PrefBlog

Brookfield Corporation accomplished most of it latest reorg on December 9:

Brookfield Corporation (NYSE: BN, TSX: BN) (the “Corporation”) and Brookfield Asset Management Ltd. (NYSE: BAM, TSX: BAM) (the “Manager”) today jointly announced the completion of the public listing and distribution of a 25% interest in the Corporation’s asset management business, through the Manager, by way of a plan of arrangement (“Arrangement”).

The Corporation has changed its name from Brookfield Asset Management Inc. to Brookfield Corporation, with effect from today and at the open of markets on December 12, 2022, its shares will trade under the new ticker “BN” on both stock exchanges. The Manager takes the name Brookfield Asset Management Ltd. and has been successfully listed on the New York Stock Exchange and the Toronto Stock Exchange. At the open of markets on December 12, 2022, its shares will trade under the ticker “BAM” on both stock exchanges.

Accordingly, the BAM Series 8, BAM.PR.E, shares have transformeed into BN Series 51, BN.PF.K shares:

Dividends
The holders of the Series 51 Preferred Shares are entitled to receive monthly floating cumulative preferential cash dividends, accruing daily, as and when declared by the board of directors on the 12th day of each month in an amount per share equal to the product of C$22.00 per share and one-twelfth of the annual floating dividend rate applicable to the month being the average Prime Rate for the month multiplied by a Designated Percentage as provided in the share conditions. The Designated Percentage established for November 2001 was 85%. Thereafter, the Designated Percentage has been adjusted each month based on the average trading price of the Series 51 Preferred Shares, to a maximum of 100% and a minimum of 50%.
…
Redemption
Subject to applicable law and certain restrictions and to the rights, privileges, restrictions and conditions attaching to other shares of the Corporation, all, but not less than all, of the Series 51 Preferred Shares will be redeemable at the option of the Corporation at a redemption price of C$22.44 per share, together with all accrued and unpaid dividends thereon up to but excluding the date of redemption. Notice of any redemption must be given by the Corporation at least 45 days and not more than 60 days prior to the date fixed for redemption.

Purchase for Cancellation
The Corporation may purchase (if obtainable) for cancellation the whole or any part of the Series 51 Preferred Shares in the open market or by private agreement or otherwise, at the lowest price obtainable, in the opinion of the board of directors, plus accrued and unpaid dividends and costs of purchase.

Exchange
Subject to certain restrictions, the holders of the Series 51 Preferred Shares will have the right, on November 1, 2026, and on November 1 in every fifth year thereafter, to exchange any or all of the Series 51 Preferred Shares held by them for Series 52 Preferred Shares of the Corporation, on a one-for one basis. An exchange of Series 51 Preferred Shares for Series 52 Preferred Shares must be initiated not less than 14 days and not more than 45 days prior to an exchange date. Under certain circumstances, the Series 51 Preferred Shares automatically convert into Series 51 Preferred Shares, on a one-for-one basis.

Rights of Liquidation
In the event of the liquidation, dissolution or winding-up of the Corporation, the holders of the Series 51 Preferred Shares will be entitled to receive C$22.00 per share together with all dividends accrued and unpaid to the date of payment before any amount will be paid or any assets of the Corporation distributed to the holders of any shares ranking junior to the Series 51 Preferred Shares. The holders of the Series 51 Preferred Shares will not be entitled to share in any further distribution of the assets of the Corporation.
…

National Bank of Canada has announced (on 2022-11-4):

that none of its outstanding 16,000,000 Series 38 Shares will be converted on November 15, 2022, into Non-Cumulative Floating Rate First Preferred Shares, Series 39 (NVCC) (the “Series 39 Shares”).

During the conversion period, 82,826 Series 38 Shares were tendered for conversion into Series 39 Shares, which is less than the minimum 1,000,000 required to give effect to the conversion, as per the terms of the Series 38 Shares described in the prospectus supplement dated June 5, 2017.

As a result, no Series 39 Shares will be issued on November 15, 2022, and holders of Series 38 Shared will retain their shares.

The Series 38 Shares are currently listed on the Toronto Stock Exchange under the symbol NA.PR.C. The annual dividend rate for such shares for the five-year period commencing on November 16, 2022, and ending on November 15, 2027, will be 7.027%.

NA.PR.C is a FixedReset, 4.45%+343, NVCC-compliant, that commenced trading 2017-6-13 after being announced 2017-6-1. Notice of extension was given in 2022 and it reset to 7.027%. The issue is tracked by HIMIPref™ and has been assigned to the FixedResets (Discount) subindex.

