LBS.PR.A To Get Bigger

June 24th, 2015

Brompton Group has announced:

Life & Banc Split Corp. (the “Company”) is pleased to announce it has filed a preliminary short form prospectus with respect to a treasury offering of class A shares and preferred shares. The class A and preferred shares have been priced at $9.65 per class A share and $10.10 per preferred share. The offering prices were determined so as to be non-dilutive to the net asset value per unit of the Company on June 23, 2015, as adjusted for dividends accrued prior to or upon settlement of the offering.

The Company invests in a portfolio of common shares of the six largest Canadian banks (“Banks”) and the four major publicly traded Canadian life insurance companies (“Lifecos”). Currently, the portfolio consists of common shares of the following Banks and Lifecos:

The Bank of Nova Scotia Royal Bank of Canada
National Bank of Canada Industrial Alliance Insurance and Financial Services Inc.
The Toronto-Dominion Bank Great-West Lifeco Inc.
Canadian Imperial Bank of Commerce Manulife Financial Corporation
Bank of Montreal Sun Life Financial Inc.

The investment objectives for the class A shares are to provide holders with regular monthly cash distributions targeted to be $0.10 per class A share and to provide the opportunity for growth in net asset value per class A share.

The investment objectives for the preferred shares are to provide holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.11875 per preferred share ($0.475 per annum), representing a yield on the original issue price of 4.75% per annum, and to return the original issue price to holders of preferred shares on the maturity date of the Company, November 29, 2018.

The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC and Scotiabank, and includes TD Securities Inc., BMO Capital Markets, National Bank Financial Inc., GMP Securities L.P., Raymond James Ltd., Canaccord Genuity Corp., Desjardins Securities Inc., Dundee Securities Ltd., Haywood Securities Inc., Industrial Alliance Securities Inc. and Mackie Research Capital Corporation.

What a joy it is when you can sell fund units valued at 18.93 as of June 23 for 19.75!

LBS.PR.A was last mentioned on PrefBlog when they raised 25.5-million in a similar offering in April. This issue is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Update, 2015-6-30: Final prospectus filed:

Life & Banc Split Corp. (the “Company”) is pleased to announce that it has filed a final short form prospectus with respect to a treasury offering of up to 1,860,000 class A shares and up to 1,860,000 preferred shares for aggregate gross proceeds of up to approximately $36.7 million.

June 23, 2015

June 24th, 2015

It’s nice to see a hint of due process in the war on banks:

First there was one. Then three. Now the U.K. Financial Conduct Authority is facing nine lawsuits for improperly identifying traders in penalty notices, in what has quickly become a nightmare for the agency.

In a London court Thursday, the FCA faced a roomful of more than 20 lawyers protesting the reputational damage their clients suffered as a result of its failure to sufficiently disguise them in bank settlement reports. The hearing was the first in a series of headaches the FCA faces on the matter and could change the future of U.K. enforcement proceedings.

“Part of deterrence is telling the story and if you’re telling it with one hand behind your back,” because you can’t allude to individuals, it will make things difficult, said FCA Chief Executive Officer Martin Wheatley in a London interview with Bloomberg last week.

The deluge of cases comes after the FCA lost a landmark appeal in May when a judge said it failed to properly hide the identity of Achilles Macris, the former JPMorgan Chase & Co. manager of the London Whale trader, in its settlement with the bank. The FCA is seeking permission to appeal the judgment to the Supreme Court. A judge will rule as soon as Tuesday on whether the other eight pending cases can proceed before the top court makes a decision on the FCA’s Macris appeal.

If the Macris ruling stands, the FCA is faced with two choices: taking years to complete investigations to give all parties the chance to participate or publishing anodyne settlements that won’t fully explain the misconduct.

While calling someone trader A in a report might seem anonymous, insiders can often figure out who’s who by references to nicknames or even position on the floor. That can damage traders’ reputation, and their ability to get another job, said Ben Rose, a London lawyer at Hickman & Rose.

“It is imperative that regulators and prosecutors prevent ‘join-the-dots’ identification,” Rose said. Regulators must “give those concerned a proper opportunity of being heard before any damaging accusations are made.”

Brookfield Renewable Energy Partners L.P., proud (indirect) issuer of BRF.PR.A, BRF.PR.B, BRF.PR.C, BRF.PR.E and BRF.PR.F, has announced:

that the Toronto Stock Exchange (the “TSX”) accepted notice of Brookfield Renewable Power Preferred Equity Inc.’s (“BRP Equity”) intention to commence a normal course issuer bid for its outstanding Class A Preference Shares (“Preferred Shares”). BRP Equity is a wholly-owned subsidiary of Brookfield Renewable. Brookfield Renewable believes that in the event that the Preferred Shares trade in a price range that does not fully reflect their value, the acquisition of Preferred Shares may represent an attractive use of available funds. There are currently five series of Preferred Shares outstanding.

I take issuer-bid announcements with a grain of salt, which is why this announcement isn’t getting a dedicated post. If they actually buy some, that will be news!

It was yet another poor day for the Canadian preferred share market, with PerpetualDiscounts losing 46bp, FixedResets down 23bp and DeemedRetractibles off 15bp. The Performance Highlights table was dominated by losers, predictably enough. Volume was slightly below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150623
Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.39 to be $0.96 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.86 cheap at its bid price of 16.05.

impVol_MFC_150623
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). The lowest spread issue, MFC.PR.F, is again noticeably off the line defined by the higher-spread issues.

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.70 to be $0.53 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.39 to be $0.45 cheap.

impVol_BAM_150623
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.76 to be $1.30 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.55 and appears to be $0.97 rich.

impVol_FTS_150623
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.40, looks $0.45 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.44 and is $0.45 rich.

pairs_FR_150623A
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.40%, including the outliers TRP.PR.A / TRP.PR.F at -0.57% and FTS.PR.H / FTS.PR.I at +1.16%. On the junk side there are four outliers: FFH.PR.E / FFH.PR.F at -0.87%; DC.PR.B / DC.PR.D at -0.07%; BRF.PR.A / BRF.PR.B at -0.68%; and FFH.PR.C / FFH.PR.F at +1.26%.

pairs_FF_150623
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 1.5673 % 2,247.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.5673 % 3,929.5
Floater 3.45 % 3.44 % 64,667 18.67 3 1.5673 % 2,389.1
OpRet 4.78 % -10.47 % 23,642 0.08 1 0.0000 % 2,785.6
SplitShare 4.56 % 4.48 % 66,700 3.27 3 0.3340 % 3,269.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0000 % 2,547.2
Perpetual-Premium 5.47 % 3.70 % 60,571 0.51 19 -0.1182 % 2,516.8
Perpetual-Discount 5.23 % 5.18 % 118,533 15.12 15 -0.4648 % 2,691.0
FixedReset 4.56 % 3.88 % 236,639 16.14 88 -0.2287 % 2,325.0
Deemed-Retractible 5.03 % 3.29 % 111,986 0.82 34 -0.1459 % 2,613.7
FloatingReset 2.49 % 2.96 % 53,738 6.10 9 -0.2750 % 2,333.1
Performance Highlights
Issue Index Change Notes
CM.PR.P FixedReset -6.04 % Not real. The day’s range for the 29,550 shares traded was 22.30-70, with a closing price of 22.33. This is simply another example either of the Exchange’s shoddy reporting or their inability to enforce market-making responsibilities.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 3.99 %
CM.PR.O FixedReset -2.57 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 21.97
Evaluated at bid price : 22.41
Bid-YTW : 3.84 %
BAM.PR.Z FixedReset -2.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.75
Evaluated at bid price : 23.43
Bid-YTW : 4.31 %
BAM.PR.T FixedReset -2.43 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 19.66
Evaluated at bid price : 19.66
Bid-YTW : 4.36 %
PWF.PR.S Perpetual-Discount -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 23.63
Evaluated at bid price : 24.01
Bid-YTW : 5.05 %
BAM.PR.R FixedReset -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 18.76
Evaluated at bid price : 18.76
Bid-YTW : 4.53 %
CU.PR.D Perpetual-Discount -1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 23.83
Evaluated at bid price : 24.25
Bid-YTW : 5.08 %
MFC.PR.B Deemed-Retractible -1.80 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.34
Bid-YTW : 6.18 %
CU.PR.E Perpetual-Discount -1.76 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 23.62
Evaluated at bid price : 24.02
Bid-YTW : 5.13 %
BMO.PR.T FixedReset -1.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.18
Evaluated at bid price : 22.75
Bid-YTW : 3.68 %
BMO.PR.W FixedReset -1.49 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 21.95
Evaluated at bid price : 22.41
Bid-YTW : 3.71 %
NA.PR.W FixedReset -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.30
Evaluated at bid price : 23.00
Bid-YTW : 3.66 %
BMO.PR.S FixedReset -1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.35
Evaluated at bid price : 23.00
Bid-YTW : 3.72 %
RY.PR.K FloatingReset -1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 2.89 %
RY.PR.Z FixedReset -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.34
Evaluated at bid price : 22.99
Bid-YTW : 3.62 %
BAM.PF.G FixedReset -1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.73
Evaluated at bid price : 23.90
Bid-YTW : 4.11 %
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 : 22.57
Bid-YTW : 5.86 %
ENB.PF.E FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 19.80
Evaluated at bid price : 19.80
Bid-YTW : 4.90 %
IFC.PR.A FixedReset 1.14 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.58
Bid-YTW : 6.24 %
BAM.PR.B Floater 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 14.67
Evaluated at bid price : 14.67
Bid-YTW : 3.40 %
IAG.PR.A Deemed-Retractible 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.90
Bid-YTW : 5.77 %
ENB.PF.C FixedReset 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 19.67
Evaluated at bid price : 19.67
Bid-YTW : 4.90 %
ENB.PR.N FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 18.95
Evaluated at bid price : 18.95
Bid-YTW : 4.93 %
ENB.PF.A FixedReset 1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 19.73
Evaluated at bid price : 19.73
Bid-YTW : 4.89 %
BAM.PR.K Floater 2.84 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 14.50
Evaluated at bid price : 14.50
Bid-YTW : 3.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.Z FixedReset 65,900 RBC bought 41,300 from Scotia at 23.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.77
Bid-YTW : 3.40 %
TRP.PR.E FixedReset 34,460 TD crossed 22,500 at 22.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.04
Evaluated at bid price : 22.55
Bid-YTW : 3.93 %
RY.PR.L FixedReset 33,500 Nesbitt crossed 25,000 at 25.94.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.94
Bid-YTW : 3.28 %
ENB.PR.P FixedReset 33,360 TD crossed 11,600 at 18.27.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 18.20
Evaluated at bid price : 18.20
Bid-YTW : 4.98 %
HSE.PR.G FixedReset 27,156 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.99
Evaluated at bid price : 24.53
Bid-YTW : 4.54 %
CM.PR.P FixedReset 26,250 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 3.99 %
There were 28 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CM.PR.P FixedReset Quote: 21.30 – 22.30
Spot Rate : 1.0000
Average : 0.6112

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 21.30
Evaluated at bid price : 21.30
Bid-YTW : 3.99 %

BAM.PR.C Floater Quote: 14.25 – 14.88
Spot Rate : 0.6300
Average : 0.4109

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 14.25
Evaluated at bid price : 14.25
Bid-YTW : 3.50 %

POW.PR.G Perpetual-Premium Quote: 25.68 – 26.31
Spot Rate : 0.6300
Average : 0.4221

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2020-04-15
Maturity Price : 25.25
Evaluated at bid price : 25.68
Bid-YTW : 5.09 %

BAM.PR.B Floater Quote: 14.67 – 15.15
Spot Rate : 0.4800
Average : 0.3094

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 14.67
Evaluated at bid price : 14.67
Bid-YTW : 3.40 %

BAM.PF.E FixedReset Quote: 22.55 – 23.00
Spot Rate : 0.4500
Average : 0.2879

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 22.02
Evaluated at bid price : 22.55
Bid-YTW : 4.13 %

PWF.PR.S Perpetual-Discount Quote: 24.01 – 24.50
Spot Rate : 0.4900
Average : 0.3289

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-23
Maturity Price : 23.63
Evaluated at bid price : 24.01
Bid-YTW : 5.05 %

June 22, 2015

June 22nd, 2015

John Williams of the San Francisco Fed is sounding very hawkish:

John Williams, president of the Federal Reserve Bank of San Francisco, said the central bank is likely to raise interest rates this year as the economy reaches full employment, though he’s troubled by low inflation.

