Archive for the ‘Return of Capital’ Category

BIP.PR.F Settles Soft on Modest Volume

Wednesday, September 12th, 2018

The Brookfield Infrastructure new issue closed today without a formal announcement from the company.

BIP.PR.F is a FixedReset, 5.10%+292M510, announced 2018-09-05. It has been assigned to the FixedReset-Discount subindex.

There are two non-standard elements to this issue, as we can specify when examining the prospectus (see SEDAR, “Brookfield Infrastructure Partners L.P. Sep 5 2018 22:59:56 ET Prospectus (non pricing) supplement – English PDF 913 K”). I regret that the Canadian Securities Administrators have made direct links to this public document illegal.

First, distributions are not dividends: they are Return of Capital and (potentially fully taxable) other things:

For Canadian federal income tax purposes, holders of Series 11 Preferred Units and Series 12 Preferred Units will be allocated a portion of the taxable income of the Partnership based on their proportionate share of distributions received on their units. The allocation of taxable income to such holders may be less than the distributions received and this difference is commonly referred to as a tax deferred return of capital (i.e., returns that are initially non-taxable but which reduce the adjusted cost base of the holder’s units). See “Certain Canadian Federal Income Tax Considerations” for further details. The below table reflects certain information regarding the taxable income allocation for the 2013 through 2017 period, with all periods updated to reflect the three-for-two unit split that occurred during September 2016. As shown in the table below, the historical 5 year average per unit return of capital (i.e., excess of distributions over allocated taxable income) expressed as a percentage of the annual distributions in respect of units of the Partnership for the period 2013 through 2017 was approximately 45%. Management anticipates a 6 year average per unit return of capital percentage of 50% for the period 2018 through 2023; however, no assurance can be provided this will occur.

  2017 2016 2015 2014 2013
Total distribution C$2.2320 C$2.0313 C$1.8511 C$1.4252 C$1.1922
Total taxable income C$0.7661 C$1.0552 C$1.0228 C$1.4024 C$0.4638
Return of capital C$1.4660 C$0.9761 C$0.8283 C$0.0228 C$0.7284
Income % 30.77% 51.62% 55.25% 98.40% 38.9%
Return of capital % 69.23% 48.38% 44.75% 1.60% 61.1%

Second, it is likely, although not certain, that conversion of this issue into a FloatingReset when the time comes may be a Deemed Disposition and therefore trigger a capital gain or loss:

The reclassification of a Series 11 Preferred Unit into a Series 12 Preferred Unit or a Series 12 Preferred Unit into a Series 11 Preferred Unit, whether pursuant to an election made by the Resident Holder or pursuant to an automatic reclassification, may be considered to be a disposition of the Series 11 Preferred Unit or Series 12 Preferred Unit by the Resident Holder. The CRA’s position is that the conversion of an interest in a partnership into another interest in the partnership may result in a disposition of the partnership interest by the holder if the conversion results in a significant change in the rights and obligations of the holder in respect of the converted interest, including a significant change in the percentage interest in the profits of the partnership. Whether or not the reclassification of Series 11 Preferred Units into Series 12 Preferred Units or Series 12 Preferred Units into Series 11 Preferred Units would result in a significant change in the percentage interest of a Resident Holder in the profits of the Partnership is a question of fact that depends upon the facts and circumstances that exist at the time of the reclassification.

BIP.PR.F traded 414,753 shares today in a range of 24.70-89 before settling at 24.88-89. Vital statistics are:

BIP.PR.F FixedReset Disc YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-09-12
Maturity Price : 23.10
Evaluated at bid price : 24.88
Bid-YTW : 5.07 %

