November 23, 2011

Remember Iceland? The first domino? It’s through the worst of it, according to S&P:

Iceland had its credit rating outlook revised to stable from negative by Standard & Poor’s Ratings Services, which cited economic growth in the country after two years of “severe contraction.”

“Significant headway has been made in restructuring the private-sector balance sheet and we expect the process to be mostly completed by mid-2012,” S&P said. The BBB-/A-3 sovereign ratings were affirmed.

But other dominoes are toppling:

Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region’s debt crisis is driving away investors.

The yield on Germany’s 2.25 percent securities maturing in September 2021 climbed 15 basis points to 2.06 percent at 4:46 p.m. London time.

Belgian 10-year yields surged 41 basis points to 5.48 percent, after reaching 5.53 percent, the highest since November 2000. French 10-year bond yields climbed 16 basis points to 3.69 percent. The yield on Greek two-year notes jumped to more than 120 percent for the first time, before slipping back to 116.59 percent.

Total bids at the auction of securities due in January 2022 amounted to 3.889 billion euros, out of a maximum target for the sale of 6 billion euros, according to Bundesbank data.

Six of the last eight bond sales by Germany have been “technically uncovered,” with fewer bids than the maximum amount on offer, Norbert Aul, a rates strategist at RBC Capital Markets in London, said in an e-mailed note.

Under the German auction system, the central bank retains securities at sales for the secondary market. In today’s offering, the debt agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply. That’s the highest proportion of unsold debt at a 10-year sale since 1995, according to Bloomberg data. The securities were sold at an average yield of 1.98 percent. In the secondary market, the rate rose to 2.13 percent.

DBRS confirmed Westcoast at Pfd-2(low):

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends.

On a consolidated basis (excluding the intercompany transaction), the Company’s external debt-to-capital ratio (52% at September 30, 2011; 54% at year-end 2008) and cash flow-to-external debt (19% for both the 12 months ending September 30, 2011, and in 2008) were relatively unchanged, while external fixed charges coverage (2.8 times, up from 2.5 times) improved marginally, partly due to contributions from expansions placed in service as noted above.

On a non-consolidated basis, Westcoast’s direct ownership of BCPFS fully supports its ability to meet its direct debt obligations. Its credit metrics are enhanced by cash dividends from several sources, the largest of which is Union Gas, which generate approximately 50% of the Company’s non-consolidated cash flow. Excluding the intercompany transaction, Westcoast’s non-consolidated external debt-to-capital ratio increased to 36% in 2010 from 32% in 2008, while cash flow-to-external debt (25%, up from 16%) and external fixed charges coverage (3.2 times, up from 2.2 times) improved significantly, mainly as a result of contributions from expansions noted above.

TMX DataLinx has collywobbles yet again, so this report is being prepared with Yahoo! data.

It was a rough day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets off 12bp and DeemedRetractibles losing 14bp. All five entries in the Performance Highlights table were losers. Volume was average.

PerpetualDiscounts now yield 5.15% (this figure is somewhat distorted by the fact that five of the seventeen issues are actually at a premium now and another two are bang-on par; the index is only rebalanced monthly), equivalent to 6.70% interest at the standard equivalency factor of 1.3x. Long Corporates are now at about 4.75%, so the pre-tax interest-equivalent spread is now about 195bp, tightening a bit (perhaps spuriously) from the 205bp reported November 16.

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 -0.4795 % 2,133.1
FixedFloater 4.91 % 4.65 % 29,609 17.08 1 0.2592 % 3,137.2
Floater 3.37 % 3.39 % 155,972 18.71 2 -0.4795 % 2,303.2
OpRet 4.97 % 2.45 % 52,068 1.48 7 0.0220 % 2,476.5
SplitShare 5.80 % 6.42 % 57,570 5.17 3 0.0988 % 2,530.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0220 % 2,264.5
Perpetual-Premium 5.58 % 0.85 % 103,037 0.13 13 -0.2247 % 2,153.3
Perpetual-Discount 5.31 % 5.15 % 100,427 14.78 17 -0.0917 % 2,297.2
FixedReset 5.10 % 2.97 % 222,055 2.48 64 -0.1184 % 2,346.7
Deemed-Retractible 5.05 % 4.44 % 201,901 3.86 46 -0.1418 % 2,218.0
Performance Highlights
Issue Index Change Notes
SLF.PR.H FixedReset -1.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 4.43 %
ELF.PR.F Perpetual-Discount -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 22.62
Evaluated at bid price : 22.90
Bid-YTW : 5.85 %
TCA.PR.X Perpetual-Premium -1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 52.30
Bid-YTW : 3.29 %
CIU.PR.A Perpetual-Discount -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 23.86
Evaluated at bid price : 24.35
Bid-YTW : 4.71 %
GWO.PR.L Deemed-Retractible -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 5.51 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.D FixedReset 1,353,175 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 23.13
Evaluated at bid price : 25.10
Bid-YTW : 3.67 %
CM.PR.G Perpetual-Discount 117,120 RBC crossed 50,000 at 24.94; Scotia crossed 30,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 24.57
Evaluated at bid price : 24.90
Bid-YTW : 5.46 %
SLF.PR.F FixedReset 101,400 RBC crossed 100,000 at 26.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 4.06 %
ENB.PR.B FixedReset 59,560 Nesbitt crossed 25,000 at 25.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 23.26
Evaluated at bid price : 25.42
Bid-YTW : 3.65 %
CM.PR.D Perpetual-Premium 42,067 Scotia crossed 30,000 at 25.40.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.20 %
RY.PR.L FixedReset 41,588 Nesbitt crossed 40,000 at 25.51.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.46
Bid-YTW : 2.92 %
There were 33 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.M Deemed-Retractible Quote: 26.00 – 26.44
Spot Rate : 0.4400
Average : 0.2887

