Issue Comments

LFE.WT.A Warrant Exercise Result

Quadravest has announced:

Canadian Life Companies Split Corp. (the “Company”) announces a total of 7,129,099 LFE.WT.A 2013 Warrants were exercised at $12.00 each for total gross proceeds of $85,549,188 bringing the Company’s net assets to approximately $190 million.

For every Warrant exercised, holders received one Preferred Share and one Class A Share of the Company. The Warrants expired on March 27, 2013. The net asset value per unit after giving effect to the warrant exercise was $13.03 as at March 28, 2013.

The proceeds from the Warrant exercise are being used by the Company to invest in common shares of four Canadian Life Insurance Companies as follows: Great-West Life, Industrial Alliance, Manulife Financial and Sun Life Financial.

According to their Annual Report to November 30, 2012:

A total of 7,776,613 2013 warrants and 7,776,613 2014 warrants were issued. During 2012, 104,000 2013 warrants were exercised. As at November 30, 2012, there were 7,672,613 2013 warrants and 7,776,613 2014 warrants outstanding.

Additionally, as noted in the post LFE.WT.A Exercise Date Changed, some warrants were exercised prior to the expiry date, but this number has not been released. So the exercise ratio was somewhere between 92% and 100%.

One way or another, the liquidity of LFE.PR.B just got a whole lot better!

Contingent Capital

Contingent Capital: The Case for COERCs

A question in the comments to my old post A Structural Model of Contingent Bank Capital led me to look up what Prof. George Pennacchi has been doing lately; together with Theo Vermaelen and Christian C. P. Wolff he has written a paper titled Contingent Capital: The Case for COERCs:

In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts to equity when the market value of equity or capital falls below a certain trigger. The conversion price is set significantly below the trigger price and, at the same time, equity holders have the option to buy back the shares from the bondholders at the conversion price. Compared to other forms of contingent capital proposed in the literature, the COERC is less risky in a world where bank assets can experience sudden, large declines in value. Moreover, the structure eliminates concerns of an equity price “death spiral” as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses. Furthermore, COERCs reduce the problem of “debt overhang,” the disincentive to replenish shareholders’ equity following a decline.

The basic justification for the COERCs is:

In contrast to the Credit Suisse coco bond [with accounting and regulatory triggers], the trigger is based on market value based leverage ratios, which are forward looking, rather than backward looking, measures of financial distress. It also means that at the time of the triggering event the stock price is known, unlike in the case of coco bonds with accounting based capital ratio triggers. As the trigger is driven by the market and not by regulators, regulatory risk is avoided. The conversion price is set at a large discount from the market price at the time of conversion, which means that conversion would generate massive shareholder dilution. However, in order to prevent this dilution, shareholders have an option to buy back the shares from the bondholders at the conversion price. In practice, what will happen is that when the trigger is reached, the company will announce a rights issue with an issue price equal to the conversion price and use the proceeds to repay the debt. As a result, the debt will be (almost) risk-free. In our simulations, we show that it is possible to design a COERC in such a way that the fair credit spread is 20 basis points above the risk-free rate. So although the shareholders are coerced to repay the debt, the benefit from this coercion is reflected in the low cost of debt as well as the elimination of all direct and indirect costs of financial distress. Although at the time of the trigger, the company will announce an equity issue, there is no negative signal associated with the issuance as the issue is the automatic result of reaching a pre-defined trigger.

Market based triggers are generally criticised because they create instability: bond holders have an incentive to short the stock and trigger conversion. Moreover, the fear of dilution may encourage shareholders to sell their shares so that the company ends up in a self-fulfilling death spiral. However, because in a COERC shareholders have pre-emptive rights in buying the shares from the bondholders, they can undo any conversion that is result of manipulation or unjustified panic. Moreover, because bondholders will generally be repaid, they have no incentive to hedge their investment by shorting the stock when the leverage ratio approaches the trigger, unlike the case of coco bonds where bondholders will become shareholders after the triggering event. The design of the contract also discourages manipulation by other bondholders. Bolton and Samama (2010) argue that other bond-holders may want to short the stock to trigger conversion, in order to improve their seniority. However, because the COERCs will be repaid in these circumstances such activity will not improve other bondholder’s seniority.

Further justification is given as:

Our objective is to propose an alternative, an instrument that a value maximizing manager would like to issue, without being forced by regulators. Companies are coerced to issue equity and repay debt by fear of dilution, not by the decision of a regulator. Imposing regulation against the interest of the bank’s shareholders will encourage regulatory arbitrage and may also reduce economic growth.6 If bankers, on the other hand, can be convinced that issuing contingent capital increases shareholder value, then any regulatory “encouragement” to issue these securities will be welcomed. Our proposal is therefore more consistent with a free market solution to the general problem that debt overhang discourages firms from recapitalizing when they are in financial distress. Hence the COERC should be of interest to any corporation where costs of financial distress are potentially important.

It seems like a very good idea. One factor not considered in the paper is the impact on equity investors.

Say you have an equity holding in a bank that has a stock price (and the fair value of the stock price) slightly in excess of the trigger price for its COERCs. At that point, buyers of the stock (and continuing holders!) must account for the probability that the conversion will be triggered and their will be a rights issue. Therefore, in order to avoid dilution, they must not only pay the fair market value for the stock, but they must also have cash on hand (or credit lines) available that will allow them to subscribe to the rights offering; the necessity of having this excess cash will make the common less attractive at its fair market value. This may serve to accelerate declines in the bank’s stock price.

It is also by no means assured that shareholders will be able to sell the rights anything close to their fair value.

A Goldman Sachs research report titled Contingent capital Possibilities, problems and opportunities is also of interest. Canadians panic-stricken by the recent musings in the federal budget (see discussion on April 1, April 2 and April 5) will be fascinated by:

Bail-in is a potential resolution tool designed to protect taxpayer funds by converting unsecured debt into equity at the point of insolvency. Most bail-in proposals would give regulators discretion to decide whether and when to convert the debt, as well as how much.

There is an active discussion under way as to whether bail-in should be a tool broadly applicable to all forms of unsecured credit (including senior debt) or whether it should be a specific security with an embedded write-down feature.

Naturally, this discussion is not being held in Canada; we’re too stupid to be allowed to participate in intelligent discussions.

As might be expected, GS is in favour of market-based solutions and consequent ‘high-trigger’ contingent capital:

Going-concern contingent capital differs substantially from the gone-concern kind. It is designed to operate well before resolution mechanisms come into play, and thus to contain financial distress at an early stage. The recapitalization occurs at a time when there is still significant enterprise value, and is “triggered” through a more objective process with far less scope for regulatory discretion. For investors to view objective triggers as credible, however, better and more-standardized bank disclosures will be needed on a regular basis. Because this type of contingent capital triggers early, when losses are still limited, it can be issued in smaller tranches. This, in turn, allows for greater flexibility in
structuring its terms.

When the early recapitalization occurs, control of the firm can shift from existing shareholders to the contingent capital holders, and a change in management may occur. The threat of the loss of control helps to strengthen market discipline by spurring the firm to de-risk and de-leverage as problems begin to emerge. As such, going-concern contingent capital can be an effective risk-mitigating tool.

