March 12, 2010

Another boring day, as far as actual news was concerned. An explanation of Lehman’s financing technique looked interesting at first, but turned out to be only legal hairsplitting. OK, OK, so the outward leg of the repo is recorded as a true sale and that delevers the balance sheet. Fair enough. But how did they avoid putting the inward leg on the balance sheet? Fortunately, volume 3 of the Examiner’s report makes that part clear:

Unlike an ordinary repo transaction, Lehman did not record the borrowing of cash from a Repo 105 transaction even though Lehman was obliged to repay the borrowing. Instead, Lehman established a long inventory derivative asset representing the obligation under a forward contract to repurchase the full amount of securities “sold.”3009 As Lehman’s internal Repo 105 Accounting Policy explained, assuming Lehman borrowed $100 cash in exchange for a pledge of $105 of fixed income collateral, Lehman booked a $5 derivative, which represented Lehman’s obligation to repurchase the securities at the end of the term of the repo transaction. The $5 arose from the fact that when it came time to repurchase the pledged securities, Lehman paid $100 cash for $105 worth of securities. The transaction therefore had a $5 value to Lehman reflecting the market value of the “overcollateralization” amount of the Repo 105 transaction. Because it had a positive fair value of $5, the derivative was recorded as an asset under SFAS 133.

Volume stayed perky today, while PerpetualDiscounts lost 8bp and FixedResets gained 14bp, taking yields on the latter down to 3.50%. Yields on FixedResets have only been below 3.50% on three days – ever! – with the all time low being 3.46% on January 11, 2010.

March 12 is the fourth-lowest FixedReset index yield of all time, March 11 is fifth-lowest.

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 2.63 % 2.77 % 51,166 20.85 1 0.4204 % 2,103.6
FixedFloater 5.12 % 3.23 % 41,025 19.90 1 0.7109 % 3,089.4
Floater 1.93 % 1.73 % 43,450 23.22 4 0.0490 % 2,389.6
OpRet 4.90 % 3.03 % 102,424 0.22 13 -0.0745 % 2,310.1
SplitShare 6.40 % 6.27 % 126,761 3.70 2 -0.2862 % 2,131.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0745 % 2,112.3
Perpetual-Premium 5.88 % 5.82 % 124,300 5.84 7 0.1931 % 1,892.4
Perpetual-Discount 5.90 % 5.96 % 173,706 13.98 71 -0.0803 % 1,791.6
FixedReset 5.36 % 3.50 % 323,459 3.70 43 0.1354 % 2,200.2
Performance Highlights
Issue Index Change Notes
HSB.PR.D Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-12
Maturity Price : 21.42
Evaluated at bid price : 21.42
Bid-YTW : 5.86 %
HSB.PR.C Perpetual-Discount -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-12
Maturity Price : 21.50
Evaluated at bid price : 21.77
Bid-YTW : 5.86 %
TRI.PR.B Floater 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-12
Maturity Price : 24.00
Evaluated at bid price : 24.25
Bid-YTW : 1.60 %
BAM.PR.I OpRet 1.15 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-07-30
Maturity Price : 25.50
Evaluated at bid price : 25.56
Bid-YTW : 4.03 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.B FixedReset 134,422 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-03-12
Maturity Price : 24.87
Evaluated at bid price : 24.92
Bid-YTW : 3.94 %
TD.PR.M OpRet 126,260 RBC bought 10,000 from National at 26.25; National crossed 25,000 at 26.12. RBC crossed 22,000 at 26.15, then bought 11,500 from National at the same price. National crossed 30,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-05-30
Maturity Price : 25.75
Evaluated at bid price : 26.10
Bid-YTW : 0.66 %
ACO.PR.A OpRet 63,748 CIBC crossed 24,900 at 25.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.38 %
BMO.PR.P FixedReset 60,615 TD crossed 50,000 at 27.10.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.09
Bid-YTW : 3.63 %
RY.PR.I FixedReset 55,439 RB crossed 21,000 at 26.47 and two blocks, of 10,000 and 15,000, at 26.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 3.55 %
TD.PR.C FixedReset 44,750 RBC crossed 10,000 at 27.10; TD crossed 17,200 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 27.08
Bid-YTW : 3.51 %
There were 38 other index-included issues trading in excess of 10,000 shares.

6 Responses to “March 12, 2010”

  1. bitey says:

    Is YTW for a fixed reset trading over issue price always if it gets called after the initial fixed period? Is there any possibility YTW would be lower after the reset if the bp peg was low? Are there any issues where this happens?

  2. jiHymas says:

    Holy Smokes, bitey, do you have me under surveillance or what?

    BAM.PR.R is one such issue and I am in the middle of writing up a discussion of both it and the effect in general for this month’s PrefLetter.

  3. bitey says:

    Its the new glasses I bought. Now put that coffee down on the right side of the desk, it will spill if you put it on the left side.

  4. […] would seem, prefer to remain anonymous, are trying to play down Repo 105, discussed on PrefBlog on March 12. But it’s a tangled web we weave…: The only people who would worry about using an old […]

  5. […] Repo 105, which was discussed March 12? The Examiner in the Lehman bankruptcy explained it: Unlike an ordinary repo transaction, Lehman […]

  6. […] The Valukas report and Repo 105 was discussed on PrefBlog on March 12, 2010. […]

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