July 17, 2014

July 18th, 2014

The Canadian Bond Investors Association has been mocked on PrefBlog on March 10 – at that time I said:

Yes, it will be a better world, as soon as there are more rules, more red tape, more regulators and more lawyers. It never occurs to any of these clowns that they have a choice regarding what to buy; if big enough, they can even approach issuers themselves with a proposal for a private placement.

… and again on March 14 (it was a good week):

Assiduous Readers will recognize that these are the same box-tickers who want bond covenants standardized in order to reduce the chance they might have to read a term sheet and, even worse, have to take a view on the value difference between slightly different covenants, as discussed on March 10.

… and now they are back in the news with more pathetic whimpering:

Royal Bank provided investors with insufficient information on short notice before its July 11 sale of C$1 billion ($930 million) in subordinated notes that can convert to equity, the first in Canada to comply with new international banking rules, The Canadian Bond Investors Association said in a letter yesterday to provincial securities regulators. Toronto-based Royal Bank said it met all requirements.

This time, however, there was an immediate rejoinder:

“The buyers could have gone on strike and not bought this,” said David Beattie, senior credit officer at Moody’s Investors Service, said by phone from Toronto.

Royal Bank “met all legal and regulatory requirements in issuing this transaction,” Sandra Nunes, a spokeswoman for the company, said in an e-mail yesterday. “The deal was well oversubscribed, and it has performed well in the secondary market.”

Since the July 11 sale at a yield of 152 basis points, or 1.52 percentage points, more than Canadian government debt, the spread on the Royal Bank bonds has narrowed to about 146 basis points, according to data compiled by Bloomberg.

My Lord. The fact that the obvious was pointed out (by David Beattie) is almost as astonishing as the fact that Bloomberg – which covers the world – did a better job than the Globe and Mail on reporting the issue. However, the Bloomberg / G&M comparison is old news. However, the G&M article is enhanced by a comment from “ontario7″, who must be some kind of genius:

If you don’t like the way bond is structured, then don’t buy it.

And look as the quoted spread! The issue has an initial coupon of 3.04%, so the spread is being quoted over five-year Canadas. Like I said, the sub-debt market consists of the sleazy selling to the stupid, so it’s no wonder the CBIA is confused.

So anyway, I looked up the CBIA admission of incompetence (bolding added):

In order to foster robust capital markets, the CBIA strongly advocates that issuers follow best practices, especially when marketing new issuers and new structures. Best practices for new debt structures include furnishing all material documents on a timely basis and with a minimum of three business days before pricing. They also include providing public investor calls with a scheduled opportunity for questions and answers and allowing rating agencies to provide preliminary reports. We believe these best practices are important for institutional investors to meet their fiduciary duty to clients. We believe that securities regulators share this view, and in fact demand this of investment managers they register.

The RBC NVCC issue of July 11, 2014 fell short of a number of these best practices. The syndicate provided only a brief, pre-recorded net roadshow to investors less than two days ahead of the deal and provided no opportunity to ask questions on the public call. When the deal came to market, no final rating agency comments were available to potential investors and only “expected” ratings were listed on the term sheet. The CBIA believes this is not in line with best practices when a deal of this significance is in the market involving an instrument that is new to institutional investors.

In our April 8, 2013 letter, the CBIA requested improved disclosure procedures during the new issue process. In our letter we wrote:

“Investors are often afforded insufficient time to review key terms and conditions of bond indentures when an issue comes to market.”

Further, we offered:

“As a minimum more time is required for review of indentures. For new issuers we believe that a minimum of three working days should be allowed for investors to review final form indentures and prospectus supplements and to disclose concerns with legal counsel.”

In summary, we ask that the Canadian securities regulators look at the new issue process for this security and whether it was appropriate in the circumstances.

So, in other words, the CBIA is able to chant the slogan “We believe these best practices are important for institutional investors to meet their fiduciary duty to clients”, but is unable to make the giant leap to the awesome concept that if you don’t feel you have enough information regarding a security to meet your fiduciary duty to clients YOU DON’T FUCKEN BUY THE SECURITY. The new issue was discussed on PrefBlog.

To be fair however, they did write an entirely sensible letter addressed to the Ministry of Finance, Bank of Canada and OSFI regarding bail-in debt:

We are writing to respectfully urge the Department of Finance to expedite the process for providing clarity on the “Bail-In” framework.

The CBIA formally commented to the Office of the Superintendent of Financial Institutions in a letter dated January 23, 2012 (attached). We stated that clarity on a regulatory regime guiding the “bail-in” of senior unsecured bank instruments and a full picture of the regulatory landscape are important to have in place ahead of NVCC issuance to allow proper risk assessment and pricing considerations. While there has been progress on some areas addressed in our letter, the critical issue of bail-in debt has not been addressed, thus leaving institutional fixed income investors in an uncomfortable position when evaluating NVCC instruments.

A worthy effort, but good luck with that. OSFI has been dragging its heels on the Life Insurance Regulatory Framework for literally years now, and Assiduous Readers will be well aware of how that has distorted pricing of preferred shares amongst Bank issues, insurance issues and unregulated issues.

There’s an interesting discussion of Maple bonds and liquidity from 2010:

EUROWEEK: How much of a concern is the lack of liquidity in the secondary market?

Lumb, CBA: You need to have at least three managers to make sure investors are confident of being able to trade some of their positions. Historically, the Maple market has always needed more managers than most. Having one just would not work.

DeRosa, MetLife: We see the liquidity in the bond market becoming increasingly more robust. Our efforts to augment our relationships with investors and dealers will help somewhat, as will our outreach to investors on the merits of our programme.

Costanzo, TD Securities: Secondary liquidity is key to any market’s success. If no one needed a secondary market, issuers would simply call investors directly and do a trade between themselves. But banks are involved in the process to commit balance sheet and provide a secondary market. That’s one of our core roles. What will be key to the continued development of the Maple market will be getting more international investors on board. This will provide an increased flow in the bonds as international investors will have different motivations to buy/sell — i.e. currency fluctuations — and therefore further the diversification and depth of the market. For this to happen, international investors need to have a reason to be involved. Canada is already very highly regarded by the global investment community. The currency story continues to be an attractive one. It would prove an even more attractive investment if yields were higher and more like the levels attainable in the Kangaroo market, which are currently about 300bp higher.

Marjaee, MFC Global: Secondary liquidity is a big issue. It was much better for some issues last year. There is still illiquidity when it comes to some subordinated bonds, especially when there is uncertainty about whether something will be called or extended. The recent deals have had hard maturities. We like that. It leaves no options on the table for the issuer, especially if the issue is priced to the shorter date and expectations have been created for the deal to be called. Liquidity has been good with the CBA issue.

Regrettably, the Maple bond market remains tiny. Even more regrettably, the regulatory push to reduce liquidity is succeeding:

CanPX, Canada’s government-mandated bond-market information service, will make trade prices freely available on its website amid a review by regulators concerned that smaller investors don’t have access to the data.

The for-profit joint venture of Canada’s major bond dealers and interdealer brokers has begun posting the previous day’s price and yield highs, lows and closing levels for all 340 corporate securities it tracks, CanPX said in a statement.

The move follows the Canadian Securities Administrators’ announcement last month it would review transparency in the C$390 billion ($363 billion) corporate bond market. The group, a coalition of Canada’s provincial and territorial securities regulators, questioned whether the private-sector model led by CanPX was working, and if more active regulation is needed.

A good chunk of government bonds have gone abroad:

Foreigners made their largest purchase of Canadian securities in two years in May, led by demand for provincial and federal government bonds.

The net purchases worth C$21.4 billion ($19.9 billion) in May included C$15.9 billion of bonds, and were more than double the April total, Statistics Canada said today in Ottawa.

Demand for bonds was led by a net C$6.3 billion purchase of provincial debt, the biggest since April 2009. Non-Canadian investors also bought C$6.9 billion of federal government debt, the most since May 2012 after sales of C$15.4 billion over the five prior months.

But government bonds did very well today:

Treasury (USGG2YR) 10-year notes rallied the most since March as reports of a Malaysian plane being shot down in eastern Ukraine and Israel’s military starting ground operations in the Gaza strip boosted refuge demand.

Thirty-year bond yields fell to the lowest level in more than a year after a Malaysian Boeing 777 with 295 aboard crashed near the Russian-Ukraine border added to to haven appeal linked to expanded sanctions against Russia for support of separatist rebels. The difference between five- and 30-year yields narrowed to the least since 2009 a day after Federal Reserve Chair Janet Yellen told lawmakers monetary stimulus is still needed, while increases in interest rates may occur sooner if the economy accelerates.

The 10-year yield dropped eight basis points, or 0.08 percentage point, to 2.45 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader Prices. The 2.5 percent notes maturing in May 2024 added 22/32, or $6.88 percent $1,000 face amount, to 100 15/32. The yield fell as much as nine basis points, the most since March 13.

