PrefBlog

I am convinced that Toronto will have a major global competitive advantage in the next century – access to Lake Ontario:

India, the world’s second-most populous nation, is doubling spending on water management to a record as conglomerates from the Tatas to Adani face shortages that the United Nations calls an impending crisis.
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Disputes with farmers demanding rights to their irrigated land have stalled about $80 billion of investment by companies including Posco and ArcelorMittal (MT) as Prime Minister Manmohan Singh seeks to revive an economy growing at the slowest pace in a decade. Tata Steel Ltd. (TATA), India’s biggest maker of the alloy, is setting annual targets to cut water usage as two-thirds of the country faces a scarcity, H.M. Nerurkar, managing director said in an April 11 interview.

“Water availability is a very big issue and in the coming days this will be a far bigger issue,” A.P. Choudhary, chairman of Rashtriya Ispat Nigam Ltd., India’s second-biggest state-run steelmaker, said in an interview. “Water is critical for the steel industry’s growth and no company is comfortably placed.”

Toronto area real-estate is already pretty expensive, but if I were a speculating kind of guy, I’d be thinking seriously about buying land in places like Cleveland and Detroit, and just trying to get enough current revenue to break even for the next thirty years.

It’s an ill wind that blows nobody any good:

Donald R. Mullen Jr., who helped Goldman Sachs Group Inc. (GS) profit from the U.S. housing crash, is giving the firm and its clients a way to gain from the recovery.

Mullen, 54, has raised almost $1 billion to buy single- family houses to rent since leaving Goldman Sachs last year as head of global credit and mortgages, five years after overseeing the bank’s bet against the imploding subprime home-loan market. His Fundamental REO LLC has already purchased or is close to acquiring almost 2,500 properties through foreclosure auctions, government agencies and even an Arizona non-profit that promotes affordable-home ownership, property records show.

Spend-Every-Penny is explaining why he has to extend his control over, and micromanagement of, the country’s financial system:

he federal budget, released in March, plans to prohibit lenders from selling insured mortgages to investors through any securitization method that is not managed by federally-run Canada Mortgage and Housing Corp . (CMHC).

That bombshell came “without any warning and without any consultation,” said Stephen Smith, president of the largest non-bank lender, First National. Speaking at the National Bank Canadian Financial Services Conference, Mr. Smith said the “collateral damage” to ABCP and smaller lenders “was not fully considered” by government officials.
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In a statement, a Department of Finance official explained the government’s reasoning as follows:

“The Government is making these changes to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector. Funding channels that use taxpayer-backed insured mortgages should be subject to minimum standards and Canadian oversight in order to promote financial stability.”
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What the new rules really do is force lenders to sell their mortgages in the specific method dictated by Ottawa, as opposed to potentially lower cost private securitization.

The Central Planners have learnt the lessons of the Credit Crunch well – you can justify any idiocy you like, as long as you chant the magic words: “Hocus Pocus, Financial Stability, Abracadabra!”

Stop the presses! Gensler of the CFTC said something sensible!

Two interest rate benchmarks that banks were fined for rigging should be scrapped and replaced by indicators based on market transactions, a top U.S. regulator said on Monday.

The changes should also include benchmarks linked to gold, oil and other commodities, said Gary Gensler, chairman of the Commodity Futures Trading Commission.

Regrettably, he did not explain how such a ban would be enforced. But doubtless there are lots of levers to use – call it terrorism, for instance. That’s what the Brits do.

We now know why the feds introduced covered bond legislation: it was to give a regulatory advantage to their future employers:

DBRS notes that there appear to be two unintended consequences of the legislation and the Guide, based on discussions with several Canadian issuers over the past few months.

First, as the requirements for continuous disclosure and data compliance required by the Guide are broad, extensive and, at times, onerous, the amount of time and effort required to comply with the mandated standard is substantial, which is also expected to be costly. Therefore, DBRS is of the opinion that lenders other than domestic systemically important banks (DSIBs) are not likely to pursue registration as a covered bond issuer under the legislation, and would therefore be at a disadvantage without the benefit of covered bond funding.

