Archive for the ‘Return of Capital’ Category

BEP.PR.I Soft On Good Volume

Wednesday, May 25th, 2016

Brookfield Renewable Partners L.P. has announced that it has:

completed its previously announced issue of Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 9 (the “Series 9 Preferred Units”). The offering was underwritten by a syndicate led by CIBC Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc.

Brookfield Renewable issued 8,000,000 Series 9 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $200,000,000.

The Series 9 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BEP.PR.I.

BEP.PR.I is a FixedReset, 5.75%+501M575, announced 2016-5-16. The issue will be tracked by HIMIPref™ but has been relegated to the Scraps subindex on credit concerns.

The prospectus supplement (a public document) is available on the regulator-owned SEDAR with the identifiers “Brookfield Renewable Partners L.P. May 17 2016 19:33:41 ET Prospectus supplement – English PDF 276 K” but I am not permitted to link to it directly since I am mere investor scum without even enough dignity to get a government job. The prospectus notes:

For Canadian federal income tax purposes, holders of Series 9 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. 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” in this Prospectus Supplement for further details. As shown in the table below, the historical 3 year average per unit Canadian dividends, ordinary income and 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 2015 were approximately 61%, 20%, and 19%, respectively. Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2016 and 2021; however, no assurance can be provided this will occur.

So be careful! This isn’t your usual distribution taxation status! See the coverage of the first day of trading of BEP.PR.G for an analytical framework.

BEP.PR.I traded 745,122 shares today (consolidated exchanges) in a range of 24.85-97 before closing at 24.92-95, 5×28. Vital statistics are:

BEP.PR.I FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-05-25
Maturity Price : 23.12
Evaluated at bid price : 24.92
Bid-YTW : 5.74 %

The TXPR index is up about 35bp since the announcement date, so closing below par suggest a very slight softness in the market’s reception of the issue.

New Issue: BEP FixedReset, 5.75%+501M575

Monday, May 16th, 2016

Brookfield Renewable Partners L.P. has announced:

that it has agreed to issue 6,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 9 (the “Series 9 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by CIBC Capital Markets, RBC Capital Markets, Scotiabank and TD Securities Inc. for distribution to the public. The Series 9 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $150,000,000.

Holders of the Series 9 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.75% annually for the initial period ending July 31, 2021. 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 5.01%, and (ii) 5.75%. The Series 9 Preferred Units are redeemable on July 31, 2021 and on each Series 9 Reclassification Date (as defined below) thereafter.

Holders of the Series 9 Preferred Units will have the right, at their option, to reclassify their Series 9 Preferred Units into Cumulative Floating Rate Reset Class A Preferred Limited Partnership Units, Series 10 (the “Series 10 Preferred Units”), subject to certain conditions, on July 31, 2021 and on July 31 every 5 years thereafter (each a “Series 9 Reclassification Date”). Holders of Series 10 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 5.01%.

Brookfield Renewable has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 9 Preferred Units which, if exercised, would increase the gross offering size to $200,000,000.

The Series 9 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Renewable’s existing Canadian short form base shelf prospectus. The Series 9 Preferred Units may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

Brookfield Renewable intends to use the net proceeds of the issue of Series 9 Preferred Units to repay indebtedness. The offering of Series 9 Preferred Units is expected to close on or about May 25, 2016.

It is my understanding that distributions on the units will be characterized in the same manner as, for instance, the related issue BEP.PR.G:

According to the prospectus:
Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2015 and 2020; however, no assurance can be provided this will occur.

… but the prospectus supplement is not yet available for this particular new issue. It’s a pity they didn’t include this rather vital information in the press release.

BEP.PR.E Listed

Thursday, February 11th, 2016

BEP.PR.E, which has resulted from a 41% conversion from BRF.PR.E commenced trading today.

“Trading” is perhaps a misnomer, because not a single share changed hands; fortunately, the well compensated and strictly supervised market maker stepped up to the plate and the issue closed 16.00-21.00, 9×2, a mere $5 spread.

