PrefBlog

The Bank of America takes wealth destruction seriously:

Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are conducting or considering their own programs.
…
The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement

Speaking of wealth destruction, S&P downgraded Greece:

Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, Standard & Poor’s said.

The rating company also cut its ranking for Greece to CC, two steps above default, from CCC, according to a statement published in London today. The outlook on the debt is negative.

“The proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” S&P said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors.”

But stupid people can relax – the authorities are taking steps to ensure that nobody will ever lose money in the PPN market:

These are a way for banks to get cheap funding by packaging an unsecured debt security with an equity/credit/commodity/whatever derivative and selling it to customers who don’t have ISDAs or otherwise aren’t down with OTC derivatives. They’re called “principal protected” because even if the linked index goes down, you still get all your money back (albeit at zero yield). But that only happens if the issuer doesn’t go bankrupt – if they go bankrupt, you’re hosed just like other noteholders.

Which, duh, or so we thought. The notes after all said that they were Lehman’s unsecured obligations and that “an investment in the Notes will be subject to the credit risk of Lehman Brothers Holdings Inc, and the actual and perceived creditworthiness of Lehman Brothers Holdings Inc. may affect the market value of the Notes.” But that wasn’t enough for these plaintiffs, or for the judge, who is going to let the structured notes claims go to trial:
…
So the advice to structured notes desks is (1) put everything on the first page and (2) don’t assume that your customers are “careful and intelligent readers.”

Canadians, on the other hand, are indeed “careful and intelligent readers.”. I proved this on January 5:

Click for Big

In the States, though the SEC must be vigilant:

Among other things, the staff observed that broker-dealers might have:

• recommended unsuitable structured securities products to retail investors;
• traded at prices disadvantageous to retail investors;
• omitted material facts about structured securities products offered to retail investors;
• engaged in questionable sales practices with customers.

YLO will release 11Q2 results on August 4.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 6bp, FixedResets off 2bp and DeemedRetractibles up 10bp. Volatility was muted (but all negative); volume was average, but with massive volume in BNS.PR.Z (which had a “last” quote with a gigantic spread) on the back of some very nice tickets by RBC.

PerpetualDiscounts now yield 5.38%, equivalent to 6.99% interest at the standard equivalency factor of 1.3x. Long corporates now yield 5.15% (!!) so the pre-tax interest-equivalent spread is now about 185bp, a tightening from the 200bp reported on July 20 as the PerpetualDiscounts played catch-up to the prior downward move in bond yields.

The SEC has invented more paperwork:

The rule contains the following requirements:

Filing a Form: Traders who engage in a substantial level of trading activity will be required to identify themselves to the SEC by filing a form, Form 13H, with the Commission. A “large trader” will be defined as a person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

The rule provides guidance on certain types of transactions that can be excluded for purposes of calculating trading levels.

Getting an Identification Number: After it files Form 13H to register with the Commission, the SEC will then assign each large trader a unique large trader identification number (LTID), which will allow the agency to efficiently identify and analyze trading activity by the large trader. A large trader will be required to disclose to its broker-dealers its LTID and highlight all of the accounts at the broker-dealer through which the large trader trades.

Recordkeeping, Reporting, and Monitoring: The rule requires broker-dealers to maintain and report data that is largely identical to the information covered by the Commission’s Electronic Blue Sheets (EBS) system – the system the SEC currently uses to collect transaction data from broker-dealers. The only additional items that broker-dealers will be required to maintain and report are the LTID and the time a transaction occurs. Accordingly, the rule leverages the existing EBS system, with modifications, to accommodate the specific requirements of the new rule. In addition, the rule requires broker-dealers to monitor whether their customers meet the threshold levels that define a “large trader” (based on transactions handled at the broker-dealer) in order to encourage compliance by their customers with the requirement to identify themselves as large traders to the SEC.

Ready Access to Data: The rule requires transaction data to be available for reporting on the morning after the day the transactions were effected. When the SEC requests data from broker-dealers, it would not under normal circumstances require responses earlier than the opening of business on the day after it makes its request. Prompt access to this data will assist the SEC in reconstructing market activity and performing other trading analyses, and also will assist in investigations of manipulative, abusive, and other illegal trading activity.

The Ontario Ministry of Pretending to Do Things So We Can All Feel Good has:

released comprehensive teacher guidelines that identify places in the Grade 4 through 12 curriculum where financial literacy can be inserted into classes as varied as mathematics, computer science and native studies.
…
Ontario, for example, suggests that in high school, “when studying classical civilizations, students could address aspects of trade, economics and use of money in ancient times,” according to the new teacher guidelines.

