Brompton Group has announced:
) Brompton Split Banc Corp. (the “Company”) is pleased to announce it is undertaking an overnight treasury offering of class A and preferred shares (the “Class A Shares” and “Preferred Shares”, respectively).
The sales period for this overnight offering will end at 9:00 a.m. (ET) on Tuesday, February 4, 2020. The offering is expected to close on or about February 13, 2020 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (“TSX”).
The Class A Shares will be offered at a price of $13.00 per Class A Share for a distribution rate of 9.2% on the issue price, and the Preferred Shares will be offered at a price of $10.25 per Preferred Share for a yield to maturity of 4.3%. (1) The closing price on the TSX for each of the Class A and Preferred Shares on January 31, 2020 was $13.11 and $10.60, respectively. The Class A and Preferred Share offering prices were determined so as to be non-dilutive to the most recently calculated net asset value per unit of the Company (calculated as at January 31, 2020), as adjusted for dividends and certain expenses to be accrued prior to or upon settlement of the offering.
The Company invests in a portfolio (the “Portfolio”) consisting of common shares of the six largest Canadian banks: Royal Bank of Canada, The Bank of Nova Scotia, National Bank of Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal. In addition, the Company may hold up to 10% of the total assets of the Portfolio in investments in global financial companies for the purpose of enhanced diversification and return potential.
The investment objectives for the Class A Shares are to provide holders with regular monthly cash distributions targeted to be at least $0.10 per Class A Share and to provide the opportunity for growth in the net asset value per Class A Share.
The investment objectives for the Preferred Shares are to provide holders with fixed cumulative preferential quarterly cash distributions, currently in the amount of $0.125 per Preferred Share, and to return the original issue price to holders of Preferred Shares on November 29, 2022.
The syndicate of agents for the offering is being led by RBC Capital Markets, CIBC Capital Markets, National Bank Financial Inc. and Scotiabank.
The NAVPU of the Whole Units (determined by adding the NAVPU of the Capital Units to the NAVPU of the preferred shares) is 22.76 and the Whole Units are being offered at 23.25, so that’s a premium of a little under 2.2%. What a great business this is, when it works! It’s very interesting to see that the preferreds are being offered at a significant discount to their market value … I’ve had a look at the Underwriting agreement for the 2019 Treasury offering (available on SEDAR; search for “Brompton Split Banc Corp. Feb 21 2019 19:20:04 ET Underwriting or agency agreements (or amendment thereto) PDF 260 K”) but can’t quite make out what happens to all that loose cash when retail clients purchase only Capital Units. Are the preferreds scooped up by the dealers’ inventories? That would be a nice incentive to sell only Capital Units!
Update, 2020-2-17: The offering raised just under $53-million.
Bought some on the open market this morning at just over 23 for the combined unit.. Probably got at NAVPU because bank shares are up this morning..
These shares have traded over NAVPU for months so hoping to make a trade..
According to the press release, the prefs being issued at $ 10.25 have a YTM of 4.3%. However. using the Yield to Call calculator available from James`website, I get a materially lower yield to maturity from Feb. 4 to November 29 2022 of 4.16%! The inputs are Feb. 4 settlement, dividend Cycle 1, pay date 15. Curious!
The good part of these splits is that the dividend and principle are very secure. Bank shares would have to drop by 60%+ before there is any risk of the principle being in jeopardy.
But, on the flip side, I would not buy them at 10.55 for the yield would probably drop below 4% (and there is the risk that it will be redeemed at par)!
I get a materially lower yield to maturity
It took a little playing around, but I’ve got a plausible explanation.
There are two things going on here, I think:
(i) The dividends are paid on the 12th, cycle 1, but they are earned at the end of every calendar quarter. See the Annual Information Form for 2018, Section 3.2.1. Therefore, the final dividend paid on maturity should be for $0.083333 (give or take a decimal place), not the $0.06522 calculated when using the 12th day of the first cycle.
(ii) They have reported the IRR (annual compounding) instead of the standard and more defensible quarterly compounding.
To address the first problem, make the pay date for each dividend the 31st day of Cycle 3. This introduces some timing errors since the cash is not actually received on those dates, but this error is less than the ‘ending partial dividend amount’ error.
To address the second problem, remember from the note of the spreadsheet that “The annualized quarterly yield (4*((1+Y)^0.25-1), where Y is the annual yield”.
Some people will angrily insist that IRR is the only proper way to report yields; ask them what the yield of a 4%, 1-year government bond is if it pays semiannually and is priced at par.
From the math, IRR is always higher than quarterly or semi-annual compounding, which is why it’s often reported. IRR is reported on the spreadsheet in cell U105; after I make the adjustment for the pay-date, I see an IRR of 4.30% and an annualized quarterly yield of 4.23%.
there is the risk that it will be redeemed at par
I would say that’s effectively a certainty. On the stated maturity, holders may hang on to their shares, sure (assuming they are extended, as is normal), but the terms are changed according to the whim of the company. However, holders can be reasonably well assured that the reset rate will be generous; the companies find it difficult enough to sell the Capital Units, they don’t want problems selling the preferreds as well!
Thank you, James, for your detailed response! For those of us who frequently use the calculator, your suggestion for a cycle “work-around” is appreciated.
your suggestion for a cycle “work-around” is appreciated.
Here’s another trick: for monthly-pay instruments, say that the cycle is the one that picks up the third dividend payment that will actually be received; so if something has a month-end record date and a pay-date of the following 10th, and you buy it on October 4, then set your calculator so that the pay-date used in the calculation is not October 10, (no dividend receipts), not November 10 (one dividend), not December 10 (two dividends) but January 10 (the third dividend that will actually be received.
Or, if you also want to use month-end pay dates due to the ‘ending stub period problem’ discussed above, say the quarterly dividend will be received December 31 (since it’s the closest month-end; there will be more error than a precise calculation but usually less error than getting the final dividend wrong).
As mentioned, the risk of buying preferred over the redemption price is that they will be recalled.. I know of at least one of the Brompton funds that had a small partial redemption at NAV.
Hence why I would never buy this preferred at 10.55 (pre offering), but at 12.25, I’m willing to take the risk.
Also, as mentioned, they have been generous with the rate they reset at, especially if the capital shares have low values (refer to OSP.PR.A/DGS.PR.A)
I know of at least one of the Brompton funds that had a small partial redemption at NAV.
This was DGS.PR.A in November 2019.
if the capital shares have low values (refer to OSP.PR.A/DGS.PR.A)
It is true, of course, that DGS.PR.A has the second-lowest Asset Coverage of the Brompton Group’s offerings, but with Coverage ratio of a little under 1.6:1 it’s good quality.