Category: Issue Comments

Pembina Pipeline Corporation has announced:

that it does not intend to exercise its right to redeem the currently outstanding Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 3 (“Series 3 Shares”) (TSX: PPL.PR.C) on March 1, 2024.

As a result of the decision not to redeem the Series 3 Shares, and subject to certain terms of the Series 3 Shares, the holders of the Series 3 Shares will have the right to elect to convert all or part of their Series 3 Shares on a one-for-one basis into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 4 of Pembina (“Series 4 Shares”) on March 1, 2024 (the “Conversion Date”). Holders who do not exercise their right to convert their Series 3 Shares into Series 4 Shares will retain their Series 3 Shares.

As provided in the terms of the Series 3 Shares: (i) if Pembina determines that there would remain outstanding immediately following the conversion less than 1,000,000 Series 3 Shares, then all remaining Series 3 Shares will be automatically converted into Series 4 Shares on a one-for-one basis effective as of the Conversion Date; or (ii) if Pembina determines that there would be less than 1,000,000 Series 4 Shares outstanding immediately following the conversion, no Series 3 Shares will be converted into Series 4 Shares on the Conversion Date. There are currently 6,000,000 Series 3 Shares outstanding.

With respect to any Series 3 Shares that remain outstanding after the Conversion Date, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate for the Series 3 Shares for the five-year period from and including March 1, 2024, to, but excluding, March 1, 2029, will be 6.019 percent, being equal to the five-year Government of Canada bond yield of 3.419 percent determined as of today plus 2.60 percent, in accordance with the terms of the Series 3 Shares.

With respect to any Series 4 Shares that may be issued on the Conversion Date, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Pembina. The annual dividend rate applicable to the Series 4 Shares for the three-month floating rate period from and including March 1, 2024, to, but excluding, June 1, 2024, will be 7.631 percent, being equal to the annual rate of interest for the most recent auction of 90-day Government of Canada treasury bills of 5.031 percent plus 2.60 percent, in accordance with the terms of the Series 4 Shares (the “Floating Quarterly Dividend Rate”). The Floating Quarterly Dividend Rate will be reset on the first day of March, June, September and December in each year.

Beneficial holders of Series 3 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2024, until 3:00 pm (MT) / 5:00 pm (ET) on February 15, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary with the time to complete the necessary steps. Any notices received after this deadline will not be valid.

As previously announced, the dividend payable on March 1, 2024, to holders of the Series 3 Shares of record on February 1, 2024, will be $0.279875 per Series 3 Share. For more information on the terms of the Series 3 Shares and the Series 4 Shares, please see the prospectus supplement dated September 25, 2013, which can be found on SEDAR+ at www.sedarplus.ca.

PPL.PR.C was issued as a FixedReset, 4.70%+260, that commenced trading 2013-10-2 after being announced 2013-9-23. Notice of the reset to 4.478% was given 2019-1-30. I recommended against conversion and there was no conversion. The issue is tracked by HIMIPref™ but is relegated to the Scraps – FixedReset (Discount) subindex on credit concerns.

Thanks to Assiduous Reader avocado for bringing this to my attention!

Update, 2024-2-21: No conversion:

Pembina Pipeline Corporation (“Pembina”) (TSX: PPL; NYSE: PBA) announced today that none of Pembina’s Cumulative Redeemable Rate Reset Class A Preferred Shares, Series 3 (“Series 3 Shares”) (TSX: PPL.PR.C) will be converted into Cumulative Redeemable Floating Rate Class A Preferred Shares, Series 4 of Pembina (“Series 4 Shares”) on March 1, 2024.

After taking into account all the conversion notices received from holders of its outstanding Series 3 Shares by the February 15, 2024 deadline for the conversion of the Series 3 Shares into Series 4 Shares, less than the 1,000,000 Series 3 Shares required to give effect to conversions into Series 4 Shares were tendered for conversion.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series P (Series P Shares) (TSX: ENB.PR.P) on March 1, 2024. As a result, subject to certain conditions, the holders of the Series P Shares have the right to convert all or part of their Series P Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series Q of Enbridge (Series Q Shares) on March 1, 2024. Holders who do not exercise their right to convert their Series P Shares into Series Q Shares will retain their Series P Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series P Shares outstanding after March 1, 2024, then all remaining Series P Shares will automatically be converted into Series Q Shares on a one-for-one basis on March 1, 2024; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series Q Shares outstanding after March 1, 2024, no Series P Shares will be converted into Series Q Shares. There are currently 16,000,000 Series P Shares outstanding.

