Archive for November, 2011

FBS.PR.B to be Refunded by New Issue

Wednesday, November 30th, 2011

5Banc Split Corp. announced on November 16:

that the final condition required to extend the term of the Company for an additional five years to December 15, 2016 has been satisfied as holders of approximately 76% of Class B capital shares (“Class B Capital Shares”) have elected to continue their participation in the Company. Holders of Class B Capital Shares approved the extension of the term of the Company on October 7, 2011 subject to the condition that a minimum of 2,500,000 Class B Capital Shares remain outstanding after giving effect to the special retraction right (the “Special Retraction Right”).

Under the Special Retraction Right, 1,592,428 Class B Capital Shares were tendered to the Company for retraction on December 15, 2011. The holders of the remaining 5,160,270 Class B Capital Shares will continue to enjoy the benefits of a leveraged participation in the capital appreciation of the Company’s portfolio of publicly listed common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank while deferring the recognition of capital gains or capital losses which would otherwise be realized on the redemption of their Class B Capital Shares.

The Class B preferred shares (the “Class B Preferred Shares”) will be redeemed by the Company on December 15, 2011 in accordance with the redemption provisions detailed in the prospectus dated November 28, 2006. Pursuant to these provisions, the Class B Preferred Shares will be redeemed at a price per Class B Preferred Share equal to the lesser of $10.00 and the Net Asset Value per Unit determined on or about December 8, 2011. In order to maintain the leveraged “split share” structure of the Company, the Company intends to create and issue a new series of Class C preferred shares, which are expected to be issued following the redemption of the Class B Preferred Shares on December 15, 2011.

The Class B Capital Shares and the Class B Preferred Shares of 5Banc Split are listed and posted for trading on the Toronto Stock Exchange under the symbols FBS.B and FBS.PR.B respectively.

They announced today that:

it has filed a preliminary short form prospectus in respect of a proposed public offering of a new series of Class C preferred shares (the “Class C Preferred Shares”). The Class C Preferred Shares are being offering to the public on a best efforts basis by a syndicate of agents led by TD Securities Inc. which includes Scotia Capital Inc., BMO Capital Markets and National Bank Financial Inc.

The Company holds a portfolio of publicly listed common shares of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank in order to provide holders of the Class C Preferred Shares with fixed cumulative preferential dividends and to provide holders of its Class B capital shares (the “Capital Shares”) with a leveraged investment and excess dividends, if any, subject to the prior rights of holders of Class C Preferred Shares and after payment of the expenses of the Company and dividends payable on the Class C Preferred Shares.

The Capital Shares and the Class B preferred shares of the Company (the “Class B Preferred Shares”) are listed and posted for trading on the Toronto Stock Exchange under the symbols FBS.B and FBS.PR.B respectively. The Class B Preferred Shares will be redeemed on December 15, 2011 in accordance with their terms.

The preliminary prospectus is on SEDAR, but the vital details are yet to be filled in.

FBS.PR.B was last mentioned on PrefBlog when it was upgraded to Pfd-3(high) by DBRS. FBS.PR.B is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

November 29, 2011

Wednesday, November 30th, 2011

S&P had an exciting day, downgrading HSB preferreds as well as a few other important names:

Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.

S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd. (1398), giving all three lenders higher grades than most big U.S. banks.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 21bp, FixedResets down 9bp and DeemedRetractibles off 9bp. Volatility was good, 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 -0.0977 % 2,102.3
FixedFloater 4.92 % 4.66 % 28,947 17.06 1 0.1036 % 3,134.0
Floater 3.42 % 3.44 % 149,340 18.60 2 -0.0977 % 2,269.9
OpRet 4.96 % 0.72 % 49,208 1.46 7 -0.1646 % 2,478.8
SplitShare 5.82 % 6.58 % 57,299 5.14 3 -0.4786 % 2,523.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1646 % 2,266.6
Perpetual-Premium 5.57 % 2.51 % 99,834 0.11 13 0.1894 % 2,154.9
Perpetual-Discount 5.31 % 5.17 % 103,577 14.67 17 0.2082 % 2,296.5
FixedReset 5.11 % 3.02 % 214,104 2.46 64 -0.0941 % 2,338.8
Deemed-Retractible 5.06 % 4.44 % 196,609 3.85 46 -0.0900 % 2,214.6
Performance Highlights
Issue Index Change Notes
MFC.PR.B Deemed-Retractible -1.71 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.82
Bid-YTW : 6.37 %
CIU.PR.A Perpetual-Discount -1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.66
Evaluated at bid price : 24.14
Bid-YTW : 4.76 %
GWO.PR.N FixedReset -1.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.67
Bid-YTW : 3.86 %
GWO.PR.M Deemed-Retractible -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.79
Bid-YTW : 5.55 %
MFC.PR.C Deemed-Retractible -1.17 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.10
Bid-YTW : 6.64 %
SLF.PR.E Deemed-Retractible -1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.92
Bid-YTW : 6.72 %
SLF.PR.G FixedReset -1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.45
Bid-YTW : 4.15 %
POW.PR.D Perpetual-Discount 1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 24.19
Evaluated at bid price : 24.66
Bid-YTW : 5.11 %
GWO.PR.H Deemed-Retractible 1.23 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.87
Bid-YTW : 5.57 %
BAM.PR.M Perpetual-Discount 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.24
Evaluated at bid price : 23.71
Bid-YTW : 5.06 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.D FixedReset 303,480 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.13
Evaluated at bid price : 25.10
Bid-YTW : 3.74 %
CM.PR.G Perpetual-Discount 79,262 Desjardins crossed 40,000 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 24.57
Evaluated at bid price : 24.90
Bid-YTW : 5.47 %
RY.PR.P FixedReset 58,501 RBC crossed 30,000 at 27.00; Scotia crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.90
Bid-YTW : 2.78 %
CM.PR.E Perpetual-Discount 43,057 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 24.70
Evaluated at bid price : 25.00
Bid-YTW : 5.65 %
CU.PR.C FixedReset 37,942 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.26
Evaluated at bid price : 25.40
Bid-YTW : 3.69 %
MFC.PR.C Deemed-Retractible 27,431 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.10
Bid-YTW : 6.64 %
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.R FixedReset Quote: 26.01 – 26.70
Spot Rate : 0.6900
Average : 0.4374