GS further emphasizes the need to appeal to fixed income investors:

Contingent capital will only be viable as a large market if it is treated as debt

Whether “going” or “gone,” contingent capital will only be viable as a large market if it is treated as debt. This is not just a question of technical issues like ratings, inclusion in indices, fixed income fund mandates and tax-deductibility, though these issues are important. More fundamentally, contingent capital must be debt in order to appeal to traditional fixed income investors, the one market large enough to absorb at least $925 billion in potential issuance over the next decade.

Surprisingly, GS is in favour of capital-based triggers despite the problems:

A capital-based trigger would force mandatory conversion if and when Tier 1 (core) capital fell below a threshold specified either by regulators (in advance) or in the contractual terms of the contingent bonds. We think this would likely be the most effective trigger, because it is transparent and objective. Investors would be able to assess and model the likelihood of conversion if banks’ disclosure and transparency are enhanced. Critically, a capital-based trigger removes the uncertainty around regulatory discretion and the vulnerability to market manipulation that the other options entail.
…
Capital-based triggers are also vulnerable to financial reporting that fails to accurately reflect the underlying health of the firm. Lehman Brothers, for example, reported a Tier 1 capital ratio of 11% in the period before its demise – well above the regulatory minimum and a level most would have considered healthy. The same was true for Bear Stearns and Washington Mutual before they were acquired under distress. We think this issue must be resolved for investors to embrace capital-based triggers.

Fortunately there are several ways to make capital ratios more robust, whether by “stressing” them through regulator-led stress tests or by enforcing more rigorous and standardized disclosure requirements that would allow investors to better assess the health of the bank. Such standardized disclosures could relieve regulators of the burden of conducting regular stress tests, and would significantly enhance transparency. The value of stress testing and greater disclosures is one lesson from the financial crisis. The US Treasury’s 2009 stress test illustrates this point vividly. While not perfect, it offered greater
transparency and comparability of bank balance sheets than investors were able to derive from public filings. With this reassurance, investors were willing to step forward and commit capital. The European stress test proves the point as well: it did not significantly improve transparency and thus failed to reassure investors or attract capital.

That is the crux of the matter and I do not believe that the Gordian Knot can be cut in the real world. The US Treasury made their stress test strict and credible because it knew in advance that its banks would pass. The Europeans made their stress test ridiculous and incredible because they knew in advance that their banks would fail.

I liked their succinct dismissal of regulatory triggers:

While flexibility can be helpful, particularly given that no two crises are alike, recent experience shows that some regulators may be hesitant to publicly pronounce that a financial firm is unhealthy, especially during the early stages of distress. There is, after all, always the hope that the firm’s problems will be short-lived, or that an alternative solution to the triggering of contingent capital can be found. Thus a regulator may be unlikely to pull the trigger – affecting not only the firm and all of its stakeholders, but also likely raising alarm about the health of other financial firms – unless it is certain of a high degree of distress. By then, losses may have already risen to untenable levels, which is why this type of trigger is associated with gone-concern contingent capital.

GS emphasizes the importance of the indices:

The inclusion of contingent capital securities in credit indices will also be an important factor, perhaps even more important than achieving a rating. This is because the inclusion itself would attract investors, who otherwise might risk underperforming benchmarks by being underweight a significant component of the index. Credit indices currently do not include mandatorily convertible equity securities, although they can include instruments that allow for loss absorption through a write-down feature. This again contributes to the appeal of the write-down feature (rather than the simple conversion to equity) to most fixed income investors. If contingent capital securities were included in credit indices, this addition would be likely to drive a substantially deeper contingent capital market.

Here in Canada, of course, the usual benchmark is prepared by the TMX, which the regulators allowed to become bank-owned on condition that it improved the employment prospects for regulators. It’s a thoroughly disgraceful system which will blow up in all our faces some days and then everybody will pretend to be surprised.

GS is dismissive of regulatory triggers and NVCC:

A discretionary, “point of non-viability” trigger would likely be attractive to many regulators as it helps them to preserve maximum flexibility in the event of a financial crisis. This can be useful given that no two crises are exactly alike. It could also allow regulators to consider multiple factors – including the state of the overall financial system – when making the decision to pull the trigger. Discretion also gives regulators the opportunity to exercise regulatory forbearance away from the public spotlight.

Yet we believe this preference for discretion and flexibility makes it difficult for regulators to meet one of their most important – yet mostly unspoken – goals, which is to develop a viable contingent capital market. Regulators have certainly solicited feedback from investors, but some seem to believe that simply making contingent capital mandatory for issuers means that investors will buy them. However, from conversations with many investors, we believe that regulators may need to move toward a more objective trigger; if not, the price of these instruments may be prohibitive.

There is another set of participants in a potential contingent capital market: taxpayers. Regulators represent taxpayers’ interests by promoting systemic stability and requiring robust loss-absorption capabilities at individual banks. But the interests of regulators and taxpayers may not always be fully aligned. If taxpayers’ principal goal is to avoid socializing private-sector losses, and to prevent the dislocation of a systemic crisis even in its early stages, then they should want a stringent version of contingent capital – one that converts to equity at a highly dilutive rate, based on an early and objective trigger. The discretion and flexibility inherent in regulatory-triggered gone-concern contingent capital may have less appeal to taxpayers. From their standpoint, gone-concern contingent capital might well have allowed a major financial firm to fail, causing job losses and other disruptions across the financial system. Taxpayers may find the potential risk-reducing incentives created by going-concern contingent capital to be a more robust answer to the problem of too big to fail.

Goldman’s musings on investor preference can be taken as an argument in favour of COERCs:

Traditional fixed-income investors will likely want contingent capital to have a very low probability of triggering, which leads them to prefer an objective, capital-based and disclosure-enhanced trigger. Many investors have indicated their concerns about the challenges of modeling a discretionary trigger: it is very difficult to model the probability of default, the potential loss given default or even the appropriate price to pay for a security that converts under a discretionary and opaque process. Greater transparency is a prerequisite for a capital-based trigger to be seen as credible by investors, because they will need to have greater confidence that banks’ balance sheets reflect reality. We also believe that investors would be more likely to embrace a capital-based trigger if the terms were quite stringent, thereby lowering the probability of conversion.

Market Action

April 5, 2013

The US jobs number was disappointing:

Payrolls grew by 88,000 workers last month, the smallest in nine months, after a revised 268,000 gain in February that was higher than first estimated, Labor Department figures showed today in Washington. The median forecast of 87 economists surveyed by Bloomberg projected an advance of 190,000. The jobless rate fell to 7.6 percent from 7.7 percent.

The US is looking serious on Too-Big-To-Fail:

The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp., would have to hold capital in excess of Basel III standards under a proposal being drafted by Senate Democrats and Republicans to curb the size of too-big-to-fail banks.

The current draft of the legislation would require U.S. regulators to replace Basel III requirements with a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, have said they intend to introduce the bill this month.

Some US politicians are trying to ban hedging:

State Senator Mike Folmer, a Republican, in February introduced a bill that would bar publicly funded entities from engaging in the derivatives, which can be used to protect against swings in interest rates. The ban would deny Philadelphia, which had entered into $3.5 billion of swaps, access to a useful tool, said Rob Dubow, finance director of the fifth-most populous U.S. city.
…
The Pennsylvania State Association of Boroughs supports a ban on swaps, said Christopher Cap, executive vice president. Elam Herr, assistant executive director of Pennsylvania State Association of Township Supervisors, said it may back Folmer’s bill.

