BPO Downgraded to P-4 by S&P

S&P Global Ratings has announced:

  • Brookfield Property Partners L.P.’s (BPY) credit quality has been impaired by persistent secular headwinds within its office segment and deteriorating metrics related to higher financing costs.
    Therefore, we lowered the issuer credit ratings on both BPY and Brookfield Properties Retail (BPR; a core subsidiary within BPY’s group structure) to ‘BB’ from ‘BBB-‘.
  • We also lowered the issue-level rating on BPY’s unsecured notes to ‘BB-‘ from ‘BB+’ and assigned a ‘5’ recovery rating (rounded estimate: 10%) to the notes.
  • In addition, we lowered the issue-level rating on BPR’s senior secured notes to ‘B+’ from ‘BB+’ and assigned a ‘6’ recovery rating (rounded estimate: 5%) to the notes.
  • Lastly, we lowered our rating on the company’s preferred shares to ‘B’ from ‘BB’ to reflect increased subordination risk for speculative-grade issuers.
  • The negative outlook reflects our view that BPY’s liquidity could be pressured by upcoming recourse maturities over the next two years, while secular headwinds within the office segment could further deteriorate its operating performance.

PRINCETON (S&P Global Ratings) Dec. 21, 2023– S&P Global Ratings today took the rating actions listed above.

Secular headwinds in the office sector have weakened our assessment of BPY’s business risk. BPY owns one of the largest real estate portfolios of any rated real estate company, with approximately $130 billion in total assets. Moreover, we view the company’s high-quality properties and its diversification across product type and geography favorably.

However, while BPY’s retail assets have recovered to pre- pandemic levels (occupancy was 95.1% as of Sept. 30, 2023), occupancy in the office portfolio has continued to erode. As of Sept. 30, 2023, occupancy in the office portfolio slipped to 85.4%, a year-over-year decrease of 140 basis points and well below pre-pandemic levels of 93%. We acknowledge that within the office segment, BPY’s core properties–64 out of its 131 assets, representing a majority of office segment net operating income (NOI)–continue to perform well (95.2% occupancy as of Sept. 30, 2023). The remaining assets (which BPY believes have significant value-add opportunities through development and leasing activities) have languished, with occupancy below 80%. Weighted by asset values, occupancy was 91.1% for BPY’s office assets, demonstrating resilience for premier class ‘A’ workplaces.

We expect sector headwinds facing commercial office real estate will generally remain in place over the next several years, with weaker tenant retention, lower occupancy, and heightened incentives (through tenant inducements) to attract new tenants. We expect occupancy at class ‘A’ properties to be more resilient as the bifurcation of performance between class ‘A’ and class ‘B’ widens. However, we believe capital expenditures (capex) to attract new tenants will reduce BPY’s future cash flows and operating metrics will also be slow to recover. As a result, we revised our business risk assessment on BPY to strong from excellent.

Refinancing risks are rising given BPY’s elevated near-term debt maturities.Excluding extension options, BPY’s weighted-average debt maturity shrunk below three years in recent quarters (to 2.6 years as of Sept. 30, 2023), which we believe poses elevated risks.

We acknowledge that the vast amount of upcoming debt is nonrecourse secured debt and most of the maturing debt contains extension options that BPY can exercise. We believe the company maintains a solid position with its lenders due to parent Brookfield Corp.’s (BN; A-/Stable/A-1) scale and platform (BN is a large owner of real assets with over $140 billion of its own invested capital, including a 75% ownership in Brookfield Asset Management [BAM], a global asset manager with $865 billion of assets under management). Moreover, we think banks are reluctant to take back any commercial real estate assets secured by loans in the current market.

While we believe banks are heavily scrutinizing new commercial real estate loans, particularly those secured by office properties, they are generally willing to refinance existing loans. For example, BPY successfully refinanced over $30 billion in loans across more than 120 individual transactions in 2023, and we expect the company to successfully refinance upcoming secured debt. In many cases, we expect banks to provide extensions on maturing debt.

In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) reduce asset values, we would expect BPY to hand back the asset. As of Sept. 30, 2023, BPY has suspended approximately 3% of its contractual payments on nonrecourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality. We revised our capital structure modifier score to negative from neutral given BPY’s elevated debt maturities over the next few years.

While BPY’s recourse corporate notes and bank loan maturities (revolving credit facilities and term loans) look manageable in 2024 (approximately $442 million of unsecured notes due in March), its maturities will increase in 2025 with approximately $2.3 billion of total debt coming due. Lack of progress in addressing these maturities well ahead of maturity could hinder our view of the company’s liquidity.

BPY’s relationship with BN enhances its credit. Following the privatization of BPY by BN in July 2021, we continue to view BPY’s group status to BN as moderately strategic. We believe BN would provide financial support to BPY under some circumstances and could help facilitate future refinancing efforts including repayment of its March 2024 bond maturity. BPY is BN’s main vehicle for real estate investments and its largest investment vehicle. This group support provides a one-notch uplift to BPY’s stand-alone credit profile.

