Canada’s Financial Sector just Crapped on its Bondholders, Hoping They Don’t Care

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To heck with the dreams of the bondholders.

Great-West Lifeco, a Canadian financial services conglomerate which operates subsidiaries in Canada, the US, Europe, and Asia – including Putnam Investments in the US – and with over $1 trillion in consolidated assets under management,  just crapped beautifully on its bondholders.

It wasn’t illegal. Bondholders had agreed to it in the terms of the bond issue. But they’d believed Great-West would never ever dare to do it. Now it did, and it cost those bondholders dearly.

Canadian financial companies issued a total of $45 billion of a special kind of hybrid bonds. And now that Great-West has become the trailblazer, they might all be subjected to the same treatment.

These bonds come with an option to be called after 10 years. If the option is not exercised, maturity is extended by another 30 years and the coupon is converted from the nice fixed-rate payment of yore to a floating-rate coupon based on an interest rate of “Libor plus,” in a world of ZIRP and NIRP.

“Canadian investors never believed a Canadian bank or issuer would do that kind of thing in Canada,” Marc Goldfried, CIO at Canoe Financial LP in Toronto which manages $3.5 billion, told Bloomberg.

But Great-West decided to become a trailblazer by not exercising this option on US$300 million in notes issued in 2006. Now the coupon converts to a floating rate based on the 3-month US-dollar Libor (currently 0.63%) plus 2.54 percentage points, so at the moment 3.17%. And investors have to wait another 30 frigging years before they get their money back! 40 years in total. And they believed they had a 10-year note! And had priced it like one!

Clearly, Great-West sees in its crystal ball that the floating rate is a good deal for a 30-year bond. The cost at the moment of around 3.17% is a lot lower than the 4.65% US financial companies have to pay on average for 30-year bonds, according to Bank of America Merrill Lynch data.

It’s a risk. Rates might rise, and coupon payments along with them. Then those bonds would get very expensive for Great-West. But apparently it believes that rates won’t rise. And to heck with the dreams of its bondholders.

“It’s a wake-up call,” James Dutkiewicz told Bloomberg. As chief investment strategist at Sentry Investments in Toronto, he manages $18 billion and owns some of Great-West’s US dollar notes. “Having a Canadian institution take advantage, on an economic basis, of a floating rate is the first.”

The market’s reaction was swift. The bonds – and similar bonds – sold off and yields soared. Bloomberg:

Great West’s US dollar note saw the yield investors demand to hold it to the call date almost triple….

Another Great West note, this one denominated in Canadian dollars with a year to go before its call date, saw its yield to the call date go from 2.4% to 7.1% as investors increased the odds it could be extended as well. If it isn’t called, those $1 billion in notes don’t have to be paid back until 2067.

The fervent belief among yield-chasing bondholders that Canadian companies would always call these fixed-to-floating-rate notes kept yields low, and thus allowed companies to borrow more cheaply. Now bondholders have woken up. As Goldfried said, it “should create a risk factor on any Canadian company with this kind of debt outstanding.”

Companies in the financial sector constantly have to issue bonds. And newly woken-up bondholders, smarting from the losses they just took, suddenly see the risks they didn’t see before. And they want to be paid for those risks. So these kinds of fixed-to-floating-rate notes might get more expensive for issuers.

But it won’t last long. Bondholders, condemned by central banks to chasing yield wherever they can find it, have a very short memory.

See Argentina. It just sold $16.5 billion in US-dollar denominated bonds – up from its initial guidance of $15 billion – with maturities of five, 10, and 30 years, though it spent 75 of the last 190 years defaulting on these kinds of foreign-currency bonds, including 2013-15, 2000-04, and 1980-92. The offering was very successful. Buyers were jostling for position. Argentina received more than $69 billion in orders!

Bondholders simply forget. These folks are institutional investors. They invest other people’s money. Chasing yield is all that counts. Central banks have now made that the golden rule. Great West knew exactly what it was doing by crapping on its bondholders: next time, these bondholders will eagerly line up again for more.

Foreign investors, particularly Chinese and Canadian investors, have been dumping US stocks in large numbers starting last year. But someone has been buying. Read… Who the Heck Is Buying the US Stocks that Chinese and other Foreign Investors Are Massively Dumping?

