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By Allan Robinson
The Globe and Mail
Report on Business
Thursday, January 19, 2006
Total financings during the fourth quarter of 2005 plunged 16.2 per cent to $24.3-billion from a year ago, contributing to a slowdown in debt and equity deals as interest rates climbed and the income trust market cooled.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "You're not getting something for nothing. We want to keep it simple and straightforward.”
Debt and equity financings in Canadian capital markets declined to $87-billion in 2005 from $90.1-billion a year earlier after business dropped off sharply during the second half.
The data are compiled by The Globe and Mail from filings with Canadian securities regulators.
The largest institutional deal during the fourth quarter was $1.2-billion raised by RBC Capital Trust, which was set up by Royal Bank of Canada to sell transferable trust units, series 2015 that yield 4.87 per cent and rank as tier one capital. The bank previously raised $1.4-billion through the issuance of two similar series -- due in 2010 and 2011 -- in 2000.
The securities are referred to in the industry as "innovative tier one" or internationally as "hybrid capital" because the interest payments are tax deductible, but the debt is deeply subordinated and could under adverse circumstances be converted into preferred shares, a bank spokesman said.
The final quarter also saw the issuance of some specialized securities known as structured notes. Some of these are designed for investors interested in gaining exposure to commodities and some of the world's hot stock markets. Sometimes the upside is magnified and the full principal is guaranteed for these hybrids, but not always.
Royal Bank issued $8-million (U.S.) medium-term notes linked to the value of five major global stock indexes and $17.1-million in notes based on a basket of commodities including aluminum, copper, nickel, crude oil and natural gas. The principal of both notes is guaranteed at the maturity date in October, 2010, for the equity-linked notes and November, 2008, for the commodity-linked notes.
The commodity-linked notes give retail clients a direct exposure to commodity prices as an asset class for a short duration without having to trade in the futures market, said Simon Carling, director of RBC Dominion Securities Inc. No interest is paid on the securities.
"[The latest deal] is the largest commodity-linked note we have done in the U.S.," he said. "There's a tremendous amount of retail interest in this asset class." These types of structured notes are designed more for retail investors than institutions, said Harry Koza, a senior market analyst for Thomson Financial, a division of Thomson Corp. "My own view is retail brokers sell these things because there is a lot of juice -- they make good commission," he said.
Structured notes issued by Merrill Lynch Canada include $10-million in S&P 500 reverse participation notes bought by investors willing to forgo interest payments for the ability to profit from a decline in the index, although the principal is guaranteed at maturity in five years; $32-million in Asia Pacific redeemable principal-protected notes linked to the Nikkei 225 and stock indexes in China, South Korea, Singapore, Taiwan and Australia; a 10-year $15-million series A extendible quarterly pay medium-term snowball notes with interest rates escalating over 10 years; and $7.9-million in Global Equity accelerator securities, series 1 in both Canadian and U.S. dollars indexed to the S&P 500, as well as a European and a Japanese index.
However, many investors opt for global equity-oriented mutual funds or exchange-traded funds such as the iShares of Morgan Stanley Capital International Japan index fund, which trade on the American Stock Exchange.
"You're not getting something for nothing," said Adrian Mastracci, an investment counsellor at KCM Wealth Management Inc. of Vancouver, referring to extendible notes. "We want to keep it simple and straightforward." The maturities of extendible notes tend to be longer than he wants and clients want to hold securities that have no chance of being redeemed until they mature, he said. He recommends a bond ladder where securities are bought over a range of different maturities.
Asset-backed securities financings consisting of credit card portfolios were hot during the fourth quarter. The deals included $500-million (Canadian) in fixed-rate notes by Algonquin Credit Card Trust backed by a portfolio of MasterCard receivables; $1.5-billion in fixed and floating-rate notes of Cards II Trust backed by Visa receivables; and $365-million in the Glacier Credit Card Trust backed by Canadian Tire credit card receivables.
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