Preferred units have advantage for Brookfield
It looks like a duck and walks like a duck, but in this case it is not a duck. There’s one little — critical — difference.
This week Bermuda-based Brookfield Renewable Partners L.P. came to the market with an offering of rate reset preferred units.
The words, “rate reset preferred units” are similar to those that would be used in a normal issue of rate reset preferred shares.
But Brookfield Renewable Partners L. P., which raised $250 million at 5 per cent, is not a normal issuer. Instead it’s a limited partnership, a structure that brings its own set of rewards and challenges.
For Brookfield, the security provides equity treatment on the balance sheet. For the investor, the quarterly income distribution represents a mixture likely split between Canadian eligible dividend (50 per cent); return of capital ( 25 per cent) and ordinary income (25 per cent.)
In marketing materials prepared for the offering, investors were advised that holders of the preferred units “will not be subject to tax on distributions …. in the same way as they would on dividends on preferred shares of a Canadian corporation.” On a normal rate reset issue, eligible dividends are subject to a dividend gross- up and a federal dividend tax credit.
For an individual investor, there is no clear answer on which security, units or shares, is more desirable.
Apart from Brookfield, real estate investment trusts have, over the years, also issued rate reset preferred units. In January 2011, Rio- Can REIT made history by becoming the first REIT to issue such a piece of paper. It raised $125 million at 5.25 per cent and redeemed it early last year.
It took at least three years for RioCan to get to the stage where it could issue such a security. Regulatory and unit holder approval as well as securing an advanced tax ruling were all required. Given the time and costs involved, the security is only an option for a few issuers. ( RioCan raised $ 149.50 million from a similar issue in late 2011. That issue is still outstanding though RioCan can redeem next June.)
In 2012, Artis REIT joined the fray and raised capital on two occasions: a $75 million raise in September and a $ 100 million financing in March 2013.
At the time, Artis, said preferred units were are “an alternative” to a debenture offering with the overriding feature “that there will be equity on our balance sheet.” For Artis, the preferred units were also cheaper than the yield on its trust units. Two for two. That’s the state of affairs at BBB- rated Bruce Power LP, which priced its second debt financing Thursday. The privately held entity, which leases and operates eight nuclear reactors on Lake Huron and sells the electricity to the grid under a long- term contract, raised $750 million.
That’s $ 150 million more than was anticipated when the deal was launched in the morning. Bruce, whose major investors are TransCanada and OMERS, raised $350 million for seven years and $ 400 million for 12 years.
Last June, the l i mited partnership, which is also the country’s only standalone nuclear electricity producer, did even better. In its debut borrowing, it ended up with $ 1 billion, or twice what it intended.
The $ 1 billion was split between five years ($ 600 million) and 10 years ($ 400 million).
The choice of lead managers, with Scotia Capital and TD Securities getting the mandate, was the other common factor on the two financings.
BRUCE POWER RETURNS