May 21, 2015

May 21st, 2015

So what’s the worst kind of person to have at the top of an important government agency? A micro-manager who is unfamiliar with the substance of the work:

Expectations were high for [Mary Jo] White, who came to the [Chair of the SEC] job with a reputation as a tough prosecutor. As U.S. Attorney for the Southern District of New York, she took on terrorists and mobsters. Later she became a highly sought-after defense attorney, representing banks and other defendants in government probes. In announcing her nomination in January 2013, President Obama warned the financial industry: “You don’t want to mess with Mary Jo.”

That reputation has been dented at the SEC. The pace of rulemaking has been so slow that some staff have labeled White’s office the cheese cellar: It’s where policy goes to age. The nickname has stuck as proposals and reports have piled up in her office, waiting for her careful, often line-by-line consideration. White’s circumspection has slowed the progress of high-profile rules governing executive pay, broker obligations, and swaps, the financial products that helped fuel the financial crisis.

White had never held a position for which she had to develop complex financial policy. That lack of experience, plus difficulty in developing a consensus on nettlesome issues, has contributed to the agency’s troubles, say critics inside and outside the agency. “You take a commission that faces the most challenging regulatory agenda since its creation and you appoint a nonpolicy person as chair,” says Barbara Roper, director of investor protection for the Consumer Federation of America. The SEC under White “has been as unproductive as I thought it would be.”

My favourite journalist, Matt Levine, takes a good look at the touted FX so-called rigging settlement:

Then there are three bullet points describing other naughtiness that does not rise to the level of antitrust conspiracy. Those bullet points begin:
“We added markup to price quotes using hand signals and/or other internal arrangements or communications.”

“We have, without informing clients, worked limit orders at levels (i.e., prices) better than the limit order price so that we would earn a spread or markup in connection with our execution of such orders.”

“We made decisions not to fill clients’ limit orders at all, or to fill them only in part, in order to profit from a spread or markup in connection with our execution of such orders.”

You might read these sentences as admissions of guilt, or disclosures of crimes, or even apologies. In context — in the context of a disclosure notice sent to clients as part of the bank’s probation for a felony conviction, one paragraph after the apology for the massive antitrust conspiracy — that’s kind of what they look like. And in the banks’ plea agreements, the practices described in those bullet points are listed as “other relevant conduct” for the criminal conspiracy. So I read the bullet points as confessions yesterday, and was puzzled because, while they seem like sharp practices, they don’t quite seem like crimes.

But those bullet points are actually introduced by the phrase, “The Firm has engaged in other practices on occasion, including:.” These are not crimes, just “practices.” And the disclosure notice just describes them. It stops after the bullet points. It never says “and those practices were wrong.” Or “and we’re sorry we did those things.” Or even: “and we’ll stop doing them.”

Because they won’t! Here’s another letter that JPMorgan is sending to its clients along with the disclosure notice.2 This one is not a condition of its probation. Here’s how it starts:

The purpose of this letter is to clarify the nature of the trading relationship between you and the Corporate & Investment Bank at JPMorgan Chase & Co. and its affiliates (together, “JPMorgan” or the “Firm”) and to disclose relevant practices of JPMorgan when acting as a dealer, on a principal basis, in the wholesale spot foreign exchange (“FX”) markets. We want to ensure that there are no ambiguities or misunderstandings regarding those practices.

So: That does not sound like an apology. That sounds downright feisty. The disclosure notice, which JPMorgan has to send, starts with an apology and then goes on to list some things that JPMorgan did in the past. The client letter, which JPMorgan wants to send, starts with a defiant “no ambiguities or misunderstandings” and then goes on to list some things that JPMorgan will keep doing in the future.

So guess what? JPMorgan acts a principal on FX transactions, to the bewildered astonishment of pseudo-portfolio managers and ignorant regulatory lawyers. And they intend to continue acting as principal! How about that, eh? And their job as principal is to make money for their firm, not yours! Isn’t that astonishing? Golly, it sure is different from kindergarten, where teacher told us to work together.

Levine adds a good point, which has me weeping that it is considered necessary to emphasize:

Of course salespeople and traders talk to each other! The salesperson’s job is to help the trader understand how to price a trade for a particular client. If the salesperson thinks it’s in the bank’s interest to add a markup — that is, if the salesperson thinks that the client is not particularly price-sensitive and will not trade away if the price is too high — then the salesperson’s job is to inform the trader.

The regulatory weenies get a much more sympathetic hearing in another article:

The manipulation didn’t stop at putting in low fixes, the traders quoted by the FCA also were attempting to trigger client stops for their own ends.

In the example the FCA gives, a client had placed to stop loss order to buy GBP77 million at the rate of 95 against another currency. The Barclays trader attempts to get the currency to trade at 97 so he could sell the full GBP77 million to the client at 96.5. Barclays would profit from this stop loss order if the average rate they bought GBP in the market was lower than this stop stop loss order.

Good for the Barclays guys! As principals, they had absolutely zero duty to their counterparty, who was a complete moron for placing a stop order in the first place. Let’s just hope that the twerp who placed that order has gone bankrupt and is now spending his days naked and hungry in a London alleyway.

It may be that the US 10-Year Break Even Inflation Rate has found a new level:

Demand at Thursday’s $13 billion auction of U.S. Treasury Inflation-Protected Securities, or TIPS, declined from the previous sale in March. The offering attracted the lowest demand since September 2014, when oil prices were collapsing, bringing down a key measure of bond-market inflation forecasts along with them.

“We’re just simply not too wrought up about inflation expectations at the moment,” said Jim Vogel, interest-rate strategist with FTN Financial in Memphis, Tennessee.

The U.S. 10-year break-even rate, a gauge of the inflation outlook derived from the yield difference between Treasuries and index-linked securities, was at 1.87 percentage points, up from a low this year of 1.53 percent on Jan. 13. That made TIPS less attractive on Thursday.

The CPPIB has reported annual returns to March 31, 2015:

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

They also talked a lot about nominal and real returns, which I think is a mistake – they’re just setting themselves up for criticism in a bad year. I confess I am a little troubled by the asset mix:

CPPIBAssetMix150331
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18.7% private equity! That’s a lot! And I continue to be convinced that at some point we’re going to see a big wave of scandals resulting from too many people playing too many games for too long with private equity valuations…

And it’s about time for me to complain again about pricing trends in education:

The college building boom is coming to New York City’s elite private schools.

With interest rates poised to rise, the Ivy League stepping stones are selling tax-exempt debt at the fastest pace in over a decade to keep their edge. Riverdale Country School in the Bronx, Saint Ann’s School in Brooklyn and La Scuola d’Italia Guglielmo Marconi near Central Park plan to sell almost $150 million of bonds to pay for projects, including a new six-lane pool and musical ensemble rooms.

The borrowing reflects the competitive pressure to replace decades-old buildings and dangle the latest amenities to draw the children of New York’s wealthiest. Tuition runs as high as $45,600 a year, in a city where half the households earn less than $52,000.

To lure students, U.S. universities have borrowed more than $250 billion in the municipal market over the past decade for labs, dormitories and gyms with features like rock-climbing walls. For public colleges, it’s a way to attract higher-paying out-of-state students. For private ones, to best the competition.

The approach has caught on in New York, where some 234,000 pupils, almost one-fifth of the total, attend private schools.

