April 17, 2014

April 17th, 2014

The Globe ran a piece on an upcoming insurance pow-wow in Toronto:

“The irony of the way insurance works, as opposed to the way banking works, is that it’s not always clear that capital is the relevant solution,” he said. “It’s often not, because insurance companies get into trouble in different ways.”

For example, insurance companies wouldn’t experience a ‘run’ on deposits, Mr. McGavick said, when reserves may not be able to cover mass customer withdrawals in the same way a bank would.

This seems like an odd remark to me, because while bank runs may be rooted in capital problems, they are made possible by liquidity problems – this is the old illiquid vs. insolvent distinction that I frequently mentioned during the Credit Crunch and which is well illustrated by the Panic of 1907.

Anyway, the Geneva Association produced an analysis titled Variable Annuities — An Analysis of Financial Stability, which references (among other things):

Key Financial Stability Issues in Insurance, released in July 2010, comprises analytical work carried out on specific issues that had been raised by regulatory and supervisory counterparts in areas such as investment management, liquidity management, limits of insurability, crisis resolution mechanisms in insurance and the confused concept of an “insurance run” (supposedly akin to a bank run).

and Key Financial Stability Issues in Insurance, which is quite interesting, but which the dorks have copy-protected so I can’t copy-paste the good parts.

Capital is virtually irrelevant during a bank run (although loss of capital might trigger the run); capital is actually more important in the insurance game. While it is quite true that Segregated Fund owners can’t take their money and run – eliminating much of the need for liquidity – a lack of capital will have severe effects on the viability of the operation – as Manulife very nearly found out during the crisis.

DGS.PR.A was confirmed at Pfd-3 by DBRS:

The net asset value (NAV) of the Company has increased steadily since the last rating confirmation in April 2013. As of April 3, 2014, the downside protection available to the Preferred Shares is approximately 46.9% and the dividend coverage ratio is approximately 1.1 times. The Pfd-3 rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets gaining 3bp and DeemedRetractibles up 13bp. Volatility was minimal. Volume … was peculiar. Very little breadth, but quite a lot of depth! A very high proportion of the volume leaders have been called for redemption.

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 0.1875 % 2,407.4
FixedFloater 4.70 % 4.24 % 32,743 17.96 1 -0.2465 % 3,656.4
Floater 3.02 % 3.15 % 50,422 19.38 4 0.1875 % 2,599.3
OpRet 4.36 % -4.39 % 36,175 0.12 2 -0.0388 % 2,693.2
SplitShare 4.81 % 4.38 % 60,411 4.24 5 -0.1112 % 3,083.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0388 % 2,462.6
Perpetual-Premium 5.55 % -6.02 % 107,298 0.09 13 0.0272 % 2,384.9
Perpetual-Discount 5.41 % 5.39 % 115,531 14.65 23 0.1591 % 2,488.7
FixedReset 4.68 % 3.64 % 195,270 4.34 79 0.0347 % 2,530.7
Deemed-Retractible 5.02 % -0.54 % 146,596 0.16 42 0.1331 % 2,495.2
FloatingReset 2.64 % 2.41 % 182,485 4.26 5 0.0159 % 2,481.7
Performance Highlights
Issue Index Change Notes
MFC.PR.F FixedReset 1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.10
Bid-YTW : 4.25 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.G FixedReset 338,738 Called for Redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 5.44 %
BNS.PR.T FixedReset 315,839 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.93 %
CM.PR.L FixedReset 244,798 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.27 %
TRP.PR.E FixedReset 223,516 Desjardins crossed blocks of 23,900 and 50,800, both at 25.42. TD crossed 40,000 and RBC crossed 100,000, all at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 23.26
Evaluated at bid price : 25.41
Bid-YTW : 3.86 %
ENB.PF.A FixedReset 182,613 Nesbitt crossed 30,00 at 25.37. TD bought 25,000 from anonymous and crossed blocks of 77,000 and 13,500, all at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 23.24
Evaluated at bid price : 25.36
Bid-YTW : 4.18 %
FTS.PR.E OpRet 177,950 Nesbitt crossed 175,000 at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.50
Evaluated at bid price : 25.95
Bid-YTW : -4.39 %
NA.PR.S FixedReset 172,080 RBC crossed blocks of 100,000 and 30,000, both at 25.43. TD crossed 40,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-15
Maturity Price : 25.00
Evaluated at bid price : 25.43
Bid-YTW : 3.67 %
TD.PR.E FixedReset 155,319 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.09 %
MFC.PR.L FixedReset 142,354 RBC crossed 120,900 at 24.85.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.85
Bid-YTW : 4.01 %
RY.PR.I FixedReset 114,223 Scotia crossed 50,000 at 25.60. RBC crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 3.11 %
VNR.PR.A FixedReset 111,594 RBC crossed 100,500 at 25.37; Scotia crossed 10,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.93 %
ELF.PR.H Perpetual-Discount 102,208 RBC crossed 100,000 at 24.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 24.01
Evaluated at bid price : 24.41
Bid-YTW : 5.65 %
There were 17 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 20.82 – 21.32
Spot Rate : 0.5000
Average : 0.3521

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 20.82
Evaluated at bid price : 20.82
Bid-YTW : 3.76 %

POW.PR.B Perpetual-Discount Quote: 24.32 – 24.67
Spot Rate : 0.3500
Average : 0.2323

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 24.06
Evaluated at bid price : 24.32
Bid-YTW : 5.53 %

PWF.PR.P FixedReset Quote: 23.89 – 24.22
Spot Rate : 0.3300
Average : 0.2261

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 23.53
Evaluated at bid price : 23.89
Bid-YTW : 3.50 %

CGI.PR.D SplitShare Quote: 24.77 – 25.08
Spot Rate : 0.3100
Average : 0.2096

YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2023-06-14
Maturity Price : 25.00
Evaluated at bid price : 24.77
Bid-YTW : 3.93 %

ENB.PR.H FixedReset Quote: 23.64 – 23.97
Spot Rate : 0.3300
Average : 0.2445

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 22.65
Evaluated at bid price : 23.64
Bid-YTW : 4.02 %

POW.PR.D Perpetual-Discount Quote: 23.27 – 23.58
Spot Rate : 0.3100
Average : 0.2320

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-17
Maturity Price : 23.01
Evaluated at bid price : 23.27
Bid-YTW : 5.39 %

FFN.PR.A: Term Extension Details

April 17th, 2014

Financial 15 Split Corp. II has released the Management Information Circular for its May 14 meeting.

The Articles of the Company currently provide that the Preferred Shares and the Class A Shares shall be redeemed by the Company on the Termination Date, which is currently scheduled for December 1, 2014. Shareholders are being asked to pass a special resolution which would, among other things, extend the Termination Date initially to December 1, 2019.

OK, a five year extension is fine since there is a Special Retraction Rights for preferred shareholders:

If the extension of the Termination Date is approved, a Shareholder who retracts a Class A Share under the 2014 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on June 13, 2014, less $10.00. A Shareholder who retracts a Preferred Share under the 2014 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on June 13, 2014. Shareholders wishing to take advantage of the 2014 Special Retraction Right must surrender their Shares for retraction no later than the close of business on June 4, 2014. Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2014 Special Retraction Right will be made no later than June 27, 2014.