U.S. 30-year yield fell seven basis points to 3.27 percent, touching the lowest level since June 2013.

According to CBid, closed at a startling 1.48% today.

Parakeet Poluz is hinting that low rates may be here to stay:

Bank of Canada Governor Stephen Poloz says the central bank may discuss the interest rate that would keep the economy at full output, a rate he said has been lowered following the global recession.

The central bank is researching what economists call a neutral interest rate, and will discuss the issue in the next quarterly economic forecast paper due in October, Poloz said in an interview aired today on CBC Radio’s “The Current” program.

Despite the fireworks in the government bond market, it was a relatively poor day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets flat and DeemedRetractibles off 4bp. Volatility was good. Volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.14 % 3.14 % 21,072 19.40 1 0.7158 % 2,534.0
FixedFloater 4.17 % 3.39 % 29,131 18.66 1 0.0000 % 4,163.9
Floater 2.84 % 2.93 % 45,730 19.92 4 0.1352 % 2,791.8
OpRet 4.01 % -8.29 % 79,620 0.08 1 0.2350 % 2,729.6
SplitShare 4.26 % 3.97 % 46,056 4.03 6 -0.0266 % 3,111.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2350 % 2,496.0
Perpetual-Premium 5.52 % -3.71 % 80,166 0.09 17 0.0069 % 2,429.9
Perpetual-Discount 5.23 % 5.16 % 107,143 15.22 20 -0.0851 % 2,581.0
FixedReset 4.38 % 3.59 % 199,468 4.60 77 0.0000 % 2,563.4
Deemed-Retractible 4.98 % 0.21 % 123,742 0.11 43 -0.0360 % 2,552.0
FloatingReset 2.66 % 2.08 % 103,091 3.84 6 0.0065 % 2,529.0
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 21.47
Evaluated at bid price : 21.82
Bid-YTW : 3.41 %
TD.PR.P Deemed-Retractible 1.08 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-16
Maturity Price : 25.75
Evaluated at bid price : 26.21
Bid-YTW : -17.99 %
BAM.PR.R FixedReset 1.37 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.91
Bid-YTW : 3.61 %
FTS.PR.H FixedReset 2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 21.47
Evaluated at bid price : 21.80
Bid-YTW : 3.49 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PF.E FixedReset 839,123 New issue settled today.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 4.16 %
CM.PR.M FixedReset 302,941 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.30 %
TD.PR.I FixedReset 241,143 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.63 %
TD.PR.K FixedReset 188,914 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.97 %
ENB.PF.C FixedReset 159,117 TD crossed 115,600 at 25.09.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.18
Evaluated at bid price : 25.16
Bid-YTW : 4.13 %
BNS.PR.M Deemed-Retractible 111,653 Nesbitt crossed 109,200 at 25.88.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-26
Maturity Price : 25.50
Evaluated at bid price : 25.83
Bid-YTW : -8.69 %
There were 31 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
SLF.PR.H FixedReset Quote: 25.70 – 26.10
Spot Rate : 0.4000
Average : 0.2685

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 2.68 %

BNS.PR.B FloatingReset Quote: 25.41 – 25.60
Spot Rate : 0.1900
Average : 0.1176

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 2.09 %

TD.PF.A FixedReset Quote: 25.35 – 25.53
Spot Rate : 0.1800
Average : 0.1098

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.25
Evaluated at bid price : 25.35
Bid-YTW : 3.64 %

CU.PR.C FixedReset Quote: 26.00 – 26.24
Spot Rate : 0.2400
Average : 0.1847

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.74 %

VNR.PR.A FixedReset Quote: 25.64 – 25.91
Spot Rate : 0.2700
Average : 0.2154

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.64
Bid-YTW : 3.53 %

GWO.PR.N FixedReset Quote: 21.37 – 21.55
Spot Rate : 0.1800
Average : 0.1255

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.37
Bid-YTW : 4.78 %

ENB.PF.E Steady On Very Good Volume

July 18th, 2014

Enbridge Inc. has announced:

that it has closed its previously announced public offering of Cumulative Redeemable Preference Shares, Series 13 (the “Series 13 Preferred Shares”) by a syndicate of underwriters led by CIBC World Markets, RBC Capital Markets, Scotiabank, and TD Securities. Enbridge issued 14 million Series 13 Preferred Shares for gross proceeds of $350 million. The Series 13 Preferred Shares will begin trading on the TSX today under the symbol ENB.PF.E. Proceeds will be used to partially fund capital projects, to reduce existing indebtedness and for other general corporate purposes of the Corporation and its affiliates.

ENB.PR.E is a FixedReset, 4.40%+266, announced July 8. It will be tracked by HIMIPref™ and has been assigned to the FixedReset subindex.

The issue traded 1,091,623 shares today (consolidated exchanges) in a tight range of 24.95-00 before closing at 24.95-96, 328×5.

Vital statistics are:

ENB.PF.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-17
Maturity Price : 23.10
Evaluated at bid price : 24.95
Bid-YTW : 4.16 %

July 16, 2014

July 16th, 2014

The regulators’ crack-down on European banks is having the intended effect:

Ignoring the rules has never been so pricey for European lenders, spurring them to hire more people to ferret out wrongdoing and offer salaries more in line with the bankers they police.

“It’s actually a very hot market right now,” said Mike Roemer, who became head of compliance at London-based Barclays Plc (BARC) in January. Today the role is seen “as an integral part of how companies manage the overall risk of the organization,” he said.

After the U.S. extracted almost $12 billion in fines in settlements with France’s BNP Paribas SA (BNP) and Zurich-based Credit Suisse Group AG (CSGN) since May, European firms say they’re overhauling culture and boosting pay for compliance staff faster than for revenue-earning bankers.

The average annual salary for a compliance employee in London rose 12.9 percent to 80,538 pounds ($138,000) in 2013, according to a survey by London-based recruitment firm Astbury Marsden & Partners Ltd. That compares with a 6.1 percent increase to 90,669 pounds for a revenue-generating banker.

No real surprises in the BoC rate announcement:

Total CPI inflation has moved up to around the 2 per cent target in recent months, sooner than expected. Core inflation has also increased but remains below 2 per cent. Recent higher inflation is attributable to the temporary effects of higher energy prices, exchange rate pass-through and other sector-specific shocks, rather than to any change in domestic economic fundamentals.

Given the downgrade to the global outlook, economic activity in Canada is now projected to be a little weaker than previously forecast.

For the inflation target to be achieved on a sustained basis in 2016, the economy must reach and remain at full capacity. Closing the output gap over the time frame described above is reliant on continued stimulative monetary policy and hinges critically on stronger exports and business investment. Meanwhile, the risks associated with household imbalances, while evolving in a constructive way, are still elevated. Weighing these considerations within the Bank’s risk-management framework, the monetary policy stance remains appropriate and the target for the overnight rate remains at 1 per cent. The Bank is neutral with respect to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks.

Today’s PrefBlog Wingnut of the Day Award goes to the authors of a new book:

In their new book, House of Debt, Atif Mian and Amir Sufi argue that out-of-control housing prices tend to inflict long-lasting pain on a country’s economy, but much of that distress can be avoided. The key? Forcing banks and other lenders to share in the ups-and-downs of the real estate cycle by requiring them to bear part of the cost if a housing boom implodes.

The authors, who teach at Princeton and the University of Chicago, respectively, are mostly concerned with the U.S. housing debacle, but their work deserves attention in any country that suspects it, too, may be suffering from real estate dementia.

The two professors propose an idea with far more teeth. They suggest rewriting mortgage contracts so that a homeowner’s payments and principal shrink if an index of local home prices declines. In effect, their system would shove part of the losses onto the shoulders of the mortgage holder. (Yes, in Canada that would be mostly you, Big Six banks.) In return, the lender would get a 5-per-cent slice of any capital gains on the house when it is sold or refinanced.

Wondderful. So my mortgage rate will go up if the bank figures the market will go down, and vice versa. Classic negative convexity, just for starters. I continue to advocate a gradual withdrawal of the government from mortgage insurance and countercyclical capital requirements when the proportion of mortgage assets to financial system assets deviates significantly from historical norms.

There’s some cheerful news for those in the investment management business:

Net flows into U.S. investment accounts were just 1 percent last year. That could create problems when, inevitably, stocks cool off. And if a bear market comes along, managers of funds may face a true reckoning.

The hardest hit will likely be traditional active money managers. They’re being underpriced by cheap passive strategies that hold stocks and bonds based on indexes in mutual funds or exchange-traded funds. Managers of mutual funds are also getting squeezed by a variety of new, more sophisticated strategies, which BCG calls “solutions.” These are options like target-date funds, income funds and global asset allocation funds that operate pretty much on autopilot.