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.49
Evaluated at bid price : 26.01
Bid-YTW : 3.86 %

GWO.PR.G Deemed-Retractible Quote: 24.70 – 25.23
Spot Rate : 0.5300
Average : 0.3770

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.70
Bid-YTW : 5.50 %

RY.PR.H Deemed-Retractible Quote: 26.51 – 26.92
Spot Rate : 0.4100
Average : 0.2785

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-24
Maturity Price : 26.00
Evaluated at bid price : 26.51
Bid-YTW : 4.12 %

CIU.PR.A Perpetual-Discount Quote: 24.14 – 24.60
Spot Rate : 0.4600
Average : 0.3405

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-29
Maturity Price : 23.66
Evaluated at bid price : 24.14
Bid-YTW : 4.76 %

BMO.PR.N FixedReset Quote: 27.01 – 27.43
Spot Rate : 0.4200
Average : 0.3084

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 27.01
Bid-YTW : 2.83 %

GWO.PR.N FixedReset Quote: 23.67 – 23.95
Spot Rate : 0.2800
Average : 0.1689

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.67
Bid-YTW : 3.86 %

HSB Preferreds Downgraded to A- by S&P; No Change on Local Scale

Tuesday, November 29th, 2011

Standard and Poor’s has announced:

  • Following a review under Standard & Poor’s revised bank criteria (published on Nov. 9, 2011), we have lowered our long- and short-term ratings on U.K.-based HSBC Holdings PLC (HSBC or “the group”) to ‘A+/A-1′ from ‘AA-/A-1+’ and the long-term ratings on the group’s core operating subsidiaries to ‘AA-’ from ‘AA’.
  • Other rating actions on debt issues and subsidiaries are listed below.
  • The group’s ‘a+’ stand-alone credit profile reflects our view of its very strong business position, adequate capital and earnings, strong risk position, average funding, and adequate liquidity.
  • The ratings also reflect its high systemic importance in the U.K.
  • The stable outlook on the group reflects our view that the group’s strengths should enable it to withstand any softening in global economic conditions or setbacks in the rundown of its U.S. consumer finance portfolio.

They specifically noted that the P-1(low) rating on the local scale for the preferred stock was affirmed.

HSB has three preferred share issues outstanding: HSB.PR.C and HSB.PR.D (Straight Perpetual) and HSB.PR.E (FixedReset).

New Issue: MFC FixedReset 4.40%+290

Tuesday, November 29th, 2011

Manulife Financial Corporation has announced:

a Canadian public offering of Non-cumulative Rate Reset Class 1 Shares Series 5 (“Series 5 Preferred Shares”). Manulife will issue eight million Series 5 Preferred Shares priced at $25 per share to raise gross proceeds of $200 million. The offering will be underwritten by a syndicate of investment dealers led by RBC Capital Markets and Scotia Capital Inc. and is anticipated to qualify as Tier 1 capital for Manulife. The expected closing date for the offering is December 6, 2011. Manulife has also granted the underwriters an option, exercisable in whole or in part at any time up to 48 hours prior to closing, to purchase up to an additional two million Series 5 Preferred Shares. The maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full. Manulife intends to file a prospectus supplement to its September 3, 2010 base shelf prospectus in respect of this issue.

“We issue preferred shares and other capital instruments from time to time to bolster capital, believing that this action is prudent when faced with uncertain market and economic conditions. Our capital position remains strong but we recognize that there could be pressure on our common share price and bond spreads if our capital ratios decline,” said Donald Guloien, President and CEO of Manulife.

Holders of the Series 5 Preferred Shares will be entitled to receive a non-cumulative quarterly fixed dividend yielding 4.40 per cent annually, as and when declared by the Board of Directors of Manulife, for the initial period ending December 19, 2016. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.90 per cent.

Holders of Series 5 Preferred Shares will have the right, at their option, to convert their shares into Non-cumulative Rate Reset Class 1 Shares Series 6 (“Series 6 Preferred Shares”), subject to certain conditions, on December 19, 2016 and on December 19 every five years thereafter. Holders of the Series 6 Preferred Shares will be entitled to receive non-cumulative quarterly floating dividends, as and when declared by the Board of Directors of Manulife, at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.90 per cent.

