Brookfield Funds is now posting the Preferred Security NAV as well as the Capital Unit NAV; the asset coverage has now fallen below unity.
The following table shows the swiftness of the descent:
| BSD.UN + BSD.PR.A NAV | |
| Date | NAVPU |
| September 5 | 15.50 |
| September 12 | 14.99 |
| September 19 | 14.67 |
| September 26 | 14.30 |
| September 30 | 13.67 |
| October 3 | 12.70 |
| October 10 | 9.07 |
Holy smokes, that was FAST. Today’s closing quote on BSD.UN was 1.11-19, 100×2, with a trading range of 1.06-20; BSD.PR.A was quoted at 6.81-50, 25×7, with all 968 shares trading at 6.78.
Holders of BSD.PR.A (some of whom, I fear, bought it on my recommendation) should not sell instantly. The market price is well below the NAV and there remains a good chance that the income coverage of over 2:1 will yet repair the damage to asset coverage over the remaining term of the security (the scheduled wind-up date is 2015-3-31); there will be no payments to capital unitholders until the damage is repaired:
The Trust may not make any cash distributions on the Capital Units if, after giving effect to the proposed distribution, the Combined Value would be less than 1.4 times the Repayment Price.
There is the possibility of Concurrent Retraction in November:
Commencing in 2005, Preferred Securities may be surrendered together with an equal number of Capital Units for redemption in the month of November of each year for redemption on the last Business Day (any day on which the Toronto Stock Exchange is open for trading is hereinafter referred to as a ‘‘Business Day’’) in November of that year (a ‘‘Redemption Date’’), subject to the Trust’s right to suspend redemptions in certain circumstances. A Securityholder who surrenders Preferred Securities together with Capital Units for redemption at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs.
DBRS still has the prefs rated at Pfd-2; FTU.PR.A was downgraded to Pfd-5 when it was in better shape.
For those holding this in their portfolios, I recommend – for now – that it be kept (since the realizable value on sale is far less than NAV) but that some thought be given to buying capital units for use in next month’s redemption opportunity. It should now be considered an equity for Asset Allocation purposes.
Also remember, that unless and until the distributions in the underlying holdings are cut massively, income will exceed expenditure.
BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing index. It was last discussed on PrefBlog in a September post, BSD.PR.A: Globe & Mail Gets the Numbers Wrong.
Update, 2008-10-17: This is very odd. The Preferred Share NAV Page no longer exists on the Brookfield Funds website.
Underlying distributions are, unfortunately, likely to be cut massively by the oil and gas trusts in the portfolio.
Sure, the holdings in Oil & Gas trusts will hurt – and probably have hurt the NAV. However, such holdings comprised only about a third of the portfolio on June 30, according to the June 30 report.
I’m sure that prefhound knows, but I should make it explicit: I am neither recommending nor deprecating BSD.PR.A as an investment at this point. Given the large discount to NAV and superb income coverage – at historical distribution levels – I suggest that holders continue to hold.
However, for new money coming in, it should be analyzed – and allocated – as an equity; and this is something that I don’t do.
Although I have long loved good quality income trusts as an asset class and own some in addition to BSD.PR.A, “superb income coverage – at historical distribution levels” may be quite wide of the mark.
I have always tried to calculate sustainable future distribution levels — to anticipate both income AND credit quality. Broadly speaking, if oil&gas trusts have cash costs = 25% of cash revenue with oil at $130/bbl, then oil at $65/bbl reduces distributable cash by 2/3 (from 3x costs to 1xcosts). Oil sands is worse, of course, because costs are higher. In addition, oil & gas distributions are a higher percentage of share value because half of it is return of capital. Thus a 30% weight might account for 40+% of income to BSD.PR.A. Fortunately, hedging at some oil&gas trusts may delay full recognition of lower distributions, giving us time to analyze this baby carefully.
Added to this, income trusts in general face a 2011 taxation onset issue — despite the new taxes being roughly neutral outside an RRSP. Non-taxable investors such as pension plans and RRSPs may reduce holdings as post-2011 dividend distributions are further cut. On the plus side, this means BSD.PR.A distributions can become dividends — and thereby increase after-tax distribution yield.
Furthermore, I fear that income trusts outside the oil & gas sphere are leveraged (dirty word today) and may face problems rolling over debt as it comes due. Even if they can roll it over, if new debt comes at a higher cost, distributions may be threatened. My guess is that oil&gas trusts have debt proportional in some way to NAV. Now that NAV is much lower, debt will have to be reduced.
Finally, income trusts are often small and illiquid, so selling (and, fortunately, buying) can move the price a great deal.
The outlook for BSD.PR.A income coverage is for it to most likely fall perhaps 50% by 2011 (but become dividends plus return of capital). I would anticipate the credit rating to fall below investment grade, though it may yet survive to maturity.
I would not call this a superb situation, and we have to balance it by the MER grind, which now accrues to the pref shares AND will get proportionately larger in the event of significant retractions. Rather than equity, this is equity short a covered call option so deep potential downside is not offset by potential upside. Depending on MER, one may actually be better off with direct ownership of income trusts — but I will need to analyse that.
Finally, income trusts are often small and illiquid, so selling (and, fortunately, buying) can move the price a great deal.
Yes, and this may have been influential in the precipituous fall in the NAV of the fund.
The outlook for BSD.PR.A income coverage is for it to most likely fall perhaps 50% by 2011 (but become dividends plus return of capital).
Yes, but according to the figures summarized in the prior post on this vehicle, a 50% reduction in gross investment income will still leave the income coverage greater than 1 even if expenses are unchanged. I should also point out that the prospectus states that management fees are proportional to NAV – taking account of the reduction in fees, will improve the outlook.
I would not call this a superb situation
Me neither!
Rather than equity, this is equity short a covered call option so deep potential downside is not offset by potential upside.
True – but at the prices quoted in the post, the preferred is trading at a substantial discount to NAV. It’s complicated, and for now I’ll say that holders should continue to hold.
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