Massive Liquidity Premium in BPO vs. BPS Preferred Shares

July 28th, 2014

Assiduous Reader JQ writes in and says:

Hi, James,

I am your long time loyal reader and have learned a lot from you. Thank you very much.

Would you please to answer the following questions about BPO and BPS preferred shares:
BPO.PR._ and BPS.PR._ are both listed, are they same? Why the price difference is so big? Will BPO.PR._ be delisted?

Thank you.

Well, JQ, flattery will get you everywhere! I checked out the last bids for Friday:

BPO vs. BPS Retractible Preferred Shares
BPO Ticker Shares
Outstanding
Quote
2014-7-25
BPS Ticker Shares
Outstanding
Quote
2014-7-25
BPO.PR.H 7.0-million 25.40-57 BPS.PR.A 1.0-million 25.11-25
BPO.PR.J 7.0-million 25.26-35 BPS.PR.B 1.0-million 24.75-76
BPO.PR.K 5.0-milllion 25.70-94 BPS.PR.C 1.0-million 24.63-90
BPO.PR.U
[US Pay]
3.4-million 25.33-47 BPS.PR.U
[US Pay]
1.0-million 24.95-00

Assiduous Readers will recall that BPS preferred shares commenced trading on June 11. Readers will also recall that after reviewing the terms of the organization I concluded that I was more or less indifferent to the choice between the old BPO preferred and the equivalent BPS preferred share:

I make no recommendation. The decision will depend on each holders desire for a (miniscule) extra amount of credit protection (with the early retraction privilege) vs. what could potentially be a very severe loss of liquidity.

However, the difference in price between the equivalent issues is currently fairly large; I urge holders of the BPO preferred shares to review very carefully their need for liquidity and determine whether or not a swap is indicated in their particular situation.

Regrettably, Brookfield Properties Split Corp. still does not have a website, from which we may deduce that the directors (see SEDAR, Brookfield Property Split Corp. Jun 27 2014 14:34:52 ET Security holders documents – English; direct links are not permitted, since the (indirectly) bank-owned SEDAR has a monopoly granted by the securities regulators which they grossly abuse; the competition bureau has given the banks huge exemptions from competition laws in exchange for large regular payments to the regulators):

  • Saul Shulman
  • Bryan Kenneth Davis
  • Robert Stelzl, and
  • Denis Andre Turcotte

are morons. Fortunately, not much brainpower is required to operate a Split Share Corporation with a single issue portfolio.

July 25, 2014

July 25th, 2014

Algonquin Power & Utilities Corporation, proud issuer of AQN.PR.A and AQN.PR.D, was confirmed at Pfd-3(low) today by DBRS:

APUC’s non-consolidated key financial metrics are in line with the current rating profile. Non-consolidated debt-to-capital has remained minimal (0% as of March 31, 2014) and APUC intends to maintain debt at the HoldCo level well below the 20% threshold. In addition, APUC’s financial profile is also supported by the small size of preferred dividends relative to the cash flow available to the HoldCo. For the year ended December 31, 2013, preferred dividends totalled $5.4 million, while estimated cash flow available to service these dividends totalled approximately $105 million, allowing the remaining cash to service common dividends and partially fund capital expenditure needs.

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts off 1bp, FixedResets down 7bp and DeemedRetractibles gaining 5bp. Volatility was low, with two of the three issues mentioned being high-volatility Floaters. Volume was very low.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.07 % 3.06 % 19,563 19.52 1 0.4115 % 2,584.9
FixedFloater 4.16 % 3.40 % 28,148 18.65 1 0.0438 % 4,167.5
Floater 2.86 % 2.96 % 46,347 19.84 4 -0.2992 % 2,768.5
OpRet 4.02 % -4.01 % 79,133 0.08 1 0.1177 % 2,722.2
SplitShare 4.25 % 3.85 % 50,019 4.01 6 -0.0347 % 3,120.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1177 % 2,489.1
Perpetual-Premium 5.52 % -5.09 % 82,653 0.09 17 0.0300 % 2,432.7
Perpetual-Discount 5.23 % 5.08 % 105,690 15.24 20 -0.0149 % 2,584.5
FixedReset 4.40 % 3.59 % 195,658 8.59 77 -0.0712 % 2,555.6
Deemed-Retractible 4.98 % -1.40 % 121,058 0.09 43 0.0546 % 2,554.8
FloatingReset 2.66 % 2.16 % 93,176 3.85 6 -0.1904 % 2,514.0
Performance Highlights
Issue Index Change Notes
BAM.PR.B Floater -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 3.01 %
PWF.PR.P FixedReset -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 22.71
Evaluated at bid price : 23.12
Bid-YTW : 3.40 %
PWF.PR.A Floater 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 20.30
Evaluated at bid price : 20.30
Bid-YTW : 2.58 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.N FixedReset 103,249 Scotia crossed 40,000 at 21.40; Desjardins crossed 56,200 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.35
Bid-YTW : 4.75 %
GWO.PR.P Deemed-Retractible 77,290 TD crossed blocks of 30,000 and 45,000, both at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.70
Bid-YTW : 5.09 %
POW.PR.G Perpetual-Premium 76,100 TD crossed blocks of 30,000 and 45,000, both at 25.72.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 5.12 %
TD.PF.A FixedReset 72,500 TD crossed 50,000 at 25.28.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 23.23
Evaluated at bid price : 25.28
Bid-YTW : 3.61 %
SLF.PR.A Deemed-Retractible 54,125 Desjardins crossed 49,200 at 24.20.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 5.24 %
BNS.PR.P FixedReset 52,100 TD crossed 50,000 at 25.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 2.83 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TD.PR.P Deemed-Retractible Quote: 26.08 – 26.55
Spot Rate : 0.4700
Average : 0.2743

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.75
Evaluated at bid price : 26.08
Bid-YTW : -11.11 %

GWO.PR.F Deemed-Retractible Quote: 25.75 – 26.20
Spot Rate : 0.4500
Average : 0.2620

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : -23.69 %

IAG.PR.F Deemed-Retractible Quote: 26.05 – 26.49
Spot Rate : 0.4400
Average : 0.2755

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 26.05
Bid-YTW : 5.05 %

BAM.PR.K Floater Quote: 17.60 – 18.00
Spot Rate : 0.4000
Average : 0.2599

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 17.60
Evaluated at bid price : 17.60
Bid-YTW : 3.00 %