BEP.PR.E will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

BEP.PR.E Perpetual-Discount YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2046-02-11
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 8.86 %

BRF.PR.E: 41% Conversion to BEP.PR.E

Tuesday, February 9th, 2016

Brookfield Renewable Energy Partners L.P. has announced:

that as of 5:00 p.m. (Toronto Time) on February 8, 2016, a total of 2,885,496 Class A Preference Shares, Series 5 of Brookfield Renewable Power Preferred Equity Inc. (TSX:BRF.PR.E) (the “Series 5 Preferred Shares”) were validly tendered to its offer to exchange each issued and outstanding Series 5 Preferred Share for one newly issued Class A Preferred Limited Partnership Unit, Series 5 of Brookfield Renewable (the “Exchange Offer”). The Series 5 Preferred Shares tendered to the Exchange Offer represent approximately 41.22% of the issued and outstanding Series 5 Preferred Shares.

As all conditions of the Exchange Offer have been satisfied, Brookfield Renewable intends to take up and pay for the Series 5 Preferred Shares tendered to the Exchange Offer by issuing a book entry only certificate representing 2,885,496 Class A Preferred Limited Partnership Units, Series 5 of Brookfield Renewable (the “Series 5 Preferred Units”) in registered form to CDS Clearing and Depository Services Inc. The Series 5 Preferred Units are expected to be issued and commence trading on the Toronto Stock Exchange under the symbol “BEP.PR.E” on or about February 11, 2016. Series 5 Preferred Shares not tendered to the Exchange Offer will continue to trade on the Toronto Stock Exchange under the symbol “BRF.PR.E”.

BRF.PR.E is a Straight Perpetual, 5.00%, which commenced trading 2013-1-29 after being announced 2013-1-21. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

BEP.PR.E is a Straight Perpetual, 5.59%, but there is a tax wrinkle on the distributions:

Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2015 and 2020; however, no assurance can be provided this will occur.

The exchange offer was initially announced in November, 2015, extended in December with the prospectus filed shortly thereafter and extended again in January with the minimum tender condition waived.

BEP.PR.E will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

BIP.PR.B Settles Better than Expected On Anemic Volume

Wednesday, December 9th, 2015

Brookfield Infrastructure has announced:

the completion of its previously announced issue of Cumulative Class A Preferred Limited Partnership Units, Series 3 (“Series 3 Preferred Units”) in the amount of $125,000,000. The offering was underwritten by a syndicate led by RBC Capital Markets, CIBC, Scotiabank, and TD Securities Inc.

Brookfield Infrastructure issued 5,000,000 Series 3 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $125,000,000. Holders of the Series 3 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.50% annually for the initial period ending December 31, 2020. 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 4.53%, and (ii) 5.50%. The Series 3 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BIP.PR.B.

BIP.PR.B is a FixedReset, 5.50%+453M550 (Interest + ROC), announced December 1. The issue traded 113,268 shares today (consolidated exchanges) in a range of 24.35-58 before closing at 24.35-40, 8×40.

Given that the TXPL index is down 6.37% to December 8 from its December 1 level, the issue actually performed a little better than expected; but it remains to be seen how much of that is due to underwriter support. I’d have more confidence in the level if the volume was higher.

With some trepidation I am including this issue in the HIMIPref™ FixedReset subindex rather than the Interest-Bearing subindex, since I feel that the defining characteristic of the issue is its dividend formula rather than its dividend taxation status. I might change my mind later!

Vital statistics are:

BIP.PR.B FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-12-08
Maturity Price : 22.92
Evaluated at bid price : 24.35
Bid-YTW : 5.61 %

New Issue: BIP FixedReset, 5.50%+453M550 (Interest + ROC)

Wednesday, December 2nd, 2015

Brookfield Infrastructure has announced:

that it has agreed to issue 5,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 3 (“Series 3 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by RBC Capital Markets, CIBC, Scotiabank and TD Securities Inc. The Series 3 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $125,000,000. Holders of the Series 3 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 5.50% annually for the initial period ending December 31, 2020. 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 4.53%, and (ii) 5.50%. The Series 3 Preferred Units are redeemable on or after December 31, 2020.