The New York schools are borrowing through Build NYC Resource Corp., a city agency that allows non-profits to raise money in the municipal-bond market. The schools repay investors, who are willing to accept lower interest rates because the income isn’t taxed. Build NYC receives fees for arranging the sales. It isn’t on the hook if they default.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 22bp, FixedResets off 16bp and DeemedRetractibles gaining 4bp. Enbridge FixedResets dominated the “return challenged” section of the Performance Highlights table. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150521
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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.90 to be $0.84 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.66 cheap at its bid price of 24.98.

impVol_MFC_150521
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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.55 to be $0.62 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.10 to be $0.61 cheap.

impVol_BAM_150521
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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.76 to be $0.61 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 25.00 and appears to be $0.55 rich.

impVol_FTS_150521
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FTS.PR.H, with a spread of +145bp, and bid at 15.92, looks $1.14 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.80 and is $0.63 rich.

pairs_FR_150521
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Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.45%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.24%, while DC.PR.B / DC.PR.D has leapt upwards to +1.26%. It’s a far cry from, for instance, March 30 when the latter pair had a break-even rate of -2.87% … since then, the price spread has narrowed from $4.00 to $0.28, while the total returns are -11.68% and +3.81%, respectively.

pairs_FF_150521
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -1.3675 % 2,283.6
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.3675 % 3,992.8
Floater 3.18 % 3.35 % 54,243 18.84 4 -1.3675 % 2,427.6
OpRet 4.45 % -7.20 % 32,945 0.11 2 -0.2172 % 2,776.9
SplitShare 4.60 % 4.70 % 61,797 3.36 3 0.2019 % 3,241.0
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2172 % 2,539.2
Perpetual-Premium 5.47 % 2.93 % 63,815 0.08 18 0.0022 % 2,516.9
Perpetual-Discount 5.06 % 5.07 % 118,712 15.35 15 0.2184 % 2,782.0
FixedReset 4.41 % 3.80 % 271,530 16.08 86 -0.1570 % 2,413.8
Deemed-Retractible 4.93 % 3.52 % 109,143 0.83 35 0.0355 % 2,636.3
FloatingReset 2.57 % 2.92 % 58,733 6.16 7 -0.0304 % 2,333.3
Performance Highlights
Issue Index Change Notes
BAM.PR.C Floater -1.97 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 14.90
Evaluated at bid price : 14.90
Bid-YTW : 3.38 %
BAM.PR.B Floater -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 15.04
Evaluated at bid price : 15.04
Bid-YTW : 3.35 %
RY.PR.M FixedReset -1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 22.85
Evaluated at bid price : 24.25
Bid-YTW : 3.74 %
BAM.PR.K Floater -1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 14.80
Evaluated at bid price : 14.80
Bid-YTW : 3.40 %
ENB.PR.B FixedReset -1.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 19.05
Evaluated at bid price : 19.05
Bid-YTW : 4.67 %
ENB.PF.C FixedReset -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.31
Evaluated at bid price : 21.31
Bid-YTW : 4.59 %
ENB.PF.E FixedReset -1.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.32
Evaluated at bid price : 21.32
Bid-YTW : 4.62 %
ENB.PF.A FixedReset -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.37
Evaluated at bid price : 21.37
Bid-YTW : 4.59 %
GWO.PR.N FixedReset -1.21 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.03
Bid-YTW : 6.52 %
ENB.PR.D FixedReset -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 19.09
Evaluated at bid price : 19.09
Bid-YTW : 4.65 %
TRP.PR.B FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 15.70
Evaluated at bid price : 15.70
Bid-YTW : 3.83 %
ENB.PR.H FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 18.34
Evaluated at bid price : 18.34
Bid-YTW : 4.58 %
ENB.PR.J FixedReset -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.12
Evaluated at bid price : 21.12
Bid-YTW : 4.52 %
ENB.PR.Y FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 19.45
Evaluated at bid price : 19.45
Bid-YTW : 4.63 %
ENB.PF.G FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.45
Evaluated at bid price : 21.75
Bid-YTW : 4.53 %
PWF.PR.S Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 24.38
Evaluated at bid price : 24.80
Bid-YTW : 4.86 %
BMO.PR.T FixedReset 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 23.10
Evaluated at bid price : 24.65
Bid-YTW : 3.38 %
FTS.PR.K FixedReset 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 21.32
Evaluated at bid price : 21.61
Bid-YTW : 3.80 %
CIU.PR.C FixedReset 1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 3.77 %
TRP.PR.C FixedReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 17.80
Evaluated at bid price : 17.80
Bid-YTW : 3.79 %
TRP.PR.D FixedReset 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 22.57
Evaluated at bid price : 23.41
Bid-YTW : 3.78 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Y FixedReset 103,869 TD crossed blocks of 49,200 and 49,900, both at 23.43.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.35
Bid-YTW : 3.00 %
HSE.PR.A FixedReset 75,913 RBC crossed 71,700 at 17.28.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 17.21
Evaluated at bid price : 17.21
Bid-YTW : 4.26 %
FTS.PR.M FixedReset 70,980 RBC crossed 55,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 23.13
Evaluated at bid price : 24.80
Bid-YTW : 3.60 %
RY.PR.K FloatingReset 59,900 TD crossed 50,000 at 24.25.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.32
Bid-YTW : 2.94 %
TRP.PR.A FixedReset 53,133 Scotia crossed blocks of 18,000 and 20,000, both at 21.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 20.92
Evaluated at bid price : 20.92
Bid-YTW : 3.72 %
IFC.PR.C FixedReset 48,858 Nesbitt crossed 40,000 at 24.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.80
Bid-YTW : 4.00 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.M FixedReset Quote: 24.25 – 24.82
Spot Rate : 0.5700
Average : 0.3455

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 22.85
Evaluated at bid price : 24.25
Bid-YTW : 3.74 %

RY.PR.K FloatingReset Quote: 24.32 – 24.98
Spot Rate : 0.6600
Average : 0.4455

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.32
Bid-YTW : 2.94 %

FTS.PR.H FixedReset Quote: 15.92 – 16.49
Spot Rate : 0.5700
Average : 0.4132

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 15.92
Evaluated at bid price : 15.92
Bid-YTW : 4.01 %

HSE.PR.E FixedReset Quote: 25.47 – 25.79
Spot Rate : 0.3200
Average : 0.2137

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : 4.29 %

ELF.PR.H Perpetual-Premium Quote: 25.22 – 25.54
Spot Rate : 0.3200
Average : 0.2245

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 24.74
Evaluated at bid price : 25.22
Bid-YTW : 5.50 %

HSE.PR.A FixedReset Quote: 17.21 – 17.51
Spot Rate : 0.3000
Average : 0.2112

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-21
Maturity Price : 17.21
Evaluated at bid price : 17.21
Bid-YTW : 4.26 %

May 20, 2015

May 20th, 2015

Six banks have agreed to pay extra taxes as a regulatory extortion payment:

Six of the world’s biggest banks will pay $5.8 billion and five of them agreed to plead guilty to charges tied to a currency-rigging probe as they seek to wind down almost half a decade of enforcement actions.

Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc agreed to plead guilty to conspiring to manipulate the price of U.S. dollars and euros in settlements with the Justice Department announced in Washington Wednesday. The main banking unit of UBS Group AG agreed to plead guilty to charges related to interest-rate manipulation. The Swiss bank, the first to cooperate with antitrust investigators, was granted immunity in the currency probe.

The four banks that agreed to plead guilty to currency charges are among the world’s biggest foreign-exchange traders. They were accused of colluding to influence benchmark rates by aligning positions and pushing transactions through at the same time. Traders who described themselves as members of “The Cartel” used online chat rooms to discuss their positions in the minutes before the rates were set, the Justice Department said.

