Category: Issue Comments

Brookfield Properties has announced:

a strategic repositioning plan to transform itself into a global pure-play office property company. The plan includes the acquisition of an interest in a significant portfolio of premier office properties in Australia from Brookfield Asset Management (BAM: NYSE, TSX, Euronext) as well as the divestment of Brookfield Properties’ residential land and housing business.
…
Brookfield Properties has agreed to enter into a transaction with Brookfield Asset Management whereby Brookfield Properties will pay Brookfield Asset Management A$1.6 billion (US$1.4 billion) for an interest in 16 premier Australian office properties comprising 8 million square feet in Sydney, Melbourne and Perth which are 99% leased. The properties have a total value of A$3.8 billion (US$3.4 billion).
…
Brookfield Properties will fund the transaction from available liquidity of US$1.3 billion and from a US$750 million subordinate bridge acquisition facility from Brookfield Asset Management, which will be repaid from the completion of some or all of the following: asset sales, including a sell down of Brookfield Properties’ equity interest in its publicly-listed company Brookfield Office Properties Canada (TSX: BOX.UN), or other financing or capital activities.

A supplemental information package relating to this transaction is available on Brookfield Properties’ website at www.brookfieldproperties.com.

As a further step in the strategy of converting Brookfield Properties into a global pure play office company, the company announced that it intends to divest of its residential land and housing division. To this end, Brookfield Properties intends to commence discussions with Brookfield Homes Corporation (NYSE: BHS) regarding the possible merger of these operations with Brookfield Homes. Should the merger proceed, Brookfield Properties’ equity interest in the residential business would be converted into a listed security in the merged entity which Brookfield Properties would then dispose of through an offering to its shareholders. Brookfield Asset Management would commit to acquire any shares of the merged entity that are not otherwise subscribed for in the offering, thereby ensuring that Brookfield Properties will successfully dispose of its residential interests and receive full proceeds.

The pricing supplement is titled Australia Office Portfolio Transaction and is of great interest:

BPO’s interest in the Portfolio will be acquired through a Total Return Swap entitling BPO to the net cash flows and any changes in the value of the properties

• This structure preserves the benefit of property-level financing and will allow for efficient transfer of this Portfolio at a future date into a different ownership entity, e.g. public vehicle or private fund in order to continue BPO’s asset management strategy
• BPO will be property manager for the portfolio and will make or approve all significant decisions relating to the properties, including refinancingsand other decisions relating to the property debt
• BPO will be responsible for additional capital requirements and will be entitled to any proceeds from refinancings from the properties
• BPO will have an option to acquire the properties at anytime

The total return swap concept is fascinating, but I haven’t yet thought through all the implications, particularly since the contract is with the parent.

On the whole, the deal seems to me to be a continuation of the basic Brookfield philosophy of accumulating assets at the parent level and then pushing them into subsidiaries; attracting co-investors and increasing (non-recourse!) leverage along the way. It hasn’t been too long since they last did this, with the BPP conversion to a REIT.

BPO has several series of preferreds outstandng: BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L and BPO.PR.N.

Update: This is credit-neutral, according to DBRS:

The rating confirmation also takes into consideration that, from a financial risk perspective, the Acquisition is expected to have a neutral impact on the Company’s balance sheet ratios. DBRS expects Brookfield to fund the Acquisition with available liquidity, including un-drawn bank facilities ($788 million) and a cash balance ($475 million) totalling approximately $1.3 billion and from a $750 million bridge facility provided by BAM. Over the next several quarters, DBRS expects Brookfield to repay this bridge facility with a combination of proceeds from the following: a sell-down of the Company’s interest in Brookfield Office Properties Canada (the REIT; of which the Company currently owns a 91% interest), asset sales and other capital activities. As a result, DBRS estimates that the Company’s debt-to-capital ratio will remain close to 55% (including preferred shares) and EBITDA interest coverage should modestly improve to the 2.35 times range (including capitalized interest). This level of interest coverage remains at the low end of the range for the current rating category. However, DBRS takes comfort in the fact that Brookfield has made good progress in improving its overall financial flexibility position and that office fundamentals in the Company’s core markets are showing signs of improvement.

Overall, DBRS believes that the Acquisition complements Brookfield’s existing high-quality office portfolio and offers an immediate and sizeable presence in a new market. Over time, DBRS expects Brookfield to grow this platform, which should further benefit leasing initiatives and tenant retention rates.

Financial 15 Split Corp. II has released its semi-annual statements to May 31, 2010.