Holders of the Series 3 Preferred Units will have the right, at their option, to reclassify their Series 3 Preferred Units into Cumulative Class A Preferred Limited Partnership Units, Series 4 (“Series 4 Preferred Units”), subject to certain conditions, on December 31, 2020 and on December 31 every 5 years thereafter. Holders of Series 4 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 4.53%.

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 3 Preferred Units which, if exercised, would increase the gross offering size to $175,000,000. The Series 3 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 3 Preferred Units for investment opportunities, working capital and other general corporate purposes. The offering of Series 3 Preferred Units is expected to close on or about December 8, 2015.

The sentence “The Series 3 Preferred Units are redeemable on or after December 31, 2020.” is, from what I’ve seen, poorly phrased. My understanding is that it is redeemable at par on every Exchange Date, in line with the accepted structure.

Investors should be aware that the distributions are expected to be a mixture of ordinary income and return of capital for tax purposes; no Eligible Dividends are expected. The company expects a 50-50 split of the two types of income over the next five years, but of course there are no guarantees! I have been supplied with the following characterization of the past five years:

Past Composition of BIP Distributions
  2014 2013 2012 2011 2010
Total distribution $2.1378 $1.7883 $1.4988 $1.3198 $1.1277
Total taxable income $2.1035 $0.4131 $0.7939 $0.4825 $0.2368
Return of capital $0.0343 $1.3752 $0.7049 $0.8372 $0.8909
Income % 98.40% 23.10% 52.97% 36.56% 21.00%
Return of capital % 1.60% 76.90% 47.03% 63.44% 79.00%

Sure bounces around a lot, doesn’t it?

BIP.PR.A was bid at 20.40 today to yield 5.50% to perpetuity … so call these issues more-or-less even yield. This suggests that the new issue is grossly expensive, unless you place a high value on the “dividend floor” feature, which I don’t.

BEP.PR.G Soft On Decent Volume

Thursday, November 26th, 2015

Brookfield Renewable Energy Partners L.P. has announced:

the completion of its previously announced issue of Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 7 (the “Series 7 Preferred Units”). The offering was underwritten by a syndicate led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank.

Brookfield Renewable issued 7,000,000 Series 7 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $175,000,000.

The Series 7 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BEP.PR.G.

BEP.PR.G is Preferred Units FixedReset 5.50%+447M550, announced November 17. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns. Note that the distribution will be a mixture of dividends, income and return of capital for tax purposes; calculating the after-tax return is complex and will require numerous assumptions!

The issue is rated Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has today finalized its provisional rating of Pfd-3 (high) with a Stable trend on Brookfield Renewable Energy Partners L.P.’s (BREP) issuance of Class A Preferred Limited Partnership Units, Series 7 (Preferred LP Units).

DBRS notes that the Preferred LP Units will rank on parity with every other series of Class A Preferred Limited Partnership Units and will be fully and unconditionally guaranteed by BREP’s key holding subsidiaries (the Guarantors). The Preferred LP Units will rank pari passu at the Guarantor level with the outstanding Preference Shares (rated Pfd-3 (high) by DBRS) of Brookfield Renewable Power Preferred Equity Inc., which are also guaranteed by BREP.

The issue traded 339,999 shares (consolidated exchanges) in a range of 24.60-94 today before closing at 24.70-75, 57×28. Vital statistics are:

BEP.PR.G FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-11-25
Maturity Price : 23.05
Evaluated at bid price : 24.70
Bid-YTW : 5.52 %

According to the prospectus:

Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2015 and 2020; however, no assurance can be provided this will occur.

This is the same estimate as was used for the coercive BRF.PR.E exchange offer, so we can recycle some analysis!