The net proceeds from the offering will be utilized for general corporate purposes, which may include investments in subsidiaries.

November 28, 2011

Monday, November 28th, 2011

Europe is considering another step towards effective nationalization of the banking system:

Banks in states roiled by Europe’s sovereign-debt crisis may be partly shielded from extra costs when they seek government guarantees, according to two people familiar with the situation.

The European Commission will publish rules on state aid for lenders that may dilute the effect of turmoil in the euro area on the fees that banks have to pay for guarantees on their loans and bonds, said the people who couldn’t be identified because the discussions aren’t public. Under the plans, the formula for setting the fees would reduce the impact of soaring debt- insurance costs for the country giving the backstops, one of the people said.

“Renewed tensions” in financial markets are forcing European Union regulators to extend into 2012 special state aid rules for banks that have allowed governments to inject billions of euros into the industry, said EU Competition Commissioner Joaquin Almunia this month. He said he was planning to “clarify and update the rules on pricing and other conditions.”

I’m not saying that’s necessarily the wrong response – I’m just saying that if it is the right response then banks are just another arm of government.

BRF.PR.A was confirmed at Pfd-3(high) by DBRS:

DBRS has today assigned an Issuer Rating of BBB (high) with a Stable trend to Brookfield Renewable Energy Partners L.P. (BREP) and a rating of BBB (high) with a Stable trend to the Senior Unsecured Debentures and Notes (the Notes) of BRP Finance ULC (BRPF). DBRS has also confirmed the Pfd-3 (high) rating with a Stable trend of Class A Preference Shares, Series 1 (the Prefs) of Brookfield Renewable Power Preferred Equity Inc. (BRPP). The ratings of the Notes of BRPF and the Prefs of BRPP are based on guarantees of the parent company, BREP, and its operating subsidiaries. In addition, the rating on the Senior Unsecured Debentures and Notes of Brookfield Renewable Power Inc. (BRPI) and the Issuer Rating and Income Fund rating of Brookfield Renewable Power Fund (the Fund) have been discontinued. These actions resolve the Under Review with Developing Implications assigned to the ratings of BRPI and the Fund on September 13, 2011.

These rating actions follow the closing of the anticipated business combination (the Transaction) today in which in BREP acquired all of the units of the Fund and the equity interests in all of BRPI’s U.S., Brazilian and Canadian power assets not already owned by the Fund. The Transaction and the expected rating outcomes were described in more detail in the DBRS press release dated September 13, 2011.

It was a mixed, uneventful day for the Canadian preferred share market, with PerpetualDiscounts losing 8bp, FixedResets down 5bp and DeemedRetractibles gaining 4bp. 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 0.00 % 0.00 % 0 0.00 0 0.0326 % 2,104.3
FixedFloater 4.92 % 4.66 % 28,713 17.05 1 -1.7812 % 3,130.8
Floater 3.42 % 3.44 % 151,838 18.60 2 0.0326 % 2,272.1
OpRet 4.95 % 0.72 % 49,744 1.46 7 0.1484 % 2,482.9
SplitShare 5.79 % 6.40 % 54,694 5.15 3 0.2257 % 2,535.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1484 % 2,270.3
Perpetual-Premium 5.59 % 3.12 % 97,593 0.41 13 0.1008 % 2,150.8
Perpetual-Discount 5.32 % 5.37 % 103,679 14.67 17 -0.0798 % 2,291.7
FixedReset 5.11 % 3.06 % 215,197 2.46 64 -0.0451 % 2,341.0
Deemed-Retractible 5.05 % 4.42 % 197,700 3.84 46 0.0384 % 2,216.6
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset -2.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 22.75
Evaluated at bid price : 24.01
Bid-YTW : 3.73 %
BAM.PR.G FixedFloater -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 25.00
Evaluated at bid price : 19.30
Bid-YTW : 4.66 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.D FixedReset 422,680 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 23.13
Evaluated at bid price : 25.10
Bid-YTW : 3.74 %
BAM.PR.Z FixedReset 140,977 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 23.15
Evaluated at bid price : 25.15
Bid-YTW : 4.42 %
BAM.PR.H OpRet 42,231 TD crossed 40,000 at 25.35.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-12-28
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 0.01 %
CM.PR.G Perpetual-Discount 41,173 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 24.57
Evaluated at bid price : 24.90
Bid-YTW : 5.47 %
CM.PR.E Perpetual-Discount 35,260 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 24.70
Evaluated at bid price : 24.99
Bid-YTW : 5.66 %
IAG.PR.E Deemed-Retractible 31,233 TD crossed blocks of 10,000 and 15,000, both at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 5.26 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSB.PR.C Deemed-Retractible Quote: 24.98 – 25.73
Spot Rate : 0.7500
Average : 0.4794

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.25 %

BMO.PR.O FixedReset Quote: 27.36 – 27.68
Spot Rate : 0.3200
Average : 0.1975

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-25
Maturity Price : 25.00
Evaluated at bid price : 27.36
Bid-YTW : 2.59 %