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  37 comments for “Canada’s Financial Sector just Crapped on its Bondholders, Hoping They Don’t Care

  1. Petunia
    April 20, 2016 at 11:20 am

    Money today was worth more to them than money tomorrow, which is why they didn’t recall the bonds. Or maybe, they didn’t have the money. Anyway whether they recognize inflation, ZIRP, NIRP, or cash is their friend, the investors get screwed. They only ones I feel bad for are the pensioners who don’t have a clue, the money they work so hard for is being stolen.

    • Chip Javert
      April 20, 2016 at 2:52 pm


      How can it possibly be “…being stolen…” if they agreed (in writing) to it?

      If you tell investors exactly what you might do to their money and investors agree to it, INVESTORS are to blame, not the company that explicitly told them what might happen.

      A large class of investors are literally too stupid to invest their own money. However, if you say this to their face, it hurts their feelings, they get mad, and will accuse you of stealing because the company did exactly what the investors agreed the company could do.

      NOTE: you can fix ignorance, but you can’t fix stupid.

      • Petunia
        April 20, 2016 at 5:13 pm

        Most people that work for a pension have no idea what’s in the pension fund. Those are the people I was referring to. Cops, teachers, union workers of all kinds, have no idea what fund managers are doing with their money. Also, the marks on most bonds are suspect because there are so many issues and so few trades per issue.

        I don’t care about the investors that buy for their own accounts. They deserve what they buy.

        • chip Javert
          April 20, 2016 at 6:30 pm

          I agree pensioners have little/no effective control over how their pension funds (as opposed to personal funds) are invested. My only proposed cure: funds should offer multiple investment choices & people should be able to direct their pension contributions.

          However, pension managers generally are more sophisticated (i.e.: demanding proper risk pricing), it’s unclear how much was owned by pension funds, and pension funds generally have less problems holding longer-term assets.

    • alexaisback
      April 20, 2016 at 3:02 pm

      We know who is buying US Stocks.
      The question is who is loaning the Corporations the
      money to do the buybacks, and how soon will that run out.
      I was asked to participate in two bond offerings late 2015.
      Big Companies Big names I will not name them though.
      ONE of the terms —- that if the share price dipped below a certain number, the BONDS AUTOMATICALLY CONVERTED TO SHARES IN THE CORPORATION.
      The yield was great but I did not want shares in either corporation so I did not take the risk. .
      . I am not sure all the buyers understood what was going on.
      IF There is a modest 7 year crash/adjustment, the bonds are wiped out/cancelled and you would be left holding shares in a falling market.

      • Shellgame
        April 21, 2016 at 7:26 am

        Sounds like the playbook they setup for bank bail-ins where, if the bank goes under, the bank depositors get their money “converted” into bank shares…instead of the “taxpayer” experiencing the joy of covering for a failed bank.

  2. OutLookingIn
    April 20, 2016 at 11:30 am

    Kind of makes you wonder what’s up, when this in conjunction with the “smart money” in the markets cashing out, to the tune of $1.36 billion for the past 16 weeks and counting.
    When the “insiders” begin fleeing to cash and out of stocks, its time to circle the wagons!

  3. walter map
    April 20, 2016 at 11:37 am


    They still haven’t figured out the Financial Industrial Complex has turned into a collection of racketeering operations out to bankrupt the planet for fun and profit.

    • Chip Javert
      April 20, 2016 at 3:05 pm


      I certainly hope your little pouty outburst made you feel better.

      Can you please explain what law has been violated? Or are you simply outraged that a company (legally) did exactly what it disclosed & investors had previously agreed to?

      This is exactly why unsophisticated people should not dabble in sophisticated financial products. Go buy an index mutual fund. Or a pet rock.

      • CrazyCooter
        April 21, 2016 at 1:16 am

        “Or a pet rock.”

        That is what I am doing. Probably part of a generation or two that will do just that instead of invest in paper-products as it were. Careful what you wish for!

        Guess what color my rock is …



      • walter map
        April 21, 2016 at 6:56 am

        “Can you please explain what law has been violated?”

        Why do you ask? Are you afraid your lobbyists may have missed one?

        You don’t have to commit any actual crimes to be the subject of a successful civil action. If you want any more legal advice we can talk about my retainer.

  4. brian t
    April 20, 2016 at 1:10 pm

    You chase high yields on unsecured bonds, this is what can happen: no sympathy. Ireland’s central bank should have done something similar, years ago, but “burning the bondholders” was and still is anathema over here.

    • Chip Javert
      April 20, 2016 at 3:09 pm

      brian t

      “burning the bondholder” might still be an anathema “over here” (presumably Ireland), but burning the taxpayer certainly isn’t.