The new issue is extremely expensive according to Implied Volatility Analysis:

impvol_bip_180912
Click for Big

According to this analysis, the fair value of the new issue on September 12 is 23.30, but note that it appears that the issue would be closer to the regression line if Implied Volatility was permitted to exceed the arbitrary limit of 40%. It is the level of Implied Volatility that is the real problem with this issue, not the distance to the fitted line.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Part of the problem may be that all but one of the BIP FixedReset series have minimum reset guarantees. There are many naifs out there (many of them stockbrokers; many others egged on by their stockbrokers) who consider this to be an effective guarantee that the issues will always trade near par. They have evidently forgotten that spread widening is a very common cause of price declines.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BIP.PR.D, FixedReset, 5.00%+378M500, ROC + Interest, is bid at 25.01 (theoretical fair value of 25.25, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.025 p.a. in dividends until it resets 2022-03-31, sure, but that’s hardly a big deal and you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

AX.PR.E : Convert or Hold?

Monday, September 10th, 2018

It will be recalled that AX.PR.E will reset at 5.472% effective October 1.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_180910
Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the AX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for AX.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 2.00% 1.50% 1.00%
AX.PR.E 21.14 330Bp 20.98 20.5 20.02

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of AX.PR.E continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 17, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

New Issue: BIP FixedReset, 5.10%+292M510

Wednesday, September 5th, 2018

Brookfield Infrastructure has announced:

that it has agreed to issue 8,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 11 (“Series 11 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets, and TD Securities Inc. The Series 11 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $200,000,000. Holders of the Series 11 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 5.10% annually for the initial period ending December 31, 2023. Thereafter, the distribution rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 2.92%, and (ii) 5.10%. The Series 11 Preferred Units are redeemable on or after December 31, 2023.

Holders of the Series 11 Preferred Units will have the right, at their option, to reclassify their Series 11 Preferred Units into Cumulative Class A Preferred Limited Partnership Units, Series 12 (“Series 12 Preferred Units”), subject to certain conditions, on December 31, 2023 and on December 31 every five years thereafter. Holders of Series 12 Preferred Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 2.92%.

Brookfield Infrastructure has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 11 Preferred Units which, if exercised, would increase the gross offering size to $250,000,000.

The Series 11 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 11 Preferred Units to fund an active pipeline of new investment opportunities and a growing backlog of committed organic growth capital expenditure projects, and for general working capital purposes. The offering of Series 11 Preferred Units is expected to close on or about September 12, 2018.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 10,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 11 (“Series 11 Preferred Units”). The Series 11 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $250,000,000. The Series 11 Preferred Units are being offered for distribution to the public on a bought deal basis by a syndicate of underwriters led by Scotiabank, BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets, and TD Securities Inc.

The Series 11 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 11 Preferred Units to fund an active pipeline of new investment opportunities and a growing backlog of committed organic growth capital expenditure projects, and for general working capital purposes. The offering of Series 11 Preferred Units is expected to close on or about September 12, 2018.

There are two non-standard elements to this issue. First, distributions are not dividends: they are Return of Capital and (potentially fully taxable) other things (commentary from my commentary regarding the announcement of BIP.PR.D:

I understand that the Return of Capital percentage of distributions is forecast – but by no means guaranteed! – to be about 50% over the next five years. See the discussion of BIP.PR.A for some sample calculations regarding the implications of this.

Second, it is likely, although not certain, that conversion of this issue into a FloatingReset when the time comes may be a Deemed Disposition and therefore trigger a capital gain or loss (commentary taken from my discussion of BIP.PR.D’s closing):

Update, 2017-10-11: Note that according to the prospectus, available on SEDAR under “Brookfield Infrastructure Partners L.P. Jan 19 2017 19:48:49 ET Prospectus (non pricing) supplement – English PDF 525 K”:
The reclassification of a Series 7 Preferred Unit into a Series 8 Preferred Unit or a Series 8 Preferred Unit into a Series 7 Preferred Unit, whether pursuant to an election made by the Resident Holder or pursuant to an automatic reclassification, may be considered to be a disposition of the Series 7 Preferred Unit or Series 8 Preferred Unit by the Resident Holder. The CRA’s position is that the conversion of an interest in a partnership into another interest in the partnership may result in a disposition of the partnership interest by the holder if the conversion results in a significant change in the rights and obligations of the holder in respect of the converted interest, including a significant change in the percentage interest in the profits of the partnership. Whether or not the reclassification of Series 7 Preferred Units into Series 8 Preferred Units or Series 8 Preferred Units into Series 7 Preferred Units would result in a significant change in the percentage interest of a Resident Holder in the profits of the Partnership is a question of fact that depends upon the facts and circumstances that exist at the time of the reclassification.

