October 9, 2009

The transfer of wealth from the banking to the shadow-banking sector got a boost today when Citigroup sold Philbro to Occidental:

Oil producer Occidental Petrol Corp., based in Los Angeles, will pay “net asset value” for the unit, the companies said today. Occidental’s net investment in Phibro will be about $250 million. The sale won’t be material to Citigroup earnings, the New York-based bank said.

Phibro had become a flashpoint for critics of excessive compensation at banks receiving federal aid because its chief, 58-year-old Andrew J. Hall, was paid more than $100 million in 2008 and is set to earn about the same this year. Citigroup, the third-biggest U.S. bank by assets, received a $45 billion taxpayer-funded bailout last year.

Vikram Pandit, 52, Citigroup’s chief executive officer, is parting with one of his most consistently profitable businesses.

Phibro, based in Westport, Connecticut, has been profitable each fiscal year since 1997, with pretax earnings averaging $371 million during the past five years, Occidental said in its statement. Citigroup had a record $27.7 billion net loss last year as the financial crisis brought mortgage-trading losses and higher loan charge-offs.

Hall, who has a degree in chemistry from the University of Oxford, is paid under a contract that gave him a portion of the unit’s trading results, and he may be owed $100 million this year under the terms of his contract with Citigroup, according to people familiar with the matter.

In Canada, of course, we solve such problems by putting an army of accountants and lawyers on the case, finding a few minor transgressions and firing the bum who made the mistake of being too good at his job. I am glad to see that Citigroup executives have more personal integrity.

Government bonds got hammered today. Across the Curve articulates my thoughts on the matter:

I was in the insomniac zone last night and was up late writing. I wrote about the Bernanke speech. I thought that he broke no new ground. Absolutely none. But some of the headline writers have focused on the fact that he mentioned that the Federal Reserve will raise rates when the economy recovers. Well, I wonder who would have been so obtuse as to think otherwise?

Aided by the Canadian jobs number, the Canadian five-year got smacked for 23bp today, closing at 2.75%. It is interesting to speculate whether the implied narrowing in required reset spreads will bring a flood of FixedReset issuance next week … I trust all the newly indentured investment bankers will be working their telephones from their call-centres.

There could be an interesting ‘cram-down’ battle going on with Energy Future:

— Energy Future Holdings Corp.bondholders are forming a group to block the electricity provider’s offer to swap $6 billion of debt for $4 billion of new secured notes with less protection for investors, according to two people familiar with the matter.

Lenders owning as much as 50 percent of Energy Future’s bonds maturing in 2017 oppose the terms of the exchange, said an attorney familiar with the matter who declined to be identified because the discussions are private.

Dallas-based Energy Future, formerly TXU Corp., needs to reduce debt after KKR & Co. and TPG Inc. paid $43 billion for the company using a combination of high-yield, high-risk loans and bonds in October 2007. That was before gas prices fell, credit markets seized up and equity markets tumbled.

Energy Future has $44.5 billion of loans and bonds, including $22.5 billion coming due in 2014, according to data compiled by Bloomberg.

The company “is suffering under the weight of an untenable debt load created by an ill-timed leveraged buyout at the top of the market,” Carl Blake, a Washington-based analyst at Gimme Credit LLC, wrote in an Oct. 6 report.

We will see more of this as the smoke clears – we saw some yesterday with the BAM acquisition of BBI.

I mentioned the controversy regarding the Federal Housing Authority yesterday. Here’s a defense of their business practices from the chair of the House Subcommittee on Housing and Community Opportunity, Maxine Waters:

It is a myth that FHA is the new subprime and has adopted lower underwriting standards and the other worst abuses of the subprime market. In fact, just the opposite is true. A recent Federal Reserve report indicates that over 60 percent of the increase in FHA purchase activity between 2007 and 2008 was to borrowers with prime-quality FICO scores. Additionally, the percentage of loans in FHA’s portfolio with loan-to-value ratios above 95 percent has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA’s mortgages require full documentation and verification of the borrower’s income and assets.