As discussed on June 12, 2013, I don’t understand the fuss about this. The dealers were simply positioning themselves to meet the forward obligations they had incurred in writing the clients a very short-term forward contract. Big deal. The only people who could possibly be hurt by any amount of manipulation of the fix are moronic portfolio managers who seek to “avoid risk” by entering a Market-On-Close order and the idiots who hire them. No sympathy here!

Cloud computing is getting some serious attention:

It sounds like the mother of all spreadsheets: 1 million rows, 1 million columns — 1 trillion entries in all.

Fortunately, Braxton McKee isn’t using Excel. Instead, he’s tapping into the cloud to crunch all that market data on the cheap with software he built that learns as it goes.

The cost of that cosmic power: $10.

Five years ago, the sort of programming involved in McKee’s 1-trillion-point dense matrix would have taken months of coding and $1 million-plus of hardware. Now McKee simply logs onto Amazon Web Services to name his price for computing capacity and sets his code loose. Out of a loft in the Flatiron District in Manhattan, he works on what he calls “coffee time.” His goal is to make every model — no matter how much data are involved – - compute in the time it takes him to putter to his office kitchen, brew a Nespresso Caramelito, and walk back to his desk.

There’s a slim chance that the banks’ hegemony on Canadian finance will be eroded:

Earlier in May, reports came out that stock-market operator Chi-X Global Holdings, which operates a trading venue in Canada, is exploring a sale. At the time, numerous prospective bidders were mentioned, so it’s hard to tell who would eventually win any auction, but the mere mention of Nasdaq as a potential suitor is catching Canadians’ attention.

To be clear, Nasdaq would acquire Chi-X globally, so this wouldn’t be a Canada-only deal. But the acquisition would have particularly serious implications here. Chi-X’s Canadian trading platforms have roughly a 17-per-cent market share – the official figure pegs that share closer to 20 per cent, but this volume is arguably inflated – and its venues are widely viewed as being competitive with the much bigger TMX.

What Chi-X lacks, though, is a listing business. That’s something TMX still has a near monopoly on, although Aequitas is trying to erode it. Not only does Aequitas offer a trading platform, it also features a new listing option for Canadian companies. Still, pretty much everyone agrees that building this business will take time.

It would be nice to see a big global outfit come in to undo some of the damage done by the unholy Canadian regulatory alliance, as discussed on July 4, 2012.

It would be very cool to have my 4am pizza delivered by quadropter. It would be even cooler, not to mention faster, to have it delivered by a ten engine tiltrotor:

Imagine a battery-powered plane that has 10 engines and can take off like a helicopter and fly efficiently like an aircraft. That is a concept being developed by NASA researchers called Greased Lightning or GL-10.

The team, at NASA’s Langley Research Center in Hampton, Virginia, is looking at the idea initially as a potential unmanned aerial vehicle (UAV). “We have a couple of options that this concept could be good for,” said Bill Fredericks, aerospace engineer. “It could be used for small package delivery or vertical take off and landing, long endurance surveillance for agriculture, mapping and other applications. A scaled up version — much larger than what we are testing now — would make also a great one to four person size personal air vehicle.”"

During a recent spring day the engineers took the GL-10 to test its wings at a military base about two hours away from NASA Langley. The remotely piloted plane has a 10-foot wingspan (3.05 meters), eight electric motors on the wings, two electric motors on the tail and weighs a maximum of 62 pounds (28.1 kilograms) at take off.

It had already passed hover tests — flying like a helicopter — with flying colors. But now was the big hurdle — the transition from vertical to forward “wing-borne” flight. As engineers who have designed full-scale vertical take off and landing tiltrotors such as the V-22 Osprey will tell you — that is no easy task because of the challenging flight aerodynamics.

“During the flight tests we successfully transitioned from hover to wing-borne flight like a conventional airplane then back to hover again. So far we have done this on five flights,” said Fredericks. “We were ecstatic. Now we’re working on our second goal — to demonstrate that this concept is four times more aerodynamically efficient in cruise than a helicopter.”

NASATiltrotor
Click for Big

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets down 16bp and DeemedRetractibles gaining 6bp. The performance highlights table is long compared to the overall move, with ENB FixedResets prominent on the bad side. Volume was below average.

PerpetualDiscounts now yield 5.07%, equivalent to 6.59% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, a widening from the 255bp reported May 14.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150520
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.00 to be $0.98 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.72 cheap at its bid price of 24.97.

impVol_MFC_150520
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.55 to be $0.59 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.10 to be $0.63 cheap.

impVol_BAM_150520
Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.77 to be $0.56 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.95 and appears to be $0.54 rich.

impVol_FTS_150520
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.96 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.75 and is $0.77 rich.

pairs_FR_150520
Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.50% and the BNS.PR.Y / BNS.PR.D pair at +0.63%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.21%, while BRF.PR.A / BRF.PR.B is at -1.17%.

pairs_FF_150520
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.0472 % 2,315.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0472 % 4,048.2
Floater 3.14 % 3.28 % 54,296 19.00 4 0.0472 % 2,461.3
OpRet 4.44 % -10.60 % 34,303 0.12 2 0.3170 % 2,782.9
SplitShare 4.61 % 4.72 % 61,950 3.36 3 -0.7746 % 3,234.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3170 % 2,544.7
Perpetual-Premium 5.47 % 2.17 % 65,273 0.08 18 0.0131 % 2,516.8
Perpetual-Discount 5.07 % 5.07 % 119,643 15.35 15 -0.0951 % 2,776.0
FixedReset 4.40 % 3.82 % 263,785 16.16 86 -0.1628 % 2,417.6
Deemed-Retractible 4.94 % 3.51 % 112,721 0.92 35 0.0562 % 2,635.4
FloatingReset 2.56 % 2.92 % 61,156 6.17 7 0.0974 % 2,334.0
Performance Highlights
Issue Index Change Notes
TRP.PR.D FixedReset -2.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 22.36
Evaluated at bid price : 23.03
Bid-YTW : 3.86 %
SLF.PR.G FixedReset -2.11 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.63
Bid-YTW : 6.78 %
BAM.PR.X FixedReset -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 18.44
Evaluated at bid price : 18.44
Bid-YTW : 4.24 %
ENB.PF.C FixedReset -1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 21.33
Evaluated at bid price : 21.62
Bid-YTW : 4.50 %
FTS.PR.K FixedReset -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 3.89 %
ENB.PF.A FixedReset -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 21.35
Evaluated at bid price : 21.65
Bid-YTW : 4.50 %
FTS.PR.G FixedReset -1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 21.36
Evaluated at bid price : 21.36
Bid-YTW : 3.91 %
ENB.PF.E FixedReset -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 21.35
Evaluated at bid price : 21.63
Bid-YTW : 4.53 %
ENB.PR.N FixedReset -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 20.34
Evaluated at bid price : 20.34
Bid-YTW : 4.67 %
ENB.PR.T FixedReset -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 19.73
Evaluated at bid price : 19.73
Bid-YTW : 4.68 %
ENB.PR.D FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 19.32
Evaluated at bid price : 19.32
Bid-YTW : 4.60 %
TRP.PR.A FixedReset 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 20.96
Evaluated at bid price : 20.96
Bid-YTW : 3.71 %
MFC.PR.L FixedReset 1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.36
Bid-YTW : 4.36 %
PWF.PR.P FixedReset 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 19.02
Evaluated at bid price : 19.02
Bid-YTW : 3.66 %
PWF.PR.A Floater 1.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 2.78 %
MFC.PR.M FixedReset 2.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.55
Bid-YTW : 3.88 %
TD.PF.B FixedReset 2.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 22.99
Evaluated at bid price : 24.37
Bid-YTW : 3.46 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.Q FixedReset 222,139 Desjardins crossed 15,100 at 25.00; RBC crossed blocks of 50,000 shares, 49,700 and 49,400 at the same price. Raymond James bought 13,200 from TD at 25.08.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 23.15
Evaluated at bid price : 25.01
Bid-YTW : 3.73 %
ENB.PR.D FixedReset 79,741 Nesbitt crossed 70,000 at 19.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 19.32
Evaluated at bid price : 19.32
Bid-YTW : 4.60 %
BNS.PR.Y FixedReset 56,300 TD crossed 50,000 at 23.28.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 3.07 %
RY.PR.H FixedReset 53,150 RBC crossed 50,000 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 22.99
Evaluated at bid price : 24.38
Bid-YTW : 3.45 %
HSE.PR.A FixedReset 50,090 TD crossed 25,000 at 17.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 17.17
Evaluated at bid price : 17.17
Bid-YTW : 4.27 %
BNS.PR.N Deemed-Retractible 42,363 TD crossed 39,600 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-19
Maturity Price : 25.50
Evaluated at bid price : 25.65
Bid-YTW : 1.41 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRP.PR.D FixedReset Quote: 23.03 – 23.49
Spot Rate : 0.4600
Average : 0.2916

