Brookfield Office Properties has announced (although not yet on their website):
that BPY and other related entities of BPY have provided full and unconditional guarantees (the “Guarantees”) for all of the Company’s Class AAA Preference Shares (the “Preference Shares”) and all of the debt securities of the Company issued pursuant to its indenture dated December 8, 2009 (the “Debt Securities”).
At the time of entering into the Guarantees, the Company had C$2,363 million of Preference Shares outstanding and C$350 million principal amount of Debt Securities outstanding. As a result of the Guarantees, the Company has received an exemption from the requirements to file certain continuous disclosure documents with Canadian securities regulators, including financial statements, on the basis that holders of the Preference Shares and the Debt Securities will have access to certain continuous disclosure filings on BPY as the guarantor. Certain financial information of the Company will be included in the consolidated summary financial information in BPY’s consolidated annual financial statements and interim reports going forward. This will simplify the Company’s reporting requirements and reduce costs.
Each of the Guarantees will terminate (subject to any existing rights or claims at the time of such termination) upon, among other things, the date that no Preference Shares or Debt Securities, respectively, are outstanding. A copy of the Guarantees have been filed on SEDAR under the profile of the Company. Investors should refer to that filing for the complete terms of the Guarantees.
In response, DBRS has announced that it:
has today placed the ratings of Brookfield Office Properties Inc.’s (Brookfield or the Company) Senior Unsecured Notes and Cumulative Redeemable Preferred Shares, Class AAA (Preferred Shares) Under Review with Developing Implications. This rating action follows the announcement yesterday that Brookfield Property Partners (BPY) and other related entities of BPY will provide full and unconditional guarantees for all of Brookfield’s Senior Unsecured Notes ($350 million in principal amounts) and all of Brookfield’s Preferred Shares ($2.4 billion outstanding) at the time of entering into the guarantees.
DBRS will review the implications of the announcement and assess the credit risk profile of BPY, which is an indirect holding company of Brookfield, against the DBRS methodology, “Rating Holding Companies and Their Subsidiaries” (January 2016). DBRS will also review the guarantee documents for Brookfield’s Senior Unsecured Notes and Preferred Shares against the DBRS Criteria “Guarantees and Other Forms of Support” (February 2016). DBRS aims to resolve the Under Review status over the next several weeks.
Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.J, BPO.PR.K, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T, BPO.PR.W BPO.PR.X and BPO.PR.Y.
It is interesting to see another company reduce its reporting obligations by having its parent reporting issuer provide a guarantee. RONA recently did the same with a guarantee from Lowe’s.
I am not so sure this is a good thing. Pooled credit. In tough times, discourse can result.
You’re quite right. One of Brookfield Asset Management’s strengths has been that so much of their debt is project-specific, so they could walk away from a bad building without it affecting the rest of their debt mountain – much! This starts to lean in the other direction.
“I am not so sure this is a good thing. Pooled credit. In tough times, discourse can result.”
And here we are.
The market is not appreciating the guarantee.
“The market is not appreciating the guarantee.”
Maybe you are too confident in their “guarantee”? It’s only as good as what their cash flows and fair value of assets worth, both are declining fast.
As bearish as I am on Brookfield, if their office/CRE entities go bust and such a titan can’t fulfill their guarantee, it would mean the market is in such bad shape, what CRE/REIT cos would not be wiped out? And pretty much everyone is most bearish on CRE/REITs.
Crazy theory/idea… when the recession comes, this might help some cos with high office exposure, as cos have more leverage to force employees back to office driving up office demand and occupancy.
“Crazy theory/idea… when the recession comes, this might help some cos with high office exposure, as cos have more leverage to force employees back to office driving up office demand and occupancy.”
Not so crazy. There would be shift in the relative power of capital vs labour. Some folks who would like to, are not going to be able to work from home anymore.
“It’s only as good as what their cash flows and fair value of assets worth.”
The key is “their”. For the BPO prefs we are talking about BPY. The profit/loss and balance sheet of BPO is irrelevant. This is what is not fully appreciated.
while bpy/bpo not alone, seems clear those prefs most at risk in real estate have these characteristics:
1) exposure to office
2) largely variable rate debt relative to fixed (what more could anyone have asked for than central banks singularly driving sovereigns to near zero on eve of and even after inflation had exploded)
3) when the “equity” is in fact largely made up of preferred equity and there isnt the normal load of common equity to buffer the prefs
BPY downgraded:
https://www.bloomberg.com/news/articles/2023-12-21/brookfield-property-debt-cut-to-junk-by-s-p-on-office-woes
sure there will be a lot of commenting on this given the response of the prefs but my 2 bits:
1) the BPY guarantee is all fine and dandy but BPY is slightly negative income at these interest rates
2) i believe that the NOI would include the management fees being kicked up to BAM so there would be flexibility there
3) the curve is calling for say 200bps of variable interest rate relief over the next 24 months. that equates to approx 1bb of reduced interest expense and puts them comfortably back in black
4) this downgrade is very stale news when prefs tagged $6 a while ago
to me this is about what can BN/BPY do to tide themselves over until interest rate relief comes and i believe:
1) they should see thru to that relief and hopefully continue with pref divs
2) appears equity distributions are being taken in kind as it is but
3) there is a substantial writedown to be had on the balance sheet of BN wrt its property equity
i’m adding into this. they kinda act as a perverse hedge to a rate reset portfolio as lower rates go, more solvent BPY becomes!
I might add, for comparison purposes, that DBRS did its last assessment of BPY, BPO etc.. on May 15 2023 and confirmed their rating of BBB-/Pfd 3 low (stable).
hey did not follow S&P’s decision on October 5 to put these entities on Credit Watch (neg). ie. so far have done nothing.
I guess credit ratings are a mixture of art, science and interpretation.
[…] It will be remembered that BPO’s preferreds are guaranteed by BPY, its parent. […]