Similarly, there will be a Continuing Special Retraction Right, particularly necessary since there will be no vote on further extensions:

By approving the special resolution to extend the Termination Date of the Company to December 1, 2019, Shareholders will also be approving the extension of the Company for an additional term of five years as determined by the Board of Directors of the Company. The Termination Date may then be a further extended for additional successive terms of five years each in the discretion of the Board of Directors. Shareholders will be able to redeem their Shares in connection with any such five year extension by exercising an additional retraction right (the Continuing Special Retraction Right) which is again designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on its scheduled Termination Date.

Similarly to FTN.PR.A, there’s a peculiar price calculation in the event of a semi-forced liquidation:

In the event the Company were to receive notice from the TSX that the Preferred Shares and the Class A Shares are to be delisted by the TSX, or if the net asset value of the Company were on any Valuation Date (as defined below) be less than $5,000,000 (each such event a Liquidation Event), the Manager could determine to cause the Company to redeem all outstanding Preferred Shares and Class A Shares on a date determined by the directors of the Company (the Liquidation Date) upon payment: (a) of an amount (the Preferred Share Liquidation Redemption Amount) in respect of each Preferred Share to be so redeemed equal to (i) (A) the net asset value of the Company on the Liquidation Date multiplied by a fraction, the numerator of which is the volume-weighted average trading price on the TSX (the VWAP) of the Preferred Shares calculated over the 20 trading days ending immediately prior to the announcement by the Company of the occurrence of the Liquidation Event and the denominator of which is the aggregate VWAP of the Preferred Shares and the Class A Shares calculated over the 20 trading days ending immediately prior to such announcement, divided by (B) the number of Preferred Shares outstanding on the Liquidation Date, plus (ii) all accrued and unpaid and declared and unpaid dividends on a Preferred Share to be so redeemed to but excluding the Liquidation Date;

As with FTN.PR.A, I don’t like it but it’s a minor issue.

The dividend will remain unchanged for the first extension:

For the fiscal year of the Company commencing December 1, 2014 and ending November 30, 2015, the dividend rate on the Preferred Shares will remain unchanged, such that holder of the Preferred Shares will continue to be entitled to receive fixed, cumulative, preferential monthly cash dividends of $0.04375 per Preferred Share. The special resolution will also permit the Company to set the prescribed minimum dividend rate on the Preferred Shares for the five year period commencing December 1, 2014 and for any five year extension of the term of the Company thereafter. This minimum rate would continue to be 5.25% of the Preferred Share Repayment Amount for the five year period from December 1, 2014 to November 30, 2019. The press release referred to above announcing the annual dividend rate for the Preferred Shares would also specify the minimum dividend rate established by the Company.

The monthly retraction formula is being changed in favour of retractors and the manager, to the disadvantage of the continuing shareholders:

Shareholders are being asked at the Meeting to approve a reduction in the discount to net asset value applicable on monthly redemptions of Shares from 4% to 2%. That is, holders of Preferred Shares would be entitled to receive a price per share equal to the lesser of (i) $10.00 and (ii) 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs and holders of Class A Shares would be entitled to receive a retraction price per share equal to 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Preferred Share in the market for cancellation and less any other applicable costs.

The manager has the ability to earn a performance ha-ha fee:

Under the Investment Management Agreement, the Manager is currently entitled to a performance fee equal to 20% of the total return per Unit of the Company for a financial year (which includes all cash distributions per Unit made during the year and any increase in the net asset value per Unit from the beginning of the year after the deduction on a per Unit basis of all fees, other expenses and distributions) that exceeds 112% of the Bonus Threshold. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is payable, is equal to the net asset value per Unit at the beginning of that financial year. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is not payable, is equal to the greater of (i) the net asset value per Unit at the end of the immediately prior financial year; and (ii) the Bonus Threshold for the prior year, minus the Adjustment Amount. The “Adjustment Amount” for any financial year is the amount, if any, by which the net asset value per Unit at the end of the immediately prior financial year plus dividends paid in that prior year exceeds the Bonus Threshold for that prior year.

It will be somewhat easier for the manager to “earn” a performance fee:

Accordingly, Shareholders are being asked to pass a resolution to approve changes to the Investment Management Agreement to provide for the deletion of the $25.00 Condition and the Ratings Condition. In their place, a new condition would be imposed, such that no performance fee could be paid to the Manager in respect of any fiscal year of the Company unless, at the end of such fiscal year, the net asset value per Unit of the Company was at least two times the amount of the Preferred Share Repayment Amount (representing a minimum coverage requirement of 200% for the Preferred Shares). As the Preferred Share Repayment Amount is currently $10.00 per Preferred Share, this would require the net asset value per Unit of the Company to be at least $20.00 before any performance fee could be paid.

The performance fee is nonsensical and constitutes yet another reason not to buy the Capital Units. The return on the fund is going to be overwhelmingly determined by the performance of the benchmark; manager skill is secondary. If they really wanted to be paid for performance, the calculation would depend on the fund performance relative to a benchmark over a period of not less than four years.

But it doesn’t matter to preferred shareholders. Nothing will be payable unless there’s Asset Coverage of at least 2:1, which is fine, and every penny of the fee comes out of the Capital Unitholders’ hide anyway. So who cares?

The final item fraught with interest is the NAV test, whereby there are no distributions to Capital Units if the NAV is less than $15.00. This will remain unchanged.

All in all, it’s a good deal for preferred shareholders. I recommend that Preferred Shareholders vote in favour of the Special Resolution.

FTN.PR.A: Term Extension Proposal Details

April 17th, 2014

Financial 15 Split Corp. has released the Management Information Circular for its May 14 meeting.

The Articles of the Company currently provide that the Preferred Shares and the Class A Shares shall be redeemed by the Company on the Termination Date, which is currently scheduled for December 1, 2015. Shareholders are being asked to pass a special resolution which would, among other things, extend the Termination Date initially to December 1, 2020.

OK, a five year extension is fine. What’s more, there is not just one, but two, count ‘em, two Special Retraction Rights for preferred shareholders:

If the extension of the Termination Date is approved, a Shareholder who retracts a Class A Share under the 2014 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on June 13, 2014, less $10.00. A Shareholder who retracts a Preferred Share under the 2014 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on June 13, 2014. Shareholders wishing to take advantage of the 2014 Special Retraction Right must surrender their Shares for retraction no later than the close of business on June 4, 2014. Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2014 Special Retraction Right will be made no later than June 27, 2014.

If the extension of the Termination Date is approved, a Shareholder who retracts a Preferred Share under the 2015 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on November 30, 2015. Shareholders wishing to take advantage of the 2015 Special Retraction Right must surrender their Preferred Shares for retraction no later than the close of business on November 13, 2015. Payment for the Preferred Shares so tendered for retraction pursuant to the 2015 Special Retraction Right will be made no later than December 15, 2015.