Second, as the legislation explicitly prohibits the issuance of covered bonds without registration, DBRS does not expect to see any coexistence of registered covered bonds and non-registered covered bonds in Canada, except for existing grandfathered covered bond programs.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets winning 32bp and DeemedRetractibles gaining 14bp. Volatility was very good, dominated by winning FixedResets. Volume was quite high.

Civility trumps justice:

Mr. Groia has spoken scathingly about his profession’s “civility movement” and has painted the discipline proceedings as a worrying attack on the ability of all lawyers to mount vigorous defences in high-stakes cases. He has received support from prominent voices in the legal community, including former Conrad Black lawyer Edward Greenspan, who warned of a chill that could see defence lawyers second-guess tough arguments for fear they will be face discipline years later.

DBRS has confirmed Brookfield Canada Office Properties at BBB:

The confirmation is based primarily on BCOP’s steady operating performance and stable financial profile within the context of a relatively inactive year for new investment. The Stable trend reflects DBRS’s expectation that operating performance will remain consistent in the near to medium term, incorporating the potential for moderately higher financial leverage that may be incurred with the refinancing of upcoming debt maturities.
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BCOP’s operating income increased significantly to $239 million in 2012 from $204 million in 2011, primarily due to a full year of contribution from the 25% interest in the Canadian Office Fund, which was acquired in late 2011. BCOP achieved same-property net operating income growth of 4.8% in 2012, mainly due to higher average rental rates on renewals and a slight improvement in overall occupancy rate (96.9% as at December 31, 2012). The higher rental rates and solid occupancy levels reached by BCOP are reflective of favourable office leasing conditions in its core markets. That said, there has been a lack of suitable supply with attractive valuations in these markets, which contributed to the fact that BCOP did not make any significant new investments or require any material capital raises in 2012.

As such, BCOP’s debt balance and EBITDA interest coverage remained relatively steady in 2012 at 2.19 times (x), versus 2.22x in 2011. DBRS notes that debt-to-capital decreased to 39.9% at December 31, 2012, from 43.1% at the end of 2011, based on higher asset valuations.

This is relevant to BAM investors because:

The Trust is a subsidiary of BPO Properties Ltd. (“BPP”), which owns an aggregate equity interest in the Trust of 83.3% as of December 31, 2012 consisting of 40.5% of the issued and outstanding units of BOX (“Trust Units”) and 100% of the issued and outstanding Class B limited partnership units (“Class B LP Units”) of Brookfield Office Properties Canada LP (“BOPC LP”), a subsidiary of BOX that owns direct interests in the Trust’s investment properties.

… and BPO Properties has proposed to exchange its preferreds for preferreds in it its owner, Brookfield Office Properties, and:

Brookfield Office Properties Inc. (“Brookfield Office Properties” or “the company”) is incorporated under the laws of Canada. The company owns, develops and operates commercial office properties in select cities in North America, Australia and the United Kingdom. The company is a subsidiary of Brookfield Asset Management Inc. (“BAM”), which owns approximately 51% of the company’s voting shares.

DBRS also confirmed Thomson Reuters at A (low), R-1 (low) and Pfd-2 (low), Stable, proud issuer of TRI.PR.B:

The ratings confirmation reflects positive expectations regarding the Company’s enhanced product offerings, particularly in the Financial & Risk segment, along with its stable free cash flow generation over the past year. The ratings continue to be supported by the Company’s entrenched market position, predominantly subscription-based revenue model and the diverse nature of its customer base. The ratings also reflect intensifying competition in key segments as well as risks associated with the Company’s acquisition and divestiture program.

It was another poor day for the Canadian preferred share market, with PerpetualPremiums off 11bp, FixedResets losing 31bp and DeemedRetractibles down 14bp. A relatively lengthy list of Performance Highlights is dominated by losing FixedResets – highly skewed towards those with low Issue Reset Spreads. Volume was extremely high; perhaps related to Monday’s index changes.

So how much of what we think we know is actually a silly error?

In the world of economic luminaries, it doesn’t get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age.
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Reinhart and Rogoff have admitted to a “coding error” in the spreadsheet that meant some countries were omitted from their calculations. But the economists denied they selectively omitted data or that they used a questionable methodology.
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“It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful,” they said in a joint statement. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work.”