With respect to any Series P Shares that remain outstanding after March 1, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series P Shares for the five-year period commencing on March 1, 2024 to, but excluding, March 1, 2029 will be 5.918 percent, being equal to the five-year Government of Canada bond yield of 3.418 percent determined as of today plus 2.50 percent in accordance with the terms of the Series P Shares.

With respect to any Series Q Shares that may be issued on March 1, 2024, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series Q Shares for the three-month floating rate period commencing on March 1, 2024 to, but excluding, June 1, 2024 will be 1.89279 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 5.03 percent plus 2.50 percent in accordance with the terms of the Series Q Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series P Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2024 until 5:00 p.m. (EST) on February 15, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.P was issued as a FixedReset, 4.00%+250, that commenced trading 2012-9-14 after being announced 2012-9-4. Notice of the reset to 4.379% was published 2019-1-30. I recommended against conversion and there was no conversion. It is tracked by HIMIPref™ but is relegated to the Scraps FixedReset Discount index on credit concerns.

Thanks to Assiduous Reader newbiepref for bringing this to my attention!

Update, 2024-2-28: No conversion:

Enbridge Inc. (TSX: ENB) (NYSE: ENB) (Enbridge) announced today that none of its outstanding Cumulative Redeemable Preference Shares, Series P (Series P Shares) will be converted into Cumulative Redeemable Preference Shares, Series Q (Series Q Shares) on March 1, 2024.

After taking into account all conversion notices received from holders of its outstanding Series P Shares by the February 15, 2024 deadline for the conversion of the Series P Shares into Series Q Shares, less than the 1,000,000 Series P Shares required to give effect to conversions into Series Q Shares were tendered for conversion.

Enbridge Inc. has announced:

that it does not intend to exercise its right to redeem its currently outstanding Cumulative Redeemable Preference Shares, Series 7 (Series 7 Shares) (TSX: ENB.PR.J) on March 1, 2024. As a result, subject to certain conditions, the holders of the Series 7 Shares have the right to convert all or part of their Series 7 Shares on a one-for-one basis into Cumulative Redeemable Preference Shares, Series 8 of Enbridge (Series 8 Shares) on March 1, 2024. Holders who do not exercise their right to convert their Series 7 Shares into Series 8 Shares will retain their Series 7 Shares.

The foregoing conversion right is subject to the conditions that: (i) if Enbridge determines that there would be less than 1,000,000 Series 7 Shares outstanding after March 1, 2024, then all remaining Series 7 Shares will automatically be converted into Series 8 Shares on a one-for-one basis on March 1, 2024; and (ii) alternatively, if Enbridge determines that there would be less than 1,000,000 Series 8 Shares outstanding after March 1, 2024, no Series 7 Shares will be converted into Series 8 Shares. There are currently 10,000,000 Series 7 Shares outstanding.

With respect to any Series 7 Shares that remain outstanding after March 1, 2024, holders thereof will be entitled to receive quarterly fixed cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The new annual dividend rate applicable to the Series 7 Shares for the five-year period commencing on March 1, 2024 to, but excluding, March 1, 2029 will be 5.988 percent, being equal to the five-year Government of Canada bond yield of 3.418 percent determined as of today plus 2.57 percent in accordance with the terms of the Series 7 Shares.

With respect to any Series 8 Shares that may be issued on March 1, 2024, holders thereof will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of Enbridge. The dividend rate applicable to the Series 8 Shares for the three-month floating rate period commencing on March 1, 2024 to, but excluding, June 1, 2024 will be 1.91038 percent, based on the annual rate on three month Government of Canada treasury bills for the most recent treasury bills auction of 5.03 percent plus 2.57 percent in accordance with the terms of the Series 8 Shares (the Floating Quarterly Dividend Rate). The Floating Quarterly Dividend Rate will be reset every quarter.

Beneficial holders of Series 7 Shares who wish to exercise their right of conversion during the conversion period, which runs from January 31, 2024 until 5:00 p.m. (EST) on February 15, 2024, should communicate as soon as possible with their broker or other intermediary for more information. It is recommended that this be done well in advance of the deadline in order to provide the broker or other intermediary time to complete the necessary steps. Any notices received after this deadline will not be valid.