BAM.PR.B Floater Quote: 17.55 – 17.95
Spot Rate : 0.4000
Average : 0.2697

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 17.55
Evaluated at bid price : 17.55
Bid-YTW : 3.01 %

PWF.PR.P FixedReset Quote: 23.12 – 23.45
Spot Rate : 0.3300
Average : 0.2080

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-25
Maturity Price : 22.71
Evaluated at bid price : 23.12
Bid-YTW : 3.40 %

July 24, 2014

July 24th, 2014

A paper by Nicholas Labelle, Varya Taylor titled Removal of the Unwinding Provisions in the Automated Clearing Settlement System: A Risk Assessment is interesting:

A default in the Automated Clearing Settlement System (ACSS) occurs when a Direct Clearer is unable to settle its final obligation. In August 2012, the Canadian Payments Association amended the ACSS by-law and rules to repeal the unwinding provisions from the ACSS default framework. Without unwinding, payment items are no longer returned by the defaulter to the other participants as a means of reducing the defaulter’s final obligation. Instead, the other Direct Clearers (survivors) pay only additional settlement obligations to cover the defaulter’s shortfall. To assess the potential exposures of an ACSS default without unwinding, we use simulations to estimate the value of additional settlement obligations for each survivor and compare these exposures to their capital and liquid assets. Results indicate that these exposures are indeed manageable by survivors and, therefore, that the ACSS does not pose systemic risk.

The global economy still looks lousy:

Today’s report from the IMF highlights, in particular, the struggles of the euro zone and the still-uneven recovery in the United States after a brutal winter, as well as the troubles in emerging markets.

In the update to its earlier world economic outlook, released in Mexico City, the IMF now forecasts that Canada’s economy will grow by 2.2 per cent this year, down marginally from its April forecast of 2.3 per cent. It held its 2015 outlook for Canada steady at 2.4 per cent.

Despite the trim, Canada’s economy will be outpaced this year among the G7 nations only by Britain, at 3.2 per cent. Next year, according to the forecast both Britain and the United States will outstrip Canada, at 2.7 per cent and 3 per cent, respectively.

The IMF forecast puts the spotlight on the euro zone, where Germany’s economy is projected to grow by 1.9 per cent this and 1.7 per cent in 2015, France by 0.7 per cent and 1.4 per cent, and Italy, by 0.3 per cent and 1.1 per cent.

Japan will also lag, at 1.6 per cent and 1.1 per cent.

Well, it looks like we have a winner for Quote of the Day!

BAMPRG_140724
Click for Big

Yes, that’s right, BAM.PR.G is quoted at 22.81-500.00, 1×9. Timestamped details are not yet available from the Toronto Stock Exchange, so it’s not clear whether this is due to a moronic market-maker, or to the TMX’s moronic practice of reporting the ‘last’ quote rather than the closing quote. I have followed my usual practice in such cases and reset the ask price used by HIMIPref™ to $1 above the bid.

Update: I’ve checked it out, buying all ‘Trades and Quotes’ between 3:55pm and 4:00pm. The only entry in the file is a quote timestamped 15:59:45, 22.81-500.00, 1×1. So what we have here, people, is a lackadaisical market-maker

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets down 8bp and DeemedRetractibles off 3bp. Volatility was negligible. Volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.09 % 3.07 % 19,802 19.49 1 -0.4098 % 2,574.3
FixedFloater 4.16 % 3.40 % 29,083 18.65 1 0.4846 % 4,165.7
Floater 2.86 % 2.95 % 46,302 19.85 4 -0.3118 % 2,776.8
OpRet 4.02 % -2.74 % 79,535 0.08 1 -0.5462 % 2,719.0
SplitShare 4.25 % 3.86 % 52,079 4.01 6 0.0398 % 3,121.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.5462 % 2,486.2
Perpetual-Premium 5.52 % -5.27 % 82,840 0.09 17 0.0878 % 2,432.0
Perpetual-Discount 5.23 % 5.09 % 109,492 15.24 20 0.0000 % 2,584.9
FixedReset 4.40 % 3.59 % 199,507 8.60 77 -0.0843 % 2,557.4
Deemed-Retractible 4.98 % 0.08 % 122,672 0.09 43 -0.0333 % 2,553.4
FloatingReset 2.66 % 2.13 % 94,093 3.82 6 -0.0787 % 2,518.8
Performance Highlights
Issue Index Change Notes
BAM.PF.A FixedReset -1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 4.04 %
BMO.PR.S FixedReset -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-24
Maturity Price : 23.30
Evaluated at bid price : 25.41
Bid-YTW : 3.70 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.Q Deemed-Retractible 303,100 Scotia crossed 298,800 at 24.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 5.25 %
RY.PR.H FixedReset 268,050 Nesbitt crossed 153,100 and two blocks of 50,000 each, all at 25.26.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-24
Maturity Price : 23.22
Evaluated at bid price : 25.20
Bid-YTW : 3.59 %
ELF.PR.H Perpetual-Discount 202,900 Nesbitt crossed 200,000 at 24.85.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-24
Maturity Price : 24.38
Evaluated at bid price : 24.81
Bid-YTW : 5.56 %
GWO.PR.P Deemed-Retractible 199,660 TD crossed blocks of 75,000 shares, 35,000 and 85,000, all at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.80
Bid-YTW : 5.01 %
BAM.PF.F FixedReset 136,300 Nesbitt crossed 125,000 at 25.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-24
Maturity Price : 23.29
Evaluated at bid price : 25.45
Bid-YTW : 4.21 %
GWO.PR.S Deemed-Retractible 90,600 RBC crossed 84,700 at 25.60.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 5.12 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.C Deemed-Retractible Quote: 22.89 – 23.30
Spot Rate : 0.4100
Average : 0.2493

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.89
Bid-YTW : 5.66 %

BAM.PR.G FixedFloater Quote: 22.81 – 23.81
Spot Rate : 1.0000
Average : 0.8542

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-24
Maturity Price : 22.86
Evaluated at bid price : 22.81
Bid-YTW : 3.40 %

IAG.PR.A Deemed-Retractible Quote: 23.20 – 23.68
Spot Rate : 0.4800
Average : 0.3518

