BSD.PR.A: Retraction Suspended, Capital Units Get No Distribution

Brookfield Funds has announced:

In accordance with its Declaration of Trust, and because the net asset value is currently below the required 1.4 times coverage ratio, the monthly distribution on the Capital Units of the Brascan SoundVest Rising Distribution Split Trust will not be paid this month. The Declaration of Trust prohibits the Trust from paying a cash distribution on its Capital Units if, after giving effect to the proposed distribution, the net asset value per unit of its Capital Units would be less than approximately $4.00 and as of October 17, 2008 this amount was $nil. The Trust will continue to monitor its net asset value per Capital Unit to determine if it will be able to make monthly distributions in the future.

These announcements do not affect the quarterly distributions payable on the Preferred Securities of Brascan SoundVest Rising Distribution Split Trust.

The Brascan SoundVest Rising Distribution Split Trust also announced that it is temporarily suspending the annual redemption rights that would have arisen in November in respect of both its Capital Units and Preferred Securities. The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained. The Trust will monitor its net asset value to determine when it will be able to resume redemptions. Further details of the redemption procedure to be followed will be announced if and when the suspension is lifted.

After having previously kept the NAV of the portfolio secret, the managers have now made it available again: NAV as of October 17 was $9.98.

The suspension of retractions is something of a surprise, although their right to do so is indeed spelled out in the prospectus. This is not the greatest problem in the world for the preferred securityholders, however, since they always had to buy a capital unit before retracting anyway:

Commencing in 2005, Preferred Securities may be surrendered together with an equal number of Capital Units for redemption in the month of November of each year for redemption on the last Business Day (any day on which the Toronto Stock Exchange is open for trading is hereinafter referred to as a ‘‘Business Day’’) in November of that year (a ‘‘Redemption Date’’), subject to the Trust’s right to suspend redemptions in certain circumstances. A Securityholder who surrenders Preferred Securities together with Capital Units for redemption at least 15 Business Days prior to a Redemption Date will receive payment for each Combined Security equal to the Combined Value determined as of the Redemption Date, less redemption costs. Redemption proceeds will be payable on or before the fifteenth Business Day after the applicable Redemption Date. See ‘‘Details of the Offering — Certain Provisions of the Preferred Securities— Concurrent Annual

On October 17, BSD.UN closed at $1.50; BSD.PR.A closed at $7.40; given a NAV of $9.98 retraction would have been quite profitable. The prospectus language, by the way is (bolding added):

The Trust may suspend the redemption of Capital Units and the repayment of Preferred Securities or postpone repayment of redemption proceeds:

(iii) if, after giving effect to redemptions, the Combined Value would be less than 1.4 times the Repayment Price,

… so the language in the press release …

The Declaration of Trust provides for the suspension of redemptions when the same 1.4 times coverage ratio mentioned above cannot be maintained.

… is a bit of a stretch. To me, it looks like they just want to hang on to their assets. Inquiries and complaints may be directed to:

Zev Korman
Director, Investor Relations and Communications – Public Funds
Tel: 416-359-1955

My own eMail says:

I note that BSD has suspended retractions and have commented on this on my blog at

Given that the prospectus gives the Trust the option of suspending retractions, without making this an obligation, what motivation is there for the suspension other than a desire to retain assets?

May I publish your response?

7 Responses to “BSD.PR.A: Retraction Suspended, Capital Units Get No Distribution”

  1. Chris says:

    Yeah, this is highly lame.

    Of interest is that it’s now in the interest of the manager to keep the NAV below 14.00 so that they can continue to collect the management fee. Ideally, they would like to keep it just below 14.00 so as to receive as large of a management fee (percentage of NAV) without causing massive redemptions if it goes above 14.00…

    Combine price of BSD.UN + BSD.PR.A is now below 7.00. The NAV should be a bit above $10 (it is correlated with the energy trust index which is up a bit since the 17th). So the combined units are trading at >30% discount to NAV. I suppose the unitholders could vote for an early termination, but it is unlikely that the retail investors targeted by split shares could be corralled into doing so without the support of management.

  2. prefhound says:

    Today’s close at $1.05 for BSD.UN and $5.71 for BSD.PR.A suggests about a 40% discount to NAV.

    However, I have looked up the portfolio of underlying trusts and it is pretty weak, with lots of micro caps and several just now eliminating distributions (not yet including the 45% oil and gas weighting; the run rate is 24% lower than the first half of 2008). Looks to me like it may have been a vehicle for offloading new issues of weak trusts as there are none of the big name trusts present (like you see in MST.PR.A/MST.UN). Very speculative fund management, I would say.

    I would guess retractions were omitted to retain assets (and, of course, MER). Last year’s retraction was associated with a 10% decline in NAV between the beginning and end of Nov. Might have been worse this year as there are no buyers for 20 days of trading in some underlying trusts.

    Without retraction, the prefs have no anchor (though the BSD.UN look cheap for a 5-year call option). Past dogs are only wound up once NAV gets to $2.00 or less, so it will be interesting to see what/when/if they do next.

    The only thing that could rescue the prefs are either, or probably both of: (a) oil prices go back up; or (b) the credit crisis “ends”. It will take a lot to get NAV back to $14. Failing this, my credit anticipation says received distributions will keep falling to put dividend coverage on the pref under 1.0 within six months. Definitely not “superb dividend coverage” at all. DBRS rated this speculative rag bag the same as Sentry Select’s Multi-Select MST.PR.A, despite the underlying trusts having stability ratings (similar to credit ratings) in the junk (vs MST’s investment grade) category. Another boner by DBRS, I am afraid.

  3. mclachlan8 says:

    Yes, and just as all of this happened, the brokerage house sent out a letter to clients re: Annual Voluntary Concurrent Redemption PRIVILEGE.
    My my, such a privilege. I dont imagine we’ll see a lot of buying of BSD.PR.A for some time.

  4. […] – I have not heard back from the company yet, but until I do, my working hypothesis is that the BSD.PR.A suspension of retractions is abusive to the shareholders. And if you decide to play any arbitrage games, remember at all times that it’s not a […]

  5. […] was part of the DBRS Mass Review of Splits. Retractions and the Capital Unit dividend were suspended in October. The reported NAV has been extremely volatile […]

  6. […] has a history of actually putting some money on the table. In this case, however, the company suspended retraction rights prior to being downgraded to Pfd-5 by DBRS in December. The suspension of retractions was permitted […]

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