PrefBlog

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

the reset dividend rate on its Class AAA Preference Shares, Series T (“Series T Shares”) (TSX: BPO.PR.T).

If declared, the fixed quarterly dividends on the Series T Shares for the five years commencing January 1, 2024 and ending December 31, 2028 will be paid at an annual rate of 6.79% ($0.424375 per share per quarter).

Holders of Series T Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on December 18, 2023, to convert all or part of their Series T Shares, on a one-for-one basis, into Class AAA Preference Shares, Series U (the “Series U Shares”), effective December 31, 2023.

The quarterly floating rate dividends on the Series U Shares have an annual rate, calculated for each quarter, of 3.16% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate for the January 1, 2024 to March 31, 2024 dividend period for the Series U Shares will be 2.04438% (8.2% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.511095 per share, payable on March 31, 2024.

Holders of Series T Shares are not required to elect to convert all or any part of their Series T Shares into Series U Shares.

As provided in the share conditions of the Series T Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series T Shares outstanding after December 31, 2023, all remaining Series T Shares will be automatically converted into Series U Shares on a one-for-one basis effective December 31, 2023; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series U Shares outstanding after December 31, 2023, no Series T Shares will be permitted to be converted into Series U Shares. There are currently 10,000,000 Series T Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series U Shares effective upon conversion. Listing of the Series U Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series U Shares will be listed on the TSX under the trading symbol “BPO.PR.Z”.

BPO.PR.T is a FixedReset, 4.60%+316, that commenced trading 2012-9-13 after being announced 2012-9-5. BPO.PR.T reset at 5.383% effective January 1, 2019; I recommended against conversion; and there was no conversion. The issue is tracked by HIMIPref™, but relegated to the Scraps – FixedReset Discount index on credit concerns.

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

Update, 2023-12-5: It has been observed that there is a discrepancy between the underlying GOC-5 rates for the resets of BPO.pr.T, CPX.PR.C and BIP.PR.F. I think that this is due to an error or choice in investors’ favour by BPO.

DBRS has announced that it:

upgraded Fairfax Financial Holdings Limited’s (Fairfax or the Company) Issuer Rating to A (low) from BBB (high). DBRS Morningstar also upgraded the Issuer Rating and the Financial Strength Ratings (FSR) of Fairfax’s subsidiaries Northbridge General Insurance Corporation (Northbridge) and Federated Insurance Company of Canada to A (high). The trends on all ratings were changed to Stable from Positive.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades reflect Fairfax’s consistent and improving underwriting profitability particularly at Brit, the Company’s UK subsidiary where Fairfax has curtailed risk and improved results. Moreover, better overall results have also improved earnings metrics and modestly reduced leverage. Demonstrating improved execution through both acquisitions and organic growth, the reported gross premiums written for YE2022 have more than doubled over the past five years to $27.6 billion (from $12.2 billion in 2017).

The credit ratings and Stable trends reflect Fairfax’s resilient, diversified, and growing franchise, including an expanding market position as a major international Property and Casualty (P&C) insurance and reinsurance group. Higher interest rates have increased risk-adjusted investment income substantially. The Company maintains ample liquid assets at both the holding and operating companies, as well as access to committed lines of credit. Its subsidiaries maintain appropriate regulatory capital ratios with buffers above required solvency levels, allowing Fairfax to handle adverse events.

The credit ratings and Stable trends also consider Fairfax’s earnings volatility that could be caused by exposure to natural catastrophe losses and the impact of financial market fluctuations on unrealized investment gains and losses. Moreover, Fairfax is a large provider of cyber insurance cover in the U.S., ranked number 2 by the NAIC in 2022, which presents some concentration risk.

CREDIT RATING DRIVERS
Over the longer term, less volatile earnings and an improvement in the Company’s risk profile would result in a credit ratings upgrade.

Conversely, the credit ratings would be downgraded if there was a sustained material deterioration in the Company’s risk profile, and overall profitability or capitalization.

CREDIT RATING RATIONALE
Fairfax has developed an extensive and diverse portfolio of global insurance and reinsurance subsidiaries over time, which the Company continues to expand through organic growth and prudent strategic acquisitions. Management of the Company’s insurance and reinsurance operating subsidiaries is decentralized, with each organization having its own autonomous management team. The breakdown of premiums written by line of business has remained consistent over the past five years, with casualty insurance accounting for more than half of the gross premiums written. Gross premiums written from insurance operations in 2022 comprised three broad categories: casualty (56.9%), property (35.2%), and specialty (7.9%).

Fairfax’s risk profile is supported by the Company’s strong underwriting and risk-limit controls, effective claims management, and reinsurance coverage for aggregate claim events or large losses. Moreover, Fairfax has strong internal controls and has been able to operate successfully in multiple jurisdictions. Fairfax’s investment portfolio has good credit quality. The Company continues to hold a significant amount of AAA-rated bonds, which account for more than half of its total fixed income assets as at 9M 2023; however, we note that there has been an increase in the proportion of bonds rated BBB and below as well. This was partly driven by the recent acquisition of approximately 95% interest in specific real estate construction loans from California-based Pacific Western Bank. While this asset class has been under pressure, we note that the loans are secured by real estate located in the United States with a conservative average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. DBRS Morningstar notes that Fairfax is a large provider of Cyber insurance cover in the U.S., which DBRS Morningstar took into consideration in its assessment of product risk.