The best known example is Oakland’s attempt to effectively default on what was effectively a loan:

Between debating the location of a proposed dog park and discussing taxi permit fees one night last month, the city council in Oakland, California, turned to severing ties with Goldman Sachs Group Inc. (GS)

The vote for the city administrator to begin the process of firing the fifth-biggest U.S. bank by assets came during an eight-hour meeting Dec. 18. It culminated months of efforts by the city to exit a 1998 interest-rate swap without paying a $14.8 million termination fee. Goldman, which underwrote $83 million of Oakland debt last year, has denied the request.
…
Oakland entered into a so-called synthetic fixed-rate swap with the bank in 1998. It issued bonds to help finance pension obligations and used variable-rate instead of fixed-rate securities, according to reports filed with the city council.

The city was lured by the prospect of upfront cash, said Zennie Abraham, economic adviser to then-Mayor Elihu Harris. California voters had just approved Proposition 218, which limited cities’ ability to raise taxes, said Abraham.

“A lot of the city staff got enamored with the city getting a huge check,” Abraham said. “That was dangled in our face.”

The city realized a $15 million windfall from entering the contract. Oakland agreed to pay a fixed 5.6775 percent until 2021, while the bank was on the hook for a variable rate equal to the Bond Markets Association Index — 3.09 percent at the time the bonds were issued in 1998.

Nothing wrong with swaps or any other derivatives. But when they’re used to cover up borrowing, a la Greece … well, somebody should get fired.

The feds are continuing to explain bail-in bonds:

While the term “bail-in” has been used in both cases, Canadian officials are now scrambling to distance their plan from any that would use consumer deposits for capital. Amid questions about the plan, a spokeswoman for Finance Minister Jim Flaherty said in a statement that no consumer bank deposits – of any kind – would be drawn upon in the Canadian bail-in scenario.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Department of Finance spokeswoman Kathleen Perchaluk said.
…
Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.

Analysts, however, say it would take extreme circumstances for the concept of a bail-in to ever come into play.

These deposit notes and bonds are not financial products available to the average investor or depositor, and do not include funds held in consumer deposits.

This may turn out very well for the preferred share market; it is impossible for the bar to be set any lower for deposit notes and bonds than it is for preferred shares, so what’s the difference? I mean really? An announcement of intention from OSFI that it will seek to convert preferred shares first in the event of non-viability?

This simply shows up the moronic nature of OSFI’s decision to go for a “low trigger” on preferred share contingent capital conversion … if they were high trigger, then the bonds could be low trigger (preferably lower trigger, rather than non-viability trigger) and then the bonds would be clearly senior and there would be a clear hierarchy. However, this would lower the importance of OSFI’s discretion when the next crisis occurs, and hence lower the importance of OSFI officialdom.

I have long argued, for instance, that all contingent capital should convert upon the common stock price breaching a certain level (taken as a VWAP over a period of time). For instance, let us assume RY’s common share price is $50. Then preferred shares should convert when the common trades below $25, at a conversion price of $25. The bonds could convert with a trigger price = conversion price = $10-15. This would be a much better system than the current mess.

With excellent timing, DBRS Requests Comments on Rating Subordinated, Hybrids and Preferred Bank Capital Securities:

DBRS is requesting comments on a proposed methodology released today that would be used in the rating of capital securities issued by banks that are either subordinated or that have unique convertibility terms (including contingent capital features). Market participants are asked to submit comments on the proposal to DBRS_Bank_Methodology_Comments@DBRS.com on or before May 10, 2013. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

Note that the proposed criteria as titled represents a merger of three outstanding DBRS banking criteria: (i) Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments; (ii) Rating Bank Subordinated Debt & Hybrid Instruments with Contingent Risks; and (iii) Rating Bank Preferred Shares & Equivalent Hybrids.

While we are open to any comments, we draw attention to three major areas, two of which are written as changes in the proposed document and one consideration for change, which has not been included in the document at this time:

(1) Present criteria dictate that bank preferred shares are typically rated three to five notches below the issuer’s intrinsic assessment. Based on further assessing the impact of notching versus POD (“probability of default”) levels, the request for comment document changes this to a standard three notches. We are also asking for comments on whether DBRS should retain the flexibility to have certain bank preferred ratings notched up by one notch versus the standard notching where there are unique positive characteristics for individual banks, or if this ability should be removed. The wording in the proposed criteria as released still provides this ability.

(2) A second change relates to the notching process that DBRS would use for contingent capital instruments. The proposed criteria within this April 5th, 2013 document provide more detail relative to the current DBRS criteria.

(3) As is the case with the present criteria, the request for comment document continues to present that normal subordinate debt instruments issued by banks that are defined by DBRS as systemically important would generally receive the identical notching benefit of typically a one-notch uplift due to external / government support that is given to deposits and senior unsecured debt. In recent times, there appears to be growing skepticism regarding governments’ willingness to support subordinated debt when dealing with systemically important banks. Our final decision on this issue could maintain the status quo; or it could result in all subordinate debt being notched from the intrinsic assessment level; or there could be a combination of the above based on the relevant legal framework, resolution schemes, and government policies for each country and banks involved.

BBO.PR.A was placed on Review-Negative by DBRS last September; the rating has now been affirmed at Pfd-2(low) and the Review removed:

DBRS has today confirmed the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) at Pfd-2 (low) and has removed the rating from Under Review with Negative Implications.
…
On September 6, 2012, DBRS placed the rating of the Preferred Shares Under Review with Negative Implications, primarily due to the drop in downside protection below required levels in the prior months. However, since then, downside protection has recovered and stabilized, fluctuating between 49% and 51%, and the dividend coverage ratio has improved. As a result, the Preferred Shares have been confirmed at Pfd-2 (low) and removed from Under Review with Negative Implications.

Complicating matters is the fact that BBO reports its NAV per Capital Share, rather than per Unit, which is made clear by their January Fact Sheet.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 9bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was above average.

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 -0.4309 % 2,603.3
FixedFloater 4.10 % 3.46 % 31,830 18.34 1 0.0000 % 3,963.1
Floater 2.67 % 2.88 % 79,744 20.07 4 -0.4309 % 2,810.9
OpRet 4.80 % 0.33 % 53,527 0.21 5 -0.0772 % 2,611.0
SplitShare 4.81 % 3.99 % 137,333 4.16 5 0.0332 % 2,953.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0772 % 2,387.6
Perpetual-Premium 5.19 % 2.03 % 88,849 0.90 32 -0.0260 % 2,375.0
Perpetual-Discount 4.86 % 4.85 % 167,918 15.73 4 -0.1221 % 2,674.7
FixedReset 4.89 % 2.59 % 284,181 3.25 80 -0.0944 % 2,520.0
Deemed-Retractible 4.86 % 2.08 % 130,845 0.48 44 0.0176 % 2,457.1
Performance Highlights
Issue Index Change Notes
TD.PR.P Deemed-Retractible -1.50 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-05
Maturity Price : 26.00
Evaluated at bid price : 26.23
Bid-YTW : -9.64 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.P FixedReset 261,217 TD crossed 24,000 at 25.20; National crossed 40,000 at the same price. Then Jacob Securities, seen for the first time yesterday, crossed 75,000 at the same price again.

I think Jacob Securities has got either a new client or a new trader, possibly both.