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.20
Bid-YTW : 5.58 %

BNS.PR.B FloatingReset Quote: 25.37 – 25.62
Spot Rate : 0.2500
Average : 0.1463

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 2.13 %

VNR.PR.A FixedReset Quote: 25.33 – 25.68
Spot Rate : 0.3500
Average : 0.2571

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 3.97 %

MFC.PR.B Deemed-Retractible Quote: 23.40 – 23.70
Spot Rate : 0.3000
Average : 0.2073

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.40
Bid-YTW : 5.55 %

New Issue: EQB FixedReset, 6.35%+478

July 24th, 2014

Equitable Group Inc. has announced:

that it has agreed to issue 2,800,000 Non-cumulative 5-Year Rate Reset Preferred Shares Series 3 (the “Series 3 Preferred Shares”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc. and Scotiabank for distribution to the public. The Series 3 Preferred Shares will be issued at a price of $25.00 per share, for aggregate gross proceeds of $70,000,000. Holders of the Series 3 Preferred Shares will be entitled to receive non-cumulative preferential quarterly fixed dividends yielding 6.35% annually for the initial period ending September 30, 2019. Thereafter, the dividend rate will be reset every five years at a rate equal to the then current 5-year Government of Canada bond yield plus 4.78%.

The Company has granted to the underwriters an over-allotment option, exercisable for a period of 30 days following closing of the offering, to purchase up to an additional 200,000 Series 3 Preferred Shares which, if exercised in full, would increase the gross offering size to $75,000,000. The Series 3 Preferred Shares will be offered in all provinces and territories of Canada by way of a supplement to the Company’s existing short form base shelf prospectus dated June 24, 2014.

“Preferred shares have long formed a fundamental part of our Bank’s efficient capital structure and of our strategy of supporting growth with non-dilutive forms of capital,” said Andrew Moor, President and CEO of Equitable Group and its wholly owned subsidiary, Equitable Bank. “This attractive offering will keep our capital position well above most industry benchmarks as we deliver profitable growth across our lines of business.”

Holders of Series 3 Preferred Shares will have the right, at their option, to convert their Series 3 Preferred Shares into Non-cumulative Floating Rate Preferred Shares Series 4 of the Company (the “Series 4 Preferred Shares”), subject to certain conditions, on September 30, 2019 and on September 30 every five years thereafter. Holders of the Series 4 Preferred Shares will be entitled to receive non-cumulative preferential quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.78%.

The proceeds of this offering will be used by the Company to acquire Basel III compliant Non-cumulative 5-Year Rate Reset Preferred Shares Series 3 of Equitable Bank (the “Bank”), which will form part of the Bank’s Tier I capital base. The Bank will in turn use the proceeds for corporate purposes and to redeem its existing Series 1 Preferred Shares, subject to the receipt of all necessary regulatory approvals. The Company likewise intends to redeem its currently outstanding Non-cumulative 5-year Rate Reset Preferred Shares Series 1 on September 30, 2014 in accordance with the terms of such shares.

“Equitable’s capital ratios have consistently exceeded minimum regulatory standards as a result of years of disciplined capital allocation,” said Tim Wilson, Chief Financial Officer of Equitable Group and Equitable Bank. “Giving effect to the issuance of Series 3 and the redemption of Series 1, on a pro forma basis our Total and Tier I Capital Ratios would improve by 80 basis points to 17.4% and 14.6% respectively on an all-in basis, based on our reported position at the end of our first quarter.”

The offering is expected to close on or about August 8, 2014. The Company will make an application to list the Series 3 Preferred Shares and Series 4 Preferred Shares on the Toronto Stock Exchange.

It’s kind of an interesting issue, because it’s being issued by the holding company with proceeds being invested in virtually identical private shares of the operating company. The OpCo’s shares will be NVCC-compliant, but the HoldCo’s shares are unregulated and do not have a forced-conversion-to-equity clause; thus, it is possible that the OpCo’s shares could be converted into OpCo common while the HoldCo’s shares still represent a $25 claim on HoldCo. While I’m sure that in such a case that this claim would not be trading at par, it sounds like a good thing, even if all it ever does is make the lawyers rich.

It is also interesting that the coupon of this issue, at 6.35%, is lower than the initial coupon on the issue it is refunding, EQB.PR.A, issued as ETC.PR.A. However, the Issue Reset Spread on the issue is higher, 478bp as opposed to 453bp. How times change!

This issue is unrated and will not be tracked by HIMIPref™. This is not because I worship the Credit Rating Agencies and am unable to do anything without them; it is because I feel that a public announcement by the CRAs of imminent downgrades do an admirable job of concentrating the minds of management and the directors on fixing the problem. Such announcements by Hymas Investment Management Inc. or Joe Blogger do not carry the same weight.

EQB.PR.A To Be Redeemed

July 24th, 2014

Equitable Group Inc. has announced:

The Company likewise intends to redeem its currently outstanding Non-cumulative 5-year Rate Reset Preferred Shares Series 1 on September 30, 2014 in accordance with the terms of such shares.

EQB.PR.A was originally issued as ETC.PR.A, a FixedReset, 7.25%+453, announced 2009-8-17. It has not been tracked by HIMIPref™ as it does not have a credit rating.

July 23, 2014

July 24th, 2014

The SEC has announced:

The Securities and Exchange Commission today adopted amendments to the rules that govern money market mutual funds.

The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.

With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.
  • Liquidity Fees – Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions. Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund. If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions. However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.
  • Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.

SEC Chair Mary Jo White’s statement inadvertently explains why these measures won’t work:

During the last financial crisis, institutional prime money market funds experienced an unprecedented run when the Reserve Primary Fund “broke the buck” and declared it would no longer redeem investors’ shares dollar-for-dollar. In one week, investors pulled approximately $300 billion from prime money market funds, or 14 percent of the assets in those funds. This phenomenon, together with other events in the fall of 2008, caused the short-term financing markets to dry up, severely limiting the ability of companies to borrow funds, manage cash, and continue fueling the American economy. As part of a program of extraordinary support across the financial system, a temporary guarantee program was provided through Treasury to stop the run on institutional prime funds, and the Federal Reserve established liquidity facilities.

OK, so you’ve got a tense situation and suddenly BANG! A blue-chip company defaults leading to a run on the entire industry. But this run is actually worse than was experienced before, because not only are corporate treasurers worried about whether or not there will be default in the fund(s) that they own, but they will also be worried that the run itself will trigger redemption gates and fees on their fund – and you don’t put your corporate cash assets in MMFs so that you can pay fees and be subject to gates.