According to Ernst & Young, marginal tax rates for an Ontario resident with taxable income of $150,000 p.a. were 46.41% on income, 23.20% on capital gains and 29.52% on eligible dividends. Since the Return of Capital on the new units will eventually be taxed as a capital gain but only when the gain or loss is crystallized, let’s apply a 25% discount to the capital gain marginal rate to reflect the time value of the money; hence, we will assume that the Return of Capital is subject to tax at a rate of 23.20% * 75% = 17.4%:

Taxation of distributions
  BEP.PR.G
Distribution
Type
Pre Tax Amount Tax Net
Eligible
Dividend
0.6875 0.20295 0.48455
Ordinary
Income
0.34375 0.1595 0.18425
Return
of
Capital
0.34375 0.0598 0.28395
Total 1.375 0.42225 0.95275

So if we accept the given figures as a good enough guess – the after-tax income per share will be 0.95275, equivalent to a dividend of 1.352, a rate of slightly over 5.40%, which is in agreement with the figure Louisprefs supplied as the Scotia estimate in the comments to the announcement post. However, note that there are no guarantees offered by the company! If it should come to pass that 100% of the distributions are ordinary income, then tax at 46.41% will come to 0.6381 and the net after-tax amount will be 0.7369, which is 23% less than the estimate above. So there’s a certain amount of tax-risk here, depending on the nature of the company’s distributions.

Update, 2015-11-26: S&P has rated the issue P-3(high). On November 4 they degraded the outlook on BREP to stable from positive:

Standard & Poor’s Ratings Services today said it revised its outlook on Brookfield Renewable Energy Partners L.P. (BREP) to stable from positive. At the same time Standard & Poor’s affirmed its ratings on BREP and subsidiaries Brookfield Renewable Power Preferred Equity Inc. and BRP Finance ULC, including its ‘BBB’ long-term corporate credit rating on BREP.

The outlook revision reflects our view of the company’s ability to generate strong remittable cash flows from its holdings and its increased level of holding company (holdco) recourse debt. The company has articulated a policy of maintaining relatively low levels of leverage at the holdco level with leverage at the holdco used opportunistically for acquisitions with equity as market conditions allow. However, during the course of the year, the company has made a number of acquisitions that, although partially funded with new equity issuance, maintained a higher level of debt at the holdco. This has resulted in lower credit metrics. “Although the metrics are still comfortably within the range for the rating, we believe that the increased debt will remain at the holdco level for the foreseeable future,” said Standard & Poor’s credit analyst Stephen Goltz.

New Issue: BEP Preferred Units FixedReset 5.50%+447M550

Wednesday, November 18th, 2015

Brookfield Renewable Energy Partners L.P. has announced:

that it has agreed to issue 5,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 7 (the “Series 7 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank for distribution to the public. The Series 7 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $125,000,000.

Holders of the Series 7 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.50% annually for the initial period ending January 31, 2021. 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 4.47%, and (ii) 5.50%. The Series 7 Preferred Units are redeemable on or after January 31, 2021.

Holders of the Series 7 Preferred Units will have the right, at their option, to reclassify their Series 7 Preferred Units into Cumulative Floating Rate Reset Class A Preferred Limited Partnership Units, Series 8 (“Series 8 Preferred Units”), subject to certain conditions, on January 31, 2021 and on January 31 every 5 years thereafter. Holders of Series 8 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 4.47%.

Brookfield Renewable has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 7 Preferred Units which, if exercised, would increase the gross offering size to $175,000,000.

The Series 7 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Renewable’s existing Canadian short form base shelf prospectus. The Series 7 Preferred Units may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

Brookfield Renewable intends to use the net proceeds of the issue of Series 7 Preferred Units to repay indebtedness and for general corporate purposes. The offering of Series 7 Preferred Units is expected to close on or about November 25, 2015.

I am assuming that since these are referred to as “Preferred Units” that the distributions will be characterized as a mixture of dividends, ordinary income and return of capital, but I have not yet been able to confirm this; but this would be consistent with the new security they are offering in exchange for BRF.PR.E.