The negative outlook indicates a one in three chance of a downgrade over the next 12 months. This reflects our view that upcoming recourse maturities over the next two years could pressure BPY’s liquidity, while secular headwinds within the office segment could further deteriorate operating performance. We project S&P Global Ratings-adjusted debt to EBITDA will be maintained in the 15x area in both 2023 and 2024, with fixed-charge coverage (FCC) sustained at about 1x.

We could lower our ratings on BPY by one notch if:

BPY fails to refinance its upcoming recourse maturities well in advance, pressuring our view of the company’s liquidity;
Its operating performance deteriorates, with occupancy in the company’s core office segment weakening to the low-80% area; or
Its key credit metrics weaken further, with FCC declining below 1x or S&P Global Ratings-adjusted debt to EBITDA rising back above 16x.
We could revise the outlook back to stable if:

BPY bolsters its liquidity, potentially through asset sales, such that upcoming recourse maturities don’t threaten our liquidity assessment;
Its operating performance improves modestly, with a recovery to office occupancy; and
Key credit metrics stabilize or strengthen, with FCC maintained comfortably above 1.0x.

This follows an earlier CreditWatch-Negative placed on the parent company on 2023-10-5.

  • Brookfield Property Partners L.P.’s (BPY) fixed-charge coverage deteriorated to below 1.0x in the second quarter of 2023, and we don’t forecast material near-term improvement given our economists’ view that interest rates will remain higher for longer.
  • The company also faces heightened refinancing risk, with a capital structure that has significant maturities over the next two years and outsized exposure to floating-rate debt.
  • S&P Global Ratings placed all its ratings on the company, including the ‘BBB-‘ issuer credit rating, on CreditWatch with negative implications.
  • The CreditWatch negative placement reflects our expectation that we could lower the ratings on BPY, possibly by more than one notch, if we don’t envision the company implementing a near-term plan to reduce refinancing risk and boost coverage levels.

BPY’s deteriorating credit protection measures are unlikely to recover materially over the next two years.As of June 30, 2023, BPY’s adjusted debt to EBITDA increased to 17.3x from 15.2x at year-end 2022 while fixed-charge coverage (FCC) fell to 0.9x from 1.4x. A notable portion of the deterioration was caused by the consolidation of one of its funds’ (BSREP IV) U.S. investments in December 2022 and foreign investments in January 2023, which added a material amount of new debt to BPY while EBITDA has not fully cycled through on our trailing-12 month adjusted metrics. BPY owns a 23% financial stake in the fund but fully consolidates it within its financial statements.

That said, interest rates have risen materially over the past year, and BPY’s substantial exposure to floating-rate debt (45% net of interest rate hedges as of June 30, 2023) has rapidly deteriorated coverage metrics. S&P Global Ratings economists expect interest rates to remain higher for longer, with one additional rate hike expected in 2023. While we acknowledge that BPY’s sizable liquidity position and consistent execution of asset sales mitigate the risk of the company not being able to pay its fixed charges over the near term, BPY has one of the weakest financial risk profiles within our North America real estate coverage given elevated leverage and thin interest coverage. We project adjusted debt to EBITDA to improve slightly to the low-16x area over the next two years but expect FCC to be sustained at about 1x. While we expect BPY to execute meaningful asset sales over the coming years, we anticipate that the majority of proceeds will continue to be distributed up to its parent Brookfield Corp. (BN; A-/Stable/A-1) rather than allocated for debt repayment.

Near-term maturities pose additional risks.BPY has substantial upcoming debt maturities that will need to be refinanced, likely at significantly higher rates. The company’s weighted average debt maturity was slightly below three years as of June 30, 2023 (not including extension options). We believe that BPY maintains a solid position with its lenders due to its parent’s scale and platform (BN is a global asset manager with over $850 billion of assets under management) and the reluctance of banks to take back any commercial real estate assets secured by loans in the current market. In many cases, we expect the banks to provide extensions on maturing debt, albeit at higher rates. In some cases, particularly when weaker operating fundamentals (low occupancy or high lease rollover risk) are reducing asset values, we would expect BPY to hand back the asset to the servicer. As of June 30, 2023, BPY has suspended approximately 3% of its contractual payments on non-recourse mortgage debt. We view this as a portfolio management exercise by BPY, not a default, but could view it more negatively if loan defaults became frequent because it would erode our view of the company’s asset quality.

That said, as one- to three-year extensions are granted by banks or exercised by BPY on its non-recourse CMBS loans, its weighted average debt maturity could narrow further. We believe BPY maintains access to the capital markets where it could issue unsecured debentures or preferred shares, but that its weakening capital structure adds a modest amount of refinancing risk.

The CreditWatch placement reflects the company’s deteriorating interest coverage metrics, continued secular challenges facing the company’s office properties, and a capital structure with a material amount of near-term, floating-rate debt. We will seek to resolve the CreditWatch placement within the next three months.

