September PrefLetter Released!

September 15th, 2014

The September, 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 September, 2014, issue, while the “Next Edition” will be the October, 2014, issue, scheduled to be prepared as of the close October 10 and eMailed to subscribers prior to market-opening on October 14 (the Monday is Thanksgiving).

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.

TLM.PR.A Downgraded to Pfd-3 by DBRS, Trend Negative

September 13th, 2014

DBRS has announced that it:

DBRS has today downgraded the Issuer Rating and Unsecured Debentures & Medium-Term Notes rating of Talisman Energy Inc. (Talisman or the Company) to BBB from BBB (high), and changed the trend to Negative. DBRS has also downgraded the Company’s Preferred Shares rating to Pfd-3 from Pfd-3 (high), with a Negative trend.

On April 16, 2014, DBRS placed the ratings of Talisman Under Review with Negative Implications. The rating action reflected DBRS’s concern about the continued challenging natural gas market environment in North America (approximately 40% of total production in H1 2014), high capital expenditures (capex) (despite a 20% reduction from 2012), ongoing operational and production reliability issues in the North Sea, and its implication on Talisman’s credit risk profile. The Company recently released its H1 2014 financial results, which remained relatively weak due to the aforementioned negative driving factors. The reduced operating performance and weakened credit metrics have resulted in a credit risk profile that is no longer consistent with a BBB (high) rating.

DBRS has changed the trend to Negative on the ratings as DBRS believes a meaningful recovery will remain challenging, largely driven by the ongoing weak natural gas market outlook in North America, continued growth capex initiatives and capex commitment associated with the North Sea operations. In the absence of much stronger commodity prices, Talisman will have to continue to execute a combination of the following to maintain an adequate financial profile: (1) growth capital spending curtailment; (2) asset sales; and (3) joint venture agreements with upfront cash receipts, with the proceeds being used to reduce leverage. While DBRS acknowledges the Company’s track record on divesting non-core assets on a timely basis, DBRS views further significant non-core asset divestitures to remain challenging, particularly the announced North Sea assets with significant decommissioning obligations and production reliability issues. Kurdistan assets (the other non-core assets announced for sale) are exposed to heightened political instability in Iraq. If Talisman is successful in returning to a free cash flow neutral position while improving its credit metrics on a sustainable basis, which would largely be influenced by the timing of the North Sea asset divestiture (the North Sea operations have continued to result in significant cash flow deficits), DBRS may consider changing the trend to Stable. However, continued weak operating performance and cash flow deficits in the absence of timely asset divestitures would result in further rating pressure.

TLM.PR.A was last mentioned on PrefBlog when the underwriters held a clearance sale. This issue is a FixedReset, 4.20%+277, announced 2011-12-5. It is tracked by HIMIPref™, but relegated to the Scraps index on credit concerns.

September 12, 2014

September 12th, 2014

Assiduous Reader DR alerts me to the Financial Post’s Barry Critchley’s attempt to whip up more hysteria regarding the so-called evils of so-called High Frequency Trading:

At best it may be unintentional consequences. At worst it may be an attempt to encourage high frequency trading in the preferred share market – all of which acts to the detriment of retail investors.

Diane Stibbard and Keith Honeyborne are two retail investors who make part of their living by buying, owning and selling preferred shares – and have concerns about how trades, especially at the market open, occur in that market.

Stibbard, an experienced investor, details the means by which the HFTs queue jump. That process starts with a market order from a retail investor – meaning the buyer or seller doesn’t specify a price – that in turn elicits a response from more sophisticated retail investors. The latter group then puts in a limit order that is inside (or between) the bid and ask of the market order. In turn, other more sophisticated retail investors follow which reduces the bid/ask spread.

Then the HFTs pounce. “At approximately one second before the open, a HFT will enter a market order on the ask side for a number of shares slightly lower than the market bid quantity, which because of your [TMX] Rule 4-701, will enable it to queue jump ahead of the prior limit orders,” said Stibbard.

The result of this last-second involvement, Stibbard says, is that at the market open, “the limit price of the lowest ask is used as the clearing price. As a result, the orders of the selling retail investors become the stalking horse for the HFT but that price-setting investor’s order will never be filled.”

At the heart of the matter is Rule 4-701:

Rule 4-701 Execution of Trades at the Opening

(1) Subject to Rule 4-702, securities shall open for trading at the opening time, and any opening trades shall be at the calculated opening price.

Amended (February 24, 2012)

(2) The following orders shall be completely filled at the opening:
(a) market orders and better-priced limit orders; and

(b) MBF orders.

(c) Repealed (October 15, 2012)

(d) Repealed (October 15, 2012)

Amended (October 15, 2012)

(3) The following orders are eligible to participate in the opening but are not guaranteed to be filled:
(a) Repealed (August 7, 2001)

(b) limit orders at the opening price.

(c) Repealed (October 15, 2012)

Amended (October 15, 2012)

(4) Unless otherwise provided, trades shall be allocated among orders at the opening price in the following manner and sequence:
(a) trades shall be allocated to orders guaranteed a fill pursuant to Rule 4-701(2) then;

(b) all possible crosses shall be executed; then

(c) Repealed (August 7, 2001)

(d) to limit orders at the opening price according to time priority.

(5) Repealed (August 7, 2001)

(6) Repealed (August 7, 2001)

(7) Orders at the opening price that are not completely filled at the opening shall remain in the Book, at the opening price.

So my reaction is, in short: Boo-hoo-fucken-hoo.

It is a pity that Critchley did not see fit to publish the “three-page letter” that Stibbard wrote to the Exchange, or to suggest improvements in the rule, but let’s look at the situation more closely.

Firstly, the strategy at issue starts with somebody entering a market order for delayed-execution in a size that is large relative to the usual or expected opening trades (which we may assume, in this market, is a very small number!). Or, to put it bluntly, we need to start the process with a moron.

