I was asked by eMail to comment on this new issue.
The issue is featured on the Brompton website and the issue characteristics are:
Pays: 5.25% p.a. as dividends, quarterly, cumulative
Options: None relevant.
Maturity: 2013-11-29 @ 10.000000
Rating: Pfd-2 by DBRS. I can’t find anything about the issue on the DBRS website, but I have no reason to believe the prospectus is inaccurate. The OSC would be inclined to take a rather dim view of such shennanigans – and so would DBRS!
Other: Split Share Corporation.
I’ve entered the information into HIMIPref™ – normally I wouldn’t bother, but I was specifically asked about this issue, so why not? – and on a TAXABLE basis the issue looks cheap compared to the current yield curve:
| Curve Price : Taxable Curve |
| Price due to base-rate |
10.21 |
| Price due to short-term |
0.10 |
| Price due to long-term |
0.38 |
| Price due to SplitShareCorp |
-0.22 |
| Price due to Retractibility |
0.34 |
| Price due to Credit Spread (2) |
-0.11 |
| Total |
$10.70 |
When discounted by the Pre-Tax curve they’re even better!
| Curve Price : Non-Taxable Curve |
| Price due to base-rate |
10.25 |
| Price due to short-term |
0.50 |
| Price due to long-term |
0.01 |
| Price due to SplitShareCorp |
-0.30 |
| Price due to Retractibility |
0.48 |
| Price due to Credit Spread (2) |
-0.17 |
| Price due to error |
0.02 |
| Total |
$10.80 |
Clearly, one’s views of the “fair” price for this instrument will be influenced by whether one is speaking of “taxable” or “non-taxable” accounts, but it is equally clear that this issue is attractively priced at $10.00 regardless of the tax-status of the speaker!
My correspondent also wondered how a split share corporation could pay 5.25% dividends when the underlying investment only pays 3-3.5%. Well, the best underlying yielder (BMO) pays 3.7%, whereas the two worst (IAG & MFC) only pay 1.9% (both figures from the preliminary prospectus), but it’s a reasonable enough guess none-the-less.
Let’s say the company takes in $100-million, which is 4 million units priced at $25 total. They’re going to have to pay issue expenses – let’s call that $500,000, for the sake of a number, and selling commissions of $4.8-million. So they’re left with $94.7-million to invest, and lets just estimate the average yield of the underlying investments at 3%. So that means the company will be getting dividend income of $2.84-million.
They have 4 million prefs outstanding, and have to pay $0.525 annually on each of them. That comes to $2.1-million. So we can say that the dividends we expect on the prefs are covered quite comfortably by the dividends on the underlying assets – a dividend coverage ratio of about 1.3:1 – which is entirely reasonable. Note that the company has $94.7-million in assets to cover the return of $40-million to the preferred shareholders … an asset coverage ratio of just under 2.37:1, which is great! These calculations help explain why DBRS has put such an attractive credit rating on the issue … the banks and insurance companies in the underlying portfolio would have to go down in price by more than 50% before the company ran out of money to pay the preferred obligations.
All very nice, you say, but what about the class A shares? Well, what about them? I don’t care about them. They’re entitled to the excess dividend income that was estimated above to be about $740,000 … they’re also entitled to all the extra income the company can make from writing options and lending securities. Good for them. And if the price of the shares in the underlying portfolio goes up, they can have all that, too. I don’t care, as long as I get paid on my prefs!
The prospectus states that in order to meet the return projections for the Class A shares (8%), the company will have to produce an annualized return of 9.2%, out of which will come the fees, expenses and, of course, the preferred shareholders slice of the pie. Who knows? Maybe the company will succeed in achieving these gains! 9.2% is certainly a not unheard-of return on financial equities over a 7 year period. However, I look upon most split-share corporations as a vehicle whereby greedy retail investors (who buy the “Class A” residual shares) voluntarily donate money to conservative retail investors (who buy the prefs). The greedy guys are my new best friends!
I wouldn’t buy the Class A shares, but the Prefs look attractively priced and well protected.
Update 2006-10-19 The above calculation of the Dividend Coverage Ratio did not take account of the MER. Oops! If an MER of 0.95% is assumed, then the income available to cover dividends should be reduced by $900,000 in the above example, leaving $1.95-million to cover dividends of $2.1-million, resulting in an estimated DCR of a little over 0.9:1, which is still fine, considering the asset coverage (and the fact that potential income from stock lending and option writing has been ignored. Thanks to Financial Webring for pointing this out.
Update, 2013-10-4: This issue trades as LBS.PR.A.
BAM.PR.E / BAM.PR.G Reset Rate Percentage Announced
Monday, September 25th, 2006Brookfield has announced – somewhat quietly! I couldn’t find anything on their site and had to look at SEDAR! – that the Selected Percentage Rate for the upcoming reset will be 108%.
So commencing November 1, 2006, the dividend rate paid on BAM.PR.G will be 108% of the Canada 5-year yield as computed on October 11. The 5-years closed today at about 3.84%, so this implies a yield of about 4.15% on the BAM.PR.G (assuming no change in rates over the next two weeks), or about $1.0375 annually per share.
Horrible! Especially compared with the 5.63% (or $1.4075) they’ve been paying for the last five years!
According to Brookfield’s “Notice of Conversion Privilege” the Designated Percentage (which varies only in accordance with trading price, not by company fiat) of prime paid on the BAM.PR.E is 81%, or currently 4.86%.
Well, pays yer money and takes yer chances. Going with ratchet-rates means taking a risk on the Designated Percentage AND taking a risk on Prime for the next five years. It’s a tough call, just like the BCE.PR.T / BCE.PR.S conversion that’s coming up … although, mind you, BCE’s fixed-rate offer is 112% of the five year yield.
Given that BAM.PR.G closed today at 25.12-32, 3×5 on volume of 2500 shares, I don’t think they’re much of an option … or, to be more explicit, if they’re the best option there is, holders are better off selling them, because a Pfd-2(low) (DBRS) credit on a perpetual paying $1.0375 (at least for the next five years) sure ain’t going to be trading above par for long!
And I just don’t like floaters, anyway, especially ratchet rates. Hard to analyze, hard to plan for, really, really hard to make any capital gains from. Given the current trading price, the percentage of prime will be declining in the near future … perhaps, eventually, to the same level as BCE.PR.S (which have the same credit rating, after all) and then be paying only 64% of prime.
So I’d say these thingies are a “sell” right now. I don’t like either alternative, not when I can get better than par by selling them now.
Hat-tip to Financial WebRing for bringing this to my attention!
Note added 2006-09-28: I have just received an eMail from a concerned user of www.prefInfo.com. The summary information regarding dividend rates for BAM.PR.G is stated as:
My correspondent went to the trouble of reading the prospectus and confirmed for himself that the BAM.PR.G do not, in and of themselves, change to floating rate.
These things are difficult to handle, particularly in the period when, as now, the upcoming reset rate is only “sort-of” known. For the “reset” side of every Ratchet-Rate-Preferred-Pair, HIMIPref™ assumes that the rate paid on the resettable prefs (which in this case is the BAM.PR.G) will be so lousy that investors will be virtually forced into the “ratchet side” (in this case, the BAM.PR.E).
It’s a conservative assumption, but a difficult one to explain in a brief summary! I’ll put together some kind of post, essentially re-stating this point, and link to it from the appropriate cells on the prefinfo.com table … eventually!
Posted in Data Changes, Issue Comments | 2 Comments »