Canadian dollar at par

The Canadian dollar is once again at par with the US dollar – if you are performing currency transactions, just remember to get the CAD-USD vs. USD-CAD conversions correct!

The currency rise has not as much to do with the Canadian dollar rising as it does with the US currency depreciating – the world is strongly reacting to the imminent quantitative easing 2 that the federal reserve is apparently planning on to spur inflation.

SNC-Lavalin trumps the CPP

In an interesting development, SNC-Lavalin (TSX: SNC) has announced that it will be exercising its right to first refusal in purchasing the CPPIB’s 10% stake in the 407 Highway.

SNC is now forming a new corporation, which will sell shares in a company (Transaxio) that has its ownership interest in the 407 Highway.

The only reason why SNC would do this is if they suspect that the CPP’s purchase was undervalued – so it will be interesting to see what the corporation will trade at when it goes public.

This will also be the first time people can directly take an ownership interest (although effectively a non-voting interest) in the 407 Highway.

CPP Investment board – 407 Highway

The CPP Investment Board announced it is buying a 10% stake in the operations of Highway 407 in Ontario – which is a toll freeway that is the outer loop of Metropolitan Ontario, a suburban route serving roughly Brampton to Markham.

The 10% stake is costing the CPP CAD$894 million. The CPP will also be acquiring another 30% stake by virtue of taking over Intoll, an Australian company, for roughly CAD$3.3 billion.

Is Highway 407 worth $9 billion total?

What is interesting is that the organization must report to SEDAR. Looking at their 2009 annual financial report, the 407 Highway has a debt of $4.8 billion, cash and equivalents (restricted or free) of $670 million, and equity of negative $1.08 billion. Not a stellar balance sheet, although the bonds themselves have a very long maturity profile and averaging about 5.7% interest.

On the income side, you have $560 million in revenues, and $116 million in operating expenses, leaving a yearly operating surplus of $444 million. Interest expense is another $275 million. Ignoring the other line items (depreciation, amortization and other capital expenses, plus taxes), you are left with an annual surplus of about $170 million.

Not that I like to criticize billion-dollar fund managers like the CPP Investment Board, but they obviously have something more strategic in mind if they are going to be spending this much money for a large minority equity stake at a price that appears to be 50 times present cash flows. There are a few mitigating factors, however.

The first is that Metropolitan Toronto is likely to grow, and with that is likely an increase in the suburb population – thus, traffic should increase. An increase in traffic also means the ability to increase tolls, which the organization does not need political authority to perform. The other deals with inflation-proofing: a toll highway is relatively insensitive to inflationary increases since you have little competition.

On the opposite side, if oil prices increase dramatically, or commuting takes a different shape, toll highways may not be a good business to be in.

Finally, there is political risk involved – if the CPP was able to take over a majority of the 407 operations (they are close with 40% currently), there will be a lot of pressure by the Ontario government to be able to lobby the federal government to recapture the rights to the highway. Although the CPP is an independent entity created by the federal government, one wonders how much political influence there would be.

In any event, the 407 Highway reverts back to the Ontario government after the 99 year lease expires. Although this lasts until 2098 (88 years from now) and I likely won’t be alive to see the end, there is a finite lifespan to this company.

The CPP is a very powerful player domestically with its $130 billion in assets – just over the scale of the Ontario Teacher’s Pension Board, which controls $96.4 billion in assets.

Is the CPP blowing this much money on a toll highway worth it? I think they overpaid, but they are probably just as desperate for yield as most investors are currently. This is possibly their best candidate to deploy $900M in cash, which is a telling statement on the entire marketplace.

Possibility of a rate increase before year’s end?

I notice that the Banker’s Acceptances have dropped (implying future rate increases) over the past week. Current quotations are as follows:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 10 OC 0.000 0.000 98.640 0.000 0
+ 10 NO 0.000 0.000 98.630 0.000 0
+ 10 DE 98.615 98.620 98.650 -0.030 12401
+ 11 MR 98.450 98.460 98.520 -0.060 21511
+ 11 JN 98.380 98.390 98.450 -0.070 6701
+ 11 SE 98.310 98.320 98.380 -0.060 2617
+ 11 DE 98.250 98.260 98.310 -0.050 1526
+ 12 MR 98.190 98.220 98.240 -0.040 99
+ 12 JN 98.090 98.130 98.150 -0.030 7

Look at the December contract – implied pricing of 1.39%. On September 8th, this was 1.14%.

Three-month corporate paper is currently trading at 1.14%, which implies that we could be seeing one more rate hike (of 0.25%) before year’s end. The next Bank of Canada scheduled rate announcements are October 19 and December 7.

Ally doesn’t inspire confidence

I’ve written about Ally before and for the most part they have performed in a minimalistic manner, which is what they should be doing. They still have a fairly high short term savings rate (2.00%) and this is only overshadowed by a couple other obscure institutions offering 2.1%.

On their high interest savings page, I saw the following:

So is it 2% or 1.75%? I logged into my account and indeed, it was 2%.

Stuff like this makes me look at the CDIC page and read out the following passage to myself:

CDIC automatically insures many types of savings against the failure of a bank or financial institution that is a CDIC member. However, NOT all savings are insured and CDIC deposit insurance does not protect against fraud, theft or scam.

I’m really beginning to wonder if a bank failure was caused by fraud whether that would count. I don’t think it is the case for Ally, which is owned by ResMor Trust Company. In the USA, the Ally brand used to be backed by the General Motors Acceptance Corporation, while in Canada, ResMor Trust Company is a mortgage firm – very similar to ING Direct’s business model except that ING Direct uses the same name for both savings and loans.