The result is that an elite group of big asset managers, who provide such alternatives, are winning the lion’s share of new dollars. In the U.S., Vanguard Group, famous for its cheap index funds and ETFs, and BlackRock, the world’s largest money manager, together get two of every five new dollars that get invested in the U.S. BCG says the top 10 asset managers make up almost three-quarters of new investment flows.

Short selling is a dangerous game:

A Wall Street trader said Cynk Technology Corp.’s (CYNK) 36,000 percent stock surge cost him his job, and he blames a short squeeze and regulators who didn’t halt the shares before the company’s value shot past $6 billion.

Tom Laresca, a market-maker at Buckman Buckman & Reid Inc., said he was among traders who thought they spotted a scam as the shares jumped to $2.25 last month from pennies. He sold it short last week around $6 — which means selling stock you don’t own with a plan to buy it cheaper soon, pocketing the difference. Laresca figured the Securities and Exchange Commission would suspend trading, sending the price toward zero. Cynk has said it’s a social-network service with no revenue and one employee.

“The stock looked worthless, if there’s even a company behind it,” Laresca said. “My 10-year-old knew it was a scam. It was a complete joke.”

Instead of falling, the price more than doubled the next day, July 9, starting the squeeze. Market-makers who had sold the shares short got nervous and scrambled to buy them to close their positions, driving the price even higher, Laresca said. The SEC stopped trading two days later, citing concerns about the accuracy of information in the marketplace and “potentially manipulative transactions.” That was too late, Laresca said.

Only 500,000 of those shares were authorized to trade publicly, according to Cynk’s transfer agent, Pacific Stock Transfer. About $12 million of stock changed hands during the past month, according to data compiled by Bloomberg. The low volume meant that market-makers couldn’t find shares to cover their short positions, Laresca said.

Kevin Kelly, chief investment officer at Recon Capital Partners LLC, which manages about $150 million and issues exchange-traded funds, said Laresca took a risk by shorting Cynk even if he thought it was sketchy.

“He should know that markets can stay irrational longer than you can stay solvent,” Kelly said. “He’s a professional.”

The video interview makes one thing clear: he’s got a great accent!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets off 11bp and DeemedRetractibles gaining 4bp. Volatility was nothing special, but comprised entirely of FixedReset losers. Volume was below average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.16 % 3.15 % 21,887 19.34 1 0.0000 % 2,516.0
FixedFloater 4.17 % 3.39 % 29,402 18.66 1 0.0000 % 4,163.9
Floater 2.84 % 2.93 % 45,714 19.92 4 0.1897 % 2,788.1
OpRet 4.01 % -5.66 % 79,751 0.08 1 -0.3124 % 2,723.2
SplitShare 4.26 % 3.97 % 46,694 4.03 6 -0.0067 % 3,112.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.3124 % 2,490.1
Perpetual-Premium 5.52 % -3.89 % 78,949 0.09 17 0.0462 % 2,429.7
Perpetual-Discount 5.23 % 5.07 % 109,540 15.21 20 0.1364 % 2,583.2
FixedReset 4.38 % 3.59 % 197,727 4.75 76 -0.1062 % 2,563.4
Deemed-Retractible 4.97 % 0.12 % 124,614 0.09 43 0.0407 % 2,553.0
FloatingReset 2.66 % -0.95 % 96,187 0.09 6 0.0917 % 2,528.9
Performance Highlights
Issue Index Change Notes
SLF.PR.I FixedReset -1.32 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 2.32 %
MFC.PR.F FixedReset -1.19 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.29
Bid-YTW : 4.04 %
BAM.PR.X FixedReset -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-16
Maturity Price : 21.76
Evaluated at bid price : 22.01
Bid-YTW : 4.01 %
Volume Highlights
Issue Index Shares
Traded
Notes
CM.PR.M FixedReset 100,633 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 5.18 %
ENB.PR.F FixedReset 65,318 RBC crossed 55,000 at 24.70.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-16
Maturity Price : 23.13
Evaluated at bid price : 24.63
Bid-YTW : 4.04 %
BMO.PR.S FixedReset 61,067 TD crossed 35,000 at 25.72.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.72
Bid-YTW : 3.57 %
ENB.PR.Y FixedReset 55,882 Desjardins crossed blocks of 17,500 and 32,500, both at 24.27.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-16
Maturity Price : 22.89
Evaluated at bid price : 24.28
Bid-YTW : 4.00 %
GWO.PR.S Deemed-Retractible 48,590 Scotia crossed 40,000 at 25.65.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.56
Bid-YTW : 5.10 %
BNA.PR.F SplitShare 40,027 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 5.07 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.R FixedReset Quote: 25.56 – 25.78
Spot Rate : 0.2200
Average : 0.1418

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-16
Maturity Price : 23.79
Evaluated at bid price : 25.56
Bid-YTW : 3.79 %

RY.PR.L FixedReset Quote: 26.51 – 26.75
Spot Rate : 0.2400
Average : 0.1842

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 3.00 %

IFC.PR.A FixedReset Quote: 24.20 – 24.42
Spot Rate : 0.2200
Average : 0.1670

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.20
Bid-YTW : 4.03 %

SLF.PR.I FixedReset Quote: 26.20 – 26.45
Spot Rate : 0.2500
Average : 0.2000

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 2.32 %

RY.PR.H FixedReset Quote: 25.35 – 25.55
Spot Rate : 0.2000
Average : 0.1510

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-16
Maturity Price : 23.27
Evaluated at bid price : 25.35
Bid-YTW : 3.65 %

GWO.PR.I Deemed-Retractible Quote: 22.81 – 23.00
Spot Rate : 0.1900
Average : 0.1430

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.81
Bid-YTW : 5.67 %

July 15, 2014

July 16th, 2014

I was sent a link to an article from 2007 by Keith Ambachsheer and Rob Bauer titled Losing ground: Do Canadian mutual funds produce fair value for their customers?:

The study specifically compares the net excess returns produced by a large sample of Canadian mutual funds with domestic equity mandates against the net excess returns produced by a large sample of the domestic equity components of Canadian pension funds. An important study finding is that, over the nine-year period from 1996 to 2004, the Canadian equity components of Canadian pension funds outperformed their Canadian equity market benchmark by an average +1.2% per annum, net of expenses. Over the same nine-year period, Canadian equity mutual funds with domestic mandates underperformed their Canadian equity market benchmark by an average -2.6% per annum, net of management fees, but before any applicable sales charges. Any such sales charges would reduce mutual fund net returns even further.

Very sweet, but nowhere does the article attempt to attribute reported outperformance of Canadian pension funds, which I suggest was due to enormous post-Tech-Wreck outperformance overcompensating for pre-Tech-Wreck underperformance. In addition, it does not attempt to address the outperformance itself, which any first-year B-School student will be pleased to tell you cannot be persistent.

The authors then ask:

Why would Canadian mutual fund investors subject themselves to an average wealth-loss of 3.8% per annum relative to implementing the same basic investment policy through Canadian pension funds? Or equivalently, why would Canadian mutual fund investors pay an average 2.75%(or more including sales charges)for an investment service that is available to Canadian pension fund participants for an average 0.25%, and which produced inferior investment results even before the far greater expenses?

… but of their four hypotheses, only one seems plausible:

Mutual funds are sold, not bought: the market for investment management services is highly asymmetric, with the buyers of these services knowing far less about what they are buying than the sellers know about what they are selling. Information economics predicts that in such a market buyers will pay too much for too little. Research results from the field of behavioural finance support this conclusion. This research shows people to be generally unsophisticated, inconsistent, hesitant, and even irrational regarding financial matters, which creates the opportunity for the for-profit financial services industry to proactively step in and sell their products and services at too-high prices.8 The veracity of his third explanation is supported by the findings of a recent survey of 1865 Canadian mutual fund investors. When asked why they had bought mutual funds, 85% said they were persuaded by “someone who provided me with advice and guidance.”9 In our view, it is the combined effects of informational asymmetry and behavioural dysfunction on the part of the customers, and opportunistic acuity on the part of the suppliers, that best explains the findings summarized in Table 1. Mahoney(2004)reaches similar conclusions in a paper titled “Manager-Investor Conflicts in Mutual Funds.”

This emphasis on prices is reasonable, but there is no attempt to reconcile the fees charged with the performance gap. In addition, the authors conveniently ignore the investment environment of the first half of their period: tech sold! Dividends were old-fashioned; managers had a choice between throwing a good portion of their mutual fund assets into tech or, alternatively, just stay home and catch up on sleep. Without tech on offer, nobody would come to the office and the ‘phones wouldn’t ring.

All this is meant to tout the idea of Government Investment Management:

We favour a middle way: the “paternalistic libertarian” approach currently in the process of being adopted in the UK. The basic idea is to create a number of arm’s-length, expert, pension delivery organizations, and then to automatically enroll the entire non-covered part of the workforce into one of them. People can elect to opt out if they do not wish to participate.