“I still believe this will be the year for liftoff,” Williams, a voting member of the policy-setting Federal Open Market Committee, said in a speech Friday in San Francisco. Although he’s awaiting more evidence inflation is moving up toward the Fed’s goal, “I see a safer course in starting sooner and proceeding more gradually.”

Williams said the U.S. will probably hit his 5.2 percent estimate for the natural rate of unemployment later this year. As of May, the jobless rate stood at 5.5 percent, down from 10 percent in 2009.

“We’re making good progress across most measures of the labor market,” he said. “Now that wage growth is starting to take off across multiple measures, it further confirms that the labor market is nearly healed.”

Employers added 280,000 positions in May, the most in five months. Average hourly earnings accelerated to a 2.3 percent year-over-year pace, the fastest since August 2013.

What’s more, Williams said economic growth in the first quarter of 2015 probably wasn’t as weak as official figures, which showed a 0.7 percent contraction, suggest.

“On closer inspection, the numbers weren’t nearly as bad as they appeared,” Williams said, citing San Francisco Fed research suggesting that the economy may have expanded at a 1.5 percent annual pace in the first three months of the year.

There is some wailing that robo-advisors might be programmed to sell the sponsor’s products:

But some might believe Power’s new alliance with Wealthsimple, as well as the entry by other large financial companies into the robo-adviser space, raises the spectre of a potentially revolutionary platform being slowly co-opted by those more interested in just selling their own products.

“That’s not necessarily bad, but it raises a bit of an issue,” said Mark Yamada, chief executive at Pur Investing Inc., a financial planner in Toronto. “Here we have an innovation that held great promise in providing investments at low cost to different generations of investors and it’s quickly being gobbled up by product folks who are looking for a new and different distribution channel.”

Battle lines on this front are already drawn in the U.S. where financial giants such as Charles Schwab Corp. and The Vanguard Group Inc. have recently jumped into the automated advice space to the chagrin of pure-play robo-advisers such as WealthFront Inc. and Betterment LLC.

WealthFront’s chief executive Adam Nash has been particularly critical of Schwab’s Intelligent Portfolios, which use proprietary ETFs as well as other companies’ funds, for not acting in the best interests of clients.

Greece had a bad week last week:

Failure to reach an agreement between Greek and European Union leaders last week spelled bad news for the banking system of the Hellenic Republic. Talk of capital controls is heating up, and with it the amount of money being pulled from Greece appears to be accelerating.

JPMorgan analysts led by Nikolaos Panigirtzoglou estimate that Greek banks lost about 6 billion euros in the week ending June 19. That takes total deposit outflows from Greece to about 44 billion euros since the beginning of the year. The analysts use Greeks’ purchases of offshore money market funds as a proxy to generate early estimates of those numbers.

GreekDeposits
Click for Big

Hard on the heels of my post regarding liquidity implications of the OSC report The Canadian Fixed Income Market: 2014 comes some cheery news about the liquidity of the Canadian market relative to those of other sovereigns:

How — or whether — investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.

Spain, for instance, must pay more to borrow money than Italy for 30 years, even though Spain is considered safer by credit raters. Why? The Italian bond market is twice as big as the Spanish one — and, therefore, more liquid.

The same thing is happening around the world. Bonds in smaller, less-traded markets like Finland, Singapore and Canada are starting to fall out of favor. And with the Federal Reserve preparing to raise U.S. interest rates, investors want to know they can sell in a hurry if debt markets turn volatile.

“Liquidity is our number-one criteria in country selection,” said Olivier de Larouziere, the head of European interest rates in Paris at Natixis Asset Management, which oversees about $367 billion.

Some investors aren’t waiting to find out. In Spain, where a slump in repurchase agreements and trading of bills sent government-debt turnover in April to lows not seen since at least 2012, they’re starting to demand a bigger premium to own the securities, data compiled by Bloomberg show.

Yields on 10-year Spanish bonds reached 2.54 percent on June 16, and rose to the highest versus Italian securities since the end of 2013. For much of the past year, the relationship was reversed as investors preferred Spain.

Part of the shift has to do with the rising cost of trading as liquidity dries up. The difference in yields for buyers and sellers of Spain’s 10-year notes — known as the bid-ask spread — is almost double that in Italy, the data show.

“Highly rated, small bond markets can become relatively illiquid,” said Chris Wightman, a London-based money manager at Wells Fargo Asset Management, which oversees about $493 billion. “Providing liquidity for our underlying clients is a paramount investment criteria for us.”

That hasn’t stopped some investors such as Canada’s Mawer Investment Management from looking toward bigger, more-liquid bond markets as a way to diversify. The Calgary-based firm, which oversees $24 billion, started its first foreign bond fund last week and will invest in the U.S., the U.K. and Europe.

“We recognize that other larger markets are more liquid than the Canadian bond market, which does naturally make Canada more vulnerable,” said James Redpath, a fund manager at Mawer.

Meanwhile, some managers are preparing for lift-off by indulging in market timing:

TCW Group Inc. is taking the possibility of a bond-market selloff seriously.

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.”

TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

And still other managers are upset because now credit analysis means looking at four pieces of paper rather than three:

Institutional investors are rewriting their old rules so they can buy bonds assigned credit ratings by a broader variety of firms, according to Kroll Bond Rating Agency Inc. and Morningstar Inc.

Over the past year, more than 30 investment firms have eased internal guidelines that limited them to bonds rated by at least one or two of the top three graders: Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, said Kim Diamond, Kroll’s head of structured finance.

The loosening comes as some of the biggest bond buyers vocalize frustration that the so-called Big Three ratings firms are being hired less, resulting in fewer bond offerings from which they can choose.

Underwriters seeking maximum investor participation in bonds also have become frustrated with the “antiquated” restrictions, Deutsche Bank analyst Ashley Hooper wrote in a May report on the market for commercial mortgage-backed securities. Ratings competition has heated up substantially in that market as well this year.

But what of the systemic importance of individual money managers?:

Pimco’s ability to cope with a stampede of investor withdrawals after Bill Gross’s departure gives credence to arguments that mutual funds don’t threaten the broader financial system, the chairman of a global group of market regulators said Monday.

The lack of market turmoil when Pacific Investment Management Co. and the famed bond investor parted ways last year also shows regulators should refrain from treating asset managers like big banks, said Greg Medcraft, chairman of the International Organization of Securities Commissions. While a run on deposits can trigger insolvency for lenders, mutual funds are prepared to deal with surges in redemptions, he said.

“Pimco being able to wind back its positions quickly in a matter of days, it was a pretty damn good test of the liquidity of markets,” Medcraft said.

The world’s biggest money managers won a reprieve last week from being labeled systemically important, which can bring tough oversight and capital rules, when IOSCO said it would instead focus on studying broad “activities” of the asset-management industry. Medcraft said market watchdogs will be “more assertive” in pushing back on claims mutual funds should face strict rules written by bank regulators.

“We’re no longer the poor cousin” of the banking regulators who predominate at the FSB, Medcraft said. “I’ve already asked for more say and we’re getting more members” on the board, he said.

While I support the end result, the rationale seems very facile to me. It’s reasonably safe to assume that most of the $27.5-billion in October 2014 redemptions were reinvested in funds or other vehicles with a similar mandate; to the extent that that hypothesis is true, most of Pimco’s selling pressure will have been offset by other managers’ buying pressure. However, the final paragraph makes it clear that this is just another turf-battle for influence between regulators.

But all this talk of bond liquidity is a distraction from the real liquidity and valuation sink-hole:

The push to attract new institutional investors is ramping up at Manulife Financial Corp., as the insurer brings on new leaders to fuel the five-year expansion plan for its private markets business.

Manulife said Monday that it appointed three senior managers to newly created roles, a response to some early success the asset management group has seen since being formed in late 2013.

Manulife’s growing private markets group was created to attract new institutional investment in several target areas, including commercial real estate equity, commercial mortgage lending, and private placements. This built on Manulife’s existing Hancock Natural Resource Group, a trio of farmland, timber and renewable energy investments, as well as private equity and oil and gas investment arms. Manulife Asset Management Private Markets had $98-billion in assets as of the end of March, including assets managed for the company’s general fund.

It was yet another poor day for the Canadian preferred share market, with PerpetualDiscounts down 17bp, FixedResets losing 30bp and DeemedRetractibles off 13bp. The lengthy Performance Highlights table is, unsurprisingly, dominated by losers. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150622
Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.51 to be $1.13 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.84 cheap at its bid price of 16.03.

impVol_MFC_150622
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). The lowest spread issue, MFC.PR.F, is again noticeably off the line defined by the higher-spread issues.

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.71 to be $0.50 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.57 to be $0.31 cheap.

impVol_BAM_150622
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.15 to be $1.06 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.45 and appears to be $0.71 rich.

impVol_FTS_150622
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.25, looks $0.60 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.45 and is $0.46 rich.

pairs_FR_150622
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including the outliers TRP.PR.A / TRP.PR.F at -0.65% and FTS.PR.H / FTS.PR.I at +1.34%. On the junk side there are three outliers: FFH.PR.E / FFH.PR.F at -0.91%; DC.PR.B / DC.PR.D at -0.30%; and BRF.PR.A / BRF.PR.B at -0.47%.

pairs_FF_150622
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 0.4700 % 2,212.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.4700 % 3,868.9
Floater 3.50 % 3.52 % 64,151 18.48 3 0.4700 % 2,352.3
OpRet 4.78 % -10.62 % 24,020 0.08 1 0.1562 % 2,785.6
SplitShare 4.58 % 4.79 % 67,768 3.27 3 0.4563 % 3,258.9
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1562 % 2,547.2
Perpetual-Premium 5.46 % 3.80 % 62,100 0.51 19 0.0685 % 2,519.8
Perpetual-Discount 5.20 % 5.14 % 114,238 15.18 15 -0.1672 % 2,703.6
FixedReset 4.55 % 3.85 % 239,127 16.23 88 -0.3046 % 2,330.3
Deemed-Retractible 5.02 % 3.28 % 110,743 0.76 34 -0.1325 % 2,617.5
FloatingReset 2.48 % 2.94 % 55,564 6.10 9 -0.0638 % 2,339.6
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset -1.97 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.36
Bid-YTW : 6.38 %
CM.PR.O FixedReset -1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.33
Evaluated at bid price : 23.00
Bid-YTW : 3.72 %
ENB.PR.B FixedReset -1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 17.30
Evaluated at bid price : 17.30
Bid-YTW : 5.03 %
BAM.PR.R FixedReset -1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 19.15
Evaluated at bid price : 19.15
Bid-YTW : 4.43 %
ENB.PR.Y FixedReset -1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 17.96
Evaluated at bid price : 17.96
Bid-YTW : 4.93 %
TRP.PR.C FixedReset -1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 16.03
Evaluated at bid price : 16.03
Bid-YTW : 4.07 %
BAM.PR.N Perpetual-Discount -1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 20.82
Evaluated at bid price : 20.82
Bid-YTW : 5.73 %
BAM.PF.B FixedReset -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 21.73
Evaluated at bid price : 22.05
Bid-YTW : 4.22 %
IAG.PR.A Deemed-Retractible -1.27 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.61
Bid-YTW : 5.94 %
MFC.PR.C Deemed-Retractible -1.24 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.22
Bid-YTW : 6.08 %
BAM.PF.C Perpetual-Discount -1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 21.15
Evaluated at bid price : 21.15
Bid-YTW : 5.76 %
ENB.PR.T FixedReset -1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 18.09
Evaluated at bid price : 18.09
Bid-YTW : 5.02 %
ENB.PR.D FixedReset -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 17.41
Evaluated at bid price : 17.41
Bid-YTW : 5.00 %
FTS.PR.G FixedReset -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 21.38
Evaluated at bid price : 21.38
Bid-YTW : 3.81 %
BAM.PF.E FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 21.95
Evaluated at bid price : 22.45
Bid-YTW : 4.16 %
MFC.PR.N FixedReset -1.10 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.57
Bid-YTW : 4.86 %
CM.PR.P FixedReset -1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.10
Evaluated at bid price : 22.67
Bid-YTW : 3.69 %
BMO.PR.S FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.52
Evaluated at bid price : 23.30
Bid-YTW : 3.66 %
NA.PR.S FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 23.00
Evaluated at bid price : 24.30
Bid-YTW : 3.55 %
ENB.PR.H FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 16.86
Evaluated at bid price : 16.86
Bid-YTW : 4.88 %
TD.PF.B FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.33
Evaluated at bid price : 23.00
Bid-YTW : 3.65 %
GWO.PR.I Deemed-Retractible 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.80
Bid-YTW : 5.72 %
IFC.PR.C FixedReset 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.00
Bid-YTW : 4.77 %
FTS.PR.K FixedReset 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 21.45
Evaluated at bid price : 21.45
Bid-YTW : 3.77 %
TRP.PR.A FixedReset 1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 3.65 %
BAM.PR.K Floater 1.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.53 %
CIU.PR.C FixedReset 1.92 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 16.45
Evaluated at bid price : 16.45
Bid-YTW : 3.68 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.T FixedReset 256,410 Nesbitt crossed 242,000 at 18.15. Nice ticket!
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 18.09
Evaluated at bid price : 18.09
Bid-YTW : 5.02 %
NA.PR.S FixedReset 156,393 Desjardins crossed 150,000 at 24.43.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 23.00
Evaluated at bid price : 24.30
Bid-YTW : 3.55 %
BNS.PR.Z FixedReset 135,296 Scotia sold 24,500 to RBC at 23.75, then crossed 100,000 at 23.65.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.64
Bid-YTW : 3.49 %
RY.PR.I FixedReset 111,845 TD crossed 100,000 at 25.23.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 3.17 %
CIU.PR.C FixedReset 71,810 TD crossed 70,400 at 16.15. Friday’s closing quote was 16.14-50, so this was not necessarily as big a price concession on this illiquid issue as one might think from today’s bid.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 16.45
Evaluated at bid price : 16.45
Bid-YTW : 3.68 %
BNS.PR.A FloatingReset 38,625 TD crossed 34,800 at 24.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.65
Bid-YTW : 2.94 %
There were 24 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.K Floater Quote: 14.10 – 14.96
Spot Rate : 0.8600
Average : 0.6148