BPY is a global, diversified real estate company that was taken private by BN in July 2021. BPY is BN’s primary vehicle to make investments across the real estate sector and is also BN’s largest investment vehicle, with approximately $130 billion in total assets as of June 30, 2023. It is the largest real estate company that we rate by total assets. BPY invests primarily in high-quality office properties located in gateway markets and class-A malls in the U.S., with approximately 198 million square feet of office and retail properties (including active development projects) within its core office and core retail platforms.

It will be remembered that BPO’s preferreds are guaranteed by BPY, its parent. The issues remain at Pfd-3(low) by DBRS.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.E, BPO.PR.G, BPO.PR.I, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y.

The market took the news badly, with BPO.PR.R down 9.34% on the day (close/close) and BPO.PR.N down 8.43%.

It will be interesting to see what happens with ZPR – as detailed in the December PrefLetter, ZPR’s weight in BPO was 3.10% in mid-November, while the index had exposure of 5.65%. ZPR’s extreme underweighting has been a huge factor in the index fund’s idiotic (positive) tracking error over the past year – but the regulatory problem remains the situation with reset date bucketting.

Thanks to Assiduous Reader hrseymour for bringing this to my attention.

77 Responses to “BPO Downgraded to P-4 by S&P”

  1. IrateAR says:

    Solactive’s guideline indicates they use the highest rating so ZPR should fine as long as DBRS doesn’t change their minds.

    TXPR though uses the lowest rating so it would appear CPD has rather a lot of these to sell.

  2. DR says:

    gonna ask that… thanks but yikes!

    can download CPD holdings and while they don’t show individual tickers, a quick sort has 3.25mm total BPO/BPY’s, of which approx 1mm are the “$8” kind

  3. jiHymas says:

    Solactive’s guideline indicates they use the highest rating so ZPR should fine as long as DBRS doesn’t change their minds.

    Oops! Quite right! It’s embarrassing that I, of all people, should have missed that!

    The Solactive methodology page 9 of PDF, section 4, paragraph h, states:

    Minimum ration (sic) of DBRS or S&P is P3 (low) or a minimum ration (sic) of Moodys above Baa3. If more than one of the rating agencies has issued a rating on the stock, the highest rating is used

  4. DR says:

    given BN’s insistence on the book value of properties being valid and their massive buybacks on own common maybe they could take in all those BPY/BPO’s off CPD in one nice clean up trade. its $36mm worth.

    but what’s the deal with the one line worth $12mm at $16.92?? I’m more of an $8 n,p,r holder…

  5. IrateAR says:

    DR – the “Download” button at the top right of CPD web site gives ISINs. Although there it only gives weights rather than shares. They made the files worse recently for some reason.

    Good point on BPYP.PR.A… I am also curious why that only yields 9%. I think it’s cross-listed in the US but that seems like an extreme difference. Especially with that $12mm seemingly coming to market soon…

  6. DR says:

    yeah, i engineered the implied price from shares&value columns to get sense as to which was which as don’t much care for super specifics (sure as shite not cross referencing ISINs!) but rather overall totals.

    reading thru the BPY.pr.A prospectus supplement but needless to say leave ones head spinning. could be senior to the rest but could also be good old fashioned rate reset value disparity. lord knows there’s plenty of that

  7. IrateAR says:

    Oh OK the dividend is in USD that makes more sense. Still seems bad.

  8. DR says:

    if click holdings and scroll down, there’s another “download” holdings link that does have shares although column header seems mislabelled .

  9. jiHymas says:

    the “Download” button at the top right of CPD web site gives ISINs. Although there it only gives weights rather than shares. They made the files worse recently for some reason.

    I am convinced that ETF sponsors do all they can to make their mandatory disclosures of fund holdings as opaque as possible.

    They use ISINs and exclude ticker symbols in order to make it as difficult as possible for retail investor scum to use the data.

  10. IrateAR says:

    Yeah that one used to have ISIN or something like that but now just does stuff like calling three different holdings “BROOKFIELD OFFICE PROPERTIES INC”. Not to be confused with “BROOKFIELD OFFICE PROPERTIES PREF” and “BROOKFIELD OFFICE PROPERTITES SERI”. :/

  11. jiHymas says:

    now just does stuff like calling three different holdings “BROOKFIELD OFFICE PROPERTIES INC”. Not to be confused with “BROOKFIELD OFFICE PROPERTIES PREF” and “BROOKFIELD OFFICE PROPERTITES SERI”. :/

    I see now that the download from ZPR still provides ISINs, but the only identification in the CPD download is those horrible – and often ambiguous – full names that aren’t quite full.

    Well, my next PrefLetter review of CPD isn’t scheduled until late next summer. Hopefully things will be different then – I have horrible memories of going through an entire list of these ambiguities trying to come up identifications based on price – no easy thing for issuers like Enbridge which have a lot of issues priced very closely to each other.