BMO.PR.N FixedReset Quote: 27.15 – 27.44
Spot Rate : 0.2900
Average : 0.1861

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-25
Maturity Price : 25.00
Evaluated at bid price : 27.15
Bid-YTW : 2.57 %

BAM.PR.X FixedReset Quote: 24.01 – 24.60
Spot Rate : 0.5900
Average : 0.4881

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-28
Maturity Price : 22.75
Evaluated at bid price : 24.01
Bid-YTW : 3.73 %

IAG.PR.C FixedReset Quote: 26.27 – 26.70
Spot Rate : 0.4300
Average : 0.3281

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.27
Bid-YTW : 3.41 %

GWO.PR.J FixedReset Quote: 26.45 – 26.74
Spot Rate : 0.2900
Average : 0.2085

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.45
Bid-YTW : 3.60 %

November 25, 2011

Saturday, November 26th, 2011

In today’s cheerful European news, Italy got whacked at a bill auction:

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The euro fell to a seven-week low.

The Italian Treasury paid 6.504 percent to auction 8 billion euros ($10.6 billion) of the debt, almost twice the 3.535 percent a month ago and the highest since August 1997. Italy’s two-year bonds yielded a euro-era record 7.83 percent, almost 50 basis points more than 10-year notes.

The euro extended declines, shedding 0.9 percent to $1.3213, the lowest since Oct. 3. Italy’s FTSE MIB index was the biggest decliner among European benchmarks, shedding 1.3 percent at 3 p.m. in Rome. Banks tumbled with Banca Monte Paschi di Siena SpA (BMPS) dropping 3.9 percent.

S&P downgraded Belgium to AA:

Belgium’s credit rating was cut one step to AA by Standard & Poor’s, which said bank guarantees, lack of policy consensus and slowing growth will make it difficult to reduce the euro region’s fifth-highest debt load.

The rating was lowered from AA+, with a negative outlook, London-based S&P said yesterday in a statement. The action by S&P is the first downgrade for Belgium in almost 13 years and puts its credit ranking on a par with the S&P local-currency ratings of the Czech Republic, Kuwait and Chile.

Belgium’s borrowing costs have surged to the highest level in 11 years in the past two months after the nation’s government agreed to buy Dexia SA’s Belgian bank unit and guarantee part of the crisis-hit lender’s liabilities for 10 years. Investors continued a selloff in Belgian bonds after six-party coalition talks ran aground this week as Liberals and Socialists clashed over how to cut the budget deficit.

TransCanada Corporation and its subsidiary TransCanada Pipelines Ltd., issuers of TRP.PR.A, TRP.PR.B, TRP.PR.C, TCA.PR.X and TCA.PR.Y were confirmed at Pfd-2(low) by DBRS:

DBRS has confirmed the ratings of TransCanada PipeLines Limited (TCPL or the Company) as listed below. DBRS has also confirmed the rating of the Preferred Shares of TransCanada Corporation (TCC) at Pfd-2 (low). The rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL.

The confirmation reflects the Company’s continued predictable cash flow from its regulated pipelines, which accounted for over 70% of consolidated EBITDA (for the first nine months (9M) of 2011). Pipeline EBITDA is supported by stable earnings that are mostly on a cost-of-service basis and/or contracted, and by incremental earnings contributed by newly constructed pipelines The remaining 30% of EBITDA is mostly contributed by power generation assets (60% in Canada and 40% in the United States). Although EBITDA from power generation is less predictable than the pipeline business, a sizable share of the power output is protected by long-term contracts with creditworthy parties.

Capex over the next two years (excluding the Keystone XL project) is likely to be much lower than the $3.6 billion level of the 12 months ending September 30, 2011. DBRS expects free cash flow to be relatively neutral until the significant capex on Keystone XL or another large project is well underway. As a result, debt levels are expected to remain stable or decrease slightly over the medium term. Combined with higher cash flow expected from newly completed pipeline projects, DBRS expects TCPL’s credit metrics to improve modestly and remain well within the current rating category.

EMA.PR.A was confirmed at Pfd-3(high) by DBRS:

DBRS has today confirmed the Medium-Term Notes and Preferred Shares – Cumulative ratings of Emera Inc. (Emera or the Company) at BBB (high) and Pfd-3 (high), respectively, with Stable trends, based on the strong earnings and cash flows generated by its regulated operations and on Emera’s, reasonable non-consolidated financial profile. The ratings also reflect increasing diversification through the ownership of regulated utilities in different jurisdictions, which reduces dependence on earnings and cash flows from any one entity and reduces volatility of earnings. However, Nova Scotia Power Inc. (NSPI) continues to account for the majority (approximately 70%) of Emera’s consolidated EBIT.

NSI.PR.D was confirmed at Pfd-2(low) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of Nova Scotia Power Inc. (NSPI or the Company) at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The ratings reflect stable and predictable regulated cash flows generated by the Company’s regulated monopolistic operations, diverse customer base and a supportive regulatory environment.