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-20
Maturity Price : 22.36
Evaluated at bid price : 23.03
Bid-YTW : 3.86 %

MFC.PR.F FixedReset Quote: 18.92 – 19.35
Spot Rate : 0.4300
Average : 0.3048

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.92
Bid-YTW : 6.02 %

MFC.PR.K FixedReset Quote: 23.50 – 23.81
Spot Rate : 0.3100
Average : 0.1953

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 4.23 %

SLF.PR.B Deemed-Retractible Quote: 24.39 – 24.70
Spot Rate : 0.3100
Average : 0.2052

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.39
Bid-YTW : 5.24 %

POW.PR.G Perpetual-Premium Quote: 26.07 – 26.38
Spot Rate : 0.3100
Average : 0.2103

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 26.07
Bid-YTW : 4.89 %

PWF.PR.R Perpetual-Premium Quote: 25.99 – 26.35
Spot Rate : 0.3600
Average : 0.2668

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.99
Bid-YTW : 4.81 %

DBRS: Bank Senior Debt On Trend-Negative Due to Government Support Uncertainty

May 20th, 2015

DBRS has announced that it:

has today changed the trend on the senior and subordinated debt ratings of six Canadian Banks and their subsidiaries plus Desjardins Group (Desjardins) and its issuing entities to Negative from Stable. Additionally, Negative trends have been placed on those related short-term ratings that might be affected by a long-term rating change under DBRS methodologies.

The rating action reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely systemic support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for these institutions. Currently, the final ratings of such deposit-taking institutions benefit from an uplift of one notch above their intrinsic assessment because of the SA2 support assessment. At the same time, DBRS notes that additional protection for non-bail-inable debt and deposits may eventually be provided by bail-inable senior debt under the anticipated bail-in debt regime. DBRS will assess the impact of the “Taxpayer Protection and Bank Recapitalization Regime” rules as more details are made available by the authorities.

DBRS currently has an SA2 support assessment for Desjardins based on DBRS’s view of likely support from the Government of Canada for this institution, which is systemically important for Québec. As DBRS’s view of Canadian Government support for the large banks shifts, so too will the potential for support for other deposit-taking institutions. While DBRS continues to view support for Desjardins as likely from the Province of Québec, a decline in support from Canada for the large banks and Desjardins may result in a change in the rating. Consequently, Desjardins rating trends have also been changed to Negative.

In other provinces, credit unions as well as their systems and centrals remain important for those individual provinces. In many rural areas, credit unions are the only providers of banking services. In addition, various provinces have 100% deposit guarantee programs. These systems, however, are not included in current legislative proposals. Accordingly, DBRS has not changed its view of the likelihood that provinces will support their credit union systems and centrals. Moreover, DBRS’s existing SA2 support assessment for the various credit union centrals is based on provincial government support and there are no trend changes in this announcement related to the centrals.

The proposed bail-in regime for Canadian banks has been previously discussed on PrefBlog. A similar outlook-change was announced by S&P in August, 2014 following a July, 2014 announcement by Moody’s.

I think it’s a little odd that Laurentian Bank was not affected.

DBRS will be hosting a conference call at 11am EDT 2015-5-21 to discuss the changes.

Separately, thirty-eight European banking groups were placed under Review-Negative:

DBRS Inc. and DBRS Ratings Limited, collectively DBRS, have placed Under Review with Negative Implications the senior debt and deposit ratings of 38 banking groups in Europe that currently benefit from some uplift for systemic support. The short-term debt ratings of 16 banking groups were also placed Under Review with Negative Implications.

These rating actions reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support for these systemically important banks (SIBs). Currently, the final ratings of such banks benefit from an uplift of one or more notches above their intrinsic assessment (IA).

… which fed through to HSBC Bank Canada:

DBRS Limited (DBRS) has today placed the Long-Term Deposits and Senior Debt as well as the Subordinated Debt ratings of HSBC Bank Canada Under Review with Negative Implications. This change is a direct result of the concurrent rating review of HSBC Holdings plc, the parent entity of HSBC Bank Canada. The ratings of HSBC Holdings plc were placed Under Review with Negative Implications following the anticipated changes in regulation concerning government support.

Preferred shares are not affected by these changes, but outstanding instruments from the affected institutions are:

BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W.

BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.D, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y, BNS.PR.Z.

CM.PR.O, CM.PR.P, CM.PR.Q.

HSB.PR.C, HSB.PR.D.

NA.PR.M, NA.PR.Q, NA.PR.S, NA.PR.W

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.J, RY.PR.K, RY.PR.L, RY.PR.M, RY.PR.W, RY.PR.

TD.PF.A, TD.PF.B, TD.PF.C, TD.PF.D, TD.PF.E, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z.

New Issue: EFN FixedReset, 6.50%+534

May 20th, 2015

Element Financial Corporation has announced:

it plans to sell, on a “bought deal” basis, $1,550 million of subscription receipts (“Subscription Receipts”), $500 million aggregate principal amount of extendible convertible unsecured subordinated debentures (“Debentures”) and $150 million cumulative 5-year rate reset preferred shares, Series G of Element (“Series G Preferred Shares”). The Company intends to use the net proceeds from the Offerings (as defined below) to fund future acquisitions.

Element has entered into an agreement to sell, on a bought deal basis, 6,000,000 Series G Preferred Shares at a price of $25.00 per Series G Preferred Share for gross proceeds of $150 million (the “Preferred Share Offering”, and with the Subscription Receipt Offering and the Debenture Offering, the “Offerings”). Holders of the Series G Preferred Shares will be entitled, if, as and when declared by the Board of Directors of Element, to receive a cumulative quarterly fixed dividend for the initial five-year period ending September 30, 2020 of 6.50% per annum. Thereafter, the dividend rate will reset every five years to an annual dividend rate equal to the 5-Year Government of Canada Bond Yield as quoted on Bloomberg on the 30th day prior to the first day of the relevant subsequent five year fixed rate period plus 5.34%.