      Why should millions of uninvolved taxpayers have to pick up the tab for thousands of stupid investors?

      • walter map
        April 21, 2016 at 7:03 am

        “Why should millions of uninvolved taxpayers have to pick up the tab for thousands of stupid investors?”

        You could also ask why millions of uninvolved taxpayers should have to pick up the tab to bail out crooked banks, but that’s different, isn’t it?

  5. Kam
    April 20, 2016 at 1:38 pm

    Power Corp.’s Desmarais family pull the strings at Great West Life. Kinda all falls under, “if you’re stupid enough to not read the fine print then don’t complain about the elbow to the eye.”

  6. David Rabinovitz
    April 20, 2016 at 1:45 pm

    But ZIRP and NIRP are not directly impacting these bonds. I have no issue with this… none at all. Investors who do not understand the investment or perform due diligence get what they deserve. My friend invested in a rock climbing gym last year. I handled the due diligence. During the process I learned we were the only party to conduct due diligence. These guys raised $2.2 million on a PowerPoint presentation that had errors. Common investors forked over up to $250K per head and as little as $50K based on a PPT. No due diligence on any of the group’s existing three facilities or how investors fared in those deals. Somewhere as a child I recall reading a fool and his money…

  7. Spencer
    April 20, 2016 at 2:51 pm

    Free Jon Corzine…!
    …”I simply do not know where the money is, or why the accounts have not been reconciled to date”…an extra ration of grog for the bondholders tonight then.

    • Chip Javert
      April 20, 2016 at 3:17 pm


      Corzine broke actual laws, but got protected by his political connections from when he was the Democrat NJ governor & senator. So much for “all men are equal under the law”…

      He (and a bunch of his employees) should have gone to jail & paid restitution.

      • polecat
        April 21, 2016 at 11:32 am

        some pigs are much more equal than you…I… us…

        • polecat
          April 21, 2016 at 11:39 am

          I’m sure, in the event Clinton becomes pres., Corzine will surface once again, to be awarded some ambassadorship or cabinet level position in her admin.

  8. Phoenix Pilgrim
    April 20, 2016 at 3:27 pm

    re. “Investors who do not understand the investment or perform due diligence get what they deserve.”

    In today’s world of highly complex financial products, it is unrealistic to think that ordinary investors can perform adequate due diligence – which is why the general public has to depend on .gov oversight and on financial advisors. I have been a successfully practicing engineer, BSEE/MSEE, for 30 years. I make implantable pacemakers and defibrillators. It is unreasonable to expect my end customers to understand the complexity of my products. Even the FDA and implanting cardiologists are dependent on the expertise of engineers such as myself.

    We cannot all be in-depth experts at everything in today’s highly complex social system. And the system operation is dependent on fair exchange and co-operation.

    I have been studying the investment world for the last 2 years trying to find a way to get a reasonable yield to retire on. I am astonished by what a rigged game the financial arena is and by the lack of integrity and morals by many of the controlling players. Predator behavior on fellow human beings seems to be rationalized by a gaming theory of Financial Darwinism. If the medical and aerospace industries operated with a similar predator mindset, we would have hundreds of thousands dying from medical device malfunctions and/or airplanes falling out of the sky and the engineers would just shrug their shoulders and say -“Customers who do not understand complex technology or perform due diligence get what they deserve.” If it ever came to that, we would all be nothing more than cannibalistic monkeys wearing clothes, driving cars and using cell phones.

    • Chicken
      April 20, 2016 at 5:06 pm

      You nailed it, like the expectation for a (MSFT) personal computer will malfunction frequently at that same rate if a GM vehicle were to malfunction would be completely unacceptable.

      And those who handle money professionally thus are paid for doing the DD don’t give a rat’s butt about your money, just their fees. In fact, they might be paid by someone to rathole your money while also being paid by you who will be left holding the bag. They know you will never be able to figure out what happened thus they’re in a position to collect both ways.

      Case in point, GS betting against MBS they knew were junk yet were marketing with an AAA rating.

      Stocks are sold, not bought.

    • Bigfoot
      April 21, 2016 at 10:07 am


      I don’t get your position here at all. Trying to compare a tangible product to a financial product doesn’t fly IMHO. A medical device, airplane, or automobile is a tangible item that can be demonstrated to either work or not. A financial product is a completely different beast. I fail to see a correlation.