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 5.43 %

BAM.PR.G FixedFloater Quote: 19.34 – 20.12
Spot Rate : 0.7800
Average : 0.6480

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 25.00
Evaluated at bid price : 19.34
Bid-YTW : 4.65 %

CIU.PR.A Perpetual-Discount Quote: 24.35 – 24.84
Spot Rate : 0.4900
Average : 0.3595

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 23.86
Evaluated at bid price : 24.35
Bid-YTW : 4.71 %

HSB.PR.C Deemed-Retractible Quote: 25.20 – 25.75
Spot Rate : 0.5500
Average : 0.4263

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 5.12 %

TCA.PR.X Perpetual-Premium Quote: 52.30 – 52.60
Spot Rate : 0.3000
Average : 0.2185

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 52.30
Bid-YTW : 3.29 %

PWF.PR.L Perpetual-Discount Quote: 24.65 – 24.99
Spot Rate : 0.3400
Average : 0.2609

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-11-23
Maturity Price : 24.19
Evaluated at bid price : 24.65
Bid-YTW : 5.20 %

4 Responses to “November 23, 2011”

  1. Gnahh! Unable to log in under my old Louis B. username. Anyhow, I am glad to read some good news on this gloomy day. If the first domino stood back up before the others are falling, this means that not all the dominos will fall off altogether…

    Please explain if you can: How come today’s issuance of German bond auctions can be said to be catastrophic if the average yield at the auction was only 1.98% (which still means issuance above par). I don’t understand… (which might explain why I am unable to perform easy tasks such as logging in..)

  2. jiHymas says:

    I must confess that I don’t really understand it either, even after reading commentary from Zero Hedge, Pragcap and The Economist.

    My problem is that I don’t understand the flow of funds. The Finanzagentur retained a big pile of bonds. So does this mean the German government didn’t get the money? Or did the Finanzagentur then pledge the retained bonds to the ECB for a loan? Or, as PragCap suggests, are they even now selling on the secondary market?

    They will then sell the bonds on the secondary markets where financing is provided.

    However, the herding nature of financial markets means that it’s all about expectations, and expectations were dashed in this instance – there were simply not enough buyers at what might be described as the Finanzagentur’s “reserve price”. We are told, for instance, that the ten-year yield rose 15bp following the auction. That’s a big move – over one percent in price – in a nervous market.

    And that’s the best I can do!

  3. jiHymas says:

    OK the WSJ has the best explanation:

    The structure of German bond issuance also played a role in the auction results. Germany traditionally auctions bonds, rather than operating a syndicate of primary dealers to place them with investors. The Finanzagentur, the government’s issuing agent, then gradually feeds the bonds it doesn’t sell into the secondary market.

    This system means that there is no pressure on banks to bid for the bonds or risk their relationship with the sovereign. Moreover, banks across the Continent are trying to reduce their holdings of sovereign bonds, or at least not take on extra exposure, Mr. Krautzberger said.

    So what we can say is that ten-years were trading on the secondary market at about the reserve price; the Finanzagenture then tried to sell a new issue at this price, but failed; so now everybody knows demand at that level was thin; and everybody is now busily marking down their bids and trying to get short so they’ll be in position to take on the bonds that the Finanzagentur is going to try to sell them very soon.

    It’s a bit like the the way that preferred shares responded to new issues during the Panic of 2007: they’d find a level, an issuer would come to market with a slight concession; and then, instead of the new issue rising to a slight premium (as is the usual objective in a well functioning market) the old issues would then fall to the new issue price.

  4. [...] called the Seniority Spread) is now about 210bp, a significant widening from the 195bp reported November 23 as PerpetualDiscounts got smacked for 17bp dividend yield on the week, while long corporates edged [...]

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