A key assumption in these calculations is that the pension delivery organizations operate in the sole best interests of plan participants, with expense ratios of 0.3%.

I wonder if Mr. Ambachsheer is involved with the proposed Ontario Pension Plan? It sounds rather similar …

The battle to make life easier for incompetent bond investors is heating up:

The Canadian Securities Administrators, a coalition of the country’s provincial and territorial securities regulators, announced last month it’s starting a review of transparency in the $390-billion corporate bond market. The CSA questioned whether the private sector-led transparency model currently in place is working, and if more active regulation is needed.

The move comes as bond trading falls under closer scrutiny worldwide with the top regulator in the U.S. calling for more public information on private trading, and the European Union seeking to build a system to publicly disclose prices in real time.

Unlike stocks, bonds aren’t traded on public exchanges but as private transactions with securities dealers acting as middlemen, giving the brokerages — many of whom are owned by banks — an informational advantage.
It’s historically been more profitable for firms to trade bonds than stocks because the debt markets are less transparent, making it easier for brokers to take a bigger fee for each exchange.

“We have a sort of oligopolistic banking system where the banks kind of set their own rules, and there’s been a lack of transparency in the bond market forever,” said Ed Waitzer, chairman of the Ontario Securities Commission from 1993 to 1997 and a senior partner at Toronto-based law firm Stikeman Elliot LLP. “It sounds like the commission is feeling a little bit of heat again because the rest of the world is kind of shining a light on dark markets.”

Yellen is still dovish on rates:

Federal Reserve Chair Janet Yellen told lawmakers the central bank must press on with record monetary stimulus to combat persistent job-market weakness.

“There are mixed signals concerning the economy,” Yellen said in response to questions during testimony to the Senate Banking Committee today. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates.”

While her “overall view is more positive,” Yellen said low wages are one sign of “significant slack” in labor markets, even after the jobless rate fell to an almost six-year low.

In prepared testimony, Yellen repeated that interest rates are likely to stay low for a “considerable period” after the Fed ends its asset-purchase program, which she said could happen following the October meeting.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said in her semi-annual testimony. “Although the economy continues to improve, the recovery is not yet complete.”

She also commented on irrational exuberance:

Ms. Yellen delivered her observation during off-script Congressional testimony on Tuesday. Well, sort of: She was actually singling out social media and biotech stocks – along with lower-rated corporate debt – as pockets of the market that look frothy and are vulnerable to setbacks, particularly when the Fed starts raising its key interest rate.

The fact that a Fed chair would discuss stock valuations of any kind is highly unusual and should push investors into evaluating market conditions after a 190 per cent rally by the S&P 500 over the past five-and-a-half years.

Dubai’s making an effort to attract the hated hedge funds:

When Ahmad Zuaiter started a frontier-markets hedge fund, the former Soros Fund Management LLC money manager chose Dubai over New York and London.

Zuaiter’s Jadara Capital Partners LP and VY Capital Management Co. Ltd. opened in the emirate in the past year, bringing to three the number of hedge-fund firms in the Dubai International Financial Centre, according to Dechert LLP, a law firm that helped establish both companies in the sheikhdom.

“If you want to run a boutique model, the best way is to be located in a centrally positioned hub like Dubai and use it as a nexus to travel extensively and frequently to your target markets,” Zuaiter, 46, said in an interview in his office, close to celebrity chef Marco Pierre White’s Wheeler’s of St James’s restaurant.


For Dubai to rival London as a finance and hedge-fund capital, it must overcome concerns about political instability in the region and 50 degree Celsius (122 degrees Fahrenheit) temperatures that drive residents to seek refuge in Geneva and other European cities during the summer. Still, zero tax, office rents one-third the price of London’s West End and an airport that connects with 90 percent of frontier markets make it attractive to startups, Zuaiter said.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 19bp, FixedResets up 13bp and DeemedRetractibles gaining 8bp. Volatility was reasonable, highlighted by FixedReset winners. Volume was low.

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 3.16 % 3.15 % 21,951 19.34 1 0.0000 % 2,516.0
FixedFloater 4.17 % 3.39 % 29,778 18.66 1 -0.2188 % 4,163.9
Floater 2.84 % 2.94 % 46,108 19.90 4 0.4627 % 2,782.8
OpRet 4.00 % -9.45 % 80,441 0.08 1 0.4708 % 2,731.8
SplitShare 4.26 % 3.98 % 48,616 4.04 6 -0.1794 % 3,112.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.4708 % 2,497.9
Perpetual-Premium 5.52 % -3.72 % 79,129 0.09 17 -0.0208 % 2,428.6
Perpetual-Discount 5.24 % 5.08 % 107,470 15.23 20 0.1900 % 2,579.7
FixedReset 4.38 % 3.56 % 196,859 4.61 76 0.1275 % 2,566.2
Deemed-Retractible 4.98 % 1.49 % 126,241 0.30 43 0.0787 % 2,551.9
FloatingReset 2.66 % 1.92 % 107,335 0.16 6 0.3614 % 2,526.5
Performance Highlights
Issue Index Change Notes
CIU.PR.C FixedReset -2.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-15
Maturity Price : 21.71
Evaluated at bid price : 22.17
Bid-YTW : 3.35 %
BNA.PR.F SplitShare -1.15 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.14
Bid-YTW : 5.11 %
BNS.PR.R FixedReset 1.21 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.93
Bid-YTW : 2.92 %
SLF.PR.I FixedReset 1.34 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 1.75 %
BMO.PR.Q FixedReset 1.70 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 3.08 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PF.F FixedReset 105,916 RBC crossed 29,100 at 25.52. TD crossed 45,000 at 25.55; Scotia sold 19,500 to Nesbitt at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 4.16 %
BMO.PR.S FixedReset 92,735 Nesbitt crossed 50,000 at 25.72; TD crossed 25,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 3.59 %
TD.PF.A FixedReset 81,916 Nesbitt crossed 30,000 at 25.52; Desjardins crossed 20,000 at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.58 %
BNA.PR.F SplitShare 63,860 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.14
Bid-YTW : 5.11 %
BNS.PR.K Deemed-Retractible 47,640 Called for redemption July 29.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-14
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.24 %
CM.PR.O FixedReset 36,835 TD crossed 10,300 at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.56 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
CIU.PR.C FixedReset Quote: 22.17 – 22.83
Spot Rate : 0.6600
Average : 0.4463

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-15
Maturity Price : 21.71
Evaluated at bid price : 22.17
Bid-YTW : 3.35 %

BAM.PR.E Ratchet Quote: 23.75 – 24.14
Spot Rate : 0.3900
Average : 0.2401

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-15
Maturity Price : 23.42
Evaluated at bid price : 23.75
Bid-YTW : 3.15 %

FTS.PR.H FixedReset Quote: 21.37 – 21.72
Spot Rate : 0.3500
Average : 0.2617

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-15
Maturity Price : 21.37
Evaluated at bid price : 21.37
Bid-YTW : 3.59 %

BAM.PF.E FixedReset Quote: 24.83 – 25.07
Spot Rate : 0.2400
Average : 0.1645

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-15
Maturity Price : 23.06
Evaluated at bid price : 24.83
Bid-YTW : 4.11 %

IGM.PR.B Perpetual-Premium Quote: 25.90 – 26.19
Spot Rate : 0.2900
Average : 0.2159

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.90
Bid-YTW : 4.96 %

BMO.PR.K Deemed-Retractible Quote: 26.07 – 26.24
Spot Rate : 0.1700
Average : 0.1057

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-14
Maturity Price : 25.75
Evaluated at bid price : 26.07
Bid-YTW : -1.35 %

July 14, 2014

July 14th, 2014

Fitch is urging government micromanagement of housing:

Canadian home prices remain overvalued relative to historical macroeconomic fundamental drivers, Fitch Ratings says. Despite government efforts to moderate growth, home prices rose 7.1% in May (on a year-over-year basis) according to the Canadian Real Estate Association. In addition, both property sales and building permits for residential construction have picked up in recent months. Home prices also continue to be supported by historically low interest rates and a lack of supply in the major metropolitan areas; these factors have propped up affordability and drive demand. According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms.
We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases. The ratio reached a high of 164.1% in third-quarter 2013 before declining slightly in the following two quarters. Fitch projects unemployment will likely remain in its current 7% range. But low interest rates are unlikely to fall further. Rising interest rates could pressure the market more than others given high borrower leverage and the short-term structure of Canadian mortgages.

Fitch believes the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market. The underwriting guidelines for loans insured by the Canadian Mortgage and Housing Corporation (CMHC) have been tightened. CMHC has also pulled back on the amount of low-ratio portfolio insurance offered to lenders and limited securitization of insured mortgages to CMHC-administered programs. Furthermore, The Office of the Superintendent of Financial Institutions has issued a guideline for prudent bank underwriting that must be adhered to for bank originations as well as those purchased from nonbank lenders. However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing.