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : -3.30 %
BAM.PR.G FixedFloater 206,430 Nesbitt crossed two blocks of 100,000 each, both at 23.25.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.34
Evaluated at bid price : 23.15
Bid-YTW : 3.46 %
TRP.PR.A FixedReset 163,445 Desjardins crossed blocks of 50,000 shares, 77,200 and 30,000, all at 25.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.88
Evaluated at bid price : 25.65
Bid-YTW : 3.02 %
BNS.PR.X FixedReset 105,079 Nesbitt crossed blocks of 53,600 and 20,000, both at 26.00. RBC crossed 10,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.01
Bid-YTW : 1.95 %
TRP.PR.D FixedReset 75,260 Scotia crossed 50,000 at 26.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.35 %
BNS.PR.Q FixedReset 62,050 TD crossed 49,900 at 25.23.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : 2.86 %
There were 38 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PR.P Deemed-Retractible Quote: 26.23 – 26.65
Spot Rate : 0.4200
Average : 0.2359

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-05
Maturity Price : 26.00
Evaluated at bid price : 26.23
Bid-YTW : -9.64 %
FTS.PR.F Perpetual-Premium Quote: 25.58 – 25.93
Spot Rate : 0.3500
Average : 0.2331

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-01
Maturity Price : 25.25
Evaluated at bid price : 25.58
Bid-YTW : 4.34 %
ABK.PR.C SplitShare Quote: 32.10 – 32.42
Spot Rate : 0.3200
Average : 0.2241

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-10
Maturity Price : 31.64
Evaluated at bid price : 32.10
Bid-YTW : 2.72 %
TRI.PR.B Floater Quote: 24.01 – 24.55
Spot Rate : 0.5400
Average : 0.4451

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-05
Maturity Price : 23.70
Evaluated at bid price : 24.01
Bid-YTW : 2.16 %
IGM.PR.B Perpetual-Premium Quote: 26.66 – 26.90
Spot Rate : 0.2400
Average : 0.1488

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.66
Bid-YTW : 3.94 %
BAM.PR.J OpRet Quote: 26.82 – 27.09
Spot Rate : 0.2700
Average : 0.1941

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.82
Bid-YTW : 2.00 %
Market Action

April 4, 2013

Enbridge Inc., proud issuer of many preferred shares, is issuing equity:

Enbridge Inc. (TSX:ENB) (NYSE:ENB) today announced that it has entered into an agreement with RBC Capital Markets and Scotiabank (“the Underwriters”) to sell 10,850,000 treasury common shares, on a bought deal basis, at $46.11 per common share for distribution to the public. Closing of the offering is expected on or about April 16, 2013.

Enbridge has granted the Underwriters an option, exercisable at any time up to 48 hours prior to closing of the offering, to purchase up to an additional 2,170,000 treasury common shares at $46.11 per common share.

“Since the long-term funding plan discussed at our investor conference last fall we have achieved greater than expected progress in the development of attractive new growth opportunities, including those already announced and those yet to be” said J. Richard Bird, Enbridge Executive Vice President, Chief Financial Officer & Corporate Development. “An update to our funding plan now indicates an incremental equity requirement over the 2012-2016 period. The common share offering today continues our practice of maintaining a very manageable forward funding requirement. After the common share offering, and our recent preferred share issue, our net forward equity requirement stands at $1.9 billion through 2016, which we expect to accommodate through additional preferred share issues and asset monetizations. The additional growth investments will contribute to sustaining Enbridge’s industry-leading EPS growth rate through 2016 and well beyond.”

Today’s prize for precious handwringing goes to The Chartered Institute for Securities & Investment:

Thousands of financial sector workers risk being frozen out of the industry unless they pass mandatory tests measuring their personal ethics and integrity.

The Chartered Institute for Securities & Investment (CISI), a London-based professional body for individuals working, or seeking careers in wealth management and capital markets around the world, wants all of its members to undergo integrity screening or face losing their membership, as it battles to restore public faith in finance.

Until now, only individuals offering financial advice had to take such a test as a condition of their CISI status and to comply with U.K. rules on how investment funds are sold to savers.

Bankers working in areas like corporate finance and mergers and acquisitions, and traders in bonds, shares and derivatives have no such regulatory requirements imposed upon them.

But CISI said on Tuesday that systematic checks on the ethics and integrity of workers across the entire financial services industry were long overdue.

Sadly, it is impossible to determine integrity through a test. Ten percent of any population will cheat as soon as they think they can get away with it. Ten percent will not cheat, no matter what happens. The rest might cheat, given the right combination and severity of circumstances. And you cannot tell in advance who is who. The instigators of this paperwork exercise recognize this, but are doing it anyway:

Martin Wheatley, head of Britain’s Financial Conduct Authority, welcomed the CISI initiative but skeptics said the test would only prove that bankers know how they should act, not whether they actually would apply those ethics on a daily basis.

“No test can guarantee how someone will behave subsequently. But our aim is to make people aware of how they should behave when faced with difficult situations,” Mr. Culhane said.

There was a wide disparity among type in the Canadian preferred share market today, with PerpetualPremiums up 7bp, FixedResets winning 20bp and DeemedRetractibles flat. Volatility was on the low side, but comprised entirely of winning FixedResets. Volume was high and all top-six places were held by FixedResets.

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 -0.1139 % 2,614.6
FixedFloater 4.10 % 3.46 % 29,464 18.34 1 0.6084 % 3,963.1
Floater 2.66 % 2.87 % 77,120 20.10 4 -0.1139 % 2,823.1
OpRet 4.79 % 0.58 % 53,080 0.21 5 0.0309 % 2,613.1
SplitShare 4.81 % 4.00 % 135,570 4.16 5 -0.0646 % 2,952.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0309 % 2,389.4
Perpetual-Premium 5.17 % 1.64 % 89,197 0.56 32 0.0707 % 2,375.6
Perpetual-Discount 4.86 % 4.83 % 168,422 15.75 4 0.4087 % 2,678.0
FixedReset 4.89 % 2.49 % 287,936 3.26 80 0.2039 % 2,522.4
Deemed-Retractible 4.86 % 2.30 % 127,151 0.38 44 0.0010 % 2,456.7
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset 1.01 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.92
Bid-YTW : 2.49 %
HSE.PR.A FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 2.23 %
VNR.PR.A FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 27.35
Bid-YTW : 2.39 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.P FixedReset 169,343 Jacob Securities (who?) crossed 100,000 at 25.18.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.23
Bid-YTW : -4.07 %
TRP.PR.D FixedReset 118,636 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 3.35 %
BNS.PR.Z FixedReset 94,566 TD crossed 12,400 at 24.90. National crossed 59,900 at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 2.96 %
TRP.PR.A FixedReset 60,357 National crossed 30,000 at 25.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-04
Maturity Price : 23.88
Evaluated at bid price : 25.65
Bid-YTW : 3.02 %
ENB.PR.T FixedReset 47,216 Scotia crossed 40,000 at 26.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.36 %
SLF.PR.G FixedReset 45,950 National crossed 33,700 at 25.50.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 2.80 %
There were 45 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSE.PR.A FixedReset Quote: 26.61 – 27.61
Spot Rate : 1.0000
Average : 0.6226

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.61
Bid-YTW : 2.23 %
GWO.PR.F Deemed-Retractible Quote: 25.59 – 25.87
Spot Rate : 0.2800
Average : 0.1856

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-04
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : -20.77 %
BAM.PF.A FixedReset Quote: 26.21 – 26.50
Spot Rate : 0.2900
Average : 0.2156

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.21
Bid-YTW : 3.55 %
BNA.PR.E SplitShare Quote: 25.55 – 25.89
Spot Rate : 0.3400
Average : 0.2712

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 4.44 %
TCA.PR.Y Perpetual-Premium Quote: 51.60 – 51.90
Spot Rate : 0.3000
Average : 0.2313

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.60
Bid-YTW : 1.59 %
TD.PR.E FixedReset Quote: 26.06 – 26.24
Spot Rate : 0.1800
Average : 0.1153

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 1.81 %
Issue Comments

LBS.PR.A To Vote On Term Extension

Brompton Group has announced:

Life & Banc Split Corp. (“LBS” or the “Fund”) is pleased to announce that its board of directors (the “Board”) has approved granting shareholders an additional option to allow them to continue their investment in the Fund beyond its currently scheduled termination date of November 29, 2013. The proposed extension will not result in any changes to shareholder redemption rights.