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.53 %

TD.PF.B FixedReset Quote: 23.00 – 23.48
Spot Rate : 0.4800
Average : 0.3167

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.33
Evaluated at bid price : 23.00
Bid-YTW : 3.65 %

IAG.PR.A Deemed-Retractible Quote: 22.61 – 23.24
Spot Rate : 0.6300
Average : 0.4979

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.61
Bid-YTW : 5.94 %

CM.PR.O FixedReset Quote: 23.00 – 23.45
Spot Rate : 0.4500
Average : 0.3184

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 22.33
Evaluated at bid price : 23.00
Bid-YTW : 3.72 %

FTS.PR.J Perpetual-Discount Quote: 23.51 – 24.10
Spot Rate : 0.5900
Average : 0.4638

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-22
Maturity Price : 23.16
Evaluated at bid price : 23.51
Bid-YTW : 5.08 %

IFC.PR.A FixedReset Quote: 19.36 – 19.90
Spot Rate : 0.5400
Average : 0.4150

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.36
Bid-YTW : 6.38 %

The Canadian Fixed Income Market: 2014

June 21st, 2015

On April 23, the OSC announced:

Today the Ontario Securities Commission (OSC) published The Canadian Fixed Income Market Report and OSC Staff Notice 21-708 – OSC Staff Report on the Canadian Fixed Income Market and Next Steps to Enhance Regulation and Transparency of Fixed Income Markets. Together, these materials summarize the OSC’s study of the fixed income markets and set out the steps the OSC will take to enhance the transparency and regulation of fixed income markets.

“With this report, we have compiled research that confirms our focus on enhanced post-trade transparency and regulation of the fixed income markets in Canada,” said Howard Wetston, Q.C., Chair and CEO of the OSC. “Our priority now is to develop regulation that will promote more informed decision-making for market participants regardless of size, improve market integrity and ensure that the market is fair and equitable to all investors.”

The Staff Notice stated:

In light of the observations in the Report, Staff considered steps that could be taken at this time to enhance fixed income regulation to achieve the following objectives:
  • 1. Facilitate more informed decision making among all market participants, irrespective of their size;
  • 2. Improve market integrity; and
  • 3. Ensure that the market is fair and equitable for all investors


In the coming year, we will take additional steps to facilitate more informed decision making by market participants for all fixed income securities, specifically:

  • a. Monitoring the implementation of new CSA cost and performance reporting rules in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, which will help retail investors better understand the cost of their fixed income transactions, and which will be fully implemented by July 2016; and
  • b. Working with the CSA to make it easier for investors to find relevant documents for fixed income offerings, especially trust indentures and credit agreements, in the SEDAR system.

Subject to determining exactly what they mean, I don’t have a huge amount of problems with their second intention, to make more information available on SEDAR (although I suspect that they will not address my perennial complaint regarding their prohibition on linking directly to these public documents). As a caveat to that, however, I’ll say that I suspect it won’t make an atom’s worth of difference: it became apparent to me about ten years ago that nobody other than the lawyers ever read bond prospectuses; if there was any information anywhere other than on Bloomberg, it didn’t really exist. And Bloomberg’s information was grossly circumscribed; the summary omitted a lot of interesting stuff, like call schedules.

I will note that my direct experience of the institutional bond market is getting pretty rusty, but I was managing a small – but still institutionally sized – corporate bond portfolio in 2007/8; things were not much different than they were in the ’90′s; the big difference was that all the dealer crap came by eMail rather than fax and snail-mail. They could improve access to information quite easily by clarifying the rules about offering memoranda; on at least one occasion, I refused to consider buying an offered bond that fit the portfolio needs quite admirably, according to the basic information available, because the only documentation the dealer had (and this dealer was the original underwriter of the deal) was the offering memorandum and they refused to send me a copy on the grounds that OSC rules forbid the dissemination of the document.

All that being said, it is a pity that the report itself was written with the purpose of providing a veneer of respectability for the next OSC implementation of mission creep. For all that the report, titled The Canadian Fixed Income Market: 2014, is quite a good collection of references.

Furthermore, a significant number of bonds, ranging from 23-47%, are privately placed and only available to accredited investors.[Footnote]

Footnote reads: Based on an analysis of FP Infomart data from 2010-2013. These securities can only be traded and held by accredited investors.

Many of these private placements will be small issues, issued to institutions like pension funds and insurance companies on a bespoke basis, but it is a great pity that this characteristic was not followed up in an effort to determine why issuers choose to issue bonds privately. For example, on September 23, 2014 I noted:

However, as has been pointed out by Ron Mendel of Hartford Investment Management in his admirable essay Private Placement Debt: Diversification, yield potential in a complementary IG asset:
Private placement investors require additional yield relative to comparable public bond issues, as lenders demand greater yield to compensate for increased liquidity risk as well as the underwriting and monitoring costs. This premium is variable over time and is a function of technical, supply and demand characteristics, credit fundamentals and insurance liability requirements. The typical liquidity premium historically ranges between 25 – 45 basis points.

For those wanting some more opinion regarding private placements, the nomenclature in the states is “144a bonds” (or 144(a)), after the rule by which our wise masters graciously permit money to be borrowed and lent privately.

So why are there private placements? One answer is the price of underwriting a public issue, as a (now rather dated) paper by Oya Altınkılıç  and Robert S. Hansen, titled Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs reports:

underwritingFees
Click for Big

That’s not the end of it, as they show with some data for Chilean issues listed in the US market, taken from a paper by Sara Zervos titled The Transactions Costs of Primary Market Issuance: The Case of Brazil, Chile, and Mexico:

issueCosts
Click for Big

Wow! Issuance costs of nearly 5% on a small issue is something fierce! While Canadian issuers will not have to deal with such an obscene amount of taxes on a bond issue, I suspect that the legal cost quoted …:

While legal fees can range according to any complications that arise, most parties quoted an approximate $50,000 for completing a straightforward deal.

… is absurdly low in today’s environment, particularly for smaller issuers that do not have a shelf prospectus in place. If we look at the recent Split Share offering by Brompton (a cookie-cutter SplitShare Corporation), found on SEDAR at “Brompton Oil Split Corp. Jan 30 2015 15:09:40 ET Final long form prospectus – English PDF 991 K” (not allowed to link!) we find:

The Company will pay the expenses incurred in connection with the offering of Preferred Shares and Class A Shares by the Company, estimated to be $725,000.

That was before selling fees of 3% (preferred) and 6% (Capital Units). An old buddy of mine blew his brains out with an ETF … spent about $750,000 and couldn’t sell the issue. So basically I think this report suffers by not examining issuance costs more – and yes, I know that legal fees aren’t public information and are therefore beyond the scope of this report. I don’t care. If they’re going to talk about costs of issue, they should have at least highlighted the fact that the cost information presented is both non-Canadian and dated.

I will also note that the information presented in the report does not differentiate by term; if we look at the information presented on SEDAR as “TELUS Corporation Mar 24 2015 17:34:26 ET Underwriting or agency agreements (or amendment thereto) PDF 275 K ” (not allowed to link!) we find:

(i) up to Cdn.$250,000,000 principal amount of Series CS Notes at a price of Cdn.$999.62 per Cdn.$1,000 principal amount of 1.50% Notes, Series CS due March 27, 2018 (the “Series CS Notes”) plus accrued interest, if any, from March 27, 2015 to the date of delivery, (ii) up to Cdn.$1,000,000,000 principal amount of Series CT Notes at a price of Cdn.$997.31 per Cdn.$1,000 principal amount of 2.35% Notes, Series CT due March 28, 2022 (the “Series CT Notes”) plus accrued interest, if any, from March 27, 2015 to the date of delivery, and (iii) up to Cdn.$500,000,000 principal amount of Series CU Notes at a price of Cdn.$999.72 per Cdn.$1,000 principal amount of 4.40% Notes, Series CU due January 29, 2046 (the “Series CU Notes”)

the Company agrees to pay to the Agents, at the Closing Date a fee of (i) Cdn. $2.50 per Cdn. $1,000 principal amount of Series CS Notes actually sold, (ii) Cdn. $3.70 per Cdn. $1,000 principal amount of Series CT Notes actually sold, and (iii) Cdn. $5.00 per Cdn. $1,000 principal amount of Series CU Notes actually sold, in each case exclusive of any applicable goods and services tax or any similar applicable tax.

So the underwriting costs in this case were 25bp for the Short-Term notes, 37bp for the Medium-Term notes and 50bp for the Long-Term notes.

But anyway, the main thrust of the report is to detail the difficulties retail investors have in building a portfolio of directly held bonds, e.g.:

In a 2010 study of US corporate bond trades, researchers observed that transaction costs were ten to twenty times lower for trades of $500,000 or more than for trades up to $100,000.[Footnotes]

[Footnotes read]: Transactions under $100,000 are considered to be retail transactions. See Appendix I: Additional Background, “Table 4: Spreads by Trade Size – Corporate Bonds (November 2008-April 2010)”.

Equivalent Canadian data is not available; however, we would expect to see a large disparity in Canada as well.

They do acknowledge concerns about transparency:

Negotiated Markets

In the fixed income market, there are many differentiated securities that do not trade very frequently. This leads to high search costs for each transaction since the market for individual securities tends to be concentrated among a small number of participants (fragmented liquidity).

This is one of the reasons the fixed income market operates as a negotiated market, where buyers and sellers negotiate the price of each transaction.

To facilitate the matching of buyers and sellers, dealers (or market makers) can help facilitate a transaction by serving as the trade counterparty. The market maker then assumes inventory risk while it looks for a seller (or buyer) to net out its position.

Complete transparency can deter market makers from participating for a number of reasons. One concern is that buyers or sellers can gain bargaining power over market makers. This could allow them to determine a market maker’s position and cost information, which drastically reduces the market maker’s potential profit.

The other concern is the free-rider effect: in a negotiated market, the initial search costs are high, but the marginal cost of disseminating and using this information is (or close to) zero. Full transparency can reduce bid-ask spreads but also reduces the incentive for market makers to participate because they rely on these spreads to compensate for their search efforts. While spreads in the fixed income market appear high relative to those in the equity market, one could argue that it is more appropriate to compare the fixed income market to other negotiated markets such as those for real estate and private equity, where both search and transaction costs can be significantly higher.

