Category: Return of Capital

New Issues

New Issue: BIP FixedReset, 4.50%+356

Brookfield Infrastructure Partners L.P. has announced:

that it has agreed to issue 5,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 1 (“Series 1 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by CIBC, RBC Capital Markets, Scotiabank and TD Securities Inc. The Series 1 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $125,000,000. Holders of the Series 1 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 4.50% annually for the initial period ending June 30, 2020. Thereafter, the distribution rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 3.56%. The Series 1 Preferred Units are redeemable on or after June 30, 2020.

Holders of the Series 1 Preferred Units will have the right, at their option, to reclassify their Series 1 Preferred Units into Cumulative Class A Preferred Limited Partnership Units, Series 2 (“Series 2 Preferred Units”), subject to certain conditions, on June 30, 2020 and on June 30 every 5 years thereafter. Holders of Series 2 Preferred Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.56%.

Brookfield Infrastructure has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 1 Preferred Units which, if exercised, would increase the gross offering size to $175,000,000. The Series 1 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 1 Preferred Units for general corporate purposes, including to fund new investments that were previously announced and repay amounts outstanding under its credit facilities. The offering of Series 1 Preferred Units is expected to close on or about March 12, 2015.

But have a look at the issuer! Brookfield Infrastructure Partners L.P.! LP, LP! For various tax reasons I am not competent to either judge or explain, this means that they cannot guarantee that the distributions will actually be dividends; instead, the distributions will be partially a return of capital and the “Certain Canadian Federal Income Tax Considerations” section of the prospectus will be more fraught with interest than otherwise might be the case.

For the past five years, the Return of Capital proportion of distribution with respect to ordinary units has been (starting with 2014) 1.60%, 76.90%, 47.03%, 63.44% and 79.00%, which many will consider gives rise to a pleasant deferral of tax (you eventually pay tax. Don’t worry about that! The ROC lowers the Adjusted Cost Base for capital gains purposes).

Just what the proportions might be in the future is for God to know and man to guess, but it appears that REI.PR.A and REI.PR.C and AX.PR.A, AX.PR.E and AX.PR.G, which also have this ROC structure now have some competition in the ‘deferred taxation’ space.

Issue Comments

REI.PR.A, REI.PR.C: Distributions 62% Return of Capital in 2011

This post is motivated by a query from Assiduous Reader adrian2, who writes in and says:

Is there any other Canadian security calling itself preferred and distributing ROC?

As it turns out, there is: REI.PR.A and REI.PR.C are reported by RioCan to have the following breakdown of their distribution in 2011:

  • Capital Gain: 1.72%
  • Foreign Non-Business Income 4.57%
  • Other Income 31.24%
  • Return of Capital 62.47%

Various implications of this kind of tax treatment were discussed by Tom Kiladze in the Globe:

In RioCan’s case, distributions will be taxed as income, not as dividends. That matters, because income is taxed at a higher rate. But the preferred units will be treated just like RioCan’s regular trust units, so a portion of the distributions will be treated as a return of capital. REITs often distribute more than their net incomes because depreciation skews their bottom lines (property values usually go up, not down), and the amount overpaid allows investors to get a better tax treatment.

BMO analyst Karine MacIndoe ran the numbers and found that RioCan has a historical five-year tax-deferral average of about 50 per cent. Applying that figure over a five-year horizon in the future, the pref units’ 5.25 per cent yield equates to a 4.82 per cent dividend yield on an after-tax return basis.

What the numbers will look like in the future is left as an exercise for the student.

Issue Comments

New Issue: AX.PR.A FixedReset 5.25%+406

Artis REIT announced on July 24:

a marketed public offering (the “Financing”) of approximately $50 million Cumulative 5-Year Rate Reset Preferred Trust Units, Series A (the “Series A Units”) at a price of $25 per Series A Unit. The Financing is being led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Artis has also granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase additional Series A Units, up to an amount equal to 15% of the number of Series A Units sold pursuant to the Financing. The Financing will be priced in the context of the market with the final terms of the Financing to be determined at the time of pricing.

