms haven’t disclosed their decision. The remaining creditors on the committee are Centerbridge Partners LP, Oaktree Capital Management LLC, Capital Research & Management Co. and Silver Point Capital LP.
…
CIT’s $500 million of 4.125 percent notes due Nov. 3 fell 4 cents to 67 cents on the dollar as of 2:52 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.Credit-default swaps on five-year CIT debt rose 2 percentage points to a mid-price of 40 percent upfront, according to CMA DataVision. That means it would cost $4 million initially and $500,000 annually to protect $10 million of CIT debt from default for five years.
KERRR-UNCH! It’s just like old time, with PerpetualDiscounts getting whacked for a loss of 70bp on the day, while FixedResets were able to pick up 12bp worth of total return. There is a long list of losers in the performance tables; volume was quite good.
PerpetualDiscounts now yield 5.92%, equivalent to 8.29% interest at the standard equivalency factor of 1.4x. Long Corporates now yield … oh, call it 5.95% so the pre-tax interest-equivalent spread has now widened to about 235bp, a large increase over the 215bp reported on September 30. So who’s smarter? Bond Guys or Pref Guys? Place yer bets, gents, place yer bets!
| 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 | -0.1104 % | 1,493.5 |
| FixedFloater | 5.72 % | 3.96 % | 45,355 | 18.63 | 1 | 0.8493 % | 2,683.1 |
| Floater | 2.61 % | 3.01 % | 100,933 | 19.73 | 3 | -0.1104 % | 1,865.9 |
| OpRet | 4.90 % | -3.75 % | 123,558 | 0.09 | 15 | -0.0389 % | 2,278.1 |
| SplitShare | 6.41 % | 6.52 % | 683,112 | 3.99 | 2 | 0.0000 % | 2,063.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0389 % | 2,083.1 |
| Perpetual-Premium | 5.88 % | 5.89 % | 151,613 | 14.00 | 11 | -0.4113 % | 1,858.8 |
| Perpetual-Discount | 5.88 % | 5.92 % | 214,188 | 14.06 | 61 | -0.7043 % | 1,761.3 |
| FixedReset | 5.50 % | 4.07 % | 463,163 | 4.07 | 41 | 0.1220 % | 2,111.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.H | Perpetual-Discount | -2.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 6.10 % |
| TD.PR.O | Perpetual-Discount | -1.88 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 5.68 % |
| TD.PR.P | Perpetual-Discount | -1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.63 Evaluated at bid price : 22.77 Bid-YTW : 5.77 % |
| PWF.PR.F | Perpetual-Discount | -1.83 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 21.43 Evaluated at bid price : 21.76 Bid-YTW : 6.03 % |
| MFC.PR.C | Perpetual-Discount | -1.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 18.76 Evaluated at bid price : 18.76 Bid-YTW : 6.06 % |
| BNS.PR.N | Perpetual-Discount | -1.64 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.65 Evaluated at bid price : 22.79 Bid-YTW : 5.77 % |
| GWO.PR.G | Perpetual-Discount | -1.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 21.52 Evaluated at bid price : 21.80 Bid-YTW : 6.00 % |
| RY.PR.W | Perpetual-Discount | -1.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.17 Evaluated at bid price : 22.32 Bid-YTW : 5.56 % |
| CM.PR.G | Perpetual-Discount | -1.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.61 Evaluated at bid price : 22.79 Bid-YTW : 5.93 % |
| BMO.PR.H | Perpetual-Discount | -1.55 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.67 Evaluated at bid price : 23.51 Bid-YTW : 5.67 % |
| PWF.PR.K | Perpetual-Discount | -1.52 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 20.45 Evaluated at bid price : 20.45 Bid-YTW : 6.07 % |
| SLF.PR.D | Perpetual-Discount | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 18.38 Evaluated at bid price : 18.38 Bid-YTW : 6.11 % |
| PWF.PR.E | Perpetual-Discount | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.45 Evaluated at bid price : 23.10 Bid-YTW : 5.93 % |
| PWF.PR.H | Perpetual-Discount | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 23.41 Evaluated at bid price : 23.74 Bid-YTW : 6.05 % |
| HSB.PR.C | Perpetual-Discount | -1.27 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 21.52 Evaluated at bid price : 21.82 Bid-YTW : 5.88 % |