ENB.PR.J was issued as a FixedReset, 4.40%+257, that commenced trading 2013-12-12 after being announced 2013-12-3. Notice of the reset to 4.449% was published 2019-1-30. I recommended against conversion and there was no conversion. The issue is tracked by HIMIPref™ but relegated to the Scraps – FixedResets (Discount) subindex on credit concerns.

Thanks to Assiduous Reader newbiepref for bringing this to my attention!

Update, 2024-2-18: No conversion.

Enbridge Inc. (TSX: ENB) (NYSE: ENB) (Enbridge) announced today that none of its outstanding Cumulative Redeemable Preference Shares, Series 7 (Series 7 Shares) will be converted into Cumulative Redeemable Preference Shares, Series 8 (Series 8 Shares) on March 1, 2024.

After taking into account all conversion notices received from holders of its outstanding Series 7 Shares by the February 15, 2024 deadline for the conversion of the Series 7 Shares into Series 8 Shares, less than the 1,000,000 Series 7 Shares required to give effect to conversions into Series 8 Shares were tendered for conversion.

Royal Bank of Canada has announced:

the applicable dividend rates for its Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BO (the “Series BO shares”) and NVCC Non-Cumulative Floating Rate First Preferred Shares, Series BP (the “Series BP shares”).

With respect to any Series BO shares that remain outstanding after February 24, 2024, holders will be entitled to receive quarterly fixed rate non-cumulative preferential cash dividends, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the 5-year period from and including February 24, 2024 to, but excluding, February 24, 2029 will be 5.885% for the Series BO shares, being equal to the 5-Year Government of Canada bond yield determined as of January 25, 2024 plus 2.38%, as determined in accordance with the terms of the Series BO shares.

With respect to any Series BP shares that may be issued on February 24, 2024, holders will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of Royal Bank of Canada, subject to the provisions of the Bank Act (Canada).

The dividend rate for the floating rate period from and including February 24, 2024 to, but excluding, May 24, 2024 will be 7.421% for the Series BP shares, being equal to the 3-month Government of Canada Treasury Bill yield determined as of January 25, 2024 plus 2.38%, as determined in accordance with the terms of the Series BP shares.

Beneficial owners of Series BO shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights on or prior to the deadline for notice of intention to convert, which is 5:00 p.m. (EST) on February 9, 2024.

RY.PR.S was issued as a FixedReset, 4.80+238, that commenced trading 2018-11-2 after being announced 2018-10-25. Notice of extension was reported previously. The issue is tracked by HIMIPref™ and is assigned to the Fixed-Resets (Discount) subindex.

Thanks to Assiduous Reader IrateAR for bringing this to my attention!

Royal Bank of Canada has announced:

that it does not intend to exercise its right to redeem all or any part of the currently outstanding Non-Viability Contingent Capital (NVCC) Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BO (the “Series BO shares”) on February 24, 2024. There are currently 14,000,000 Series BO shares outstanding.

Subject to certain conditions set out in the prospectus supplement dated October 29, 2018 (the “Prospectus”) relating to the issuance of the Series BO shares, the holders of the Series BO shares have the right to convert all or part of their Series BO shares, on a one-for-one basis, into NVCC Non-Cumulative Floating Rate First Preferred Shares Series BP (the “Series BP shares”) on February 24, 2024. On such date, holders who do not exercise their right to convert their Series BO shares into Series BP shares will continue to hold their Series BO shares. The conversion will occur on February 26 being the first business day following the conversion date of February 24 as identified in the Prospectus, which falls on a Saturday. The foregoing conversion rights are subject to the following:

if Royal Bank of Canada determines that there would be less than 1,000,000 Series BP shares outstanding after taking into account all shares tendered for conversion on February 24, 2024, then holders of Series BO shares will not be entitled to convert their shares into Series BP shares, and
alternatively, if Royal Bank of Canada determines that there would remain outstanding less than 1,000,000 Series BO shares after February 24, 2024, then all remaining Series BO shares will automatically be converted into Series BP shares on a one-for-one basis on February 24, 2024.
In either case, Royal Bank of Canada will give written notice to that effect to holders of Series BO shares no later than February 17, 2024.

The dividend rate applicable for the Series BO shares for the 5-year period from and including February 24, 2024 to, but excluding, February 24, 2029, and the dividend rate applicable to the Series BP shares for the 3-month period from and including February 24, 2024 to, but excluding, May 24, 2024, will be determined and announced by way of a press release on January 25, 2024.