Holders of the Series G Preferred Shares will have the right to convert their shares into cumulative floating rate preferred shares, Series H of Element (“Series H Preferred Shares”), subject to certain conditions and Element’s right to redeem the Series G Preferred Shares, on September 30, 2020 and on September 30 every five years thereafter. Holders of the Series H Preferred Shares will be entitled to receive a quarterly floating rate dividend, if, as and when declared by the Board of Directors of Element, equal to the then current three-month Government of Canada Treasury Bill plus 5.34%. Holders of the Series H Preferred Shares may convert their Series H Preferred Shares into Series G Preferred Shares, subject to certain conditions and Element’s right to redeem the Series H Preferred Shares, on September 30, 2025 and on September 30 every five years thereafter. The Series G Preferred Shares will not be rated. If an Eligible Transaction does not proceed, the net proceeds from the Preferred Share Offering will be used by Element for general corporate purposes.

The Preferred Share Offering is being led by BMO Capital Markets, CIBC World Markets Inc., National Bank Financial Inc., RBC Capital Markets, and TD Securities, and includes GMP Securities L.P., Cormark Securities Inc., Desjardins Securities Inc., Manulife Securities Inc., and Scotiabank (collectively, the “Preferred Share Underwriters”).

This issue joins EFN.PR.A (FixedReset, 6.60%+471); EFN.PR.C (FixedReset, 6.50%+481); and EFN.PR.E (FixedReset, 6.40%+472).

As with the three previous issues, this issue will not be tracked by HIMIPref™ on the grounds that it is not rated. This is not because I can’t come to my own views regarding credit quality, or because I worship the Credit Rating Agencies, but because I feel the threat of an imminent downgrade from a major agency does an excellent job of focussing the minds of the directors and management that they have a problem that really should be addressed. A ‘Review-Negative’ by Hymas Investment Management does not have quite the same effect.

SLF.PR.G To Be Extended

May 20th, 2015

Sun Life Financial Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Class A Non-Cumulative Rate Reset Preferred Shares Series 8R (the “Series 8R Shares”) on June 30, 2015. As a result, subject to certain conditions, the holders of Series 8R Shares have the right to convert all or part of their Series 8R Shares on a one-for-one basis into Class A Non-Cumulative Floating Rate Preferred Shares Series 9QR of Sun Life Financial (the “Series 9QR Shares”) on June 30, 2015. Holders of Series 8R Shares who do not exercise their right to convert their Series 8R Shares into Series 9QR Shares on such date will retain their Series 8R Shares.

The foregoing conversions are subject to the conditions that: (i) if Sun Life Financial determines that there would be less than one million Series 8R Shares outstanding after June 30, 2015, then all remaining Series 8R Shares will automatically be converted into Series 9QR Shares on a one-for-one basis on June 30, 2015, and (ii) alternatively, if Sun Life Financial determines that there would be less than one million Series 9QR Shares outstanding after June 30, 2015, no Series 8R Shares will be converted into Series 9QR Shares. In either case, Sun Life Financial will give a written notice to that effect to any registered holder affected by the preceeding minimums on or before Monday, June 22, 2015.

The dividend rate applicable to the Series 8R Shares for the five-year period commencing on June 30, 2015 and ending on June 29, 2020, and the dividend rate applicable to the Series 9QR Shares for the three-month period commencing on June 30, 2015 and ending on September 29, 2015, will be determined on Monday, June 1, 2015 and will be announced in a news release on Monday, June 1, 2015.

Beneficial owners of Series 8R Shares who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and ensure that they follow their instructions in order to ensure that they meet the deadline to exercise such right, which is 5:00 p.m. (ET) on Monday, June 15, 2015.

Subject to regulatory approval, Sun Life Financial may redeem the Series 8R Shares and the Series 9QR Shares in whole or in part on June 30, 2020 and on the 30th of June in every fifth year thereafter.

An application will be made to list the Series 9QR Shares on the Toronto Stock Exchange.

SLF.PR.G is a FixedReset, 4.35%+141, that commenced trading 2010-5-25 after being announced 2015-5-13.

There can be no surprise regarding the extension seeing that it has been trading below $25.00 for some time and has lost considerable ground vs. SLF.PR.D over the past year. Today it is bid at $18.01, against $22.90 for SLF.PR.D, a spread of $4.89 – this may be compared to $6.25 at April month-end, $2.16 at 2014 year-end and ($1.29) [that is, a pay-up] at 2013 year-end.

As noted in the press release, the new dividend rate will be determined June 1 and announced later that day; if we use today’s GOC-5 rate of 1.09%, the new rate will be 1.09%+141bp = 2.50%, a stunning 43% reduction from its initial dividend.

Given current conditions for Strong Pairs, I expect that I will eventually recommend that the FixedReset be held rather than converted.

Estimate of SLF.PR.? FloatingReset Trading Price In Current Conditions Assuming Reset to 2.50% for SLF.PR.G FixedReset
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0% +0.30% +0.60%
SLF.PR.G 18.01 141bp 16.82 17.15 17.48

These various scenarios for the Implied Average Bill Yield can be compared with the current state of affairs for FixedReset / FloatingReset pairs:

pairs_FR_150519A
Click for Big

So, given current market conditions, it is reasonable to expect that the new FloatingReset issue (if it is issued) will be trading significantly lower than the continuing FixedReset issue (assuming there is enough of it left that the company does not force conversion) and thus those who really want the FloatingReset will be able to trade on the market on better terms than available through conversion. But there’s still a lot of time left before a decision has to be made, and the actual dividend rate for the next five years for SLF.PR.G isn’t even known yet. So regard these musings as tentative!

May 19, 2015

May 20th, 2015

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 11bp, FixedResets gaining 6bp and DeemedRetractibles down 35bp. The Performance Highlights table is lengthy relative to the overall move. Volume was well above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150519
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.13 to be $1.03 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.89 cheap at its bid price of 24.95.

impVol_MFC_150519
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.35 to be $0.71 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.06 to be $0.60 cheap.

impVol_BAM_150519
Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.66 to be $0.74 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 25.00 and appears to be $0.54 rich.

impVol_FTS_150519
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $1.16 cheap and resets 2015-6-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 24.88 and is $0.69 rich.

pairs_FR_150519A
Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.29% and the BNS.PR.Y / BNS.PR.D pair at +0.62%. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -1.03%, while BRF.PR.A / BRF.PR.B is at -0.82%.