The new issue is extremely expensive according to Implied Volatility Analysis:

impvol_bip_180905
Click for Big

According to this analysis, the fair value of the new issue on September 5 is 23.41.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BIP.PR.D, FixedReset, 5.00%+378M500, ROC + Interest, is bid at 25.08 (theoretical fair value of 25.33, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.025 p.a. in dividends until it resets 2022-03-31, sure, but that’s hardly a big deal and you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

AX.PR.E To Reset To 5.472%

Friday, August 31st, 2018

Artis Real Estate Investment Trust has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Preferred Units, Series E (“Series E Units”) (AX.PR.E) on September 30, 2018.

As a result, and subject to certain conditions set forth in the certificate of preferred units terms relating to the Series E Units dated effective March 21, 2013 (the “Certificate of Series E Unit Terms”), the holders of Series E Units will have the right to elect to reclassify all or any of their Series E Units into Preferred Units, Series F (“Series F Units”) of Artis on the basis of one Series F Unit for each Series E Unit on September 30, 2018.

With respect to any Series E Units that remain outstanding after September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series E Unit determined by multiplying the Annual Fixed Distribution Rate for such subsequent fixed rate period by $25.00, and shall be payable quarterly on the last business day of each of March, June, September and December in each year during such subsequent fixed rate period. For the initial subsequent fixed rate period commencing on October 1, 2018, the Annual Fixed Distribution Rate is 5.472% per annum.

With respect to any Series F Units that may be issued on September 30, 2018, holders thereof will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an amount per Series F Unit determined by multiplying the Floating Quarterly Distribution Rate (calculated on the basis of the actual number of days elapsed in such quarterly floating rate period, divided by 365) by $25.00, which shall be payable quarterly on the last business day of such quarterly floating rate period. For the initial quarterly floating rate period commencing October 1, 2018, the Floating Quarterly Distribution Rate is 4.809% per annum.

As provided in the Certificate of Series E Unit Terms: (i) if Artis determines that there would remain outstanding on September 30, 2018 less than 500,000 Series E Units, all remaining Series E Units shall be reclassified automatically into Series F Units on a one-for-one basis, effective September 30, 2018; or (ii) if Artis determines that less than 500,000 Series F Units would be issued based upon the elections of holders, then holders of Series E Units shall not be entitled to reclassify their Series E Units into Series F Units.

As at the date hereof, there are an aggregate of 4,000,000 Series E Units issued and outstanding.

The Series E Units are issued in “book entry only” form and must be purchased or transferred through a participant in the CDS depository service (each, a “CDS Participant”). All rights of holders of Series E Units must be exercised through CDS or the CDS Participant through which the Series E Units are held. The deadline for the registered holder of Series E Units to provide notice of exercise of the right to reclassify Series E Units into Series F Units is 5:00 p.m. (Toronto time) on September 17, 2018. Any notices received after this deadline will not be valid. As such, holders of Series E Units who wish to exercise their right to reclassify their Series E Units into Series F Units should contact their broker or intermediary for more information and it is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with time to complete the necessary steps.

If Artis does not receive an election notice from a holder of Series E Units during the time fixed therefor, then the Series E Units shall be deemed not to have been reclassified (other than pursuant to an automatic reclassification). Holders of Series E Units and Series F Units will have the opportunity to reclassify their units again on September 30, 2023, and every five years thereafter as long as such units remain outstanding.

