17 Responses to “April 4, 2022”

1. peet says:

   April 5, 2022 at 9:40 am

   Brookfield Renewable has just announced a new 5.5% Perpetual issue but whether this also guarantees a redemption of BEP.PR.K is yet another example of loose language in the press release.

   The BEP.PR.K prospectus reads that “On April 30, 2022 … the Partnership may, at its option, on at least 25 days … prior written notice, redeem” the BEP.PR.K shares.

   However, today’s press release waffles about a “potential” redemption only:

   “Brookfield Renewable intends to use the net proceeds from this offering to finance and/or [refinance]… including the potential redemption of all or a portion of the Partnership’s Class A Preferred Limited Partnership Units, Series 11 on April 30, 2022.”

2. skeptical says:

   April 5, 2022 at 9:58 am

   BEP.PR.E was redeemed a few months ago. That also yielded 5.5% and was a perpetual. Now they are reissuing an identical issue and losing at least 4.5 to 5 million in underwriting costs.
   Some real financial geniuses, considering it’s Brookfield and the only thing they know is to run money.
   It’s encouraging to see that the masters of money can fumble just as much as others.

3. CanSiamCyp says:

   April 5, 2022 at 11:35 am

   Keep in mind that BEP.PR.K is a min reset with a spread of 3.82 – meaning that if it were to reset at current GOC5 it would be locked into a yield on par of approx. 6.37%. So issuing a perpetual at 5.5% to replace a min reset at 6.37% would offer some advantage to BEP. The biggest question is – given that rates are going to increase greatly in the months ahead – who would be silly enough to lock in their funds with a perpetual at par? It will be interesting to see how this offer closes and whether there is any buy-in for the underwriter’s option for an additional 1 million units. Perhaps James will comment on how BEP can get away with leaving the redemption/reset notification for a 30 April reset pref so late into the month of April. Not the usual practice by issuers!

4. skeptical says:

   April 5, 2022 at 11:55 am

   True. I was commenting on a complete lack of ‘what if’ scenario building by whoever is responsible for financing costs, considering they paid over par (25.25?) for the redemption of BEP.PR.E just a few months ago.

   Just tells you how many people have been caught totally of guard by the surge in interest rates. I expect this story will be repeated multiple times this year, at least till inflation expectations are brought in check.

   On iTrade, the new issue was done within 15 minutes. My suspicion is that a lot of people have very strong recency bias related to falling/low interest rates and it would take a while before people give up the perpetuals. 5.5% would be the highest coupon for borderline investment grade in a very long time. IFC (better credit) issued IFC.PR.I back in 2020 Feb.
   There might be 6% perpetuals in the offing later this year if this story continues.

5. ratchetrick says:

   April 5, 2022 at 2:12 pm

   Its also interesting how, over the past few months of central bank & media bantering about the imminent mega-hiking of interest rates, how rate ratchet preferreds now act just like bonds. Regardless of duration to reset, when bonds rise, 5 year, 30 year, whatever . . . the reset prefs, which will ultimately benefit with more attractive dividend assignments are simply viewed as another 5 year bond . . . with valuations sinking in lock step. In the past they moved in the opposite direction. The only reason for this I can think of is how they’ve been on the rise for quite a while now in anticipation of this reversal in the cycle. Bottom line is this, it seems: with interest rates believed to be rising by at least a quarter point every 6 weeks for the next year or two or more . . . is there any pref investment that makes any sense at all? A $25 pref yielding 5.5% is pretty good . . . but that pref will probably be sub $20 two years from now . . . so has an investor gained?

6. Rod says:

   April 5, 2022 at 7:46 pm

   Rate resets have always been risk sensitive, even more so than stocks. When yields and stocks both fall prefs collapse. And when stocks and yields rise they recover. Right now we seem to have falling stocks and rising yields, and the prefs are responding more to fear than to the yields. I don’t think any of it makes sense. It’s just a reflection of the low investment knowledge of people who own them. Creates some amazing opportunities once in a while.

7. jiHymas says:

   April 5, 2022 at 9:49 pm

   A $25 pref yielding 5.5% is pretty good . . . but that pref will probably be sub $20 two years from now . . . so has an investor gained?

   Well, what the investor has gained is a pref that yields 5.5% of tax advantaged income forever (barring default; a more subtle fundamental risk is of being called). That’s better than virtually anything else available with comparable fundamental risk – I say “virtually” only because I abhor absolutes, not because I can actually think of an exception.