They don’t want to take another vote in five years:

By approving the special resolution to extend the Termination Date of the Company to December 1, 2020, Shareholders will also be approving the extension of the Company for an additional term of five years as determined by the Board of Directors of the Company. The Termination Date may then be further extended for additional successive terms of five years each in the discretion of the Board of Directors. Shareholders will be able to redeem their Shares in connection with any such five year extension by exercising an additional retraction right (the Continuing Special Retraction Right) which is again designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on its scheduled Termination Date.

Oddly, there is a strange price calculation in the event of a (semi-)forced liquidation:

In the event the Company were to receive notice from the TSX that the Preferred Shares and the Class A Shares are to be delisted by the TSX, or if the net asset value of the Company were on any Valuation Date (as defined below) be less than $5,000,000 (each such event a Liquidation Event), the Manager could determine to cause the Company to redeem all outstanding Preferred Shares and Class A Shares on a date determined by the directors of the Company (the Liquidation Date) upon payment:

(g) of an amount (the Preferred Share Liquidation Redemption Amount) in respect of each Preferred Share to be so redeemed equal to (i) (A) the net asset value of the Company on the Liquidation Date multiplied by a fraction, the numerator of which is the volume-weighted average trading price on the TSX (the VWAP) of the Preferred Shares calculated over the 20 trading days ending immediately prior to the announcement by the Company of the occurrence of the Liquidation Event and the denominator of which is the aggregate VWAP of the Preferred Shares and the Class A Shares calculated over the 20 trading days ending immediately prior to such announcement, divided by (B) the number of Preferred Shares outstanding on the Liquidation Date, plus (ii) all accrued and unpaid and declared and unpaid dividends on a Preferred Share to be so redeemed to but excluding the Liquidation Date; and

I don’t understand the necessity for this and don’t like it, but the chances of it being triggered are remote and the ill effects if it is are fairly muted, so we’ll let it pass.

A critical issue is the dividend rate on the preferreds:

The special resolution will permit the Company to file an amendment to the Articles that will permit the Company to determine the annual rate of cumulative preferential monthly dividends for the Preferred Shares for the one year period commencing December 1, 2015 and for each fiscal year of the Company thereafter, subject to prescribed minimum annual dividend. Such determination will be made no later than September 30 (or the first business day thereafter, if September 30 is not a business day) each year during the term of the Company and announced by press release.

The special resolution will also permit the Company to set the prescribed minimum dividend rate on the Preferred Shares for the five year period commencing December 1, 2015 and for any five year extension of the term of the Company thereafter. This minimum rate would be a specified percentage of the Preferred Share Repayment Amount. The Preferred Share Repayment Amount is the amount payable per Preferred Share on the Termination Date and is currently $10.00 per Preferred Share. In the event of any subdivision or consolidation of the Preferred Shares, the Preferred Share Repayment Amount would be adjusted accordingly. The press release referred to above announcing the annual dividend rate for the Preferred Shares would also specify the minimum dividend rate established by the Company.

The prescribed minimum dividend amount for the Preferred Shares would be set at 5.25% of the Preferred Share Repayment Amount for the initial five year extension term beginning on December 1, 2015 and ending on November 30, 2020. This change will provide the Board of Directors with the opportunity to make any appropriate changes to the amounts paid on the Preferred Shares in the context of market conditions existing at the relevant time. As there would no longer be a fixed Termination Date for the Company, the Board of Directors believes it important to provide for additional flexibility in this regard.

Fair enough. The dividend rate will not go down for the first extension (and if it doesn’t go up enough, we can take advantage of the 2015 Special Retraction Right. The “minimum dividend rate” appears to be setting up for a potential floating rate with a cap and collar, such as is the case with Canadian Banc Corp.

The monthly retraction formula is being changed in favour of retractors and the manager, to the disadvantage of the continuing shareholders:

Shareholders are being asked at the Meeting to approve a reduction in the discount to net asset value applicable on monthly redemptions of Shares from 4% to 2%. That is, holders of Preferred Shares would be entitled to receive a price per share equal to the lesser of (i) $10.00 and (ii) 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs and holders of Class A Shares would be entitled to receive a retraction price per share equal to 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Preferred Share in the market for cancellation and less any other applicable costs.

It is therefore proposed that the 2% discount would be payable to the Manager to partially compensate the Manager for this reduction in management fees.

The manager has the ability to earn a performance ha-ha fee:

Under the Investment Management Agreement, the Manager is currently entitled to a performance fee equal to 20% of the total return per Unit of the Company for a financial year (which includes all cash distributions per Unit made during the year and any increase in the net asset value per Unit from the beginning of the year after the deduction on a per Unit basis of all fees, other expenses and distributions) that exceeds 112% of the Bonus Threshold. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is payable, is equal to the net asset value per Unit at the beginning of that financial year. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is not payable, is equal to the greater of (i) the net asset value per Unit at the end of the immediately prior financial year; and (ii) the Bonus Threshold for the prior year, minus the Adjustment Amount. The “Adjustment Amount” for any financial year is the amount, if any, by which the net asset value per Unit at the end of the immediately prior financial year plus dividends paid in that prior year exceeds the Bonus Threshold for that prior year.

It will be somewhat easier for the manager to “earn” a performance fee:

Accordingly, Shareholders are being asked to pass a resolution to approve changes to the Investment Management Agreement to provide for the deletion of the $25.00 Condition and the Ratings Condition. In their place, a new condition would be imposed, such that no performance fee could be paid to the Manager in respect of any fiscal year of the Company unless, at the end of such fiscal year, the net asset value per Unit of the Company was at least two times the amount of the Preferred Share Repayment Amount (representing a minimum coverage requirement of 200% for the Preferred Shares).

The performance fee is nonsensical and constitutes yet another reason not to buy the Capital Units. The return on the fund is going to be overwhelmingly determined by the performance of the benchmark; manager skill is secondary. If they really wanted to be paid for performance, the calculation would depend on the fund performance relative to a benchmark over a period of not less than four years.

But it doesn’t matter to preferred shareholders. Nothing will be payable unless there’s Asset Coverage of at least 2:1, which is fine, and every penny of the fee comes out of the Capital Unitholders’ hide anyway. So who cares?

The final item fraught with interest is the NAV test, whereby there are no distributions to Capital Units if the NAV is less than $15.00. This will remain unchanged.

All in all, it’s a good deal for preferred shareholders. I recommend that Preferred Shareholders vote in favour of the Special Resolution.

April 16, 2014

April 16th, 2014

The BoC kept the overnight rate low, with a fairly gloomy outlook:

Inflation in Canada remains low. Core inflation is expected to stay well below 2 per cent this year due to the effects of economic slack and heightened retail competition, and these effects will persist until early 2016. However, higher consumer energy prices and the lower Canadian dollar will exert temporary upward pressure on total CPI inflation, pushing it closer to the 2 per cent target in the coming quarters. We expect total CPI inflation will remain close to target throughout the projection, even as upward pressure from energy prices dissipates, because the impact of retail competition will gradually fade and excess capacity will be absorbed.