INE.PR.A was confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed the Issuer Rating of BBB (low) and the Preferred Shares rating of Pfd-3 (low) of Innergex Renewable Energy Inc. (Innergex or the Company). Both ratings have Stable trends. The ratings reflect the strength of the Company’s high-quality, low-cost renewable power generating assets, operating under long-term off-take contracts with highly-rated counterparties, and its consistent execution in developing and constructing new generating assets.

Consolidated credit metrics are expected to remain weak for the rating category through the medium term, with EBITDA-to-interest in the 2.3 times (x) to 2.5x range and cash flow-to-debt in the 5% to 8% range. DBRS expects future modest improvement in coverage metrics as assets under construction are completed and enter service. Consolidated debt-to-capital, currently 63%, is expected to increase modestly over the next several years and peak in 2013 to 2014 until new construction assets begin to operate. Most of the consolidated debt (82%) is project-level debt and non-recourse to the Company.

Business risk factors are low for the rating category. Innergex’s competitive position, asset composition and contractual position are all strong for the BBB (low) rating. Asset diversification and operational expertise also support the investment-grade quality assessment. In addition, the focus on renewable assets minimizes exposure to environmental regulation and is positive for the rating. The Company’s low business risk profile mitigates weaker financial credit metrics. Renewable resources are variable, reducing energy production stability and related cash flows. However, this risk is mainly offset by the geographic diversity of the generating portfolio. Also, the Company has cash-funded reserves at the project level (typically six months of debt service) to smooth variability in cash flows from wind/hydrology resources.

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 -1.2862 % 2,103.6
FixedFloater 4.83 % 4.55 % 28,554 17.19 1 -0.7576 % 3,187.5
Floater 3.42 % 3.44 % 153,962 18.60 2 -1.2862 % 2,271.4
OpRet 4.96 % 3.06 % 51,452 1.47 7 0.1376 % 2,479.2
SplitShare 5.80 % 6.48 % 56,945 5.16 3 0.1696 % 2,529.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1376 % 2,267.0
Perpetual-Premium 5.59 % 3.15 % 98,283 0.27 13 -0.0572 % 2,148.7
Perpetual-Discount 5.31 % 5.19 % 105,139 14.68 17 0.0775 % 2,293.5
FixedReset 5.11 % 3.02 % 217,792 2.47 64 -0.0718 % 2,342.0
Deemed-Retractible 5.05 % 4.40 % 199,515 3.85 46 -0.0262 % 2,215.7
Performance Highlights
Issue Index Change Notes
IAG.PR.F Deemed-Retractible -1.92 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 5.51 %
BAM.PR.K Floater -1.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 15.29
Evaluated at bid price : 15.29
Bid-YTW : 3.47 %
RY.PR.R FixedReset -1.66 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.65
Bid-YTW : 3.22 %
CM.PR.P Deemed-Retractible -1.23 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 3.23 %
TD.PR.P Deemed-Retractible -1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-01
Maturity Price : 25.50
Evaluated at bid price : 26.13
Bid-YTW : 4.39 %
GWO.PR.N FixedReset -1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.10
Bid-YTW : 3.59 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.D FixedReset 122,050 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 23.13
Evaluated at bid price : 25.10
Bid-YTW : 3.67 %
TD.PR.K FixedReset 38,630 RBC crossed 30,000 at 27.44.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.42
Bid-YTW : 2.67 %
CM.PR.E Perpetual-Discount 32,581 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 24.70
Evaluated at bid price : 25.00
Bid-YTW : 5.65 %
CM.PR.G Perpetual-Discount 27,615 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 24.58
Evaluated at bid price : 24.91
Bid-YTW : 5.46 %
ENB.PR.B FixedReset 21,897 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 23.26
Evaluated at bid price : 25.41
Bid-YTW : 3.65 %
BNS.PR.Z FixedReset 21,893 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.96
Bid-YTW : 3.20 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
RY.PR.R FixedReset Quote: 26.65 – 27.10
Spot Rate : 0.4500
Average : 0.2711

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.65
Bid-YTW : 3.22 %

CM.PR.P Deemed-Retractible Quote: 25.61 – 26.14
Spot Rate : 0.5300
Average : 0.3621

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-29
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 3.23 %

BMO.PR.L Deemed-Retractible Quote: 26.93 – 27.20
Spot Rate : 0.2700
Average : 0.1760

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 26.00
Evaluated at bid price : 26.93
Bid-YTW : 3.12 %

TD.PR.P Deemed-Retractible Quote: 26.13 – 26.39
Spot Rate : 0.2600
Average : 0.1717

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-11-01
Maturity Price : 25.50
Evaluated at bid price : 26.13
Bid-YTW : 4.39 %

BAM.PR.K Floater Quote: 15.29 – 15.52
Spot Rate : 0.2300
Average : 0.1658

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 15.29
Evaluated at bid price : 15.29
Bid-YTW : 3.47 %

POW.PR.A Perpetual-Discount Quote: 25.11 – 25.41
Spot Rate : 0.3000
Average : 0.2372

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-25
Maturity Price : 24.88
Evaluated at bid price : 25.11
Bid-YTW : 5.65 %

BoC Releases Autumn 2011 Review

Friday, November 25th, 2011

The Bank of Canada has released the Bank of Canada Review: Autumn 2011 with major articles:

  • The International Monetary System: An Assessment and Avenue for Reform
  • Liquidity Provision and Collateral Haircuts in Payments Systems
  • Extracting Information from the Business Outlook Survey: A Principal-Component Approach
  • Modelling the Counterfeiting of Bank Notes: A Literature Review

The second article, on Liquidity provision, is by James Chapman, Jonathan Chiu and Miguel Molico, all of whom are bank employees. They explain:

The study presented in the following section argues that the central bank’s haircut policy can therefore directly affect liquidity in these markets and indirectly influence market participants’ choice of asset portfolios, as well as the pricing of credit and liquidity spreads. The central bank is concerned not only about its own exposure to credit risk, but also about the efficiency and stability of the financial system. Consequently, in setting its haircut policy, the central bank must consider the impact of the policy on the financial system and its participants.

