New Issue: BPO FixedReset, 4.85%+323M485

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

that it has agreed to issue to a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc., for distribution to the public, ten million Cumulative Minimum Rate Reset Class AAA Preference Shares, Series II (the “Preferred Shares, Series II”). The Preferred Shares, Series II will be issued at a price of C$25.00 per share, for aggregate proceeds of C$250 million. Holders of the Preferred Shares, Series II will be entitled to receive a cumulative quarterly fixed dividend yielding 4.85% annually for the initial period ending December 31, 2022. 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 3.23% and (ii) 4.85%.

Holders of Preferred Shares, Series II will have the right, at their option, to convert their shares into Cumulative Floating Rate Class AAA Preference Shares, Series JJ (the “Preferred Shares, Series JJ”), subject to certain conditions, on December 31, 2022 and on December 31 every five years thereafter. Holders of Preferred Shares, Series JJ will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 3.23%.

The Series II Shares and Series JJ Shares will be fully and unconditionally guaranteed, jointly and severally, as to: (i) the payment of dividends, as and when declared, (ii) the payment of amounts due on redemption, and (iii) the payment of amounts due on the liquidation, dissolution or winding-up of Brookfield Office Properties, by the following entities: Brookfield Property Partners L.P., Brookfield Property L.P., Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, BPY Bermuda Holdings II Limited, BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited.

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 II at the same offering price. Should the option be fully exercised, the total gross proceeds of the financing will be C$300 million.

The Preferred Shares, Series II 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 August 29, 2016.

The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes. The offering is expected to close on or about December 7, 2017.

This issue looks extraordinarily expensive to me! According to Implied Volatility analysis:

Click for Big

With the parameters shown, the theoretical value of the new issue is 23.12. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

However, when the graph is examined more closely, it does look as if the Floor issues are on a different line with a steeper slope than the non-Floor issues. So let’s try disaggregating the data:

Click for Big
Click for Big

It’s an interesting idea that bears watching in the future. The Implied Volatility of the “Floor” series is extremely high, indicating that the Black-Scholes assumptions do not hold, which I usually take to mean implies a strong belief in the directionality of future prices, e.g., that all issues will be called and hence are all expected to gravitate towards par. Regretably, all extant ‘floor’ issues (BPO.PR.C, BPO.PR.E, BPO.PR.G) have relatively high spreads (518, 396 and 374bp, respectively) and are trading above par, which may be contaminating the data.

3 Responses to “New Issue: BPO FixedReset, 4.85%+323M485”

  1. dodoi says:

    I also thought they were expensive. It seems that all new issues are expensive as well, but they sell out very fast within hours. Beside the etf index funds like ZPR, CPD I was wondering who would buy them? Probably there are a lot of people looking for yield.

  2. jiHymas says:

    I was wondering who would buy them?

    Anybody whose stockbroker gets 3% commission for selling them.

    Also, a few lazy institutional portfolio managers who need to invest a lot of cash without effort.

  3. marpy says:

    I had placed an expression of interest in these but I think I will cancel and wait to see what they trade at. just checked and this issue is still not closed (slow moving).

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