The Bank continues to expect Canada’s real GDP growth to average about 2 1/2 per cent in 2014 and 2015 before easing to around the 2 per cent growth rate of the economy’s potential in 2016. Competitiveness challenges continue to weigh on Canadian exporters’ ability to benefit from stronger growth abroad. However, a range of export subsectors have been growing in line with fundamentals, which suggests that as the U.S. recovery gathers momentum and becomes more broadly-based, many of our exports will benefit. The lower Canadian dollar should provide additional support. We continue to believe that rising global demand for Canadian goods and services, combined with the assumed high level of oil prices, will stimulate business investment in Canada and shift the economy to a more sustainable growth track.

In sum, the Bank continues to see a gradual strengthening in the fundamental drivers of growth and inflation in Canada. This view hinges critically on the projected upturn in exports and investment. With underlying inflation expected to remain below target for some time, the downside risks to inflation remain important. At the same time, the risks associated with household imbalances remain elevated. The Bank judges that the balance of these risks remains within the zone for which the current stance of monetary policy is appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks.

… so the loony got knocked:

The Canadian dollar touched the lowest level in more than a week after the Bank of Canada said its next move on interest rates could be up or down as a forecast pickup in business investment has been slow to materialize.

I saw some husked corn for sale at my favourite greengrocer today; but was told that it was from the US so it will be all dried out. Geez, we can get Chilean apples; why can’t we get Brazilian corn?

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 11bp, FixedResets gaining 1bp and DeemedRetractibles up 8bp. Brookfield’s floaters got whacked – probably on the BoC announcement – but otherwise volatility was minimal. Volume was low; all the highlights are FixedResets.

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 -1.1125 % 2,402.9
FixedFloater 4.68 % 4.23 % 34,104 17.98 1 0.6951 % 3,665.4
Floater 3.03 % 3.15 % 51,027 19.37 4 -1.1125 % 2,594.4
OpRet 4.36 % -4.59 % 33,497 0.13 2 0.0194 % 2,694.2
SplitShare 4.81 % 4.37 % 62,595 4.24 5 0.0238 % 3,087.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0194 % 2,463.6
Perpetual-Premium 5.55 % -5.26 % 108,806 0.09 13 0.0091 % 2,384.3
Perpetual-Discount 5.42 % 5.40 % 115,367 14.60 23 0.1087 % 2,484.7
FixedReset 4.68 % 3.65 % 195,634 4.19 79 0.0077 % 2,529.9
Deemed-Retractible 5.03 % -0.82 % 147,382 0.13 42 0.0767 % 2,491.9
FloatingReset 2.64 % 2.41 % 189,387 4.26 5 0.0557 % 2,481.4
Performance Highlights
Issue Index Change Notes
BAM.PR.K Floater -1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 3.18 %
BAM.PR.B Floater -1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 16.65
Evaluated at bid price : 16.65
Bid-YTW : 3.17 %
BAM.PR.C Floater -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 16.77
Evaluated at bid price : 16.77
Bid-YTW : 3.15 %
GWO.PR.I Deemed-Retractible 1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.10
Bid-YTW : 6.03 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.A FixedReset 154,340 RBC crossed blocks of 50,000 and 100,000, both at 23.53.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 22.85
Evaluated at bid price : 23.50
Bid-YTW : 3.81 %
TD.PR.G FixedReset 131,900 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.63 %
MFC.PR.L FixedReset 105,350 Scotia crossed 45,000 and 50,000, both at 24.78.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.78
Bid-YTW : 4.04 %
BNS.PR.X FixedReset 80,700 Nesbitt crossed 75,000 at 24.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.42 %
BMO.PR.O FixedReset 60,040 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 1.70 %
BAM.PR.T FixedReset 49,150 RBC crossed 39,200 at 24.88.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 23.28
Evaluated at bid price : 24.71
Bid-YTW : 4.02 %
There were 18 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.G Perpetual-Discount Quote: 21.47 – 22.14
Spot Rate : 0.6700
Average : 0.4575

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 21.47
Evaluated at bid price : 21.47
Bid-YTW : 5.57 %

BAM.PF.B FixedReset Quote: 24.80 – 25.06
Spot Rate : 0.2600
Average : 0.1688

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 23.10
Evaluated at bid price : 24.80
Bid-YTW : 4.21 %

BAM.PR.R FixedReset Quote: 25.33 – 25.58
Spot Rate : 0.2500
Average : 0.1650

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 23.65
Evaluated at bid price : 25.33
Bid-YTW : 3.97 %

GWO.PR.N FixedReset Quote: 22.15 – 22.50
Spot Rate : 0.3500
Average : 0.2651

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.15
Bid-YTW : 4.44 %

MFC.PR.B Deemed-Retractible Quote: 22.51 – 22.78
Spot Rate : 0.2700
Average : 0.1899

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.51
Bid-YTW : 5.99 %

CIU.PR.C FixedReset Quote: 20.89 – 21.16
Spot Rate : 0.2700
Average : 0.1899

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-16
Maturity Price : 20.89
Evaluated at bid price : 20.89
Bid-YTW : 3.75 %

BMO.PR.O To Be Redeemed

April 16th, 2014

Bank of Montreal has announced:

its intention to redeem all of its $275,000,000 Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 21 (“Preferred Shares Series 21″) on May 25, 2014.

The Preferred Shares Series 21 are redeemable at Bank of Montreal’s option on May 25, 2014, at a redemption price of $25.00 per share. Payment of the redemption price will be made by Bank of Montreal on or after May 26, 2014, upon surrender of the Preferred Shares Series 21.

Separately from the payment of the redemption price, the final quarterly dividend of $0.40625 per share for the Preferred Shares Series 21 will be paid in the usual manner on May 26, 2014, to shareholders of record on May 1, 2014.

Notice will be delivered to holders of the Preferred Shares Series 21 in accordance with the terms outlined in the Preferred Shares Series 21 prospectus supplement.

BMO.PR.O is a FixedReset, 6.50%+458, commenced trading 2009-3-20 after being announced 2009-3-11. The size of the Issue Reset Spread means that the redemption shouldn’t come as a surprise to anyone.

April 15, 2014

April 16th, 2014

Nothing happened today.

