Manitoba’s viewpoint loud and clear

It took 16 pages but if there was any doubt that Manitoba was not in favor of a national securities regulator the message came through in the final paragraph.

“The existing regulatory scheme has capably met the needs of investors, market participants and businesses in Manitoba by managing risks during the 2008 global financial crisis,” said Donald Murray, chair of the Manitoba Securities Commission.

Murray made those comments in an affidavit filed with the Court of Appeal of Quebec. It was filed there because that province is preparing a constitutional challenge to the draft federal legislation. Included in Murray’s filing was a 127- page paper, titled Securities Regulation and Systemic Risk, prepared by Eric Spink, an Edmontonbased lawyer

In Murray’s view, since the 2008 crisis, the provincial securities regulators in co-operation with the CSA has placed “a renewed emphasis on identifying and managing potential systemic risk.” He points, for example, to the 2009 CSA decision to set up a Standing Committee on Systemic Risk, a group that identifies and monitors “systemic risk” in capital markets. While the proposed federal regulations have not yet been drafted, what bothers Murray is that when they are, they will inevitably “replicate” the same day- to- day regulation and management of risks in the securities industry. And that entry “is currently within the ambit of the Commission and other provincial securities regulators across Canada.” With a hearing scheduled for November, Canada and British Columbia are scheduled to file their evidence by early May with factums due over the summer. By then there will be thousands of pages of documents.

RATE RESET RUSH

It’s been a field day — or more specifically a field few weeks — for banks seeking to raise non- viable contingent capital in the form of five-year rate- reset preferred shares and for investors wishing to buy them.

Since Jan 1, seven financial issuers have come to the market and left with $2.95 billion in proceeds with most of the deals having being upsized. Here’s the roll call: National Bank ($400 million up from a planned $250 million); Royal Bank ($750 million up from $300 million); TD Bank ($700 million vs $ 300 million); Laurentian Bank ($100 million with the possibility of an additional $50 million); and Bank of Nova Scotia ($ 500 million vs $300 million.) The other issuer is Manulife Financial which raised $ 400 million compared with an initial goal of $300 million.

Canadian Western Bank is the latest to raise capital in this form: on Thursday it came to the market seeking $100 million of five-year money at 6.25 per cent. That yield consists of a base rate ( the five year Canada bond rate) plus a spread of 5.47%. If demand is sufficient the underwriters will sell another 600,000 pref shares and raise $ 15 million. This is CWB’s third deal with its most recent being in February 2014 when it raised $ 125 million at 4.4 per cent and a spread of 276 basis points.

So what’s the attraction of these securities?

First, the current form of rate resets is different from the earlier version: the new structure complies with the new rules laid down by global regulators and convert to common shares in a so-called trigger event. While such an event is considered unlikely, there is still a risk.

Second, the yields are attractive with spreads being in the 450 – 550 basis points range.