John Nagel Likes Brookfield Floaters

Fabrice Taylor had a column in the Globe yesterday, Preferred offer value, but watch your step. I confess to being a little perplexed by his remarks on discounts to call:

And you have to understand the math. Take a $20 par value preferred that can be called from you (i.e., the company can buy back from you) in two years. If it pays a fixed dividend of $1 per year but can be had for $16, you’re not getting 5 or 6 per cent, you’re getting almost 18 per cent annually. That’s the real beauty of buying these things below par.

Call options are bad. They are always bad. They always limit your winnings in the event of yield declines, while doing nothing to protect you in the event of yield increases. Unfortunately, they cannot be avoided – so the question on an investor’s mind should always be “How bad is this particular call option schedule and how much extra yield do I want in this particular case as compensation?”.

Mr. Taylor also quotes John Nagel, who has been mentioned on PrefBlog previously, touting BCE Prefs:

When we spoke, [Desjardins’ preferred share trader] Mr. Nagle [sic] was partial to a Brookfield Asset Management floating rate preferred issue that, while enjoying the same rating as a Thomson Reuters issue, is quoted at half the price. He’s waiting for Brookfield’s earnings next week to see if that discount is warranted, but otherwise finds the discount highly attractive, and there are other opportunities for those who can roll up their sleeves and do some hard-nosed work.

Mr. Nagel’s track record was not disclosed. Brookfield’s quarterly earnings will be released on November 7, but I can’t help but think that waiting to see them is a bit of an affectation. Brookfield is an investment grade company. Black swan events excepted – always excepted! – one quarter’s earnings are not going to make a huge amount of difference to its credit risk, whatever it might do to the stock. If it were otherwise, the company would not be investment grade: virtually the whole meaning of “investment grade” is that a bad quarter or two – even the occasional horrible quarter – will not dislodge the company’s status.

There have been no rumours of a Black Swan event at Brookfield and,while the common (which takes the first loss) has done just as badly as everything else lately, it hasn’t been taken out to the woodshed for particular punishment. While I will be just as interested in Brookfield’s earnings as anybody else, I’m not about to recommend freezing trading in its issues until they have been released.

The BAM issues are discussed often on PrefBlog – f’rinstance, with respect to the BAM / BPO Floater Credit Inversion and the recent DBRS affirmation of BAM’s credit quality.

I’ve uploaded some charts [click for big] … for instance BAM.A (common) versus BAM.PR.K (floater):

and TRI (common) vs. TRI.PR.B (floater):

and, just for fun, RY (common) vs. RY.PR.F (PerpetualDiscount)

and BMO (common) vs. BMO.PR.J (PerpetualDiscount):

Update, 2008-11-14: I missed this at the time, but Brookfield issued (small) US debt 2008-10-24:

TORONTO, October 24, 2008 – Brookfield Asset Management Inc. (“Brookfield”) (NYSE/TSX: BAM) announced today that it has issued US$150 million of unsecured term debt comprising US$75 million of 5-year 6.65% notes and US$75 million of 4-year 6.4% notes.

Small issues, but in this environment those are pretty good terms.

6 Responses to “John Nagel Likes Brookfield Floaters”

  1. Louis says:

    I think this just shows how nervous the market currently is:

    I suspect that Brookfield is particulary scary nowadays because:

    1. no one truly knows how to categorize it and it does not really have pairs to compare it with. Is this more of a financial, utilities (hydro-electricity & electricity lines), commercial property, natural ressources (timber) or asset managing company?

    2. I can understand and even share anyone fears in its overly complex and, apparently, quite leveraged structure. However, I rather perceive Brookfield as the winner of the award “how-to-raise-capital-by-all-possible-imaginable-ways-and-more”.

