New Issue: Brompton Oil Split Corp. 5-Year 5%

Brompton Funds Limited has announced (table formatting added):

that Brompton Oil Split Corp. (the “Company”) has filed an amended and restated preliminary prospectus in respect of an initial public offering of preferred shares and class A shares.

The Company will invest in a portfolio (the “Portfolio”) of equity securities of at least 15 large capitalization North American oil and gas issuers, as listed below, selected by the Manager from the S&P 500 Index and the S&P/TSX Composite Index giving consideration to attractive valuation, growth prospects, profitability, liquidity, sustainability of dividends and a strong balance sheet. The Portfolio will be focused primarily on oil and gas issuers that have significant exposure to oil, and will include equities of the following oil and gas issuers:

ARC Resources Ltd. Chevron Corporation Occidental Petroleum Corporation
Canadian Natural Resources Limited Encana Corporation PrairieSky Royalty Ltd.
ConocoPhillips EOG Resources Inc. Suncor Energy Inc.
Crescent Point Energy Corp. Husky Energy Inc. Vermilion Energy Inc.
Cenovus Energy Inc. Imperial Oil Limited Exxon Mobil Corporation

Prospective purchasers investing in the Company will have the option of paying for shares in cash or by exchanging equity securities of Exchange Eligible Issuers (the “Exchange Option”), as set forth below. Prospective purchasers who utilize the Exchange Option must have their investment advisor deposit their securities of Exchange Eligible Issuers with Equity Financial Trust Co. (the “Exchange Agent”) through CDS prior to 5:00 p.m. (Toronto time) on January 23, 2015. Please contact your investment advisor or refer to the prospectus for detailed information on how to participate in the offering by way of either cash purchase or exchange of securities. The Exchange Eligible Issuers include all of the Portfolio issuers, with the exception of Occidental Petroleum Corporation.

Holders of Class A shares will receive the benefits of monthly cash distributions targeted to be 8.0% per annum on the $15.00 issue price, low management fees and the opportunity for growth in net asset value. Holders of preferred shares will receive attractive quarterly distributions of 5.0% per annum on the $10.00 issue price.

Brompton Funds Limited will be the investment fund manager and portfolio manager of the Company. The Manager currently manages 4 split share funds with assets under management over $900 million. The portfolio management team will be led by Laura Lau, an award winning portfolio manager with over 20 years of experience in financial services, who has a proven track record in managing flow-through funds and resource assets. The team also includes Michael Clare, an experienced energy and flow-through portfolio manager who specializes in the analysis of crude oil and natural gas markets.

The syndicate of agents for the offering is being led by Scotiabank, CIBC and RBC Capital Markets with TD Securities Inc., BMO Capital Markets, National Bank Financial Inc., GMP Securities L.P., Raymond James Ltd., Canaccord Genuity Corp., Desjardins Securities Inc., Dundee Securities Ltd., Industrial Alliance Securities Inc. and Mackie Research Capital Corporation.

The preliminary prospectus is available on the Brompton website.

Brompton Oil Split Corp. (the ‘‘Company’’) is a mutual fund corporation established under the laws of the Province of Ontario. The Company proposes to offer preferred shares (‘‘Preferred Shares’’) and class A shares (‘‘Class A Shares’’) at a price of $10.00 per Preferred Share and $15.00 per Class A Share (the ‘‘Offering’’). Preferred Shares and Class A Shares are issued only on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all times.

The investment objectives for the Preferred Shares are to provide their holders with fixed cumulative preferential quarterly cash distributions in the amount of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the issue price of $10.00 per Preferred Share) until March 31, 2020 (the ‘‘Maturity Date’’) and to return the original issue price of $10.00 to holders on the Maturity Date. See ‘‘Investment Objectives’’.

It is noteworthy that:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears or (ii) in respect of a cash distribution by the Company, the NAV per Unit would be less than $15.00.

Preferred Shares may be surrendered at any time for retraction to • (the “Registrar and Transfer Agent”), the Company’s registrar and transfer agent, but will be retracted only on the second last Business Day of a month (the “Retraction Date”). … Holders of Preferred Shares whose Preferred Shares are surrendered for retraction will be entitled to receive a retraction price per Preferred Share equal to 96% of the lesser of (i) the NAV per Unit determined as of such Retraction Date, less the cost to the Company of the purchase of a Class A Share for cancellation; and (ii) $10.00.

Redemption of the Shares by the Company: All Preferred Shares and Class A Shares of the Company outstanding on the Maturity Date will be redeemed by the Company on such date provided that theterm of the Company may be extended after the Maturity Date for a further period of five years and thereafter for additional successive periods of five years as determined by the Company’s Board of Directors on such date.

So it’s got a NAV test on Capital Units dividends, monthly retractions and no redemption prior to maturity. I like it already!

They also state (I believe that this is a regulatory requirement):

Assuming that the gross proceeds of the Offering are $100 million and fees and expenses are as presented in this prospectus, in order to achieve the Company’s targeted annual distributions for the Class A Shares and the Preferred Shares while maintaining a stable NAV per Unit, the Company will be required to generate an average annual total return (comprised of net realized capital gains, option premiums and dividends) on the Portfolio of approximately 8.4%. The Portfolio currently generates dividend income of 3.5% per annum and would be required to generate an additional 4.9% per annum from other sources to return and distribute such amounts. Such distributions may consist of ordinary dividends, capital gains dividends or returns of capital. There can be no assurance that the Company will be able to pay distributions to the holders of Preferred Shares or Class A Shares.

This is hopelessly misleading. In the presence of cash flows and volatility, the company is exposed to Sequence of Returns risk and the quoted 8.4% total return requirement is applicable only if volatility is zero (ha!) or option profits make up the “additional 4.9% from other sources” (ha!) or in some other way the company does not have to take market action on its portfolio to alternately raise and invest cash (see Credit Quality of SplitShare Preferreds. 8.4% is the mathematical minimum requirement; in practice the requirement is much higher. But that’s mainly for the suckers who buy Capital Units to worry about and discuss.

The pricing doesn’t give much of a concession to buyers, but if this is issued in reasonable size it will certainly be tracked by HIMIPref™.

Update, 2015-01-08: Provisionally rated Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by Brompton Oil Split Corp. (the Company). The Company will issue an equal number of Preferred Shares and Class A Shares, at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and Class A Shares will be scheduled to mature on March 31, 2020.

Net proceeds from the offering will be used to invest in the common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio). The Portfolio will be initially equally weighted and will be rebalanced at least semi-annually. A portion of the Portfolio’s investments will be denominated in U.S. dollars, and this exposure is expected to be hedged completely back to the Canadian dollar.

Dividends received on the Portfolio will be used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share), while holders of the Capital Shares are expected to receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income. Based on the minimum offering size, the initial downside protection available to holders of the Preferred Shares is expected to be approximately 57.3%.

The provisional rating is primarily based on the expected level of downside protection and dividend coverage available to holders of the Preferred Shares as well as the credit quality of the underlying companies in the Portfolio.

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