| SLF.PR.C | Perpetual-Discount | -1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 18.45 Evaluated at bid price : 18.45 Bid-YTW : 6.08 % |
| PWF.PR.L | Perpetual-Discount | -1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 21.29 Evaluated at bid price : 21.56 Bid-YTW : 5.91 % |
| CM.PR.P | Perpetual-Discount | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 22.58 Evaluated at bid price : 23.27 Bid-YTW : 5.89 % |
| SLF.PR.E | Perpetual-Discount | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 18.54 Evaluated at bid price : 18.54 Bid-YTW : 6.12 % |
| NA.PR.K | Perpetual-Premium | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 24.23 Evaluated at bid price : 24.55 Bid-YTW : 5.94 % |
| SLF.PR.A | Perpetual-Discount | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 19.66 Evaluated at bid price : 19.66 Bid-YTW : 6.09 % |
| RY.PR.L | FixedReset | -1.04 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.52 Bid-YTW : 4.29 % |
| PWF.PR.G | Perpetual-Premium | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 24.20 Evaluated at bid price : 24.60 Bid-YTW : 5.99 % |
| BNS.PR.O | Perpetual-Premium | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 24.26 Evaluated at bid price : 24.47 Bid-YTW : 5.73 % |
| MFC.PR.B | Perpetual-Discount | -1.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 19.60 Evaluated at bid price : 19.60 Bid-YTW : 6.00 % |
| PWF.PR.M | FixedReset | 1.05 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 27.00 Bid-YTW : 3.91 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.C | Perpetual-Discount | 170,403 | Scotia bought 11,000 from Nesbitt at 19.05; RBC crossed 130,000 at 18.87; Nesbitt crossed 10,000 at 18.70. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-10-07 Maturity Price : 18.76 Evaluated at bid price : 18.76 Bid-YTW : 6.06 % |
| SLF.PR.F | FixedReset | 66,200 | Nesbitt crossed 40,000 at 27.00; RBC crossed 10,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.00 Bid-YTW : 4.22 % |
| BNS.PR.Q | FixedReset | 60,505 | Desjardins crossed 50,000 at 25.65. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-11-24 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 4.24 % |
| GWO.PR.J | FixedReset | 58,975 | RBC bought 10,000 from anonymous at 26.96; TD bought blocks of 10,000 and 13,200 from anonymous at 26.95; RBC crossed 10,700 at 26.95. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.95 Bid-YTW : 4.07 % |
| PWF.PR.J | OpRet | 58,340 | Desjardins crossed 35,000 at 25.95, then sold 20,000 to Nesbitt at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2009-11-06 Maturity Price : 25.75 Evaluated at bid price : 25.95 Bid-YTW : -8.33 % |
| TRP.PR.A | FixedReset | 46,814 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2020-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.19 Bid-YTW : 4.46 % |
| There were 46 other index-included issues trading in excess of 10,000 shares. | |||
Re: KERRR-UNCH! It’s just like old time, with PerpetualDiscounts getting whacked for a loss of 70bp on the day
Is there some seasonality to the large volume of trades that have occurred in Perpetual Discounts? For instance cm.pr.j traded over 7 times its daily volume on Oct 6, 2009. Or is all this activity profit taking with a view that pref shares yields will be going up?
I believe that US mutual funds close out there books at the end of October. Do you know if they holders of CAD pref shares?
The only seasonality of which I am aware is DPS.UN Retractions, but I don’t think that’s it. I think it’s just market timers doing their regular thing.
I would be very surprised if US mutual funds were holders of CAD prefs – there’s no tax advantage in it for them.
[…] PerpetualDiscounts closed yielding 6.01%, equivalent to 8.41% interest at the standard equivalency factor of 1.4x. Long Corporates are close as dammit to 6.0% so the pre-tax interest-equivalent spread is now about 240bp, a slight increase from the 235bp recorded October 7. […]
[…] may wish to refer to the PrefBlog post reporting the concept release, with additional commentary on October 7. Basically, the proposed rule change […]