PrefBlog

Brookfield Infrastructure has announced (although not yet on their website) (emphasis added):

that it has agreed to issue 4,000,000 Senior Preferred Shares, Series 1 (“Series 1 Shares”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank. The Series 1 Shares are being issued by BIP Investment Corporation (“BIPIC”), a wholly-owned subsidiary of Brookfield Infrastructure, and will be fully and unconditionally guaranteed by Brookfield Infrastructure and certain of its key holding subsidiaries. The Series 1 Shares will be issued at a price of $25.00 per share, for gross proceeds of $100,000,000. Holders of the Series 1 Shares will be entitled to receive a cumulative quarterly fixed dividend at a rate of 5.85% annually for the initial period ending March 31, 2024. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 3.96%, and (ii) 5.85%. The Series 1 Shares are redeemable by BIPIC on or after March 31, 2024.

Holders of the Series 1 Shares will have the right, at their option, to convert their Series 1 Shares into Senior Preferred Shares, Series 2 (the “Series 2 Shares”), subject to certain conditions, on March 31, 2024 and on March 31 every five years thereafter. Holders of Series 2 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.96%.

The Series 1 Shares will be offered in all provinces and territories of Canada by way of a supplement to BIPIC’s existing short form base shelf prospectus.

The net proceeds of the issue of the Series 1 Shares will be used to fund new investments and/or for general working capital purposes. The offering of Series 1 Shares is expected to close on or about February 5, 2019.

Note the redemption terms, because this is very important. These are not redeemable only on exchange dates, they are redeemable at any time after the first exchange date. This marks a new low in the quality of the swill that gets offered to new issue investors. I do not believe this is a mere typo – though I will be checking the prospectus supplement! – because in the very next sentence the company is careful to say that conversion rights exist “on March 31, 2024 and on March 31 every five years thereafter.”

But, such is the state of investment management in Canada that there will be many who think increased opportunity for calls by the issuers is a good thing, in the charming belief that it’s good to get called out of a position.

S&P further muddies the waters (emphasis added):

S&P Global Ratings today said it assigned its ‘BBB-‘ global scale rating and ‘P-2(Low)’ Canada scale rating to BIP Investment Corp.’s (BIPIC) C$100 million proposed cumulative minimum rate reset senior preferred shares, series 1. The company intends to use the net proceeds from the offering to fund new investments and for general working capital purposes.

We classify the series 1 preferred shares as having minimal equity content because in our view the retraction feature, which gives the investors the option to put the preferred share securities at any time, undermines the
permanence of these securities. Consequently, we will treat 100% of the principal outstanding as debt and will treat 100% of the related dividends on these securities as interest expense in our analysis.

BIPIC is a newly formed subsidiary of Brookfield Infrastructure Partners L.P. (BBB+/Stable/–), which will fully guarantee BIPIC’s series 1 preferred shares.

I’m not quite sure how to interpret this mention of a retraction feature. If the shares are retractible into cash at any time, then that is of course an extremely valuable feature; but if they’re only retractible into debentures, a la PVS Split Share Preferreds, then it’s worth … not so much. And if this is just a stenographical error by S&P, then it’s worth nothing! I’ll wait until the prospectus supplement is available.

The prospectus (available on SEDAR at “BIP Investment Corporation Nov 23 2018 14:13:23 ET Final short form prospectus – English PDF 826 K”, but I’m not allowed to link to it directly because Canadian regulators think you’re scum) states:

The Preference Shares of each series will rank on a parity with the Preference Shares of every other series with respect to accumulated dividends and return of capital. Each series of Preference Shares will participate rateably with every other series of Preference Shares in respect of accumulated dividends and return of capital.

So I think we can assume that distributions will be a mixture of dividends and return of capital – no ordinary income! – although that’s yet another thing I will have to check when the prospectus supplement comes out.

Update, 2019-2-1: The prospectus supplement is now available on SEDAR via a search for “BIP Investment Corporation Jan 29 2019 21:10:15 ET Prospectus (non pricing) supplement – English PDF 882 K”. The regulators won’t allow me to link to it directly, sorry. If you don’t like it, move to the States, where the SEC treats investors as having some importance.

There were three things badly in need of checking.

First, redemption. From page 16 of the PDF:

The Series 1 Shares will not be redeemable by the Corporation prior to March 31, 2024. On March 31, 2024 and on March 31 every five years thereafter (or, if such date is not a business day, the immediately following business day), and subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”, the Corporation may, at its option, on at least 30 days and not more than 60 days prior written notice, redeem all or from time to time any part of the outstanding Series 1 Shares by payment in cash of a per share sum equal to C$25.00, in each case together with all accrued and unpaid dividends up to but excluding the date fixed for redemption (less any tax required to be deducted or withheld by the Corporation).