Sadly, there is nothing in today’s Ontario budget about buying us all new houses. They missed that one:

Most of the budget, however, lays out long-term plans for new spending.

It provides for $29-billion in new funds for transit, roads and bridges over the next decade, plus tens of billions more for other capital costs, including schools. The budget puts more than a billion dollars into various social programs, with raises for personal support workers and more funds for programs for people with developmental disabilities.

A new $2.5-billion fund for businesses is meant to help lure corporations to the province and encourage existing operations to expand.

The plan also allocates a billion for a new road or rail link to the Ring of Fire, a Northern Ontario mineral deposit that the government estimates will yield $60-billion worth of economic activity.

The document further introduces the Ontario Retirement Pension Plan, a pension system for people who do not already have one through their employer, that aims to double the benefits of the Canada Pension Plan for retirees.

There have been an interesting couple of articles lately on US employment trends. The first approves of extreme pickiness when hiring:

Since the recession, many employers halted widely distributed cost-of-living raises. Instead, they’re giving big bonuses and salary boosts to a select few. The average pay raise might be 2 percent, but the extra cash is shared among a small group of employees who have leverage, says Thomas Gimbel, chief executive officer of Chicago-based staffing company LaSalle Network. For them, he says, “Things are better than they’ve ever been.”

These wily pay strategies may also explain why there are so many open jobs. According to data released July 8, there were 4.6 million job openings in the U.S. in May, up from 3.9 million a year before. For key positions, companies are letting job openings stay open until they find exactly the right person, Gimbel says. In the meantime, existing employees must work harder to fill the gap. Then, for the perfect job candidate, they’ll pay up, he says. For example, a job listed for a $125,000 salary might be vacant for a year but then filled by someone who demands — and receives — $140,000.

The second one blames it on algorithms (beloved of Human Resources departments):

Expanding use of technology that uses ultra-specific criteria to screen and winnow candidates may be perpetuating one of the most unusual features of the slow rebound in the U.S. labor market: Despite a steady increase in openings since the recession ended in 2009, these positions are being matched with job seekers less efficiently than in the past. For each 100,000 new openings, for example, companies have hired about 48,000 people, compared with about 54,000 following the 2001 recession.

Software provided by Taleo, a unit of Oracle Corp. (ORCL), allows recruiters to conduct “precision matching” through a “profile-based recruiting system” that uses “advanced search and artificial intelligence to find and short list top talent,” according to a brochure on Oracle’s website.

For workers and job-seekers with exactly the right skills industries need today, the software programs can be a boon, filling their e-mail with notes from recruiters, talent scouts said. There’s also a benefit for companies in lower talent-acquisition and training costs.

There are also disadvantages for other job prospects: A candidate with some, but not all, of the required attributes may be eliminated or moved down the list. This may be one reason why people out of work for 27 weeks or more still represent about a third of the total unemployed, compared with an average of 19 percent between 2004 and 2007. The share is down from about 37 percent in June 2013.

Well, the proof of the pudding is in the eating and I would be loathe to pontificate about the evils of HR algorithms. But I will bet a nickel that over the long run, it is more costly for a company to be too lean than it is for it to be slightly over-staffed, with guys who are familiar with InventoryMaster 8.0, but – critically – unfamiliar with InventoryMaster 9.1.

Housing pundit Will Dunning, who I featured in the post How to Dissect a Housing Bubble, is in the news again, criticizing government micro-management of housing:

“If and when there is a correction in the condo market, the severity will have been aggravated by the actions of the federal government, which elected to depress demand at a time when demand was already beginning to weaken organically and a wave of supply has been developing,” Mr. Dunning writes in a new research note.

He sketched out a scenario in which Toronto’s condo prices would fall by about 10 per cent, as a result of rising supply and falling demand.

“I believe that the federal mortgage insurance policy changes of the past few years will continue to weigh on demand, for both owner-occupants and investors,” Mr. Dunning writes.

His 10-per-cent-price-correction scenario also assumes that job creation does not bounce back to a healthier rate in Canada’s most populous city, and that interest rates remain constant.

“The timing of this process is highly uncertain – it probably won’t start for at least a half-year, and if there are further delays in (condo construction) completions, it could be a long way off,” he writes.

But micro-management is all the rage:

Banks shouldn’t count on a fresh round of European Central Bank cash to trade sovereign debt and reap big profits, Mario Draghi said.

“The convenience to use the ECB cheap money to buy government bonds is much less” than in a previous funding round which started in 2011, the ECB president said in testimony to the European Parliament in Strasbourg, France yesterday. “The general situation is such that these carry trades are going to be much less profitable.”

As spreads on government debt from Spain to Italy over similar German securities have fallen to record lows, a carry trade that was lucrative two years ago may now yield less, Draghi said. In a liquidity drive that pins cash to banks’ performance in extending loans to the economy, the Frankfurt-based ECB could extend as much as 1 trillion euros ($1.36 trillion) in its so-called TLTRO program starting in September.

A condition of that program is that banks have to meet a benchmark on lending to businesses and households, excluding mortgages, or else hand back the money in 2016.

“If banks don’t lend to the non-financial private sector, they’ll have to repay,” Draghi said.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets up 9bp and DeemedRetractibles gaining 8bp. Volatility looks pretty good at first – until you realize it’s half Floaters, which always bounce around a lot. Still, the Performance Highlights table is comprised exclusively of winners! Volume was low.

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 3.16 % 3.15 % 21,896 19.34 1 -0.6276 % 2,516.0
FixedFloater 4.16 % 3.38 % 28,978 18.68 1 0.3513 % 4,173.0
Floater 2.86 % 2.96 % 46,632 19.85 4 1.1842 % 2,770.0
OpRet 4.02 % -4.06 % 83,161 0.08 1 -0.1176 % 2,719.0
SplitShare 4.25 % 4.01 % 50,620 4.04 6 -0.0422 % 3,118.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1176 % 2,486.2
Perpetual-Premium 5.52 % -2.46 % 81,951 0.09 17 0.0786 % 2,429.1
Perpetual-Discount 5.25 % 5.10 % 107,435 15.23 20 0.1304 % 2,574.8
FixedReset 4.39 % 3.58 % 196,522 4.76 76 0.0942 % 2,562.9
Deemed-Retractible 4.98 % 1.48 % 126,906 0.12 43 0.0824 % 2,549.9
FloatingReset 2.67 % 2.12 % 108,859 3.88 6 0.0526 % 2,517.4
Performance Highlights
Issue Index Change Notes
BAM.PR.C Floater 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 17.83
Evaluated at bid price : 17.83
Bid-YTW : 2.96 %
SLF.PR.H FixedReset 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 2.84 %
CIU.PR.C FixedReset 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 22.49
Evaluated at bid price : 22.83
Bid-YTW : 3.26 %
BAM.PR.B Floater 1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 17.78
Evaluated at bid price : 17.78
Bid-YTW : 2.97 %
CU.PR.C FixedReset 1.51 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.26
Bid-YTW : 2.36 %
BAM.PR.K Floater 1.55 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 2.98 %
Volume Highlights
Issue Index Shares
Traded
Notes
BNS.PR.N Deemed-Retractible 150,500 Scotia crossed 150,000 at 26.04.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-13
Maturity Price : 25.75
Evaluated at bid price : 26.01
Bid-YTW : -9.78 %
TRP.PR.A FixedReset 139,622 RBC bought two blocks of 10,000 each from anonymous at 23.29. Desjardins crossed blocks of 24,400 and 21,400, both at 23.30. RBC crossed two blocks of 20,000 each, both at 23.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 22.42
Evaluated at bid price : 23.30
Bid-YTW : 3.69 %
TD.PF.A FixedReset 77,444 Nesbitt crossed 44,600 at 25.51.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 3.57 %
POW.PR.G Perpetual-Premium 63,961 Scotia crossed blocks of 19,400 and 40,000, both at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 5.13 %
BMO.PR.K Deemed-Retractible 53,462 TD crossed two blocks of 25,000 each, both at 26.08.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-13
Maturity Price : 25.75
Evaluated at bid price : 26.06
Bid-YTW : -1.05 %
MFC.PR.H FixedReset 53,051 RBC crossed blocks of 23,600 and 25,000, both at 26.45.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.32
Bid-YTW : 2.68 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNS.PR.R FixedReset Quote: 25.62 – 25.94
Spot Rate : 0.3200
Average : 0.2016

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 3.21 %

SLF.PR.G FixedReset Quote: 22.53 – 22.85
Spot Rate : 0.3200
Average : 0.2108

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.53
Bid-YTW : 4.27 %

HSE.PR.A FixedReset Quote: 23.11 – 23.39
Spot Rate : 0.2800
Average : 0.1847

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 22.73
Evaluated at bid price : 23.11
Bid-YTW : 3.64 %

MFC.PR.L FixedReset Quote: 25.16 – 25.48
Spot Rate : 0.3200
Average : 0.2291

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 3.77 %

FTS.PR.G FixedReset Quote: 24.83 – 25.14
Spot Rate : 0.3100
Average : 0.2230

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-14
Maturity Price : 23.17
Evaluated at bid price : 24.83
Bid-YTW : 3.65 %

GWO.PR.S Deemed-Retractible Quote: 25.50 – 25.73
Spot Rate : 0.2300
Average : 0.1470

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 5.13 %

July PrefLetter Released!

