February 5, 2008

The roar erupts from the angry crowds: when is PrefBlog going to get any work done? Again today, general commentary will be greatly foreshortened. In my defence, I can only say that I was able to post about Seniority of BAs, ruin Kaspu‘s day with a comment on CCS.PR.C, report on performance of Malachite Aggressive Preferred Fund (my little fund did well! So why is it a little fund?), Best & Worst January Performers and finally January Index Performance.

So, apart from time constraints, my fingers are tired.

Econbrowser‘s Menzie Chinn commented on the Bush Budget and highlights the Reuters report by David Lawder :

“I think the main deceptions in the budget are the same ones we’ve seen for five years. The costs for Iraq and Afghanistan has consistently been $200 billion a year, but they’ve only put aside $70 billion,” said Chris Edwards, economist at the libertarian Cato Institute. “The war will cost $100 (billion) to $150 billion a year until 2012 or so.”

Coupled with unrealistic growth forecasts, the additional war costs mean the fiscal 2008 deficit will likely top $500 billion, he said.

Even Captain’s Quarters, a political blog which can usually be counted on to toe the Republican party line, has thrown in the towel on any hopes for fiscal conservatism. I continue to think that American fiscal profligacy will continue until conditions are in a lot worse shape than they are now – and, as in Canada, it will be the non-(so-called)-conservative party that does it, because they’re the ones who can’t be attacked for preaching hard times and shooting the hippo.

Fun and frolic for CDOs continued, with Fitch revamping its model and taking a gloomier view on the underlying securities chance of default. But nobody trades those things anymore, do they?:

Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry’s largest conference.

“We’re definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,” Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday during a panel discussion at the American Securitization Forum’s annual conference in Las Vegas. “It’s a challenging time.”

I should note that the story is referring to American preferred shares, not Canadian ones. While some American issues are eligible for preferential tax treatment, this is a major bone of political contention, as I noted on January 10 (and continued after the charts, in the “Update” section). Without tax advantages, prefs are simply deeply subordinated debt.

This model revision is also having knock-on effects on … wait for it … the monolines:

MBIA Inc.’s AAA bond insurance ranking was placed back under review for a downgrade by Fitch Ratings less than a month after being affirmed with a stable outlook.

Fitch, which also put CIFG Financial Guaranty back under review, is updating its assumptions for higher losses on U.S. subprime-mortgage securities, the New York-based ratings company said today in a statement. If loss projections rise materially, the AAA ratings on bond insurers may no longer be appropriate regardless of how much capital they hold, the company said.

And it’s not as if the monolines don’t recognize their problems:

XL Capital Ltd., the Bermuda-based business insurer, said it lost $1.06 billion in the fourth quarter as it wrote down the value of investments including a stake in bond insurer Security Capital Assurance Ltd.

XL lost $6.01 a share, compared with a net profit of $481.1 million, or $2.62 a year earlier, the company said today in a statement. Excluding investment losses, XL earned 66 cents a share, lagging the $1.45 average estimate of 14 analysts surveyed by Bloomberg.

It seems, however, that business conditions aside, some portion of the monoline damage is self-inflicted … hedges aren’t perfect (hat tip: MarketRant).

Speaking of hedges … there is much concern and consternation about the BCE deal and the seemingly different probabilities assigned by the stock and bond markets (hat tip: Financial Webring Forum):

When it comes to the chances of the $35-billion BCE Inc. buyout falling through, the bond market isn’t buying what the equity market is selling.

Many stock market investors clearly believe the deal is likely to fail. The stock finished Friday at $36 on the Toronto Stock Exchange, well below the $42.75 that Ontario Teachers’ Pension Plan and its partners agreed to pay last June before global markets went haywire.

Those in the bond market, on the other hand, are much more convinced the transaction will close later this year.

According to the credit-default swaps (CDS) market, an influential backroom of the financial system where big bond investors place bets, there’s at least a 70-per-cent chance that the deal succeeds.

To me, this sounds normal. Each market is taking a gloomy view. Didn’t the lawsuit over Hemlo take a billion dollars off the combined market cap of the adversaries, when logically it should have been a wash? Seems to me that if I were a hedge fund, I’d be devoting enormous resources to calculating what proportion of equity and bonds I should have in a basket that … maybe, possibly, subject to fearsome market punishment … would have an expected positive return irrespective of the outcome.

A relatively quiet day in the preferred market. I’ll admit, I view the precipituous decline in the number of issues on the “Price Mover” list with mixed feelings … on the one hand, it means I have a whole lot less typing to do (I still haven’t caught up with HIMIPref™ Preferred Indices, so I still have to do it all manually); on the other hand, huge price movements are often a source of wonderful trades. Oh well, we’ll just see how it goes.