    And to think the OSC insists on full names of issues on client statements! The presence of ticker symbols was deemed irrelevant.

    I can see their point when it comes to bonds, which aren’t listed and often have ambiguous names where a casual inpection might lead one to think that the issuer was a different entity from the actual issuer – but really! For exchange-traded issues in funds in which every issue is exchange-traded?

  12. DR says:

    as for the us$ pay bpy.pr.a…

    long canadas are 3.1 vs ust’s at 4.05. adjusting for reset stub aside, that should put us pay prefs almost 100 back of comparable c$ pay one, not thru them

    must be some seniority element to that series as its so far out of whack

  13. IrateAR says:

    the only identification in the CPD download is those horrible – and often ambiguous – full names that aren’t quite full.

    They do give ISINs if you click on “Download” at the top right of the page, although that one only gives weights and notional that need to be turned back to shares.

    If it’s any consolation to the retail investor scum Bloomberg has always handled pref symbols weirdly for professionals as well. CPD seems to be taking the Bloomberg “Ticker” field which for whatever reason is not the exchange ticker.

  14. jiHymas says:

    They do give ISINs if you click on “Download” at the top right of the page,

    Quite right, but it’s very strange. I clicked “Holdings” on the black bar that stays at the top of the page when you scroll down, then “All Holdings” on the black bar in that section, then “Download Holdings” below the table and got what I described.

    I can’t imagine a rational purpose behind having two different holdings files with different data fields.

  15. IrateAR says:

    Yeah it’s a curious approach.

  16. DR says:

    word is they are adding a third file, different from the other 2 in that everything will be italicized to make it look sexier for investors

  17. IrateAR says:

    S&P confirmed all the BPO/BPYPs going out of TXPR. BPOs getting crushed today… CPD has two weeks to figure this out.

  18. Nestor says:

    old news… the bpo prefs aren’t down huge. 1-2%. non event.

  19. IrateAR says:

    The rebalance announcement came out Friday night and is new, if unsurprising.

    I see them down 3.4% on average currently against a flat TXPR. Call it “struggling” rather than “crushed” if you like.

  20. Nestor says:

    yes. i like “struggling” better … lol

    i know a few are down more.. some less. it isn’t a complete washout.

  21. Lateralus Capital says:

    All these BPO prefs are getting kicked out of the Index. The announcement was last Friday and the Index Event is Jan 19th. The Blackrock CPD ETF will be a forced seller of ~300k shares per line. The volume is picking up as people pre-positioning by shorting these are closet indexers sell. Would expect them to continue to go lower.

    BPO.PR.A
    BPO.PR.C
    BPO.PR.E
    BPO.PR.G
    BPO.PR.I
    BPO.PR.N
    BPO.PR.P
    BPO.PR.R
    BPO.PR.T

  22. hrseymour says:

    Interestingly, the BPO preferreds in the US market are up a little today:

    BPYPN
    BPYPO
    BPYPP

    These are fixed rate preferred yielding about 12%, a much lower rate than their CAD brethren. Aren’t they pari passu with the CAD BPO prefs?

  23. Lateralus Capital says:

    yes they are

  24. IrateAR says:

    Speaking of B’s does anyone know what was up with BBD.PR.D today? Down 7%.

  25. DR says:

    mystery deepens…they announce an ncib on those expensive bpy.pr.a but none of the others?

  26. hrseymour says:

    I see 2 bonds issued by: Brookfield Property REIT Inc / BPR Cumulus LLC / BPR Nimbus LLC / GGSI Sellco LLP

    They are rated B+ and yield about 8% (not distressed):
    USU11128AA05: BPR 5 3/4 05/15/26 ~$96
    USU11128AC60: BPR 4 1/2 04/01/27 ~$89

    I believe that BPR and BPO have call on the same assets and are pari passu? Given that the BPO preferreds are cumulative, the different level of distress between them is mystifying to me.

  27. Lateralus Capital says:

    its just that the USD ones are owned by US investors and many institutions and the BPO CAD ones are owned by Canadian Retail…different investor bases who cant move between them and cant borrow the expensive ones to go long the CAD and short the USD

  28. jiHymas says:

    Morningstar DBRS Places North American Single-Asset/Single Borrower Transactions Backed by Office Properties Under Review With Negative Implications:

    DBRS, Inc. (Morningstar DBRS) placed outstanding public credit ratings associated with 77 North American single-asset/single-borrower (NA SASB) transactions backed by commercial real estate (CRE) loans primarily secured by office collateral types Under Review with Negative Implications and removed the existing trends on the ratings, as credit ratings placed under review do not carry trends. These NA SASB transactions were issued between 2013 and 2023, with just under half (37) issued between 2020 and 2023. In addition, Morningstar DBRS placed outstanding public credit ratings on four rake bonds associated with multi-borrower transactions issued between 2014 and 2020, each of which are also backed by loans collateralized by office properties, Under Review with Negative Implications and removed the trends on the ratings. All of the credit ratings Morningstar DBRS placed Under Review with Negative Implications are determined and monitored using the LTV Sizing Benchmarks as described in the “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology).