Ms. White counters this with the party line:

While many strongly favor this reform, others have expressed a concern that it could do harm by potentially triggering destructive “pre-emptive” runs. This concern is important, but addressing it need not — and should not — mean foregoing an important reform. What we have done in response to this concern is to make significant modifications to the original proposal that, while preserving the fundamental utility of fees and gates, mitigate the pre-emptive run risk and dampen the effects if they were to occur.
  • The recommendation, among other measures, increases the thresholds for imposing a fee or gate to a higher level of remaining liquid assets. A money market fund that imposes a fee or gate with substantial remaining internal liquidity is in a better position to bear those redemptions without a broader market impact because it can satisfy those redemption requests with cash, without selling assets, and this is less likely to generate a run in other funds.
  • The recommendation makes the imposition of a fee or gate more discretionary, rather than the result of strict triggers. The absence of such triggers make it less likely that informed investors will be able to “front run” the exercise of a fee or gate, thereby precipitating a run.
  • And the recommendation lessens the liquidity impact for investors of a fee or gate by, among other things, permitting only a short maximum gate. This change will also diminish the incentive of an investor to run in order to preserve liquidity.

Well, I guess we’ll just have to wait for the next crisis to see who’s right on this one. They come along every twenty years or so; it will give some interest to the twilight of my career. Until then I will argue that the only thing that has proved to be effective against a bank run is solvency backed up by central bank lending. And solvency in a crisis, when a certain proportion of holdings has either defaulting or is trading at stressed levels, requires capital. And these new rules ain’t got no capital.

Commissioner Kara M. Stein explained in her statement how solvency and liquidity were attained last time:

The Federal Reserve created several programs to support the liquidity of financial institutions, borrowers, and investors.[3] And the Treasury Department guaranteed nearly $2.4 trillion in money market fund assets through its Temporary Guarantee Program.[4]

[3] See, e.g., Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIF), and the Term Asset-Backed Securities Loan Facility (TALF). For descriptions of these programs, see http://www.federalreserve.gov/newsevents/reform_cpff.htm (reflecting $739 billion in CPFF loans and $738 billion in purchases of commercial paper), http://www.federalreserve.gov/newsevents/reform_amlf.htm (reflecting $217 billion in AMLF loans), http://www.federalreserve.gov/newsevents/reform_mmiff.htm (reflecting $0 in total loans as the MMIF facility was never used), and http://www.federalreserve.gov/newsevents/reform_talf.htm (reflecting $71.1 billion in TALF loans).

[4] See Press Release, Treasury Announces Temporary Guarantee Program for Money Market Funds (Sept. 29, 2008), available at http://www.treasury.gov/press-center/press-releases/Pages/hp1161.aspx.

Footnote [3] addresses liquidity, is an entirely normal feature of central bank crisis management and requires no apology or correction. Footnote [4] addresses solvency, is an unpleasant and unwelcome crisis measure by the government and reflects a situation that certainly should be corrected with new procedures and attitudes, but which is unaddressed by the new rules.

However, Ms. Stein makes some effort to redeem herself (at par):

However, after careful study, I am concerned that gates are the wrong tool to address this risk. As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital. More importantly, a run in one fund could incite a system-wide run because investors in other funds likely will fear that they also will impose gates. I share the concerns of many commenters and economists that while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole.[7]

Even further, while a run by investors in one fund may be halted when the gate for that fund is used, that does not mean the impact on the wholesale funding markets will stop. To the contrary, a fund that drops a gate likely would need to build liquidity to meet redemption requests when the gate is lifted. This means the fund is likely to stop re-investing maturing securities during the gated period, or will invest primarily in government securities, thereby cutting off funding to issuers. This effect could be amplified by investors, who likely will redeem assets from other funds if one fund imposes a gate. And if investors are not able to redeem before the gate comes down, they will be harmed as they are deprived of access to their capital.[8] Ultimately, this contagion could freeze the wholesale funding markets in much the same way as occurred during the recent financial crisis.

[7] See, e.g., Comment Letters from the Federal Reserve Bank of Boston (Sept. 12, 2013), The Systemic Risk Council (Sept. 16, 2013), Samuel Hanson, David Scharfstein, and Adi Sunderman (Sept. 16, 2013), Goldman Sachs Asset Management (Sept. 17, 2013 and July 21, 2014), Deutsche Investment Management Americas (Sept. 17, 2013), Committee on Capital Markets Regulation (Sept. 17, 2013), The Squam Lake Group (Sept. 17, 2013), and Americans for Financial Reform (Sept. 17, 2013). See also Federal Reserve Bank of New York, Staff Report No. 670, Gates, Fees, and Preemptive Runs (Apr. 2014).

See Kevin McCoy, Primary Fund Shareholders Put in a Bind, USA Today, Nov. 11, 2008 (discussing hardships faced by Reserve Primary Fund shareholders due to having their shareholdings frozen); John G. Taft, STEWARDSHIP: LESSONS LEARNED FROM THE LOST CULTURE OF WALL STREET (2012), at 2 (“Now that the Reserve Primary Fund had suspended redemptions of Fund shares for cash, our clients had no access to their cash. This meant, in many cases, that they had no way to settle pending securities purchases and therefore no way to trade their portfolios at a time of historic market volatility. No way to make minimum required distributions from retirement plans. No way to pay property taxes. No way to pay college tuition. It meant bounced checks and, for retirees, interruption of the cash flow distributions they were counting on to pay their day-to-day living expenses.”).

… and I will award Ms. Stein full marks for:

I also am not sufficiently persuaded by the argument that many investors with a low tolerance for gates will seek alternative financial products that are better aligned with their risk-return preferences. While this could happen, it seems just as likely that those same investors will continue to invest in money market funds because they believe they will be able to redeem before a gate is imposed, or that sponsor support will prevent the gate from ever being used. While the rule requires disclosure of sponsor support, it unfortunately does little to address the moral hazard that is created by it.

In addition to which, Ms. Stein is a whole lot younger and better looking than the average SEC commissioner. I wonder if she’s married, and if she’d like to meet a nice Canadian preferred share specialist.