A growing need for high quality collateral is forecast:

Policy-makers also face the challenge of a growing demand for high-quality collateral. Modern financial systems tend to utilize more collateral because of the increased private use of collateral, and because of the need to post additional collateral with payment and settlement systems. The G-20 countries committed to have all standardized over-the-counter derivatives contracts cleared by central counterparties (CCPs) by the end of 2012 to help strengthen the global financial system. Such an increase in CCP activity has the potential to increase the need for collateral. In addition, revisions to the core principles for financial market infrastructure, currently being considered by the Bank for International Settlements’ Committee on Payment and Settlement Systems and by the International Organization of Securities Commissions, will further increase the demand for collateral by financial market participants. The haircuts set by central banks are important parameters in determining the ability of financial systems to make the most efficient use of high-quality collateral.

November 24, 2011

Thursday, November 24th, 2011

Today’s cheerful credit news is about Japan:

Standard & Poor’s said Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, an indication it may be preparing to lower the nation’s sovereign grade.

“Japan’s finances are getting worse and worse every day, every second,” Takahira Ogawa, director of sovereign ratings at S&P in Singapore, said in an interview. Asked if that means he’s closer to cutting Japan, he said it “may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today.”

Meanwhile, in Europe:

Stocks fell, Italian bonds declined and the cost of insuring European government debt against default rose to a record after German Chancellor Angela Merkel ruled out joint euro-area borrowing.

The yield on Italy’s 10-year bond climbed 14 basis points to 7.11 percent, while similar-maturity French debt yields rose three basis points to 3.72 percent.

Portugal’s bonds fell, with 10-year note yields climbing 90 basis points to 12.21 percent after Fitch Ratings cut the nation’s credit grade one step to BB+, the highest junk status.

Germany’s 10-year bond yield rose as much as 12 basis points to 2.26 percent before trading five basis points higher at 2.20 percent. Two-year note yields increased three basis points to 0.47 percent.

The Royal Canadian Mint’s gold receipt IPO appears to be going very well:

The Royal Canadian Mint raised C$600 million ($573 million) in an initial public offering of securities tied to its gold reserves, more than double its IPO target, according to two people familiar with the sale.

The mint initially sought to raise C$250 million from selling units in Canadian or U.S. dollars at C$20 or $19.29 each, the Ottawa-based firm said. Strong demand from institutional and individual investors drove up the size of the sale, said the people, who declined to be named because terms aren’t public.

Each exchange-traded receipt represents ownership in physical gold bullion held in custody of the Royal Canadian Mint. Proceeds from the sale will be used to buy gold, and the buyers of the receipts will own the metal rather than a stake in the mint, according to an Oct. 28 statement.

Huxley said “History is bunk.” Moody’s says Hungary is junk:

Hungary lost its investment-grade rating at Moody’s Investors Service after 15 years as the Cabinet seeks International Monetary Fund help to boost confidence in the European Union’s most-indebted eastern member.

The foreign- and local-currency bond ratings were cut one step to Ba1, the highest junk-level score, from Baa3, the company said today in a statement. Moody’s, which awarded Hungary its investment grade in 1996, assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.

The government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened. Prime Minister Viktor Orban’s Cabinet on Nov. 17 asked for IMF “insurance” that doesn’t entail a loan and doesn’t impose conditions.

It was a rough day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets down 13bp and DeemedRetractibles off 8bp. Not much volatility. Volume was very light – not unexpectedly, what with the US turkeys.