    Morningstar DBRS decided to place these credit ratings Under Review with Negative Implications to undertake a review of the NA SASB office-related loans as the office market dynamics may have shifted, prompting a review of the Morningstar DBRS Values and, by extension, the Morningstar DBRS Capitalization (Cap) Rates assigned to determine that those values are reflective of the change in the office sector’s forward-looking credit outlook. The change in the outlook on office is a result of the overall stress observed over the last few years for office property types across the country, as a significantly higher interest rate environment has coincided with shifting office use dynamics following the increase in remote work amid the coronavirus pandemic. These dynamics have resulted in lower investor appetite for office property types, which has, along with higher interest rates, contributed to higher cap rates for the relatively few sales that have occurred since the beginning of 2022. These same factors have also contributed to increased defaults on office loans in commercial mortgage-backed securities (CMBS) and other CRE finance sectors over the last year.

  29. IrateAR says:

    mystery deepens…they announce an ncib on those expensive bpy.pr.a but none of the others?

    One mystery solved… the BPOs just took an extra day to approve. They rallying today.

  30. Brassens says:

    Volumes are 8-10X higher than average on some of them today. I guess they found buyers for that risk.

  31. Nestor says:

    with a ytw for some of the bpo prefs in the 15-20% range and brookfield supposedly buying 10% of the float this year, kind of hard to resist. we’ve probably seen the bottom on these. as well as in most other prefs. the tide turned oct 31…

  32. Lateralus Capital says:

    The floaters are now the chepaest BPO pref by far. even with a few rate cuts the yields are much better than the fied rates and BPY is trying to reduce its floating rate exposure. I think BPO may target them first under the NCIB. BPO.PR.X is trading at 7.75 even though BPO.PR.W is 7.95 bid. the Xs have a ~16% running yield versus the highest running yield of 15% on the fixed rates. Some of the fixed rate running yields are < 13.5%

  33. Lateralus Capital says:

    The floaters are now the chepaest BPO pref by far. even with a few rate cuts the yields are much better than the fied rates and BPY is trying to reduce its floating rate exposure. I think BPO may target them first under the NCIB. BPO.PR.X is trading at 7.75 even though BPO.PR.W is 7.95 bid. the Xs have a ~16% running yield versus the highest running yield of 15% on the fixed rates. Some of the fixed rate running yields are < 13.5%

  34. DR says:

    laterlus,

    i would have a rethink of how you price prefs. granted there has long been an unholy obsession with current yield, these things are perpetuals and should be treated as such.

    that said, the massive inversion may be around for a while longer but in a perpetual sense, the curve is generally upward sloping and indeed the curve implies a return to that within the next year or two.

    however, for arguments sake, treat the curve as perpetually flat, lets say at 3.25.

    a 175bps reduction in prime would drop the floaters yield to 12%ish. meanwhile once reset occurs n,p,r will still be yielding in excess of 20%.

    to say the floaters are the cheapest by far is an odd statement. heck they aren’t even materially cheaper on price than n,p,r should a reorg occur!

    its time people stop trading these on current yield and more on anticipated forward yield adjusted for the stub to reset.

    while there is much debate on speculating what rates will be in the future, the futures markets offers a nice guide. a 5yr rate in 5,10,15,20 & 25 years time is readily hedgeable using futures or swaps and strips out to equal the 30 yr GOC yield. fortunately to simplify matters spot 5yr and 30yr are roughly the same now.

    if one were to overlay their opinion to override the current yield curve and its implications, that is fine but i would be more inclined to bet that long Canadas wont be 100 thru USTs in perpetuity than betting the curve will remain so inverted for the next 30 yrs.

  35. DR says:

    and of course i use the term perpetuals in this instance to imply forever a fixed reset as opposed to the fixed coupon perpetual

  36. jiHymas says:

    while there is much debate on speculating what rates will be in the future, the futures markets offers a nice guide. a 5yr rate in 5,10,15,20 & 25 years time is readily hedgeable using futures or swaps and strips out to equal the 30 yr GOC yield.

    I take issue with the ‘nice guide’ part of this assertion. Forward prices at any given moment are based on the ‘expectations hypothesis’. If somebody wants you to sell them a contract whereby they can buy a 5-year Canada in 20 years at a fixed price, you can work it out pretty easily … you can hedge the short forward position by buying a 20-year bond and selling a 25-year bond. Work out the cost of the hedge, stick on some profit and bang! You’ve got the price of the forward.

    Forwards are magnificient hedges. They have minimal predictive utility. See my post Forward Interest Rates.