The Series A Units will pay fixed cumulative preferential distributions, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, for the initial approximately five-year period ending September 30, 2017. The first quarterly distribution, if declared, shall be payable on September 30, 2012. The distribution rate will be reset on September 30, 2017 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and a spread which will be set upon pricing of this Financing. The Series A Units are redeemable by Artis, at its option, on September 30, 2017 and on September 30 of every fifth year thereafter.
Holders of Series A Units will have the right to reclassify all or any part of their Series A Units as Cumulative Floating Rate Preferred Trust Units, Series B (the “Series B Units”), subject to certain conditions, on September 30, 2017 and on September 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement). Holders of Series B Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread which will be set upon pricing of this Financing.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated June 15, 2012. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

Artis continues to enjoy a strong deal flow pipeline, with a continued focus on the accretive acquisition of quality commercial properties, in select markets in Canada and the U.S.

The issue was priced the following day:

announced today that is has priced its previously announced marketed public offering (the “Financing”) of Cumulative 5-Year Rate Reset Preferred Trust Units, Series A (the “Series A Units”). Artis will issue 3 million Series A Units at a price of $25 per Series A Unit for gross proceeds to Artis of $75,000,000.

The Financing is being led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Artis has also granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase up to an additional 450,000 Series A Units.

The Series A Units will pay fixed cumulative preferential distributions of $1.3125 per unit per annum, yielding 5.25% per annum, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, for the initial approximately five-year period ending September 30, 2017. The first quarterly distribution, if declared, shall be payable on September 30, 2012 and shall be $0.2122 per unit, based on the anticipated closing of the offering of Series A Units of August 2, 2012. The distribution rate will be reset on September 30, 2017 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.06%. The Series A Units are redeemable by Artis, at its option, on September 30, 2017 and on September 30 of every fifth year thereafter.

Holders of Series A Units will have the right to reclassify all or any part of their Series A Units as Cumulative Floating Rate Preferred Trust Units, Series B (the “Series B Units”), subject to certain conditions, on September 30, 2017 and on September 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement). Holders of Series B Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of March, June, September and December of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread of 4.06%.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated June 15, 2012. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about August 2, 2012 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to fund future acquisitions, repay indebtedness, and for general trust purposes.

Artis continues to enjoy a strong deal flow pipeline, with a continued focus on the accretive acquisition of quality commercial properties, in select markets in Canada and the U.S.

And they announced on August 2:

it has closed its previously announced marketed public offering (the “Financing”) of Cumulative 5-Year Rate Reset Preferred Trust Units, Series A, (“the Series A Units”), through a syndicate of underwriters led by RBC Capital Markets, CIBC and Macquarie Capital Markets Canada Ltd. (the “Underwriters”). Pursuant to the Financing, Artis issued 3.0 million Series A Units at a price of $25 per Series A Unit for gross proceeds to Artis of $75,000,000.

Artis has granted the Underwriters an over-allotment option, exercisable at any time up to 30 days after the closing of the Financing, to purchase up to an additional 450,000 Series A Units.

Artis intends to use the net proceeds from the Financing to repay indebtedness, fund future acquisitions, and for general trust purposes.

According to the prospectus supplement (available at SEDAR dated July 25, 2012; I am not permitted to link to it directly due to the cosy little contract the soon-to-be-bank-owned CDS has signed with regulators), “The Series A Units and the Series B Units are not rated by any rating agency.” Accordingly, the issue will not be tracked by HIMIPref™. As I have stated so often that people are getting sick of the repetition, this policy is not because I don’t think I can analyze the credit quality myself, and not because I worship the rating agencies … but because a public credit rating serves as a useful public flash-point during times of stress. It’s always useful to give the directors something to talk about over lunch!

Taxation is complicated: “Artis’ income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.” In 2011, Unitholder distributions were 100% return of capital and this was also the case in 2010.