Over the last three years, the Class A shares and Preferred shares have traded at an average combined premium to net asset value per share of approximately 4.2%. By approving the extension of the Fund, shareholders will have the opportunity to benefit from potential future trading premiums. In the event that the proposed extension is not approved by shareholders, the Fund will terminate and Class A and Preferred shareholders will receive the net asset value per Class A and Preferred share which are currently less than their trading prices.

LBS invests in a portfolio, on an approximately equal weight basis, of common shares of 6 Canadian Banks: Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank and 4 Canadian life insurance companies: Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc. In 2012, the Class A shares and Preferred shares of the Fund had total returns of 46.8% and 5.4%, respectively, as the 6 Canadian banks and 4 Canadian life insurance companies had strong performance over the year.

Under the proposal:

  • • The term of LBS may be extended for an additional term of up to 5 years, as determined by the Board. In addition, the termination date may be extended further for successive terms of up to 5 years thereafter, as determined by the Board;
  • • Current retraction rights of the Class A shareholders and Preferred shareholders will remain unchanged and shareholders will be provided with an additional special retraction right providing an option to retract either Preferred shares or Class A shares at the end of the term (and each successive term thereafter) and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 29, 2013; and
  • • The distribution rates on the Preferred shares and Class A shares for the new term will be announced prior to the extension of the term.

LBS will hold a special meeting of holders of Preferred shares and Class A shares on April 11, 2013 to consider and vote upon the proposal. Shareholders of record at the close of business on March 1, 2013 will be provided with the notice of meeting and management information circular in respect of the meeting and will be entitled to vote at the meeting. The proposal is also subject to any required regulatory approvals.

Further details regarding the proposal will be contained in the management information circular. The circular will also be available on www.sedar.com and posted at www.bromptongroup.com.

LBS.PR.A currently has Asset Coverage of 1.7-:1 and Income Coverage of 107% in 2012, so it is of very good credit quality compared to many of its peers. It was downgraded to Pfd-3(low) by DBRS in September 2012.

The Information Circular contains the vital provision:

provide Shareholders who do not wish to continue their investment in LBS with a special retraction right (the “Special Retraction Right”) to enable such holders to retract their shares at the end of the initial term and each extension of the term thereafter (each, a “Special Retraction Date”) on the same terms that would have applied had LBS redeemed all Class A Shares and Preferred Shares as originally contemplated and provide that Shareholders who wish to exercise such Special Retraction Right must give notice that they wish to exercise such right on or prior to October 31, 2013 and for subsequent Special Retraction Rights no later than the last business day of the month prior to the Special Retraction Date of the year of any extension;

… which makes voting in favour of this an extremely low risk proposition, although it should be noted that management has a blank cheque as far as resetting the dividend on LBS.PR.A is concerned:

The Board may change the distribution rate on the Preferred Shares and the distribution target on the Class A Shares at the time of any extension to the redemption date as described above. Any such change will be announced by way of news release issued at least 60 days prior to such extension of the term.

I recommend that LBS.PR.A holders vote in favour of the proposal although it might be prudent to sell prior to the dividend reset.

Thanks to Assiduous Reader AC for bringing this to my attention.

Issue Comments

FSV.PR.U: Some To Be Redeemed, The Rest Converted

FirstService Corporation has announced:

plans to simplify its capital structure by eliminating all of its 7% Cumulative Preference Shares, Series 1 (the “Preferred Shares”) and to pay a dividend on its Subordinate Voting Shares and Multiple Voting Shares (together, the “Common Shares”). All amounts are in US dollars.

Currently, there are 5,230,634 Preferred Shares outstanding. The Preferred Shares will be eliminated on May 3, 2013 (the “Redemption Date”) in a two-step process. First, there will be a partial redemption for cash of 1,569,190 Preferred Shares (representing 30% of the outstanding Preferred Shares) on a pro rata basis for $25.00 per share plus accrued and unpaid dividends of $0.1582 per share, net of any tax required to be deducted or withheld by FirstService. Second, immediately following the partial redemption, the balance of 3,661,444 Preferred Shares (representing 70% of the initially outstanding Preferred Shares) will be converted by FirstService into Subordinate Voting Shares. A Notice of Redemption and Conversion has been mailed to holders of Preferred Shares in accordance with the terms of Preferred Shares.
…
Partial Redemption of Preferred Shares

On May 3, 2013, 1,569,190 Preferred Shares will be redeemed by FirstService for $25.00 per share plus accrued and unpaid dividends of $0.1582 per share, net of any tax required to be deducted or withheld by FirstService (the “Redemption Price”), for expected total redemption consideration of $39.5 million. The accrued and unpaid dividends reflect the period of March 31, 2013 to the day prior to the redemption date. The Preferred Shares to be redeemed will be selected on a pro rata basis (disregarding fractions).

Conversion of Preferred Shares Remaining after Partial Redemption

On May 3, 2013, immediately after the partial redemption of the Preferred Shares, the remaining 3,661,444 Preferred Shares will be converted into fully paid, non-assessable and freely tradable Subordinate Voting Shares of FirstService. The number of Subordinate Voting Shares to be received for each Preferred Share converted is determined in accordance with a formula set out in the terms of the Preferred Shares, wherein the Redemption Price of each Preferred Share is divided by 95% of the weighted average trading price of the Subordinate Voting Shares traded on NASDAQ for the twenty consecutive trading days ending on the fourth day prior to the conversion date. No fractional Subordinate Voting Shares will be issued. FirstService will satisfy any such fractional interest with a payment based on the market price of such fractional interest. FirstService expects that, based on current trading prices, approximately 3.0 million Subordinate Voting Shares will be issued on the conversion, resulting in a total of approximately 31.8 million Subordinate Voting Shares outstanding following the conversion. The Preferred Shares will be de-listed from trading on the TSX at the close of trading on the Redemption Date.

The formal notice of redemption and conversion is also available on FirstService’s website.

FSV.PR.U was last mentioned on PrefBlog when DBRS put the rating on Review-Developing in 2008. DBRS discontinued the rating in 2010.

The common stock, FSV, is now trading in the range of $34.00, implying that preferred shareholders will receive approximately 0.75 subordinate voting shares per preferred – not bad, since the preferreds were distributed as a stock dividend on the basis of one preferred for every five SVS in 2007.

FSV.PR.U has not been tracked by HIMIPref™.

Market Action

April 3, 2013

Europeans are encountering Money Market angst:

Investors in Europe risk losing a haven as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley break a taboo that’s stopped 88 billion euros ($113 billion) of money-market funds from ever losing principal.