July 14th, 2014

The July, 2014, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

The regular appendices reporting on DeemedRetractibles and FixedResets are included.

PrefLetter may now be purchased by all Canadian residents.

Until further notice, the “Previous Edition” will refer to the July, 2014, issue, while the “Next Edition” will be the August, 2014, issue, scheduled to be prepared as of the close August 8 and eMailed to subscribers prior to market-opening on August 11.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: My verbosity has grown by such leaps and bounds that it is no longer possible to deliver PrefLetter as an eMail attachment – it’s just too big for my software! Instead, I have sent passwords – click on the link in your eMail and your copy will download.

Note: The PrefLetter website has a Subscriber Download Feature. If you have not received your copy, try it!

Note: PrefLetter eMails sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository – there are some hints in the post Sympatico Spam Filters out of Control. If it’s not there, contact me and I’ll get you your copy … somehow!

Note: There have been scattered complaints regarding inability to open PrefLetter in Acrobat Reader, despite my practice of including myself on the subscription list and immediately checking the copy received. I have had the occasional difficulty reading US Government documents, which I was able to resolve by downloading and installing the latest version of Adobe Reader. Also, note that so far, all complaints have been from users of Yahoo Mail. Try saving it to disk first, before attempting to open it.

Note: There have been other scattered complaints that double-clicking on the links in the “PrefLetter Download” email results in a message that the password has already been used. I have been able to reproduce this problem in my own eMail software … the problem is double-clicking. What happens is the first click opens the link and the second click finds that the password has already been used and refuses to work properly. So the moral of the story is: Don’t be a dick! Single Click!

Note: Assiduous Reader DG informs me:

In case you have any other Apple users: you need to install a free App from the apple store called “FileApp”. It comes with it’s own tutorial and allows you to download and save a PDF file.

DFN.PR.A 2013 Annual Report

July 13th, 2014

Dividend 15 Split Corp. has released its Annual Report to November 30, 2013.

DFN / DFN.PR.A Performance
Instrument One
Year
Three
Years
Five
Years
Whole Unit +20.70% +10.88% +13.44%
DFN.PR.A +5.38% +5.38% +5.38%
DF +39.44% +17.09% 23.58%
S&P/TSX 60 Index +13.40% +4.36% +9.65%

Using the S&P TSX 60 index rather than “Dividend Aristocrats” seems a little odd to me – but we’ll let them choose their benchmark!

Figures of interest are:

MER: 1.49% of the whole unit value (As reported)0.

Average Net Assets: The average of the beginning and end of year figures is ($378.1-million + $307.8-million) / 2 = $343-million. Total preferred share dividends = $8,890,054 at 0.525 / share implies average of 16.93-million units outstanding, at an average NAVPU of ($18.22 + $18.45) / 2 = 18.34, implies average net assets of $310-million. Not very good agreement! But call it about $327-million

Underlying Portfolio Yield: Dividends received of $12.13-million divided by average net assets of 327-million is 3.7%

Income Coverage: Net Investment Income of 7.23-million divided by Preferred Share Distributions of 8.89-million is 81%.

July 11, 2014

July 11th, 2014

Tammy Schirle of Wilfrid Laurier writes a good piece titled Six questions Ontario must answer before it starts a pension plan (although the headline writer confused ‘exhortations’ with ‘questions’):

  • 1. Be clear about the market failures you are trying to address.
  • 2. Be precise about the policy target.
  • 3. Be clear about any redistribution that will occur.
  • 4. Notice that low-income families won’t benefit from a simple expansion of benefits
  • 5. How are you going to deal with interprovincial migration and interprovincial employment arrangements?
  • 6. Enhancing the CPP remains the Ontario government’s preferred solution.

It was mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 7bp and DeemedRetractibles up 2bp. Volatility was minimal. Volume was extremely low.

And now it’s time to start work on the July PrefLetter!

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 3.14 % 3.13 % 21,886 19.40 1 0.0000 % 2,531.9
FixedFloater 4.17 % 3.40 % 27,277 18.66 1 0.4694 % 4,158.4
Floater 2.89 % 2.99 % 47,081 19.78 4 -0.8330 % 2,737.5
OpRet 4.02 % -5.85 % 83,269 0.08 1 0.0784 % 2,722.2
SplitShare 4.25 % 3.94 % 52,705 4.05 6 0.1397 % 3,119.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0784 % 2,489.1
Perpetual-Premium 5.53 % -4.80 % 84,342 0.09 17 0.0671 % 2,427.2
Perpetual-Discount 5.25 % 5.11 % 109,101 15.23 20 0.0086 % 2,571.5
FixedReset 4.39 % 3.58 % 193,323 4.62 76 -0.0651 % 2,560.5
Deemed-Retractible 4.98 % 1.91 % 129,476 0.12 43 0.0222 % 2,547.8
FloatingReset 2.67 % 2.12 % 107,909 3.89 6 0.0658 % 2,516.1
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset -1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-11
Maturity Price : 21.84
Evaluated at bid price : 22.11
Bid-YTW : 3.98 %
BAM.PR.K Floater -1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-11
Maturity Price : 17.43
Evaluated at bid price : 17.43
Bid-YTW : 3.03 %
BAM.PR.C Floater -1.12 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-11
Maturity Price : 17.65
Evaluated at bid price : 17.65
Bid-YTW : 2.99 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PF.F FixedReset 76,399 Scotia crossed two blocks of 30,000 each, both at 25.55.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.54
Bid-YTW : 4.16 %
RY.PR.H FixedReset 75,221 RBC bought blocks of 11,400 and 10,400 from TD, both at 25.55. Desjardins crossed 16,000 at the same price; Scotia crossed 21,600 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 3.56 %
GWO.PR.G Deemed-Retractible 56,124 RBC crossed 50,000 at 25.07.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 5.28 %
BNA.PR.F SplitShare 29,738 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2021-10-08
Maturity Price : 25.00
Evaluated at bid price : 24.42
Bid-YTW : 4.91 %
CM.PR.O FixedReset 28,267 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.49
Bid-YTW : 3.57 %
CU.PR.G Perpetual-Discount 23,038 Nesbitt crossed 20,000 at 22.50.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-11
Maturity Price : 22.18
Evaluated at bid price : 22.47
Bid-YTW : 5.05 %
There were 11 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
W.PR.H Perpetual-Premium Quote: 25.09 – 26.09
Spot Rate : 1.0000
Average : 0.6089

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-10
Maturity Price : 25.00
Evaluated at bid price : 25.09
Bid-YTW : 0.38 %

BAM.PR.X FixedReset Quote: 22.11 – 22.51
Spot Rate : 0.4000
Average : 0.2474

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-11
Maturity Price : 21.84
Evaluated at bid price : 22.11
Bid-YTW : 3.98 %

CU.PR.C FixedReset Quote: 25.87 – 26.25
Spot Rate : 0.3800
Average : 0.2693

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 25.87
Bid-YTW : 2.91 %

VNR.PR.A FixedReset Quote: 25.52 – 25.88
Spot Rate : 0.3600
Average : 0.2688

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 3.67 %

MFC.PR.K FixedReset Quote: 25.12 – 25.49
Spot Rate : 0.3700
Average : 0.2796

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.12
Bid-YTW : 3.75 %

IAG.PR.A Deemed-Retractible Quote: 23.17 – 23.45
Spot Rate : 0.2800
Average : 0.1963

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.17
Bid-YTW : 5.57 %

Royal Bank Issues NVCC-Compliant Sub-Debt

July 11th, 2014

Royal Bank of Canada has announced:

an inaugural Basel III-compliant offering of $1 billion of subordinated debentures (“the Notes”) through its Canadian Medium Term Note Program.

The Notes bear interest at a fixed rate of 3.04 per cent per annum (paid semi-annually) until July 17, 2019, and at the three-month Banker’s Acceptance Rate plus 1.08 per cent thereafter until their maturity on July 17, 2024 (paid quarterly). The expected closing date is July 17, 2014 and RBC Capital Markets is acting as lead agent on the issue.

The bank may, at its option, with the prior approval of the Office of the Superintendent of Financial Institutions Canada, redeem the Notes on or after July 17, 2019 at par, in whole at any time or in part from time to time, on not less than 30 days and not more than 60 days notice to registered holders.

We routinely undertake funding transactions to maintain strong capital ratios and a cost effective capital structure. Net proceeds from this transaction will be used for general business purposes.

