BAM.PR.N : A Ticking Time-Bomb?

The previously announced new issue of BAM 4.75% Perpetuals started trading today under the symbol BAM.PR.N … and I can’t believe my eyes!

I was expecting it to trade in the $24.50 area, simply because that’s where the BAM.PR.M issue promptly slumped to immediately after the new issue was announced … the price level is not a surprise.

The surprise is that it’s now 1:30 pm, only 5,500 shares have traded, and the market is quoted at 24.60-64, 3×7. 3×7? On a new issue? 5,500 shares?

Together with the drop in price being so pre-ordained by the behaviour of BAM.PR.M, what this is telling me is that the underwriters haven’t sold a whole lot of shares. I can’t state that as a definite fact and I’m not the Oracle of Delphi, but that’s my interpretation and I’ll bet anybody who likes an entire dime that I’m right.

I suspect that this one will have an Inventory Blow-Out Sale, just like SLF.PR.D did last fall. Maybe early June, but I won’t bet any money on that part of the prediction. In the mean-time, I urge extreme caution when buying both BAM.PR.N and its twin sister BAM.PR.M … at least until the situation clarifies.

The HIMIPref™ database has been updated with the new issue information – BAM.PR.N has been assigned the securityCode A41223, replacing the preIssue code of P43000. A reorgDataEntry has been processed to reflect the change.

Update: Closed at 24.50-60, 3×19, on volume of 9,400 in a trading range of 24.50-75.

At some point, I’m going to do some research on “First Trading Days”. This must be some kind of record.

tick … tick … tick …

Update: This issue has been added to the PerpetualDiscount Index.

10 Responses to “BAM.PR.N : A Ticking Time-Bomb?”

  1. Drew says:

    You imply that the offering was conducted on a “bought-deal” basis, where the underwriter has no ability to market out if there are insufficient purchasers. Is this preferred share offerings are typically done? If so, why would the underwriter tie up so much capital in a losing, more importantly illiquid position, rather than selling in the grey market at a discount? Surely it doesn’t propose to sell a position as large as you imply it has in the market. If it does, I’ll place my bid now, at $20.

  2. jiHymas says:

    From the “Plan of Distribution” in the prospectus:

    Under an agreement (the ‘‘Underwriting Agreement’’) dated April 26, 2007 among the Underwriters and the Company, the Company has agreed to issue and sell, and the Underwriters have agreed to purchase, on May 9, 2007 or on such other date as may be agreed, but in any event not later than May 16, 2007, subject to compliance with all necessary legal requirements and to the terms and conditions contained in the Underwriting Agreement, 8,000,000 Series 18 Shares at a price of $25.00 per share for an aggregate price of $200,000,000. The Underwriting Agreement provides that the Company will pay to the Underwriters a fee of $0.25 per share for Series 18 Shares sold to certain institutions and $0.75 per share for all other Series 18 Shares purchased by the Underwriters, in consideration for their services in connection with this Offering. The obligations of the Underwriters under the Underwriting Agreement are several and may be terminated at their discretion on the basis of their assessment of the state of the financial markets and may also be terminated upon the occurrence of certain stated events. The Underwriters are, however, obligated to take up and pay for all of the Series 18 Shares offered hereby if any are purchased under the Underwriting Agreement. The distribution price of the Series 18 Shares was determined by negotiation between the Company and the Underwriters.

    Well – I don’t know the precise terms of the Underwriting Agreement … but the deal has closed! As to why they do it … the underwriters make up to $0.75 per share sold, which covers the occasional loss and then some. If they bail at the first sign of trouble, they’ll lose future business – from the affected company and from others that are looking for a good level of certainty.

    I don’t have any stats on bought-deal vs. marketted-deal percentages … it’s my impression that there have been a lot of bought deals lately, but that’s just an impression.

    What could happen? Well, I retain fond memories of the issue of POW.PR.B and PWF.PR.F. The recollections of the syndicates involved will not be so happy.

    The former commenced trading 2001-11-29, and on 2001-12-31 was quoted at 22.50-60 on volume of 7,470 shares.

    The latter commenced trading on 2001-11-30 and on 2001-12-31 was quoted at 21.02-20 on volume of 473,100 shares. The latter commenced trading 2001-11-30.

    Ah, those were the good old days!