Commissioner Michael S. Piwowar makes an argument I don’t buy:

As a threshold matter, there is no evidence that money market funds themselves pose any threat to the stability of the U.S. financial system. Rather, if there were any systemic risk related to the money markets, it would be over-reliance by financial institutions, particularly banks, on the money markets for short-term funding. In fact, it has been argued that the reason Treasury instituted the guarantee program in 2008 was to reduce financial pressure on banks that had guaranteed the commercial paper of off-balance sheet conduits established by the banks with the approval of the Federal Reserve.[5] As I have said before, if the banking regulators are concerned by banks’ over-reliance on short-term funding from money market funds, then they have the authority to address this bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed this authority.

[5] See Peter Wallison, Money Market Funds Were a Victim, Not a Cause, Of the Financial Crisis (May 2, 2014) available at [LINK]

Wallison’s linked article states:

It was always a bit implausible that Treasury would set up an insurance system just to protect the shareholders of MMFs against what many were calling a “run.” What interest could Treasury possibly have in whether MMF shareholders suffer losses?

But there’s another and more plausible reason for what Treasury did. By the mid-2000s, MMFs were a major financing source for $1.3 trillion in commercial paper that had been issued by off-balance sheet entities established and guaranteed by the largest U.S. banks. These entities, known as asset backed commercial paper conduits (ABCP conduits) had been set up with the approval of the Fed and had invested in prime and subprime mortgage-backed securities. Supporting long term assets like mortgages with short term commercial paper is profitable, but risky. If the mortgages begin to lose value, the financing sources may not roll over, and what would the banks do then?

These facts provide a completely different perspective than the conventional view of the of the Treasury’s action. It was not to save the shareholders of the MMFs — there was literally no reason for the Treasury to do that — but to ease the financial pressures on the banks that had guaranteed the commercial paper of their off-balance sheet conduits. It follows that in any future crisis — unless the banks are again allowed by the Fed to establish ABCP conduits — there is no likelihood that the Treasury will seek to use taxpayer funds to protect the shareholders of MMFs, even if one or more of those MMFs break the buck.

I don’t buy it. There’s been considerable commentary – reported at various times on PrefBlog, like f’rinstance in the post BIS Releases March 2009 Quarterly Review – that it was the European banks that were put at risk by a US MMF collapse, which in turn could have fed into global systemic collapse; or, if not collapse, then perhaps something even worse than what actually happened. So let’s just ignore Piwowar and his threshold matters.

And even PrefBlog’s favourite whipping boy, Commissioner Luis A. Aguilar, had a useful link, although I can’t say he actually proved his point:

Some observers, including staff at the Federal Reserve Bank of New York, have suggested the possibility that fees and gates may themselves cause pre-emptive runs, by encouraging investors to redeem their shares before fees and gates are imposed.[29] However, as discussed at length in today’s release, the Federal Reserve staff’s conclusion that fees and gates may cause pre-emptive runs is based on a model whose assumptions and features are different than the reforms we are adopting today.[30] Accordingly, as noted in the release, the Federal Reserve paper’s findings regarding the risks of pre-emptive redemptions are not likely to apply.[31]

[29] See, e.g., Federal Reserve Bank of New York Staff Report, Gates, Fees, and Preemptive Runs (Apr. 2014), available at http://www.newyorkfed.org/research/staff_reports/sr670.html.

[30] Id. For example, the Federal Reserve Bank of New York Staff Report relies upon a model that assumes that fees or gates are imposed only when a fund’s liquid assets are fully depleted. In contrast, under today’s reforms, fees or gates may be imposed while the fund still has substantial liquid assets, and thus investors may be dissuaded from pre-emptively redeeming from funds with substantial internal liquidity because the fund is more likely to be able to readily satisfy redemptions without adversely impacting the fund’s pricing. Adopting Release, supra note 1, at 63-66. Another important difference is that our reforms include a floating NAV for a significant portion of money market funds, which may have the effect of altering the behavior of investors under a model that took such a combination of effects into account. Id. at 65. Another significant difference is that our reforms include a floating NAV for institutional prime money market funds, which constitute a sizeable portion of all money market funds, but the model assumes a stable NAV. The floating NAV requirement may encourage those investors who are least able to bear risk of loss to redirect their investments to other investment opportunities (e.g., government money market funds), and this may have the secondary effect of removing from the funds those investors most prone to redeem should a liquidity event occur for which fees or gates could be imposed.

[31] Adopting Release, supra note 1, at 65-66.

Isn’t the US system great? You never see anything like this in Canadian regulatory discussion. The banks wouldn’t approve.

There has been a mass rebranding of the DEX bond indices to FTSE TMX Canada bond indices.

Has anyone here ever seen anything like this? Concrete paviors with a 3:1 plan ratio. I took this picture on Yorkville Avenue between Yonge and Bay.

All the stuff I can find on the internet merely talks about the aspect ratio – that is, the longest dimension divided by the vertical length, what I would call the depth, but what they call the thickness, noting only that 3:1 or less is required for vehicular traffic.

All I can find regarding the plan ratio simply notes that 2:1 or 3:1 can be set in an interlocking herringbone pattern … fine, but why not a 4:1 plan ratio? Would that make the aspect ratio silly, or unsafe, or uneconomic, or what? Certainly if a plan ratio of 4:1 was to be used for vehicular traffic, and therefore requiring a maximum 3:1 aspect ratio, then the depth would be greater than width and the installers would feel pretty silly. But are there other reasons?

And are there any advantages or disadvantages to a 3:1 plan ratio relative to a 2:1 plan ratio?

2014-07-23 18.00.19
Click for Big

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 10bp and both FixedResets and DeemedRetractibles gaining 7bp. Volatility was anemic. Volume was average.

PerpetualDiscounts now yield 5.09%, equivalent to 6.62% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread is now about 240bp, unchanged from July 9.

