SBC.PR.A Suffers ~41% Retraction; Resells Shares

Brompton Group has announced (on 2022-11-16):

Brompton Split Banc Corp. (the “Company”) is pleased to announce it is undertaking a treasury offering of preferred shares (“Preferred Shares”) (the “Offering”).

The sales period for this offering will end no later than 9:00 a.m. (ET) on Friday, November 18, 2022. The offering is expected to close on or about November 24, 2022 and is subject to certain closing conditions including approval by the Toronto Stock Exchange (“TSX”).

The Preferred Shares will be offered at a price of $9.55 per Preferred Share for a yield to maturity of 7.5%.
(1) The closing price on the TSX for the Preferred Shares on November 15, 2022 was $9.64. The offering is being led by RBC Capital Markets.

The investment objectives for the Preferred Shares are to provide holders with fixed cumulative preferential quarterly cash distributions and to return the original $10.00 issue price to holders of Preferred Shares on the maturity date. On March 24, 2022, the Company announced that the Board of Directors approved an extension of the maturity date of the Company for an additional 5-year term to November 29, 2027. On September 26, 2022, the Company announced that the distribution rate for the Preferred Shares for the new 5-year term from November 30, 2022 to November 29, 2027 will be $0.625 per annum.

Based on the most recently calculated net asset value per unit of the Company on November 10, 2022, the Preferred Shares have downside protection from a decline in the value of the Company’s portfolio of approximately 51%. The Preferred Shares have delivered a 5.1% per annum total return over the last 5 years, outperforming the S&P/TSX Preferred Share Index by 4.7% per annum.(1) The Preferred Shares have a DBRS rating of Pfd-3(high).

The Company received retraction notices from certain holders of Preferred Shares in connection with the non-concurrent retraction right on November 29, 2022. The Company is offering Preferred Shares under the Offering in order to, to the extent possible, have a matched number of Preferred Shares and Class A Shares of the Company (“Class A Shares”) outstanding following the nonconcurrent retraction and secure term financing for the Class A shareholders for the next 5-year term ending on November 29, 2027. Class A shareholders enjoy the opportunity for enhanced capital appreciation because of the leverage provided by the Preferred Shares. Class A Shares have generated a 14% per annum return over the past 10 years, outperforming the S&P/TSX Capped Financials Index by 3.1% per annum. (1)

The Company invests in a portfolio (the “Portfolio”) consisting of common shares of the six largest Canadian banks: Royal Bank of Canada, The Bank of Nova Scotia, National Bank of Canada, The Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Montreal. In addition, the Company may hold up to 10% of the total assets of the Portfolio in investments in global financial companies for the purpose of enhanced diversification and return potential.

They have now announced:

Brompton Split Banc Corp. (the “Company”) is pleased to announce a successful treasury offering of preferred shares (“Preferred Shares”). Gross proceeds of the offering are expected to be approximately $74 million. The offering is expected to close on or about November 24, 2022 and is subject to certain closing conditions. Following closing of the offering and after giving effect to the November 29, 2022 non-concurrent retraction it is
expected that there will be a matched number of Preferred Shares and class A shares of the Company outstanding. The Company has granted the Agents (as defined below) an over-allotment option, exercisable for 30 days following the closing date of the offering, to purchase additional Preferred Shares up to such number as is equal to 15% of the number of Preferred Shares issued at the closing of the offering.

The “nonconcurrent retraction” mentioned in the first press release is the Special Retraction granted to the preferred shareholders in lieu of the previously scheduled maturity. It will be remembered that the preferreds reset to 6.25% effective 2022-11-30, up from 5.00% for the past five years. At the time, this rate was, perhaps, a little on the skimpy side but still within reasonable bounds; but by mid-October times had changed and much better yields were available elsewhere. Hence, a big retraction at par.

$74-million at a price of 9.55 implies that this offering totalled about 7.75-million shares; the 2022-9-30 Fund Profile implies that about 18.6-million shares were outstanding at that time. Hence, a 41% retraction rate (assuming that this issuance precisely covers the retraction); and the non-exercising shareholders should kick themselves, because they could have retracted at $10.00 and repurchased at $9.55, which is good business. The shares traded in a range of 9.41-49 today.

One can calculate how much the company lost on this deal fairly easily (don’t forget underwriting commissions!), but management will argue that boosting the dividend to a level at which retractions would be negligible would cost the company more. It’s also true, of course, that if they had restored the equality of Capital Units and Preferreds by consolidating the former, this would have meant reduced assets in the fund and, alas, reduced fees.

Thanks to assiduous readers EW and JD for bringing this to my attention!

5 Responses to “SBC.PR.A Suffers ~41% Retraction; Resells Shares”

  1. CanSiamCyp says:

    Several years ago, I was told by someone with experience in such matters that CRA does not consider different preferred share series issued by the same corporate issuer as identical equities; therefore, CRA would not – repeat not – disallow capital losses “harvested” by using a pair swap. For instance, if one holds an “in the red” position in ENB.PR.P and wishes to crystallize the capital loss to offset other capital gains, one could simultaneously sell ENB.PR.P shares and buy ENB.PR.T shares (essentially identical terms except the latter resets 3 months later than the former).

    However, before I pull the trigger on such a swap myself, I would appreciate hearing from any PrefBlog members who have experience with such a pair swap, and, in particular, whether their experience with CRA was positive or negative. By negative, of course, I mean that CRA declared the loss as a superficial loss and disallowed the “deduction”.

    Thanks!

  2. peet says:

    I haven’t dealt with CRA on this point but IT387 R2 covers it.

    The discussion in par. 1 makes it clear that identical properties are those “the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another”.

    Given the inherent volatility in the 5 yr. GOC, this “prospective buyer” would not be totally indifferent to the three-month delta in reset dates and therefore the likelihood that “P” and “T” each end up with different coupons for the ensuing five years.

  3. stusclues says:

    Strong pairs (i.e. those with introconvertibility) are considered identical but other series of the same issuer are not. At least this is the conclusion I have drawn in the past.

  4. earlyriser says:

    Similar to SBC, PRM.PR.A currently has a retraction option. You must elect soon or you will likely end up in the same situation as SBC holders. PRM.PR.A is currently trading around $10 but I don’t expect that will last once the option to retract expires.

  5. CanSiamCyp says:

    Thanks peet and stusclues! Cheers!

Leave a Reply

You must be logged in to post a comment.