If less than all of the outstanding Series 1 Shares are to be redeemed, the shares to be redeemed shall be selected on a pro rata basis disregarding fractions or, if such shares are at such time listed on such exchange, with the consent of the TSX, in such manner as the Board of Directors in its sole discretion may, by resolution, determine.

So Assiduous Reader dodoi‘s report of the TDDI description, which was later confirmed by Assiduous Reader prefguy is all correct – and a damn sight better than the execrable press release!

The second thing to check was the retraction terms. From page 16 of the prospectus supplement:

The Series 1 Shares may be surrendered for retraction at any time, subject to the provisions of the BCBCA and certain other restrictions set out in “Description of the Series 1 Shares — Restrictions on Dividends and Retirement and Issue of Shares”. Retraction payments for Series 1 Shares will be made on or before the 15th day of each month (the “Series 1 Retraction Payment Date”) provided the Series 1 Shares have been surrendered for retraction at least five business days (the “Series 1 Deposit Date”) before the last business day of the preceding month. If a holder makes such surrender after 5:00 p.m. (Toronto time) on a Series 1 Deposit Date, the retraction payment will be made on the next succeeding Series 1 Retraction Payment Date.

The Corporation will enter into a remarketing agreement (the “Series 1 Remarketing Agreement”) with a registered dealer that will provide that the registered dealer will use its commercially reasonable efforts to find purchasers for any Series 1 Shares tendered for retraction at a price that is not less than (after expenses) the Series 1 Retraction Price (as defined herein), provided that a retracting holder has not withheld consent to the sale of such Series 1 Shares. If a purchaser cannot be found pursuant to the terms of the Series 1 Remarketing Agreement or the retracting holder has withheld its consent, the retracting holder will receive, per Series 1 Share retracted, cash in an amount equal to the Series 1 Retraction Price. The “Series 1 Retraction Price” will be equal to the lesser of (i) 95% of the volume weighted average price of the Series 1 Shares on the principal exchange or market on which the Series 1 Shares are listed or quoted for trading for the three business days ending on the applicable Series 1 Deposit Date and (ii) C$23.75 (less any tax required to be deducted or withheld by the Corporation).

So this provision is not quite entirely useless, although it approaches that state. It is possible, albeit not at all probable, that something happens on the Deposit Date that really hurts the fundamentals of the company; holders will then have until 5pm to submit them for retraction at a price which can at least be guessed at (since the VWAP is determined for the three days up to and including the Deposit Date) and, possibly, completely known (for those who are able to instruct their intermediaries between the 4pm market close and the 5pm deadline).

But it’s still basically useless. At best, the retraction price is only 95% of the VWAP – in all but the most contrived circumstances, investors will be better off just selling them on the market.

For this reason, I will be ignoring this provision when specifying the issue on HIMIPref™.

The puzzle is – why include such a useless provision at all? The only publicly stated effect, so far, is that S&P won’t give the issue any equity credit, which is contrary to the company’s interest. It may be ‘some tax thing’ or it might even be a bit of flim-flam, taken with the aim of getting the issue onto lists of retractible issues (it will not appear on HIMIPref™’s list!). There are thousands and thousands of clowns out there who call themselves market professionals and rarely, if ever, do anything more than read the Bloomberg description of issue terms.

So Assiduous Reader prefhound‘s description of the feature taken from Scotia iTrade was correct, and I agree with prefguy‘s succinct “useless” summary.

The third thing to check was the tax status of the distributions. From page 26 of the PDF:

Taxable dividends received on the Shares by a holder will be included in computing the holder’s income.

In the case of a holder that is an individual, taxable dividends will be subject to the gross-up and dividend tax credit rules under the Tax Act normally applicable to taxable dividends received from a taxable Canadian corporation. Such taxable dividends will be eligible for the enhanced gross-up and dividend tax credit if the Corporation designates the taxable dividends as “eligible dividends”. There may be limitations on the Corporation’s ability to designate taxable dividends as eligible dividends.
…
The amount of any dividend that the Corporation elects to pay from its “capital gains dividend account” (as defined in the Tax Act) (“Capital Gains Dividend”) received by a holder of the Shares from the Corporation will be considered to be a capital gain of such holder from the disposition of capital property in the taxation year of the holder in which the Capital Gains Dividend is received.

I don’t see anything explicit about distributions being treated as a return of capital in the prospectus supplement, but I don’t know of any reason why the company couldn’t designate them as such.

This entry was posted on Tuesday, January 29th, 2019 at 10:25 pm 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.