Dividend receipts declined to about $1.3-million in 1H10 from about $2.1-million in 1H09, while expenses rose to $461,000 from $390,000 due to higher valuations and a small expense for Service Fees. Accordingly, Income Coverage for the Preferred Shares dropped to 0.6-:1 in 1H10 from 1.0+:1 in 1H09.

FFN.PR.A was last mentioned on PrefBlog when the Capital Unit Distribution was suspended in June (hah! No Service Fees to pay this quarter!). FFN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Financial 15 Split Corp. has announced:

that its semi-annual financial statements and management report of fund performance for the period ended May 31, 2010 are now available at www.sedar.com and the Company’s website at www.financial15.com.

The Report (to 2010-5-31) states:

During April 2010, the Company issued 1,980,000 Class A and Preferred shares at a unit price of $20 for total net proceeds after the payment of agents fees of $37.5 million. As a result of this offering, one time issue costs and agents fees in connection with the offering increased the expense ratio during the period. The Company did not immediately invest the proceeds into the financial services stocks as reflected by the higher cash position as at May 31,2010 thus benefiting from the opportunity to purchase the core stocks at lower levels than those in April.

Net investment income was $1.1-million, while distributions on preferred shares amounted to $2.1-million, so income coverage for the six months to May 31, 2010, was 0.5+:1, a huge reduction from the 1.2+:1 recorded in 1H09.

Cash on the balance sheet represented 17% of total assets, but this does not explain the sharp decline in income coverage – the secondary offering closed in mid-April, so the cash was only there for about six weeks.

Instead, it appears that several other factors had dominance:

• Dividend receipts declined from about $3-million to about $2-million
• Management and Service fees increased to about $670,000 in 1H10 from about $340,000 (net) in 1H09

Note 6 to the financials reads in part:

The Company is responsible for all expenses incurred in connection with the operation and administration of the Company, including, but not limited to, ongoing custodian, transfer agent, legal and audit expenses.

Pursuant to the administration agreement, the Manager is entitled to an administration fee payable monthly in arrears at an annual rate of 0.10% of the transactional net assets of the Company, which includes the outstanding Preferred shares, calculated as at each monthly valuation date and an amount equal to the service fee payable to dealers on the Class A shares at a rate of 0.50% per annum. No service fee will be paid in any calendar quarter if regular dividends are not paid to holders of Class A shares in respect of each month in such calendar quarter.

Pursuant to the terms of the investment management agreement, Quadravest is entitled to a base management fee payable in arrears at an annual rate equal to 0.65% of the transactional net assets of the Company, which include the outstanding Preferred shares, calculated as at each monthly valuation date. In addition, Quadravest is entitled to receive a performance fee subject to the achievement of certain pre-established total return thresholds.

Total management fees of $519,631 (May 31, 2009-$373,315), incurred during the period, include the administration fee and base management fee. No performance fees were paid in 2010 or 2009.

Clearly, the Service Fee increased because the capital unitholders received all their dividends in the first half so all Service Fees were payable. In 1H09, no service fees were payable – there was even a rather odd recovery!

Management fees increased due to the increase in assets of the fund.

So it looks like the expenses are probably here to stay – provided the NAV holds up above $15.00 and the capital unit distributions are made – but it is rather odd that dividend receipts have declined so precipituously despite the increase in assets. At some point it will be most interesting to attempt to reconcile these data with the disclosed holdings – how much of this is the result of actual dividend cuts for the common shares held, and how much due to selection of lower yielding securities?

However, the income coverage should improve to some extent in the second half as the cash on the balance sheet is invested.

This should have been posted yesterday, July 28. Sorry!

Fairfax Financial Holdings Ltd. has announced that it:

has completed its previously announced public offering of Preferred Shares, Series G (the “Series G Shares”) in Canada. As a result of the underwriters’ exercising in full their option to purchase an additional 2,000,000 Series G Shares, Fairfax has issued 10,000,000 Series G Shares for gross proceeds of $250 million. Net proceeds of the issue, after commissions and expenses, are approximately $242 million.

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

The Series G Shares were sold through a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC, RBC Capital Markets and Scotia Capital, and that also included TD Securities, National Bank Financial, Cormark Securities, GMP Securities, Canaccord Genuity, Desjardins Securities and HSBC Securities (Canada).

FFH.PR.G is a FixedReset, 5.00%+256, announced July 20.

Vital statistics are:

FFH.PR.G will be tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

This should have been posted yesterday, July 28. Sorry!