pairs_FF_150519
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.6717 % 2,314.2
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.6717 % 4,046.3
Floater 3.14 % 3.25 % 53,291 19.07 4 -0.6717 % 2,460.1
OpRet 4.46 % -5.25 % 35,607 0.12 2 0.0000 % 2,774.2
SplitShare 4.57 % 4.32 % 60,943 3.36 3 0.0668 % 3,259.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,536.7
Perpetual-Premium 5.47 % 2.98 % 63,967 0.08 18 -0.1614 % 2,516.5
Perpetual-Discount 5.07 % 5.08 % 120,725 15.34 15 -0.1118 % 2,778.6
FixedReset 4.40 % 3.80 % 267,619 16.27 86 0.0584 % 2,421.6
Deemed-Retractible 4.94 % 3.50 % 111,884 0.84 35 -0.3529 % 2,633.9
FloatingReset 2.57 % 2.96 % 62,001 6.17 7 -0.0608 % 2,331.7
Performance Highlights
Issue Index Change Notes
TD.PF.B FixedReset -3.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 22.70
Evaluated at bid price : 23.70
Bid-YTW : 3.59 %
MFC.PR.B Deemed-Retractible -3.08 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.27
Bid-YTW : 5.56 %
SLF.PR.B Deemed-Retractible -1.81 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.38
Bid-YTW : 5.25 %
PWF.PR.S Perpetual-Discount -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.96
Evaluated at bid price : 24.36
Bid-YTW : 4.95 %
MFC.PR.C Deemed-Retractible -1.40 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.17
Bid-YTW : 5.46 %
BAM.PR.K Floater -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 15.14
Evaluated at bid price : 15.14
Bid-YTW : 3.32 %
TRP.PR.C FixedReset -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 17.38
Evaluated at bid price : 17.38
Bid-YTW : 3.89 %
BAM.PR.R FixedReset -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 21.01
Evaluated at bid price : 21.01
Bid-YTW : 4.23 %
SLF.PR.A Deemed-Retractible -1.31 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.14
Bid-YTW : 5.32 %
FTS.PR.K FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 21.33
Evaluated at bid price : 21.63
Bid-YTW : 3.80 %
HSE.PR.A FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 17.14
Evaluated at bid price : 17.14
Bid-YTW : 4.28 %
PWF.PR.A Floater -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 2.83 %
ENB.PR.B FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 19.42
Evaluated at bid price : 19.42
Bid-YTW : 4.58 %
PWF.PR.T FixedReset 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.41
Evaluated at bid price : 25.40
Bid-YTW : 3.42 %
BAM.PR.X FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 18.79
Evaluated at bid price : 18.79
Bid-YTW : 4.16 %
MFC.PR.F FixedReset 1.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.05
Bid-YTW : 5.93 %
MFC.PR.N FixedReset 1.80 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.35
Bid-YTW : 3.91 %
SLF.PR.G FixedReset 2.74 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.01
Bid-YTW : 6.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.M FixedReset 148,540 Desjardins crossed blocks of 75,000 and 42,200, both at 25.07.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.16
Evaluated at bid price : 24.88
Bid-YTW : 3.58 %
PWF.PR.P FixedReset 77,150 Scotia crossed blocks of 40,000 and 33,000, both at 19.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 18.73
Evaluated at bid price : 18.73
Bid-YTW : 3.71 %
TRP.PR.B FixedReset 58,923 RBC crossed 36,200 at 16.00.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 15.77
Evaluated at bid price : 15.77
Bid-YTW : 3.81 %
TD.PF.D FixedReset 57,079 RBC crossed 48,800 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.09
Evaluated at bid price : 24.84
Bid-YTW : 3.76 %
TD.PR.Y FixedReset 56,600 TD crossed 39,900 at 25.35 and 16,000 at 25.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 3.06 %
CU.PR.C FixedReset 56,122 RBC crossed 50,000 at 24.68.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.40
Evaluated at bid price : 24.55
Bid-YTW : 3.52 %
There were 42 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PF.B FixedReset Quote: 23.70 – 24.75
Spot Rate : 1.0500
Average : 0.6051

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 22.70
Evaluated at bid price : 23.70
Bid-YTW : 3.59 %

PWF.PR.S Perpetual-Discount Quote: 24.36 – 24.90
Spot Rate : 0.5400
Average : 0.3425

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 23.96
Evaluated at bid price : 24.36
Bid-YTW : 4.95 %

CIU.PR.C FixedReset Quote: 16.47 – 17.20
Spot Rate : 0.7300
Average : 0.5332

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-19
Maturity Price : 16.47
Evaluated at bid price : 16.47
Bid-YTW : 3.82 %

MFC.PR.L FixedReset Quote: 23.10 – 23.85
Spot Rate : 0.7500
Average : 0.5550

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.10
Bid-YTW : 4.50 %

MFC.PR.B Deemed-Retractible Quote: 23.27 – 23.68
Spot Rate : 0.4100
Average : 0.2435

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.27
Bid-YTW : 5.56 %

GWO.PR.I Deemed-Retractible Quote: 23.72 – 24.15
Spot Rate : 0.4300
Average : 0.3077

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.72
Bid-YTW : 5.29 %

May 15, 2015

May 15th, 2015

FFN.PR.A was confirmed at Pfd-4(high) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by North American Financial 15 Split Corp. (the Company) at Pfd-4 (high).

In October 2004, the Company issued 6.4 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Although these shares were offered separately, together they form a Unit. The redemption date was originally December 1, 2014, but shareholders have approved an extension of the redemption date for both classes of shares to December 1, 2019.

Since the last rating confirmation in May 2014, the NAV of the Company has been generally stable, with downside protection fluctuating from 37% to 41% over the past year. The Preferred Share dividend coverage ratio is below 1.0 times and the monthly Class A Share distribution is expected to result in an average grind on the portfolio of 5.3% annually for the remaining term until maturity. As a result, the rating of the Preferred Shares has been confirmed at Pfd-4 (high).

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 19bp, FixedResets losing 20bp and DeemedRetractibles off 3bp. The Performance Highlights table is of more-or-less average length, dominated by FixedReset losers. Volume was low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150515
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.05 to be $0.91 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.80 cheap at its bid price of 25.00.

impVol_MFC_150515
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 23.92 to be $0.38 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.00 to be $0.55 cheap.

impVol_BAM_150515
Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.61 to be $0.81 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.87 and appears to be $0.48 rich.

impVol_FTS_150515
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.10, looks $1.01 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.91 and is $0.61 rich.

pairs_FR_150515
Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.29% and the BNS.PR.Y / BNS.PR.D pair at +0.71. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -0.99%, while BRF.PR.A / BRF.PR.B is at -0.81%.

pairs_FF_150515
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 1.0576 % 2,329.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.0576 % 4,073.6
Floater 3.12 % 3.25 % 53,558 19.07 4 1.0576 % 2,476.8
OpRet 4.46 % -4.81 % 37,076 0.13 2 -0.0271 % 2,774.2
SplitShare 4.58 % 4.31 % 60,926 3.38 3 1.0633 % 3,257.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0271 % 2,536.7
Perpetual-Premium 5.46 % 1.34 % 62,909 0.08 18 -0.0022 % 2,520.6
Perpetual-Discount 5.06 % 5.05 % 121,054 15.35 15 -0.1896 % 2,781.7
FixedReset 4.40 % 3.71 % 269,085 16.38 86 -0.2027 % 2,420.2
Deemed-Retractible 4.92 % 3.39 % 111,416 0.77 35 -0.0272 % 2,643.2
FloatingReset 2.59 % 2.92 % 61,930 6.18 7 -0.0243 % 2,333.2
Performance Highlights
Issue Index Change Notes
SLF.PR.G FixedReset -3.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.53
Bid-YTW : 6.73 %
TRP.PR.C FixedReset -2.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 17.62
Evaluated at bid price : 17.62
Bid-YTW : 3.72 %
ENB.PR.J FixedReset -2.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 4.40 %
MFC.PR.M FixedReset -2.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.11 %
MFC.PR.K FixedReset -2.04 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.37
Bid-YTW : 4.24 %
FTS.PR.J Perpetual-Discount -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.61
Evaluated at bid price : 24.00
Bid-YTW : 4.94 %
FTS.PR.H FixedReset -1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 16.10
Evaluated at bid price : 16.10
Bid-YTW : 3.84 %
ENB.PF.G FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 21.66
Evaluated at bid price : 22.05
Bid-YTW : 4.38 %
RY.PR.Z FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.10
Evaluated at bid price : 24.59
Bid-YTW : 3.31 %
PVS.PR.D SplitShare 1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.52
Bid-YTW : 4.83 %
PVS.PR.C SplitShare 1.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 25.26
Bid-YTW : 4.31 %
BAM.PR.K Floater 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 15.35
Evaluated at bid price : 15.35
Bid-YTW : 3.28 %
BAM.PR.B Floater 1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 15.46
Evaluated at bid price : 15.46
Bid-YTW : 3.25 %
BAM.PR.C Floater 1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 15.30
Evaluated at bid price : 15.30
Bid-YTW : 3.29 %
CIU.PR.C FixedReset 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 16.50
Evaluated at bid price : 16.50
Bid-YTW : 3.69 %
Volume Highlights
Issue Index Shares
Traded
Notes
MFC.PR.A OpRet 421,300 Called for redemption 2015-6-19.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-19
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 1.26 %
CM.PR.Q FixedReset 135,310 RBC sold 35,000 to anonymous at 25.00. Desjardins crossed 60,900 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.11
Evaluated at bid price : 24.89
Bid-YTW : 3.69 %
TD.PF.D FixedReset 119,839 TD crossed 100,000 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.09
Evaluated at bid price : 24.84
Bid-YTW : 3.70 %
RY.PR.K FloatingReset 46,000 Nesbitt crossed 45,000 at 24.21.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 3.00 %
PWF.PR.T FixedReset 40,100 TD crossed 39,500 at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.32
Evaluated at bid price : 25.11
Bid-YTW : 3.40 %
TRP.PR.B FixedReset 36,853 TD crossed 25,000 at 15.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 15.77
Evaluated at bid price : 15.77
Bid-YTW : 3.68 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.M FixedReset Quote: 24.00 – 24.60
Spot Rate : 0.6000
Average : 0.4240