Stibbard and Honeyborne like to make a little money fleecing morons – nothing wrong with that, that’s why God created morons. So, fine: they take the opposite side of the market with a limit order inside the other limit orders that are in the book at that point – which, no doubt, will fuel a column next week dealing with the complaints of those poor souls who entered their limit orders at 9:15, who are being victimized by predatory trading by the current complainants, who are not-quite-high-but-gee-whiz-pretty-often-you-know frequency traders.

Remember the old adage?

Big fleas have little fleas
On their backs to bite ‘em
And them fleas got smaller fleas
And so ad infinitum.

So the predatory Stibbard and Honeyborne are having their lunch eaten by more predatory predators. And so they complain that the rules are unfair, that there should be special rules that will allow them to compete with the big boys, even though they’re conducting their predatory trading by typing orders manually on their ten-bucks-a-throw discount brokers’ screens. Which, boys and girls, is the whole story of the HFT controversy in a nutshell.

Still, it would be interesting to learn just what they propose as a solution. Eliminate the priority of market orders over limit orders? Have a black-out period before the opening, during which market orders will be refused? Criminalize the possession and use of better algorithms and hardware than what they have? Maybe the Exchange should simply deposit money directly into their bank account?

It will also be noted that there is no reason to believe that the fiercer predators are, in fact, HFT. I don’t think HFT will be much interested in the preferred share market, where 40,000 shares in a day will get you on the PrefBlog volume highlights; and besides, I don’t think any preferred share issues are qualified for maker-taker exchange fees, which is a big chunk of HFT profits; and anyway, I don’t know how maker-taker pricing applies to a collision of market orders at the opening and am too lazy to look it up. It’s more likely a prop trader or market-maker at a brokerage, who can get away with using yesterday’s technology because the competition is using last week’s. There is a strong possibility, as discussed below, that it isn’t a professional at all, that it’s just another retail trader committing the unpardonable sin of using a brokerage that isn’t bank-owned, one that offers order types that the Powers That Be have deemed too complex for stupid Canadians. How awful of him!

How would I attempt to compete in this kind of big boy’s game? Interactive Brokers offers iceberg orders, which:

provides a way to submit large volume orders to the market in increments while publicly displaying only a specified portion of the total order size.

These are supported for entry on the Toronto Exchange. And on the Toronto Exchange:

10. How will Icebergs be treated at the opening?

The total volume of an Iceberg order will be included in the calculation of the Calculated Opening Price (COP). If an Iceberg order is a Better Priced Limit order (BPL) or a MKT order, the disclosed volume is guaranteed a fill at the Opening. The reserve volume is not guaranteed to be filled, but will be treated as a Participatory Order for the opening rotation. Any remaining reserve volume will be re-priced at the COP.

So say there’s a market buy order coming in for 5,000 shares. And, say, by looking at the Level 2 book at 9:28 am, you figure the opening price is going to be 24.95, and you’d love to sell a bunch at anywhere north of 24.90.

Well, what you do is you enter your order to sell a bunch at 24.93, but display only 100 shares. So the sharpie with the market order, ignoring your order because it’s so small, figures he’s going to be filled at 24.95, but he’s only going to get 24.93. He’ll still get filled before you do, but the uncertainty is going to make the deal a little less attractive for him.

[To be frank, I'm not completely sure that this will work as planned. I'm not sure precisely what information is visible to clients in the pre-opening. Better check carefully before entering your order!]

And, as a side-benefit, the moron with the initial market order will get a better price, which is the whole point of the rules in the first place. It will be noted that the moron with the initial market order will never, ever get a worse price in the presence of the so-called predatory order than he will in its absence, and will probably get a better one (although you can make an argument that enough of this so-called predation will discourage the entry of limit orders before the open. Let’s see some figures on that first, though). It will also be noted that this entire dispute concerns traders and has nothing to do with investing which are two very different games. As I have often asserted in the past, market microstructure should be evaluated solely on the basis of how it affects investors – traders can look after themselves.

Another strategy, which will cost money but might be worth it in the end, is to create still more uncertainty by entering a market order for 300 shares at the last second. If this works, you might get an unfortunate fill if this small size tips the balance so that the opening is executed on the bid side rather than the ask … and the sharpie with his market order of 4,900 shares isn’t going to like that at all, perhaps to the extent he gives up his (rather simplistic) strategy. You could also do this at Interactive Brokers with their Good After Time order, which according to their example will give time increments down to 1-second. So presumably, you could put in this market order at 9:29:00, with a Good After Time of 9:29:59, although I’ve never tried it and don’t know if the IB system will actually do this. If it does, and if the “approximately one second before opening” estimate of Ms. Stibbard is correct, then there’s a decent chance that Stibbard and Honeyborne are being predated by somebody who’s only one notch up the food chain, not an apex predator. An apex predator would measure the interval between order placement and market opening in milliseconds, and not many of them either.

Note that Canadian banks’ discount brokerages do not – as far as I know – offer these useful order types to retail scum because … they don’t have to! Ha-ha! Suckers!

However, there is a third way to play this new game, and that’s to enter your own pre-emptive market order to sell. It’s 9:20, there’s a market buy order for 5,000 shares and you’ve got your limit sell order for 4,000 shares at 24.90, which you think will set the opening price. Maybe it’s an iceberg, maybe it’s not, whatever. But you’re afraid the competition is going to come in at 9:29, nine minutes from now, with a market order to sell 4,500 and scoop up all the profits. Fine. Get there first. Put it your own market sell order for 4,500 (in addition to your limit order). Now, if the enemy puts in his own market order, he’s going to tip the balance and the opening will be on the bid side, which would be horrible – so, you reason, he probably won’t do it. And hurray, you scoop the entire market buy!