It was another positive day on the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets up 2bp and DeemedRetractibles gaining 5bp. Volatility was low; volume was below average.

This is getting monotonous:

Greece’s sovereign credit rating was cut three steps by Moody’s Investors Service, which said the European Union’s financing package for the debt-laden nation implies “substantial economic losses” for private creditors.

Greece’s long-term foreign currency debt was downgraded to Ca from Caa1, the ratings company said in a statement in London today. Moody’s assigned a developing outlook to the ratings and said it will re-assess the credit risk profile of any outstanding or new securities issued by the Greek government after Greece’s debt exchange has been completed.

It occurs to me … one way that the Greek government hid debt was to enter into currency swaps with a present value far different from zero at trade-time. This was not just allowable under the rules at that time, but even encouraged and everybody knew they were doing it; this made it a little harder for the politicians to say it was all the brokers’ (Goldman Sachs’) fault, but somehow they managed.

I haven’t seen anything about these things for a while. Could it be possible that lenders through a swap facility will get off scot-free?

Who wants to take responsibility for this bond market effect?

A cut in the U.S. government’s AAA grade could force investors to sell asset-backed securities tied to student loans, causing spreads to widen “significantly,” according to Citigroup Inc.

“A ratings downgrade would be a significant blow” to the $250 billion government-guaranteed sector, Citigroup analysts led by Mary Kane said in a July 22 report. “The likelihood of forced selling is elevated.”

Citigroup sees a 50 percent chance of a ratings cut this year as the U.S. struggles to reduce its long-term debt. Many investors buy student-loan securities specifically because they’re so highly rated and a U.S. government credit risk, according to analysts at the New York-based lender. Money managers with rating-based guidelines would be forced to sell into a sinking market, affecting the sector more than other asset-backed debt tied to consumers, commercial mortgages and corporate loans, they wrote.

The situation worries me. I don’t think there’s any imminent danger, and I’ve written about this before … but remember the last days of the Roman Republic. You had two parties: the “good men” and the “populists”, nominally representing basically the old traditional oligarchy and the new guys looking in, respectively. Their main political purpose was to ensure that the other party couldn’t do anything – so little got done and everybody got frustrated and angry. Then along came Julius Caesar: smart, ambitious and ruthless, who staged a coup. All the US needs is another two decades or so of log-jam, and I’ll start taking bets.

S&P revised its outlook on BAM:

• We are revising our outlook on Brookfield Asset Management to stable from negative.
• At the same time, we are affirming our ratings on the company, including our ‘A-‘ corporate credit and ‘A-2’ short-term ratings.
• We base the outlook revision on the improved operating performance and outlook in Brookfield’s operating subsidiaries. It also reflects the
  company’s continued ability to execute its asset management strategy by attracting external investment capital, while maintaining company-level cash flow coverage measures in line with our expectation for the ratings.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 19bp, FixedResets up 1bp and DeemedRetractibles gaining 17bp. Volatility was minimal; volume was low.

Trader Corporations debt deal closed:

Trader Corp. late yesterday completed an offering of secured notes via sole bookrunner RBC Capital Markets, sources said. Terms were inked at the middle of talk, with a $15 million upsizing, to $290 million, after a 103 prepay option was removed from the deal, sources note. Beyond that, terms include a first call at par plus 75% of the coupon to balance the shorter-than-typical call protection on a seven-year tenor. Issuance comes under Rule 144A for life. Proceeds support the buyout of the classified-ads-magazine publisher by Apax Partners from Montreal-based Yellow Media. The assets being acquired comprise AutoTrader.ca and a roughly 30% interest in Dealer Dot Com. Yellow Media’s real-estate, employment and LesPAC.com businesses are excluded from the proposed asset sale.

Settlement is July 28, so we should soon see definitive timing of the YLO deal.

Speaking of junk, Fitch has declared default on Greece:

Fitch ratings agency declared Greece would be in temporary default as the result of a second bailout, which Athens said had bought it breathing space.

But the agency pledged to give Greece a higher, “low speculative grade” rating after its bonds had been exchanged and said Athens now had some hope of tackling its debt mountain, which most economists still expect to force a deeper restructuring in the future.
…
Ratings agencies Standard & Poor’s and Moody’s are likely to follow Fitch’s lead since banks and insurers are expected to write down the value of Greek bonds by around 20 percent, with more losses maybe to follow.

“We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65 per cent,” said Gary Jenkins, head of fixed income research at Evolution.

The default will cost a big pile of money:

Europe’s biggest banks stand to lose 20.6 billion euros ($29.7 billion) on their Greek government bonds after lenders in the region pledged to contribute to a new rescue package for Greece.