  37. DR says:

    the market must decide what an appropriate terminal rate is for goc5yr in perpetuity. i believe you use spot goc5 for post reset time frames? i dont take issue with that given goc5 happens to be close to goc30

    what i do take exception to is using spot rates in general as proxy for forward rates when we have a perfectly liquid yield curve that is the closest thing we will get to predicting forward yields

    to illustrate my points i always like taking things to extremes:

    on july 13, 2022 the BOC hiked by 100 bps.

    on july 12, it was fully discounted. july 13’s implied prime rate would in essence have been a “forward”, albeit only 1 day

    who in their right mind would use july 12’s spot prime rate to value anything?

  38. stusclues says:

    “its time people stop trading these on current yield and more on anticipated forward yield adjusted for the stub to reset.”

    Or possibly based on Implied Volatility Theory (since we are on Hymas’ site after all)? Actually, on second thought, please do continue on with current or anticipated yields.

  39. DR says:

    guess my point is the interest rate futures market is by far the most liquid market in the world granted less so once get further into the future.

    why on earth would anyone choose to use a rate materially different than that which is being transacted upon to value prefs?

  40. DR says:

    stusclues,

    IVT and indeed all options pricing, notable interest rate options, demands a forward price as part of the pricing model

    what is debated here is whether one should use a spot price in the future or the futures price itself!

  41. Lateralus Capital says:

    Over the last 1 year, 3 years 5 years, 10 years and 20 years… the Canadian Bank PRIME Rate x 70% has on average been greater than the Government of Canada 5 yr. (see below) Factoring in the lower dollar price and less interest rate risk of the PRIME floaters plus the fact that current coupons are elevated until we see significant rate cuts I still think the floaters are the cheapest but I take your point on the forward curve. Using the forward curve to calculate IRR to perpetuity the lowest dollar price lower reset spread prefs like BPO.R, BPO.P and BPO.N are mathematically the cheapest of all the BPOs. Also remember that PRIME can lag Bank of Canada overnight rate during the cutting cycle. Its not a forgone conclusion that of the BofC cuts say 100 bps this year that PRIME comes down by 100 bps…may only come down by 50 bps or 75 bps etc.

    Historically average 5 yr Prime x 70% Positive Spread
    Last 1 year 3.57 4.88 1.31
    Last 3 years 2.47 3.20 0.74
    Last 5 years 1.89 2.85 0.96
    Last 10 Years 1.62 2.48 0.86
    Last 20 years 2.24 2.61 0.37

  42. DR says:

    prime to overnight outward drift is indeed one of the positive features of floaters. however, i believe the best days of canadian banks running roughshod over the canadian consumer are likely behind us. scandals at TD and the like are slowly shedding light on this. look to the royal commission in australia to see how they addressed a similar issue.

    your goc5 vs .7Xprime table is valid. however, i think you may be forgetting one key variable and that is the reset spread that gets tacked on top of a FR and not a floater….

  43. jiHymas says:

    what i do take exception to is using spot rates in general as proxy for forward rates when we have a perfectly liquid yield curve that is the closest thing we will get to predicting forward yields

    I’m not sure about this … and I’m not trying to be diplomatic, I’m genuinely not sure. It seems to me that curve shape and other financing implications are going to muck things up a bit. At some point I’ll find a piece of paper and a sharp pencil and do the algebra. There’s a term premium too, and a liquidity premium to the extent that’s a different number. The Expectations Hypothesis has holes in it!

    And, as I tried to say before, forward contract prices are not a yield prediction. They’re a hedging vehicle and the prices are based solely on spot prices in the cash market, not on a prediction of future yields.

    There will be some, of course, who will claim that spot markets contain all the information that could possibly be known about 5-year yields twenty years hence. Even if I grant that, there’s still the problem of tomorrow’s headlines; this information is not incorporated in today’s price.

    The last article cited in the post I linked had a nice chart showing actual vs. predicted yields. Not much correspondence in the two figures! Of course, there’s not much correspondence against the spot rate for the 5-year that I use, either … but I don’t claim there is any in the first place. It’s used because one has to use something; consistency matters much more than accuracy; spot rates are widely available for free; and using a spot rate – rather than a predicted rate – minimizes regret and bias effects.

    guess my point is the interest rate futures market is by far the most liquid market in the world granted less so once get further into the future. … why on earth would anyone choose to use a rate materially different than that which is being transacted upon to value prefs?

    One reason is lack of access to forward market pricing. I’ve had occasion, for instance, to want to get the five-year swap rate when trying to see how closely BCE’s fixed rate selection corresponds with the five year swap rate (spoiler: often not very). Difficult to find! Perhaps I should try again … but with my luck the source will dry up anyway after a few months, perhaps scared off by lawyers’ letters.

    Damned if I’m going to pay $2500 / month, or whatever it is nowadays, for a Bloomberg terminal.

    Current Yield has a lot of effect on valuing prefs too, but I don’t take that as an argument in favour of its use.