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 3.07 % 3.06 % 19,911 19.52 1 0.0000 % 2,584.9
FixedFloater 4.19 % 3.41 % 30,232 18.61 1 1.4752 % 4,145.6
Floater 2.85 % 2.94 % 46,485 19.87 4 0.3412 % 2,785.5
OpRet 4.00 % -9.33 % 80,344 0.08 1 0.0000 % 2,733.9
SplitShare 4.25 % 4.00 % 48,216 4.01 6 0.1197 % 3,120.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,499.9
Perpetual-Premium 5.52 % -4.81 % 83,982 0.09 17 -0.0139 % 2,429.9
Perpetual-Discount 5.23 % 5.09 % 109,792 15.21 20 0.0958 % 2,584.9
FixedReset 4.40 % 3.59 % 203,446 8.57 77 0.0702 % 2,559.6
Deemed-Retractible 4.98 % -0.29 % 123,904 0.09 43 0.0713 % 2,554.3
FloatingReset 2.66 % 2.12 % 95,384 3.82 6 -0.1834 % 2,520.8
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset 1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.29
Bid-YTW : 4.00 %
BAM.PR.G FixedFloater 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 22.78
Evaluated at bid price : 22.70
Bid-YTW : 3.41 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.A FixedReset 97,601 RBC crossed 25,000 at 25.36. Nesbitt bought 10,000 from TD at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 23.24
Evaluated at bid price : 25.30
Bid-YTW : 3.61 %
ENB.PF.E FixedReset 57,200 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 23.10
Evaluated at bid price : 24.97
Bid-YTW : 4.11 %
GWO.PR.P Deemed-Retractible 53,510 TD crossed 50,000 at 25.80.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.72
Bid-YTW : 5.07 %
BNS.PR.Q FixedReset 47,000 RBC crossed 29,900 at 25.45. Desjardins crossed 15,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.43
Bid-YTW : 3.17 %
PVS.PR.D SplitShare 35,234 Recent new issue and ticker change.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 4.95 %
BNS.PR.P FixedReset 33,400 RBC crossed 30,000 at 25.48.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 2.83 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.G FixedFloater Quote: 22.70 – 23.70
Spot Rate : 1.0000
Average : 0.6944

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 22.78
Evaluated at bid price : 22.70
Bid-YTW : 3.41 %

FTS.PR.F Perpetual-Discount Quote: 24.52 – 24.82
Spot Rate : 0.3000
Average : 0.2092

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 24.23
Evaluated at bid price : 24.52
Bid-YTW : 5.06 %

FTS.PR.H FixedReset Quote: 21.45 – 21.82
Spot Rate : 0.3700
Average : 0.2874

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-23
Maturity Price : 21.45
Evaluated at bid price : 21.45
Bid-YTW : 3.51 %

GWO.PR.H Deemed-Retractible Quote: 24.10 – 24.40
Spot Rate : 0.3000
Average : 0.2263

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 5.37 %

PWF.PR.G Perpetual-Premium Quote: 25.40 – 25.58
Spot Rate : 0.1800
Average : 0.1132

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-22
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : -14.46 %

IFC.PR.C FixedReset Quote: 25.77 – 25.94
Spot Rate : 0.1700
Average : 0.1103

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.77
Bid-YTW : 2.88 %

BCE Exchange Offer for BAF Preferreds

July 23rd, 2014

BCE Inc. has announced:

that BCE will privatize Bell Aliant by acquiring the interest of its affiliate’s public minority shareholders, while supporting Bell Aliant’s ongoing growth and competitiveness with significant investments in Atlantic Canada infrastructure and employment.

BCE expects the privatization transaction to be completed by November 30, 2014, subject to more than 50% of Bell Aliant common shares held by public minority shareholders being tendered to the offer, notification under the Competition Act, and other conditions set forth in the support agreement, a copy of which is available under Bell Aliant’s SEDAR profile at www.sedar.com. CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant, and no transfers of wireless spectrum licences.

BCE will also offer holders of preferred shares of Bell Aliant Preferred Equity Inc. (Prefco) the opportunity to exchange their Prefco preferred shares for BCE preferred shares with the same financial terms as the existing Prefco preferred shares, subject to terms and conditions of the offer. Completion of the Bell Aliant privatization is not conditional upon completion of the preferred share exchange.

The Special Committee of the independent directors of Prefco has unanimously determined that the preferred share offer is fair to preferred shareholders and, on the Special Committee’s recommendation, the Board of Directors of Prefco is recommending that shareholders accept the offer and tender their preferred shares. The Special Committee has received an opinion from Scotia Capital that, subject to the assumptions, limitations and qualifications set out in such opinion, the consideration to be received pursuant to the BCE preferred shares offer is fair from a financial point of view to the preferred shareholders. Completion of the preferred share exchange offer is conditional upon completion of the common share offer, holders of at least two-thirds of the outstanding preferred shares tendering their preferred shares to the offer, and the other conditions set forth in the support agreement.

The offers are expected to be commenced in mid-August and to expire in the second half of September. Tender offer circulars containing the full details of the common share offer and the preferred share offer (together with directors’ circulars for each offer) and other related documents setting forth full details of the terms and conditions of the offers will be mailed to shareholders.

It is not clear to me just what the position of untendered BAF preferred shares will be, in terms of the corporate structure, but will await shareholder documents.

Affected issues are:

These issues will be nicely complementary to BCE.PR.K, A FixedReset, 4.15%+188, which commenced trading July 5, 2011 with a ridiculous re-opening 2011-12-12.

DBRS has confirmed BCE at Pfd-3(high):

Following the transaction, DBRS expects Bell Aliant to be transferred to Bell Canada from BCE. As such, DBRS expects Bell Canada’s 2014 year-end gross debt-to-EBITDA to be approximately 2.35 times (x) versus DBRS’s previous expectation of approximately 2.10x. In its rating report dated April 7, 2014, DBRS stated that it expects Bell Canada to reduce its gross debt-to-EBITDA ratio to below 2.0x by mid-2015 and that failure by the Company to deleverage as expected could result in a negative rating action. DBRS is now more comfortable with a gross debt-to-EBITDA ratio of slightly above 2.0x over the medium term given the benefits to the business risk profile of the combined entity, the Company’s strong coverage ratios and its solid operating performance.

Going forward, the Company intends to deleverage through growth in operating income and the application of free cash flow toward debt reduction toward 2.0x over the next two to three years. This could be accelerated with the use of a dividend reinvestment plan funded by treasury stock issuance. Weaker-than-expected operating performance and/or failure to deleverage in the expected time frame could result in pressure on the ratings.

DBRS expects the transaction to be completed in November 2014. DBRS notes that the CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant and no transfers of wireless spectrum licenses. DBRS will re-evaluate its ratings confirmation if there is an increase in BCE’s offer price and/or a change in the terms of financing.

DBRS has placed BAF Under Review with Positive Implications:

DBRS has today placed the ratings of Bell Aliant Regional Communications, Limited Partnership’s (Bell Aliant) Under Review with Positive Implications following BCE Inc.’s tender offer to acquire the minority interest in Bell Aliant for $3.95 billion (BCE Inc./Bell Canada currently own 44.1% of Bell Aliant).