It gets interesting, of course, if the enemy also reads PrefBlog and has been carefully watching the issue in question, because the pattern of orders will make it clear to him just what’s happening. ‘Oh, yeah, tough guy?’ he’ll think to himself, ‘You wanna play cute with me? Eat this!’ as he puts in a market sell for 4,500. And now it’s a fascinating Mexican stand-off, that is very well modelled as a Prisoner’s Dilemma game:

  • If you both execute, you both lose a lot of money
  • If one party cancels, he’s flat and the executing party makes a lot of money
  • If you both cancel, you’re both flat, and somebody else grabs the moron’s cash

Note that there was such a thing as an anti-scooping rule so pro accounts couldn’t play this game after 9:28, but these rules have been repealed. Note also that I am not a trading specialist and rarely, if ever, trade at the opening. Or the close, for that matter. Plain vanilla trading works just fine for me.

In more traditional news, real estate prices rose faster than debt:

Statistics Canada’s quarterly national balance sheet report said household credit debt (consumer credit, mortgages and other loans) rose by 1.3 per cent in the quarter, outpacing the growth in disposable income. As a result, the ratio of credit debt to disposable income, a closely watched measure of the household debt burden, rose to 163.6 per cent, slightly below the record 164.1 per cent in the third quarter of 2013.

However, household net worth rose by 2.3 per cent in the second quarter, to a record $8.1-trillion (or $227,000 per person), driven primarily by a continued rise in real estate values. As a result, the ratio of household credit market debt to net worth – another measure of consumers’ capacity for debt – fell to 22.3 per cent from 22.5 per cent, the lowest level in six years.

The rise in household consumer credit came from all sources – mortgages, non-mortgage loans and consumer credit (primarily credit cards). Consumer credit rose 1.4 per cent in the quarter, its biggest increase since the 2012 third quarter. Mortgage debt rose 1.4 per cent, its biggest rise in three quarters.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets down 21bp and DeemedRetractibles off 15bp. Volatility was average. Volume was low.

And now it’s time for 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 0.00 % 0.00 % 0 0.00 0 -0.5244 % 2,647.0
FixedFloater 4.14 % 3.40 % 25,692 18.56 1 0.0436 % 4,185.8
Floater 2.91 % 3.03 % 46,759 19.66 4 -0.5244 % 2,737.2
OpRet 4.05 % 0.22 % 93,077 0.08 1 -0.1578 % 2,727.1
SplitShare 4.28 % 3.73 % 111,959 3.93 5 -0.0036 % 3,155.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1578 % 2,493.7
Perpetual-Premium 5.46 % 0.43 % 71,673 0.09 20 -0.0530 % 2,440.0
Perpetual-Discount 5.23 % 5.14 % 106,577 15.19 16 -0.2382 % 2,608.5
FixedReset 4.26 % 3.81 % 181,959 6.58 74 -0.2101 % 2,559.5
Deemed-Retractible 5.00 % 1.87 % 103,420 0.20 42 -0.1509 % 2,564.9
FloatingReset 2.62 % 0.48 % 82,022 0.08 6 -0.1504 % 2,528.5
Performance Highlights
Issue Index Change Notes
FTS.PR.J Perpetual-Discount -2.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 23.27
Evaluated at bid price : 23.61
Bid-YTW : 5.05 %
PWF.PR.A Floater -1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 2.57 %
IFC.PR.A FixedReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.60
Bid-YTW : 4.38 %
VNR.PR.A FixedReset 1.03 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 25.51
Bid-YTW : 3.91 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PF.E FixedReset 111,630 Nesbitt crossed three blocks: 11,200 shares, 14,400 and 50,000, all at 25.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 23.14
Evaluated at bid price : 25.05
Bid-YTW : 4.29 %
TD.PF.A FixedReset 61,430 Desjardins crossed 50,000 at 25.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 23.25
Evaluated at bid price : 25.30
Bid-YTW : 3.81 %
BNS.PR.Y FixedReset 46,370 TD crossed 40,000 at 24.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.97
Bid-YTW : 3.51 %
RY.PR.D Deemed-Retractible 38,953 RBC crossed 35,000 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-02-24
Maturity Price : 25.25
Evaluated at bid price : 25.60
Bid-YTW : 1.87 %
CM.PR.O FixedReset 36,300 RBC crossed 25,000 at 25.38.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.83 %
SLF.PR.D Deemed-Retractible 32,207 RBC crossed 25,000 at 22.45.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.39
Bid-YTW : 5.81 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.J Perpetual-Discount Quote: 23.61 – 24.08
Spot Rate : 0.4700
Average : 0.3073

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 23.27
Evaluated at bid price : 23.61
Bid-YTW : 5.05 %

BAM.PR.X FixedReset Quote: 22.16 – 22.45
Spot Rate : 0.2900
Average : 0.1968

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 21.89
Evaluated at bid price : 22.16
Bid-YTW : 4.10 %

BNS.PR.R FixedReset Quote: 25.72 – 25.95
Spot Rate : 0.2300
Average : 0.1382

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.72
Bid-YTW : 3.24 %

RY.PR.B Deemed-Retractible Quote: 25.50 – 25.70
Spot Rate : 0.2000
Average : 0.1285

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-12
Maturity Price : 25.25
Evaluated at bid price : 25.50
Bid-YTW : -4.37 %

ELF.PR.G Perpetual-Discount Quote: 22.18 – 22.36
Spot Rate : 0.1800
Average : 0.1129

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 21.83
Evaluated at bid price : 22.18
Bid-YTW : 5.42 %

PWF.PR.A Floater Quote: 20.50 – 20.86
Spot Rate : 0.3600
Average : 0.2945

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-12
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 2.57 %

September 11, 2014

September 11th, 2014

The loonie got hit today:

The Canadian dollar fell to the lowest level in five months as crude oil, the nation’s largest export, traded at almost its lowest point in more than a year.

