DBRS has announced that it:
downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 (low) from Pfd-5. As of March 5, 2020, the downside protection available to Preferred Shareholders was –18.3%. It has been gradually decreasing since the last review in December 2019 because of the depressed price of energy stocks as the oil market continues to suffer from lower demand and oversupply. Recent geopolitical developments, including negative impacts from the accelerated global spread of Coronavirus (COVID-19), have added further stress to stock prices.
On February 4, 2020, the Company announced a new term extension of three years on the Preferred Shares with the new maturity date of March 30, 2023. The distribution rate on the Preferred Shares increased to 6.5% per annum paid on the original price of $10.00. The targeted distributions to the Capital Shares remained unchanged at $1.20 per Capital Share per year, subject to a net asset value (NAV) test of 1.5 times (x). Because the NAV test is currently not being met, the Capital Share distributions have been suspended. The dividend coverage was 0x as the Portfolio is currently generating just enough income to cover expenses. Based on the value of the Company’s portfolio value as of March 5, 2020, the anticipated average grind is 8.62% per annum over the next three years.
On March 2, 2020, the Company announced that approximately 2.4 million Preferred Shares were tendered for a special retraction at the end of the current term (March 31, 2020). This amount will constitute approximately 75% of the currently outstanding Preferred Shares if they are not withdrawn from the retraction.
Considering the limited time remaining until maturity and the insufficient amount of downside protection, there is an increased likelihood that the original principal invested by Preferred Shareholders will not be fully repaid during the upcoming special retraction. As a result, DBRS Morningstar downgraded its rating of the Preferred Shares issued by the Company to Pfd-5 (low).
The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria (i.e., issuers that operate in energy subsectors including equipment, services, pipelines, transportation, and infrastructure). The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending to generate additional income.
Extension details were announced in January following the March, 2019, notice of extension. In the former post, I strongly recommended retraction of the preferreds. As of 2020-2-28, the fund had only $8.38 in assets for every $10.00 of preferred share obligations. The company suffered a 75% retraction of its preferreds.
I reiterate my recommendation that preferred shares be retracted by their holders; as the notification deadline has passed, those who did not retract cannot follow this advice, but I want to emphasize that shares that have been tendered for retraction should not be “withdrawn from the retraction.” Those who hope that the underlying portfolio will recover and thereby return their par value of $10 are better advised to invest directly in a similar portfolio to that held by the company. The downside risk will be the same; but in the event of a strong recovery, those who hold the preferreds will be handing over their excess profits (if any, that exceed the $10 par value) to the Capital Unitholders.
This entry was posted on Wednesday, March 11th, 2020 at 5:25 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
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OSP.PR.A Downgraded to Pfd-5(low) by DBRS
DBRS has announced that it:
Extension details were announced in January following the March, 2019, notice of extension. In the former post, I strongly recommended retraction of the preferreds. As of 2020-2-28, the fund had only $8.38 in assets for every $10.00 of preferred share obligations. The company suffered a 75% retraction of its preferreds.
I reiterate my recommendation that preferred shares be retracted by their holders; as the notification deadline has passed, those who did not retract cannot follow this advice, but I want to emphasize that shares that have been tendered for retraction should not be “withdrawn from the retraction.” Those who hope that the underlying portfolio will recover and thereby return their par value of $10 are better advised to invest directly in a similar portfolio to that held by the company. The downside risk will be the same; but in the event of a strong recovery, those who hold the preferreds will be handing over their excess profits (if any, that exceed the $10 par value) to the Capital Unitholders.
This entry was posted on Wednesday, March 11th, 2020 at 5:25 pm and is filed under Issue Comments. 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.