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.11 %

ENB.PF.G FixedReset Quote: 22.05 – 22.39
Spot Rate : 0.3400
Average : 0.2162

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 21.66
Evaluated at bid price : 22.05
Bid-YTW : 4.38 %

FTS.PR.J Perpetual-Discount Quote: 24.00 – 24.42
Spot Rate : 0.4200
Average : 0.3188

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.61
Evaluated at bid price : 24.00
Bid-YTW : 4.94 %

HSE.PR.A FixedReset Quote: 17.36 – 17.65
Spot Rate : 0.2900
Average : 0.1957

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 17.36
Evaluated at bid price : 17.36
Bid-YTW : 4.10 %

FTS.PR.F Perpetual-Discount Quote: 24.25 – 24.55
Spot Rate : 0.3000
Average : 0.2166

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-15
Maturity Price : 23.99
Evaluated at bid price : 24.25
Bid-YTW : 5.05 %

GWO.PR.R Deemed-Retractible Quote: 24.95 – 25.20
Spot Rate : 0.2500
Average : 0.1785

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 4.93 %

RBS.PR.B: Partial Call For Redemption

May 15th, 2015

Scotia Managed Companies has announced:

R Split III Corp. (the “Company”) announced today that it has called 111,228 Preferred Shares for cash redemption on May 29, 2015 (in accordance with the Company’s Articles) representing approximately 18.652% of the outstanding Preferred Shares as a result of the annual retraction of 222,456 Capital Shares by the holders thereof. The Preferred Shares shall be redeemed on a pro rata basis, so that each holder of Preferred Shares of record on May 27, 2015 will have approximately 18.652% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $13.60 per share.

In addition, holders of a further 23,400 Capital Shares and 11,700 Preferred Shares have deposited such shares concurrently for retraction on May 29, 2015. As a result, a total of 245,856 Capital Shares and 111,228 Preferred Shares, or approximately 20.217% of both classes of shares currently outstanding, will be redeemed.

Holders of Preferred Shares that are on record for dividends but have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to but not including May 29, 2015.

Payment of the amount due to holders of Preferred Shares will be made by the Company on May 29, 2015. From and after May 29, 2015 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any rights in respect of such shares except to receive the amount due on redemption.

R Split III Corp. is a mutual fund corporation created to hold a portfolio of common shares of Royal Bank of Canada. Capital Shares and Preferred Shares of R Split III Corp. are listed for trading on The Toronto Stock Exchange under the symbols RBS and RBS.PR.B respectively.

RBS.PR.B was last mentioned on PrefBlog when there was a partial redemption in May 2014. It is not tracked by HIMIPref™ since, with only about 600,000 shares outstanding with a par value of $13.60, it’s too small – and now it’s getting smaller!

FTS.PR.H: Convert or Hold?

May 15th, 2015

It will be recalled that FTS.PR.H will reset to 2.50% effective June 1 – a fact that was established with some difficulty!

Holders of FTS.PR.H have the option to convert to FloatingResets, FTS.PR.I, which will pay 3-month bills plus 145bp on its par value of $25.00. The deadline for notifying the company of the intent to convert is May 19; but note first that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! Also, Monday 18 is a holiday in most of Canada and your brokerage will probably be closed. However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., FTS.PR.H and the FloatingReset, FTS.PR.I, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_FR_150514
Click for Big

The market appears to have a distaste at the moment for floating rate product; the implied rates until the next interconversion are all (except one!) lower than the current 3-month bill rate and one is significantly negative! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity. The average in the table above for the junk issues (except FFH.PR.E / FFH.PR.F at -0.85% and BRF.PR.A / BRF.PR.B at -1.05%) is about +0.30%; for the investment grade issues (except TRP.PR.A / TRP.PR.F) it is also about 0.30%. This is pretty good agreement.

If we plug in the current bid price of the FTS.PR.H FixedReset, we may construct the following table showing consistent prices for the soon-to-be-issued FTS.PR.I FloatingReset given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FTS.PR.I FloatingReset Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 0% +0.30% +0.60%
FTS.PR.H 16.33 145bp 15.22 15.54 15.85

Based on current market conditions, I suggest that the FloatingReset that will result from conversion of FTS.PR.H will be cheap and trading a little below the price of FTS.PR.H. Therefore, I recommend that holders of FTS.PR.H continue to hold this issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FTS.PR.I commences trading and that the relative pricing of FTS.PR.H / FTS.PR.I will reflect these conditions.

Note as well that conversion rights are dependent upon at least one million shares of each series being outstanding after giving effect to holders’ instructions; e.g., if only 100,000 shares of FTS.PR.H are tendered for conversion, then no conversions will be allowed; but if only 100,000 shares of FTS.PR.H will remain after the rest are all tendered, then conversion will be mandatory. However, this is relatively rare: all 26 Strong Pairs currently extant have some version of this condition and all but two have both series outstanding.

May 14, 2015

May 15th, 2015

The Bank of Canada published the Bank of Canada Review – Spring 2015, which is a bust as far as capital markets articles are concerned. Articles are:

  • Inflation Dynamics in the Post-Crisis Period
  • The Slowdown in Global Trade
  • Improving the Foundation of Canada’s Payments System
  • The “Bank” at the Bank of Canada
  • The Use of Cash in Canada

Some investors thought they heard opportunity knock today … but only the ding-dongs:

Fooling investors is surprisingly easy. You can even do it on the government’s official site for company filings.

The latest reminder unspooled within a few minutes Thursday when a notice came out that a purported private-equity firm made a bid to buy Avon Products Inc. In a market where computers scrape filings and trade automatically on news headlines, the stock shot up 20 percent before the company said it was a hoax.

The notice, submitted by a firm registered at an empty office, was filed on the Securities and Exchange Commission’s Edgar system, which houses more than 20 million company filings for investors to peruse. Already more than 4,700 filings have been submitted today.

The SEC doesn’t verify whether entities using its filing systems “are real or have money,” said James Maloney, a former SEC official now at law firm Gibson Dunn & Crutcher. Getting access to Edgar “is no more complicated than signing up for an e-mail account,” he said.

Should the SEC vet Edgar filings before they go out? Maloney says no.

“It would be the equivalent of saying don’t let anyone have e-mail or Twitter because they might use it for bad purposes,” he said.