Banks will voluntarily agree to write down the value of their Greek securities by 21 percent as part of the bond exchange and debt buyback program, the Institute of International Finance said in a statement today. Europe’s 90 biggest banks hold about 98 billion euros of Greek debt, according to the European Banking Authority.

Which just goes to show: private enterprise can sometimes screw up big-time, but nobody, nobody, can screw up like government.

The Financial Post has a bit today on the TMX / Maple talks:

“If TMX and Maple got together, if they were to agree on something, whatever they agree on would probably have a better chance of passing competition reviews in Canada,” said Ed Ditmire, an analyst with Macquarie Capital in New York.

The Competition Bureau is reviewing Maple’s offer, which includes plans to integrate the Toronto Stock Exchange with the Alpha Group alternative trading system (ATS), the TSX’s largest domestic competitor.

The move would result in the combined entity controlling more than 80% of Canadian stock trading and has raised concerns it would give TMX-Alpha too much power over listing prices.

Earlier this week, the bureau requested more information to complete its review of the proposed deal.

“It is inconceivable it should be an issue for the competition bureau, given other (ATS) players such as Chi-X and PureTrading could fill any void,” said independent analyst Chris Damas.

I don’t quite understand that. How often are the banks going to have a void when they make a decisions as to where to place a limit order? I looked at the website for Chris Damas’ firm, BCMI Research, but was unable to find any performance data, so I skipped down to later in the FP article:

“It’s not as simple an issue as people let out to be,” said Thomas Caldwell, chairman of Caldwell Securities, who conceded that Maple’s competition hurdles were not insurmountable.

“It’s about some major institutions basically trying to gain control of the pricing mechanisms. So from that perspective, let’s call a spade a shovel here. It’s actually a remutualization (of the TMX) with a little bit of window dressing.”

Caldwell, who has not been shy about his opposition to the Maple offer and the nationalist rhetoric surrounding the deal, said he was “open” to Maple should the two sides find a middle ground that addressed concerns over access, pricing, and a promise by Maple’s key members to eventually reduce their ownership over time.

OK, that part I understand, except for the part about how the competition hurdles are surmountable.

Interesting bit on fiduciary responsibilities of doctors:

When you go to a walk-in clinic, instead of a hospital emergency department, your doctor gets financially dinged for it.

If that clinic billed Ontario for an intermediate assessment done on your son, for example, your doctor would lose $33.10 from his so-called access bonus because he’s in a family health network; or in a family health organization or on a blended salary model. That, however, does not give him the right to threaten to fire you from his medical practice and it is highly inappropriate for him to suggest as much.

I called Ontario’s Health Minister Deb Matthews about your question and she’s heard other stories of doctors suggesting to patients they go to an emergency instead of a walk-in clinic, though not necessarily threatening to fire them.

“That is disappointing,” Ms. Matthews says in a telephone interview, “the doctor would put their compensation ahead of the best possible care for their patient.”

Not disappointing. Expected. This is a dumb dinging system: it is the patient who should have been dinged for the $33.10. Why is it that bureaucrats always assume that everybody in the world is a Good Scout?

I recently had occasion to send some registered mail; today, when I checked to see whether it had been delivered, I was startled to see a note on the Canada Post tracking website that I should call customer service. ‘Uh-oh’, I thought, or words to that effect, ‘this can’t be good’. So I call and it turns out everything was fine – the delivery has been made, albeit one day later than I thought would be the case. So why did I have to call customer service? It seems that tracking numbers can be duplicated and when they are the computerization doesn’t work properly.

Leave it to Canada Post to carefully build a system involving eleven digit tracking numbers, and then duplicate them! Good old Canada Post, always good for a laugh!

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 6bp, FixedResets gaining 7bp and DeemedRetractibles winning 15bp. Not much volatility. Volume was low.

Here’s an interesting snippet on the Yellow / Apax / Traders’ deal:

Apax-owned Trader Media, which publishes Auto Trader, will take on £150m of additional debt to fund a dividend for the private equity firm. The new loan is the first covenant-lite package to be issued in Europe for four years, according to law firm Eversheds.
…
In order to secure lender support for its dividend, Apax has also offered to defer £50m of its dividend strip until Trader Media’s gearing –or net debt to earnings before interest, taxes, depreciation and amortisation ratio- falls below about five times, according to Mark Spinner, a partner at Eversheds.

He added that leveraged buyouts currently have an average gearing multiple in the region of three and a half to four times.

Another Apax Partners portfolio company, Dutch directories publisher Truvo, which the firm acquired alongside Cinven in 2004, issued one of the first covenant-lite debt structures in Europe in 2007. Truvo filed for bankruptcy protection last year, following two years of declining sales. The firm posted a net loss of €260.8m in 2009.