Certainly, false advertising should not be condoned. But banning somebody from the industry for life seems a little extreme:

According to the SEC’s order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.
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According to the SEC’s order, Tandon violated Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

Well, at least another SEC lawyer got another notch in his belt.

DGS.PR.A was confirmed by DBRS at Pfd-3:

The net asset value (NAV) of the Company dropped shortly after the last rating confirmation in May 2012, but has been increasing since June. As of April 11, 2013, the downside protection available to the Preferred Shares is approximately 42.5% and the dividend coverage ratio is approximately 1.0 times. The Pfd-3 rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was a modestly down day for the Canadian preferred share market, with PerpetualPremiums down 7bp, FixedResets off 3bp and DeemedRetractibles losing 8bp. Volatility was modest. Volume was high.

The Bank of Canada conveyed no surprises in its rate announcement:

On a quarterly basis, growth in Canada is expected to pick up to about 2.5 per cent in the second half of this year. Despite this expected pickup, with the weak growth in the second half of 2012, annual average growth is now projected to be 1.5 per cent in 2013. The economy is then projected to grow by 2.8 per cent in 2014 and 2.7 per cent in 2015, reaching full capacity in mid-2015 – later than anticipated in the January MPR.

Total CPI and core inflation have remained low in recent months, broadly in line with expectations in the January MPR. Muted core inflation reflects material excess supply in the economy, heightened competitive pressures in the retail sector, and some special factors such as slower increases in regulated prices and the pass-through of previous declines in agricultural prices to consumer prices. Total CPI inflation has been restrained by low core inflation and declining mortgage interest costs, with some offset from higher gasoline prices.

Both total and core inflation are expected to remain subdued in coming quarters before gradually rising to 2 per cent by mid-2015 as the economy returns to full capacity, the special factors that are weighing on core inflation subside, and inflation expectations remain well-anchored.

The Canadian preferred share market got hit today, with PerpetualPremiums off 8bp, FixedResets down 18bp and DeemedRetractibles losing 21bp. Volatility was minimal. Volume was very high.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a significant widening from the 210bp reported April 3.

Regulatory extortion is still being pondered:

SAC Capital Advisors LP’s record $602 million insider trading settlement with the U.S. Securities and Exchange Commission was approved by a federal judge, who conditioned his ruling on a future appeals court decision in an SEC settlement with Citigroup Inc. (C)

U.S. District Judge Victor Marrero in Manhattan approved the settlement, while saying it remains subject to a ruling by the U.S Court of Appeals in New York in the Citigroup case on whether defendants in SEC cases may be permitted to neither admit nor deny fault in such agreements. Marrero expressed concern about such a provision in the SAC settlement in a hearing on March 28. Marrero’s ruling, which was made public today, is dated yesterday.

In the Citigroup case, U.S. District Judge Jed Rakoff in Manhattan criticized the SEC’s policy of allowing defendants to resolve the agency’s allegations without admitting wrongdoing, ruling that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. The appeals court heard arguments in the case in February. The court hasn’t said when it will rule.

SEC Commissioner Luis A. Aguilar is one of the supporters of extra-judicial sentencing:

I must also say that I am disappointed in the Commission’s apparent lack of urgency in implementing the Dodd-Frank Act’s mandate to prevent crooks and so-called “bad actors” from utilizing Rule 506 (the “Bad Actor Rule”). It does not seem controversial for the Commission to prevent felons and other law-breakers from pitching private investment deals to investors. However, it has been almost two years since the Commission’s proposal to disqualify “bad actors” from 506 offerings, and the Commission has yet to adopt the Bad Actor Rule. I agree with U.S. House Financial Services Ranking Democrat Maxine Waters when she said:

[t]he Commission should work swiftly to impose the “bad actor” disqualification before expanding the availability of general solicitation and advertising, particularly since Congress directed the Commission to institute this disqualification provision nearly two years before the JOBS Act.

The adoption of a disqualification provision would provide much needed investor protection and would not be detrimental to legitimate issuers. The continuing delay only hurts investors.