It was an off day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets losing 11bp and DeemedRetractibles off 5bp. Volatility was minor. 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 0.00 % 0.00 % 0 0.00 0 0.2287 % 2,429.9
FixedFloater 4.72 % 4.27 % 33,541 17.93 1 -0.5432 % 3,640.1
Floater 3.00 % 3.11 % 51,033 19.45 4 0.2287 % 2,623.6
OpRet 4.36 % -6.53 % 34,879 0.13 2 0.1358 % 2,693.7
SplitShare 4.81 % 4.39 % 64,765 4.24 5 0.0318 % 3,086.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1358 % 2,463.1
Perpetual-Premium 5.55 % -4.53 % 105,697 0.09 13 0.0242 % 2,384.1
Perpetual-Discount 5.43 % 5.39 % 116,527 14.60 23 -0.0730 % 2,482.0
FixedReset 4.68 % 3.65 % 199,362 4.19 79 -0.1147 % 2,529.7
Deemed-Retractible 5.03 % -0.58 % 145,125 0.12 42 -0.0498 % 2,490.0
FloatingReset 2.64 % 2.43 % 192,420 4.26 5 0.0000 % 2,480.0
Performance Highlights
Issue Index Change Notes
TRP.PR.C FixedReset -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 22.14
Evaluated at bid price : 22.45
Bid-YTW : 3.65 %
FTS.PR.H FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 21.32
Evaluated at bid price : 21.61
Bid-YTW : 3.68 %
PWF.PR.A Floater 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 2.71 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Z FixedReset 282,650 Scotia bought blocks of 14,000 and 16,600 from Instinet at 25.52 and crossed 35,000 at the same price. RBC crossed 99,900 and TD crossed blocks of 25,000 and 50,000, all at the same price again.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 23.32
Evaluated at bid price : 25.52
Bid-YTW : 3.72 %
TRP.PR.A FixedReset 56,288 TD crossed 50,000 at 23.53.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 22.85
Evaluated at bid price : 23.50
Bid-YTW : 3.80 %
GWO.PR.N FixedReset 54,775 Nesbitt crossed 50,000 at 22.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.30
Bid-YTW : 4.37 %
TD.PR.K FixedReset 52,334 RBC crossed 50,000 at 25.31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 1.69 %
TD.PR.I FixedReset 51,979 TD crossed 40,000 at 25.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.29
Bid-YTW : 1.42 %
CU.PR.G Perpetual-Discount 43,207 TD crossed 25,000 at 21.80.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 21.39
Evaluated at bid price : 21.72
Bid-YTW : 5.23 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.H FixedReset Quote: 21.61 – 21.89
Spot Rate : 0.2800
Average : 0.1896

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 21.32
Evaluated at bid price : 21.61
Bid-YTW : 3.68 %

IGM.PR.B Perpetual-Premium Quote: 25.93 – 26.15
Spot Rate : 0.2200
Average : 0.1446

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.25
Evaluated at bid price : 25.93
Bid-YTW : 5.00 %

POW.PR.D Perpetual-Discount Quote: 23.15 – 23.39
Spot Rate : 0.2400
Average : 0.1647

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 22.89
Evaluated at bid price : 23.15
Bid-YTW : 5.42 %

TRP.PR.E FixedReset Quote: 25.30 – 25.45
Spot Rate : 0.1500
Average : 0.0927

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-15
Maturity Price : 23.22
Evaluated at bid price : 25.30
Bid-YTW : 3.88 %

BNS.PR.K Deemed-Retractible Quote: 25.35 – 25.56
Spot Rate : 0.2100
Average : 0.1531

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-28
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : -8.51 %

GWO.PR.I Deemed-Retractible Quote: 21.88 – 22.08
Spot Rate : 0.2000
Average : 0.1438

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.88
Bid-YTW : 6.15 %

POW.PR.F Sinking Fund

April 15th, 2014

I received a call today from Assiduous Reader HR, who brought to my attention the buy-back provisions of POW.PR.F:

The First Preferred Shares – 1986 Series are entitled to a quarterly cumulative dividend at a floating rate equal to one quarter of 70% of the average prime rate of two major Canadian chartered banks. Dividends are payable on the 15th day of each of the months of January, April, July, and October in each year.

The shares are redeemable by the Corporation for $50 per share plus declared and unpaid dividends. The Corporation will make all reasonable efforts to purchase for cancellation on the open market 20,000 shares per quarter, such number being cumulative only in the same calendar year.

It’s interesting because according to the 2013 Annual Report:

During the twelve months ended December 31, 2013, the Corporation purchased 12,000 of such shares.

In 2012:

During the twelve months ended December 31, 2012, the Corporation purchased 40,000 such shares.

In 2011:

A total of 77,300 such shares were purchased during the twelve months ended December 31, 2011.

In 2010:

A total of 80,000 such shares were purchased during the twelve months ended December 31, 2010.

In 2009:

A
total of 80,000 such shares were purchased during the twelve months ended December 31, 2009.

In 2008:

A total of 60,000 such shares were purchased during the twelve-month period of 2008.

So it’s clear they’ve made their quota occasionally, but have fallen far short in the past two years. Now, let it be said that these things are hopelessly illiquid. According to the Exchange, there are 530,578 outstanding, about $25-million worth. They are the second-least liquid issue in the HIMIPref™ universe, with an Average Daily Trading Value of only $1,290, beaten only by BSC.PR.B, a split-share with only 713,371 shares outstanding (at a par value of 18.85). They were intermittently included in the Floater subindex a few times in the 1990s – one month in 1994, two months in 1996, two in 1997 and one in 1999 – but otherwise, and since November 30, 1999, they have been relegated to the Scraps sub-index on volume concerns.

But look at this!

POWPRF
Click for Big

Since January 2, 2013, there has not been a single day on which the closing quote provided by the Exchange has been above $50.00. The maximum offer has been $49.90. So, one might think, “all reasonable efforts” would include lifting the offer every day, even if only for 100 shares a time, but this clearly isn’t happening. How come?

I suspect that one reason is the volume: in all of 2013, all of 47,734 shares traded on the Toronto Exchange (there may have been more on Alpha, etc., but my guess is ‘not many’). So to give them their due, buying 12,000 shares ranks as something of an accomplishment, even though it doesn’t meet quota.

It occurred to me that there might be exchange rules with respect to issuer bids. According to the Exchange rules on Normal Course Issuer Bids:

It is inappropriate for an issuer making a Normal Course Issuer Bid to abnormally influence the market price of its shares. Therefore, purchases made by Issuers pursuant to a Normal Course Issuer Bid must not be transacted at a price which is higher than the last independent trade of a Board Lot of the class of shares which is the subject of the Normal Course Issuer Bid.

So if a single Board Lot escapes their net and hits an independent bid, then they can’t bid any more than that price until a higher independent transaction occurs.

Not only that, but there are time and volume restrictions in a NCIB:

“normal course issuer bid” means an issuer bid by a listed issuer to acquire its listed securities where the purchases:

(a) if the issuer is not an investment fund, do not, when aggregated with all other purchases by the listed issuer during the same trading day, aggregate more than the greater of: (i) 25% of the average daily trading volume of the listed securities of that class; and (ii) 1,000 securities;

(b) if the issuer is an investment fund, do not, when aggregated with the total of all other purchases by the listed issuer during the preceding 30 days, aggregate more than 2% of the listed securities of that class outstanding on the date of acceptance of the notice of normal course issuer bid by the Exchange; and

(c) over a 12-month period, commencing on the date specified in the notice of the normal course issuer bid, do not exceed the greater of
(i) 10% of the public float on the date of acceptance of the notice of normal course issuer bid by the Exchange; or

(ii) 5% of such class of securities issued and outstanding on the date of acceptance of the notice of normal course issuer bid by the Exchange, excluding any securities held by or on behalf of the listed issuer on the date of acceptance of the notice of normal course issuer bid by the Exchange,

and for the purposes of (b) and (c), whether such purchases are made through the facilities of a stock exchange or otherwise, but excluding purchases made under a circular bid.

