New Issue: Sagen MI Canada Inc. Straight Perpetual 5.40%

Sagen MI Canada Inc. has announced:

that it has agreed to issue 4,000,000 non-cumulative Class A Preferred Shares, Series 1 (the “Series 1 Shares”) on a bought deal basis, for gross proceeds of C$100 million (the “Offering”). The Series 1 Shares will be priced at C$25.00 per share and will entitle holders thereof to fixed, non-cumulative dividends if, as and when declared by the board of directors of the Company with an annual dividend yield of 5.40%. Closing is expected to occur on or about February 18, 2021. The issue will be underwritten by a syndicate of underwriters led by BMO Capital Markets, CIBC World Markets, National Bank Financial, RBC Capital Markets, Scotia Capital and TD Securities.

The Company intends to use the net proceeds of the Offering to strengthen the Company’s capital base, for distributions to shareholders (subject to the completion of the previously announced plan of arrangement pursuant to which Brookfield Business Partners L.P., together with certain of its affiliates and institutional partners (“Brookfield”), will acquire all of the outstanding common shares of the Company not already owned by Brookfield), and/or for general corporate purposes.

So on the one hand, it’s great to see a new issuer. On the other hand, it’s yet another member of the Brookfield empire.

And it’s great to see a new Straight Perpetual. On the other hand, it’s small.

DBRS rates the issue Pfd-2(high) Trend-Negative without discussion.

S&P rates the issue P-2(low):

S&P Global Ratings said today it assigned its ‘P-2(Low)’ Canada scale and ‘BBB-‘ global scale preferred stock ratings to Sagen MI Canada Inc.’s (BBB+/Negative/–) C$100 million 5.40% fixed-rate non-cumulative Series 1 Class A preferred shares.

The rating on the preferred shares is two notches below our long-term issuer credit rating on Sagen, reflecting subordination and the dividend deferability. The preference shares will rank in parity with all future class A preferred shares, and they will rank junior to the policyholders’ obligations, and to all existing and future indebtedness of Sagen. We assign an intermediate equity content to these preference shares.

To satisfy public float requirement under the Canadian Insurance Company Act, the preference shares will carry 35% voting rights. The voting rights will commence on the date on which Falcon Holdings L.P. becomes the holder of more than 65% of Sagen’s issued and outstanding common shares and continuing until Sagen or any of its subsidiaries are no longer subject to the public float requirement or until it is not necessary that the preference shares carry such rights in order to satisfy the public float requirement. Brookfield Business Partners L.P., together with certain of its affiliates, and institutional partners will gain full ownership of the issued and outstanding common shares of Sagen through the intermediate holding company, Falcon Holdings, once the transaction closes in the first half of 2021.

The company intends to use the net proceeds from this offering for general corporate purposes. With the new issuance, Sagen’s pro forma financial leverage as of year-end 2020 will modestly increase to 16.9% from 15.1%, while the fixed-charge coverage ratio will remain what we consider strong at more than 10x.

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