If it is the intent of Congress to include lifetime prohibitions from certain activities as part of criminal sentencing, discretion to do so should be in the hands of the judge at trial – not of Aguilar’s beloved bureaucrats.

Talisman, proud issuer of TLM.PR.A, was confirmed at Pfd-3(high) by DBRS:

The Company’s operating cash flow for the year was affected by its exposure to weak natural gas pricing, along with a reduction in liquids production due to maintenance activities in the North Sea. This resulted in a free cash flow deficit, despite decreased capital spending (capex) of $3.7 billion in 2012 versus $4.3 billion in 2011. The Company used proceeds of asset sales (including the sale of 49% of its U.K. business to Sinopec International Petroleum Exploration and Production Co. (Sinopec); refer to Transactions on page 11) to fund the deficit, along with reducing short-term debt, which resulted in adjusted leverage lowering to 35.6% in 2012 (from 40.2% in 2011). DBRS anticipates future free-cash flow deficits to be funded with proceeds of asset sales/joint ventures.
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Talisman has indicated that its key priorities are (1) to live within its means through reducing capex to levels within internally generated cash flow, (2) to focus capex on higher-value projects that can come onstream more quickly, (3) to focus on building and strengthening two core regions (the Americas and Southeast Asia) and (4) improving operational performance and reduce cost structure. DBRS notes that successful implementation of these priorities will support the rating of Talisman, however it remains to be seen if the Company will be able to realize the benefits of this shift in strategic focus. An inability to successfully implement its strategic plans could result in further pressure on its financial profile. DBRS would view adjusted leverage approaching 40% to be aggressive for the current rating category, which could result in negative rating action.

Emera, proud issuer of EMA.PR.A and EMA.PR.C, was confirmed by DBRS at Pfd-3(high):

The Company’s business risk profile is viewed as good, as Emera’s earnings and cash flow are largely generated by its relatively low-risk regulated subsidiaries (regulated subsidiaries accounted for over 90% of consolidated net income in 2012). Over the medium to long term, Emera’s regulated earnings and cash flow are expected to grow significantly once the Maritime Link is completed (pending approval from the Nova Scotia Utility and Review Board).
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Emera is currently on track to deleverage its non-consolidated balance sheet as reflected by (1) a $250 million preferred shares offering in June 2012 and (2) an equity offering of approximately $200 million in December 2012. The Company’s non-consolidated debt-to-capital ratio was 34.2% as of December 31, 2012, versus its peak of 41.5% in Q2 2012. Going forward, DBRS expects Emera to fund significant unforeseen costs or cash shortfalls (including potential cost overruns associated with the Maritime Link) with equity (including preferred shares and dividend re-investment proceeds) and to continue to deleverage its non-consolidated balance sheet to a level that is commensurate with the current BBB (high) rating.

It was a fine day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets up 9bp and DeemedRetractibles gaining 8bp. There was no volatility. None. Volume was quite low.

S&P is nonchalant regarding recent banking regulatory announcements:

In the past month, there have been two significant announcements relating to domestic regulation of Canadian banks.

• •On March 21, the federal government’s budget announced its plan to introduce a “bail-in” policy framework that would provide a mechanism to recapitalize a nonviable bank through conversion of certain bank liabilities into capital instruments.
• •On March 26, the Office of the Superintendent of Financial Institutions issued an advisory that imposed a 1% capital surcharge for banks it has designated as domestic systemically important banks (D-SIBs). These banks include Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank. This advisory follows the Bank for International Settlements (BIS) publication of “A Framework For Dealing With Domestic Systemically Important Banks” in October 2012 and its recommendation that national banks identified as D-SIBs by their national authorities comply with the principles in line with the phase-in arrangements for the globally systemically important bank (G-SIB) framework, starting in January 2016. The BIS has not identified any Canadian bank as a G-SIB.

In a report released today, Standard & Poor’s Ratings Services said both announcements were in line with its expectations for the sector. “These developments reinforce our perception that Canadian regulators are emphasizing prudential standards, active bank supervision, and the avoidance of a future taxpayer funded bailout of a failing financial institution,” said Standard & Poor’s credit analyst Tom Connell in the report, entitled “Regulatory Initiatives Might Contribute To The Evolution Of Canada’s Banking Industry.”