The Company reported strong results for the first nine months of 2023 (9M 2023). Fairfax has been successful in transforming Brit’s underwriting results, which has helped improve overall underwriting profitability. The Company is on track for a record year in 2023 with a consolidated net income of $3.4 billion as of 9M 2023 driven by strong underwriting results and positive investment income. The ongoing favorable insurance pricing environment coupled with higher reinsurance prices that benefit its significant reinsurance businesses is expected to contribute positively to Fairfax’s earnings in the short to medium term.

Fairfax’s credit ratings benefit from a sizable holding of liquid assets at the parent-holding company level with approximately $1.2 billion in total for cash and liquid investments as at 9M 2023. DBRS Morningstar considers this level of cash and investments as providing an important liquidity cushion for any potential uptick in insurance claims from the Company’s subsidiaries or potential catastrophe losses. Additionally, Fairfax maintains a committed credit facility of $2 billion that is available to support liquidity needs. The credit facility was undrawn as at September 30, 2023.

Fairfax’s insurance and reinsurance operating subsidiaries are appropriately capitalized, with each major subsidiary having available capital exceeding the required regulatory targets. The Company’s fixed-charge coverage ratios have been volatile over time because of the impact of the accounting treatment of unrealized capital gains and losses within the investment portfolio. The volatility is partly mitigated by the holding company’s strong liquidity position, which provides comfort that fixed charges can be paid under stressed market conditions. The Company’s financial leverage ratio (calculated by DBRS Morningstar on a consolidated basis as debt plus preferred shares to capital) decreased to 29.1% at 9M 2023, in part because of the material improvement in net earnings, and the transition to IFRS 17. The main drivers were adjustments for the discounting of provision for losses and loss adjustment expenses on transition to IFRS 17, which resulted in an increase in common shareholders’ equity.

The S&P rating for FFH continues to be P-3(high). S&P did an annual review for FFH dated 2023-5-30.

Affected issues are: FFH.PR.C, FFH.PR.D, FFH.PR.E, FFH.PR.F, FFH.PR.G, FFH.PR.H, FFH.PR.I, FFH.PR.J, FFH.PR.K and FFH.PR.M.

DBRS has announced (on 2023-11-22, they say, but I swear I looked and didn’t see it) that it:

upgraded the Issuer Rating, long-term obligations, and preferred shares credit ratings of Brookfield Corporation (BN or the Company) and its guaranteed subsidiaries, including BN’s Issuer Rating and Senior Notes to “A” from A (low) and its Preferred Shares rating to Pfd-2 from Pfd-2 (low). In addition, DBRS Morningstar confirmed the short-term credit ratings of BN and its guaranteed subsidiaries at R-1 (low). All trends are Stable. These actions remove the long-term and preferred share ratings on BN and its subsidiaries from Under Review with Positive Implications as well as the short-term ratings from Under Review with Developing Implications where they were placed on September 27, 2023, to conduct a review of the Company and the methodological approach to the credit ratings. For more information, please see the related press release here: https://www.dbrsmorningstar.com/research/421150/dbrs-morningstar-places-certain-ratings-of-brookfield-corporation-and-its-subsidiaries-under-review-with-positive-implications.

During the course of its review, DBRS Morningstar conducted a credit analysis of Brookfield Asset Management Ltd. (BAM) using the “Global Methodology for Rating Investment Management Companies” and of Brookfield Reinsurance Ltd. (BNRE) using the “Global Methodology for Rating Insurance Companies and Insurance Organizations.”

KEY CREDIT RATING CONSIDERATIONS
BN’s and its guaranteed subsidiaries credit ratings reflect the Company’s (1) position as the parent company of BAM (75% ownership), (2) position as the substantial owner of BNRE (majority economic interest), (3) position as the parent company of Brookfield Property Partners L.P. (BPY, rated BBB (low) with a Stable trend by DBRS Morningstar; 100% ownership), (4) position as the parent company of Brookfield Renewable Partners L.P. (BEP, rated BBB (high) with a Stable trend by DBRS Morningstar; 46% ownership), and (5) strong consolidated credit metrics, liquidity profile, and industry diversification. For each BN business that contributes a material portion of the Company’s consolidated distributable earnings or already had a DBRS Morningstar public credit rating, DBRS Morningstar assessed its credit quality based on its proportionate contribution, adjusted for BN’s ownership interest in the subsidiary (the Composite Rating). DBRS Morningstar then adjusted the Composite Rating for the following overlay factors: (1) the structural subordination on the leveraged cash flows from BNRE, BPY, and BEP, (2) the Company’s superior industry diversification, and (3) BN’s very strong liquidity. The result is an overall Issuer Rating of “A.”