The currency weakened against all its 16 major peers after a report showed home prices were unchanged in July, the second indicator this week to suggest the housing market is fading as a driver of economic growth. The Bank of Canada said last week it is waiting for strong-enough exports to take the burden of economic growth from over-indebted consumers, prompting speculation it would lag behind the U.S. Federal Reserve raising interest rates.

The loonie, as the Canadian dollar is called for the image of the aquatic bird on the C$1 coin, fell 0.9 percent to C$1.1035 per U.S. dollar at 5 a.m. in Toronto. It reached C$1.1059, the weakest since April 1. One loonie buys 90.62 U.S. cents.

Crude oil fell as much as 1.4 percent to $90.43 per barrel in New York, the lowest since May 2013, before trading at $93.14, according to data compiled by Bloomberg.

BMO NVCC-compliant sub-debt got a provisional rating of A(low) from DBRS:

DBRS has today assigned a provisional rating of A (low) with a Stable trend to the Bank of Montreal’s (the Bank or BMO) Series H Medium Term-Notes (Subordinated Indebtedness) (NVCC Sub Debt Series H or Series H).

DBRS assigned the NVCC Sub Debt Series H a rating equal to the Bank’s intrinsic assessment, less three rating notches, because Series H has only the Office of the Superintendent of Financial Institutions (OSFI)-required non-viable contingent capital (NVCC) triggers and no additional triggers. Furthermore, in the event of a conversion to common shares, NVCC Sub Debt Series H has a potential for recovery which is sufficiently better than BMO’s existing NVCC Preferred Shares to allow for a differentiation in the Series H rating relative to the NVCC Preferred Shares rating. Please see the DBRS press release entitled “DBRS Provides Guidance on Canadian Bank Non-Viability Contingent Capital Ratings” dated January 10, 2014, for more details.

Those with good memories will remember the rating on the BMO NVCC-compliant preferreds:

DBRS has today provisionally rated Bank of Montreal’s (the Bank) Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27 (NVCC Preferred Shares Series 27 or Series 27) at Pfd-2 with a Stable trend.

DBRS assigned the NVCC Preferred Shares Series 27 a rating equal to the Bank’s intrinsic assessment less four rating notches because the Series 27 has only an Office of the Superintendent of Financial Institutions (OSFI)-compliant non-viable contingent capital (NVCC) trigger, which is consistent with the OSFI requirements for NVCC instruments, and no additional triggers.

The relative recovery hopes of sub-debt and preferreds were discussed in the posts Royal Bank Issues NVCC-Compliant Sub-Debt and Feds Consulting on Bank Recapitalization Regime.

CU Inc., proud issuer of CIU.PR.A and CIU.PR.C, was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the Issuer Rating, Unsecured Debentures & Medium-Term Notes, Commercial Paper and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), A (high), R-1 (low) and Pfd-2 (high), respectively. All trends are Stable, reflecting that CUI is on track to complete its heavy capital spending for the 2012 to 2016 period. The rating assumes further weakness in the debt-to-cash flow ratio over the next two years because of the elevated level of capital expenditures (capex), but this ratio is not expected to materially deviate from the current rating category while other key metrics, including the debt-to-capital and interest coverage ratios, may also weaken but will remain within the acceptable range.

CUI’s business risk profile is expected to benefit from the approximately $9.8 billion of capex spent over the 2012 to 2016 period, strengthening the Company’s internally generated cash flow capability. Once completed, the Company’s rate base will be double that of 2011 levels.

CUI’s financial risk profile has weakened because of the significant level of capex over the past few years. This has led to deterioration in the Company’s debt-to-capital and cash flow-to-debt ratios, which are expected to be pressured further in 2015. This temporary weakness in CUI’s key metrics is not, however, expected to negatively affect the Company’s current ratings. Following the completion of the transmission build-out in 2016, CUI will benefit from a higher rate base and its key financial ratios should recover to historical levels consistent with the current rating category. The large capex spent on transmission infrastructure is also considered to be a low-risk investment as it will provide stable returns once in service. For the remaining duration of the transmission build-out period, CUI is expected to finance its capex largely through debt issuances, along with continued support from its parent, Canadian Utilities Limited (rated “A” by DBRS), through timely equity injections and lower dividend payout requirements. Although this will likely result in a higher debt-to-capital ratio, the Company is committed to maintaining its leverage at approximately 60% to be in line with its regulatory capital structures and to still be commensurate with the “A” rating range. DBRS also expects the Company’s cash flow-to-debt ratio to remain above 10% during the transmission build-out period.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 30bp, FixedResets up 13bp and DeemedRetractibles gaining 10bp. Volatility was good, comprised entirely of winners and everything except the Floater was issued by BAM. Did people forget that BAM went ex-dividend today? Volume was very low, but notable for a heavy presence of ENB issues in the highlights, presumably due to the new issue announcement.