  44. jiHymas says:

    who in their right mind would use july 12’s spot prime rate to value anything?

    A contrarian?

  45. jiHymas says:

    https://www.chathamfinancial.com/technology/canadian-market-rates

    https://www.rbccm.com/en/expertise/fixed-income/notes-canada.page

    Not only do I stand corrected, but I’m embarrassed to find I have a link to Canadian Swap Rates as part of the blog theme, under the heading “Markets”. RBC has pretty good correspondence with Chatham Financial.

    I guess my early experiences trying to find these data on the Web left deeper scars on my psyche than I thought!

  46. Meesha says:

    Okay so BPO leaves the index today and CPD still shows the 4.9% exposure to Pfd-4 (BPO/BPY I assume). What is happening here? What was all the selling heading into today? Does anyone know if they have extra time to liquidate those holdings?

  47. IrateAR says:

    Yes they don’t appear to have done anything thus far. As far as I know they have as much time as they like and can deviate from their index if they are so inclined. Historically though they will sell today.

  48. Nestor says:

    well.. someone just traded 352,600 shares in one shot of bpo.pr.n at 11.29 this morning. scotia to scotia.

  49. IrateAR says:

    Looks like they found buyers at these levels no problem for everything but the BPYP.PR.A.

  50. jiHymas says:

    It’s interesting to see that BPO.PR.N, for instance, closed at 7.27 on January 5 (immediately before the index announcement) and closed today at 8.20 (on huge volume).

    The intent of index pre-announcements is to ensure that the index itself takes a hit from crowded trades into and out of the index, thus reducing the tracking error of index funds. It didn’t work this time! Those who sold early to beat the rush got beaten up pretty well themselves.

    I cheerfully admit that BPO.PR.N is the only one I’ve looked at!

  51. […] of the past 21 trading days – which we may presume is due to the TXPR rebalancing reported by IrateAR and Lateralus […]

  52. Lateralus Capital says:

    A lot of people thought BPO prefs would really trade down in the Market on Close index event today because the CPD ETF needed to liquidate a decent chunk of BPO prefs at the closing price. They traded down after the index announcement a couple weeks ago but there has been steady buying everyday into this index event. There were various buy imbalances at the close suggesting strong demand for folks wanting to get long coming out of the index rebalance. On top of that Brookfield announced an ncib on BPO prefs recently and have been using it every day in small size. Anyone who wanted to or needed to sell is out of the way and their was pure greed today from BPo buyers who were paying up …the floor is in on this in the short to medium term

  53. CaddilacMan says:

    “and have been using it every day in small size.”
    How do you know this “Lateralus”?
    May I ask where I can find that information?
    Thanks in advance

  54. Lateralus Capital says:

    You need to subscribe to the TSX service that shows insider transactions on a daily basis. Otherwise have to wait a month to see on SEDI unless the company voluntarily files. Should show up in a few weeks on SEdi

  55. Rod says:

    So for a fee the TSX will sell you material non-public information? How is this even legal?

  56. Brassens says:

    Once they all get out of the index, what’s next? If in 2 years their credit goes back and and it’s possible for them to be reintroduce, do the index have an obligation of buying back some of the shares? This would put an upward pressure wouldn’t it?

  57. vic88 says:

    The BN parent’s share price is reflecting almost no value for the real estate assets. This has persisted for over a year. To me the BPO buyback is just a test of shareholders resolve to hang on. BN is playing the long game with their real estate holdings. But the question is, how long will BN shareholders remain patient ? BPO and BPY preferred shares market pricing & visibility is a big factor in BN’s current share price. If Bruce Flatt wants to fix this mess then the only solution is to replace the BPO & BPY preferred shares with BN preferred shares (or just buyout the preferred shares outright – they have the cash to do so).

  58. IrateAR says:

    [em] So for a fee the TSX will sell you material non-public information? How is this even legal?[/em]

    Huh that’s an interesting question. I don’t think Brookfield buying thousands of shares under its publically announced NCIB would qualify as material, but if it had been millions of shares… seems like it could be? I feel like information probably doesn’t have to be free to be considered “public” but can’t find a source.

    [em] Once they all get out of the index, what’s next? If in 2 years their credit goes back and and it’s possible for them to be reintroduce, do the index have an obligation of buying back some of the shares? This would put an upward pressure wouldn’t it?[/em]

    If S&P upgrades and at least seven months have passed and the issues meet the trading volume and market cap requirements they will presumably by re-added to the TXPR index and CPD will buy them again. This would put upwards pressure on the prices, although this probably a relatively small factor compared to the buying of the rest of the market seeing those yields on a safer credit.

  59. Nestor says:

    well.. that was a humdinger of a day for BPO prefs today. someone out there must be really mad…

  60. Brassens says:

    Anyone took chances on these dangerous BPO pref?