The Toronto Stock Exchange (TSX) has conditionally approved the listing of the Series F Units effective upon reclassification. Listing of the Series F Units is subject to Artis fulfilling all the listing requirements of the TSX.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

pairs_fr_180831
Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.58% and +1.33%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the AX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Estimate of FloatingReset (received in exchange for AX.PR.E) Trading Price In Current Conditions
  Assumed FloatingReset
Price if Implied Bill
is equal to
FixedReset Bid Price Spread 2.00% 1.50% 1.00%
AX.PR.E 21.31 330bp 21.15 20.67 20.18

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of AX.PR.E continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

AX.PR.U Redemption Becomes Official

Sunday, February 25th, 2018

Artis Real Estate Investment Trust has announced (on 2018-2-22):

that it has delivered formal notice to the holder(s) of its Preferred Units, Series C (the “Series C Units”) that, on March 31, 2018, the Trust will redeem all of the 3,000,000 outstanding Series C Units at a price of US$25.328125 (the “Redemption Price”) for each Series C Unit, being US$25.00 plus US$0.328125 in accrued and unpaid distributions thereon up to but excluding March 31, 2018.

The Redemption Price will be payable upon presentation and surrender of the Series C Units called for redemption at the corporate trust offices of AST Trust Company (Canada) at 1 Toronto Street, Suite 1200, Toronto, Ontario, M5C 2V6, Attention: Corporate Actions.

The intention to redeem, but not a commitment, was announced in January.

AX.PR.U is a FixedReset, 5.25%+446, US Pay, ROC, that commenced trading 2012-9-18 after being announced 2012-9-11. It is callable at par on March 31. The issue has not been tracked by HIMIPref™ as it is US-Pay.

AX.PR.I Settles Firm on Decent Volume

Wednesday, January 31st, 2018

Artis Real Estate Investment Trust has announced:

that it closed its previously announced public offering, through a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”), on a bought deal basis, of 5,000,000 cumulative minimum rate reset preferred trust units, Series I (“Series I Units”) at a price of $25.00 per Series I Unit for gross proceeds of $125,000,000 (the “Financing”).

DBRS Limited has assigned a rating of Pfd-3 (low) to the Series I Units.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

AX.PR.I is a FixedReset, 6.00%+393M600, ROC issue announced 2018-01-22. It will be tracked by HIMIPref™ but will be relegated to the Scraps subindex on the basis of its Pfd-3(low) rating from DBRS.

The issue traded 419,647 shares today in a range of 24.90-99 before closing at 24.95-97. Vital statistics are:

AX.PR.I FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-31
Maturity Price : 23.13
Evaluated at bid price : 24.95
Bid-YTW : 5.98 %

Investors should note that according to the prospectus (see SEDAR and search for Artis Real Estate Investment Trust Jan 24 2018 15:21:01 ET Prospectus (non pricing) supplement – English PDF 606 K; I am not permitted to link to this public document on its public website directly, because the Canadian Securities Administrators don’t want you to bother your pretty little heads with things like “prospectuses” and the like. Just do what the nice man at the bank tells you is best. If he wasn’t wise and benevolent, he wouldn’t be working for a bank, would he now?) [emphasis added]:

The holders of Series I Units will have the right, at their option, to reclassify their Series I Units as Preferred Units, Series J (“Series J Units”) of Artis, subject to certain conditions, on April 30, 2023 and on April 30 every five years thereafter.

The CRA (as hereinafter defined) has expressed the preliminary view that the reclassification of the Series I Units and Series J Units would likely result in a taxable disposition at that time.

The tax consequences of reclassification are not necessarily a good or bad thing, although note that the fact that such reclassification is an option suggests the issue will be trading below par. It will depend on your Adjusted Cost Base and personal tax circumstances.

Thanks again to Assiduous Reader JB who originally brought this issue to my attention.

The new issue looks quite expensive to me, according to Implied Volatility Analysis:

impvol_ax_180131
Click for Big

This perceived richness has a different source than the other issues discussed here recently, such as the BEP.PR.M issue, the CM.PR.S issue and the NA.PR.E, since the calculated level of Implied Volatility, 9%, is actually quite reasonable.