They acknowledge disputes about the effects of TRACE, without actually defining what they mean by liquidity:

A consensus on lower transaction costs with a continuing debate on liquidity Empirical evidence, gathered after the rollout of the TRACE system, showed that post-trade transparency lowered transaction costs in the fixed income market without decreasing liquidity.[Footnotes] As a corollary, these findings indicate that greater price transparency, leads to less information asymmetry and lower economic rents,[Footnote] which makes the market more efficient.[Footnote] However, in a more recent study, researchers argue that while post-trade transparency has reduced transaction costs in the fixed income market, it has had a negative impact on liquidity, particularly for less frequently traded bonds.[Footnote]

Footnotes read:

See Edwards, Amy K., Lawrence E. Harris, and Michael S. Piwowar. “Corporate Bond Market Transaction Costs and Transparency.” The Journal of Finance 62.3 (2007): 1421-451. Web. 24 July 2014. <[LINK]>; Learner, Heidi. “An Examination of Transparency in European Bond Markets.” An Examination of Transparency in European Bond Markets. CFA Institute, Oct. 2011. Web. 06 Apr. 2015. <[LINK}>;and M. Goldstein, E. Hotchkiss, and E. Sirri, “Transparency and Liquidity: A Controlled Experiment on Corporate Bonds,” Babson College working paper, 2005, <[LINK]>.

See International Comparisons, “Comparing Transparency” for additional details related to TRACE.

Economic rent represents the return on an asset in excess of the amount needed to keep it productive in a competitive market. Alternatively economic rent is the return that can be eliminated by competition. Rent-seeking actors are those that enter a market to capture economic rents.

Large traders can obtain a proprietary advantage by keeping the traded prices of bonds hidden. See United States. Library of Congress. Congressional Research Service. Does Price Transparency Improve Market Efficiency? Implications of Empirical Evidence in Other Markets for the Health Sector. By D. Andrew Austin and Jane G. Gravelle. United States Congress, 24 July 2007. Web. 31 July 2014. <[LINK]>.

Asquith, Paul, Thomas R. Covert, and Parag Pathak. The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market. Working paper. SSRN, 5 Sept. 2013. Web. 25 Nov. 2014. <[LINK]>

I reviewed the last of these papers in the post TRACE and the Bond Market. And I’m pretty upset that they did not include the observations of Bessembinder and Maxwell (which I reviewed in the post TRACE and Corporate Bond Market Transparency) in this section, although they’re clearly aware of this paper since they cited it twice. One observation is critical and was conveniently ignored; it was:

Market participants with whom we spoke, including both dealers and the traders at investment firms who are their customers, were nearly unanimous in the view that trading is more difficult after the introduction of TRACE. Whereas it may have previously been possible to complete a sizeable bond purchase with a single phone call to a dealer who held sufficient quantities of the bond in inventory, the post-TRACE environment may involve communications with multiple dealers, and delays as the dealers search for counterparties. A bond trader with a major insurance company told us that there is less liquidity, in that market makers carried less “product,” and it has become more difficult to locate bonds for purchase in the post-TRACE environment. A bond trader for a major investment company responded to the publication of Bessembinder, Maxwell, and Venkataraman (2006) by sending the authors an unsolicited e-mail stating: “I want to be able to execute a trade even if a bond dealer does not have a simultaneous counterparty lined up…. [T]oo much price transparency reduces dealers’ willingness to commit capital…. [T]he focus on the bid-ask spread is too narrow, and a case of being penny-wise and pound-foolish.”

However, having acknowledged (however imperfectly) a debate about liquidity, the authors of the OSC paper immediately start advocating for greater transparency:

Why is price transparency important?

Markets can operate more efficiently when pricing is transparent for both buyers and sellers. Price transparency helps to ensure the buyer can make a more informed purchase, especially in financial markets that involve an intermediary, and helps sellers by making it easier to gauge demand. Price transparency also helps to prevent price discrimination in the market, where different people pay different prices for otherwise identical goods or services.

Why are prices in some markets less transparent than others?
1. Search costs. There are opportunity, including time, and monetary costs to acquire information; and
2. Privacy. Some participants are concerned that any increase in transparency might have a negative effect on their ability to manage their positions. However, it is not clear if these privacy concerns should dominate if most participants do not intend to trade the securities.

What are some of the arguments for greater transparency in the fixed income market?
1. The internet has significantly reduced search costs for consumers across many industries ranging from consumer retail to stock markets by reducing the marginal cost of information dissemination close to zero; and
2. Given that fixed income markets are generally not liquid, many participants in the market are buy-and-hold investors, so it is not clear if the privacy concerns are valid for investors that do not intend to trade these bonds.

And then there’s the usual whining:

Transparency depends on the investor’s level of sophistication … The market is relatively transparent to institutional investors … There is limited information available to retail investors … COSTS TO INVESTORS ARE NOT TRANSPARENT

In short, as I stated at the beginning of this post, the report itself was written with the purpose of providing a veneer of respectability for the next OSC implementation of mission creep. There is very little attempt to address the issue of ‘what is the corporate bond market for’ and an overarching bias towards the idea that greater transparency is always good. Well, maybe it’s good for retail investors, but is it good for the capital markets? Is it good for issuers who seek to raise funds to invest in fixed assets? As Assiduous Readers know, I take the view that it ain’t. Retail investors are well served by ETFs and, to a lesser extent (because of the fees!), by mutual funds; I have explained in the past Why only millionaires should invest in bonds directly. I have advocated for a version of Treasury Direct to be established in Canada, but those are for Canada bonds; and it’s in the context of creating something more useful than CSBs for small retail investors.

All in all, if the OSC really wants to know how investors get abused in the bond marketplace, they would be better advised to investigate manipulation of the bond indices.

But my prediction is that increased transparency will in fact come to the Canadian corporate bond market and quote spreads will in fact tighten and all the morons will be very, very happy. As a corollary to this, the market will become thinner, therefore more volatile and less liquid (when we define liquidity along the lines of ‘the ability to perform a 1-million pv transaction in a reasonable time without significant market impact); therefore investors will want higher spreads, therefore more issuers will head to the States and build fewer factories. We might also see an increase in the bespoke market, where issuers do more financing by with tiny issues sold in their entirety to insurance companies and pension plans. But the allegedly good part is a headline and the bad parts are only statistics, so who cares?

Morningstar had an article on the paper, titled Regulators: Retail investors deserve true bond transparency, which makes it clear that facts don’t matter; increased transparency and the degradation of Canada’s tiny corporate bond market is a foregone conclusion:

”We believe there is a need for additional transparency, both to regulators and to market participants, as well as enhanced regulation,” says Susan Greenglass, director of market regulation at the OSC.

In the Bank of Canada’s December 2003 Financial System Review, Tran-Minh Vu wrote Transparency in the Canadian Fixed-Income Market: Opportunities and Constraints which included a very peculiar assertion:

In Canada, because of the decentralized nature of the fixed-income market, customers typically contact several dealers to obtain the best price.[Footnote]

Footnote reads: Because they are primarily institutional investors, customers usually have a fiduciary duty to obtain at least three quotes from different dealers.

Let’s just say I’d like to see some supporting documentation for both parts of that quotation!

June 19, 2015

June 19th, 2015
battlingRobots
Click for Big

It’s time for … Battling Robots!

Vanguard has an ally in Palo Alto, California–based Wealthfront. The company’s algorithms direct about 90 percent of the average portfolio to Vanguard funds. The firms don’t have a financial relationship, and they’re chasing different markets. Yet their CEOs praise each other’s strategies. “I’m a big fan of what’s happened in the robo-world,” Vanguard CEO Bill McNabb says.

Fidelity is embracing the robo-product route via the 3,200 independent advisory firms for which it clears trades and holds about $1.5 trillion in assets. Boston-based Fidelity teamed up with No. 2 robo-firm Betterment in October to steer those advisers toward Betterment’s software. The robo-programs pick portfolios, often based on Vanguard funds, and automatically rebalance them to cut time and costs. Fidelity gets a referral fee, which it won’t disclose, from its New York–based partner. “Financial firms can no longer wait for the emerging affluent to appear at their doorstep when they have enough assets,” says David Canter, who heads a Fidelity unit serving independent advisers. “You have to think about them now.”

In the rising robo-rivalry between Fidelity and Vanguard, the winner may be … Charles Schwab Corp. The largest independent U.S. brokerage by client assets started a robo-offering for retail investors on March 9. By the end of May, the new program had $2.4 billion in client money and about 33,000 accounts. “The pressure is on,” Aite’s Pirker says.

So far, at any rate, there doesn’t appear to be any big threat to human advisors; everything’s happening in the discount space and clients are those who were already willing to go it alone, but are willing to pay a few bucks for some reassurance. Eventually I’m quite certain that every comprehensive fund family – and who is more comprehensive than Vanguard? – will have one.

Bond ETF outflows are rising:

Investors in U.S. exchange-traded funds have sold the most bonds in June in 15 months. So far, it’s proving to be a winning bet.

They pulled $2.14 billion out of fixed-income funds since May 31, on course to be the biggest monthly withdrawal since March 2014, according to data compiled by Bloomberg.

With everyone getting ready for the Federal Reserve to raise interest rates, Treasuries have fallen almost 1 percent since the end of May, based on Bloomberg World Bond Indexes. It’s the biggest monthly decline since February.

Tim Kiladze of the Globe notes the current disaffection with FixedResets:

A sudden change of heart from retail investors is making financing decisions much tougher for Canada’s biggest companies.

Until recently, retail investors were happy to buy new issues of rate reset preferred shares from companies such as Royal Bank of Canada, TransCanada Corp. and Husky Energy Inc.

Such a heavy appetite for the product made it easy for these issuers to raise cash. In 2014, $14-billion worth of these securities were gobbled up.

But lately, retail investors are giving rate reset preferred shares the cold shoulder. Burned by poor performing issues, they are much less willing to buy new offerings of these securities.

My comments of June 16 regarding the Brondesbury Group report on Mutual Fund Fee Research commissioned by the OSC attracted some attention from a well-known activist … so I replied with an eMail:

At the risk of putting words in your mouth, I’ll suggest that you’re concerned with the 1-5% (?) of cases in which the salesman-client relationship goes badly wrong.

I am concerned about these cases, but in the same way I’m concerned about murder and burglary. When people clearly do wrong, catch ‘em and punish ‘em, I say – I do not advocate that we require people to prove that they have no intention of murdering or burglarizing anybody, and to prove that they have adequate supervision to ensure they don’t go astray. Nor do I advocate that police check everybody’s house annually to ensure the locks are up to the latest standards and the ‘safe-room’ is adequately secured against armed marauders, or that the citizen sign a release stating that he does not want these things and file it with the proper authorities.

I am more concerned with the effects on capital markets of a blanket fiduciary standard. Mainly, capital markets do not exist for the purpose of giving Granny a safe investment; giving Granny a good place to put her $50,000 is only a means to an end. Capital markets exist for the purpose of transmitting money from savers to direct investors – companies that need a few billion to build a pipeline, or a factory or whatever. All regulation must not only recognize this, but recognize that all other aspects of capital markets are subordinate to this purpose.

So my major problem with a blanket fiduciary standard is: who’s going to do the selling? Selling is hard work and it’s valuable to the entity whose goods are being sold. So we have new issue commissions, paid directly from the issuer to the salesman, just like happens with the friendly salesman at your local electronics store. So who are these people going to be?

Under a blanket fiduciary standard, it obviously cannot be the fiduciary, so Granny can’t buy a new issue bond and capture (to some extent) the new issue concession. Granny must buy whatever is available on the secondary market and pay a markup that is (proportionately) pretty big. Granny can’t buy a GIC either, because GICs have the profit margin and sales commission (or salary, if it’s a teller doing the work) built in to the offered yield (taken off the top!) and are therefore (according to some) inherently evil.

However, fiduciaries are a valuable part of capital markets. I should know – I’m a fiduciary myself. Fiduciaries allow for a certain amount of trust in a relationship between naive client and big-shot markets guy, thereby encouraging more direct participation by clients in the capital market’s purpose of turning cash under the mattress into new skyscrapers.