  61. Nestor says:

    “Anyone took chances on these dangerous BPO pref?”

    yup. was too hard to pass up the trade. bought some bpo.n. the pref market turned up in late Oct. then i factored in the current yield, and what the reset would work out to in a couple of years, … finally, once Brookfield issued the ncib, was an easy decision for me. so far so good. but there’s always risk. so, we’ll see how it works out over the next couple of years.

  62. stusclues says:

    “yup. was too hard to pass up the trade”

    Agreed for the same reasons and the inevitable (now playing out I think) collapse in FR spreads. I was way too early with first purchases in April last year. That said, with swapping and divs, the trade has been profitable so far.

  63. Rod says:

    I have a modest 20% position. Probably about break even right now.

  64. CaddilacMan says:

    Thanks for your reply Lateralus. I’ll wait and check SEDI as you suggest
    I own the R series reset and the W floater.

  65. vic88 says:

    Some recent RBC analyst report commentary for BN mentioned “moving trophy real estate assets to re-insurance”. Nothing more about this except a Bermuda news article yesterday stating that BN is to build a commercial office building with ground floor retail on Front Street in Hamilton Bermuda. This will be the corporate headquarters for BNRE and the other Bermuda-based subsidiaries. This all sounds somewhat positive for BPO prefs. I also see the best prefs BPO.C/E/G moving up nicely the last week. Anyone have further info about BPO being moved to BNRE ?

  66. Lateralus Capital says:

    yes, the long-term strategy is to move longer duration real estate assets from BPY to the balance sheets of the insurance subs. Its a perfect match for them. Brookfield has acquired a bunch of insurance subs last couple years and they want to use the assets to invest in BAM originated assets so they can earn more fees.

    The assets will be transferred at FV likely IFRS which are healthy values so the insurance subs will be paying full price. If they do that its accretive to BPY and thus BN common equity and BN is pricing in that BPY is essentially worth zero. Plus the cash will be used to de-lever BPY’s balance sheet which will help the prefs.

    Also, BPY has multiple hotel properties for sale at the moment that will generate cash to help payback the unsecured bonds and de-lever company.

    I expect BPO prefs will continue to pay dividends even as we are in a commercial real estate recession.

  67. Brassens says:

    BPO.C/E/G being the best because of their minimum clause? For them to be in action the 5y has to be below 1.1 roughly. We have seen this being possible of course, but unlikely. I might be missing something here though. The effective spread is still higher on the N,P,R.

  68. Lateralus Capital says:

    my rank order for relative cheapest is as follows (ignoring the floaters)

    R
    P
    N
    E
    C
    G
    A

  69. IrateAR says:

    At the moment:

    PR
    N
    I
    AEG
    C
    T

  70. Lateralus Capital says:

    agree T is richest

  71. vic88 says:

    Not just the minimums but the + on the 5yr Goc :

    BPO.C : 5YR GoC Yld +5.18% (min. 6.00%) – resets 6/30/2026
    BPO.E : 5YR GoC Yld +3.96% (min. 5.10%) – resets 3/31/2027
    BPO.G : 5YR GoC Yld +3.23% (min. 4.85%) – resets 6/30/2027

    Should mention also next best based on + above 5yr GoC :
    BPO.R : 5YR GoC Yld +3.48% – resets 9/20/2026

    Looking at these from long term hold perspective. Just wondering if BPO prefs will soon be replaced by BNRE prefs? This might be good for valuation but us Canadians may lose the eligible div status.

  72. KevinBe says:

    Interesting discussion… As a new BPO pref investor I wonder to what extend BN would go to not default on a pref and where this reasoning sits in the valuations discussed. Also, where does one get a full list of prefs on the Canadian market? I know of the usual suspect (https://canadianpreferredshares.ca/) but as mentioned here, it does not include all the issues. Thanks, K

  73. KevinBe says:

    Are there any comments on BPYPN? A quick search didn’t reveal anything.

  74. Lateralus Capital says:

    Bruce Flatt from Brookfield conf call today on Real estate:

    It’s Bruce. I’ll just give you a general comment on real estate and then maybe Nick can follow up just on our strategy related to our balance sheet. But I would say the story of today is not what you just mentioned. The past story was that real estate in the United States was under stress. The new story will become soon that there are major tailwinds behind real estate because fundamentals are good and interest rates are coming down by 200 basis points. And as that occurs, real assets and real estate in particular are going to have major tailwinds to both the net income and cash flows because the fundamental revenues are still going — are flat to going up and interest costs are coming down dramatically. And secondly, that will spawn realistic cap rates and therefore transaction activity will come back. So I think the next 24 months in real estate, you’re going to see a much different story play out than what you imagined. And those stories of — that people are still talking about, are stories from 24 months ago, not the next 24 months. That’s the general comment I’d make on real estate

  75. Nestor says:

    those who are expecting lower rates this year will be very disappointed.

  76. Brassens says:

    Bad news for BPO, but the resets will be higher on the resets globally.

Leave a Reply

You must be logged in to post a comment.