Northland Power Income Fund has announced:

the closing of the previously announced offering of Cumulative Rate Reset Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) by Northland Power Preferred Equity Inc. (the “Corporation”), an indirect wholly-owned subsidiary of the Fund. The Series 1 Preferred Shares are guaranteed by the Fund. The Corporation issued a total of 6 million Series 1 Preferred Shares at $25.00 per share for gross proceeds of $150 million. The offering was made on a bought deal basis through a syndicate of underwriters led by CIBC.

The Series 1 Preferred Shares commence trading on the TSX today under the symbol NPP.PR.A.

The Corporation intends to loan the net proceeds of the offering to NPIF Holdings L.P., a subsidiary of the Fund, which will use the funds to: (i) finance the remaining $51 million equity infusion in North Battleford Power L.P.; (ii) finance the $26 million equity infusion in Mount-Louis Wind L.P.; and (iii) repay certain non-recourse project debt in the amount of $40 million. The remainder of the loan will be used by NPIF Holdings L.P. for general corporate purposes.

NPP.PR.A is a FixedReset, 5.25%+280, announced July 6.

Vital statistics are:

NPP.PR.A will be tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

About four months ago, on March 26, I noted that RY.PR.R was bid at under 3.00%. It turns out that that was a significant date: March 26 marked a peak in the FixedReset market, which then entered a slump period that I analyzed extensively in the May edition of PrefLetter.

So now BMO.PR.N is bid through 3.00%. This is an interesting issue: it was announced 2008-11-25, very close to the all time low in the PerpetualDiscount market (BMO PerpetualDiscounts were at 8.50%!), and settled in December 2008; it’s a FixedReset, 6.50%+383bp. It closed today bid at 28.30 and is callable at 25.00 on February 25, 2014.

We plug the following data into the Yield-to-Call calculator:
Current Price 28.30
Call Price 25.00
Settlement Date 2010-7-23 (easily disputable – so sue me)
Quarterly Dividend 0.40625
Cycle 2 (FMAN)
Pay Date 25
Include First Dividend 1 = yes (goes ex 7/28; the proximity of the ex-Date might be influencing the price)

And we get IRR = 2.95%, Quarterly compounded yield 2.91%. HIMIPref™ reports 2.98% yield – the difference is due to the month’s grace period that is a bug feature idiosyncracy in the system; of very little import since it’s small AND consistent across issues, but it’s embarrassing because it has to be disclosed every time I discuss yields. One day I’ll change it, never fear.

Another notable fact regarding BMO.PR.N is that it has just been added to TXPR which may be exerting a little upwards pressure on the price.

Two charts have been uploaded for your edification and amusement:

• Yield-to-Worst
• Bid Price

which plot both BMO.PR.N and RY.PR.R from the latter’s issuance in January 2009. Enjoy!

Faircourt Asset Management Inc. has announced:

that in accordance with the terms of the Trust Indenture governing the Preferred Securities and the maintenance of a minimum 1.4 times asset coverage to be maintained by the Trust, dated November 17, 2004, the monthly distribution on the Trust Unit (TSX: FIG.UN) will be suspended until further notice. The Trust’s ability to continue variable distributions, as announced on April 19, 2010, is dependent on market conditions, the results of the annual redemption, and the Trust’s asset coverage levels and would be evaluated by the Manager on a monthly basis.

This announcement does not affect the quarterly distributions related to the Preferred Securities of either Trust (TSX: FIG.PR.A).

Faircourt Income & Growth Split Trust is designed to provide levered exposure to a portfolio comprised of Income Trusts, North American Dividend Paying Equities, as well as other income generating securities.

Acuity Investment Management Inc. is the Investment Advisor for Faircourt Income & Growth Split Trust.

Acuity is best known for holding income trusts in “Acuity Fixed Income Fund”, but the performance of FIG.UN (-15.24% p.a. annualized since inception, vs. a benchmark of +6.96%) is also worthy of note.

FIG.PR.A was last mentioned on PrefBlog when it was announced that warrant exercise in June was minimal. FIG.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

Lifeco Split Corporation Inc. has announced:

that in relation to its previously announced reorganization, the Company has called 15,194 Preferred Shares for cash redemption on July 30, 2010, representing approximately 6.6035% of the outstanding Preferred Shares. The Company is redeeming the 15,194 Preferred Shares in order to increase the downside protection on the remaining Preferred Shares to approximately 38.8%, as at July 15, 2010. The Preferred Shares shall be redeemed on a pro rata basis so that each holder of Preferred Shares of record on July 29, 2010 will have approximately 6.6035% of their Preferred Shares redeemed. Holders of the Preferred Shares being redeemed will still be entitled to the dividend payable on July 30, 2010. The redemption price of the Preferred Shares will be equal to the lesser of (i) Unit Value on July 26, 2010 (the “Valuation Date”) and (ii) $51.19. As at the close of business yesterday, Unit Value was $76.20. The Preferred Shares will commence trading on a post redemption basis commencing July 27, 2010.