As part of the transaction, BCE Inc. will assume Bell Aliant’s $2.89 billion net debt and $618 million preferred shares. The Positive Implications of the Under Review status reflect the stronger credit profile of BCE Inc./Bell Canada. DBRS will proceed with its review as more information about the form and final structure of the transaction becomes available.

Similarly, S&P’s rating of BCE is unaffected at P-2(low):

Standard & Poor’s Ratings Services today said that its ratings and outlook on Montreal-based diversified telecom and media service provider BCE Inc. (BBB+/Stable/–) and its related entities are not affected by the company’s tender offer to acquire the remaining (55.9%) minority interest float in Bell Aliant Inc. for approximately C$3.95 billion. BCE plans to fund the transaction with about C$2.95 billion of BCE Inc. common shares and about C$1 billion of debt.

And S&P’s rating of BAF is on CreditWatch Positive:

  • •Montreal-based BCE Inc. has announced a tender offer to acquire the remaining minority interest float in Atlantic-Canada based Bell Aliant Inc.
  • •BCE will fund the C$3.95 billion purchase with about C$2.95 billion of
    equity and about C$1 billion of debt.
  • •As a result, we are placing our long-term ratings on Bell Aliant and its related entities, including our ‘BBB’ corporate credit rating on the company, on CreditWatch with positive implications.


We expect to rate any Bell Aliant debt that remains after the acquisition on a consolidated basis with BCE — the ratings on which are unchanged following this announcement …. The transaction is subject to support from more than 50% of Bell Aliant’s minority shareholders as well as approval from the Competition Bureau of Canada, and we expect it to close in fourth-quarter 2014 following these approvals.

July 22, 2014

July 22nd, 2014

There are musings about a possible drop in Canadian policy rates:

The Bank of Canada says it’s just going with the flow: If economic data in the months ahead get stronger than currently expected, it will ready for higher interest rates; if economic conditions unexpectedly worsen, the central bank says it is prepared to cut its benchmark interest rate from its already ultra-low setting of 1 per cent. For now, the central bank is totally neutral.

Craig Alexander, chief economist at Toronto-Dominion Bank, doesn’t really believe it. His latest commentary is inspired by a question about whether the central bank really could surprise and cut interest rates. Mr. Alexander politely considers the question, saying the possibility “is not ridiculous given some of the recent economic developments.” Then he goes about demolishing the idea almost entirely.

Mr. Alexander’s report sets the backdrop:

The Bank of Canada has been on hold for an unprecedented 45 months, and TD Economics expects the overnight rate to remain unchanged for at least another year. Futures markets are in agreement, as they anticipate the next move in rates will be a hike, but not until the fourth quarter of 2015. This consensus view is predicated on the belief that the economy will deliver only moderate growth, gradually eating up the available economic slack and closing the output gap in early 2016. The economic backdrop augurs that inflation will remain close to the Bank’s 2% target, implying no rush to reduce the degree of monetary stimulus, but also no need to lower rates.

There’s not much action in the US bond market:

Trading in U.S. government bonds has dropped 25 percent in the past few weeks from the comparable period last year, according to Federal Reserve data. Investment-grade (NTMBIV) and junk-bond trading have plunged 17 percent and 8 percent, respectively, since the end of the second quarter, according to Financial Industry Regulatory Authority data.

This means that, for one, it’s harder for investors to shuffle their portfolios even if they want to because there are fewer people out there looking to sell or buy. And, two, this eats into bond dealers’ already waning trading revenues.

Adding to the summer doldrums is a declining volume of corporate-debt sales. Companies have sold an average $22.7 billion of dollar-denominated bonds each week this month, compared with an average $36.2 billion per week in June, according to data compiled by Bloomberg. Investors typically transact more frequently in bonds that have been sold within the prior few months.

How much of this is economics and how much is regulation? What are the implications for capital markets if liquidity remains low for an extended period? Does anybody know? Does anybody care?

Meanwhile, there is politics being played with the Jackson Hole guest list:

As the Federal Reserve Bank of Kansas City prepares to host next month’s annual gathering of central bankers in Wyoming, seasoned Fed watchers from the financial markets, including the chief U.S. economists of the biggest American banks, aren’t being invited, according to past participants.

The exclusion of Wall Street may reflect a dispute between some regional Fed bank presidents who are more worried by loose monetary policy than Fed governors in Washington including Yellen, said Pippa Malmgren, founder of DRPM Group in London and another frequent delegate who won’t be attending this year.

“I fully support disinviting the chief economists of the largest beneficiaries of quantitative easing,” Malmgren said, referring to the Fed’s program of monthly bond purchases, which is on course to end this year.

“This weakens the support for the Yellen camp and gives her opponents more chance to make their case” during the meeting, said Malmgren, a former adviser to U.S. President George W. Bush.

It seems very odd to me that the Fed isn’t inviting its best salesmen to their trade show.

I moaned yesterday about an incomprehensible tax dodge being controversially used by Renaissance Capital. Matt Levine explains it.

DBRS has confirmed W.PR.H and W.PR.J at Pfd-2(low):

Westcoast is expected to continue its significant expansion projects in the medium term to take advantage of the strong exploration and unconventional drilling activity in Western Canada. The Company invested $946 million in capex in 2013, including $528 million of expansion capital, with an additional $950 million in capex planned for 2014. Increasing earnings and cash flow from expansions placed into service to date have resulted in relatively strong credit ratios. Although a major portion of capital spending is expected to be funded through the Company’s operating cash flow, incremental financing is likely from increased long-term debt issuance. While the capex program is substantial, spending is allocated to low-risk gathering and processing (G&P) and pipeline segments, and underpinned by long-term contractual commitments, which will continue to support Westcoast’s relatively strong business risk profile. DBRS expects the Company to fund its capital expenditure prudently and maintain credit metrics in line with the current rating category.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets down 22bp and DeemedRetractibles off 6bp. Volatility was average. Volume was quite high, probably due to portfolio shuffling after the new issue announcements from BMO, FixedReset, 3.80%+222 and TD, FixedReset, 3.80%+227.