WFS.PR.A is behaving strangely … the huge volume today is unusual, but not strange; what’s strange is the day’s high price: $10.75. Holy smokes, at that level you’re amortizing the premium by over $0.20 annually against dividends of $0.525 to wind up with a Yield-to-Maturity of about 3.1%, according to Mr. Calculator. Geez, and there I am, thinking it’s overpriced at $10.37, yielding 4.26%! 

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.55% 5.58% 51,398 14.50 2 -0.2658% 1,070.4
Fixed-Floater 5.18% 5.68% 86,336 14.67 7 -0.3814% 1,016.4
Floater 4.93% 4.98% 77,696 15.52 3 +0.3947% 856.6
Op. Retract 4.83% 1.76% 81,067 2.71 15 -0.2348% 1,042.7
Split-Share 5.31% 5.52% 100,092 4.11 15 -0.0522% 1,036.3
Interest Bearing 6.28% 6.42% 62,105 3.36 4 -0.5243% 1,074.6
Perpetual-Premium 5.75% 5.49% 404,764 6.06 16 +0.1252% 1,025.0
Perpetual-Discount 5.44% 5.47% 302,020 14.71 52 +0.0718% 944.4
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixFloat -2.1142%  
BSD.PR.A InterestBearing -1.7690% Asset coverage of just under 1.6:1 as of February 1, according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.23% (mostly as interest) based on a bid of 9.44 and a hardMaturity 2015-3-31 at 10.00.
IAG.PR.A PerpetualDiscount -1.6841% Now with a pre-tax bid-YTW of 5.38% based on a bid of 21.60 and a limitMaturity.
CM.PR.G PerpetualDiscount +1.0549% Now with a pre-tax bid-YTW of 5.67% based on a bid of 23.95 and a limitMaturity.
RY.PR.E PerpetualDiscount +1.4554% Now with a pre-tax bid-YTW of 5.21% based on a bid of 21.61 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BNS.PR.O PerpetualPremium 345,600 Scotia crossed 15,000 at 25.25. New issue settled 1/31. Now with a pre-tax bid-YTW of 5.51% based on a bid of 25.24 and a call 2017-5-26 at 25.00.
WFS.PR.A SplitShare 369,127 Asset coverage of just under 1.9:1 as of January 31, according to Mulvihill. Now with a pre-tax bid-YTW of 4.26% based on a bid of 10.37 and a hardMaturity 2011-6-30 at 10.00.
PWF.PR.K PerpetualDiscount 128,000 Scotia crossed 75,000 at 23.01; Nesbitt crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 5.43% based on a bid of 22.91 and a limitMaturity.
RY.PR.A PerpetualDiscount 56,205 Nesbitt crossed 47,100 at 21.20. Now with a pre-tax bid-YTW of 5.26% based on a bid of 21.21 and a limitMaturity.
PWF.PR.H PerpetualPremium 52,700 Nesbitt crossed 50,000 at 25.43. Now with a pre-tax bid-YTW of 5.43% based on a bid of 25.33 and a call 2012-1-9 at 25.00.

There were seventeen other index-included $25.00-equivalent issues trading over 10,000 shares today.

10 Responses to “February 5, 2008”

  1. kaspu says:

    As someone who buys a fair bit of U.S. prefs, may I offer a bit of a clarification to the above. The U.S. pref market is now rigidly divided into those that are in the hybrid camp and those that are general straight prefs. The issuance of hybrids (CORTS, STRATS, etc), almost all of which pay semi-annually, much of which is treated as income, originally came about as tax-efficient way to utilize existing senior debt as collateral for lesser preferreds. All have been tarred as being CDO-type crap, and there has been no issues since the summer. In fact, there are still some very highly rated hybrids, backed by good paper from such companies as IBM, and, of course the major banks. Most are cumulative (not generally available for banks, U.S. or Cdn), cannot be deferred, and are fairly senior. Up until two months ago, you could get 8% YTW or even more on AA hybrid prefs. Now its about 7-7.25. Still not bad for AA. They also get called on a fairly regular basis.
    Insofar as straight prefs are concerned, Citi, Merril and others have issued some attractive stuff. Most are non-cumlative, and some have some weird convertible features. Although there is nothing on the US side that comes even close to the quality of Prefblog and its subscriber service, a fairly good preferred screening service is provided at http://www.epreferredsm.com.

  2. jiHymas says:

    Thanks, kaspu! I will not pretend to much familiarity with the US Pref market.