Update, 2015-11-19: The company announced on November 18:

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 7,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 7 (the “Series 7 Preferred Units”). The Series 7 Preferred Units will be issued at a price of C$25.00 per share, for gross proceeds of C$175,000,000 pursuant to a prospectus supplement filed today. The Series 7 Preferred Units are being offered on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank for distribution to the public.

BRF.PR.E: Coercive Exchange Offer

Tuesday, November 10th, 2015

Brookfield Renewable Energy Partners L.P. has announced:

the commencement of an offer to exchange (the “Exchange Offer”) each issued and outstanding Class A Preference Share, Series 5 of Brookfield Renewable Power Preferred Equity Inc. (TSX:BRF.PR.E) (“BRP Equity”) with an annual dividend rate of 5.00% (collectively, the “Series 5 Preferred Shares”) for one newly issued Class A Preferred Limited Partnership Unit, Series 5 of Brookfield Renewable with an annual distribution rate of 5.59% (collectively, the “Series 5 Preferred Units”). The annual distribution rate on each Series 5 Preferred Unit will be C$1.3976, compared to the annual dividend rate of C$1.25 on each Series 5 Preferred Share.

Holders of Series 5 Preferred Shares (“Series 5 Preferred Shareholders”) will be entitled to receive one Series 5 Preferred Unit for each Series 5 Preferred Share tendered under the Exchange Offer. Each of the guarantors of the Series 5 Preferred Shares will also be a guarantor of the Series 5 Preferred Units, other than the issuer, Brookfield Renewable. The Series 5 Preferred Units have been assigned a provisional rating of “Pfd-3 (high)” by DBRS Limited (“DBRS”) and a preliminary rating of “P-3 (high)” by Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies Inc. (“S&P”), which are the same ratings currently assigned by DBRS and S&P to the Series 5 Preferred Shares.

The Exchange Offer will be open for acceptance until 5:00 p.m. (Toronto Time) on December 18, 2015, unless extended or withdrawn by Brookfield Renewable. The Exchange Offer is conditional upon, among other things, at least 50% of the Series 5 Preferred Shares having been validly deposited or tendered under the Exchange Offer and not withdrawn, which condition may be waived by Brookfield Renewable.

The Exchange Offer is being made pursuant to a supplement to Brookfield Renewable’s short form base shelf prospectus dated May 12, 2015 (the “Prospectus Supplement”) that will be filed today with securities regulatory authorities in each of the provinces and territories of Canada.

Series 5 Preferred Shareholders should consider the following factors, among others, in making a decision whether to accept the Exchange Offer:
•Increased distributions: The annual distribution rate on the Series 5 Preferred Units is 5.59% (C$1.3976), compared to the annual dividend rate of 5.00% (C$1.25) for the Series 5 Preferred Shares.

•Substantially similar other terms and conditions: The other terms and conditions of the Series 5 Preferred Units will be substantially similar to those of the Series 5 Preferred Shares, other than certain technical amendments noted in the Prospectus Supplement.

•Unanimous Board Recommendation: The board of directors of the general partner of Brookfield Renewable and the board of directors of BRP Equity, after reviewing the Fairness Opinion (as defined below) have unanimously recommended that Series 5 Preferred Shareholders accept the Exchange Offer and deposit their Series 5 Preferred Shares pursuant to the Exchange Offer.

•Fairness Opinion: The Partnership and BRP Equity engaged PricewaterhouseCoopers LLP to provide an opinion to the effect that, subject to the assumptions, limitations and qualifications contained therein, the consideration to be received under the Exchange Offer is fair, from a financial point of view, to the holders of Series 5 Preferred Shares (the “Fairness Opinion”).