The banks are preparing to abandon the policy that investors get one euro back for every one they put in as government bond yields near record lows make it harder for the funds to generate returns.

A money-market fund failing to repay investors in full is said to “break the buck” and is forced to shut down. To avoid this, banks propose to change rules governing the investment vehicles so they can pass on losses to investors by reducing the number of shares outstanding in a fund, without closing.
…
Benchmark German bond yields are close to record lows, with the rate on Germany’s two-year bond at minus 0.001 percent, up from minus 0.023 on March 28, data compiled by Bloomberg show. France’s two-year security is yielding 0.145 percent, up from a record-low 0.03 percent in December.

Since the ECB cut the deposit rate to zero in July, money- market funds that are restricted to buying short-term debt generated almost no extra cash, putting pressure on their goal to provide a sanctuary for investors. The seven-day yield on funds that buy euro government securities was zero percent for the week ended March 22, according to research firm iMoneyNet Inc.

Prime funds, which take more risk and can also invest in bonds issued by the highest-rated banks and companies, made 0.02 percent. Since Jan. 4, euro money funds have seen assets under management fall by 7.1 billion euros to 87.9 billion euros, Westborough, Massachusetts-based iMoneyNet data show.

Here’s some good energy business news, amidst all the unhappy headlines:

Canada is pulling ahead of the U.S. in a contest to be the first exporter of liquefied natural gas from the North American shale bonanza to Asia’s $150 billion LNG market.

An LNG terminal being built at a cove north of Vancouver financed by a Houston private-equity firm is scheduled to begin shipping the fuel across the Pacific Ocean in mid-2015, eight months before the first continental U.S. plant is slated to start. Canada’s government has approved twice as much LNG export capacity as its southerly neighbor, evincing a friendlier attitude toward selling domestic gas to the highest bidder and positioning the nation as the go-to source of gas in North America for overseas buyers.
…
After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the federal government suspended reviews of all other applications so it could study the potential impacts of overseas sales on domestic energy prices. There are now 19 proposed U.S. LNG projects awaiting export permits, with the longest on hold for 28 months.

In contrast, Canada, which has seen a similar surge in gas production, issued its third LNG export license in February for a project led by Royal Dutch Shell Plc (RDSA) in British Columbia. All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S., according to data compiled by Bloomberg.

This is better than the usual story:

Canada stands to lose out on more than $50-billion over a three-year period because of oil pipeline constraints, one of the country’s major banks projected today as it urged President Barack Obama to approve the controversial Keystone XL project.

That figure from CIBC World Markets represents lost opportunities, in terms of producer revenues and government royalties.

Economist Peter Buchanan forecasts that this “money left on the table” will be about $20-billion this year, $15.2-billion in 2014 and $16.5-billion a year later.

DBRS updated its report on Husky, proud issuer of HSE.PR.A:

DBRS has today updated its report on Husky Energy Inc. (Husky or the Company). Husky’s credit quality is supported by its: (1) conservative financial profile, (2) integrated operations and (3) medium- to long-term exploration and production (E&P) growth potential.

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term, with minimal impact on credit metrics.
…
DBRS also notes that the Company has updated its financial and operational targets from those initially set out in December 2010. DBRS believes that these targets are largely achievable, contingent upon Husky’s ability to execute its medium- to longer-term growth projects. DBRS expects that the Company will continue to manage its financial profile conservatively, in order to achieve the stated targets.

It was a slow drift upwards for the Canadian preferred share market, with both PerpetualPremiums and FixedResets gaining 3bp and DeemedRetractibles up 4bp. Volatility was low. Volume was a hair below average, with low-Issue Reset Spread BNS FixedResets seeing a fair bit of shuffling.

PerpetualDiscounts now yield 4.86%, equivalent to 6.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a bit below 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) increase from the 205bp reported March 27.

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 -0.2652 % 2,617.6
FixedFloater 4.13 % 3.48 % 28,618 18.29 1 0.0435 % 3,939.2
Floater 2.66 % 2.85 % 77,940 20.13 4 -0.2652 % 2,826.3
OpRet 4.80 % 0.81 % 53,775 0.21 5 0.2399 % 2,612.3
SplitShare 4.81 % 4.00 % 134,508 4.16 5 0.0079 % 2,954.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2399 % 2,388.7
Perpetual-Premium 5.18 % 1.63 % 86,091 0.57 32 0.0272 % 2,373.9
Perpetual-Discount 4.88 % 4.86 % 169,505 15.72 4 -0.2852 % 2,667.1
FixedReset 4.89 % 2.62 % 288,788 3.26 80 0.0307 % 2,517.3
Deemed-Retractible 4.85 % 2.69 % 128,183 0.39 44 0.0387 % 2,456.7
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.30
Bid-YTW : 2.65 %
Volume Highlights
Issue Index Shares
Traded		 Notes
BNS.PR.Y FixedReset 146,697 Nesbitt crossed 34,600 at 24.35. TD crossed blocks of 10,000 shares, 17,000 shares, 18,000 and 12,000, all at 24.29.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.28
Bid-YTW : 2.92 %
BNS.PR.Z FixedReset 118,567 National bought 16,100 from TD at 24.85, then another 14,700 at 24.97 and crossed 25,000 at 24.86. TD crossed 16,600 at 24.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 3.00 %
BAM.PR.T FixedReset 66,500 Nesbitt crossed 57,500 at 26.18.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-31
Maturity Price : 25.00
Evaluated at bid price : 26.17
Bid-YTW : 3.26 %
BMO.PR.Q FixedReset 56,870 Nesbitt crossed 45,200 at 25.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 2.83 %
BNS.PR.T FixedReset 53,430 Nesbitt crossed 50,000 at 26.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 1.97 %
PWF.PR.S Perpetual-Premium 51,296 TD crossed 11,700 at 25.29.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.29
Bid-YTW : 4.62 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
VNR.PR.A FixedReset Quote: 27.03 – 27.93
Spot Rate : 0.9000
Average : 0.6574

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 27.03
Bid-YTW : 2.67 %
ABK.PR.C SplitShare Quote: 32.10 – 32.34
Spot Rate : 0.2400
Average : 0.1506

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-10
Maturity Price : 31.64
Evaluated at bid price : 32.10
Bid-YTW : 2.70 %
SLF.PR.F FixedReset Quote: 26.27 – 26.49
Spot Rate : 0.2200
Average : 0.1404

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 1.88 %
PWF.PR.E Perpetual-Premium Quote: 25.87 – 26.16
Spot Rate : 0.2900
Average : 0.2134

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-03
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : -23.07 %
BAM.PR.O OpRet Quote: 25.14 – 25.44
Spot Rate : 0.3000
Average : 0.2294

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.14
Bid-YTW : 2.78 %
RY.PR.Y FixedReset Quote: 26.73 – 26.99
Spot Rate : 0.2600
Average : 0.1998

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-24
Maturity Price : 25.00
Evaluated at bid price : 26.73
Bid-YTW : 2.22 %
Market Action

April 2, 2013

This may sound like a joke, but it’s actually a big deal:

The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
…
Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Previously, you had to issue a press release; in Canada, that generally (maybe always?) means you have to go through MarketWire or NewsWire, the two major agencies that distribute press releases.

Those two companies – the list is probably a little longer in the States! – have a history: if you issue through these places, you know you’re not going to get in trouble with the regulators for selective disclosure, whereas if you go to Honest Jimmy’s Press Release Distribution Service … you might. So what the established companies are really selling is safe harbor …. and boy-oh-boy, do they ever charge through the nose for it!