TIPS are having a rough time of it:

History is repeating itself in the bond market as investors capitulate on bets that the Federal Reserve’s money-printing efforts will spark faster inflation.

Firms from U.S. Bancorp to Federated Investments that had been buying government securities that protect against rising consumer prices during the Fed’s recent efforts to inject cash into the economy are now selling. For the first time since the depths of the financial crisis in 2008, mutual funds that target Treasury Inflation-Protected Securities have seen outflows for three straight months, according to Morningstar Inc.

Even after the Fed injected more than $2.3 trillion into the financial system since 2008, inflation is under control, bolstering the appeal of bonds while providing the central bank with more scope to provide stimulus as needed to foster the economic recovery. Commodity prices are down and wages have grown just 1.9 percent on average since 2009, below the 3.1 percent in the prior three years, government data show.
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Returns on TIPS have topped non-indexed Treasuries since 2009, gaining an average of 9.4 percent in each of the past four years, versus 3.41 percent for nominal U.S. government debt, according to Bank of America Merrill Lynch indexes. This year, nominals are beating TIPS, 1.93 percent versus 1.27 percent.

PrefBlog’s “Golly, It Was Hard To See This One Coming” department is working overtime!

Banks are leaving the panel that sets ISDAFix, the benchmark for the $379 trillion swaps market, as regulators probe suspected manipulation of the rate.

HSBC Holdings Plc (HSBA), Europe’s largest bank by assets, and Japan’s Mizuho Financial Group (8411) stopped contributing to the ISDAFix dollar rate between November and January, and haven’t been replaced, documents on the International Swaps and Derivatives Association’s website show. The industry group didn’t give any reason for the lenders’ departure.

Firms are pulling out of rates such as the London interbank offered rate, Euribor and ISDAFix on growing concern that they may face lawsuits, fines and criminal penalties if found to have engaged in wrongdoing. Without data from a large number of firms, benchmarks risk becoming unrepresentative and losing the confidence of the market, said Owen Watkins, a former regulator at the U.K.’s Financial Services Authority.
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Martin Wheatley, the U.K. regulator charged with overhauling Libor, said in a September report it might be necessary to force firms to contribute to financial benchmarks “if submitting banks were to explore leaving.” Michel Barnier, the European Union’s internal market and services commissioner, said in February he was considering forcing lenders to participate in benchmarks including Euribor.

The report is formally known as The Wheatley Review:

5.27 At this stage, the Wheatley Review does not consider it necessary to recommend that the FSA compel particular banks to be members of LIBOR panels. However, the Wheatley Review recognises that, if submitting banks were to explore leaving the LIBOR panels, or if panel sizes did not increase, this might be necessary. For example, there could be a state of affairs whereby banks that have expertise in certain inter-bank markets, including those not currently involved in LIBOR, might be required to participate in LIBOR panels as a condition of their activity in those markets. This could possibly be achieved by making rules requiring such firms to contribute, on a continuing basis, to LIBOR.

5.28 While the FSA’s current powers would allow it to impose such an obligation on a temporary basis, for example to avoid the threat of financial stability or a loss of market integrity, they would not allow the imposition of a long term continuing obligation on banks to submit to LIBOR. This suggests there is a potential gap in the regulatory toolkit. The Wheatley Review therefore recommends that the Government legislate to provide the FSA with an express “reserve” power to compel LIBOR submissions, to be used only if the FSA should consider it to be necessary in the future.

Remember the Rochdale Securities case, last mentioned on December 4? That’s the one where the trader input an erroneous buy order for 1.625-million shares of Apple, which promptly fell, causing great consternation. It looks like we have reached the denouement:

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC’s charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer’s profit if Apple’s stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

In market timing news:

Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the last two trading days as the precious metal plummeted 13 percent.

Amidst all the gloom and whining, it’s good to know that Canadian teens are world-beaters at something:

Teenagers in Canada use cannabis more than any other developed country, according to a new study released by Unicef.

It was a rough day for the Canadian preferred share market – although equities got really whacked – with PerpetualPremiums off 11bp, FixedResets losing 17bp and DeemedRetractibles down 12bp. Volatility was average. Volume was average.