It’s not clear to me how the floating rate of BAs+108bp was calculated. The Canada 10-year is trading at around 2.20%, the five year around 1.55% and three-month BAs a little above 1.20%. None of these values fits very well with the 3.04% initial rate to provide a 108bp increment.

However, the important thing – for some – is the fact that a clear demarcation exists between the five-year pretend-maturity and the ten-year actual maturity. This will make it easier for the sleazy to sell the debt to the stupid.

Not much meat on those bones. The heart of the matter is the conversion feature, as noted by Moody’s:

Moody’s assigned a rating of Baa1 (hyb) to Royal Bank of Canada’s (RBC, Aa3 Negative, C+/a2 Stable) 3.04% CAD1 billion Basel III compliant NVCC subordinated debt. Proceeds from the issuance will be added to the bank’s general funds and utilized for general banking purposes. The NVCC subordinated debt provides loss absorption as it is subject to automatic conversion into common shares, based on a predetermined conversion formula, at the point of non-viability, as defined by the Office of the Superintendent of Financial Institutions Canada (OSFI), subject to regulatory discretion. This incremental loss absorption feature is credit positive for holders of senior securities of RBC, as a layer of loss absorbing securities will reduce the risk of losses incurred higher in the capital hierarchy if the bank gets into financial distress.

This marks the first issuance in Canada of contractual non-viability subordinated debt. The rating is positioned 2 notches below the a2 adjusted baseline credit assessment (adjusted BCA) of RBC, in line with Moody’s standard notching guidance for contractual non-viability subordinated debt. An additional notch is added relative to the notching for “plain vanilla” subordinated debt with normal loss severity (currently 1 notch below adjusted BCA) to capture the potential uncertainty related to the timing of loss absorption.

By way of comparison, Moody’s has the NVCC-compliant Royal Bank preferreds at Baa3:

This marks the first issuance in Canada of contractual non-viability preferred securities. The rating is positioned 4 notches below the a2 adjusted baseline credit assessment (adjusted BCA) of RBC, in line with Moody’s standard notching guidance for contractual non-viability preferred securities. An additional notch is added relative to the notching for legacy Canadian non-cumulative preferred shares (currently 3 notches below adjusted BCA) to capture the potential uncertainty related to the timing of loss absorption.

Standard and Poor’s explains what makes them more creditworthy than preferreds (bolding added):

The ‘A-’ rating is two notches below the stand-alone credit profile (SACP), incorporating:
  • •A deduction of one notch from the SACP for subordination, reflecting our belief that the Canadian legal and regulatory framework insulates senior debt from defaults on the subordinated debt; and
  • •The deduction of an additional notch to reflect that the subordinated notes feature a mandatory contingent conversion trigger provision. Should a trigger event occur (as defined by The Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements, Chapter 2), each subordinated note outstanding will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank, determined in accordance with a conversion formula.

The following constitute trigger events:

  • •OSFI publicly announces it has advised RBC that it believes the bank has ceased, or is about to cease, to be viable and that, after converting the preferred shares and all other contingent instruments RBC has issued, and taking into account any other relevant factors, it is reasonably likely that the bank’s viability will be restored or maintained; or
  • •The federal government or a provincial government in Canada publicly announces that RBC has accepted a capital injection, or equivalent support, from a government or agency, without which the bank would be nonviable, according to OFSI.

Because we expect this instrument’s conversion to occur at or near the point of the banks’ nonviability, we view this mechanism as a nonviability trigger.

We expect to assign “minimal” (as our criteria describe the term) equity content to these subordinated notes because we do not consider notes that have only nonviability features to be able to absorb losses prior to the bank’s point of nonviability.

By way of comparison, S&P has the NVCC-compliant preferreds at BBB+, one notch lower on the global scale than the Sub-Debts A-.

So OSFI gets a lot of discretion in determining conversion – surprise, surprise! Since bond management firms are typically much larger than preferred share management firms (I believe there’s only one of these in Canada!), and since bond investors are typically much bigger than preferred share investors (aka, “retail scum”) I believe that in a crisis there will be frenzied and successful lobbying of OSFI personnel by their future employers to convert preferreds but to ‘just wait a bit’ before forcing sub-debt conversion.

Blair Keefe, David Seville and Thomas Yeo of Tory’s Law Firm recently wrote an article titled The Preferred Share Market Finally Re-Opens For Canadian Banks:

The market is still waiting for the first offering of NVCC subordinated debt. There are a few reasons why the banks have remained hesitant to tap that market. One reason relates to changes in capital ratios mandated by Basel III, which reduce the need for subordinated debt on a bank’s balance sheet. Prior to the introduction of Basel III, subordinated debt could account for almost one-third of the total capital of a bank. With the new minimum total capital requirement of 10.5%2 (including a countercyclical capital buffer of 2.5%) of risk-weighted assets and a 8.5% minimum for tier 1 capital, effectively the most that can be satisfied with subordinated debt is 2% of the bank’s risk-weighted assets. As well, under Basel III, most deductions from capital must be made from common share equity, whereas in the past, certain deductions could be made from total capital. Effective January 1, 2015, the leverage or asset-to-capital ratio in Canada will be based on tier 1 capital as opposed to total capital. This requirement is particularly important for smaller deposit-taking institutions because they tend to be limited by their asset-to-capital multiples. As a result, we expect that subordinated debt will be eliminated from the capital structure of many smaller institutions—and will form a significantly smaller portion of the capital structure of larger institutions than it has historically.

Market uncertainty also remains over how the proposed “bail-in” debt regime will interact with NVCC instruments. In October 2011, the Financial Stability Board issued a paper providing that regulators should have the power to convert (or write off) all or part of the unsecured and uninsured creditor claims of a financial institution under resolution into equity or other ownership instruments. It was proposed that such a conversion would be done in a manner that respects the hierarchy of claims in liquidation. The 2013 Canadian federal government budget includes a proposed plan to implement a “bail-in” regime for systemically important banks3; Canadian banks and the market generally are still waiting for details as to how the federal government intends to implement this regime. The institutional investors that make up the vast majority of the market for subordinated debt are particularly concerned with how the bail-in regime will function and the effect of further dilution after NVCC instruments are converted, resulting in a “wait-and-see” approach to investor interest in NVCC subordinated debt offerings.

The precise conversion formula to be adopted by the banks for NVCC subordinated debt is not yet known. Under OSFI’s requirements, conversion formulas for both NVCC preferred shares and subordinated debt need to be set to ensure respect for the relative hierarchy of claims between the two types of instruments in the event of a triggering event. In other words, since debt ranks ahead of equity in the traditional capital structure, in the event of a triggering event, holders of subordinated debt should receive more common shares on conversion than holders of preferred shares on a dollar-for-dollar basis. The banks have put substantial effort in the development of a formula used in the preferred share offerings which addresses concerns about potential market manipulation and death spirals in situations where conversion appears to be a possibility. As of the date this article was written, all offerings of NVCC preferred shares have used the same formula based on the issue price of the preferred shares, plus declared and unpaid dividends, divided by the volume- weighted average trading price over the 10 trading days before a triggering event, subject to a $5.00 floor price. It is unlikely that other banks will depart from this formula. The preferred share formula would suggest that the conversion formula for subordinated debt will use some multiple of the principal amount of the debt, together with accrued interest, to achieve the hierarchy of claims desired by OSFI. Issuers of NVCC subordinated debt should consider obtaining an advance income tax ruling from the Canada Revenue Agency confirming the deductibility by the bank of the interest payments, although we anticipate no difficulty in banks obtaining that ruling.

So my guess is that not only will the sub-debt benefit by delayed conversion, but the floor on the conversion price to equity will be lower – say, $3-4 instead of the now-standard $5 floor for preferreds. Senior “debt”, presumably, will be lower still.

The next matter of interest is whether this non-debt gets included in the bond indices; given that they’re bank issues, and the banks own TMX, and TMX runs the standard index (this arrangement has been blessed by the regulators, in exchange for regular payments), I’d say it’s a slam-dunk. But I have no information yet.

Update, 2014-7-12: OK, so I found the term sheet on SEDAR. It’s not under Prospectus, it’s under “Marketing Materials”, dated July 9. The conversion is:

The “Contingent Conversion Formula” is (Multiplier x Note Value) ÷ Conversion Price = number of Common Shares into which each Note shall be converted.

The “Multiplier” is 1.5.

The “Note Value” of a Note is the Par Value plus accrued and unpaid interest on such Note.

The “Conversion Price” of each Note is the greater of (i) a floor price of $5, and (ii) the Current Market Price of the Common Shares. The floor price of $5 will be subject to adjustment in the event of (i) the issuance of Common Shares or securities exchangeable for or convertible into Common Shares to all holders of Common Shares as a stock dividend, (ii) the subdivision, redivision or change of the Common Shares into a greater number of Common Shares, or (iii) the reduction, combination or consolidation of the Common Shares into a lesser number of Common Shares. The adjustment shall be computed to the nearest one-tenth of one cent provided that no adjustment of the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% of the Conversion Price then in effect.