Full details of the Exchange Offer are contained in the Prospectus Supplement and other related documents that will be mailed today to the registered holder of all Series 5 Preferred Shares as required under applicable Canadian securities laws. Copies of the Prospectus Supplement and other relevant documents will be available on SEDAR at www.sedar.com and on Brookfield Renewable’s website at www.brookfieldrenewable.com. Brookfield Renewable has also commenced the process of mailing to beneficial holders of Series 5 Preferred Shares. Series 5 Preferred Shareholders are urged to evaluate carefully all information in the Exchange Offer, including risk factors, and to consult their own investment, tax and legal advisors.

Computershare Investor Services Inc. is the Depositary for the Exchange Offer and D.F. King Canada, a division of CST Investor Services Inc., is the Information Agent. Any questions or requests for assistance concerning the Exchange Offer or further information about tendering to the Exchange Offer should be directed to the Depositary at 1-800-564-6253 (toll free in North America) or 1-514-982-7555, or by e-mail at corporateactions@computershare.com; or to the Information Agent at 1-800-332-4904 (toll free in North America) or 1-201-806-7301, or by e-mail at inquiries@dfking.com.

Copies of the Prospectus Supplement and any other documents relating to the Exchange Offer as referred to above may be obtained free of charge upon request to the Depositary or the Information Agent. Series 5 Preferred Shareholders whose Series 5 Preferred Shares are registered in the name of a broker, investment dealer, bank, trust company or other nominee should contact such nominee for assistance in depositing their Series 5 Preferred Shares to the Exchange Offer.

BRF.PR.E is a Straight Perpetual, 5.00%, which commenced trading 2013-1-29 after being announced 2013-1-21. It is tracked by HIMIPref™ but relegated to the Scraps index on credit concerns.

I consider this offer coercive because, according to the prospectus supplement:

Following the completion of the Exchange Offer and any Subsequent Acquisition or Compulsory Acquisition Transaction relating thereto, the Partnership intends to cause BRP Equity to apply to the TSX to delist the Series 5 Preferred Shares from trading. See “The Exchange Offer – Effect of the Exchange Offer on the Market for Series 5 Preferred Shares, Listing and Public Disclosure by BRP Equity”.

The more detailed explanation is:

Effect of the Exchange Offer on the Market for Series 5 Preferred Shares, Listing and Public Disclosure by BRP Equity

If, after taking up Series 5 Preferred Shares under the Exchange Offer, the Partnership holds a sufficient number of Series 5 Preferred Shares, the Partnership intends to effect a Subsequent Acquisition Transaction or, if a sufficient number of Series 5 Preferred Shares are tendered, a Compulsory Acquisition. In such event, if permitted by applicable Law, the Partnership will apply to delist the Series 5 Preferred Shares from the TSX and there will no longer be a trading market for the Series 5 Preferred Shares.

Even if the Subsequent Acquisition Transaction or Compulsory Acquisition cannot be completed as quickly as intended, the purchase of Series 5 Preferred Shares by the Partnership pursuant to the Exchange Offer will reduce the number of Series 5 Preferred Shares that might otherwise trade publicly, as well as the number of Series 5 Preferred Shareholders and would likely adversely affect the liquidity and market value of the remaining Series 5 Preferred Shares held by the public.

A decline in liquidity is all part of the game, but it will be noted that company is not making any commitment to maintain the listing in any scenarios that are not specified in the above. Note that:

Resident Holders are cautioned that, if the Series 5 Preferred Shares are no longer listed on a “designated stock exchange” (which currently includes the TSX) and BRP Equity ceases to be a “public corporation” for purposes of the Tax Act, the Series 5 Preferred Shares will not be qualified investments for trusts governed by RRSPs, RRIFs, registered education savings plans, registered disability savings plans, deferred profit sharing plans or TFSAs. Resident Holders are urged to consult their own tax advisors with respect to the potential income tax consequences to them in this regard.

So that’s the stick. The carrot is:

Increased distributions: The annual distribution rate on the Series 5 Preferred Units is 5.59%, compared to the annual dividend rate of 5.00% for the Series 5 Preferred Shares.