In this case, the richness is due to the extraordinarily high value that retail – fighting the last war, as always – has placed on the minimum reset guarantee. If, like me, you consider the guarantee to have little or no value, you will expect the new issue to be trading near the price of AX.PR.A, which has an Issue Reset Spread of 406bp (and a current coupon of 5.662%). However, this issue closed today at 23.50 bid, indicating that retail considers the minimum rate guarantee to be worth somewhere around $1.50. Wow! That’s many multiples of the value of the call option in this analysis!

BIP.PR.E Settles Firm on Modest Volume

Tuesday, January 23rd, 2018

Brookfield Infrastructure hasn’t announced anything, but their new issue of BIP.PR.E settled today.

BIP.PR.E is a FixedReset, 5.00%+300M500, ROC, announced January 15. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex on the basis of its P-2(low) rating from S&P (it is not rated by DBRS).

The issue traded 421,809 shares today in a range of 24.85-00 before closing at 24.93-95. Vital statistics are:

BIP.PR.E FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-23
Maturity Price : 23.13
Evaluated at bid price : 24.93
Bid-YTW : 4.96 %

This issue looks quite expensive to me, according to Implied Volatility Analysis:

impvol_bip_180123
Click for Big

We see in this chart many of the same features we saw when reviewing the recent new issues of NA.PR.E, BEP.PR.M and CM.PR.S:

  • The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
  • The prior issues are trading relatively near to, or well above par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue is 23.41, down from the announcement day estimate of 23.50 – and, remember, that is before making any adjustments for the ridiculously steep Implied Volatility calculation curve.

AX.PR.U : Probable Call 2018-3-31

Tuesday, January 23rd, 2018

When announcing today’s new issue, Artis Real Estate Investment Trust stated:

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

This intention (not yet a formal commitment!) was repeated in a later announcement.

AX.PR.U is a FixedReset, 5.25%+446, US Pay, ROC, that commenced trading 2012-9-18 after being announced 2012-9-11. It is callable at par on March 31. The issue has not been tracked by HIMIPref™ as it is US-Pay.

New Issue: AX FixedReset, 6.00%+393M600, ROC

Tuesday, January 23rd, 2018

Artis Real Estate Investment Trust has announced:

that is [sic] has entered into an agreement to sell to a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”), on a bought deal basis, 4,000,000 Cumulative Minimum Rate Reset Preferred Trust Units, Series I (“Series I Units”) at a price of $25.00 per Series I Unit (the “Issue Price”) for gross proceeds of $100,000,000 (the “Financing”). Artis has also granted the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the Financing, to purchase a further 1,000,000 Series I Units at the Issue Price, which, if fully exercised, would result in additional gross proceeds of $25,000,000.

The Series I Units will pay fixed cumulative preferential distributions of $1.50 per Series I Unit per annum, yielding 6.00% per annum, payable on the last day of January, April, July and October of each year, as and when declared by the board of trustees of Artis, for the initial period ending on April 30, 2023. The first quarterly distribution, if declared, will be payable on April 30, 2018 and will be $0.3750 per Series I Unit, based on the anticipated closing date of the Financing on January 31, 2018. The distribution rate will be reset on April 30, 2023 and every five years thereafter at a rate equal to the greater of (i) the sum of the then five year Government of Canada bond yield and 3.93% and (ii) 6.00%. The Series I Units are redeemable by Artis, at its option, on April 30, 2023 and on April 30 of every fifth year thereafter.

Holders of Series I Units will have the right to reclassify all or any part of their Series I Units as Cumulative Floating Rate Preferred Trust Units, Series J (the “Series J Units”), subject to certain conditions, on April 30, 2023 and on April 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement for the Financing). Holders of Series J Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of January, April, July and October of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread of 3.93%.