Live by the sword, die by the sword. Good riddance.

Still, it was a pretty good day, all in:

The Standard & Poor’s 500 Index closed at an all-time high, halting a three-session slide, as Microsoft Corp. and Apple Inc. led a rally in technology shares and the weaker dollar spurred gains in multi-national companies.

It looks like infrastructure investors have another target:

Greece will continue with efforts to privatize the country’s largest port and regional airports as it seeks ways to attract investment for other state assets, Economy Minister George Stathakis said, in a government concession in talks with its creditors.

The privatization process that is already underway for the Piraeus Port Authority SA, operator of Greece’s largest harbor, and for 14 regional airports will continue, Stathakis said today in an interview in Tbilisi, Georgia. “We’re trying to revise some elements of these privatizations in order to improve them and I think we’ll get a sensible agreement for both.”

A sale of the Piraeus Port would be a reversal on the part of Greece’s Syriza party-led government, which had earlier pledged to block such moves. As part of ongoing negotiations to unlock aid to Europe’s most-indebted nation, Greek’s European creditors have asked for more specific policy proposals in areas including labor market deregulation, a pension-system overhaul, sales tax reform and privatization of state-held assets. Still, Stathakis said the government doesn’t plan to sell other assets at the moment.

Fed hikes? What Fed hikes?

The longer U.S. central bankers wait to initiate their tightening cycle, the more traders push back their expectations for when borrowing costs will start rising. On Thursday, futures contracts were implying that traders saw the fed funds rate at about 0.3 percent rate by December. That’s the lowest estimate of the year, and about half the forecast for the overnight lending benchmark that the Fed gave in March.

The market is essentially calling the Fed’s bluff. Traders are betting that policy makers won’t be able to raise rates this year without disrupting stocks and bonds, something that they’d really rather not do. So either U.S. policy makers will have to risk another market-wide tantrum, or they’ll give in to traders who embrace the idea of these historically low borrowing costs sticking around for longer.

I’m not going to try and guess whether hikes will come this year, next year, or not until after my retirement. But my fears of a disorderly return to normal are growing.

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts off 7bp, FixedResets up 4bp and DeemedRetractibles gaining 1bp. The Performance Highlights table is shorter than it has been of late, but still much longer than the 2014 average. Volume was very low.

PerpetualDiscounts now yield 5.06%, equivalent to 6.58% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 255bp, a slight (and perhaps spurious) widening from the 250bp reported May 6.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150514
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.15 to be $0.94 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.79 cheap at its bid price of 24.92.

impVol_MFC_150514
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.75 to be $0.51 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.35 to be $0.65 cheap.

impVol_BAM_150514
Click for Big

The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 22.54 to be $0.86 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.93 and appears to be $0.52 rich.

impVol_FTS_150514
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.33, looks $0.98 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.00 and is $0.57 rich.

pairs_FR_150514
Click for Big

Investment-grade pairs predict an average over the next five-odd years of about 0.30%, including the TRP.PR.A / TRP.PR.F at -0.36% and the BNS.PR.Y / BNS.PR.D pair at +0.78. On the junk side, the FFH.PR.E / FFH.PR.F pair is at -0.85%, while BRF.PR.A / BRF.PR.B is at -1.05%.

pairs_FF_150514
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.3167 % 2,305.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.3167 % 4,031.0
Floater 3.15 % 3.30 % 53,697 18.96 4 0.3167 % 2,450.8
OpRet 4.43 % -4.72 % 38,605 0.13 2 0.0123 % 2,774.9
SplitShare 4.57 % 4.80 % 60,523 3.34 3 -0.0267 % 3,223.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0123 % 2,537.4
Perpetual-Premium 5.46 % 2.09 % 63,637 0.08 18 -0.0283 % 2,520.6
Perpetual-Discount 5.05 % 5.06 % 120,016 15.38 15 -0.0687 % 2,787.0
FixedReset 4.39 % 3.73 % 271,447 16.57 86 0.0412 % 2,425.1
Deemed-Retractible 4.92 % 3.35 % 111,028 0.62 35 0.0137 % 2,644.0
FloatingReset 2.59 % 2.89 % 61,323 6.18 7 -0.1154 % 2,333.7
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset -3.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 18.01
Evaluated at bid price : 18.01
Bid-YTW : 3.63 %
RY.PR.Z FixedReset -1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.00
Evaluated at bid price : 24.34
Bid-YTW : 3.36 %
CU.PR.E Perpetual-Discount -1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 24.30
Evaluated at bid price : 24.76
Bid-YTW : 4.93 %
CU.PR.D Perpetual-Discount -1.18 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 24.73
Evaluated at bid price : 25.20
Bid-YTW : 4.85 %
GWO.PR.N FixedReset -1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.15
Bid-YTW : 6.27 %
ENB.PR.T FixedReset 1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 4.55 %
PWF.PR.A Floater 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 17.90
Evaluated at bid price : 17.90
Bid-YTW : 2.78 %
MFC.PR.K FixedReset 1.18 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 3.98 %
BAM.PR.R FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 21.27
Evaluated at bid price : 21.27
Bid-YTW : 4.08 %
IFC.PR.A FixedReset 1.30 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.05
Bid-YTW : 5.37 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.T FixedReset 159,112 RBC crossed 108,600 at 25.29. TD bought blocks of 10,000 and 30,000 from Scotia, both at 25.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.35
Evaluated at bid price : 25.20
Bid-YTW : 3.38 %
PWF.PR.P FixedReset 130,633 Nesbitt sold 23,800 to RBC at 18.65 and another 16,200 to TD at 18.60, then crossed 90,000 at 18.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 18.57
Evaluated at bid price : 18.57
Bid-YTW : 3.64 %
BMO.PR.T FixedReset 53,326 RBC crossed 50,000 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.00
Evaluated at bid price : 24.40
Bid-YTW : 3.36 %
BAM.PR.Z FixedReset 52,397 Nesbitt crossed 44,700 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.28
Evaluated at bid price : 24.56
Bid-YTW : 4.12 %
ENB.PR.T FixedReset 45,126 RBC crossed 34,200 at 20.20.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 4.55 %
BMO.PR.L Deemed-Retractible 38,400 RBC crossed two blocks of 19,100 each, both at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-06-24
Maturity Price : 25.50
Evaluated at bid price : 25.71
Bid-YTW : -3.13 %
There were 18 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PR.T FloatingReset Quote: 24.10 – 24.54
Spot Rate : 0.4400
Average : 0.2733

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 2.85 %

HSE.PR.C FixedReset Quote: 25.00 – 25.40
Spot Rate : 0.4000
Average : 0.2404

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.19
Evaluated at bid price : 25.00
Bid-YTW : 4.15 %

PWF.PR.P FixedReset Quote: 18.57 – 19.06
Spot Rate : 0.4900
Average : 0.3676

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 18.57
Evaluated at bid price : 18.57
Bid-YTW : 3.64 %

RY.PR.Z FixedReset Quote: 24.34 – 24.78
Spot Rate : 0.4400
Average : 0.3358

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 23.00
Evaluated at bid price : 24.34
Bid-YTW : 3.36 %

PWF.PR.A Floater Quote: 17.90 – 18.35
Spot Rate : 0.4500
Average : 0.3746

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-05-14
Maturity Price : 17.90
Evaluated at bid price : 17.90
Bid-YTW : 2.78 %

GWO.PR.N FixedReset Quote: 18.15 – 18.40
Spot Rate : 0.2500
Average : 0.1807

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.15
Bid-YTW : 6.27 %