But the difficult part is the tax considerations. First off, this is not a tax-free rollover:

A Holder of Series 5 Preferred Shares who for purposes of the Tax Act (as defined herein) and at all relevant times, is or is deemed to be resident in Canada (a “Resident Holder”) who exchanges Series 5 Preferred Shares for Series 5 Preferred Units pursuant to the Exchange Offer will be considered to have disposed of such Series 5 Preferred Shares for proceeds of disposition equal to the fair market value, as at the time of acquisition, of the Series 5 Preferred Units acquired by such Resident Holder on the exchange. As a result, the Resident Holder generally will realize a capital gain (or capital loss) to the extent that such proceeds of disposition exceed (or are less than) the aggregate of the adjusted cost base to the purchaser of the Series 5 Preferred Shares so exchanged and any reasonable costs of disposition.

However, this is of relatively small concern, since the year-end 2014 bid was 21.40 compared to today’s closing bid of 21.05 (after a healthy pop in price today, +3.64%. It looks like some players like the offer!), so I suspect that most – although not all! – holders will crystallize a capital loss.

Of greater pith and moment is the nature of the dividends to be paid on the new Preferred Units:

For Canadian federal income tax purposes, holders of Series 5 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. 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” in this Prospectus Supplement for further details. As shown in the table below, the historical 3 year average per unit Canadian dividends, ordinary income and 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 2012 through 2014 were approximately 56%, 26%, and 18% respectively. Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2015 and 2020; however, no assurance can be provided this will occur.

So let’s take them at their word and estimate the after tax return on BRF.PR.E compared to the new units (which pay a total of 5.59%). According to Ernst & Young, marginal tax rates for an Ontario resident with taxable income of $150,000 p.a. were 46.41% on income, 23.20% on capital gains and 29.52% on eligible dividends. Since the Return of Capital on the new units will eventually be taxed as a capital gain but only when the gain or loss is crystallized, let’s apply a 25% discount to the capital gain marginal rate to reflect the time value of the money; hence, we will assume that the Return of Capital is subject to tax at a rate of 23.20% * 75% = 17.4%:

Taxation comparison of distributions
  BRF.PR.E New Security
Distribution
Type
Pre Tax Amount Tax Net Pre Tax Amount Tax Net
Eligible
Dividend
1.25 0.369 0.881 0.69875 0.20627 0.49248
Ordinary
Income
0.00 0.00 0.00 0.349375 0.162145 0.187230
Return
of
Capital
0.00 0.00 0.00 0.349375 0.060791 0.288584
Total 1.25 0.369 0.881 1.3975 0.4292 0.9683

So on the surface it seems like a genuine improvement – the after-tax income per share will increase from 0.881 to 0.9683, a 9.9% hike. However, note that there are no guarantees offered by the company! If it should come to pass that 100% of the distributions are ordinary income, then tax at 46.41% will come to 0.6486 and the net after-tax amount will be 0.7489, a 15.0% decline. So there’s a certain amount of tax-risk here, depending on the nature of the company’s distributions.

DBRS has assigned a provisional rating of Pfd-3(high) to the issue:

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-3 (high) with a Stable trend to Brookfield Renewable Energy Partners L.P.’s (BREP; rated BBB (high), Stable trend) proposed new issuance of Class A Preferred Limited Partnership Units, Series 5 (Preferred LP Units).

I will not make a recommendation regarding tendering holdings of BRF.PR.E at this time, and I might not make a recommendation at all. But feel free to comment!

BIP.PR.A Weak On Decent Volume

Thursday, March 12th, 2015

Brookfield Infrastructure has announced:

the completion of its previously announced issue of Cumulative Class A Preferred Limited Partnership Units, Series 1 (“Series 1 Preferred Units”) in the amount of $125,000,000. The offering was underwritten by a syndicate led by CIBC, RBC Capital Markets, Scotiabank, and TD Securities Inc.