So we need fiduciaries and we need salesmen in our idealized capital markets – and guess what? We have that already! There are lots of fiduciaries around for those that want them; there are lots of salesmen around for those who want them, too. There will be lots of individuals who will want relationships with both types of professional; and, I suggest, there will be lots of investors who will maintain accounts with salesmen only when an objective evaluation will suggest a fiduciary. ‘Why should I pay this fiduciary?’ they will ask. ‘Last year he only did two trades and charged me $3,000!’

What we don’t have is strict separation of functions. Given the huge amount of money that’s made from new issue commissions (as I mentioned on June 16, this exceeds mutual fund commission revenue at the major brokerages), it should be clear that strict separation is necessary. Not only should any individual market professional be prohibited from being both a salesman and a fiduciary (even to different clients), but any given corporate group should be prohibited from assuming both roles. If X is a sales channel and Y is a fiduciary channel and Z owns both X and Y … there will be problems, conflicts of interest and leakages. Guaranteed. So all investment professionals and all their employers must be forced to make the choice. Sell Side or Buy Side? Choose!

It won’t happen. There are a lot of very large corporate interests that make very good money by being all things to all people and there are lots of regulators and politicians who want to work for these large corporations in their futures at double the paycheque. So we’ll keep muddling along, true to the ideal that we can all achieve moral perfection as long as there are enough rules and enough people to enforce them and enough money spent on compliance instead of laying bricks for the new factory.

Actually, this eMail turned out rather longer than I expected and I like it. So I’m going to publish it on my blog tonight (your name will not be mentioned).

By the way, I have a small and nascent sideline providing expert witness reports for negligence and misconduct cases involving preferred shares; it’s something I think can grow, since I have the belief that the guys in the big firms won’t work for plaintiffs. You might want to keep me in mind when one of the 1-5% (?) of relationships crosses your desk.

Sincerely,

Actually, I should have also pointed out that the typical problem I see when reviewing portfolios is not that investors have too much equity, but that they have too little. Not only are they grossly overweighted in fixed-income, but that fixed income is short term, and not only is it short term, but it’s federal debt. If anything, commissions on selling equities should be increased because people simply aren’t holding enough of them.

On cue, Rob Carrick writes a piece in the Globe about fee based accounts:

Fee-based advice is where the momentum is in the investment industry today. PriceMetrix says the percentage of fee-based assets rose to 35 per cent in 2014 from 31 per cent in 2013, while the percentage of total fee revenue from fee-based accounts rose to 53 per cent from 47 per cent. “More and more advisers are realizing that operating on a fee-for-service basis is simply a more productive way to grow your business,” said Patrick Kennedy, co-founder and chief customer officer at Toronto-based PriceMetrix.

The general unavailability of fee information is a problem, though. Try this: Google the name of an investment firm you know and see if there’s a “fees” or “pricing” tab on their website. Outside of some online robo-adviser firms, I couldn’t find a single example of a company doing this.

Fee secrecy is good for business. Clients are told what the costs are and they have no context to judge them. They can negotiate, but without the knowledge that there may be other firms doing the same kind of work for half a percentage point less. On a $500,000 portfolio, that difference amounts to $2,500 per year.

It’s not just fee information that is hard to get (I publish my fees!) but, more critically, it is performance information that is very difficult to get. I didn’t mention it in my long eMail, above, but I think anybody charging a fee for discretionary asset management should be required to publish a comprehensive performance report, going back to inception. Composites can be created either by asset type or account characteristics (or both!), I don’t care, but performance must be published! What’s more, returns should be reported using Time-Weighted returns, not the Dollar-Weighted returns so beloved of regulators and morons (see November 26, 2012 for the initial fluttering of eyelashes; the eventual decision to mandate dollar-weighted returns was discussed in greater detail in PrefLetter).

John Heinzl in the Globe gave a sensible response to a small investor wailing about preferred share prices:

A few years ago I started accounts worth $5,000 for each of two grandchildren, and invested all of the money in BCE preferred shares (BCE.PR.K). The value of these accounts has since fallen to about $3,900, but my adviser recommends we leave them as is. The funds will not be needed for the grandchildren until about 15 years from now. I have thought about dumping the shares but feel the capital loss at this point would be significant, and perhaps the shares will pick up in the years to come?

Two other factors to consider are the time horizon and diversification. If the money will not be needed for 15 years, you might wish to consider investing in something that provides more growth potential (preferred shares are usually purchased for income, not growth). Investing the entire account in a single stock is probably not a good idea, however, because it entails too much risk; a low-cost index exchange-traded fund or mutual fund – particularly one that allows full reinvestment of dividends to maximize compounding – will give you both growth potential and diversification.

Fifteen year time horizon? For the kids? There are only two legitimate choices:

  • Canadian equity ETF
  • One, maybe two, single stocks

I’ll also note that ‘selling things because they’ve gone down’ is as common as it is silly; it’s probably a factor in the current very long stretch of drip-drip-drip losses.

One of the best investments I ever made (well, it was made on my behalf, but never mind that) was 100 shares (or so) of Irwin Toy when I was about ten years old. Investment returns were no great shakes, and I’m not even sure if I got dividend cheques, but it was a company whose products I was familiar with AND I could watch the stock price AND I could read a little bit of the quarterly reports (although I found them pretty boring – I was only ten!) AND, best of all, Irwin Toy had a Junior Shareholders Club, and if we went to the annual meeting we got a present. I still wonder, from time to time, whether there were a few boys from Marketting in attendance, making notes about kids reactions to the game or toy they received.

Anyway, it was a superb introduction to the concept of stocks. So while the investor didn’t say anything about his personal circumstances, I suggest that those with a little bit of breathing room in their finances would be well advised to buy their kids a few shares (not necessarily a board lot, but worth enough that a ten year old will consider it a significant investment) in something like Walt Disney common. Or Apple. Or Loblaw. Or Cineplex. Or Hudson’s Bay Company. Or Restaurant Brands. Are these good investments, by the standards of my very astute Assiduous Readers? I don’t know. Who cares?

Getting back to economics for a moment, numbers released today were soft:

Canada’s consumer prices advanced 0.9 per cent in May from a year earlier while retail sales for April posted a surprise decline, signs the second-quarter recovery the central bank is counting on remains in doubt.

Core inflation, which excludes eight volatile products, slowed to 2.2 per cent from 2.3 per cent in April, Statistics Canada said Friday from Ottawa. April retail sales fell 0.1 per cent on declines in food and electronics. Economists had expected sales to rise 0.7 per cent, according to the median forecast in a Bloomberg News survey.

Total inflation, while exceeding April’s 0.8 per cent pace, is still outside the Bank of Canada’s 1 per cent to 3 per cent target range. The 0.1 per cent April decline in retail sales exceeded even the most bearish economist forecast, suggesting economic weakness in the first quarter from lower crude oil prices is lingering into the second.

And, just to cap the week, Barrie McKenna wrote about one of our favourite off-topics:

At the moment, demand is growing for butter and cream, but it’s flat for fluid milk. The excess skim milk is turned into powder for baby formula, used as animal feed, or thrown away.

Trade is generally not an option. Canada is severally limited in what it can export because the World Trade Organization deems the fixed domestic milk prices a subsidy.

Imports have been growing rapidly, and will continue to rise when the free-trade deal with Europe is put in place. If Canada eventually joins the Trans-Pacific Partnership, experts say even more imported dairy products will pour into the country.

Canada’s trade deficit in dairy products has more than doubled since 2006. In 2014, dairy imports reached $900-million versus exports of $281-million, and the trend has accelerated in the first three months of this year. Exports were lower in 2014 than they were in 2006.

“Canada’s dairy sector is being seriously squeezed and faces a growing trade deficit,” according to a report slated to be released Monday by the Canadian Agri-Food Policy Institute. “This is hardly a growth formula for one of Canada’s largest agri-food sectors, but more importantly, a significant threat to the current system.”

The dairy industry is a great example of the long-term evils of trade protectionism.

It was another bad day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both down 30bp and DeemedRetractibles off 10bp. FixedResets dominated the bad part of the Performance Highlights table; the good part wasn’t big enough to be worth noticing. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150619
Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.20 to be $0.84 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.51 cheap at its bid price of 16.27.

impVol_MFC_150619
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.69 to be $0.49 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.70 to be $0.23 cheap.

impVol_BAM_150619
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.50 to be $0.92 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.70 and appears to be $0.69 rich.

impVol_FTS_150619
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.39, looks $0.32 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.15 and is $0.19 rich.

pairs_FR_150619
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including the outliers TRP.PR.A / TRP.PR.F at -0.34% and FTS.PR.H / FTS.PR.I at +1.17%. On the junk side there are two outliers: FFH.PR.E / FFH.PR.F at -0.87% and DC.PR.B / DC.PR.D at -0.46%.

pairs_FF_150619
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.3746 % 2,202.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.3746 % 3,850.8
Floater 3.52 % 3.52 % 63,131 18.48 3 -0.3746 % 2,341.3
OpRet 4.78 % -9.28 % 23,474 0.08 1 0.0395 % 2,781.3
SplitShare 4.60 % 4.92 % 68,816 3.28 3 -0.1608 % 3,244.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0395 % 2,543.2
Perpetual-Premium 5.47 % 4.76 % 58,985 4.98 19 -0.0069 % 2,518.1
Perpetual-Discount 5.20 % 5.15 % 115,336 15.21 15 -0.3036 % 2,708.1
FixedReset 4.54 % 3.88 % 241,764 16.21 88 -0.3001 % 2,337.4
Deemed-Retractible 5.01 % 3.34 % 112,089 0.76 34 -0.1038 % 2,621.0
FloatingReset 2.51 % 2.93 % 57,860 6.10 9 0.1524 % 2,341.1
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -2.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 15.56
Evaluated at bid price : 15.56
Bid-YTW : 4.54 %
TRP.PR.C FixedReset -2.52 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 16.27
Evaluated at bid price : 16.27
Bid-YTW : 4.04 %
IFC.PR.C FixedReset -2.37 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 4.95 %
TRP.PR.E FixedReset -2.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 21.85
Evaluated at bid price : 22.26
Bid-YTW : 4.01 %
ENB.PR.N FixedReset -2.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 18.82
Evaluated at bid price : 18.82
Bid-YTW : 4.98 %
BAM.PR.K Floater -1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 13.85
Evaluated at bid price : 13.85
Bid-YTW : 3.60 %
MFC.PR.L FixedReset -1.76 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.30
Bid-YTW : 4.94 %
FTS.PR.K FixedReset -1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 21.15
Evaluated at bid price : 21.15
Bid-YTW : 3.84 %
CIU.PR.C FixedReset -1.59 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 16.14
Evaluated at bid price : 16.14
Bid-YTW : 3.78 %
ENB.PR.J FixedReset -1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 19.21
Evaluated at bid price : 19.21
Bid-YTW : 4.91 %
FTS.PR.G FixedReset -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 21.32
Evaluated at bid price : 21.62
Bid-YTW : 3.76 %
FTS.PR.H FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 16.39
Evaluated at bid price : 16.39
Bid-YTW : 3.78 %
ENB.PF.A FixedReset -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 19.61
Evaluated at bid price : 19.61
Bid-YTW : 4.94 %
TD.PF.A FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 22.37
Evaluated at bid price : 23.10
Bid-YTW : 3.66 %
ENB.PF.C FixedReset -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 19.48
Evaluated at bid price : 19.48
Bid-YTW : 4.97 %
ENB.PF.E FixedReset -1.06 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 19.64
Evaluated at bid price : 19.64
Bid-YTW : 4.96 %
FTS.PR.M FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 22.84
Evaluated at bid price : 24.05
Bid-YTW : 3.69 %
RY.PR.K FloatingReset 1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.73
Bid-YTW : 2.69 %
MFC.PR.H FixedReset 1.18 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 2.95 %
IFC.PR.A FixedReset 1.44 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.75
Bid-YTW : 6.13 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.F Deemed-Retractible 344,965 Scotia crossed blocks of 155,000 and 187,600, both at 25.42. Nice tickets!
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-19
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : -12.77 %
MFC.PR.H FixedReset 99,831 RBC bought blocks of 10,700 and 33,900 from National at 25.65, then another 30,800 at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 2.95 %
HSE.PR.G FixedReset 90,627 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 23.01
Evaluated at bid price : 24.59
Bid-YTW : 4.54 %
FTS.PR.M FixedReset 78,000 RBC crossed 75,000 at 24.45.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 22.84
Evaluated at bid price : 24.05
Bid-YTW : 3.69 %
RY.PR.I FixedReset 73,233 TD crossed blocks of 34,200 and 25,000, both at 25.23.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.23
Bid-YTW : 3.16 %
TRP.PR.G FixedReset 57,060 RBC crossed 39,400 at 24.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 23.10
Evaluated at bid price : 24.91
Bid-YTW : 3.83 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
HSE.PR.C FixedReset Quote: 23.61 – 24.44
Spot Rate : 0.8300
Average : 0.5285