Beneficial owners of Series BO shares who wish to exercise their conversion rights should instruct their broker or other nominee to exercise such rights during the conversion period, which runs from January 25, 2024 until 5:00 p.m. (EST) on February 9, 2024.

RY.PR.S was issued as a FixedReset, 4.80+238, that commenced trading 2018-11-2 after being announced 2018-10-25. It is tracked by HIMIPref™ and is assigned to the Fixed-Resets (Discount) subindex.

Thanks to Assiduous Reader IrateAR for bringing this to my attention!

Dundee Corporation has announced (on 2023-12-28):

the results of its substantial issuer bid (the “Offer”) to purchase for cancellation from the holders thereof who chose to participate up to 975,610 of its issued and outstanding Cumulative Floating Rate First Preference Shares, Series 3 in the capital of the Corporation (the “Series 3 Shares”) at a purchase price of C$20.50 per Series 3 Share, for a maximum aggregate purchase price of C$20,000,005. The Offer expired at 11:59 p.m. (Toronto time) on December 27, 2023.

Based on the report of Computershare Investor Services Inc., as depositary for the Offer (the “Depositary”), 914,040 Series 3 Shares were tendered to the Offer. In accordance with the terms and conditions of the Offer and based on the Depositary’s report, the Corporation has taken up and will pay for 914,040 Series 3 Shares at a purchase price of C$20.50 per Series 3 Share for an aggregate purchase price of C$18,737,820. All Series 3 Shares purchased by the Corporation under the Offer will be cancelled in due course. The Series 3 Shares purchased under the Offer represent approximately 55.8% of the Series 3 Shares issued and outstanding before giving effect to the Offer. After giving effect to the cancellation of the Series 3 Shares purchased by the Corporation under the Offer, 724,982 Series 3 Shares will be issued and outstanding.

The Corporation has made payment for the Series 3 Shares tendered and accepted for purchase by tendering to the Depositary the aggregate purchase price payable on the Series 3 Shares validly tendered, taken up and paid for under the Offer, all in accordance with the Offer and applicable laws. Payment to shareholders for the Series 3 Shares will be made in cash, without interest, and will be completed by the Depositary as soon as practicable. Any Series 3 Shares invalidly tendered will be returned to the tendering shareholder promptly by the Depositary.

“This Offer represents a critical step towards optimizing our capital structure to support the successful execution of our strategic business plan with a focus on capital allocation in the junior mining space. By reducing the demands on our capital from the payment of preferred share dividends, we can deploy more resources to fund our core strategy,” said Jonathan Goodman, President and Chief Executive Officer.

“We believe this is an effective way of simplifying our balance sheet, reducing our cost of capital, and lowering our recurring cash needs to unlock value for all of our shareholders. By partially funding the purchase of the Series 3 Shares tendered with cash from treasury, we minimize debt obligations and run-rate cash outflows,” said Lila Murphy, Executive Vice President and Chief Financial Officer.

The full details of the Offer are described in the Corporation’s offer to purchase and issuer bid circular dated November 22, 2023, as well as the related letter of transmittal and notice of guaranteed delivery, copies of which were filed and are available under Dundee’s profile on SEDAR+ at www.sedarplus.ca and are posted on Dundee’s website at www.dundeecorporation.com.

Dundee retained Cassels Brock & Blackwell LLP to act as its external legal advisor and appointed Computershare Investor Services Inc. to act as depositary for the Offer.

The Board of Directors of the Corporation will continue to review various options for the allocation of capital. Beginning in early 2018, the Corporation has focused on the implementation of its strategy of rationalizing its portfolio of investments and monetizing non-core assets as it exits business lines which are no longer deemed to be aligned with its longer-term mining-focused strategy. As part of this process, the Corporation has taken significant steps to streamline its capital structure and strengthen its balance sheet.

This news release is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell any Series 3 Shares.