   The Price Risk of preferreds is much larger than you would expect – but who cares about price risk? Not long-term investors; and to the extent that it is a concern, one can always take comfort in a diversified portfolio that contains elements that will – or at least ‘should’! – do well in an environment that is adverse for prefs. The longer the holding period, the less the price risk matters, even for those who care about price risk.

   OK, so maybe these preferreds trade at $20. Then the securities will yield about 6.88% (before accounting for the tax advantage) and eventually even a stockbroker will be able to tell it’s a good deal.

   A paper loss of $5? Only a market timer cares, and since they’re going to lose all their money eventually anyway, it doesn’t really matter.

   Will I buy this issue, either for myself or clients? Not as a new issue; I feel there are currently better alternatives on the preferred share secondary market, typically because issues can be bought at a significant discount, sharply reducing call risk.

8. niagara says:

   April 5, 2022 at 11:52 pm

   I believe that BEP.PR.E was redeemed in January on the back of their issuance of these notes in Dec:
   https://bep.brookfield.com/press-releases/bep/brookfield-renewable-issues-260-million-green-perpetual-subordinated-notes

   Suffice to say that BEP could not possibly raise such long-dated “debt” at 4.875% with the run up in bond yield since then…so perhaps they saw the opp to redeem BEP.PR.K with a straight pred – straight pref yields have not moved as much as bond yields in Canada.

9. ratchetrick says:

   April 6, 2022 at 1:38 pm

   Hi everyone! Thank you James, for the reply, and to Rod as well. I understand, and fully agree with the points you’re both making. (I’ve been in the preferred space for a long time, so there are no real surprises to me pertaining to the ongoing erratic trading behavior of some of the issues!) I wanted to clarify my point on the “timing” issue that James has related this to. As we all understand, many prefs trade sparsely, and with wide spreads, so using any of these as an example would be pointless. I can use this one to illustrate my point, since it’s not one of the lesser traded ones! . . . MFC.PR.L. Yesterday it traded some 25,000 shares, which is in the middle/high volume level for most prefs. It also ended the day down .86/sh. The current annual dividend is .9465/sh. Based on this reality, there were enough “investors”, who seemed willing to forfeit nearly a year’s worth of dividends in one trading day, just to exit the issue. Based on the rather consistent trading volume through the day, this would confirm an element of “fear” in holding the issue . . . and since the bond space had yields rising throughout the day, it would also follow that my original point of consistently rising rates, and bond yields, would be the core reason for the selling sentiment. My point then, is this: market timing is definitely a fools game, as James points out. But identifying a market cycle, and positioning accordingly . . . that is in my opinion mandatory when investing in the pref space. I want to buy that 5.5% pref for $20, and enjoy the 6.8% yield to maturity, with a possible takeout premium of $5 added. In the meantime, is it necessary to lose copious quantities of market value, far in excess of the dividends collected . . . just for the sake of some positive (and taxable, albeit favourably) cashflow?

10. jiHymas says:

    April 6, 2022 at 6:58 pm

    I can use this one to illustrate my point, since it’s not one of the lesser traded ones! . . . MFC.PR.L. Yesterday it traded some 25,000 shares, which is in the middle/high volume level for most prefs. It also ended the day down .86/sh. The current annual dividend is .9465/sh

    This is an example market inefficiency, not market timing – unless you are suggesting that such events can be predicted in advance.

    But identifying a market cycle, and positioning accordingly . . . that is in my opinion mandatory when investing in the pref space.

    I don’t understand the difference.

    I want to buy that 5.5% pref for $20, and enjoy the 6.8% yield to maturity, with a possible takeout premium of $5 added.

    If I was certain that the price was going to decline 20%, I’d be shorting the hell out of the issue.

11. ratchetrick says:

    April 7, 2022 at 1:36 pm

    At this moment in time, the 30yr bond is up 5.16%. I’ve scanned 50 of the more common, traded prefs and the average yield today is up 5%+. In a number of cases, the pref needed to lose near, or over $1 in price to come to that yield.

    I’m having a very, very hard time accepting anecdotal things such as market ineffeciency as the sole explanation for this seemingly crystal clear, lock step association between bond yields . . . and rate reset preferreds price behaviour.

    If . . . and please hear me out . . . if this is the real explanation of what’s happening right now, would it not be logical to anticipate a continuation of this trend, as the “rate hike” situation starts to pick up steam? If so, then this is the “difference” between identifying a market cycle, . . . and just “timing” a trade.

    In other words, the endless rate hike hype has, in effect, induced a possibly very serious market correction not only in bonds, but anything perceived to be similar to bonds . . . not trying to freak everbody out; just trying to keep it real. Just an observation!