7. Block Purchase Exception—A listed issuer may make one block purchase per calendar week which exceeds the daily repurchase restriction contained in subsection 628(a)(ix)(a) of the Company Manual, subject to maximum annual aggregate limits. Once the block purchase exception has been relied on, the listed issuer may not make any further purchases under the normal course issuer bid for the remainder of that calendar day.

8. Purchases at the Opening and Closing—A listed issuer shall not make any purchases of its securities pursuant to a normal course issuer bid at the opening of a trading session, or during the 30 minutes before the scheduled close of a trading session. However, notwithstanding Policy 6-501(1)(1), purchases of securities pursuant to a normal course issue bid may be effected through the Exchange’s Market-On-Close facility

These restrictions were important during the NCIB for CWB.PR.A:

Apart from block purchase exceptions, the maximum number of preferred shares that may purchased per trading day is 1,538, an amount equal to 25% of the average daily trading volume of the preferred shares on the TSX for the six month period ended January 31, 2013.

Now, despite spending a considerable amount of time with Mr. Google, SEDAR and the Power Corporation website, I have not been able to find anything that definitively states that the purchases of POW.PR.F constitute a Normal Course Issuer Bid. I think they do, but I’m not a specialist in such matters and if I was, I’d shoot myself. There are a lot of rules and compliance for such a hopelessly illiquid security must be a nightmare.

But I will send an inquiry to the company.

April 14, 2014

April 14th, 2014

It is possible that the US will lose its IMF veto:

At issue is the global community’s efforts to align the IMF’s power structure to match changes in the distribution of strength in the global economy. Each country is assigned shares, or quota, to match its contribution to the world’s gross domestic product. The 2010 changes — which, ironically, were prompted by President Barack Obama — would give more clout to countries such as China and India and reduce the influence of some European nations whose relative share of global GDP has shrunk over time.

The U.S. would remain the IMF’s dominant member. It would retain more than 17 per cent of total shares — which gives the U.S. veto power because approval of members representing 85 per cent of shares is required to approve major decisions. The next closest would be Japan and China, each of which would hold about 6.4 per cent of total quota.

Yet the governance overhaul also requires increased contributions to the fund’s permanent resources. The contributions are akin to insurance, as countries would only lose money if the IMF’s loans to troubled countries went unpaid.

Most legislatures approved the increased financial commitments to the IMF long ago. Mr. Obama, however, has failed repeatedly to muster enough votes in the U.S. Congress to pass the measure. Republican leaders in the House of Representatives and the Senate characterize the Obama administration’s request as akin to asking American taxpayers to bail out troubled countries such as Greece and Portugal.

Seems to me that the IMF should simply let the US drop below 17% if that’s what it wants – and perhaps assign caps to member contributions, instead of quota. If the Chinese want influence, let them buy it. I’ll sell them my share!

Canadian grain farmers aren’t the only ones complaining about railroads:

They can’t move because increasing oil production from North Dakota’s Bakken field, a record grain crop and unprecedented cold weather overwhelmed the U.S. railroad system. In part because of transport delays, coal inventories were down 26 percent in January from a year ago. A quarter of all U.S. freight rail traffic passes through Chicago, or 37,500 rail cars each day. The trip through the city can take more than 30 hours.

Coal producers including the Western Coal Traffic League, whose members are shippers of coal mined west of the Mississippi River, point at inconsistent rail service as the primary culprit and railroads put the blame on Chicago. The group asked on March 24 that the U.S. Surface Transportation Board institute a proceeding to address BNSF’s coal service in the region.

BNSF said in a response to the agency that it plans to spend $5 billion this year on service. “As these resources come on line, service will gradually improve,” it said in a March 25 letter.

Dwell times, a measure of how long loaded railroad cars sit in a railyard, averaged about 26 hours during the first quarter, up from 21 hours during the same period in 2013, AAR data show.

Trains are getting mired in Chicago’s tangle of bottlenecks, said Charles Clowdis, an IHS Global Insight analyst in Lexington, Massachusetts.

Sheryl King reminds us that long rates are different from short rates:

When it comes to any possible bearish sentiment, bond market investors are currently preoccupied with estimating the neutral policy rate for central banks, and how far long-term bond yields may or may not rise. At this point, however, there has very little focus on where the slope of the yield curve will be headed. History suggests it will get a lot flatter as we head toward the first Federal Reserve rate increase at some point in 2015; and Canada’s bond curve will follow suit.

So when will the yield curve start to discount policy tightening? It may already be happening in the U.S., with the curve almost 20 basis points flatter now than it was a few weeks ago. But the Canada curve remains at a cycle high.

The yield curve remains steep because doubt persists about the strength of the economy, which is keeping yields low at the front end of the curve.

Brace yourself for disaster – the regulators are getting interested in the bond market:

Bill Gross and Larry Fink manage a $3 trillion pile of bonds — an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc. (BLK), doubled holdings since 2008, outpacing the market’s growth of 50 percent.

The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.

The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.

More than five years of near-zero interest rates from the Fed has propelled corporate bonds to record performance and the biggest debt managers have ballooned in size. Pimco, Vanguard Group Inc. and Fidelity Investments manage 39 percent of all mutual fund-owned taxable bonds today, up from 18 percent in 1997, according to Morningstar Inc. data. The smallest 205 fund providers manage 0.1 percent of the market.

At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago — through telephone conversations and e-mails.

In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.

The SEC is examining to what extent smaller buyers are disadvantaged, and whether the behavior constitutes market manipulation, according to two people with direct knowledge of the matter who asked not to be identified because the probe hasn’t been made public.

Finra is examining whether Wall Street firms overcharge investors and whether they unfairly allocate new corporate debt issues to reward certain clients, Nancy Condon, a spokeswoman, confirmed in an e-mail last week.

It’s getting tougher to trade bonds as the business gets less profitable for Wall Street. Corporate-debt trading volumes in the U.S. have failed to keep pace with issuance, increasing 14 percent since 2010 as outstanding notes grew by 33 percent, according to Finra and Bank of America Merrill Lynch index data.

Requirements that banks hold more cash in the event their investments tank have prompted dealers to reduce their inventories, giving the biggest managers even more sway in the market. The largest dealers had slashed their holdings of corporate bonds to $56 billion as of a year ago from $235 billion in 2007, according to Fed Bank of New York data. The inventories worked to cushion against price swings and made it easier to trade in larger sizes.

There’s a little pushback on the evil-HFT narrative:

Michael Lewis’s argument that the $23 trillion U.S. stock market is rigged in favor of speed traders is careless, according to Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld.

The controversy over high-frequency trading intensified with the publication of Lewis’s book “Flash Boys” on March 31. Lewis argues that the fastest trading firms prey on slower investors by getting early access to nonpublic information.

“I think that was irresponsible on his part,” Greifeld said in an interview on PBS’s “Charlie Rose” show. “I feel poorly for the academics. Our markets are researched more than any other market that’s out there.”