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 22.63
Evaluated at bid price : 23.61
Bid-YTW : 4.42 %

IFC.PR.C FixedReset Quote: 22.70 – 23.59
Spot Rate : 0.8900
Average : 0.6494

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 4.95 %

CU.PR.G Perpetual-Discount Quote: 21.97 – 22.68
Spot Rate : 0.7100
Average : 0.4885

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 21.64
Evaluated at bid price : 21.97
Bid-YTW : 5.15 %

TRP.PR.E FixedReset Quote: 22.26 – 22.93
Spot Rate : 0.6700
Average : 0.5056

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 21.85
Evaluated at bid price : 22.26
Bid-YTW : 4.01 %

ELF.PR.H Perpetual-Premium Quote: 25.05 – 25.56
Spot Rate : 0.5100
Average : 0.3632

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-19
Maturity Price : 24.56
Evaluated at bid price : 25.05
Bid-YTW : 5.57 %

GWO.PR.S Deemed-Retractible Quote: 26.10 – 26.50
Spot Rate : 0.4000
Average : 0.2555

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 4.69 %

SLF.PR.G / SLF.PR.J: 50% Conversion to FloatingResets

June 19th, 2015

Sun Life Financial Inc. has announced:

that 6,007,314 of its 11,200,000 Class A Non-cumulative Rate Reset Preferred Shares Series 8R (the “Series 8R Shares”) have been elected for conversion on June 30, 2015, on a one-for-one basis, into Class A Non-cumulative Floating Rate Preferred Shares Series 9QR (the “Series 9QR Shares”). Consequently, on June 30, 2015, Sun Life Financial will have 5,192,686 Series 8R Shares and 6,007,314 Series 9QR Shares issued and outstanding. The Series 8R Shares and Series 9QR Shares will be listed on the Toronto Stock Exchange under the symbols SLF.PR.G and SLF.PR.J, respectively.

Subject to regulatory approval, Sun Life Financial may redeem the Series 8R Shares and the Series 9QR Shares in whole or in part on June 30, 2020 and on the 30th of June every five years thereafter.

The conversion rate is much higher than the most recent conversion, FTS.PR.H / FTS.PR.I, in which a 30% conversion was seen.

And the conversion rate flies in the face of my recommendation to hold SLF.PR.G, the FixedReset. Oh well, we’ll see how it turns out.

ENB Finalizes Dropdown; S&P Downgrades To P-2(low); DBRS Review-Negative

June 19th, 2015

Enbridge Inc. has announced:

  • •$30.4 billion transfer of the Canadian Mainline, the Regional Oil Sands System and Canadian renewable energy assets to Enbridge Income Fund
  • •Transaction supports higher dividend payout and positions Enbridge to extend its industry leading growth rate beyond 2018
  • •Available Cash Flow from Operations growth expected to average approximately 18 percent from 2014 to 2018
  • •33 percent dividend per share growth in 2015, as previously announced
  • •14 to 16 percent expected annual average dividend per share growth from 2016 to 2018
  • •Transformation of Enbridge Income Fund Holdings to a premier Liquids Pipelines investment vehicle in Canada
  • •Enbridge to remain as manager and operator of transferred assets

Enbridge Inc. (TSX:ENB) (NYSE:ENB) (Enbridge or the Company) has reached agreement with Enbridge Income Fund (the Fund) to transfer its Canadian Liquids Pipelines Business, held by Enbridge Pipelines Inc. (EPI) and Enbridge Pipelines Athabasca Inc. (EPA), and certain Canadian renewable energy assets to the Fund for consideration payable at closing valued at $30.4 billion (the Transaction). The Transaction is subject to customary regulatory approvals and closing conditions, as well as a vote of the public shareholders of Enbridge Income Fund Holdings Inc. (TSX: ENF) (ENF), which is expected to occur in August 2015.

The Transaction is a key component of Enbridge’s Financial Strategy Optimization introduced in December of last year which included an increase in the Company’s targeted dividend payout. It advances the Company’s sponsored vehicle strategy and supports Enbridge’s previously announced 33 percent dividend increase in 2015 and expected annual average dividend per share (DPS) growth of 14 to 16 percent from 2016 through to 2018. It also positions Enbridge to extend its industry leading DPS growth beyond 2018. The Transaction is expected to provide Enbridge with an alternate source of funding for its enterprise wide growth initiatives and enhance its competitiveness for new organic growth opportunities and asset acquisitions.

The transaction (often referred to as the dropdown), and its resultant rating agency unhappiness with the company, was discussed on PrefBlog in December, 2014. Now it has advanced a step and the first thing that happened was a downgrade from S&P:

  • •We are lowering our ratings on Calgary, Alta.-based Enbridge Inc. (EI), Enbridge Pipelines Inc. (EPI), and Toronto-based Enbridge Gas Distribution Inc. (EGD), including our long-term corporate credit rating on each to ‘BBB+’ from ‘A-’.
  • •We are also lowering our corporate credit rating on Houston-based Enbridge Energy Partners L.P. (EEP) to ‘BBB’ from ‘BBB+’.
  • •We are removing the ratings from CreditWatch, where they were placed Dec. 4, 2014.
  • •The downgrade reflects our assessment of weak forecast financial metrics at EI.
  • •The announced dropdown transaction of assets to Enbridge Income Fund (EIF) does not change our assessment of business or financial risk profiles at EI, nor does it introduce a sufficient level of subordination to further lower EI debt ratings.
  • •We assess EGD and EPI to be “core” and EEP to be “highly strategic” to EI.


We view Enbridge’s financial risk profile as “aggressive.” The continuing large capital program to expand existing and build new liquids pipelines will continue to pressure financial metrics for the next several years. We forecast adjusted funds from operations (AFFO)-to-debt of 10%-13% under our forecast capital expenditures and financing plans over the next two years. The lower financial risk profile reflects our expectation of lower consolidated funds from operations (FFO)-to-debt ratios that are in the aggressive financial risk profile category using the medial cash flow volatility table. The company has brought large-scale capital projects in service on time and on budget, and we expect this to continue. Financial policy has generally been credit-supportive, although growing capital expenditures from new projects, and the parents support of subsidiary companies with internal equity financing, have shifted to what we believe is a more neutral stance.

A downgrade could occur if AFFO-to-debt stays below 11%, which could result from weaker financial performance, due to mainline volumes falling below expectations, or a more aggressive funding of the large capital program throughout our outlook period.

Maintaining AFFO-to-debt above 15% could result in an upgrade by revising the financial risk profile to “significant” from aggressive.

DBRS was more restrained, changing the status of the Review to Negative from Developing:

DBRS Limited (DBRS) has today changed the status of the following ratings of Enbridge Inc. (ENB) to Under Review with Negative Implications from Under Review with Developing Implications, where they were placed on December 3, 2014:
— Enbridge Inc., Issuer Rating of A (low)
— Enbridge Inc., Medium-Term Notes & Unsecured Debentures rated A (low)
— Enbridge Inc., Cumulative Redeemable Preferred Shares rated Pfd-2 (low)
— Enbridge Inc., Commercial Paper rated R-1 (low)


DBRS expects the combination of the Transaction and the Plan to have a negative impact on ENB’s credit risk profile mainly due to the following factors:

(1) Following completion of the Transaction and the Plan, holders of ENB’s direct external debt would be further away from the cash flow of the assets transferred to EIF (the Transferred Assets). Dividends from the Transferred Assets would be needed to service EIF debt prior to the payment of common dividends to EIFH’s public shareholders and payment of preferred and common share dividends to ENB, the latter of which would be available to meet the obligations to ENB’s external debt and preferred shareholders. Conversely, as part of the Plan, ENB’s direct external debt holders would be closer to EEP’s assets, which would be owned directly by ENB (through EECI) rather than through EPI (and then EECI) following completion of the Plan. For context, however, the Transferred Assets accounted for more than 40% of ENB’s 2014 segment earnings compared with 12% for EEP.

(2) The initial 33% increase in ENB’s common share dividend and its move to a higher dividend payout ratio range (75% to 85% of adjusted earnings, converting to 40% to 50% of available cash flow from operations), combined with the impacts of the Transaction and the Plan, would result in higher consolidated ENB funding needs. Consequently, ENB would be relying more heavily on dividends from (and external funding at) its directly encumbered subsidiaries (including EIF) to finance the direct-to-ENB portion (including its joint ventures with EEP) of the substantial consolidated growth capital expenditure (capex) program over the 2015 to 2018 period. This factor would be at least partly offset by the offloading of at least part of the direct-to-ENB funding needs to EIF. DBRS’s ENB ratings incorporate expected improvement in ENB’s credit metrics on both fully and modified consolidated bases as longer-dated organic growth projects come on-stream and begin to generate cash flow in the later years of its five-year growth capex program.

Based on its review to date, DBRS expects to downgrade all of ENB’s ratings by one notch, with Stable trends, upon completion of the Transaction; therefore, DBRS believes that Under Review with Negative Implications is the appropriate rating action at this time.

Moody’s had nothing to say but the Outlook remains Negative.

Affected issues are: ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y.

June 18, 2015

June 18th, 2015

The Greek tragedy is approaching a climax:

The European Central Bank plans to hold an emergency session of its Governing Council on Friday to discuss the deteriorating liquidity situation of Greek banks, three people familiar with the matter said.

The call is scheduled for noon Frankfurt time on Friday, and the officials will consider a Bank of Greece request for an increase of more than 3 billion euros in Emergency Liquidity Assistance, one of the people said. All three asked not to be identified as the plans aren’t public. An ECB spokesman declined to comment.

The request comes just a day after Greece received an increase in its liquidity line of 1.1. billion euros ($1.25 billion), which raised the limit to 84.1 billion euros.

The short interval may be a signal that deposit flight is accelerating as the latest bailout talks ended without progress on Thursday.

Frankly, I’m surprised that there’s any money left in the Greek banking system to take flight.

And it looks like there’s a lot of internal politicking in Athens:

Prime Minister Alexis Tsipras’s government said there was an effort under way to spur capital flight, with Finance Minister Yanis Varoufakis later accusing the central bank of stoking fears.

The scaremongering seeks to undermine the financial system and strengthen the position of the country’s creditors, a Greek government official said in an e-mail to reporters.

“These tactics facilitate creditors who want to further blackmail the Greek government,” the official said in the statement. “Greece won’t be blackmailed.”

Further to the discussion of the OSC’s Brondesbury Report on June 16, today saw the publication of the Kenmar Commentary on CSA Fund Fee Report. This polemic does not address the question of new issue commissions, proxy solicitation fees, the willingness of small investors to pay advisors directly or the effects on capital markets of a change in fee schedules; changes are advocated as a method of smuggling in the concept of fiduciary duty.

On a related note, Michael P Regan of Bloomberg passes on a very bullish prediction on robo-advice:

Their popularity is going to explode even more, if new projections from consulting firm A.T. Kearney are in the right ballpark. Assets under management by robo advisers are estimated to increase 68 percent annually to about $2.2 trillion in five years, according to a forecast from the firm. About half of that is expected to come from money that’s already invested and the rest from non-invested assets.

As far as I can tell, Bloomberg just got a review copy of the paper; while the A.T. Kearney website features a front page link to the Bloomberg piece, the paper itself does not appear to be on the site.

I can’t resist passing on another shot at supply management:

Faced with a stagnant domestic market, Montreal-based Saputo Inc. and other major Canadian dairy producers have been investing heavily outside the country, where growth opportunities are better. This has exacerbated the skim milk surplus because dairies aren’t expanding their Canadian production of butter, cream or milk powder.