“Current Market Price” of the Common Shares means the volume weighted average trading price of the Common Shares on the Toronto Stock Exchange (the “TSX”), if such shares are then listed on the TSX, for the 10 consecutive trading days ending on the trading day preceding the date of the Trigger Event. If the Common Shares are not then listed on the TSX, for the purpose of the foregoing calculation reference shall be made to the principal securities exchange or market on which the Common Shares are then listed or quoted or, if no such trading prices are available, “Current Market Price” shall be the fair value of the Common Shares as reasonably determined by the board of directors of the Bank.

It’s interesting that they’re implementing this with a conversion factor, rather than changing the floor price. Just what the implications of that might be is something that will bear thinking about.

Update, 2014-7-18: DBRS rates at A(low) [Stable].

July 10, 2014

July 10th, 2014

Looks like Canadian shadow banking is picking up:

Canada’s banks developed their commercial banking arms over decades by lending to companies that typically generate annual revenue of $50-million or less, nurturing scores of client relationships. Since the financial crisis, however, private equity firms have been scooping up smaller companies, shaking up their historical banking relationships.

Anatol von Hahn, Bank of Nova Scotia’s head of personal and commercial banking, said he would be “be very surprised if we don’t have double, triple” the number of small Canadian companies that are owned by private equity firms twenty years from now. Because they are flush with cash that they simply can’t sit on, private equity firms are often willing to pay big multiples to buy small businesses. “They’re playing a huge role,” he said.

To adapt to the changing dynamics, Scotiabank has gone so far as to invest in certain private equity funds in order to get access to the companies they acquire, according to Mr. von Hahn, allowing the bank to pitch itself as a potential banking partner.

The trend isn’t playing out in Canada alone. U.S. firms are looking for mid-market acquisitions north of the border. In May, New Jersey-based private equity player Swander Pace Capital acquired Montreal’s Recochem, marking its 10th acquisition north of the border in the past decade. More acquisitions could come because the firm recently raised a brand new $350-million fund.

Could we be heading towards European banking crisis redux?

Shares in Banco Espírito Santo SA … were suspended from trading Thursday after falling an additional 17%. Shares of the lender’s controlling shareholder, Espírito Santo Financial Group SA, were also suspended because, it said, of “ongoing material difficulties” at its parent company, Espírito Santo International. “ESFG is currently assessing the financial impact of its exposure to ESI.”

A spokesman for Espírito Santo International declined to comment.

This week’s downward spiral has knocked 32% off the bank’s market value and has dragged down Portugal’s main stock index with it.

On Thursday, the turmoil spread elsewhere in Southern Europe, illustrating how investors remain nervous about the fragility of the continent’s financial system. In Spain, a bank and a construction company each called off planned bond sales. In Italy, a drug company pulled its stock offering. In Greece, a government-bond sale came in smaller than expected. And stock markets across the continent fell, along with the euro.

It has been more than a year since fears about the health of a European bank rattled markets. Lately, after years of crisis, investors, bankers and regulators have been growing more confident about the stability of the continent’s financial system. Regulators hoped the banking industry’s improving health would be on display in coming months as they conduct so-called stress tests on more than 120 large banks.

Instead, Espírito Santo’s rapid descent, and the collateral damage in other European markets, suggests that conditions remain precarious.

Critics of Espírito Santo’s complex corporate structure have worried for years about the linkages among companies within the conglomerate. Among the concerns: whether the group’s nonfinancial companies—including a hotel chain and a hospital operator—were using the bank and its customers to raise funds.

Here in Ontario, our wise masters are protecting us from lower prices:

Ontario’s governing Liberals say they want to remove barriers to interprovincial trade, but suggest they’re reluctant to lift some restrictions that give Ontario companies an advantage.

Finance Minister Charles Sousa says there are a number of sectors within Ontario’s economy that are strong because they’re protected.

Sousa says he’s open to talks on how to grow the economy, but he doesn’t want to jeopardize the livelihood of Ontario companies.

Sousa’s comments come after the leaders of three western provinces called for the removal of trade barriers to reduce the cost of doing business and help provincial economies grow.

As far as I can tell, Mr. Sousa did not explain why strong companies need protection.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 4bp, FixedResets gaining 14bp and DeemedRetractibles off 3bp. Volatility was average, but uniformly positive. Volume was below average overall, and concentrated in a handful of issues.

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 3.14 % 3.13 % 22,179 19.40 1 0.0000 % 2,531.9
FixedFloater 4.15 % 3.43 % 28,342 18.45 1 -0.2179 % 4,138.9
Floater 2.87 % 2.95 % 46,425 19.86 4 0.1367 % 2,760.5
OpRet 4.02 % -5.05 % 86,525 0.08 1 0.0785 % 2,720.0
SplitShare 4.26 % 3.99 % 54,773 4.05 6 -0.0333 % 3,115.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0785 % 2,487.2
Perpetual-Premium 5.53 % -4.30 % 85,467 0.09 17 0.0417 % 2,425.6
Perpetual-Discount 5.25 % 5.18 % 110,158 15.23 20 -0.0449 % 2,571.2
FixedReset 4.39 % 3.59 % 200,106 4.61 76 0.1436 % 2,562.2
Deemed-Retractible 4.98 % 1.94 % 131,236 0.12 43 -0.0278 % 2,547.2
FloatingReset 2.66 % 2.15 % 109,597 3.89 6 -0.0723 % 2,514.5
Performance Highlights
Issue Index Change Notes
CU.PR.C FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-06-01
Maturity Price : 25.00
Evaluated at bid price : 26.05
Bid-YTW : 2.65 %
RY.PR.L FixedReset 1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 2.77 %
CIU.PR.C FixedReset 1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.24
Evaluated at bid price : 22.55
Bid-YTW : 3.38 %
BAM.PR.C Floater 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 17.85
Evaluated at bid price : 17.85
Bid-YTW : 2.95 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.A FixedReset 318,878 Nesbitt crossed 100,000 at 25.50. TD crossed blocks of 14,700 and 84,900 at the same price. Desjardins crossed 100,000 at the same price again.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.57 %
BMO.PR.T FixedReset 212,720 Nesbitt crossed two blocks of 50,000 each, both at 25.45. Scotia crossed blocks of 32,000 and 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-08-25
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 3.61 %
BMO.PR.S FixedReset 192,599 RBC crossed blocks of 10,000 and 11,600 at 25.60. TD crossed 25,000 at 25.70. Nesbitt crossed blocks of 50,000 and 69,300, both at 25.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 3.55 %
CM.PR.M FixedReset 184,573 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.97
Bid-YTW : 4.86 %
CM.PR.K FixedReset 181,858 Called for redemption July 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 3.79 %
CM.PR.O FixedReset 176,412 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.55 %
TD.PR.K FixedReset 144,299 Called for redemption July 31..
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.29 %
NA.PR.S FixedReset 135,592 Scotia crossed blocks of 35,400 and 25,000, both at 25.56. National sold 28,400 to anonymous at 25.60. TD crossed 24,700 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-15
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 3.46 %
RY.PR.H FixedReset 126,715 Desjardins crossed 26,500 at 25.50 and blocks of 25,000 and 15,000 at 25.55. Scotia crossed 30,000 at 25.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.50
Bid-YTW : 3.57 %
BNS.PR.Q FixedReset 125,406 RBC crossed 75,000 at 25.43; Desjardins crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-10-25
Maturity Price : 25.00
Evaluated at bid price : 25.44
Bid-YTW : 3.13 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.O Perpetual-Premium Quote: 26.15 – 26.45
Spot Rate : 0.3000
Average : 0.2062

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 26.00
Evaluated at bid price : 26.15
Bid-YTW : 2.67 %

PWF.PR.A Floater Quote: 20.00 – 20.30
Spot Rate : 0.3000
Average : 0.2133

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 2.64 %

HSB.PR.D Deemed-Retractible Quote: 25.33 – 25.60
Spot Rate : 0.2700
Average : 0.1942

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.33
Bid-YTW : 2.49 %

SLF.PR.I FixedReset Quote: 26.13 – 26.40
Spot Rate : 0.2700
Average : 0.2059

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.13
Bid-YTW : 2.42 %

PWF.PR.P FixedReset Quote: 23.16 – 23.38
Spot Rate : 0.2200
Average : 0.1769

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.75
Evaluated at bid price : 23.16
Bid-YTW : 3.52 %

HSE.PR.A FixedReset Quote: 23.10 – 23.22
Spot Rate : 0.1200
Average : 0.0805

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-07-10
Maturity Price : 22.72
Evaluated at bid price : 23.10
Bid-YTW : 3.72 %