Spinner said Trader Media was not as risky an investment for banks. “Trader Media is clearly a very good company and as such is almost certainly seen as a good credit risk for the banks prepared to inject an additional £150m..

Yesterday’s rant on water prices was timely, since Willem Buiter thinks water will be bigger than oil:

I expect to see a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments — puts, calls, swaps — both exchange-traded and OTC will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.

Possible, but it’s equally likely that Mohammed must go to the mountain. If I were a Big Noise at one of the huge asset management shops – with so many hundreds of billions under management that it becomes possible to put serious money into tail event scenarios while retaining a prudent portfolio – I’d be looking seriously at Cleveland. Buy lots of land and water rights in Cleveland, hope to stay cash flow neutral through rentals to farmers, and wait. Detroit, too, is a place where vast quantities of Great Lakes real-estate are available at depressed prices.

Rumour are swirling that the Europeans may face reality:

Euro-area leaders may accept a temporary Greek default and widen the scope of their rescue fund as officials intensify efforts to resolve the region’s 21-month sovereign debt crisis.

With Greece being charged about 35 percent to borrow for two years, government chiefs meeting in Brussels are devising a second aid package that could tip it into default for a few days. They may also cut interest rates on loans to Greece, Portugal and Ireland to about 3.5 percent and could double the repayment time to at least 15 years.

Europe’s main rescue fund, boosted just last month to 440 billion euros ($632 billion), may be allowed to buy bonds directly from investors, help recapitalize banks and offer International Monetary Fund-style precautionary credit-lines to repel speculative attacks.

What, no subsidized daycare or aid for farmers? What kind of European rescue fund is that?

Further details are slowly coming out:

The Greek financing package will consist of 109 billion euros from the euro region and the IMF. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load, the leaders’ communiqué said.

The European Commission plans to brief reporters on the package’s technical details at 1 p.m. in Brussels.

The leaders sought to regain the initiative after market turmoil intensified amid a spat between ECB President Jean- Claude Trichet and German Chancellor Angela Merkel over how to manage the crisis. The outlook was worsened by signs that Greece was backsliding on axing its budget deficit as it struggles to cut a debt of 143 percent of gross domestic product. A Bank of America Merrill Lynch poll this week showed investors trimming their European stock holdings to the lowest in more than a year.
…
Banks will reduce Greece’s debt by 13.5 billion euros by exchanging bonds and “potentially much more” through a buyback program still to be outlined by governments, said the Institute of International Finance, a Washington-based group representing banks.

Investors will have the option to exchange existing Greek debt into four instruments. Three will be fully collateralized by AAA-rated zero-coupon securities and have a 30-year maturity, and the fourth will be for 15 years and partially collateralized by funds held in an escrow account.

Crisis managers are aiming for a 90 percent participation rate from Greek bondholders.

One wonders what the participation rate will be in bond funds sponsored by the banks!
And:

Participating investors would see on average a 21 percent reduction in the net present value of their existing Greek bonds, the IIF estimates. [ Institute of International Finance Managing Director Charles] Dallara said the effects on bank profits, balance sheets and capital structure will be handled on an institution-by-institution basis.

S&P confirmed Brookfield Renewable Power the operator and 34% owner of Brookfield Renewable Power Fund, which is the sole owner of Brookfield Renewable Power Preferred Equity Inc., which is the issuer of BRF.PR.A:

• We are affirming our ‘BBB’ long-term rating on Brookfield Renewable Power
  Inc. (BRPI).

• At the same time, we are revising our short-term rating on BRPI to ‘A-2’ from ‘A-3’, based on the ‘BBB’ long-term rating and the company’s adequate liquidity.
• The rating action follows our assessment that the company’s cash flows remain in line with our expectations despite challenging hydrology in
  2010.

• The stable outlook reflects our view that BRPI’s improved business risk profile and strong financial flexibility support the ratings despite our concerns about its high debt and resulting weak coverage measures for the ratings.

Although financial measures (both consolidated and at the company level) are weak for the ratings, we believe strong financial flexibility and its strategic relationship with its corporate
parent, Brookfield Asset Management Inc. (Brookfield; A-/Negative/A-2), mitigate this. The weak financial measures reflect BRPI’s practice of using substantial project-level debt in its operating companies or investments. Although these debts are nonrecourse to the company, they increase the variability of cash flows distributable to BRPI, as they are available only after operating needs and debt servicing requirements at the operating company level are satisfied. Exposure to hydrological risk and wholesale power price volatility, albeit reducing, also constrain the ratings.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 29bp, FixedResets gaining 5bp and DeemedRetractibles up 7bp. Volume was very light.