Immediately following the redemption of the Preferred Shares, the Company will subdivide the remaining Preferred Shares on a 1.39-for-1 basis in order to maintain the ratio of two Capital Shares for each Preferred Share. Accordingly, the redemption price of the Preferred Shares will be adjusted so that after the subdivision, the Preferred Shares will be redeemable for a cash amount equal to the lesser of (i) Unit Value and (ii) $36.84. The quarterly fixed distribution of the Preferred Shares will be also be adjusted, effective July 30, 2010, so that after the subdivision, holders of Preferred Shares will be entitled to quarterly fixed distributions equal to $0.3684. On an annualized basis, the fixed distribution will continue to represent a yield of 4.00% on the redemption price of $36.84. The subdivision will be effected as at the close of business on August 5, 2010 and the Preferred Shares will commence trading on a post subdivision basis commencing August 3, 2010.

It is not clear to me whether these 15,194 shares are including or in addition to the redemption of 10,107 shares due to unmatched capital unit retractions announced in June.

The downside protection on the remaining Preferred Shares to approximately 38.8% equates to Asset Coverage of 1.6+:1.

LSC.PR.C is not tracked by HIMIPref™.

World Financial Split Corp. has announced:

that it has filed a preliminary short form prospectus relating to an offering of Warrants to holders of its Class A Shares. Each Class A shareholder of record on the record date will receive one Warrant for each Class A Share held.

Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price. The record date and the subscription price will be determined at the time the Fund files its final prospectus for the offering. The Fund has applied to list the Warrants and the Class A Shares and the Preferred Shares issuable upon the exercise thereof on the Toronto Stock Exchange.

The exercise of Warrants by holders will provide the Fund with additional capital that can be used to take advantage of attractive investment opportunities and is also expected to increase the trading liquidity of the Class A Shares and the Preferred Shares and to reduce the management expense ratio of the Fund.

The Fund invests in a portfolio that includes common equity securities selected from the ten largest financial services companies by market capitalization in each of Canada, the United States and the rest of the world (the “Portfolio Universe”). In addition, up to 20% of the NAV of the Fund may be invested in common equity securities of financial services companies that are not in the Portfolio Universe but meet certain market capitalization and credit rating thresholds. To generate additional returns above the distributions earned on its securities, the Fund may, from time to time, write covered call options in respect of some or all of the securities in its portfolio. The Fund may also, from time to time, write cash-covered put options in respect of securities in which the Fund is permitted to invest. The Fund’s investment portfolio is managed by its investment manager, Mulvihill Capital Management Inc.

WFS.PR.A was last mentioned on PrefBlog when it’s last warrant offering was 10% subscribed. WFS.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

If at first you don’t succeed, try, try again! S Split Corp. has announced:

that it has filed a preliminary short form prospectus relating to an offering of Warrants to holders of its Class A Shares. Each Class A shareholder of record on the record date will receive one Warrant for each Class A Share held.

Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price. The record date and the subscription price will be determined at the time the Fund files its final prospectus for the offering. The Fund has applied to list the Warrants and the Class A Shares and the Preferred Shares issuable upon the exercise thereof on the Toronto Stock Exchange.

The exercise of Warrants by holders will provide the Fund with additional capital that can be used to take advantage of attractive investment opportunities and is also expected to increase the trading liquidity of the Class A Shares and the Preferred Shares and to reduce the management expense ratio of the Fund.

The Fund invests in a portfolio of common shares of The Bank of Nova Scotia. To generate additional returns above the distributions earned on its securities, the Fund may, from time to time, write covered call options in respect of some or all of the securities in its portfolio. The Fund may also, from time to time, write cash-covered put options in respect of securities in which the Fund is permitted to invest. The Fund’s investment portfolio is managed by its investment manager, Mulvihill Capital Management Inc.

A preliminary short form prospectus containing important information relating to the securities has been filed with the securities commissions or similar authorities in certain jurisdictions of Canada. The preliminary short form prospectus is still subject to completion or amendment. Copies of the preliminary short form prospectus may be obtained from Mulvihill Fund Services Inc. at the address, telephone numbers, website and e-mail address set forth above. There will not be any sale or any acceptance of an offer to buy the securities until a receipt for the final short form prospectus has been issued.

SBN.PR.A was last mentioned on PrefBlog when they announced a 34% subscription rate on April’s warrant offering. SBN.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.