National Post

Preferred share swaps cause for concern

- Barry Critchley Financial Post bcritchley@nationalpo­

Read it and weep. In the past month, two TSX-listed issuers, Brookfield Renewable Energy Partners LP and Dundee Corp., have proposed plans that undermine the expectatio­ns — i-ndeed, the rights — enjoyed by hold ers of preferred shares.

Investors purchased the two lots of securities — specifical­ly the Series 5 prefs issued by Brookfield Ren-ew able and the Series 4 prefs issued by Dundee — on the understand­ing that they’d get their money back when the issues matured. In other words, they paid their money with the knowledge that in a number of years they’d get a return of the principal

But Brookfield Renewable, which c-alls itself the “flagship listed renew able energy company of Brookfield Asset Management,” and Dundee Corp. apparently have a different view.

Next Friday, Brookfield Renewable preferred shareholde­rs have to decide on an exchange offer whereby they swap their five- per- cent securities issued in 2013 for 5.59-per-cent Series 5 preferred units offered by Brookfield Renewable Power Preferred Equity, a different but related issuer.

It seems the market — and $ 175 million of these perpetual prefs were issued — has given its judgment: the prefs hit a six-month low during the week. The prefs, now yielding 6.75 per c-ent, have traded down since the Nov ember announceme­nt of the offer.

Those prefs came with certain terms, specifical­ly that they couldn’t be redeemed prior to April 30, 2018. A- fter that date, the issuer was re q- uired to pay a premium that de clines to $ 25 “on or after April 30, 2022.”

It appears holders won’t be getting any of those potential benefits if more than two- thirds of the holders tend into the offer.

T-he proposal has upset some hold ers, with one suggesting Brookfield Ren-ewable “seems to be urging cur rent owners of the shares to redeem f-or a lesser product which they pre tend is a better investment.”

For example, the Series 5 preferred units “do not have a fixed maturity date and are not redeemable at the o-ption of the holders of Series 5 Pre ferred Units,” according to 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 exc-hange offers holders increased dis tributions, substantia­lly similar other terms and conditions, unanimous board recommenda­tion and a fairness opinion. Calls to the company seeking further comment were not returned.

Dun-dee, meanwhile, this week re leased the circular for its Jan. 7, 2016, meeting where holders of its Series 4 pref shares (which pay five per cent) w-ill vote on exchanging them for Ser ies 5 prefs that pay six per cent.

This proposal — which also needs approval of two-thirds of the holders — has attracted controvers­y for two reasons.

O- ne is whether the higher cou pon is high enough. A market test — whereby Dundee redeems the Series 4 prefs (that are retractabl­e next June) a- nd issues a new class — would an swer that question. Dundee, with a $300-million market cap, is trading at levels not seen in six years

The second concerns the fees paid to the brokers ( and their clients) to tender. Dundee will pay one per cent to the brokers ( and 1.25 per cent to t-he clients) if the tender is made be fore year-end and that falls to 1.5 per cent (with one-third of that going to the broker) if the vote arrives later.

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