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 0.7658 % 2,660.9
FixedFloater 4.15 % 3.40 % 26,018 18.56 1 0.0000 % 4,183.9
Floater 2.90 % 3.04 % 45,384 19.64 4 0.7658 % 2,751.6
OpRet 4.04 % -1.83 % 96,820 0.08 1 0.1580 % 2,731.4
SplitShare 4.28 % 3.82 % 113,393 3.93 5 0.0874 % 3,155.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1580 % 2,497.6
Perpetual-Premium 5.46 % 0.42 % 83,638 0.09 20 0.1729 % 2,441.3
Perpetual-Discount 5.22 % 5.11 % 106,214 15.24 16 0.2951 % 2,614.8
FixedReset 4.25 % 3.74 % 179,672 6.61 74 0.1284 % 2,564.9
Deemed-Retractible 4.99 % 0.60 % 99,809 0.20 42 0.1046 % 2,568.8
FloatingReset 2.62 % -1.43 % 83,043 0.08 6 0.1178 % 2,532.3
Performance Highlights
Issue Index Change Notes
BAM.PR.N Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 21.55
Evaluated at bid price : 21.55
Bid-YTW : 5.53 %
BAM.PF.D Perpetual-Discount 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 21.84
Evaluated at bid price : 22.16
Bid-YTW : 5.53 %
BAM.PF.E FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.16
Evaluated at bid price : 25.09
Bid-YTW : 4.08 %
BAM.PR.M Perpetual-Discount 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 21.60
Evaluated at bid price : 21.60
Bid-YTW : 5.52 %
PWF.PR.A Floater 1.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 20.86
Evaluated at bid price : 20.86
Bid-YTW : 2.53 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PF.E FixedReset 84,700 RBC crossed 50,000 at 25.00; Scotia crossed 80,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.13
Evaluated at bid price : 25.02
Bid-YTW : 4.23 %
BMO.PR.J Deemed-Retractible 52,376 RBC crossed 50,000 at 25.79.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-11
Maturity Price : 25.50
Evaluated at bid price : 25.75
Bid-YTW : -4.92 %
MFC.PR.M FixedReset 52,255 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-12-19
Maturity Price : 25.00
Evaluated at bid price : 25.08
Bid-YTW : 3.91 %
ENB.PF.A FixedReset 50,100 Scotia crossed 37,000 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.16
Evaluated at bid price : 25.05
Bid-YTW : 4.19 %
ENB.PF.C FixedReset 36,881 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.14
Evaluated at bid price : 25.03
Bid-YTW : 4.18 %
PWF.PR.S Perpetual-Discount 34,654 RBC crossed 27,100 at 24.04.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.65
Evaluated at bid price : 24.01
Bid-YTW : 5.04 %
There were 14 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.G FixedFloater Quote: 22.91 – 23.07
Spot Rate : 0.1600
Average : 0.1064

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 22.91
Evaluated at bid price : 22.91
Bid-YTW : 3.40 %

SLF.PR.I FixedReset Quote: 26.08 – 26.23
Spot Rate : 0.1500
Average : 0.1182

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.08
Bid-YTW : 2.23 %

FTS.PR.H FixedReset Quote: 20.62 – 20.80
Spot Rate : 0.1800
Average : 0.1503

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 20.62
Evaluated at bid price : 20.62
Bid-YTW : 3.76 %

BNS.PR.B FloatingReset Quote: 25.56 – 25.66
Spot Rate : 0.1000
Average : 0.0764

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-11
Maturity Price : 25.50
Evaluated at bid price : 25.56
Bid-YTW : -2.84 %

BMO.PR.S FixedReset Quote: 25.30 – 25.38
Spot Rate : 0.0800
Average : 0.0579

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-25
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 3.78 %

FTS.PR.F Perpetual-Discount Quote: 24.23 – 24.43
Spot Rate : 0.2000
Average : 0.1782

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.96
Evaluated at bid price : 24.23
Bid-YTW : 5.08 %

PPL.PR.G Firm On Excellent Volume

September 11th, 2014

Pembina Pipeline Corporation has announced:

that it has closed its previously announced public offering of 10,000,000 cumulative redeemable rate reset class A preferred shares, series 7 (the “Series 7 Preferred Shares”) for aggregate gross proceeds of $250 million (the “Offering”).

The Offering was announced on September 2, 2014 when Pembina entered into an agreement with a syndicate of underwriters. Due to strong investor demand, the size of the Offering was increased from an originally proposed offering of 6,000,000 Series 7 Preferred Shares plus an underwriters’ option to purchase up to an additional 2,000,000 Series 7 Preferred Shares (for aggregate gross proceeds of $200 million assuming the underwriters’ option had been exercised in full).

The proceeds from the offering will be used to help fund a portion of Pembina’s proposed purchase of the Vantage pipeline system and the Saskatchewan Ethane Extraction Plant from Mistral Midstream Inc. and other entities affiliated with Riverstone Holdings LLC (the “Transaction”), as well as to fund a portion of the remainder of the Company’s 2014 capital expenditure program and for general corporate purposes. The Transaction is subject to regulatory approvals including approval of the National Energy Board and under the Competition Act (Canada) and the Canada Transportation Act, required consents and other customary closing conditions, including the approval of the Toronto Stock Exchange. Further details about the Transaction are set out in a separate press release from Pembina dated September 2, 2014, and which may be found on Pembina’s SEDAR profile at www.sedar.com.

The Series 7 Preferred Shares will begin trading on the Toronto Stock Exchange today under the symbol PPL.PR.G.

Dividends on the Series 7 Preferred Shares are expected to be $0.2813 quarterly, or $1.125 per share on an annualized basis, payable on the 1st day of March, June, September and December, as and when declared by the Board of Directors of Pembina, for the initial fixed rate period to but excluding December 1, 2019.

All of Pembina’s dividends are designated “eligible dividends” for Canadian income tax purposes.

PPL.PR.G is a FixedReset, 4.50%+294, announced 2009-9-2 2014-9-2. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

The issue traded 1,451,885 shares today (consolidated exchanges) in a range of 25.05-19 before closing at 25.10-11, 1×70. Vital statistics are:

PPL.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-11
Maturity Price : 23.19
Evaluated at bid price : 25.12
Bid-YTW : 4.41 %

TCL.PR.D To Be Redeemed

September 11th, 2014

Transcontinental Inc. has announced:

that it will exercise its right to redeem all of its 4 million outstanding Cumulative 5-Year Rate Reset First Preferred Shares, Series D on October 15, 2014 at the price per share of $25.00, for an aggregate total of $100 million. The Corporation intends to finance the share redemption through its revolving credit facility.

The quarterly dividend of $0.4253 per Series D Shares will be the final dividend on the Series D Shares, and will be paid in the usual manner on October 15, 2014 to shareholders of record on October 15, 2014. After October 15, 2014, the Series D Shares will cease to be entitled to dividends and the holders of such shares will not be entitled to exercise any right in respect thereof except that of receiving the redemption amount.

