PrefBlog

Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners L.P., has announced:

that it has agreed to issue to a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc., for distribution to the public, ten million Cumulative Minimum Rate Reset Class AAA Preference Shares, Series II (the “Preferred Shares, Series II”). The Preferred Shares, Series II will be issued at a price of C$25.00 per share, for aggregate proceeds of C$250 million. Holders of the Preferred Shares, Series II will be entitled to receive a cumulative quarterly fixed dividend yielding 4.85% annually for the initial period ending December 31, 2022. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of (i) the five-year Government of Canada bond yield plus 3.23% and (ii) 4.85%.

Holders of Preferred Shares, Series II will have the right, at their option, to convert their shares into Cumulative Floating Rate Class AAA Preference Shares, Series JJ (the “Preferred Shares, Series JJ”), subject to certain conditions, on December 31, 2022 and on December 31 every five years thereafter. Holders of Preferred Shares, Series JJ will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 3.23%.

The Series II Shares and Series JJ Shares will be fully and unconditionally guaranteed, jointly and severally, as to: (i) the payment of dividends, as and when declared, (ii) the payment of amounts due on redemption, and (iii) the payment of amounts due on the liquidation, dissolution or winding-up of Brookfield Office Properties, by the following entities: Brookfield Property Partners L.P., Brookfield Property L.P., Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, BPY Bermuda Holdings II Limited, BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited.

Brookfield Office Properties has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase an additional 2,000,000 Preferred Shares, Series II at the same offering price. Should the option be fully exercised, the total gross proceeds of the financing will be C$300 million.

The Preferred Shares, Series II will be offered in all provinces of Canada by way of a supplement to Brookfield Office Properties’ existing Canadian short form base shelf prospectus dated August 29, 2016.

The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes. The offering is expected to close on or about December 7, 2017.

This issue looks extraordinarily expensive to me! According to Implied Volatility analysis:

Click for Big

With the parameters shown, the theoretical value of the new issue is 23.12. Critics will be quick to point out that in this calculation there is zero value assigned to the minimum rate guarantee … but I’d say that’s about right!

However, when the graph is examined more closely, it does look as if the Floor issues are on a different line with a steeper slope than the non-Floor issues. So let’s try disaggregating the data:

Click for Big

Click for Big

It’s an interesting idea that bears watching in the future. The Implied Volatility of the “Floor” series is extremely high, indicating that the Black-Scholes assumptions do not hold, which I usually take to mean implies a strong belief in the directionality of future prices, e.g., that all issues will be called and hence are all expected to gravitate towards par. Regretably, all extant ‘floor’ issues (BPO.PR.C, BPO.PR.E, BPO.PR.G) have relatively high spreads (518, 396 and 374bp, respectively) and are trading above par, which may be contaminating the data.

Harvest Portfolios Group Inc. has announced:

that Big Pharma Split Corp. (the “Company”) has completed its initial public offering (the “Offering”) of 1,360,000 Preferred Shares and 1,360,000 Class A Shares for aggregate gross proceeds of $34 million. The Company has granted the Agents (as defined below) an over-allotment option, exercisable for a period of 30 days from today’s date, to purchase up to an additional 204,000 Preferred Shares and up to an additional 204,000 Class A Shares. The Class A Shares and the Preferred Shares will commence trading today on the Toronto Stock Exchange under the symbols “PRM” and “PRM.PR.A”, respectively.

The Company will invest in an initially equally-weighted portfolio (the “Portfolio”) of ten issuers comprised of equity securities selected by Harvest from a universe of pharmaceutical issuers that at the time of investment and immediately following each semi-annual reconstitution and rebalancing: (i) are listed on a North American exchange; (ii) pay a dividend; and (iii) have options in respect of its equity securities that, in the opinion of Harvest, are sufficiently liquid to permit Harvest to write options in respect of such securities (the “Investable Universe”). The Portfolio will be comprised primarily of the largest (as determined by market capitalization calculated in US$) pharmaceutical issuers in the Investable Universe. In order to seek to generate additional returns, Harvest may write call options each month in respect to some or all of the equity securities in the Portfolio.

The investment objectives for the Preferred Shares are to provide their holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.125 per Preferred Share ($0.50 per annum or 5.0% per annum on the $10.00 issue price) until December 31, 2022 (the “Maturity Date”) and to return of the original issue price to holders on the Maturity Date.

The investment objectives for the Class A Shares are to provide their holders with regular monthly cash distributions targeted to be $0.1031 per Class A Share ($1.2372 per annum or 8.25% per annum on the $15.00 issue price) and with the opportunity for growth in net asset value per Class A Share.

Harvest is the manager, portfolio manager and promoter of the Company.

The syndicate of agents for the Offering is being co-led by BMO Capital Markets, CIBC Capital Markets and Scotiabank and also includes National Bank Financial Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Echelon Wealth Partners Inc., Industrial Alliance Securities Inc., Mackie Research Capital Corporation and PI Financial Corp. (collectively, the “Agents”).

For additional information: Please visit www.harvestportfolios.com, e-mail info@harvestportfolios.com or call toll free 1-866-998-8298.

The SplitShare Corporation has its own web-page.

The preferred shares have been rated Pfd-3(high) by DBRS:

The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.
…
Based on current asset coverage of 2.4 times (x), the net asset value of the Company would have to fall by approximately 57.5% for the holders of the Preferred Shares to be in a loss position. The initial dividend coverage ratio is 0.4x. To supplement Portfolio income, the manager will engage in call option writing.

On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.
The credit quality of the Portfolio is strong, though it is concentrated in the health-care sector. Nevertheless, the underlying companies from the indicative Portfolio have a consistent dividend paying history. The Company’s NAV may be sensitive to volatility of prices of the Portfolio securities as well as changes in the dividend policies of the underlying companies and the health-care industry-specific risks. In assigning the Pfd-3 (high) rating, DBRS has taken into account (1) the level of downside protection available to holders of the Preferred Shares, (2) the Portfolio quality, (3) potential foreign-exchange risk because the income received on the Portfolio will not be hedged and (4) stated distributions to the Class A Shares.

This issue will not be tracked by HIMIPref™ as it is too small to allow for reasonable expectations of efficient tradability. But here’s hoping they build it up!