BEP.PR.G Soft On Decent Volume

Brookfield Renewable Energy Partners L.P. has announced:

the completion of its previously announced issue of Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 7 (the “Series 7 Preferred Units”). The offering was underwritten by a syndicate led by TD Securities Inc., CIBC, RBC Capital Markets and Scotiabank.

Brookfield Renewable issued 7,000,000 Series 7 Preferred Units at a price of $25.00 per unit, for total gross proceeds of $175,000,000.

The Series 7 Preferred Units will commence trading on the Toronto Stock Exchange this morning under the ticker symbol BEP.PR.G.

BEP.PR.G is Preferred Units FixedReset 5.50%+447M550, announced November 17. It will be tracked by HIMIPref™ but relegated to the Scraps index on credit concerns. Note that the distribution will be a mixture of dividends, income and return of capital for tax purposes; calculating the after-tax return is complex and will require numerous assumptions!

The issue is rated Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has today finalized its provisional rating of Pfd-3 (high) with a Stable trend on Brookfield Renewable Energy Partners L.P.’s (BREP) issuance of Class A Preferred Limited Partnership Units, Series 7 (Preferred LP Units).

DBRS notes that the Preferred LP Units will rank on parity with every other series of Class A Preferred Limited Partnership Units and will be fully and unconditionally guaranteed by BREP’s key holding subsidiaries (the Guarantors). The Preferred LP Units will rank pari passu at the Guarantor level with the outstanding Preference Shares (rated Pfd-3 (high) by DBRS) of Brookfield Renewable Power Preferred Equity Inc., which are also guaranteed by BREP.

The issue traded 339,999 shares (consolidated exchanges) in a range of 24.60-94 today before closing at 24.70-75, 57×28. Vital statistics are:

Maturity Type : Limit Maturity
Maturity Date : 2045-11-25
Maturity Price : 23.05
Evaluated at bid price : 24.70
Bid-YTW : 5.52 %

According to the prospectus:

Management anticipates the 5 year average per unit Canadian dividend, ordinary income and return of capital will be 50%, 25%, and 25%, respectively, for the period between 2015 and 2020; however, no assurance can be provided this will occur.

This is the same estimate as was used for the coercive BRF.PR.E exchange offer, so we can recycle some analysis!

According to Ernst & Young, marginal tax rates for an Ontario resident with taxable income of $150,000 p.a. were 46.41% on income, 23.20% on capital gains and 29.52% on eligible dividends. Since the Return of Capital on the new units will eventually be taxed as a capital gain but only when the gain or loss is crystallized, let’s apply a 25% discount to the capital gain marginal rate to reflect the time value of the money; hence, we will assume that the Return of Capital is subject to tax at a rate of 23.20% * 75% = 17.4%:

Taxation of distributions
Pre Tax Amount Tax Net
0.6875 0.20295 0.48455
0.34375 0.1595 0.18425
0.34375 0.0598 0.28395
Total 1.375 0.42225 0.95275

So if we accept the given figures as a good enough guess – the after-tax income per share will be 0.95275, equivalent to a dividend of 1.352, a rate of slightly over 5.40%, which is in agreement with the figure Louisprefs supplied as the Scotia estimate in the comments to the announcement post. However, note that there are no guarantees offered by the company! If it should come to pass that 100% of the distributions are ordinary income, then tax at 46.41% will come to 0.6381 and the net after-tax amount will be 0.7369, which is 23% less than the estimate above. So there’s a certain amount of tax-risk here, depending on the nature of the company’s distributions.

Update, 2015-11-26: S&P has rated the issue P-3(high). On November 4 they degraded the outlook on BREP to stable from positive:

Standard & Poor’s Ratings Services today said it revised its outlook on Brookfield Renewable Energy Partners L.P. (BREP) to stable from positive. At the same time Standard & Poor’s affirmed its ratings on BREP and subsidiaries Brookfield Renewable Power Preferred Equity Inc. and BRP Finance ULC, including its ‘BBB’ long-term corporate credit rating on BREP.

The outlook revision reflects our view of the company’s ability to generate strong remittable cash flows from its holdings and its increased level of holding company (holdco) recourse debt. The company has articulated a policy of maintaining relatively low levels of leverage at the holdco level with leverage at the holdco used opportunistically for acquisitions with equity as market conditions allow. However, during the course of the year, the company has made a number of acquisitions that, although partially funded with new equity issuance, maintained a higher level of debt at the holdco. This has resulted in lower credit metrics. “Although the metrics are still comfortably within the range for the rating, we believe that the increased debt will remain at the holdco level for the foreseeable future,” said Standard & Poor’s credit analyst Stephen Goltz.

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