Now there are more safe harbours … FREE safe harbours! In the great scheme of things, potential savings from reduced press release costs probably won’t boost Royal Bank’s stock price much … but for smaller companies, every penny counts!

The feds have clarified the budget’s bail-in musings that were mentioned here yesterday:

“The bail-in scenario described in the Budget has nothing to do with depositors’ accounts and they will in no way be used here,” Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk said in a statement Tuesday. “Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.”
…
“The [Canadian] bail-in regime is to protect both taxpayers from having to bail out banks and depositors from having to take a financial hit like we’ve seen in Cyprus,” Ms. Perchaluk said. “If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.”

It’s a pity that the Globe’s reporter, Grant Robertson, has no idea of what bank regulation is all about and didn’t speak to anybody who does – he perpetuates the following confusion:

Under the proposed Canadian plan, banks would set aside contingent capital, such as shares, which could be quickly converted to cash to provide liquidity and stabilize their operations should a crisis hit.

However, it is charming that Spend-Every-Penny’s mouthpiece, Kathleen Perchaluk, has such faith in the CDIC. As mentioned on March 27 (and on other occasions!) the CDIC’s reserves are far too small to even begin to cope with the collapse of a major bank.

John Greenwood of the Financial Post not only knows more about bank regulation, but actually talked to people who knew more than him:

According to one senior fixed-income analyst, Ottawa has its eye on senior unsecured debt issued by banks. Popular with institutional fixed-income investors, the product is widely traded and makes up a big chunk of the domestic bond market.

So far it’s only a proposal in the budget and a vaguely worded one at that, but “everyone is taking the government at their word and hence the market is coming to terms with whether or not to buy it and at what price,” said the analyst, who asked not to be named.
…
Critics worried that investors may not buy it at a price that the banks consider affordable and the banks themselves have said they have reservations. In any case, the banks haven’t issued any yet. One interpretation of the budget is that Ottawa is looking to nudge the process forward.

The last one probably won’t be a big worry. The bank-owned TMX will be “encouraged” by the bank regulator to include the so-called bonds in the index which will virtually guarantee a market.

It was a day of modest losses for the Canadian preferred share market, with PerpetualPremiums losing 5bp, FixedResets off 1bp and DeemedRetractibles down 3bp. There was no volatility – none. Volume was below average.

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 0.1011 % 2,624.5
FixedFloater 4.13 % 3.48 % 29,607 18.29 1 0.0000 % 3,937.4
Floater 2.65 % 2.85 % 78,828 20.15 4 0.1011 % 2,833.8
OpRet 4.81 % 1.98 % 54,621 0.21 5 0.0387 % 2,606.0
SplitShare 4.81 % 3.98 % 136,196 4.17 5 0.1182 % 2,954.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0387 % 2,382.9
Perpetual-Premium 5.18 % 1.81 % 89,615 0.57 32 -0.0514 % 2,373.3
Perpetual-Discount 4.86 % 4.84 % 170,212 15.74 4 -0.0611 % 2,674.7
FixedReset 4.89 % 2.59 % 290,470 3.43 80 -0.0149 % 2,516.5
Deemed-Retractible 4.86 % 1.87 % 128,465 0.24 44 -0.0334 % 2,455.7
Performance Highlights
Issue Index Change Notes
No individual gains or losses exceeding 1%!
Volume Highlights
Issue Index Shares
Traded		 Notes
TRP.PR.B FixedReset 148,779 National crossed 50,000 at 24.70, then bought 20,000 from Scotia at the same price. RBC crossed 49,300 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-02
Maturity Price : 23.41
Evaluated at bid price : 24.69
Bid-YTW : 2.55 %
BNS.PR.P FixedReset 110,224 National crossed 25,000 at 25.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : -3.38 %
BNS.PR.Z FixedReset 74,440 TD crossed 10,000 at 24.77; Desjardins crossed 16,500 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.76
Bid-YTW : 3.04 %
PWF.PR.S Perpetual-Premium 73,123 Nesbitt crossed 10,000 at 25.27.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.28
Bid-YTW : 4.62 %
BNS.PR.Y FixedReset 58,268 TD crossed 15,000 at 24.30, then sold 13,300 to anonymous at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.31
Bid-YTW : 2.90 %
MFC.PR.D FixedReset 40,627 RBC crossed 31,800 at 26.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-19
Maturity Price : 25.00
Evaluated at bid price : 26.41
Bid-YTW : 2.10 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
VNR.PR.A FixedReset Quote: 26.93 – 27.55
Spot Rate : 0.6200
Average : 0.3913

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.93
Bid-YTW : 2.76 %
TRI.PR.B Floater Quote: 23.90 – 24.55
Spot Rate : 0.6500
Average : 0.4605

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-02
Maturity Price : 23.63
Evaluated at bid price : 23.90
Bid-YTW : 2.18 %
CU.PR.E Perpetual-Premium Quote: 26.30 – 26.57
Spot Rate : 0.2700
Average : 0.1873

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-09-01
Maturity Price : 25.00
Evaluated at bid price : 26.30
Bid-YTW : 4.24 %
BMO.PR.L Deemed-Retractible Quote: 26.75 – 26.95
Spot Rate : 0.2000
Average : 0.1209

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 26.00
Evaluated at bid price : 26.75
Bid-YTW : -10.04 %
PWF.PR.L Perpetual-Premium Quote: 25.82 – 26.04
Spot Rate : 0.2200
Average : 0.1433

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.25
Evaluated at bid price : 25.82
Bid-YTW : 4.16 %
RY.PR.Y FixedReset Quote: 26.74 – 26.95
Spot Rate : 0.2100
Average : 0.1339

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-24
Maturity Price : 25.00
Evaluated at bid price : 26.74
Bid-YTW : 2.19 %
Market Action

April 1, 2013

Assiduous Reader KL was intrigued by my note on OSFI’s target for depositor recovery on March 27 and passed along a few links.

A US stockbroker pointed out (with assistance from a goldbug) that the federal budget contained (pages 154-155 of the PDF) the following:

The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

  • Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.
  • The Government proposes to implement a ―bail-in‖ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.
  • Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail”.

Both commentators assumed that the word “liabilities” in the second point means “deposits”, which could ultimately be the case, of course (particularly for uninsured deposits), but for now can be taken to mean “contingent capital” – Garth Turner has it right, just as a change of pace.

While there is no clarity yet, the budget announcement is probably a signal that the feds have bought into the Ban the Bond Movement and that soon all bank bonds will be contingent capital; hey, who needs bankruptcy law anyway?

The first and third points of the three-part process refers to OSFI’s inadequate provision for D-SIBs.

Speaking of totally inadequate government agencies, the Toronto Transit Commission’s CEO Report for 12Q4 just came to my attention, with the following commentary regarding streetcar service:

The last two weeks of Period 12 (December Board) saw high levels of insufficient workforce due to vacation, resulting in numerous cancellations due to no Operator. The resulting cancelled service contributed to delays, longer trip times, and ragged headways.

Is there any doubt but that the TTC is grossly mismanaged? Is there anybody employed at the TTC who could run a three-house paper route?