Instruction with respect to receipt of the redemption amount will be set out in the Letter of Transmittal to be transmitted to registered holders of the Series D Shares shortly. Inquiries should be directed to our Registrar and Transfer Agent, CST Trust Company, at 1‑800‑387‑0825 (or in Toronto 416‑682‑3860). Beneficial holders who are not directly the registered holders of these shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds.

No surprises here! TCL.PR.D is a FixedReset, 6.75%+416, that closed 2009-10-2 after being announced 2009-9-21.

New Issue: ENB FixedReset, 4.40%+268

September 11th, 2014

Enbridge Inc. has announced:

that it has entered into an agreement with a group of underwriters to sell eight million Cumulative Redeemable Preference Shares, Series 15 (the “Series 15 Preferred Shares”) at a price of $25.00 per share for distribution to the public. Closing of the offering is expected on September 23, 2014.

The holders of Series 15 Preferred Shares will be entitled to receive fixed cumulative dividends at an annual rate of $1.10 per share, payable quarterly on the first day of March, June, September and December, as and when declared by the Board of Directors of Enbridge, yielding 4.40 per cent per annum, for the initial fixed rate period to but excluding September 1, 2020. The first quarterly dividend payment date is scheduled for December 1, 2014. The dividend rate will reset on September 1, 2020 and every five years thereafter at a rate equal to the sum of the then five-year Canadian Government bond yield plus 2.68 per cent. The Series 15 Preferred Shares are redeemable by Enbridge, at its option, on September 1, 2020 and on September 1 of every fifth year thereafter.

The holders of Series 15 Preferred Shares will have the right to convert their shares into Cumulative Redeemable Preference Shares, Series 16 (the “Series 16 Preferred Shares”), subject to certain conditions, on September 1, 2020 and on September 1 of every fifth year thereafter. The holders of Series 16 Preferred Shares will be entitled to receive quarterly floating rate cumulative dividends, as and when declared by the Board of Directors of Enbridge, at a rate equal to the sum of the 90-day Government of Canada Treasury bill rate plus 2.68 per cent.

Enbridge has granted to the underwriters an option, exercisable at any time up to 48 hours prior to the closing of the offering, to purchase up to an additional 2 million Series 15 Preferred Shares at a price of $25.00 per share.

The offering is being made only in Canada by means of a prospectus supplement to the base shelf prospectus of the Corporation dated September 2, 2014. 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.

The syndicate of underwriters is led by TD Securities Inc., CIBC World Markets, RBC Capital Markets, and Scotiabank.

Later, they added:

that as a result of strong investor demand for its previously announced offering of Cumulative Redeemable Preference Shares, Series 15 (the “Series 15 Preferred Shares”), the size of the offering has been increased to 11 million Series 15 Preferred Shares. The aggregate gross proceeds will be C$275 million. Closing of the offering is expected on September 23, 2014.

Of the many very closely related ENB FixedResets available, the new issue is most comparable to ENB.PF.C, 4.40%+264, which closed today at 24.99-19, 9×29, and ENB.PF.E, 4.40%+266, which closed at 25.00-02, 17×19. Not much of a new-issue concession here!

Update, 2014-9-17: Rated Pfd-2(low) [Stable] by DBRS.

September 10, 2014

September 11th, 2014

Low policy rates are causing everybody in the world to pile into real-estate. The UK response deals with income, not Loan-to-Value:

[Professional government mouthpiece Mark] Carney’s attempt to reassure consumers and businesses that the BOE benchmark will peak well below the 5 percent seen before the financial crisis has helped to hold down borrowing costs. Five-year gilts are yielding 1.76 percent today compared with 1.86 percent at the end of last year. Traders are betting the BOE will refrain from raising the 0.5 percent benchmark until June, Sonia contracts show.

Financial-stability officials have taken some action to prevent an unsustainable debt buildup, toughening affordability checks in April and then restricting the proportion of mortgages at 4.5 times income to no more than 15 percent of new home loans.

“They’ve picked out this 4.5 times loan-to-income multiple from thin air because it’s one of the few measures where you’re not through the previous peak substantially,” [Talisman Global Asset Management Ltd. Chief Investment Officer Julian] Sinclair said.

Meanwhile, in Canada:

Bank of Montreal has once again lowered its five-year fixed mortgage rate to 2.99 per cent, from 3.29 per cent, a move that could cause more downward pressure on rates at a time when they’re already defying expectations.

BMO’s rate is not the lowest in the market, but it is the lowest that’s currently available from the country’s biggest banks. BMO sparked a mortgage price war among the banks when it first introduced its 2.99 per cent five-year-fixed rate in early 2012. That rate also earned the bank a lecture from then-Finance Minister Jim Flaherty, who had been taking steps to curb growth in the housing market amid fears that a bubble could be forming. BMO has repeatedly brought the rate back since then, most recently this March.

Dog bites man? That’s not news. But man bites dog is news!

Apple Inc. will charge fees from banks every time consumers use their iPhone to make purchases, a move that will give the company a cut of the growing mobile payments market, Bloomberg reported, citing people with knowledge of the arrangement.

Apple unveiled a watch, two larger iPhones and the mobile payments service Apple Pay on Tuesday.

The new iPhones will come equipped with the payments service, which launches in the United States next month and allows users to pay for items in stores with their phones instead of physically presenting their credit or debit cards.

Under the deals struck individually with each bank, Apple will collect a fee for each transaction, the report said.

As far as consumers are concerned, of course, it just means yet another layer of fee-demanding middlemen. That part isn’t news at all.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 11bp, FixedResets losing 15bp and DeemedRetractibles off 3bp. Volatility was average, but comprised entirely of FixedReset losers. Volume was low, but the highlights consist entirely of FixedResets.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 240bp, a significant narrowing from the 250bp reported September 3.

