New Issue: BPO FixedReset, 6.00%+518M600

Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners, has announced:

that it has agreed to issue to a syndicate of underwriters led by TD Securities Inc., CIBC Capital Markets, RBC Capital Markets and Scotiabank, for distribution to the public, six million Cumulative Minimum Rate Reset Class AAA Preference Shares, Series CC (the “Preferred Shares, Series CC”). The Preferred Shares, Series CC will be issued at a price of C$25.00 per share, for aggregate proceeds of C$150 million. Holders of the Preferred Shares, Series CC will be entitled to receive a cumulative quarterly fixed dividend yielding 6.00% annually for the initial period ending June 30, 2021. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of (i) the five-year Government of Canada bond yield plus 5.18% and (ii) 6.00%.

Holders of Preferred Shares, Series CC will have the right, at their option, to convert their shares into Cumulative Floating Rate Class AAA Preference Shares, Series DD (the “Preferred Shares, Series DD”), subject to certain conditions, on June 30, 2021 and on June 30 every five years thereafter. Holders of Preferred Shares, Series DD will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 5.18%.

Brookfield Office Properties has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase an additional 2,000,000 Preferred Shares, Series CC at the same offering price. Should the option be fully exercised, the total gross proceeds of the financing will be C$200 million.

The Preferred Shares, Series CC will be offered in all provinces of Canada by way of a supplement to Brookfield Office Properties’ existing Canadian short form base shelf prospectus dated November 13, 2014.

The net proceeds of the issue will be used for general corporate purposes which may include the redemption of existing preferred shares. The offering is expected to close on or about April 27, 2016.

Implied Volatility analysis tells a rather peculiar tale:

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The Implied Volatility is extremely low, which is particularly surprising in light of the fact that calculations for most other series result in a value that is extremely high. This suggests that lower-spread issues should be favoured. The very wide range of Expected Future Current Yield is also surprising – BPO.PR.N resets at +307 on 2016-6-30, which implies a dividend rate of 3.84% at the current level of GOC-5, which is an annual rate of $0.96, which, based on its current bid price of $15.00, implies an Expected Future Current Yield of 6.40%, well in excess of the new offering.

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