Update Regarding the Loan

As previously announced by the Corporation on November 20, 2023, in connection with the Offer, the Corporation entered into a loan agreement dated November 17, 2023 (the “Loan Agreement”) among the Corporation, as borrower, Dundee Resources Limited, as guarantor, and Earlston Investments Corp. (the “Lender”), as lender, pursuant to which the Lender agreed to make a loan in a principal amount of up to C$20,000,000 upon satisfaction of certain customary conditions precedent. Pursuant to the Loan Agreement and in connection with the completion of the Offer, the Lender has advanced to the Corporation a loan in the principal amount of C$14,000,000 for purposes of funding the purchase of the Series 3 Shares tendered, taken up and paid for under the Offer. For further details relating to the Loan and the Loan Agreement, including certain material terms and conditions thereof, please see the Corporation’s news release dated November 20, 2023.

The SIB was previously discussed on PrefBlog.

Thanks to Assiduous Reader paullo for bringing this to my attention!

Power Financial Corporation has announced:

the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series T (the “Series T shares”) and Non-Cumulative Floating Rate First Preferred Shares, Series U (the “Series U shares”).

With respect to any Series T shares that remain outstanding after January 31, 2024, holders thereof will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 5-year period from and including January 31, 2024 to but excluding January 31, 2029 will be 5.595%, being equal to the 5-year Government of Canada bond yield determined as of today plus 2.37%, in accordance with the terms of the Series T shares.

With respect to any Series U shares that may be issued on January 31, 2024, holders thereof will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, if, as and when declared by the Board of Directors of Power Financial. The dividend rate for the 3-month floating rate period from and including January 31, 2024 to but excluding April 30, 2024 will be 7.407%, being equal to the 3-month Government of Canada Treasury Bill yield determined as of today plus 2.37%, calculated on the basis of the actual number of days in such quarterly period divided by 365, in accordance with the terms of the Series U shares.

Beneficial owners of Series T shares who wish to exercise their conversion right should communicate with their broker or other nominee to ensure their instructions are followed so that the registered holder of the Series T shares can meet the deadline to exercise such conversion right, which is 5:00 p.m. (Eastern Time) on January 16, 2024.

PWF.PR.T was issued as a FixedReset, 4.20%+237, that commenced trading 2013-12-11 after being announced 2013-12-2. PWF.PR.T reset at 4.215% effective 2019-1-31. I recommended against conversion and there was no conversion. Notice of extension was provided in December, 2023. The issue is tracked by HIMIPref™ and is assigned to the FixedReset Discount subindex.

Thanks to Assiduous Reader NK for bringing this to my attention!

S&P Global Ratings has announced:

• Brookfield Property Partners L.P.’s (BPY) credit quality has been impaired by persistent secular headwinds within its office segment and deteriorating metrics related to higher financing costs.
  Therefore, we lowered the issuer credit ratings on both BPY and Brookfield Properties Retail (BPR; a core subsidiary within BPY’s group structure) to ‘BB’ from ‘BBB-‘.
• We also lowered the issue-level rating on BPY’s unsecured notes to ‘BB-‘ from ‘BB+’ and assigned a ‘5’ recovery rating (rounded estimate: 10%) to the notes.
• In addition, we lowered the issue-level rating on BPR’s senior secured notes to ‘B+’ from ‘BB+’ and assigned a ‘6’ recovery rating (rounded estimate: 5%) to the notes.
• Lastly, we lowered our rating on the company’s preferred shares to ‘B’ from ‘BB’ to reflect increased subordination risk for speculative-grade issuers.
• The negative outlook reflects our view that BPY’s liquidity could be pressured by upcoming recourse maturities over the next two years, while secular headwinds within the office segment could further deteriorate its operating performance.

PRINCETON (S&P Global Ratings) Dec. 21, 2023– S&P Global Ratings today took the rating actions listed above.

Secular headwinds in the office sector have weakened our assessment of BPY’s business risk. BPY owns one of the largest real estate portfolios of any rated real estate company, with approximately $130 billion in total assets. Moreover, we view the company’s high-quality properties and its diversification across product type and geography favorably.

However, while BPY’s retail assets have recovered to pre- pandemic levels (occupancy was 95.1% as of Sept. 30, 2023), occupancy in the office portfolio has continued to erode. As of Sept. 30, 2023, occupancy in the office portfolio slipped to 85.4%, a year-over-year decrease of 140 basis points and well below pre-pandemic levels of 93%. We acknowledge that within the office segment, BPY’s core properties–64 out of its 131 assets, representing a majority of office segment net operating income (NOI)–continue to perform well (95.2% occupancy as of Sept. 30, 2023). The remaining assets (which BPY believes have significant value-add opportunities through development and leasing activities) have languished, with occupancy below 80%. Weighted by asset values, occupancy was 91.1% for BPY’s office assets, demonstrating resilience for premier class ‘A’ workplaces.

