BAM Split Corp., issuer of BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E, has released its Annual Report to September 30, 2011.
Figures of interest are:
MER: (excluding dividends on preferred shares, issue costs and Class A Preferred Share redemption premium) 0.0%. You don’t see that number very often! A more precise calculation from the Income Statement shows that the expenses totalled $312,000 for the year, or about 2bp p.a. on assets.
The expenses are wel itemized, however, and are a delight for voyeurs. I found the Listing Fees of $101,000 and Rating Fees of $20,000 to be most interesting.
Average Net Assets: This must be calculated if we’re to find the second decimal point on the MER. On 2011-9-30, total assets were 1.541-billion; on 2010-9-30, 1.547-billion. I used the lower figure.
Underlying Portfolio Yield: Given the fund’s portfolio composition and investment policy, deviations from the raw yield on BAM.A will not be material. This is currently 1.865%
Income Coverage: Dividends & Interest of $27.307-million less expenses (before amortization of issue costs) of $0.312-million is $26.995-million, to cover preferred dividends of $24.297-million is 111%.
A noteworthy disclosure in the report is:
0n December 8, 2011, the board of directors authorized the company to exchange $200 million capital shares for $200 million newly created Junior Preferred Shares. The Junior Preferred Shares will be retractable at the option of the holder, will pay a noncumulative quarterly dividend at an annual rate of 5.00% and will rank junior to the publicly held Class A, Class AA and Class AAA Preferred Shares. The company expects to complete the exchange of capital shares for Junior Preferred Shares in January 2012.
There is no further information available on these Junior Preferreds, but it’s probably safe to assume that the new shares will have a par value of $25, and that the capital units outstanding will be adjusted so that a Unit continues to be one preferred and one capital unit.
This means that the $200-million in new preferreds will be comprised of 8-million shares, so there will be 8-million new units outstanding with no new money in the fund. There are now 19.713-million units outstanding, so there will soon be 27.713-million units outstanding and the NAVPU will decline so that it is 19713 / 27713 of its current value, or 71.1%.
Thus, the “diluted NAVPU” will decline to about 53.78 from its Dec. 30 level of 75.65 and Asset Coverage will therefore decline to 2.2-:1 from its current level of 3.0+:1.
This is nasty stuff. BNA has always been notable for its extremely high Asset Coverage and now it’s being smacked down to levels that are simply adequate for its investment-grade rating. More insidiously, it seems to me that the junior preferreds are retractible at any time; in times of trouble they could sneak ahead of the senior issues which are retractible for cash only at a given time in the future.
However, DBRS confirmed the preferreds at Pfd-2(low) on December 13 and must have known about the plans at that time:
The downside protection available to the Class AA Preferred Shares is approximately 66.0%, based on the market value of the BAM Shares as of November 25, 2011. The dividend coverage ratio is approximately 1.1 times. As a result, the Company will initially be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company will sell some of the BAM Shares or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.
The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.
The main constraints to the ratings are the following:
(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.
(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.
(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.
(4) As the BAM Shares pay dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate – specifically, the appreciation of the Canadian dollar versus the U.S. dollar – which may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares as these dividends are paid in Canadian dollars.
BNA has the following preferred share issues outstanding: BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E.
The $200 million in Jr. Prefs are in exchange for $200 million of existing capital shares so I’m not sure the NAVPU impact is that onerous.
Details are missing, however, some of my speculations:
– At current BAM.A dividend levels, there is nowhere near enough BAM Split income to pay the 5% dividend to the Jr. Pref’s. As the Jr. Pref’s are non-cumulative and subordinate to the existing prefs, all of this appears like an alternate mechanism to payout the remaining fund income (after existing pref dividends) to current capital share holders. Perhaps the $200 million exchange is pro-rata for current capital shareholders to accomplish this.
– The exchange for capital shares and non-cumulative subordination means the risk structure of the existing prefs hasn’t really changed except for the retraction rights. I don’t understand how they can make subordinate capital (which is now subordinate prefs) retractable ahead of existing prefs without any restrictions??
– DBRS rating confirmation after BAM Split approves these new shares gives me some comfort (assuming they know the details).
The $200 million in Jr. Prefs are in exchange for $200 million of existing capital shares so I’m not sure the NAVPU impact is that onerous.
Well, I’ve detailed my reasoning. With which part do you disagree?
The exchange for capital shares and non-cumulative subordination means the risk structure of the existing prefs hasn’t really changed except for the retraction rights.
That is a really big exception! Say the NAV goes to $26 (credit analysis is all about the bad scenarios). All preferred shareholders will wish to retract. Only one class will be able to do so at will.
My mistake… NAVPU will decline assuming these Jr. prefs are treated similar to existing prefs. I just don’t understand how the subordination affects the risk structure of the existing prefs.
I also can’t figure out the rationale to issue new jr. non-cumulative prefs without the income to pay the dividends on these new prefs.
Obviously much I don’t understand.
I just don’t understand how the subordination affects the risk structure of the existing prefs.
I view the subordination as being cosmetic. It will apply if the company actually goes bankrupt, which is unlikely in the extreme. It could also also allow the company to stop dividends on the new issue without complicating life for the senior preferreds, but that, too, seems very unlikely.
They’ve finally posted the Jr. Pref. Share agreement on Sedar.
You’re absolutely right regarding the retraction right affecting the risk structure of the other preferreds.