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 0.1108 % 2,640.7
FixedFloater 4.15 % 3.40 % 25,962 18.57 1 0.2626 % 4,183.9
Floater 2.90 % 3.07 % 45,069 19.47 4 0.1108 % 2,730.7
OpRet 4.05 % -0.05 % 98,060 0.08 1 -0.0395 % 2,727.1
SplitShare 4.28 % 3.81 % 114,773 3.93 5 -0.0317 % 3,152.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0395 % 2,493.7
Perpetual-Premium 5.47 % 0.41 % 74,819 0.09 20 -0.0746 % 2,437.1
Perpetual-Discount 5.22 % 5.13 % 110,342 15.21 16 -0.1122 % 2,607.1
FixedReset 4.25 % 3.74 % 182,443 8.40 74 -0.1453 % 2,561.6
Deemed-Retractible 5.00 % 1.85 % 100,163 0.21 42 -0.0275 % 2,566.1
FloatingReset 2.62 % 1.92 % 80,212 0.16 6 -0.1438 % 2,529.4
Performance Highlights
Issue Index Change Notes
VNR.PR.A FixedReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.38
Evaluated at bid price : 25.04
Bid-YTW : 4.35 %
CIU.PR.C FixedReset -1.87 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 20.42
Evaluated at bid price : 20.42
Bid-YTW : 3.73 %
TRP.PR.A FixedReset -1.80 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 21.86
Evaluated at bid price : 22.34
Bid-YTW : 3.93 %
TRP.PR.E FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.26
Evaluated at bid price : 25.35
Bid-YTW : 3.87 %
Volume Highlights
Issue Index Shares
Traded
Notes
NA.PR.S FixedReset 147,403 TD crossed two blocks of 10,000 each, both at 25.60. RBC crossed two blocks of 24,200 and 25,000 at 25.60 and another block of 60,000 at 25.64.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-05-15
Maturity Price : 25.00
Evaluated at bid price : 25.61
Bid-YTW : 3.61 %
TD.PF.B FixedReset 108,747 RBC bought 10,000 from Scotia at 25.12 and crossed 50,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.20
Evaluated at bid price : 25.10
Bid-YTW : 3.74 %
TRP.PR.D FixedReset 65,592 RBC crossed 25,000 at 25.35; TD crossed 26,300 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.27
Evaluated at bid price : 25.25
Bid-YTW : 3.85 %
MFC.PR.E FixedReset 61,921 Called for redemption September 19.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 24.99
Bid-YTW : 4.73 %
ENB.PF.E FixedReset 23,875 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.15
Evaluated at bid price : 25.08
Bid-YTW : 4.22 %
MFC.PR.M FixedReset 23,150 Recent new issue.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-12-19
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 3.92 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
VNR.PR.A FixedReset Quote: 25.04 – 25.49
Spot Rate : 0.4500
Average : 0.2836

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.38
Evaluated at bid price : 25.04
Bid-YTW : 4.35 %

CIU.PR.C FixedReset Quote: 20.42 – 21.00
Spot Rate : 0.5800
Average : 0.4395

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 20.42
Evaluated at bid price : 20.42
Bid-YTW : 3.73 %

GWO.PR.M Deemed-Retractible Quote: 26.20 – 26.45
Spot Rate : 0.2500
Average : 0.1643

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.20
Bid-YTW : 3.67 %

TRP.PR.E FixedReset Quote: 25.35 – 25.60
Spot Rate : 0.2500
Average : 0.1647

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.26
Evaluated at bid price : 25.35
Bid-YTW : 3.87 %

FTS.PR.G FixedReset Quote: 24.51 – 24.75
Spot Rate : 0.2400
Average : 0.1708

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-10
Maturity Price : 23.07
Evaluated at bid price : 24.51
Bid-YTW : 3.75 %

POW.PR.G Perpetual-Premium Quote: 26.02 – 26.23
Spot Rate : 0.2100
Average : 0.1414

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-15
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 5.05 %

September 9, 2014

September 9th, 2014

The Bank for International Settlements has released a paper by Sami Alpanda, Gino Cateau and Césaire Meh, all of the Bank of Canada, titled A policy model to analyze macroprudential regulations and monetary policy:

We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.

This conclusion is supported by:

Using our model, we …find that targeted policies such as LTV regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively. In particular, a 5 percentage point (pp) tightening in regulatory LTV decreases household debt by about 7.6 per cent at the peak, while its output impact is about 0.7 per cent. In contrast, a 1 pp increase in capital requirements reduces household debt by about 1.4 per cent and reduces output by about 0.35 per cent at the peak. Hence, an increase of about 2 pp in bank capital would have the same impact on output as a 5 pp reduction in LTV, but its impact on household debt would be about half of LTV at the peak. Similarly, a 100 basis point (bp) temporary increase in the policy rate reduces household debt by about 0.5 per cent at the peak, but this comes at an output cost of about 0.4 per cent, o¤ering an even worse trade-o¤ than capital requirements in terms of reducing household debt.