BAM.PF.J will reset at 6.229% effective 2023-1-1. BAM.PF.J was issued as a FixedReset, 4.75%+310M475, that commenced trading 2017-9-13 after being announced 2017-09-06.

BAM.PR.Z will reset at 6.089% effective 2023-1-1. BAM.PR.Z was issued as a FixedReset, 4.80%+296, that commenced trading 2011-11-2 after being announced 2011-10-24. BAM.PR.Z reset to 4.685% effective 2018-1-1; I recommended against conversion; and there was no conversion.

BPO.PR.I will reset at 6.359% effective 2023-1-1. BPO.PR.I was issued as a FixedReset, 4.85%+323M485, that commenced trading 2017-12-7 after being announced 2017-11-29.

IFC.PR.A will reset at 4.841% effective 2022-12-31. IFC.PR.A was issued as a FixedReset, 4.20%+172, that commenced trading 2011-7-12 after being announced 2011-6-22. IFC.PR.A reset at 3.396% effective December 31, 2017, and I recommended against conversion. There was no conversion.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. IFC.PR.A and the FloatingReset that will arise if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

It is somewhat surprising to note that the market is pricing in a lengthy policy tightening cycle by the BoC: the implied rates until the next interconversion are not much different from the current 3-month bill rate of 4.26%, with the averages for investment-grade and junk issues at +4.08% and +4.25%, respectively. Some may conclude that investors are making no attempt to forecast the duration of this tightening cycle!

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

It should be noted that the data is not of particularly good quality, since of the InvestmentGrade pairs, only SLF.PR.G / SLF.PR.J and TRP.PR.A / TRP.PR.F have FloatingResets of any appreciable liquidity. These two pairs are plotted with the coordinates (2.89 years, 3.62%) and (2.39 years, 4.22%) respectively. So there’s a certain amount of danger that plots could change appreciably if the upcoming conversion options result in FloatingResets that are highly liquid. Be warned!

If we plug in the current bid price of the IFC.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Similarly, for BAM.PF.J:

Similarly, for BAM.PR.Z:

Similarly, for BPO.PR.I:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to trade above the price of their FixedReset counterparts. Therefore, I recommend that holders of IFC.PR.A, BAM.PF.J, BAM.PR.Z and BPO.PR.I convert their holdings to the corresponding FloatingResets. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap one issue for the other in the market once both elements of each pair are trading and you can – hopefully – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Readers who are not as Assiduous as they should be occasionally get upset at my conversion recommendations because I make no attempt whatsoever to make my own estimate of the average 3-month bill rate for the next five years and tailor a recommendation accordingly. I do not do this because it cannot be done with any degree of conviction whatsoever; anybody who tells you that they can reliably predict market yields five years in advance is a charlatan. Market Timing is a snare and delusion; financial markets form a chaotic system in which things that have no rational relevance today can be the driving forces tomorrow. I did not predict the market effects of the COVID pandemic six months before it happened; I did not predict the market effects of the Russian invasion of Ukraine six months before it happened, either; I don’t know anybody who did. All we can ever do is compare similar instruments and attempt an educated guess about relative value; for example IFC.PR.A vs. its possible Floating Rate counterpart. Comparing either one of them with cash or equity over the short term is an exercise in futility.

So what to do? Construct your portfolio to meet your needs and your risks, based on the long-term characteristics of the various alternatives. If, for instance, you are financing your position with a variable rate mortgage based on prime (not a wise move, but some people do it), your lower risk (higher certainty) option is the FloatingReset, as it will reset every three months in accordance with the three month bill rate, which is closely related to prime. Prime and the three month bill rate are similar instruments; prime and the five-year bond rate are less similar; prime and equity prices are highly dissimilar. My purpose in making these ‘convert or hold’ recommendations is to show the potential for short term trading gains between the FixedReset and its FloatingReset counterpart which are, as previously noted, similar instruments. Thus, for instance, if your portfolio requirements indicate that the FixedReset instrument is better suited for you, you might wish to elect to convert to the FloatingReset anyway; this would be reasonable (but not guaranteed!) to the extent that you have a reasonable (but not guaranteed!) expectation that the FloatingReset will be trading higher than the FixedReset for a long enough period to allow you to swap the issues on the market and maybe take out $0.25/share on the swap.

That’s how you make money in the market, taking out small profits as many times as opportunity permits. That’s what proprietary traders (and properly operated hedge funds, deserving of the name) do – and proprietary trades, backed with sufficient capital, are the only group of market participants that consistently make profits.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Toronto time) on December 16, 2022 for each of these issues. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so if you wish to convert there’s no time to waste! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.