Greifeld said about 100 academic papers have been written about how the U.S. markets operate and a similar number have been produced on overseas markets. Academics who have spent their careers studying markets are divided on high-speed trading, he said, with some in favor of it and some opposed.

“It’s not a story-telling type of issue,” he said. “It’s really dense academic papers to get through what happens in the marketplace.”

Mind you, the Europeans are seizing the opportunity to have more regulators writing more rules:

European Union lawmakers are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first crackdown in the aftermath of Michael Lewis’s latest book, “Flash Boys.”

The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

Members of the European Parliament will vote tomorrow on EU rules that also include a requirement for traders to have their algorithms tested on venues and authorized by regulators. The assembly in Strasbourg, France, is set to endorse a tentative deal reached with governments on the measures earlier this year.

So … when do you figure the first scandal about a regulatory clerk selling code after approving it is going to happen? Another point of interest is … if an HFT firm discusses with the regulators what they have to do to get approval, does this mean that the regulators are in the business of writing code? That line of reasoning has been advanced in connection with Credit Rating Agencies and structured products!

Here’s a good joke!

DALBAR_20131231
Click for Big

Howard Gold comments on MarketWatch:

Its 20th annual Quantitative Analysis of Investor Behavior paints such a grim picture that if it were a painting, it would look like Edvard Munch’s “The Scream.”

After citing familiar figures on how individual investors substantially underperform the market averages because of terrible market timing, the firm, which has reported these statistics for 20 years, calls out investors’ obtuseness and the miserable failure of the financial-services industry to change their dysfunctional behavior.

“After decades of analyzing investor behavior in good times and in bad times, and after enormous efforts by thousands of industry experts to educate millions of investors, imprudent action continues to be widespread,” the report asserted.

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited.”

I know I’ve discussed DALBAR somewhere. In PrefLetter, I think. Dan Hallet has discussed DALBAR:

I suspect that DALBAR calculates what it calls investor returns by applying dollar-weighted fund redemption rates to benchmark returns – rather than applying a DWRR [Dollar Weighted Rate of Return] calculation directly to the funds. And if they’re doing that, they’re not calculating investor returns.

If I’m right, it’s not clear exactly what they’re calculating. But this explains why their figures show such staggering gaps of several percentage points. My research on this topic over the past 13 years is more in line with figures I’ve seen from Morningstar.com. In the U.S., Morningstar calculates what they call “investor returns” using the same method I have for more than a dozen years – i.e. calculating actual fund DWRR. … But even that is an estimate because it’s based on monthly data; and daily fund flows are required for a precise DWRR. But DALBAR’s reported figures aren’t even an estimate because they appear to blend fund flows with index returns.

Accordingly, DALBAR is probably correct in direction – i.e. whether TWRR [Time Weighted Rate of Return] is higher or lower than DWRR – but not even close in quantifying the gap between the two measures.

You can buy the DALBAR report for USD 775. That’s right, only USD 775! Damn well better be right.

There’s always a lot of political argument about contracting-out … for instance, only Rob Ford was brave enough to defy the unions and contract out garbage collection in Toronto. Many people will claim that government services are cheaper because there is no built-in profit … many people should price a visit to the International Space Station:

Later this month, a company called SpaceX is scheduled to launch its Falcon 9 rocket on a routine supply mission to the International Space Station (ISS). But if all goes as planned, this mission could herald the beginning of something decidedly not routine: the use of private, reusable rockets to service America’s space program.

SpaceX and another private launch company, Orbital Sciences, are the beneficiaries of a recent shift in the American space program toward privatizing more routine missions – such as the transport of supplies and eventually people to and from the ISS. While this upcoming mission is only a preliminary test, SpaceX eventually hopes to dramatically reduce the cost of launching cargo and people into space by eventually making both the first and second stages of its rockets reusable. Last year, the company estimated that once its rockets are able to land back on earth and, after re-fueling, quickly be re-launched, the cost for a trip to the ISS could drop to as low as from $5 million to $7 million.

Factoring in NASA’s financial assistance in developing the Falcon 9 rocket and the cost of the 12-launch contract, the space agency is paying SpaceX about $166 million per launch to the ISS. By contrast, estimates for the cost of sending the recently retired space shuttle to the ISS range as high as $1.5 billion, including the money spent developing and building the shuttles.

It was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp and both FixedResets and DeemedRetractibles up 5bp. Volatility was higher than usual, with a number of FixedReset winners. Volume was below 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 0.00 % 0.00 % 0 0.00 0 -1.1447 % 2,424.3
FixedFloater 4.69 % 4.24 % 33,989 17.97 1 0.3469 % 3,660.0
Floater 3.00 % 3.10 % 49,343 19.48 4 -1.1447 % 2,617.6
OpRet 4.37 % -4.40 % 34,011 0.13 2 -0.0388 % 2,690.0
SplitShare 4.81 % 4.38 % 65,065 4.24 5 0.0159 % 3,085.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0388 % 2,459.8
Perpetual-Premium 5.55 % -4.35 % 107,247 0.09 13 -0.1299 % 2,383.5
Perpetual-Discount 5.43 % 5.36 % 120,916 14.58 23 0.0056 % 2,483.8
FixedReset 4.68 % 3.53 % 202,402 4.20 79 0.0459 % 2,532.6
Deemed-Retractible 5.03 % -0.21 % 150,981 0.12 42 0.0508 % 2,491.2
FloatingReset 2.64 % 2.44 % 199,414 4.11 5 -0.0080 % 2,480.0
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -2.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %
FTS.PR.G FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.17
Evaluated at bid price : 24.89
Bid-YTW : 3.74 %
FTS.PR.H FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.49
Evaluated at bid price : 21.84
Bid-YTW : 3.63 %
IFC.PR.C FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.59 %
BAM.PR.T FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.28
Evaluated at bid price : 24.70
Bid-YTW : 4.02 %
TRP.PR.C FixedReset 2.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 22.38
Evaluated at bid price : 22.72
Bid-YTW : 3.60 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Z FixedReset 273,946 RBC bought blocks of 12,400 and 10,000 from Scotia at 25.50 and crossed blocks of 50,000 and 20,000 at 25.54. Scotia crossed 25,000 at 25.50. TD crossed 100,000 at 25.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 3.46 %
CM.PR.L FixedReset 178,088 Called for redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.92 %
TRP.PR.E FixedReset 108,000 Scotia crossed 24,400 at 25.45 and bought 12,900 from RBC and 10,000 from TD at the same price. Desjardins crossed 50,000 at the same price again.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.26
Evaluated at bid price : 25.41
Bid-YTW : 3.86 %
RY.PR.I FixedReset 84,950 Scotia crossed 39,600 at 25.60; TD crossed 41,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : 3.11 %
TD.PR.E FixedReset 82,100 Called for Redemption.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.76 %
ENB.PR.J FixedReset 77,926 TD crossed blocks of 10,000 and 50,000, both at 25.35.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.25
Evaluated at bid price : 25.26
Bid-YTW : 4.14 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 19.22 – 20.00
Spot Rate : 0.7800
Average : 0.5839