  3. tobyone says:

    The new EPCOR 4.85% issue to close May 25 is a “bought deal” front and centre on the info page – will be interesting to see how received! IMHO the pref market is choking on the huge amount of new issues since the OCT. 31 income trust massacre. Not helpful is the confusion surrounding DPS.UN who can’t seem to even organize a unitholder meeting – see their website – at the same time unit price has been whacked from 24.50 down to 22.50 since Mar. 31 distribution. Negative investor sentiment toward corporate prefs such as BCE, AL, BAM, TOC due to merger/privatization frenzy. Q – if and when will a decent buying opportunity emerge from the current carnage?? Will we see any new issues in the foreseeable future??

  4. Drew says:

    James, I don’t think your explanation of what is going on is the mostly likely, namely that the underwriters did not find many buyers. The extract from the prospectus indicates that the deal was not a “bought deal”, as it contained a market out clause. If there were no buyers, the underwriters would almost certainly have marketted out or, with the consent of the issuer, repriced. They would not, in my experience, close for reasons of goodwill, because every issuer knows that if it cannot be sold any underwriter will market out. But we’ll see.

  5. jiHymas says:

    Drew – well, I’m only speculating! But the situation is a little wierd.

    When MAPF bought SLF.PR.D at 24.00 during the blow-out sale, it received a prospectus together with the confirm – frankly, I was surprised by this, but it didn’t make a lot of difference to me.

    After reading your comments, I have poked around in SEDAR and found the “Underwriting or Agency Agreement” dated October 2, 2006 for Sun Life Financial Inc., which states in part:

    After the Underwriters have made a reasonable effort to sell all of the Securities at the Purchase Price, the Purchase Price may be decreased and may be further changed from time to time to an amount not greater than $25.00. Notwithstanding the foregoing, the Corporation shall be entitled to receive from the Underwriters $25.00 per Security.

    And, wonder of wonders, I have also found the “Other material contract(s)” for Brookfield Asset Management dated April 26, 2007 related to this issue. It does not contain the same clause – so far as I can see after a very quick skim – but it does contain the following phrase which is not strictly relevant but is so entertaining I can’t stop myself from quoting it:

    Upon and subject to the terms and conditions contained herein, the Underwriters, severally and not jointly, offer to purchase all but not less than all of the Shares from the Corporation, and by its acceptance hereof, the Corporation agrees to sell to the Underwriters at Closing Time (as defined herein) all, but not less than all of the Shares of a price of $25.00 per share for an aggregate purchase price of $200,000,000 (the “Purchase Price”). The Underwriters propose to distribute the Shares in the Provinces pursuant to the Prospectus to be filed by the Corporation in each of the Provinces in the manner contemplated by this agreement.

    “All but not less than all”! There must have been a lawyer involved!

    So, I don’t know what’s going on in the back-rooms. I suggest, though, that Brookfield has an awful lot of clout as an issuer and deal-maker and that a failed transaction would be a black eye for all concerned.

    Tobyone, welcome to the blog! For those of you just joining in, the EPCOR issue is discussed here.

    I can’t really answer your questions, much as I would like to. Many of the banks still have Tier 1 Capital room available for preferred share issuance (although Royal & CIBC are full up). I keep looking for a GWO issue that will help pay for the Putnam purchase, but it hasn’t come yet.

    There were two interesting issues earlier this spring – original issue Pfd-3’s, issued as retractibles. Those seemed to me to be reflective of a lot of demand for retractibles, enough that investors and their advisors were willing to relax the usual issuance requirement of a Pfd-2 rating.

    Buying opportunity? You’ll have to ask a young guy (or, of course, a priest). I’m old enough that I’ve made my quota of mistakes on market timing.

  6. […] There were only six, count ‘em, six trades in the entire day, for a whopping volume of 7,300 shares, closing at 23.75-99, 5×50. Even BAM.PR.N’s opening day was better, which is really saying a mouthful. […]

  7. […] New low of 22.52 today, but volumes are still low. Tick … tick … tick …. Now with a pre-tax bid-YTW of 5.31% based on a bid of 22.61 and a limitMaturity. […]

  8. […] Now with a pre-tax bid-YTW of 5.37% based on a bid of 22.40 and a limitMaturity. New low of 22.25 today … tick … tick … tick … . […]

  9. […] Now with a pre-tax bid-YTW of 5.68% based on a bid of 21.20 and a limitMaturity. The virtually identical BAM.PR.N issue is bid at 20.62 for a pre-tax bid-YTW of 5.84, and its redemption period starts six months later. […]

  10. […] It has been a long time coming – and  the fund invested too early, as I can now tell with benefit of hindsight – but as of noonish today, 80,669 shares of BAM.PR.N have traded; it’s currently quoted at 19.46-60, 3×81. […]

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