Martha Hall Findlay, a former Liberal MP and fellow at the University of Calgary School of Public Policy, said the real victims of the wastage are low-income Canadians, who aren’t getting the benefit of lower prices.

In a free market, surpluses would typically lead to lower consumer prices, but that isn’t the case in Canada because prices are fixed, she pointed out. “The system can’t accommodate fluctuations in demand,” said Ms. Findlay, who has written a series of reports advocating the dismantling of the supply management system.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts losing 59bp, FixedResets off 5bp and DeemedRetractibles down 14bp. PerpetualDiscounts are, predictably, overweighted in the bad part of the Performance Highlights table, while FixedResets are conspicuous on both sides. Volume was slightly above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150618
Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.36 to be $0.73 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.49 cheap at its bid price of 14.78

impVol_MFC_150618
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule). Note that the lowest spread issue, MFC.PR.F, is again clearly off the line defined by the other issues.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.70 to be $0.53 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.40 to be $0.44 cheap.

impVol_BAM_150618
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.53 to be $0.94 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.50 and appears to be $0.65 rich.

impVol_FTS_150618
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $0.40 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.50 and is $0.25 rich.

pairs_FR_150618
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.35%, including the outliers TRP.PR.A / TRP.PR.F at -0.54% and FTS.PR.H / FTS.PR.I at +0.95%. On the junk side there’s only one outlier: FFH.PR.E / FFH.PR.F at -0.93%.

pairs_FF_150618
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 1.8845 % 2,210.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.8845 % 3,865.2
Floater 3.50 % 3.52 % 63,308 18.49 3 1.8845 % 2,350.1
OpRet 4.45 % -8.98 % 24,337 0.08 2 -0.0987 % 2,780.2
SplitShare 4.59 % 4.89 % 71,608 3.28 3 0.2956 % 3,249.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0987 % 2,542.2
Perpetual-Premium 5.45 % 4.77 % 59,653 4.92 19 0.1160 % 2,518.2
Perpetual-Discount 5.18 % 5.12 % 117,337 15.22 15 -0.5936 % 2,716.4
FixedReset 4.52 % 3.88 % 241,212 16.36 88 -0.0527 % 2,344.4
Deemed-Retractible 5.01 % 3.40 % 112,577 0.77 34 -0.1441 % 2,623.7
FloatingReset 2.52 % 2.93 % 58,555 6.11 9 0.0590 % 2,337.5
Performance Highlights
Issue Index Change Notes
HSE.PR.A FixedReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 4.41 %
BAM.PF.C Perpetual-Discount -1.79 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.44
Evaluated at bid price : 21.44
Bid-YTW : 5.68 %
CU.PR.G Perpetual-Discount -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.82
Evaluated at bid price : 22.11
Bid-YTW : 5.12 %
SLF.PR.G FixedReset -1.72 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.03
Bid-YTW : 7.80 %
BAM.PF.D Perpetual-Discount -1.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.62
Evaluated at bid price : 21.94
Bid-YTW : 5.59 %
GWO.PR.G Deemed-Retractible -1.59 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.21
Bid-YTW : 5.64 %
ENB.PR.F FixedReset -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 5.03 %
RY.PR.H FixedReset -1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 22.36
Evaluated at bid price : 23.06
Bid-YTW : 3.65 %
BAM.PR.N Perpetual-Discount -1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.20
Evaluated at bid price : 21.20
Bid-YTW : 5.63 %
ENB.PR.H FixedReset -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 17.05
Evaluated at bid price : 17.05
Bid-YTW : 4.84 %
PWF.PR.P FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 18.34
Evaluated at bid price : 18.34
Bid-YTW : 3.69 %
FTS.PR.J Perpetual-Discount -1.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.28
Evaluated at bid price : 23.65
Bid-YTW : 5.04 %
IFC.PR.A FixedReset -1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.47
Bid-YTW : 6.32 %
IFC.PR.C FixedReset -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 4.65 %
ENB.PF.E FixedReset -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 19.85
Evaluated at bid price : 19.85
Bid-YTW : 4.90 %
TRP.PR.E FixedReset -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 22.18
Evaluated at bid price : 22.77
Bid-YTW : 3.90 %
BAM.PF.F FixedReset 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.04
Evaluated at bid price : 24.50
Bid-YTW : 3.99 %
TRP.PR.G FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.11
Evaluated at bid price : 24.93
Bid-YTW : 3.83 %
BAM.PF.E FixedReset 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 22.02
Evaluated at bid price : 22.55
Bid-YTW : 4.15 %
TRP.PR.D FixedReset 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.91
Evaluated at bid price : 22.31
Bid-YTW : 3.94 %
TRP.PR.B FixedReset 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 14.78
Evaluated at bid price : 14.78
Bid-YTW : 3.88 %
BAM.PR.K Floater 1.44 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.53 %
FTS.PR.I FloatingReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 16.50
Evaluated at bid price : 16.50
Bid-YTW : 3.14 %
BAM.PR.B Floater 1.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 14.46
Evaluated at bid price : 14.46
Bid-YTW : 3.44 %
MFC.PR.L FixedReset 1.79 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 4.71 %
BAM.PR.C Floater 2.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 14.15
Evaluated at bid price : 14.15
Bid-YTW : 3.52 %
Volume Highlights
Issue Index Shares
Traded
Notes
HSE.PR.G FixedReset 250,190 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.01
Evaluated at bid price : 24.59
Bid-YTW : 4.54 %
TD.PF.E FixedReset 192,193 TD crossed blocks of 100,000 and 75,000, both at 25.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.15
Evaluated at bid price : 25.04
Bid-YTW : 3.73 %
GWO.PR.F Deemed-Retractible 100,938 Scotia crossed 100,000 at 25.42.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-18
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : -15.19 %
BMO.PR.Y FixedReset 100,072 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 23.03
Evaluated at bid price : 24.66
Bid-YTW : 3.69 %
BMO.PR.L Deemed-Retractible 90,150 Nesbitt crossed 84,100 at 25.71.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-07-18
Maturity Price : 25.50
Evaluated at bid price : 25.70
Bid-YTW : 0.68 %
BMO.PR.R FloatingReset 68,382 TD crossed 65,000 at 24.15.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.11
Bid-YTW : 2.83 %
There were 38 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.N FixedReset Quote: 22.60 – 23.60
Spot Rate : 1.0000
Average : 0.6362

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.60
Bid-YTW : 4.85 %

HSE.PR.A FixedReset Quote: 16.00 – 16.47
Spot Rate : 0.4700
Average : 0.3318

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 4.41 %

TD.PF.A FixedReset Quote: 23.38 – 23.78
Spot Rate : 0.4000
Average : 0.2729

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 22.52
Evaluated at bid price : 23.38
Bid-YTW : 3.60 %

MFC.PR.F FixedReset Quote: 17.39 – 17.83
Spot Rate : 0.4400
Average : 0.3207

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.39
Bid-YTW : 7.04 %

BAM.PF.C Perpetual-Discount Quote: 21.44 – 21.76
Spot Rate : 0.3200
Average : 0.2027

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-18
Maturity Price : 21.44
Evaluated at bid price : 21.44
Bid-YTW : 5.68 %

IFC.PR.C FixedReset Quote: 23.25 – 23.75
Spot Rate : 0.5000
Average : 0.3856

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.25
Bid-YTW : 4.65 %

June 17, 2015

June 18th, 2015

The big news of the day was the FOMC statement:

Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

There were no dissents. Other information released indicates that the committee is dovish:

For Federal Reserve officials, the U.S. economy is a glass house where aggressive moves could break something.

While the median forecast of policy makers still calls for two interest-rate increases by year-end, more officials say just one would be enough in 2015. Still more advocate a go-slow approach to further tightening in 2016.

Projections from the Federal Open Market Committee published Wednesday showed that five officials foresee one increase in the federal funds rate this year, up from just a single policy maker who said so in March. And while policy makers said the economy has picked up after a first-quarter slump, Fed Chair Janet Yellen said she still wants to see more “decisive” evidence of a lasting turnaround.

At her press conference following the FOMC meeting, Yellen cited signs of “cyclical weakness” in the labor market, and noted wage growth remains “subdued.”

“Although progress clearly has been achieved, room for further improvement remains,” Yellen said. “Economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases in the target federal funds rate.”

As a result:

Treasuries climbed and the dollar weakened against the euro after the Federal Reserve revised down its outlook for interest rates amid fragile economic conditions.

Yields on 10-year U.S. notes fell four basis points to 2.28 percent by 11:05 a.m. in Tokyo, with rates on Japanese and Australian debt also down. The greenback weakened to $1.1362 per euro and slipped 0.2 percent versus the yen.

Back in April, Natixis Global Asset Management (parent of NexGen Financial) released the results of a poll of Canadian investors:

The majority of those surveyed (54%) say they fear future oil price drops, 61 percent admit they are not willing to take more investment risk compared to a year ago and 59 percent said they feel vulnerable when it comes to protecting their portfolios from market shocks.

Besides oil prices, investors’ other concerns include a worldwide economic slowdown (cited by 54%), slower global growth (39%) and higher interest rates (37%).

Despite the economic challenges, 88 percent of Canadian investors believe their current approach will enable them to have a steady income when they retire. To get there, investors say their portfolio needs to gain an average of 9.3 percent annually, over and above inflation, the survey found. Eighty percent of investors think their target is realistic.

Retirement remains the top financial priority, and most investors (57%) say the responsibility of funding retirement is falling increasingly to individuals and away from government- and employer-sponsored schemes.

They anticipate 50 percent of their retirement income will come from their own efforts – saving, investing, selling their home or business or picking up a job after retiring. Of the rest of their retirement income, 26 percent would come from an employer pension, 18 percent from government support and 6 percent from other sources (including support from children).

Natixis surveyed 250 individual investors across Canada with a minimum of C$256,460 (US$205,230) in investable assets. The online survey was conducted in February 2015 and is part of a larger global study of 7,000 investors in 17 countries from Europe, the Americas and the Middle East. The findings are published in a new whitepaper, “Close enough isn’t good enough.” For more information, visit durableportfolios.com.

9.3% annual returns, over and above inflation? Good luck with that!

The global summary has an amusing section on retirement expectations:

When asked at what age they would like to retire, younger investors are clearly focused on early retirement: Millennials say age 58, while Generation X say 62. When asked when they think they will actually retire, their aspirations moderate only slightly at age 60 and age 63 respectively.

Asked the same questions, Baby Boomers say age 68 on both counts. Pre-Boomers respond with 73 on both counts. In reality, for members of those generations who are already retired, the day came much earlier at age 59 and 63 respectively.

… but respondents have a Plan B:

Should they fall short on their retirement savings, investors have clear plans on how they will make up the difference. The largest number (45%) say employment will be the answer, followed by support from their spouse or significant other (36%), government programs (35%), and family (23%).

And finally, there’s a little section on the value of advice:

valueOfAdvice
Click for Big

Now, this study is hardly up to academic standards – it’s in Natixis’ best interests to convince everybody (particularly those with over $200,000 in investible assets) that they need an advisor and they need alternative investments. But I suspect that meticulously unbiased research would give similar results.

And it is, perhaps, these unrealistic expectations and the expectation of government support that is driving the trend towards enhanced public pension plans, both in Ontario (as discussed May 1, 2014; also see the official ORPP website) and in the States:

The U.S. retirement system is a failure, in at least one respect: Half of private-sector workers have no access to a 401(k) or a pension plan on the job, so millions of Americans have scant retirement savings or none at all. To retire, they’ll need to rely on programs such as Social Security and Medicaid.

The federal government has done little to get more Americans saving for retirement. In December the White House launched a pilot program called myRA (My Retirement Account), an individual retirement account (or IRA) set up through an employer’s payroll system and aimed at low-income workers. But participation is voluntary, and Congress has gotten nowhere with bills proposed to encourage workplace retirement plans.

So the states are stepping up. This month, an Illinois law went into effect that would give a state-run IRA to all employees of companies with at least 25 people on staff who don’t have their own retirement plan. Workers would automatically be signed up to contribute 3 percent of their salary to the IRA and could opt out or adjust their contribution. The system is scheduled to be up and running by June 2017.