We expect sector headwinds facing commercial office real estate will generally remain in place over the next several years, with weaker tenant retention, lower occupancy, and heightened incentives (through tenant inducements) to attract new tenants. We expect occupancy at class ‘A’ properties to be more resilient as the bifurcation of performance between class ‘A’ and class ‘B’ widens. However, we believe capital expenditures (capex) to attract new tenants will reduce BPY’s future cash flows and operating metrics will also be slow to recover. As a result, we revised our business risk assessment on BPY to strong from excellent.

Refinancing risks are rising given BPY’s elevated near-term debt maturities.Excluding extension options, BPY’s weighted-average debt maturity shrunk below three years in recent quarters (to 2.6 years as of Sept. 30, 2023), which we believe poses elevated risks.

We acknowledge that the vast amount of upcoming debt is nonrecourse secured debt and most of the maturing debt contains extension options that BPY can exercise. We believe the company maintains a solid position with its lenders due to parent Brookfield Corp.’s (BN; A-/Stable/A-1) scale and platform (BN is a large owner of real assets with over $140 billion of its own invested capital, including a 75% ownership in Brookfield Asset Management [BAM], a global asset manager with $865 billion of assets under management). Moreover, we think banks are reluctant to take back any commercial real estate assets secured by loans in the current market.

While we believe banks are heavily scrutinizing new commercial real estate loans, particularly those secured by office properties, they are generally willing to refinance existing loans. For example, BPY successfully refinanced over $30 billion in loans across more than 120 individual transactions in 2023, and we expect the company to successfully refinance upcoming secured debt. In many cases, we expect banks to provide extensions on maturing debt.

In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) reduce asset values, we would expect BPY to hand back the asset. As of Sept. 30, 2023, BPY has suspended approximately 3% of its contractual payments on nonrecourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality. We revised our capital structure modifier score to negative from neutral given BPY’s elevated debt maturities over the next few years.

While BPY’s recourse corporate notes and bank loan maturities (revolving credit facilities and term loans) look manageable in 2024 (approximately $442 million of unsecured notes due in March), its maturities will increase in 2025 with approximately $2.3 billion of total debt coming due. Lack of progress in addressing these maturities well ahead of maturity could hinder our view of the company’s liquidity.

BPY’s relationship with BN enhances its credit. Following the privatization of BPY by BN in July 2021, we continue to view BPY’s group status to BN as moderately strategic. We believe BN would provide financial support to BPY under some circumstances and could help facilitate future refinancing efforts including repayment of its March 2024 bond maturity. BPY is BN’s main vehicle for real estate investments and its largest investment vehicle. This group support provides a one-notch uplift to BPY’s stand-alone credit profile.

The negative outlook indicates a one in three chance of a downgrade over the next 12 months. This reflects our view that upcoming recourse maturities over the next two years could pressure BPY’s liquidity, while secular headwinds within the office segment could further deteriorate operating performance. We project S&P Global Ratings-adjusted debt to EBITDA will be maintained in the 15x area in both 2023 and 2024, with fixed-charge coverage (FCC) sustained at about 1x.

We could lower our ratings on BPY by one notch if:

BPY fails to refinance its upcoming recourse maturities well in advance, pressuring our view of the company’s liquidity;
Its operating performance deteriorates, with occupancy in the company’s core office segment weakening to the low-80% area; or
Its key credit metrics weaken further, with FCC declining below 1x or S&P Global Ratings-adjusted debt to EBITDA rising back above 16x.
We could revise the outlook back to stable if:

BPY bolsters its liquidity, potentially through asset sales, such that upcoming recourse maturities don’t threaten our liquidity assessment;
Its operating performance improves modestly, with a recovery to office occupancy; and
Key credit metrics stabilize or strengthen, with FCC maintained comfortably above 1.0x.

This follows an earlier CreditWatch-Negative placed on the parent company on 2023-10-5.