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 -0.0964 % 2,131.1
FixedFloater 4.80 % 4.51 % 28,451 17.25 1 2.3785 % 3,211.9
Floater 3.38 % 3.41 % 66,017 18.68 2 -0.0964 % 2,301.0
OpRet 4.97 % 1.66 % 51,439 1.47 7 -0.0275 % 2,475.8
SplitShare 5.81 % 6.58 % 59,294 5.16 3 -0.2115 % 2,525.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0275 % 2,263.9
Perpetual-Premium 5.59 % 2.84 % 102,058 0.43 13 -0.1562 % 2,149.9
Perpetual-Discount 5.32 % 5.19 % 101,069 14.68 17 -0.2366 % 2,291.7
FixedReset 5.10 % 3.04 % 218,480 2.48 64 -0.1273 % 2,343.7
Deemed-Retractible 5.05 % 4.39 % 202,643 3.86 46 -0.0777 % 2,216.3
Performance Highlights
Issue Index Change Notes
PWF.PR.E Perpetual-Discount -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 23.85
Evaluated at bid price : 25.01
Bid-YTW : 5.50 %
POW.PR.B Perpetual-Discount -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 24.53
Evaluated at bid price : 24.78
Bid-YTW : 5.46 %
BAM.PR.G FixedFloater 2.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 25.00
Evaluated at bid price : 19.80
Bid-YTW : 4.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.D FixedReset 91,050 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 23.13
Evaluated at bid price : 25.10
Bid-YTW : 3.67 %
SLF.PR.H FixedReset 66,200 TD crossed 46,400 at 23.30.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.30
Bid-YTW : 4.54 %
CIU.PR.B FixedReset 51,600 Nesbitt crossed 50,000 at 27.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 27.09
Bid-YTW : 3.20 %
RY.PR.E Deemed-Retractible 46,681 TD crossed 34,100 at 25.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 4.51 %
CM.PR.G Perpetual-Discount 45,402 Desjardins crossed 25,000 at 24.91.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 24.57
Evaluated at bid price : 24.90
Bid-YTW : 5.46 %
BNS.PR.Z FixedReset 36,021 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.96
Bid-YTW : 3.20 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSB.PR.E FixedReset Quote: 27.06 – 27.50
Spot Rate : 0.4400
Average : 0.2850

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 27.06
Bid-YTW : 3.69 %

PWF.PR.E Perpetual-Discount Quote: 25.01 – 25.50
Spot Rate : 0.4900
Average : 0.3533

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-24
Maturity Price : 23.85
Evaluated at bid price : 25.01
Bid-YTW : 5.50 %

GWO.PR.M Deemed-Retractible Quote: 26.10 – 26.60
Spot Rate : 0.5000
Average : 0.3992

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 5.38 %

CIU.PR.B FixedReset Quote: 27.09 – 27.55
Spot Rate : 0.4600
Average : 0.3620

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.00
Evaluated at bid price : 27.09
Bid-YTW : 3.20 %

IAG.PR.A Deemed-Retractible Quote: 22.65 – 23.00
Spot Rate : 0.3500
Average : 0.2610

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.65
Bid-YTW : 5.81 %

BAM.PR.O OpRet Quote: 25.76 – 26.10
Spot Rate : 0.3400
Average : 0.2513

YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 3.54 %

BoE 2011Q3 Quarterly Bulletin

Thursday, November 24th, 2011

The Bank of England has released its 2011Q3 Quarterly Bulletin with the following research articles:

  • The United Kingdom’s quantitative easing policy: design, operation and impact
  • Bank resolution and safeguarding the creditors left behind
  • Developments in the global securities lending market
  • Measuring financial sector output and its contribution to UK GDP
  • The Money Market Liaison Group Sterling Money Market Survey
  • Summaries of recent Bank of England working papers
    • An estimated DSGE model of energy, costs and inflation in the United Kingdom
    • The impact of permanent energy price shocks on the UK economy
    • Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change
    • Preferred-habitat investors and the US term structure of real rates

I was very interested in the second article, as it contains a defense of Special Resolution Regimes relative to bankruptcy; the politicians favouring of the former at the expense of the latter is a particular hobby horse of mine:

Commencement of insolvency leads to a freeze in the bank’s ability to make payments, which effectively results in the end of its business.(2) The sudden severing of these interconnections between a bank and the rest of the financial system and wider economy can have highly undesirable systemic effects. Individuals and small companies are entitled to compensation by the Financial Services Compensation Scheme (FSCS) for the first £85,000 of their deposits. But even a relatively short delay in the time needed by the FSCS to process and pay many deposit insurance claims can lead to hardship for households and businesses left temporarily without access to their savings. Disruption of this kind can undermine depositor confidence, potentially triggering contagion to other banks and endangering financial stability.

This fear on the behalf of depositors is a red herring. The authors would have us believe that delays by the deposit insurance corporation are inevitable, while delays by Special Resolution bureaucrats are non-existent.

The legal power to transfer some or all of the business of a failed bank to another company lies at the core of the United Kingdom’s SRR and of most other bank resolution regimes around the world.[Footnote]

Footnote reads: The transfer powers are called ‘stabilisation powers’ in the United Kingdom’s SRR and a ‘purchase (of assets) and an assumption (of liabilities)’ in the United States. The United States has had a bank resolution authority since 1933 and Canada since 1967. Transfer powers have also existed in Italy for some time and have been recently adopted in Germany.

I see no reason why these transfer powers can’t be incorporated into the regular bankruptcy process as a special case for defined institutions. Given bankruptcy, the regulator steps in as receiver and splits the bank with the objective of making the “Good Bank” as small as possible consistent with the purpose of maintaining financial stability. The “Bad Bank” holds all the common shares of the Good Bank and may sell them at leisure, although it may wish to do so on the weekend. I don’t see that this is different in practice from the aims of special resolution, or inconsistent with existing bankruptcy law. All that’s needed is an adjustment to bankruptcy law allowing this to happen when (i) the failed company is a bank and (ii) the receiver is the regulator.

