PrefBlog

DBRS announced on February 6 that it:

has today assigned a provisional rating of Pfd-2 (low) to the Class A Preferred Shares, Series 1 (the Preferred Shares) to be issued by Global Champions Split Corp. (the Company). The Preferred Shares will be offered at an issue price of $25.00.

Net proceeds from the initial offering will be used to invest in a portfolio of common shares (the Portfolio) of 15 international large capitalization companies with a strong global presence. The majority of the Portfolio’s investments will be denominated in U.S. dollars, and any exposure to currencies other than the U.S. dollar is expected to be hedged back to the U.S. dollar. Dividends received on the Portfolio securities denominated in currencies other than the U.S. dollar may – but are not required to – be hedged back to the U.S. dollar.

The provisional rating is primarily based on the expected level of downside protection available to holders of the Preferred Shares (49.0%), the Preferred Share distribution coverage ratio (1.27 times), the credit quality of the underlying companies in the indicative Portfolio and disclosure included in the preliminary prospectus.

The assignment of final rating is subject to receipt by DBRS of final portfolio-related information that is consistent with the information DBRS has already reviewed and the settlement of material transaction documents in a manner acceptable to DBRS commensurate with the relevant rating level and in accordance with the applicable DBRS methodologies.

According to SEDAR, Global Champions Split Corp. filed a preliminary long-form prospectus on December 7 that makes rather interesting reading. It seems that all of the Capital Units will be held by the sponsor, BAM Investments, although the only committment made is that “BAM Investments will also acquire at least a majority of the Capital Shares to be issued in connection with the Offering of the Series 1 [Preferred] Shares under this prospectus.”

The ownership chain – as is usual for Brookfield – is rather complex

Brookfield Financial Corp. is wholly-owned by Brookfield Asset Management Inc. (“Brookfield”). Partners Limited together with its related company, BAM Investments Corp. (“BAM Investments”), collectively own 56,776,184 million Class A Limited Voting Shares and 85,120 Class B Limited Voting Shares, representing approximately 9.1% and 100% respectively, of each class of shares of Brookfield. BAM Investments owns all of the voting shares of the Company. Therefore the Company may be considered a related issuer to Brookfield Financial Corp. for purposes of applicable securities laws. The terms of the Offering were negotiated at arm’s length between the Company and the Agents. Brookfield Financial Corp. will not receive any benefit in connection with the Offering other than as described herein.

The “related issuer” part is considered to be of interest only because Brookfield Financial Corp. is one of the agents of the offering. Brookfield Asset Management (BAM) owns all of Brookfield Financial Corp, and:

BAM Investments is a publicly listed investment company.

Further, from the BAM Investments 2011 Annual Report:

BAM Investments Corp., (the “company”) is a leveraged investment company whose prinicipal investment is a direct and indirect ownership interest in 56.2 million Class A Limited Voting Shares (“Class A Shares”) of Brookfield Asset Management Inc.

So on the one hand, BAM Investments will be diversifying, which is good. On the other hand, it’s diversifying on a leveraged basis, which raises the potential for contagion: a sharp decline in the value of Global Champions could force BAM Investments to raise cash, which it can do only by selling its (leveraged) position in BAM.A.

Unfortunately, I have not been able to determine the source of funding for the BAM Investments proposed position in this new Global Champions venture.

Update, 2013-3-7:DBRS rates Pfd-2(low):

DBRS has today assigned a final rating of Pfd-2 (low) to the Class A Preferred Shares, Series 1 (the Preferred Shares) issued by Global Champions Split Corp. (the Company). The Company will issue a maximum of 2,300,000 Class A Preferred Shares at an issue price of $25.00 per Class A Preferred Share and an equal number of capital shares (the Capital Shares) in order to attain a leveraged split share structure. The redemption date for the Class A Preferred Shares will be on or about July 31, 2019.

Net proceeds from the initial offering will be used to invest in a portfolio of common shares of approximately 15 international large capitalization companies (the Portfolio). The Portfolio will initially be equally weighted and may be changed from time to time.
All of the Portfolio’s investments denominated in currencies other than the U.S. dollar (USD) are expected to be hedged back to USD. Dividends received on the Portfolio securities denominated in currencies other than USD may – but are not required to – be hedged back to USD. Distributions to holders of the Class A Preferred Shares are denominated in Canadian dollars and will be hedged back to USD unless the net asset value (NAV) of the Company is less than the aggregate original issue price of the Class A Preferred Shares.

The Portfolio provides initial downside protection of approximately 48.9% to holders of the Class A Preferred Shares. The Company will make quarterly fixed cumulative distributions of $0.25 per Class A Preferred Share to yield 4.00% per annum on the issue price. Based on the dividend yields on Portfolio and foreign exchange rates as of February 27, 2013, the initial dividend coverage ratio (net of expenses) is 1.2 times. Holders of the Capital Shares are expected to receive all excess income after Company expenses and Class A Preferred Share distributions have been paid.

The Pfd-2 (low) rating on the Class A Preferred Shares is primarily based on the downside protection and dividend coverage available to holders of the Preferred Shares, the credit quality of the underlying companies in the Portfolio and disclosure included in the final prospectus.

This entry was posted on Friday, February 15th, 2013 at 2:08 am and is filed under New Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.