CREDIT RATING DRIVERS
The credit ratings on the Company and its guaranteed subsidiaries reflect those of its primary business units and operating companies, namely BAM, BNRE, BPY, and BEP. Significant improvement in the credit risk profiles of one or more of these businesses may result in an upgrade of BN’s credit ratings.

Conversely, a deterioration in the credit risk profile(s) of BN’s primary business units and operating companies; a material increase in debt at the Company; debt at BAM that causes debt at BN to be structurally subordinated to a greater percentage of its cash flows; or a deterioration in governance controls may result in a downgrade of BN’s credit ratings.

CREDIT RATING RATIONALE

These credit rating actions reflect DBRS Morningstar’s assessment of BN’s key subsidiaries and overlay factors, including the following:

Subsidiaries
BAM—BAM’s credit profile benefits from its position as one of the largest alternative asset managers in the world, with more than $440 billion of fee-bearing capital, the majority of which is long term (10+ years) or perpetual in nature. Assets under management (AUM) have grown significantly in the last five years, indicative of BAM’s strong fundraising abilities, capital resources, and investment track record. BAM’s capital-light business model, growth in AUM, and high margins have resulted in strong earnings, the majority of which are distributed to BN. BAM also has no corporate debt and very strong liquidity. DBRS Morningstar’s assessment of BAM’s credit profile also considers that the nature of the funds it manages are relatively illiquid and that the current macroeconomic environment could result in increased impairments, defaults, and lower valuations in some of its investments. DBRS Morningstar notes that while in the short-term, this would not have a significant impact on the credit profile of BAM, in the medium to long term this could impact the ability for the business to continue to grow its fee-bearing capital.

BNRE—BNRE’s credit profile is supported by the expectation of improved market position and franchise strength over the near to medium term, particularly in the Annuity and Property and Casualty (P&C) business lines; improved earnings stability as it develops a sizable base of recurring premium revenues; and strong investment from BN to execute on its growth plan and to meet capital requirements. DBRS Morningstar’s assessment of BNRE’s credit profile also considers a limited track record of operations to assess historical profitability of the consolidated entity; the risk and uncertainty related to its aggressive growth plans; and that the credit and market risk of its investment portfolio, its financial leverage, and its capital needs are high relative to other insurers.

BPY—BPY’s credit profile benefits from its market position as a preeminent global real estate company; its high-quality assets (particularly the BPY Core Office and Retail segment) with long-term leases to large, recognizable investment-grade-rated tenants; and its superior diversification by property, tenant, and geography. BPY’s credit profile is constrained by its weak financial risk assessment as reflected in its highly leveraged balance sheet and low EBITDA interest coverage, a riskier retail leasing profile in terms of lease maturities and counterparty risk relative to its Core Office segment, and a higher-risk opportunistic Limited Partnership Investments segment composed of hotel, office, retail, mixed-used, housing, and alternative assets.

BEP—BEP’s credit profile is supported by its long-term contracts with diverse, solid-credit counterparties; its diversified and large generation asset portfolio; and its low environmental risk, low-cost and high-quality assets. DBRS Morningstar’s assessment also considers BEP’s expansion risk; refinancing and recontracting risk at the project level; and hydrology and wind resource risk.

Overlay Factors
Structural Subordination—DBRS Morningstar notes that BN finances its assets on a non-recourse basis without any parental guarantees or cross-collateralization. BN’s debt is structurally subordinated to the leveraged cash flows from BNRE, BPY, and BEP; however, there is no corporate debt held at BAM, which, along with Direct Investments, accounted for 54% of consolidated distributable earnings in the last 12 months ended September 30, 2023.

Diversification—DBRS Morningstar believes that the Company benefits from cash flow stability resulting from superior industry diversification of its business units and operating companies. BN’s cash flows are generated from diversified businesses comprising asset management, insurance solutions, real estate, private equity, infrastructure, and renewable power.

Liquidity—DBRS Morningstar considers BN’s liquidity to be very strong because of its $1.5 billion in cash and financial assets, $2.5 billion in undrawn and committed credit facilities, and $4.6 billion in annualized distributions at September 30, 2023. DBRS Morningstar also notes that, including perpetual affiliate liquidity and uncalled private fund commitments, BN and its subsidiaries had a total of $119 billion in liquidity as of September 30, 2023.

Issues affected are (deep breath): BN.PF.A, BN.PF.B, BN.PF.C, BN.PF.D, BN.PF.E, BN.PF.F, BN.PF.G, BN.PF.H, BN.PF.I, BN.PF.J, BN.PF.K, BN.PF.L, BN.PR.B, BN.PR.C, BN.PR.K, BN.PR.M, BN.PR.N, BN.PR.R, BN.PR.T, BN.PR.X and BN.PR.Z. Not to be forgotten is the Brookfield Investments Corporation, BRN.PR.A, which is not tracked by HIMIPref™.

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