The preferred share market was down again today, with PerpetualDiscounts down 24bp and FixedResets giving up 7bp; as always, figures are given in terms of total return. The S&P/TSX Preferred Share Index was down 41bp, as opposed to no change yesterday; I have been asked about such differences and suspect that S&P uses the Close to price the index, rather than the Closing Bid used by HIMIPref™, although their published methodology does not make this absolutely explicit. Volume was good.

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 0.4405 % 1,504.8
FixedFloater 5.82 % 4.06 % 45,009 18.51 1 -0.4797 % 2,636.5
Floater 2.59 % 3.00 % 101,127 19.76 3 0.4405 % 1,879.9
OpRet 4.91 % -0.55 % 133,179 0.14 15 -0.2134 % 2,276.3
SplitShare 6.44 % 6.48 % 646,605 3.98 2 0.2673 % 2,053.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2134 % 2,081.5
Perpetual-Premium 5.90 % 5.91 % 150,084 13.97 11 -0.0330 % 1,851.4
Perpetual-Discount 5.92 % 5.96 % 217,782 13.95 62 -0.2381 % 1,749.6
FixedReset 5.51 % 4.13 % 434,307 4.06 41 -0.0735 % 2,106.4
Performance Highlights
Issue Index Change Notes
POW.PR.B Perpetual-Discount -2.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 21.51
Evaluated at bid price : 21.51
Bid-YTW : 6.26 %
PWF.PR.L Perpetual-Discount -1.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 20.74
Evaluated at bid price : 20.74
Bid-YTW : 6.17 %
GWO.PR.J FixedReset -1.78 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.47
Bid-YTW : 4.56 %
POW.PR.C Perpetual-Discount -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 23.14
Evaluated at bid price : 23.44
Bid-YTW : 6.21 %
TD.PR.P Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 22.38
Evaluated at bid price : 22.51
Bid-YTW : 5.84 %
PWF.PR.H Perpetual-Discount -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 6.12 %
POW.PR.D Perpetual-Discount -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 20.65
Evaluated at bid price : 20.65
Bid-YTW : 6.09 %
HSB.PR.C Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 21.52
Evaluated at bid price : 21.52
Bid-YTW : 5.98 %
MFC.PR.A OpRet -1.11 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 3.54 %
BMO.PR.J Perpetual-Discount 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 20.26
Evaluated at bid price : 20.26
Bid-YTW : 5.64 %
TRI.PR.B Floater 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 19.20
Evaluated at bid price : 19.20
Bid-YTW : 2.06 %
GWO.PR.I Perpetual-Discount 1.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 6.06 %
GWO.PR.G Perpetual-Discount 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 21.65
Evaluated at bid price : 21.65
Bid-YTW : 6.06 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.I Perpetual-Discount 278,790 RBC crossed 62,900 at 18.92; Nesbitt crossed three blocks, of 90,000 shares, 50,000 shares and 60,000 shares, at 18.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 18.75
Evaluated at bid price : 18.75
Bid-YTW : 6.06 %
CM.PR.A OpRet 224,400 RBC crossed 99,000 at 25.90; Nesbitt crossed blocks of 50,000 shares, 20,000 shares and 55,000 shares at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2009-11-08
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : -16.82 %
PWF.PR.O Perpetual-Discount 149,780 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 24.15
Evaluated at bid price : 24.35
Bid-YTW : 5.99 %
TD.PR.O Perpetual-Discount 130,801 RBC crossed 111,000 at 21.43.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 21.44
Evaluated at bid price : 21.44
Bid-YTW : 5.67 %
RY.PR.A Perpetual-Discount 69,450 Nesbitt crossed 50,000 at 20.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 20.06
Evaluated at bid price : 20.06
Bid-YTW : 5.63 %
TD.PR.P Perpetual-Discount 63,570 Nesbitt crossed 50,000 at 22.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-10-09
Maturity Price : 22.38
Evaluated at bid price : 22.51
Bid-YTW : 5.84 %
There were 43 other index-included issues trading in excess of 10,000 shares.

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