      You believe the general public has to depend on government oversight or financial advisors. OK. Why? A book could be written on why you shouldn’t rely on government oversight & I don’t feel the need to expound on this. What does it take to become a FA & what is their primary function? One has to pass a series 7 stockbroker exam & a series 66 uniform combined state law exam. That is it. My teenage granddaughter could accomplish this. An FA’s primary function = SALES & generally involve meeting quotas!!. You acknowledge that after 2 years you have concluded that the financial industry is rigged, unethical, & lacking morals. Are you really going to rely on a FA or the government for your investing? Sounds like you have actually done your due diligence.

      In an era of ZIRP, NIRP, & widespread corruption reported throughout the financial world & society in general (for years) do you think we are all owed a return on our investment? Anybody who can read & assimilate the information presented can perform due diligence regarding anything. People seek security when security is really an illusion. Many want someone else (government/FA’s) to perform their due diligence for them. Yeah, the easy button so they can spend countless hours watching TV. Nobody deserves to be stolen from but people who fail to conduct due diligence deserve the outcomes handed to them. It’s just not that complex.

      Here’s a positive book recommendation- The Wisdom of Insecurity written by Alan Watts. Written in 1951, it’s a philosophical book that I’ve had for years & is just as relevant today as when it was written. Pretty much about enjoying the present instead of tying your psyche into knots regarding the past or the future. It helped me sort things out in the past.

      Enjoy the day !

      • Phoenix Pilgrim
        April 21, 2016 at 5:02 pm

        Tangible products are still managed risk – same as financial products. And risk is a probability function. There is no such thing as a defect-free silicon wafer, integrated circuit, hybrid microcircuit, etc. Engineers perform complex analysis, screening, and accelerated wear-out studies of their products and manufacturing processes to create an accurate failure probability model. We cannot prevent occasional procured material or component defects, human error or machine malfunctions. But we anticipate those and build margin into our systems to compensate if they should occur or compensate the victim if we fail. Isn’t that what derivatives, etc were originally supposed to do in the financial domain?

        • Bigfoot
          April 21, 2016 at 8:52 pm

          Hello PP,

          We seemed to have strayed of the topic of due diligence. I get your frustration with trying to earn a return with most any financial instrument. You are probably in my age group. If you have been employed in your field for 30 years, have you not been deploying surplus monies into something market related?

          I understand completely that there are risks associated with manufacturing & selling any tangible product. I believe that is one of the things that liability insurance is for.

          “We cannot prevent occasional procured material or component defects, human error or machine malfunctions. But we anticipate those & build margin into our systems to compensate if they should occur or compensate the victim if we fail. Isn’t that what derivatives, etc were supposed to do in the financial domain?”

          First off, I’m certainly not an expert on derivatives or anything else. I did trade commodity & index futures/options for about 6 years & have a good understanding of those products but those are only 2 forms of financial derivatives. I’ll attempt to answer your question even though you didn’t answer mine. ” Are you really going to rely on an FA or the government for your investing?” ” do you think we are all owed a return on our investment?” Feel free to engage.

          There are a ridiculous amount of financial derivatives in the modern marketplace & the vast majority IMO are there to game the system. Here’s a short list.
          1. Mortgage backed securities
          2. Commodity forwards/futures
          3. Stock/bond/forex futures
          4. Credit default swaps
          5. Swaps that correlate to many different markets, commodities, currencies, equities, interest rates & more
          6. Options – available on almost everything
          Some derivatives trade over the counter & are thus non reported & can’t be tracked while others trade on designated exchanges. Derivatives have many purposes which include risk management or hedging & also financial speculation. Most derivatives used to speculate have various degrees of leverage attached to them. As an example, you can trade a gold contract (buy or sell) with a little over 4k of margin money on the Comex exchange. For every 1 dollar fluctuation in the price of gold, your account fluctuates $100. Great if your winning, painful if you are not. If you have done your due diligence, you would know that the gold market has been heavily manipulated for decades. The earliest forms of derivatives were centered around agriculture products & date back perhaps a couple hundred years. The short answer to your question could be both a yes, derivatives are used to hedge risk, & no, derivatives are used to make speculative monetary gains.

