October 17, 2018

We are most used to thinking of financial repression as being applied by governments through a low-interest-rate policy, but as noted on June 2, 2015, for instance, another way is to require regulated entities to hold government debt. This sometimes has spectacular effects:

A trio of Canadian banks is facing the fallout from a debt restructuring in Barbados that will slash the value of hundreds of millions of dollars worth of government paper they collectively own.

Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia are the largest lenders in the Caribbean, and each has direct exposure to Barbados. The country is home to one of the region’s largest economies, but the government’s finances have deteriorated over time.

To help turn the economy around, the International Monetary Fund is working with Barbados to formulate a financial rescue plan. As part of this effort, the government proposed a debt restructuring in September that would amend the terms of its existing domestic debt. On Sunday, Ms. Mottley announced the restructuring plan will proceed.

Through the restructuring, Canadian banks will face losses on their debt holdings because Barbados has forced them to hold a greater percentage of their reserves in government debt, to help fund its deficits. These securities must now be held for much longer, and their coupons will also be cut, so the lenders will receive much lower returns on their money.

The total impact on Canadian lenders is still being calculated, but the three affected banks hold a substantial amount of Barbados debt. As of January, 20 per cent of their Barbadian reserves had to be held in government debt.

PerpetualDiscounts now yield 5.69%, equivalent to 7.40% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.15%, so the pre-tax interest-equivalent spread is now about 325bp, a significant widening from the 315bp reported October 10.

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 -0.0526 % 3,185.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.0526 % 5,845.9
Floater 3.41 % 3.60 % 41,252 18.31 4 -0.0526 % 3,369.0
OpRet 0.00 % 0.00 % 0 0.00 0 0.0477 % 3,224.8
SplitShare 4.61 % 4.78 % 51,639 4.72 5 0.0477 % 3,851.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0477 % 3,004.8
Perpetual-Premium 5.62 % 0.82 % 76,719 0.20 12 -0.0565 % 2,912.6
Perpetual-Discount 5.54 % 5.69 % 74,813 14.38 21 -0.0925 % 2,961.0
FixedReset Disc 4.20 % 5.10 % 140,719 15.38 45 -0.1782 % 2,590.2
Deemed-Retractible 5.29 % 6.59 % 65,040 5.25 27 -0.1105 % 2,926.6
FloatingReset 3.56 % 3.68 % 42,564 5.56 4 0.1615 % 2,873.7
FixedReset Prem 4.88 % 4.21 % 234,576 2.83 34 -0.0115 % 2,567.4
FixedReset Bank Non 3.12 % 3.63 % 72,581 0.35 8 -0.0611 % 2,574.8
FixedReset Ins Non 4.40 % 5.72 % 101,795 5.36 22 -0.3966 % 2,545.5
Performance Highlights
Issue Index Change Notes
IFC.PR.G FixedReset Ins Non -3.89 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.74
Bid-YTW : 5.96 %
IFC.PR.F Deemed-Retractible -1.55 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.48
Bid-YTW : 6.59 %
IFC.PR.E Deemed-Retractible -1.55 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.86
Bid-YTW : 7.00 %
MFC.PR.I FixedReset Ins Non -1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.05
Bid-YTW : 5.49 %
BAM.PR.X FixedReset Disc 1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 19.30
Evaluated at bid price : 19.30
Bid-YTW : 5.07 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.E FixedReset Prem 323,470 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 4.63 %
TD.PF.K FixedReset Prem 83,900 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2023-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 4.73 %
EMA.PR.F FixedReset Disc 77,712 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 23.51
Evaluated at bid price : 23.96
Bid-YTW : 5.22 %
BNS.PR.I FixedReset Disc 71,398 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 23.15
Evaluated at bid price : 25.01
Bid-YTW : 4.75 %
HSE.PR.G FixedReset Prem 54,358 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-06-30
Maturity Price : 25.00
Evaluated at bid price : 24.73
Bid-YTW : 5.44 %
BAM.PF.E FixedReset Disc 53,844 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 23.41
Evaluated at bid price : 23.84
Bid-YTW : 5.14 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.G FixedReset Ins Non Quote: 23.74 – 24.74
Spot Rate : 1.0000
Average : 0.5458

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.74
Bid-YTW : 5.96 %

BMO.PR.W FixedReset Disc Quote: 23.10 – 23.49
Spot Rate : 0.3900
Average : 0.2631

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 22.60
Evaluated at bid price : 23.10
Bid-YTW : 4.97 %

ELF.PR.H Perpetual-Discount Quote: 24.16 – 24.54
Spot Rate : 0.3800
Average : 0.2595

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 23.83
Evaluated at bid price : 24.16
Bid-YTW : 5.71 %

HSE.PR.G FixedReset Prem Quote: 24.73 – 25.19
Spot Rate : 0.4600
Average : 0.3424

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-06-30
Maturity Price : 25.00
Evaluated at bid price : 24.73
Bid-YTW : 5.44 %

BAM.PF.B FixedReset Disc Quote: 23.80 – 24.15
Spot Rate : 0.3500
Average : 0.2359

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-10-17
Maturity Price : 23.00
Evaluated at bid price : 23.80
Bid-YTW : 5.24 %

MFC.PR.B Deemed-Retractible Quote: 20.53 – 20.95
Spot Rate : 0.4200
Average : 0.3107

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.53
Bid-YTW : 8.50 %

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