DBRS confirmed CU at Pfd-2(high) [Stable]:

DBRS has today confirmed the Issuer Rating and the ratings of the Unsecured Debentures, Cum. Preferred Shares and Commercial Paper of Canadian Utilities Limited (CU or the Company) at “A,” “A,” Pfd-2 (high) and R-1 (low), respectively, all with Stable trends. The confirmations reflect CU’s relatively stable business risk profile, strong financial profile and the credit quality of its primary subsidiary, CU Inc. (CUI; rated A (high)). The one-notch differential in the ratings of CU and CUI reflects structural subordination at CU.
…
DBRS assesses CU’s financial profile based on a non-consolidated basis. CU is expected to continue to support the significant capital expenditure program at CUI (approximately $2 billion annually from 2013 to 2015) with debt and preferred shares issuances over the medium term. As of March 25, 2013, the Company has approximately $900 million of preferred shares outstanding (including a $175 million issuance in March 2013). Pro forma the $175 million issuance, $145 million of CU’s outstanding preferred shares are treated as debt by DBRS in the adjusted debt-to-capital calculation (with a pro forma adjusted debt-to-capital ratio of approximately 9%). In the adjusted debt-to-capital calculation, the amount of preferred shares over the 20% preferred shares-to-equity threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferred) is treated as debt. DBRS expects the Company to continue to maintain its non-consolidated adjusted debt-to-capital ratio in line with the 20% threshold on a non-consolidated basis. Should CU exceed the 20% threshold, this could result in negative rating implications

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets down 23bp and DeemedRetractibles off 1bp. Volatility was average. Volume was low.

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 -0.4905 % 2,621.9
FixedFloater 4.13 % 3.48 % 27,411 18.30 1 -0.6479 % 3,937.4
Floater 2.65 % 2.83 % 79,460 20.15 4 -0.4905 % 2,830.9
OpRet 4.81 % 1.94 % 55,431 0.22 5 -0.1546 % 2,605.0
SplitShare 4.82 % 3.99 % 137,684 4.17 5 -0.1338 % 2,950.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1546 % 2,382.0
Perpetual-Premium 5.18 % 1.02 % 93,032 0.54 32 0.0932 % 2,374.5
Perpetual-Discount 4.86 % 4.84 % 167,550 15.74 4 -0.0407 % 2,676.4
FixedReset 4.89 % 2.53 % 293,394 3.27 80 -0.2305 % 2,516.9
Deemed-Retractible 4.85 % 2.07 % 126,238 0.24 44 -0.0105 % 2,456.5
Performance Highlights
Issue Index Change Notes
BNS.PR.Y FixedReset -3.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.17
Bid-YTW : 2.98 %
BMO.PR.Q FixedReset -2.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : 2.84 %
BNS.PR.Z FixedReset -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 3.00 %
BAM.PR.C Floater -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-01
Maturity Price : 18.30
Evaluated at bid price : 18.30
Bid-YTW : 2.86 %
Volume Highlights
Issue Index Shares
Traded		 Notes
TRP.PR.D FixedReset 219,052 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.97
Bid-YTW : 3.36 %
BNS.PR.Z FixedReset 200,314 TD sold 16,800 at 25.15 and 10,500 at 25.10 to Nesbitt; then sold 20,000 to RBC at 24.99; then crossed three blocks, 14,400 shares, 31,000 and 49,500 at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 3.00 %
BNS.PR.P FixedReset 150,390 RBC crossed 50,000 at 25.19; Nesbitt crossed 20,400 at 25.20.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.18
Bid-YTW : -2.53 %
BNS.PR.Y FixedReset 128,258 Anonymous bought blocks of 10,500 and 18,700 from CIBC at 24.70; then bought 30,500 at 24.61 and 24,200 at 24.60 from TD.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.17
Bid-YTW : 2.98 %
GWO.PR.P Deemed-Retractible 92,428 Scotia crossed blocks of 32,100 and 50,000 at 26.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.36
Bid-YTW : 4.67 %
ENB.PR.P FixedReset 71,297 Scotia crossed 55,000 at 25.92.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-01
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 3.39 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.F Deemed-Retractible Quote: 26.89 – 27.48
Spot Rate : 0.5900
Average : 0.4227

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.89
Bid-YTW : 3.90 %
BAM.PR.O OpRet Quote: 25.06 – 25.42
Spot Rate : 0.3600
Average : 0.2419

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.06
Bid-YTW : 4.04 %
BNS.PR.Y FixedReset Quote: 24.17 – 24.50
Spot Rate : 0.3300
Average : 0.2372

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.17
Bid-YTW : 2.98 %
BAM.PR.K Floater Quote: 18.38 – 18.68
Spot Rate : 0.3000
Average : 0.2085

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-01
Maturity Price : 18.38
Evaluated at bid price : 18.38
Bid-YTW : 2.85 %
BAM.PR.G FixedFloater Quote: 23.00 – 23.45
Spot Rate : 0.4500
Average : 0.3682

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-04-01
Maturity Price : 23.22
Evaluated at bid price : 23.00
Bid-YTW : 3.48 %
FTS.PR.J Perpetual-Premium Quote: 25.89 – 26.09
Spot Rate : 0.2000
Average : 0.1223

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-12-01
Maturity Price : 25.00
Evaluated at bid price : 25.89
Bid-YTW : 4.33 %
Issue Comments

SLF: S&P Affirms Rating, Sets Outlook To Stable

Standard & Poor’s has announced:

  • •Sun Life Financial Inc.’s (SLF) operating performance improved in 2012. Fixed-charge coverage is now at levels we expect for the ratings.
  • •We are affirming all ratings and revising the outlook on SLF to stable from negative. The outlook on core operations remains stable.
  • •The stable outlook reflects our view that SLF is well positioned to weather a wide range of potential adverse economic environments.

Standard & Poor’s Ratings Services said today that it revised its outlook on Sun Life Financial Inc. (SLF) to stable from negative. We also affirmed all our ratings on SLF, including the ‘A/A-1’ counterparty credit rating.
…
“The change to a stable outlook on SLF is driven primarily by the improvement in Sun Life’s after-tax net operating income to $1.679 billion in 2012,” said Standard & Poor’s credit analyst Robert Hafner. Operating results now support a fixed-charge coverage ratio of more than 5x. As of year-end 2012, SLF’s fixed-charge coverage ratio was 5.7x and its total financial leverage ratio was 29.4%. Sun Life continues to reduce its earnings and capital sensitivity to equity market and interest rate changes, thereby improving earnings stability. When completed, the pending sale of SLFUS will further reduce earnings and capital sensitivity.
…
The stable outlook on SLF and its core subsidiaries reflects our view that Sun Life is well positioned to weather a wide range of potential adverse economic environments. We expect Sun Life’s consolidated pretax operating earnings to continue to improve in the intermediate term and to exceed $1.5 billion in 2013, which is necessary to support expected coverage levels of more than 5x at SLF. We believe that Sun Life’s competitive advantages will enable it to continue to expand its market share profitably in many of its chosen markets.
We expect asset-quality issues to be less severe than for many North American peers. If the proportion of nonprotection business increases, the quality of earnings would decline, even while the quantity of earnings increases.

This follows the S&P announcement in February, 2012, that:

» The negative outlook on holding company Sun Life Financial Inc. reflects that fixed charge coverage may not rebound to the levels we expect in 2012.

SLF has the following preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and assigned to their respective indices.

S&P rates all the preferreds as P-2(high). DBRS downgraded SLF to Pfd-2(high) in February 2013. Moody’s has them at Baa3(hyb), Review Positive.