I’ll admit to being suspicious of this result, but without fully understanding and playing with the model I must also admit that I can’t explain why. I don’t like such finely targeted government policies, with some Pooh-Bah in Ottawa pronouncing on whether a citizen is permitted to buy a house or not. What if they get it wrong? They always do, eventually. Unaddressed in the paper is the effect of CMHC policies, which, in expanding the amount of mortgage insurance outstanding to a gargantuan extent, has thoroughly distorted the market, leading to today’s very high (although not necessarily excessive) debt levels and very high (although not necessarily excessive) housing prices.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 3bp, FixedResets off 7bp and DeemedRetractibles gaining 2bp. Volatility was average. 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 0.00 % 0.00 % 0 0.00 0 -0.1659 % 2,637.8
FixedFloater 4.16 % 3.41 % 25,134 18.55 1 -0.3923 % 4,173.0
Floater 2.91 % 3.07 % 45,746 19.48 4 -0.1659 % 2,727.7
OpRet 4.05 % -0.67 % 97,938 0.08 1 0.0395 % 2,728.2
SplitShare 4.28 % 3.80 % 115,889 3.94 5 0.0521 % 3,153.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0395 % 2,494.6
Perpetual-Premium 5.46 % 0.41 % 74,441 0.09 20 0.1494 % 2,438.9
Perpetual-Discount 5.21 % 5.13 % 105,153 15.22 16 0.0321 % 2,610.0
FixedReset 4.24 % 3.71 % 181,617 8.40 74 -0.0666 % 2,565.3
Deemed-Retractible 5.00 % 1.45 % 99,717 0.15 42 0.0180 % 2,566.8
FloatingReset 2.62 % 0.00 % 74,741 0.08 6 -0.0653 % 2,533.0
Performance Highlights
Issue Index Change Notes
FTS.PR.H FixedReset -1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 20.70
Evaluated at bid price : 20.70
Bid-YTW : 3.75 %
PWF.PR.A Floater -1.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 20.52
Evaluated at bid price : 20.52
Bid-YTW : 2.57 %
IFC.PR.A FixedReset -1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.24 %
IGM.PR.B Perpetual-Premium 1.29 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.25
Evaluated at bid price : 26.00
Bid-YTW : 5.09 %
MFC.PR.F FixedReset 1.64 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.89
Bid-YTW : 4.25 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PF.B FixedReset 194,678 RBC crossed blocks of 49,600 and 50,000, both at 25.12.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 23.21
Evaluated at bid price : 25.11
Bid-YTW : 3.74 %
ENB.PF.A FixedReset 44,113 RBC crossed 40,000 at 25.05.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 23.15
Evaluated at bid price : 25.02
Bid-YTW : 4.19 %
BAM.PR.P FixedReset 39,868 Called for redemption September 30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.41
Bid-YTW : 3.20 %
GWO.PR.S Deemed-Retractible 36,400 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 4.98 %
GWO.PR.N FixedReset 31,160 CIBC crossed 18,000 at 21.77.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.70
Bid-YTW : 4.63 %
TRP.PR.B FixedReset 27,332 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 19.70
Evaluated at bid price : 19.70
Bid-YTW : 3.70 %
There were 20 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.A FixedReset Quote: 24.00 – 24.28
Spot Rate : 0.2800
Average : 0.1802

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.00
Bid-YTW : 4.24 %

PVS.PR.C SplitShare Quote: 25.81 – 26.90
Spot Rate : 1.0900
Average : 1.0096

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-12-10
Maturity Price : 25.50
Evaluated at bid price : 25.81
Bid-YTW : 3.80 %

TD.PR.T FloatingReset Quote: 25.35 – 25.61
Spot Rate : 0.2600
Average : 0.1808

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.35
Bid-YTW : 2.06 %

BAM.PR.X FixedReset Quote: 22.51 – 22.70
Spot Rate : 0.1900
Average : 0.1233

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 22.14
Evaluated at bid price : 22.51
Bid-YTW : 4.01 %

BAM.PR.M Perpetual-Discount Quote: 21.64 – 21.81
Spot Rate : 0.1700
Average : 0.1111

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-09-09
Maturity Price : 21.64
Evaluated at bid price : 21.64
Bid-YTW : 5.60 %

GWO.PR.N FixedReset Quote: 21.70 – 21.95
Spot Rate : 0.2500
Average : 0.1918

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.70
Bid-YTW : 4.63 %

DF.PR.A To Get Bigger

September 9th, 2014

Quadravest has announced:

Dividend 15 Split Corp. II (the “Company”) is pleased to announce it has filed a preliminary short form prospectus in each of the provinces of Canada with respect to an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC, RBC Capital Markets and will also include TD Securities Inc., BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp. and Raymond James.

The Preferred Shares will be offered at a price of $10.00 per Preferred Share to yield 5.25% on the issue price and the Class A Shares will be offered at a price of $8.75 per Class A Share to yield 13.71% on the issue price. The closing price on the TSX of each of the Preferred Shares and the Class A Shares on September 8, 2014 was $9.18 and $10.19, respectively.

Since inception of the Company, the aggregate dividends paid on the Preferred Shares have been $4.05 per share and the aggregate dividends paid on the Class A Shares have been $8.40 per share, for a combined total of $12.45. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the secondary offering will be used by the Company to invest in an actively managed portfolio of dividend-yielding common shares which includes each of the 15 Canadian companies listed below:

Bank of Montreal Enbridge Inc. TELUS Corporation
The Bank of Nova Scotia Manulife Financial Corp. Thomson-Reuters Corporation
BCE Inc. National Bank of Canada The Toronto-Dominion Bank
Canadian Imperial Bank of Commerce Royal Bank of Canada TransAlta Corporation
CI Financial Corp. Sun Life Financial Inc. TransCanada Corporation

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends in the amount of $0.04375 per Preferred Share to yield 5.25% per annum on the original issue price; and
ii. on or about December 1, 2019, to pay the holders of the Preferred Shares the original issue price of those shares.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends initially targeted to be $0.10 per Class A; and
ii. on or about termination, to pay the holders of Class A Shares at least the original issue price of those shares.

The sales period of this overnight offering will end at 9:00 a.m. (EST) on September 10, 2014.

Lynx-eyed readers will find some amusement in the fact that they got their closing prices for the two classes reversed, even when using the word “respectively”.

The NAVPU was 17.43 as of September 8, so the Capital Units are trading at a nice premium to intrinsic value, which provides a great deal of incentive for the fund to issue more units.

DF.PR.A was last mentioned on PrefBlog when they released their 2014 Semi-Annual Report. They also got bigger last March. DF.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.