Brookfield Infrastructure issued 5,000,000 Series 1 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $125,000,000. Holders of the Series 1 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 4.50% annually for the initial period ending June 30, 2020. Thereafter, the distribution rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 3.56%. The Series 1 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BIP.PR.A.

BIP.PR.A is a FixedReset, 4.50%+356, announced March 4. It will be tracked by HIMIPref™ and has been assigned to the FixedResets subindex.

As I noted on the post regarding the announcement, the ‘tax considerations’ section of the prospectus (SEDAR, Brookfield Infrastructure Partners L.P. Mar 4 2015 21:37:58 ET, Prospectus supplement – English, PDF 305 K, sorry, I can’t link directly because this is Canada and regulators think you’re shit) is fraught with interest:

For Canadian federal income tax purposes, holders of Series 1 Preferred Units and Series 2 Preferred Units will be allocated a portion of the taxable income of our 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. 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 our Partnership for the period 2010 through 2014 was approximately 50%. Management anticipates a 5 year average per unit return of capital percentage of 50% for the period 2015 through 2019; however, no assurance can be provided this will occur.

  2014 2013 2012 2011 2010
Total distribution C$2.1378 C$1.7883 C$1.4988 C$1.3198 C$1.1277
Total taxable income C$2.1035 C$0.4131 C$0.7939 C$0.4825 C$0.2368
Return of capital C$0.0343 C$1.3752 C$0.7049 C$0.8372 C$0.8909
Income % 98.40% 23.10% 52.97% 36.56% 21.00%
Return of capital % 1.60% 76.90% 47.03% 63.44% 79.00%

The details of the 2014 CANADIAN TAXABLE INCOME CALCULATION (for the non-preferred units, remember!) are mind-boggling:

The table below provides the Canadian taxable income information for Brookfield Infrastructure Partners for its 2014 taxation year.

All amounts are reported in Canadian dollars (unless stated otherwise) and are on a per unit basis by quarter. Taxable income is allcoated to unitholders based upon distributions.

All Canadian non-registered unitholders should have received a Form T5013 from their broker.

The information in the table below can be used by a unitholder to verify the amounts reported on Form T5013.

Quarterly return of capital amounts are determined as (i) the Cdn dollar equivalent of the quarterly distribution using the noon rate on the date of payment (according to the Bank of Canada), minus (ii) Canadian taxable income for the quarter.

Record date 28-Feb 30-May 29-Aug 28-Nov  
Payment date 31-Mar 30-Jun 30-Sep 31-Dec Full Year
Per Unit Distribution US$ $ 0.4800 $ 0.4800 $ 0.4800 $ 0.4800 $ 1 .9200
Cdn$/Unit Cdn$/Unit Cdn$/Unit Cdn$/Unit Cdn$/Unit
Per Unit Distribution $ 0.5305 $ 0.5124 $ 0.5380 $ 0.5568 $ 2 .1378
Canadian source interest $ 0.0049 $ 0.0049 $ 0.0049 $ 0.0049 $ 0.0198
Canadian eligible dividend $ 0.0118 $ 0.0118 $ 0.0118 $ 0.0118 $ 0.0472
Foreign dividend and interest income $ 0.6055 $ 0.6055 $ 0.6055 $ 0.6055 $ 2.4220
Other investment income $ – $ – $ – $ – $ –
Carrying charges $ (0.0994) $ (0.0994) $ (0.0994) $ (0.0994) $ (0.3977)
Capital gain / (loss) $ 0.0030 $ 0.0030 $ 0.0030 $ 0.0030 $ 0.0122
Total tax allocation $ 0.5259 $ 0.5259 $ 0.5259 $ 0.5259 $ 2.1035

BIP.PR.A traded 486,480 shares today (consolidated exchanges) in a range of 24.51-86 before closing at 24.51-60. Vital statistics are:

BIP.PR.A FixedReset YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-03-12
Maturity Price : 22.97
Evaluated at bid price : 24.51
Bid-YTW : 4.51 %