    3. Its interests in timberlands, commecial property leased by NY financial companies (including Merril Lynch) via its 50% stake in BPO, its properties in battered Australia and Brasil, etc. are all legitimate sources of concerns;

    4. Its normally less than 2.5% percent dividend yield on ordinary shares (because of the recent slump I think it is now at 3%) might not be perceived as a sufficient “cushion” causing bad sleep night to the holders of its numerous prefs; and

    5. The irrationale fear factor: No ones seems to know why BAM’s prefs went down so low so quick such that everyone thinks there must be a reason for that and do likewise selling what they have of it at any price;

    6. While its credit rating was recently maintained, many (including myself) have lost faith in credit rating agencies especially when they deal with a complex structures such as SIVs, ABCPs, AIG or, let’s face it, BAM itself.

    7. In these difficult times, BAM’s downgraded recommendations by some banks and negative initial recommendation by S&P (“hold” but this seems to me to be simply because they are initiating their coverage over it if one reads their intial analysis)

    All the above being said, I do confess not having listened to the sound advice and words of wisdom of my “guru” James Hymus. I purchased even more of Brookfield’s prefs eventhough I was already overweight with it. Why?

    a) As of October 23rd they had bought quite a lot of their ordinary stock for cancellation in October despite the bad times (See INK most recent insder report);

    b) Its taxation and financial corporate officers bought BAM’s stock on the public market at the end of September when the current crisis had started. Mind you, they bought small quantities but why would they throw out money by the window?

    c) BPO’s results (in which Brookfield has a 50% stake) published last week were not that bad and, I would add, not that bad at, all things taken into account. Still, some qualified financial analysts (which I am not) revised its target price even lower than its current low price. However, the market seems to have taken the results in a more positive way as I do; and

    d) For Cr***ke, what a return BAM.PR.M, BAM.PR.N, etc. now give! Their prefs are certainly riskier than buying prefs of a Canadian Bank or of Power Corp but, in my humble opinion, not to a point of justifying the dividend yield they now give at the price I bought them.

    Me too I will look carefully at the upcoming financial results of Brookfield. While I agree with James that an eventual bad quarter should not by its own justify buying or selling, it may certainly provide comfort and dissipate some of the unjustified (I hope) concerns expressed by the overreacting and highly adverse to risks current depressed market.

  2. […] PrefBlog Canadian Preferred Shares – Data and Discussion « John Nagel Likes Brookfield Floaters […]

  3. jiHymas says:

    Louis – That’s a fine piece of work you’ve posted! When you are that familiar with a company, there is certainly a reason to allow some overweighting of the name … but that degree of study is veering into equity analysis as opposed to fixed income, which is not something that I, personally, do.

    A lot will depend upon your time horizon and your ability to keep your time horizon in mind even when the market doesn’t agree with you – and, in fact, violently disagrees with you for an extended period.

    However, you should always bear in mind the potential for Black Swan events. By definition, you won’t be able to see them coming. They will just magically happen overnight, with possibly bad effects on your portfolio.

    And finally, after having done all that analysis and formed your conclusions – none of which I disagree with, by the way – as a conscientious investor you should ask yourself the most important question of all: what if I’m wrong?

  4. Annette says:

    What do you think of Brookfield’s Friday’s results? I’ve only read the press release summary but I have also listened to the replay of the conference call you may access. The telephone number for the replay (with a convenient fast forward function) is stated in the news press releases regarding the Q3 conference call. The most interesting part of these conference calls is always the question period at the end from bank analysts, etc. This is not so for the question or their answers as such but for the hesitation and/or figure skating answering those. Anyhow, BAM put a lot of stress on their record liquidities. I praise Louis for having noted the significant share redemptions / cancellations BAM is doing with its ordinary shares. This, subject to what you may have found out, should reassure the market as to BAM’s credit strentgh. I haven’t read any analysis yet such that I may be wrong (again) in my preliminary assessmment, but BAM’s CFO was certainlly successfull with putting back some faith in me on their future.

  5. jiHymas says:

    I haven’t been through the financials thoroughly as yet, but on the face of it: a good solid quarter. I was particularly impressed by the fact that they can go three years without accessing the capital markets – one of the nice things about this company is the intelligent way in which they manage their liabilities.

  6. […] is always – well, recently – a hot topic of discussion on PrefBlog, so here are some numbers from the Brookfield Properties […]

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