    Do you prefer http://www.epreferredsm.com to the one I have recommended on occasion in the past, http://www.quantumonline.com ?

  3. prefhound says:

    A Clarification on the BCE probabilities:

    These signals for bonds, prefs and common MAY NOT be contradictory. As I read the probabilities, the deal WILL GO THROUGH at a reduced price around $38-40, with possible downward adjustment for the prefs too. These holders will still vote for a lower price rather than let the deal fall through (and see a huge price collapse, and try to sue for the $1B break fee, which is only $3 per share and will never be paid.

    Since the deal is LIKELY (>90%) to go through, but at a reduced price, bonds will still lose.

    Since I am a bond holder, I’m pissed.

  4. kaspu says:

    I find that http://www.quantumonline.com tries a bit too hard to be all things non-equity, and thus ignores some of the smaller and more obscure U.S. pref issues.

    also…it’s http://www.epreferreds.com. my apologies.

  5. madequota says:

    BCE — Hold the phone

    Here are a couple of side points on the BCE/bond issue: the consortium of Sun Life, Manulife, CIBC et al have a substantial legal front that I believe just wrapped up their defence in Quebec. Teacher’s, on the other hand is using a relatively small-time, although well-known Toronto-based firm.

    The general idea is that the bondholders should all be redeemed based on the general corporate change resulting from the buyout, but failing that, should at least be granted the same [weighted] voting rights as the other stakeholders. At the very least the bondholders will win this concession.

    My gut says that Teacher’s legal lightweights will be out-muscled, and forced to come up with a compromise with the bondholders for the deal to be approved. This will probably amount to a full redemption, or more likely, a debt-for-equity swap, based as you suggest on a lower per share price. I don’t see Teacher’s pulling this off “as disclosed” under any circumstances, nor do I see the bondholders left holding “junk” as a result of this [proposed] deal.


  6. madequota says:

    Prefs at Midday – the RBC phenomenon continues

    Here we are approaching noon on Feb 6; prefs are solid and up across the board: noteable is BNS.PR.L +.09 on nice volume, all the GWO’s, SLF’s, & MFC’s are up; MFC.PR.B +.45, and a very nice 10,000 share under market bid by BMO @ $22.82 underpinning the gain!

    Three exceptions [and you know the seller] is RY.PR.E +.19, but stubbornly overhung at $21.75 with little else until $22.50 . . . also W.PR.H has been held down by a large offering at $23.95, next offer $24.49 . . . and ELF.PR.G, now sacrificed at $20.11 with nothing more until $20.49.


    How many RBC fund managers does it take to screw in a light bulb?

    We don’t know; they sold all their light bulbs 30% below cost, and remain perpetually in the dark!


  7. jiHymas says:

    prefhound – You may well be right – who knows, we’re all just speculating without much information here. However, an ultimate take-out price of $38-40 is still substantially below the current market level of $35-and-change and would be subject to a new shareholders’ vote on a new plan of arrangement. We shall see, and I’m not taking a position one way or the other.

    madequota – re BCE – I don’t think the bondholders have a leg to stand on, frankly, and that the whole court case is simply an opportunity for underperforming fund managers to grandstand for the cheering crowds. And I CONTINUE to be mystified as to why the prefs were on the winning side of the arrangement-as-it-stands.

    - re RBC – *snicker*

  8. madequota says:

    it’s a tough one to call for sure, but there’s also the issue of the phone conversation between Manulife, I believe and BCE, a week before the deal was announced . . . where BCE confirmed that there was no deal pending, and the bondholders therefore, secure . . . this was misleading to say the least, and could be a thorny point with “the judge” . . . time will tell . . . fund managers “grandstanding”? fund managers don’t do that kind of thing, do they?!

    I had a question about one, if I could . . . EPP.PR.A . . . seems to be one of the few (today especially) not participating in the pref rally . . . seems like pretty good paper at $17.84 . . . possible takeover candidate as well [by Transalta Corp.] . . . they had a major lawsuit outstanding, but that was recently settled . . . any idea why this thing doesn’t move up? [I can't even blame this one on RBC!] . . . is it a buy down here?

    regards, madequota

  9. [...] Assiduous Reader madequota asked about EPP.PR.A in the comments to February 5 … since he is an Assiduous Writer as well … let’s indulge him, shall we? It has been a long time since I last looked at this issue. [...]

  10. [...] Asset coverage of just under 1.9:1 as of January 31, according to Mulvihill. Now with a pre-tax bid-YTW of 4.81% based on a bid of 10.20 and a hardMaturity 2011-6-30. Still a pretty crummy yield, if you ask me, but better than yesterday! [...]

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