          Again, I fail to see the correlation between a tangible product & financial product. The tangible product must perform as advertised & not cause any harm to it’s user. There is an implied utility with that product. If it breaks while under warranty, you generally get some form of compensation, Sometimes things go wrong & a product causes harm so that’s why we carry product liability insurance. When you purchase ANY financial product, you are expecting a financial gain. Who’s to blame if instead you incur a loss? Last I checked, nobody is offering a warranty or guaranty on your speculation, so there are no warranties. It’s pure speculation any way you cut it, slice it or dice it up. So it is the 100% the speculators responsibility to educate themselves (due diligence) before undertaking any financially speculative positions in any market.

          The markets exist to separate you from your hard earned money. It’s just that simple.

          Enjoy the day (or night) !

  9. d'Cynic
    April 20, 2016 at 4:26 pm

    It might be tempting to call these bond holders stupid, but then remember; these bonds were originally sold in 2006. Feels like a lifetime, and a different world from today. The million dollar question is what would look stupid ten years from now.

  10. Kam
    April 20, 2016 at 4:47 pm

    The million dollar question is what would look stupid ten years from now ?

    Same answer as today- trusting any financial/banking criminal with your money.

    • Chip Javert
      April 20, 2016 at 6:41 pm


      The other million dollar question is will investors still be as ignorant, uninformed, uneducated, and unaccountable as many of them are today?

      Most individual investors don’t know what a “fiduciary responsibility” is, much less if their financial advisor is bound by one.

      • walter map
        April 21, 2016 at 10:06 am

        “The other million dollar question is will investors still be as ignorant, uninformed, uneducated, and unaccountable as many of them are today?”

        That depends. Will you be pointing out the posts telling them they’re idiots who deserve to get ripped off? Many may find those very educational.

  11. Chicken
    April 20, 2016 at 4:51 pm

    Glad I didn’t own the debt but this deal seems lucrative for the corporation. Is this the “loophole” that rescues these indebted companies from bankruptcy so they may live on into infamy?

    • Chip Javert
      April 20, 2016 at 6:46 pm


      Nice try, but no banana.

      No, this is not a “loophole”; it’s actually a company (legally) doing what it fully disclosed to its investors, and to which those investors agreed to…

      • Chicken
        April 20, 2016 at 10:25 pm

        Ha yes well, Bay Street has earned the same level of respect as a den of rattlesnakes So they can bite me, there’s my sufficient due diligence.

      • walter map
        April 21, 2016 at 10:13 am

        ‘No, this is not a “loophole”; it’s actually a company (legally) doing what it fully disclosed to its investors, and to which those investors agreed to…’

        Translation: “Hey, you signed it, sucker.”

  12. ML
    April 21, 2016 at 12:50 am

    It always amuses me that whenever investors agree to something that involves alternatives, the unlikely is generally dismissed. By now, one would have thought that where an alternative is part of the offer that is what the offeror had in mind all along.

  13. d
    April 21, 2016 at 4:00 am

    This sort fo thing will keep on Happening.

    To funds and trusts in Particular.

    As long as financial advisers in many parts of the world have no fiduciary responsibility or culpability.

  14. nick kelly
    April 21, 2016 at 10:45 am

    Or to put this another way, central banks crapped on Great West Life with ZIRP etc. and GW passed it on.
    The piece names GW as a Lifeco, so I guess it is exposed to annuities and
    other promises to pay- life insurance etc.
    In 2006 it made promises to customers, based on reasonable returns on things like government bonds.
    Now ZIRP has squeezed those returns to virtually nothing.
    A high ranking German official who is no spring chicken has said he can’t get his head around negative interest rates- after a lifetime of experience in finance he no longer knows how to function.

  15. Jimmy
    April 23, 2016 at 12:24 am

    Maybe a further explanation of what this investment was is useful. These bonds were issued 10 years ago with a fixed rate for 10 years and then after that fixed rate period the company could redeem them or pay a rate of interest that floats at a premium of 2.54% over short term interest rates. These were 40 year bonds that the company was expected to redeem after 10 years. Why was it expected that they would be redeemed after 10 years? The answer is that 10 years ago, it was widely assumed that rates would be a lot higher in 2016. If 10 years ago you said rates would be close to zero in 2016, people would have laughed at you. Great West Life paid a higher rate on these bonds than a normal 10 year bond so investors got a premium for taking the risk that rates would go down. Now Great West Life has a fiduciary duty to its shareholders to do what they think is in the companies best interest. If you own any Canadian mutual fund or have a pension plan, it is likely that it has an investment in Great West Life. Don’t blame GWL or anyone for this, unless you think they were clarvoint and could see 10 years into the future.

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