Read it and weep.
In yesteryear month, two TSX-listed issuers, Brookfield Alternative energy Partners LP and Dundee Corp. have proposed plans that undermine the expectations – indeed, the rights – enjoyed by holders of preferred shares.
Investors purchased the two plenty of securities – specifically the Series 5 prefs from Brookfield Renewable and the Series 4 prefs issued by Dundee – on the understanding that they’d get their money-back once the issues matured. In other words, they paid their cash with the knowledge that in many years they’d obtain a return from the principal
But Brookfield Renewable, which calls itself the “flagship listed renewable energy company of Brookfield Asset Management,” and Dundee Corp. apparently have a different view.
Next Friday, Brookfield Renewable preferred shareholders need to choose an exchange offer whereby they swap their five-per-cent securities issued in 2013 for 5.59-per-cent Series 5 preferred units provided by Brookfield Renewable energy Preferred Equity, another but related issuer.
It seems the marketplace – and $175 million of these perpetual prefs were issued – has provided its judgement: the prefs hit a six-month low during the week. The prefs, now yielding 6.75 per cent, have traded down because the November announcement from the offer.
Those prefs came with certain terms, specifically that they couldn’t be redeemed prior to April 30, 2018. After that date, the issuer was required to pay reasonably limited that declines to $25 “on or after April 30, 2022.”
It appears holders will not be getting any of those potential benefits if a lot more than two-thirds from the holders tend in to the offer.
The proposal has upset some holders, with one suggesting Brookfield Renewable “seems to become urging current owners of the shares to redeem for a lesser product which they pretend is a better investment.”
For example, the Series 5 preferred units “do not have access to a fixed maturity date and aren’t redeemable at the option of the holders of Series 5 Preferred Units,” based on a Brookfield Renewable circular. “The ability of a holder to liquidate its holdings of Series 5 Preferred Units may be limited.”
The circular also said that the exchange offers holders increased distributions, substantially similar other terms and conditions, unanimous board recommendation along with a fairness opinion. Calls towards the company seeking further comment weren’t returned.
Dundee, meanwhile, now released the circular because of its Jan. 7, 2016, meeting where holders of their Series 4 pref shares (which pay five per cent) will vote on exchanging them for Series 5 prefs that pay six percent. Dundee has stated the proposal “is fair to the holders of the Series 4 preferred shares – and is in the needs of the company.”
This proposal – that also needs approval of two-thirds from the holders – has attracted controversy for two reasons.
One is whether the higher coupon is high enough. A market test – whereby Dundee redeems the Series 4 prefs (which are retractable next June) and issues a new class – would answer that question. Dundee, with a $300-million market cap, is trading at levels not observed in six years
The second concerns the fees paid towards the brokers (as well as their clients) to tender. Dundee pays one percent towards the brokers (and 1.25 % to the clients) if the tender is created before year-end and that falls to 1.5 per cent (with one-third of this going to the broker) if the vote arrives later. Dundee didn’t return calls requesting comment.
Brookfield can also be paying soliciting fees, but they’re not as high.