Creditors, such as bondholders or other wholesale funders, that the resolution authority may have decided to leave behind in the residual bank do not enjoy these benefits [of being creditors of a solvent firm]. They must claim instead for repayment of their debts in the bank’s insolvency. But as is shown in the box on page 217, a decision to split the balance sheet in a way that fully protects depositors and certain other creditors could, on the face of it, put those creditors left behind in a potentially worse position than had the transfer powers never been used and the bank had been left to go through normal insolvency.

One reason for this lies in the fact that, under UK insolvency law, depositors in the United Kingdom rank equally — or ‘pari passu’ — with other ordinary senior creditors and therefore should share any losses equally between them.[Footnote]

Footnote reads: This contrasts with some other jurisdictions, most notably the United States, where depositors rank ahead of the other creditors (so-called ‘depositor preference’).

Seems to me that if the problem is the seniority of depositors, this is most easily addressed through legislation changing the seniority of depositors. You don’t need a Special Resolution Regime to do that. Another means of achieving the same end is for the deposit insurer to put up all the funds required to cover to the insured depositors and give the insurer and the uninsured depositors a senior claim in the Bad Bank.

The authors conclude, in part:

Bank special resolution regimes are designed to address systemic risks caused by bank failure while freeing the public authorities from the dilemma of having to use public funds to bail out all of a bank’s creditors. By doing so, they offer benefits to a financial system not only at the point of use but more generally through their effect on the behaviour of banks and their creditors.

There’s nothing here that can’t be addressed by small adjustments to existing bankruptcy law. However, the most objectionable part of the article is contained in the box which describes their plans for adusting the resolution regime:

Augment the existing SRR by developing ways to restructure a firm’s balance sheet without splitting it into separate parts. There is currently much discussion around the possible use of a ‘bail-in’ tool to write down or convert into equity some classes of unsecured debt of a firm in resolution. This would enable the resolution authority to allow losses to fall on some creditors by reducing the value of their claims on the firm without having to deal with the operational and legal consequences of transferring some of the business to a purchaser. The practical benefits of such an approach may be significant articularly when dealing with large and complex banks with huge numbers of counterparties and contracts governed by different laws.

This business of giving the resolution authority the ability to change the seniority of claims in an insolvency by fiat, instead of in accord with existing bankruptcy law, is what really sticks in my craw. Discretionary “bail-in” provisions at the whim of the regulator are an affront to the rule of law.

The other article I found of interest was “Developments in the global securities lending market”, but this was a review of the topic and how it is changing, with little that was particularly new or controversial.

Security Transaction Taxes and Market Quality

Thursday, November 24th, 2011

The Bank of Canada has released a working paper by Anna Pomeranets and Daniel G. Weaver titled Security Transaction Taxes and Market Quality:

We examine nine changes in the New York State Security Transaction Taxes (STT) between 1932 and 1981. We find that imposing or increasing an STT results in wider bid ask spreads, lower volume, and increased price impact of trades. In contrast to theories of STT imposition as a means to reduce volatility, we find no consistent relationship between the level of an STT and volatility. We examine the propensity of traders to switch trading locations to avoid the tax and find no consistent evidence that they will change locations. We do find evidence to suggest that taxes imposed on the par value of stock will result in corporations managing the par value in the direction of minimizing the impact of the tax on investors.

Section II of the report, “Regulatory History”, give a highly entertaining account of the history of STT with the New York state government attempting to collect as much revenue as it could, with the affected companies, investors and competitors attempting to minimize the figure. A lot of time, and highly skilled time at that, must have been burned up in these games – which is the most insidious effect of a targetted tax.

Similar fun and games have been observed elsewhere, particularly with respect to preferred shares, as discussed on the blog in the post Par Value.

The literature review in section III traces the debate from the beginning:

The earliest proponents of STTs, Keynes (1936) and Tobin (1978), argue that an STT will improve market quality. In particular, Keynes contends that chasing short-term returns, while potentially profitable to specific individuals, is a zero-sum game in terms of economic welfare. Since one investor’s gain is another’s loss and trading utilizes resources, the value-added through trading is negative. As a result, imposing an STT may increase welfare by reducing wasted resources. Second, since trading is speculative by nature, it potentially contributes to financial instability when trades are driven by short-term capital gains and not fundamental information. Keynes argues that an STT will curtail short-term speculation, and thereby reduce wasted resources, market volatility and asset mispricing. Consistent with Keynes, Tobin (1978) proposes a tax on foreign exchange transactions that would make short term currency trading unprofitable. He suggests that a transaction tax would “throw some sand in the wheels of speculation.”

I have a bit of a problem with this. In the first place, speculators help long term investors by providing liquidity when they wish to buy and sell; in the second place, market prices are a very important signal to issuers, who can choose to start new companies or issue additional stock in accordance with the prices. A dramatic (if rather unfortunate) example of this was the Tech Boom of the late 1990′s, in which all kinds of companies were able to get financing thanks to the influence of speculators on the price of Internet stocks. All good things can be taken too far!

After examining the data, the authors conclude (in part):

Our findings largely come down on the side of opponents of the tax who suggest that an STT will harm market quality. Since spreads have been shown to be directly related to a firm’s cost of capital, imposing an STT may hinder economic growth by reducing the present value of projected profits.