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %

ELF.PR.G Perpetual-Discount Quote: 21.34 – 21.73
Spot Rate : 0.3900
Average : 0.3061

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.34
Evaluated at bid price : 21.34
Bid-YTW : 5.60 %

BNS.PR.R FixedReset Quote: 25.58 – 25.84
Spot Rate : 0.2600
Average : 0.1828

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.28 %

TD.PR.S FixedReset Quote: 25.27 – 25.42
Spot Rate : 0.1500
Average : 0.0891

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 3.08 %

TD.PR.O Deemed-Retractible Quote: 25.28 – 25.43
Spot Rate : 0.1500
Average : 0.0913

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.25
Evaluated at bid price : 25.28
Bid-YTW : 0.79 %

BMO.PR.J Deemed-Retractible Quote: 25.84 – 25.99
Spot Rate : 0.1500
Average : 0.0939

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.50
Evaluated at bid price : 25.84
Bid-YTW : -4.65 %

New Issue: BMO FixedReset, 4.00%+233, NVCC-Compliant

April 14th, 2014

Bank of Montreal has announced:

an inaugural Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27″). The offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets. The Bank has granted to the underwriters an option to purchase up to an additional $50 million of the Preferred Shares Series 27 exercisable at any time up to two days before closing.

The Preferred Shares Series 27 will be issued to the public at a price of $25.00 per Preferred Share Series 27 and holders will be entitled to receive non-cumulative preferential fixed quarterly dividends for the initial period ending May 25, 2019 as and when declared by the board of directors of the Bank, payable in the amount of $0.25 per Preferred Share Series 27, to yield 4.00 per cent annually.

Subject to regulatory approval, on or after May 25, 2019, the Bank may redeem the Preferred Shares Series 27, in whole or in part at par. Thereafter, the dividend rate will reset every five years to be equal to the 5-Year Government of Canada Bond Yield plus 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 27 into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 28 (“Preferred Shares Series 28″) on May 25, 2019 and on May 25 of every fifth year thereafter. Holders of the Preferred Shares Series 28 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 2.33 per cent. Subject to certain conditions, holders may elect to convert any or all of their Preferred Shares Series 28 into an equal number of Preferred Shares Series 27 on May 25, 2024 and on May 25 of every fifth year thereafter.

The anticipated closing date is April 23, 2014. The net proceeds from the offering will be used by the Bank for general corporate purposes.

This was quickly followed up by:

Bank of Montreal (TSX:BMO)(NYSE:BMO) today announced that as a result of strong investor demand for its previously announced Basel III-compliant domestic public offering of $300 million of Non-Cumulative 5-year Rate Reset Class B Preferred Shares Series 27 (the “Preferred Shares Series 27″), the size of the offering has been increased to $500 million. As announced earlier today, the revised offering will be underwritten on a bought deal basis by a syndicate led by BMO Capital Markets.

To my chagrin, they did not announce the redemption of BMO.PR.O, a FixedReset, 6.50%+458 which is callable on May 25. Given the fat Issue Reset Spread, a call is as close to certain as one ever gets in this business … but I guess I’ll just have to keep checking their news releases every day.

The new issue is provisionally rated Pfd-2 by DBRS:

DBRS has today provisionally rated Bank of Montreal’s (the Bank) Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (NVCC Preferred Shares Series 27 or Series 27) at Pfd-2 with a Stable trend.

DBRS assigned the NVCC Preferred Shares Series 27 a rating equal to the Bank’s intrinsic assessment less four rating notches because the Series 27 has only an Office of the Superintendent of Financial Institutions (OSFI)-compliant non-viable contingent capital (NVCC) trigger, which is consistent with the OSFI requirements for NVCC instruments, and no additional triggers.

The rating is consistent with DBRS’s criteria titled, “Rating Bank Capital Securities — Subordinated, Hybrid, Preferred & Contingent Capital Securities.”

… and P-2(low) by S&P:

Standard & Poor’s Ratings Services today said it assigned its ‘BBB-’ global scale and ‘P-2(Low)’ Canada scale ratings to Bank of Montreal’s (BMO) C$300 million non-cumulative five-year rate reset class B preferred shares series 27. The issuer credit rating on BMO is A+/Stable/A-1.

The ‘BBB-/P-2(Low)’ ratings stand three notches below BMO’s stand-alone credit profile (SACP), incorporating:
  • •A deduction of two notches the minimum downward notching from the SACP under our criteria for hybrid capital instruments; and
  • •A deduction of an additional notch to reflect that the preferred shares feature a non-viability contingent conversion trigger provision. Should a trigger event occur (as defined by the Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements, Chapter 2), each preferred share outstanding will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank determined in accordance with a conversion formula.

LFE.PR.B Monthly Retraction Price

April 14th, 2014

The calculation of the monthly retraction price stated in the Annual Information Form:

Except as noted below, holders of Preferred Shares whose Shares are surrendered for retraction will be entitled to receive a price per Share (the “Preferred Share Retraction Price”) equal to the sum of (i) the sum of (A) the lesser of (x) $10.00 and (y) 98% of the net asset value per Unit determined as of the Retraction Date, less in either case the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs, plus (B) an amount equal to any accrued and unpaid dividends on each Preferred Share to but excluding the applicable Retraction Date, plus (ii) all declared and unpaid dividends (“Dividends Owing”) on a Preferred Share to be retracted to but excluding the applicable Retraction Date.

… differs from that specified in the prospectus:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (i) $10.00; and (ii) 96% of the Net Asset Value determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation.

Complicating matters – there’s always a complication! – was the 2012 Capital Reorganization, in which:

amend the Articles of the Company to decrease the discount to net asset value applicable to monthly redemptions of shares from 4% to 2% and provide for the amount of this reduced discount to be paid to Quadravest, and not retained by the Company;

I sent an inquiry to the company:

I am concerned regarding the phrase ” less in either case ” found in the AIF version. If, for instance, there was a situation in which NAVPU was $12 and the market price of a Class A Share was $1, it would appear that this $1 for the Class A share would be deducted from ” (x) $10.00 ” and thus [assuming that amount (ii) = 0] the Preferred Share Retraction Price would be $9.00, whereas under the prospectus language, the Preferred Share Retraction Price would be $10.00.

To but it another way, the AIF phrase “less in either case” appears to apply to both case (x) and case (y), which differs from the prospectus language, unamended by the reorganization, and which doesn’t make a lot of sense anyway.

Can you clarify the calculation of the Preferred Share Retraction Price?

The company responded very quickly and efficiently:

Payment for LFE.PR.B shares retracted would be the lessor of (a) $10 or (b) 98% of the net asset value per unit, less the cost to buy a LFE share in the market for cancellation.

In your example below, based on a net asset value per unit of $12, the calculation (b) above would be: (98% x $12) less $1 = $10.76. Please note there could also be a maximum of 1% charged should the fund have to unwind securities in the event of a large volume of retractions in a particular month.

Therefore the lessor of (a) and (b) would still be $10.

I don’t expect the monthly retraction option to be viable unless there is another market crash, but it’s always nice to have these things nailed down in advance.