PrefBlog

Accrued Interest has reluctantly called a bottom in the credit markets:

But yeah, if you stick a gun to my head, I’d say we’ve seen the wides in credit spreads. Not because the economic problems are solved, but because liquidity has improved to the point that people are willing to be opportunistic. That will put a lid on how far investment-grade names will move before yield hungry investors come in. Issuers will be able to come to market with new issues, and the wheels of the credit market will continue to churn.

Meanwhile, today is the day that the CBOT officially attempts to find out why the basis on grain futures isn’t going to zero during the delivery period, as mentioned April 17. Naked Capitalism republishes a NYT article on the issue which suggests:

Mr. Grieder’s crop insurance premiums rise with the volatility. So does the cost of trading in options, which is the financial tool he has used to hedge against falling prices. Some grain elevators are coping with the volatility and hedging problems by refusing to buy crops in advance, foreclosing the most common way farmers lock in prices.
…
Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.

When that happens, farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market.
…
John Fletcher, a grain elevator operator in Marshall, Mo., started pressing the C.B.O.T. to address the flaws of futures contracts almost two years ago — even before his futures hedge on a million bushels of soybeans failed to fully protect him last September, hitting him with a cash loss of $940,000.
…
Frustrated over the flawed futures contract, Mr. Fletcher is voting with his feet. Last year, he entered into a contract with A.I.G. Financial Products, a leading sponsor of commodity index funds, which allows him and the index fund to hedge their risks without using the C.B.O.T.

Instead of using futures or options, A.I.G. simply buys the commodity directly from Mr. Fletcher, who stores it for a fee and buys it back six months later. His storage fee is lower than the one built into the C.B.O.T. contract, so A.I.G. pays less for its stake in the market. And he has a hedge he can rely on.

In a strong indication that Canadian banks are using their strong balance sheets to sniff around in the States, BMO has announced:

a definitive agreement today to acquire Chicago-based Griffin, Kubik, Stephens & Thompson Inc. (GKST). The acquisition will make BMO Capital Markets the sixth-largest bank qualified municipal bond dealer in the United States and the largest in Illinois, greatly accelerating BMO’s national presence in the municipal bond market.

Good for them! It would appear that the BNS / National City rumours discussed on April 11 have come to nothing:

Cleveland-based National City, Ohio’s biggest bank, agreed yesterday to sell a $7 billion stake to a group led by Corsair Capital LLC.
…
National City agreed to sell the Corsair stake at a discount to market price, and increased the size of the offering after finding strong demand. The move, which may dilute existing shareholders by more than 50 percent, sent the stock plummeting almost 28 percent and drew complaints from investors who asked during a conference call whether there wasn’t “a more palatable alternative.”

The bank had to raise enough capital “to stabilize our debt ratings, beyond a shadow of a doubt,” National City Chief Executive Officer Peter Raskind responded, citing speculation about the bank’s condition. “We had counterparties who were uncomfortable interacting with us. That had to stop.”

Royal Bank of Scotland is also raising capital:

Royal Bank of Scotland Group Plc, the U.K. lender reeling from asset writedowns, will sell 12 billion pounds ($24 billion) of shares to investors in Europe’s largest rights offer and cut the dividend.
…
RBS plans to raise its Tier 1 capital ratio, a measure of capital strength, to more than 8 percent from 7.3 percent and the core equity Tier 1 ratio to more than 6 percent from 4.5 percent by the end of the year, the bank said.

Good for them for doing it by a rights offering! It’s much fairer to existing investors, although I suppose it’s a little more expensive and slower.

Merrill has also joined the parade:

Merrill Lynch & Co., the third- biggest U.S. securities firm, plans to raise at least $7.3 billion by selling bonds and preferred shares after writing down the value of $6.5 billion of assets.

The firm today began offering $7 billion of senior unsecured notes in its biggest debt offering, luring investors with yields over Treasuries that would be as much as triple what it paid a year ago. Merrill is also selling at least $300 million of perpetual preferred shares that yield about 8.625 percent.

It should be noted, however, that the $7-billion headline number addresses liquidity issues, not equity; the preferred share issue is picayune.

I must say, it’s very pleasant for a fixed income guy to see the equity crowd get hit for a change. The last ten years have been all too often in the other direction.

There might be some adjustment to Regulation FD in the future – this is the source of National Policy 51-201, which states that Credit Rating Agencies may have access to material non-public information. Chairman Cox of the SEC said in testimony to the Senate Banking Committee:

To enhance transparency, the Commission may soon consider new rules that would require the disclosure of information about the assets underlying the mortgage-backed securities, CDOs, and other types of structured finance products they rate. This would allow market participants to better analyze the assets underlying structured securities, and reach their own conclusions about their creditworthiness. This data availability could particularly benefit subscriber-based NRSROs, who could use it to perform independent assessments of the validity of the ratings by their competitors who use the “issuer pays” model.

Further improvements in transparency could be considered in the form of enhanced disclosures about how NRSROs determine their ratings for structured products. This disclosure could include the manner of analysis of the mortgages’ conformance with underwriting standards, and the firms’ procedures for monitoring their current credit ratings.

The Commission may also consider rules requiring the disclosure of ratings information in a way that makes it possible for investors to readily distinguish among ratings for different types of securities, such as structured products, corporate securities, and municipal securities.

This is rather convoluted, frankly. The ratings agencies don’t release material non-public data because it’s non-public. The company or issuer makes the decision (subject to the SEC’s disclosure rules) regarding what’s public and what ain’t. All I can imagine is that the intended purpose of the rules the SEC is considering is to get disclosure by the back door … for one reason or another, the issuer can’t (or won’t) be forced by the SEC to disclose data, but the NRSRO’s will be … thus, if the information is to be kept out of the public domain, the company will have to forgo a NRSRO credit rating, which will (presumably) make the issue a much harder sell. If anybody has a better explanation, say so in the comments!

Following the BoC’s easing to 3.00% overnight rate, TD was the first major to cut Prime, although they were behind CCDQ. The second major was RY, followed by BMO, then BNS.

Another poor day for preferred shares, as PerpetualDiscounts are now yielding 5.73%, interest equivalent (at 1.4x) of 8.02%. Given that long corporates now yield about 6.1%, this represents spread maintenance against the competition.

There were fourteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Tuesday, April 22nd, 2008 at 9:23 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.