DBRS Limited has assigned a provisional rating of Pfd-3 (low) to the Series I Units.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated August 8, 2016. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about January 31, 2018 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 5,000,000 Cumulative Minimum Rate Reset Preferred Trust Units, Series I (“Series I Units”) to be offered on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”). The Series I Units will be issued at a price of $25.00 per unit, for gross proceeds of $125,000,000 (the “Financing”).

The Financing is being made pursuant to the REIT’s base shelf prospectus dated August 8, 2016. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about January 31, 2018 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

The issue they intend to redeem is AX.PR.U, a FixedReset, 5.25%+446 US PAY ROC announced 2012-09-11 which commenced trading 2012-9-18, and which is callable at par on 2018-3-31.

The new issue looks quite expensive to me, according to Implied Volatility Analysis:

impvol_ax_180122
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This perceived richness has a different source than the other issues discussed here recently, such as the BEP.PR.M issue, the CM.PR.S issue and the NA.PR.E, since the calculated level of Implied Volatility, 11%, is actually quite reasonable.

In this case, the richness is due to the extraordinarily high value that retail – fighting the last war, as always – has placed on the minimum reset guarantee. If, like me, you consider the guarantee to have little or no value, you will expect the new issue to be trading near the price of AX.PR.A, which has an Issue Reset Spread of 406bp (and a current coupon of 5.662%). However, this issue closed today at 23.61, indicating that retail considers the minimum rate guarantee to be worth somewhere around $1.50. Wow! That’s nearly double the value of the call option in this analysis!

BEP.PR.M Settles Firm on Decent Volume

Tuesday, January 16th, 2018

There was no announcement from Brookfield Renewable Partners L.P., but BEP.PR.M closed today.

BEP.PR.M is a FixedReset 5.00%+300M500 ROC announced 2018-01-09. The issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The issue traded 437,036 shares today in a range of 24.75-00 before closing at 24.99-00. Vital statistics are:

BEP.PR.M FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-01-16
Maturity Price : 23.14
Evaluated at bid price : 24.99
Bid-YTW : 4.92 %

This issue looks quite expensive to me, but quantifying the degree of richness is difficult. According to Implied Volatility Analysis:

impvol_bep_180116
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Well, it’s starting to get monotonous, but we see in this chart many of the same features we saw when reviewing the recent BIP new issue as well as last week’s BEP issue, the CM issue and NA issue:

  • The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
  • The extant issues are trading relatively near to, or well above par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; in turn, I suggest that this reflects a rather touching faith that the existence of a minimum rate guarantee on reset also indicates that the issues will never, ever trade below par. There will be a lot of long faces when this test gets failed in the future! All it will take is a spread-widening, whether market-wide or company-specific.

However, for the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

Complicating the above analysis is a high probability that the three extant issues will each be called at the first opportunity. I will certainly agree that this is likely to happen, but I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

All told, though, I have no hesitation in slapping a ‘Very Expensive’ label on this issue. According to the analysis illustrated by the above chart, the fair price is 23.36.

Update: Demonstration – to prepare the following chart I have constrained Implied Volatility to 10% (a much more reasonable figure, I think) and done a very, very, rough approximation to the error-minimizing Market Spread.

impvol_bep_180116_demonstration
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In this calculation, the calculated fair values for the issues BEP.PR.G / I / K / M, with the difference from the actual market price in brackets, are 27.11 (+1.56), 28.23 (+2.48), 25.29 (+0.20) and 22.53 (-2.46). The values for N(d2) are 72%, 88%, 41% and 7%, respectively.

See the comments for the discussion.

Update #2, 2018-1-23: From January’s PrefLetter, here are charts FR-16, FR-31 and FR-37 … the numbering is consistent with the Fixed Reset Review of October 2016 that is referred to in the comments:

pl_180112_app_fr_chart_16
Chart FR-16, 2018-1-12
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pl_180112_app_fr_chart_31
Chart FR-31, 2018-1-12
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pl_180112_app_fr_chart_37
Chart FR-37, 2018-1-12
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See the comments for discussion.