• Brookfield Property Partners L.P.’s (BPY) fixed-charge coverage deteriorated to below 1.0x in the second quarter of 2023, and we don’t forecast material near-term improvement given our economists’ view that interest rates will remain higher for longer.
• The company also faces heightened refinancing risk, with a capital structure that has significant maturities over the next two years and outsized exposure to floating-rate debt.
• S&P Global Ratings placed all its ratings on the company, including the ‘BBB-‘ issuer credit rating, on CreditWatch with negative implications.
• The CreditWatch negative placement reflects our expectation that we could lower the ratings on BPY, possibly by more than one notch, if we don’t envision the company implementing a near-term plan to reduce refinancing risk and boost coverage levels.

BPY’s deteriorating credit protection measures are unlikely to recover materially over the next two years.As of June 30, 2023, BPY’s adjusted debt to EBITDA increased to 17.3x from 15.2x at year-end 2022 while fixed-charge coverage (FCC) fell to 0.9x from 1.4x. A notable portion of the deterioration was caused by the consolidation of one of its funds’ (BSREP IV) U.S. investments in December 2022 and foreign investments in January 2023, which added a material amount of new debt to BPY while EBITDA has not fully cycled through on our trailing-12 month adjusted metrics. BPY owns a 23% financial stake in the fund but fully consolidates it within its financial statements.

That said, interest rates have risen materially over the past year, and BPY’s substantial exposure to floating-rate debt (45% net of interest rate hedges as of June 30, 2023) has rapidly deteriorated coverage metrics. S&P Global Ratings economists expect interest rates to remain higher for longer, with one additional rate hike expected in 2023. While we acknowledge that BPY’s sizable liquidity position and consistent execution of asset sales mitigate the risk of the company not being able to pay its fixed charges over the near term, BPY has one of the weakest financial risk profiles within our North America real estate coverage given elevated leverage and thin interest coverage. We project adjusted debt to EBITDA to improve slightly to the low-16x area over the next two years but expect FCC to be sustained at about 1x. While we expect BPY to execute meaningful asset sales over the coming years, we anticipate that the majority of proceeds will continue to be distributed up to its parent Brookfield Corp. (BN; A-/Stable/A-1) rather than allocated for debt repayment.

Near-term maturities pose additional risks.BPY has substantial upcoming debt maturities that will need to be refinanced, likely at significantly higher rates. The company’s weighted average debt maturity was slightly below three years as of June 30, 2023 (not including extension options). We believe that BPY maintains a solid position with its lenders due to its parent’s scale and platform (BN is a global asset manager with over $850 billion of assets under management) and the reluctance of banks to take back any commercial real estate assets secured by loans in the current market. In many cases, we expect the banks to provide extensions on maturing debt, albeit at higher rates. In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) are reducing asset values, we would expect BPY to hand back the asset to the servicer. As of June 30, 2023, BPY has suspended approximately 3% of its contractual payments on non-recourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality.

That said, as one- to three-year extensions are granted by banks or exercised by BPY on its non-recourse CMBS loans, its weighted average debt maturity could narrow further. We believe BPY maintains access to the capital markets where it could issue unsecured debentures or preferred shares, but that its weakening capital structure adds a modest amount of refinancing risk.

The CreditWatch placement reflects the company’s deteriorating interest coverage metrics, continued secular challenges facing the company’s office properties, and a capital structure with a material amount of near-term, floating-rate debt. We will seek to resolve the CreditWatch placement within the next three months.

BPY is a global, diversified real estate company that was taken private by BN in July 2021. BPY is BN’s primary vehicle to make investments across the real estate sector and is also BN’s largest investment vehicle, with approximately $130 billion in total assets as of June 30, 2023. It is the largest real estate company that we rate by total assets. BPY invests primarily in high-quality office properties located in gateway markets and class-A malls in the U.S., with approximately 198 million square feet of office and retail properties (including active development projects) within its core office and core retail platforms.

It will be remembered that BPO’s preferreds are guaranteed by BPY, its parent. The issues remain at Pfd-3(low) by DBRS.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.E, BPO.PR.G, BPO.PR.I, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y.

The market took the news badly, with BPO.PR.R down 9.34% on the day (close/close) and BPO.PR.N down 8.43%.

It will be interesting to see what happens with ZPR – as detailed in the December PrefLetter, ZPR’s weight in BPO was 3.10% in mid-November, while the index had exposure of 5.65%. ZPR’s extreme underweighting has been a huge factor in the index fund’s idiotic (positive) tracking error over the past year – but the regulatory problem remains the situation with reset date bucketting.

Thanks to Assiduous Reader hrseymour for bringing this to my attention.