California is working on a similar plan, and on Tuesday the Oregon State Senate sent the governor a bill requiring automatic IRAs at private employers by July 2017. By early next year, Connecticut officials must finish a study, mandated by the state legislature, of how feasible a state-run retirement plan would be there. There are advocates for similar plans in at least a dozen other state legislatures.

Separately, we are told that employees are idiots:

Canadians are missing out on billions of dollars of potential retirement savings every year by not taking full advantage of matching contributions by their employers in group RRSP and defined contribution retirement plans.

Tom Reid of Sun Life Financial estimates more than $3-billion a year of potential company contributions go unmade because employees don’t make the required matching contributions to obtain them.

A survey by Great-West Life found significant numbers of respondents weren’t taking advantage of voluntary plans. It found a 79 per cent participation rate for voluntary DC plans and just 51 per cent for voluntary group RRSPs in 2014.

Meanwhile there is a call to eliminate Canada Savings Bonds:

The private sector already offers various savings products, backed by deposit insurance, according to a report prepared by KPMG LLP for the Canadian Finance Department. Canadian households appear to like those options better, as the stock of retail debt outstanding in the Canada Savings Bond program plummeted to just under 8 billion Canadian dollars ($6.5 billion) in 2013 from a 1987 level of C$55 billion. That’s an average decline of C$1.8 billion a year.

“There is currently no valid economic rationale for the retail debt program,” KPMG said. “Outstanding stock is expected to reach a level where, despite all the recent accomplishments in cost reduction, it will be difficult to justify the existence of the program either on economic grounds, on participation levels, or as a share of retail debt outstanding to market debt.”

A spokeswoman for Canada’s Finance Department said the Canada Savings Bonds Program would be maintained in its current format, while officials would look at potential ways to reduce the scheme’s costs. The spokeswoman said more than a million Canadians still purchase securities from the program, “demonstrating their continuing interest” in the program.

The U.S. and Germany have essentially terminated their retail debt programs, which like the Canadian one were created to provide citizens with a guaranteed savings instrument in an era when the retail banking sector was underdeveloped, and there was no such mechanism as deposit insurance. In Germany’s case, it concluded it could no longer issue a cost-effective rate that would attract retail investor interest.

I love the official response. It must be nice to be in government and never have to show any intellectual integrity at all!

The actual report includes a fascinating graph:

CSBsOutstanding
Click for Big

In terms of spread:

We notice that the CPB rate is tracking closely the 3-year benchmark Government of Canada bond since 2008 with a spread ranging between minus 20 to plus 60 basis points (bps) leaving little or no margin to offset unit administration and option costs (see Chart 6). Likewise, the CSB rate, even with spreads ranging from 10 to 70 bps compared to the 1 year treasury bill rate since 2009 does not leave enough margin to cover unit administration and option costs.

In terms of cost:

Today, the operating costs of the Retail Debt Program at $58 million are equivalent to the yearly interest costs (approx. $58 million) on the outstanding stock of retail debt (see Chart 7). Of course this relation may change in the future, based on the evolution of interest rates and changes in the cost structure. It is nevertheless an interesting snapshot putting the overall costs of the Retail Debt Program in perspective.

The largest component of the operating costs for the Retail Debt Program is the HP back-office operations which stand at $36 million or 62% of the expenses.

Given all the recent fuss, one wonders whether some aspects of the programme will be changed …

Introduced in 1997 by Canada Investment and Savings Agency (CI&S), trailer fees were discontinued in the fall of 2010 and replaced by an up-front 35 bps commission. This proved a significant cost reduction measure. Beforehand, financial institutions benefitted from annual trailer fees of 23 bps until maturity. In 2009 trailer fees accounted for 93% of total commissions to financial institutions.

Based on the pre-2000 issues still outstanding and on the estimated pace of redemptions, trailer fees are expected to end in 2019-2020. We estimate that in 2012-2013 they still represent approximately 92% of the commission expense as this would be consistent with $3.5 billion of outstanding debt still being subject to the 23 bps trailer fee (see Table 4).

KPMG makes one recommendation I really like … but it comes with a warning label!

Consider making the Retail Debt Program totally internet-based, with no intermediaries: This is the current US model, and the phase-in would likely be very expensive. With respect to the US example, it should be noted that the infrastructure they built behind their Treasury Direct website is mostly used for individuals purchasing retail sizes of wholesale US Treasury securities.

It’s surprisingly difficult to find information on the size of the Treasury Direct retail programme; if anybody knows where I can get this information, let me know!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets off 8bp and DeemedRetractibles gaining 6bp. FixedResets continue to dominate the Performance Highlights table at both ends. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

impVol_TRP_150617
Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.00 to be $0.87 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.63 cheap at its bid price of 14.58

impVol_MFC_150617
Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.60 to be $0.44 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.50 to be $0.41 cheap.

impVol_BAM_150617
Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.41 to be $0.94 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 17.82 and appears to be $0.61 rich.

impVol_FTS_150617
Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.52, looks $0.43 cheap and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 21.95 and is $0.16 rich.

pairs_FR_150617
Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.40%, including the outlier TRP.PR.A / TRP.PR.F at -0.37%. On the junk side, three of the six currently extant pairs are outside the range of the graph: DC.PR.B / DC.PR.D at -0.22%; AZP.PR.B / AZP.PR.C at +1.01%; and FFH.PR.E / FFH.PR.F at -0.86%.

pairs_FF_150617
Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -1.4111 % 2,169.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.4111 % 3,793.8
Floater 3.57 % 3.58 % 63,853 18.35 3 -1.4111 % 2,306.6
OpRet 4.44 % -11.38 % 23,529 0.08 2 0.1979 % 2,782.9
SplitShare 4.60 % 4.91 % 69,262 3.28 3 0.0538 % 3,239.7
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1979 % 2,544.7
Perpetual-Premium 5.46 % 4.92 % 58,688 4.92 19 0.0477 % 2,515.3
Perpetual-Discount 5.14 % 5.11 % 118,950 15.24 15 -0.2108 % 2,732.6
FixedReset 4.52 % 3.85 % 243,492 16.30 88 -0.0803 % 2,345.7
Deemed-Retractible 5.00 % 3.26 % 111,233 0.68 34 0.0572 % 2,627.5
FloatingReset 2.52 % 2.91 % 56,090 6.11 9 -0.0590 % 2,336.1
Performance Highlights
Issue Index Change Notes
BAM.PR.C Floater -1.78 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 13.80
Evaluated at bid price : 13.80
Bid-YTW : 3.61 %
BAM.PR.K Floater -1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 13.90
Evaluated at bid price : 13.90
Bid-YTW : 3.58 %
MFC.PR.F FixedReset -1.48 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 17.35
Bid-YTW : 7.07 %
MFC.PR.N FixedReset -1.35 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.67
Bid-YTW : 4.81 %
PWF.PR.T FixedReset -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 23.35
Evaluated at bid price : 25.16
Bid-YTW : 3.40 %
TD.PF.A FixedReset -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 22.43
Evaluated at bid price : 23.20
Bid-YTW : 3.63 %
BMO.PR.S FixedReset -1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 22.63
Evaluated at bid price : 23.52
Bid-YTW : 3.63 %
BAM.PR.R FixedReset -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 19.41
Evaluated at bid price : 19.41
Bid-YTW : 4.39 %
SLF.PR.G FixedReset 1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.31
Bid-YTW : 7.58 %
TRP.PR.E FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 22.31
Evaluated at bid price : 23.00
Bid-YTW : 3.85 %
HSE.PR.E FixedReset 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 23.11
Evaluated at bid price : 24.81
Bid-YTW : 4.49 %
FTS.PR.K FixedReset 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 21.35
Evaluated at bid price : 21.35
Bid-YTW : 3.80 %
FTS.PR.G FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 21.70
Evaluated at bid price : 21.95
Bid-YTW : 3.70 %
HSE.PR.A FixedReset 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 16.32
Evaluated at bid price : 16.32
Bid-YTW : 4.32 %
MFC.PR.K FixedReset 1.65 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.75
Bid-YTW : 4.62 %
Volume Highlights
Issue Index Shares
Traded
Notes
HSE.PR.G FixedReset 966,420 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 23.01
Evaluated at bid price : 24.59
Bid-YTW : 4.54 %
ENB.PR.P FixedReset 129,554 RBC crossed 111,800 at 18.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 18.51
Evaluated at bid price : 18.51
Bid-YTW : 4.91 %
MFC.PR.L FixedReset 93,106 TD crossed 50,000 at 22.70. RBC crossed 40,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.30
Bid-YTW : 4.94 %
BMO.PR.R FloatingReset 92,925 TD crossed blocks of 27,500 and 60,000, both at 24.15.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.15
Bid-YTW : 2.80 %
NA.PR.Q FixedReset 59,010 TD crossed 58,500 at 25.25.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 3.51 %
MFC.PR.J FixedReset 52,700 RBC crossed 50,000 at 24.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.60
Bid-YTW : 3.95 %
There were 33 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.M FixedReset Quote: 23.07 – 24.00
Spot Rate : 0.9300
Average : 0.5832

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.07
Bid-YTW : 4.65 %

TRP.PR.F FloatingReset Quote: 18.55 – 19.28
Spot Rate : 0.7300
Average : 0.4375

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 18.55
Evaluated at bid price : 18.55
Bid-YTW : 3.40 %

RY.PR.K FloatingReset Quote: 24.51 – 24.98
Spot Rate : 0.4700
Average : 0.3561

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.51
Bid-YTW : 2.84 %

BAM.PF.G FixedReset Quote: 24.27 – 24.57
Spot Rate : 0.3000
Average : 0.2017

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 22.89
Evaluated at bid price : 24.27
Bid-YTW : 4.04 %

MFC.PR.N FixedReset Quote: 22.67 – 23.00
Spot Rate : 0.3300
Average : 0.2374

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.67
Bid-YTW : 4.81 %

BAM.PR.R FixedReset Quote: 19.41 – 19.73
Spot Rate : 0.3200
Average : 0.2276

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 19.41
Evaluated at bid price : 19.41
Bid-YTW : 4.39 %

HSE.PR.G Soft On Good Volume

June 17th, 2015

Husky Energy has announced that it:

has completed its recently announced public offering of 6,000,000 Cumulative Redeemable Preferred Shares, Series 7 (the “Series 7 Shares”) with a syndicate of underwriters led by RBC Capital Markets, BMO Capital Markets and Scotia Capital Inc.

The aggregate gross proceeds to Husky from the completed offering are $150 million.

The net proceeds of the offering will be used for general corporate purposes which may include, among other things, the partial repayment of bank debt incurred by the Company to further advance its near-term heavy oil thermal projects.

The Series 7 Shares were offered by way of prospectus supplement to the short form base shelf prospectus of Husky Energy dated February 23, 2015.

Holders of the Series 7 Shares are entitled to receive a cumulative quarterly fixed dividend yielding 4.60 percent annually for the initial period ending June 30, 2020. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.52 percent.

Holders of Series 7 Shares will have the right, at their option, to convert their shares into Cumulative Redeemable Preferred Shares, Series 8 (the “Series 8 Shares”), subject to certain conditions, on June 30, 2020 and on June 30 every five years thereafter. Holders of the Series 8 Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill rate plus 3.52 percent.

The Series 7 Shares are listed on the Toronto Stock Exchange under the symbol HSE.PR.G.

HSE.PR.G is a FixedReset, 4.60%+352, announced June 9. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,051,829 shares today (consolidated exchanges) in a range of 24.50-73 before closing at 24.59-60. Since announcement date the FixedReset subindex is down just a hair over 1%, so the weakness in this issue is not fully explained by market movement. Vital statistics are:

HSE.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-06-17
Maturity Price : 23.01
Evaluated at bid price : 24.59
Bid-YTW : 4.54 %

Similarly to the analysis of announcement day, the chart of Implied Volatility for the series of HSE FixedResets indicates that the new issue can be thought of as being a little cheap because the Implied Volatility seems a little high, indicating that there is, perhaps, a little bit more downside protection with the higher-spread issues than with the lower-spread issues.

impVol_HSE_150617
Click for Big

Update, 2015-6-18: Rated Pfd-2(low) by DBRS.