BAM Split Corp has entered into a bought-deal refunding the BNA.PR.A, which pays 6.25% and matures 2010-9-30, but is redeemable at par commencing 2010-10-1.
Issue: BAM Split Corp. Cumulative Class AA preferred shares, Series 4
Size: 5-million shares (= $125-million)
Dividend: 7.25% paid quarterly (=$0.453125 quarterly, =$1.8125 p.a.). First coupon payable Sept. 7 for $0.26318, based on closing July 9.
Redemption: Will be redeemed 2014-7-9 at lesser of $25.00 or NAV. Optional redemption at $26.00 at any time – company may redeem early only if Capital Units retracted or there is a takeover bid for BAM.A
Retraction: Into Debentures. No Cash Retractions (except that the 2014-7-9 counts as a retraction for analytical purposes)! Debs pay interest of 7.35%, same maturity and – I PRESUME – are senior to prefs. Check the prospectus when available.
Update: BNA Press Release
The purpose of the new issue is to redeem BNA.PR.A. The new issue yields 7.35% while the retiring PR.A yields 6.25%, so this will cost $1.35M more per year PLUS new issue expenses (and both PR.A and the new issue will be outstanding for 3 months presumably, although it might make sense to call the PR.A two months early for $25.25 and save 26c in duplicate dividends).
Except for new issue costs, the capital structure of BNN split would remain the same, but pref dividend coverage will fluctuate around 1.0.
What annoys me as an owner of BNA.PR.C (which will be redeemed in 2019 at the latest) is that the new issue gets redeemed before mine (2014). Although these prefs are ranked pari passu, if they can’t be rolled over, BNN split will have to sell a lot of BAM shares which might depress the price (NAV) and will raise the proportion of expenses I have to bear.
On the other hand, BNA.PR.C yields 10.7% for 10 years; and BNA.PR.B 8.1% for 2016 maturity, so maybe 7.35% for 5 years is the best the company could do in the current market (steep yield curve!). They have another year to refund the Pref A, so the fact they choose to do it now could suggest a gloomy view of the year-ahead future for BAM.
To your point on retraction-conversion to debentures — a wrinkle that appeared for BNA.PR.C which is way worse than the retraction for cash for BNA.PR.B we’ve discussed before (and I’ve taken advantage of).
I see that the new issue sounds similar to debenture retraction for PR.C. However, I considered this during the winter as PR.C shares languished near $12. The PR.C can be retracted for a debenture yielding slightly more (so could suit an RRSP).
The debentures do rank prior to prefs, BUT (a) this debenture might be issued by BAM Investments (which owns the capital shares and may not be in a position to pay anything); and (b) the company limits the issuance to 5% of NAV (to maintain the credit rating, I guess). Thus, I wonder, aside from the annoyance value of small holder retractions, whether the debenture conversion feature can really be used on a large scale, and if used, offer much protection.
Anyway, for now I like my 10.7% 10-year yield on PR.C and hold enough BAM/BPO/BNA to avoid the new issue (which I see sold like hotcakes). Furthermore, a DBRS rating of Pfd-2Low on a split share is small comfort. The history of DBRS ratings on split shares is that they are 25X more likely to be downgraded than a similarly ranked pref issued directly by an operating company with the same rating. Some risk is being underassessed!
What annoys me as an owner of BNA.PR.C (which will be redeemed in 2019 at the latest) is that the new issue gets redeemed before mine (2014).
On the other hand, the redemption in 2014 is at the lower of par or NAV. Therefore, it is conceivable that the new issue could default, while the BNA.PR.C pays off in full!
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