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 3.07 % 3.06 % 20,715 19.53 1 0.4115 % 2,584.9
FixedFloater 4.25 % 3.47 % 29,444 18.50 1 -1.8860 % 4,085.3
Floater 2.85 % 2.94 % 46,229 19.89 4 -0.2709 % 2,776.0
OpRet 4.00 % -9.46 % 81,590 0.08 1 0.4704 % 2,733.9
SplitShare 4.26 % 3.99 % 44,640 4.02 6 0.0000 % 3,116.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.4704 % 2,499.9
Perpetual-Premium 5.52 % -3.41 % 84,586 0.08 17 -0.0193 % 2,430.2
Perpetual-Discount 5.23 % 5.15 % 110,342 15.21 20 0.0043 % 2,582.5
FixedReset 4.40 % 3.59 % 201,271 8.57 77 -0.2235 % 2,557.8
Deemed-Retractible 4.98 % -1.15 % 124,714 0.09 43 -0.0572 % 2,552.4
FloatingReset 2.65 % 0.72 % 98,833 0.16 6 -0.1308 % 2,525.4
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset -2.33 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.13 %
BAM.PR.G FixedFloater -1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 22.54
Evaluated at bid price : 22.37
Bid-YTW : 3.47 %
ENB.PR.Y FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 22.78
Evaluated at bid price : 24.02
Bid-YTW : 4.01 %
CIU.PR.C FixedReset 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 21.64
Evaluated at bid price : 22.06
Bid-YTW : 3.31 %
Volume Highlights
Issue Index Shares
Traded
Notes
BMO.PR.S FixedReset 427,622 RBC bought 13,300 from anonymous at 25.73. Desjardins crossed 85,000 at 25.75. Nesbitt crossed 50,000 at 25.75; Scotia crossed 200,000 at 25.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.36
Evaluated at bid price : 25.62
Bid-YTW : 3.66 %
CM.PR.K FixedReset 327,845 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.67 %
CM.PR.O FixedReset 161,825 Scotia crossed 20,000 at 25.48. Desjardins crossed 30,000 at 25.50. RBC crossed 50,000 at 25.50 and 13,400 at 25.46.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.29
Evaluated at bid price : 25.40
Bid-YTW : 3.65 %
TD.PR.Y FixedReset 143,000 TD crossed 69,700 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 3.15 %
TD.PR.I FixedReset 126,172 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.62 %
ENB.PF.E FixedReset 103,688 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-22
Maturity Price : 23.10
Evaluated at bid price : 24.96
Bid-YTW : 4.11 %
CM.PR.M FixedReset 101,649 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.83 %
There were 44 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.I Perpetual-Premium Quote: 25.37 – 25.60
Spot Rate : 0.2300
Average : 0.1518

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-21
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : -13.24 %

GWO.PR.P Deemed-Retractible Quote: 25.65 – 25.89
Spot Rate : 0.2400
Average : 0.1619

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.65
Bid-YTW : 5.12 %

RY.PR.T FixedReset Quote: 24.97 – 25.19
Spot Rate : 0.2200
Average : 0.1430

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 1.33 %

CM.PR.G Perpetual-Premium Quote: 25.46 – 25.72
Spot Rate : 0.2600
Average : 0.1837

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-21
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : -17.44 %

MFC.PR.F FixedReset Quote: 23.02 – 23.41
Spot Rate : 0.3900
Average : 0.3188

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.02
Bid-YTW : 4.13 %

GWO.PR.Q Deemed-Retractible Quote: 24.85 – 25.05
Spot Rate : 0.2000
Average : 0.1289

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 5.30 %

New Issue: TD FixedReset, 3.80%+227, NVCC Compliant

July 22nd, 2014

The Toronto-Dominion Bank has announced:

a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”).

TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 12 million Series 3 Shares at a price of $25.00 per share to raise gross proceeds of $300 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 3 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.

The Series 3 Shares will yield 3.80% annually, payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending July 31, 2019. Thereafter, the dividend rate will reset every five years at a level of 2.27% over the then five-year Government of Canada bond yield.

Subject to regulatory approval, on July 31, 2019 and on July 31 every 5 years thereafter, TD may redeem the Series 3 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption, holders of the Series 3 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Shares”), subject to certain conditions, on July 31, 2019, and on July 31 every five years thereafter. Holders of the Series 4 Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury bill yield plus 2.27%.

The expected closing date is July 31, 2014. TD will make an application to list the Series 3 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

Later, they added:

that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares, Series 3 (the “Series 3 Shares”), the size of the offering has been increased to 20 million Series 3 Shares. The gross proceeds of the offering will now be $500 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.

The expected closing date is July 31, 2014. TD will make an application to list the Series 3 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.

ImpliedVolatility_TD_FR_140722
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It is difficult to come to any conclusions regarding the Implied Volatility. The two issues with the highest Issue Reset Spreads, TD.PR.I and TD.PR.K, have been called for redemption and otherwise the issues available for calculation are not well distributed – the low-spread issues are not NVCC-compliant, while the higher-spread issues are.

New Issue: BMO FixedReset, 3.80%+222, NVCC Compliant

July 22nd, 2014

Bank of Montreal has announced:

a Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 31 (the “Preferred Shares Series 31″). The offering will be underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets.

The Preferred Shares Series 31 will be issued to the public at a price of $25.00 per share. Holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending November 25, 2019, as and when declared by the board of directors of the Bank, payable in the amount of $0.2375 per share, to yield 3.80 per cent annually.

Subject to regulatory approval, on or after November 25, 2019, the Bank may redeem the Preferred Shares Series 31 in whole or in part at par. On November 25, 2019, the dividend rate will reset and will reset thereafter every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.22 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 31 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 32 (“Preferred Shares Series 32″) on November 25, 2019, and on November 25 of every fifth year thereafter. Holders of the Preferred Shares Series 32 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared by the board of directors of the Bank, equal to the then 3-month Government of Canada Treasury Bill yield plus 2.22 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 32 into an equal number of Preferred Shares Series 31 on November 25, 2024, and on November 25 of every fifth year thereafter.

The anticipated closing date is July 30, 2014. The net proceeds from the offering will be used by the Bank for general corporate purposes.

The Implied Volatility calculation for BMO FixedResets is very interesting – it appears that the slope of the three NVCC-compliant issues is much less than the 40% calculation that is obtained when all issues, including those which are not NVCC-compliant and therefore virtually certain to be called on one of the next two possible dates – are thrown into the mix.

ImpliedVolatility_BMO_FR_140722
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Of course, the range of Issue Reset Spreads for the NVCC compliant issues is very small, and the issue price has been used for the new issue calculations, so one cannot draw many conclusions just yet, but … we will see!