12. skeptical says:

    April 7, 2022 at 1:50 pm

    I go back all the way to 2013 and look at the carnage that was caused by the Bernanke Taper Tantrum. At that time, the inflation was below 2% or so.
    A lot of preferreds fell by 20 to 30% or even more.
    Right now inflation is sky high. Central banks are likely to crush inflation by pushing interest rates higher. Rates are going higher and higher till inflation falls down or economy falls apart. Both will probably happen together.

    The rate resets are the collateral damage caused by investor ignorance and offer a tremendous opportunity to construct beautiful barbells of perpetuals yielding close to 5.6% and rate resets/floaters offered at deep discount. It’s a beautiful setup if you can forget mark to market for a little while.

13. ratchetrick says:

    April 7, 2022 at 2:56 pm

    Exactly right skeptical . . . but the question is: when is the buy in opportune? James will probably kick my butt for hinting at “timing”, but the buying opps looked good yesterday. Fast forward 24 hours, and look at the board . . . many down another .75 – $1+ today. What happens tomorrow? At some point, the rate hike cycle will be “baked in” to the prices, and the paranoia based selling will stop . . . probably well short of the last rate hike. But at this point, we’ve barely started into the cycle. It’s quite feasible that many of these prefs will give back several dollars before the carnage is over . . . 5.6% divs look tasty . . . but 6.5% would be better. Or if I have it totally wrong . . . not lol. idk, right now, it looks like bonds and bond equivalents are in for a rough ride for a while . . . time will tell!

14. skeptical says:

    April 7, 2022 at 3:07 pm

    That’s the most valuable question- do you keep on waiting or do you pull the trigger at a certain point?
    It’s possible that deals can keep on getting better and better but one needs to have some internal metrics to time the market.
    Market timers typically act like this-
    At 10% drop, I’ll commit 20% of capital
    At 20% drop, another 20%
    and so forth.
    The key is discipline. Lots of investment professionals deride market timing because few people have the discipline to unemotionally pull the trigger when markets do fall. If someone can have the timing algorithms set up as well as the emotional stability to act on the algorithms, it can lead to great success.
    I don’t recall the name of the investor, but an investing giant nonetheless, he would write down the prices of various securities at which he would pull the trigger. As and when the opportunities arose, he pulled the trigger, leading to tremendous long term success.
    Requires tremendous nerves of steel as well thorough knowledge of the trade.

15. jiHymas says:

    April 8, 2022 at 9:16 am

    If someone can have the timing algorithms set up as well as the emotional stability to act on the algorithms, it can lead to great success.

    I’ve never met, or even heard of, anybody who could successfully time the markets. I’ve met a lot of charlatans, though!

    If so, then this is the “difference” between identifying a market cycle, . . . and just “timing” a trade.

    I still don’t understand the distinction you’re making between identifying a market cycle and timing a trade.

    I will note that sometimes rational portfolio management can look like market timing. If you rebalance your portfolio to some fixed percentage of assets periodically, for instance, you will automatically be selling high and buying low, for instance, without taking a view at all on future price movements. It should also be clear that corporate bonds, for instance, might fit a whole lot better into a portfolio when they yield 6% than they do at 3% (all else being equal) and a perfectly rational allocation based on relative yields might look a lot like market timing when viewed in retrospect.

16. skeptical says:

    April 8, 2022 at 10:07 am

    “The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”
    -Charlie Munger

    https://www.fool.com/investing/general/2015/03/27/mungers-advice-on-shamans-humility-and-attention-s.aspx

    Berkshire Hathaway itself isn’t ‘fully invested.’ They have a cash hoard of over $150 billion, just waiting for the right deal to come along.

    Again, they have both the discipline and internal algorithms to identify a good deal as well the courage to pull the trigger when the world is seemingly falling apart.

17. jiHymas says:

    April 11, 2022 at 9:39 am

    they have both the discipline and internal algorithms to identify a good deal

    This is not the same thing as market timing; it’s more like having a high hurdle rate (in terms of expected return, derived from fundamentals rather than expectations of being able to cash out at the next peak.

    It’s certainly possible to define the term ‘market timing’ in such a way that Berkshire Hathaway’s investment style, or anybody else’s, fits the definition, but I’m very dubious about your chances of finding much support for such a position.

    Here’s a website which purports to quote Warren Buffet’s views on market timing (among other topics). There are no attributions and I have done no checking, but the quotes reflect the impression I have formed over the years.