June 3, 2009 (18.73) Review and Discussion of BAM 8.95% Notes Due June 2, 2014 CAD$500M Here is a link to the Prospectus Supplement http://rbcpa.com/companies/BAM_8.950_notes_due_2014.pdfThis filing is a supplement to the Short Form Base Shelf Prospectus US$1B, filed on January 12, 2009. Here is a link to that filing http://rbcpa.com/companies/BAM_Short_Form_Prospectus_Filed_2... Cusip 112585AF1, issued 6/2/09Not TRACE Reportable and not DisseminatedCanada Issue and currencyUnderwriters:TD SECURITIES INC SCOTIA CAPITAL INC BMO NESBITT BURNS INC CIBC WORLD MARKETS INC RBC CAPITAL MARKETS INC NATIONAL BANK FINANCIAL INC HSBC SECURITIES (CANADA) INC Proceeds used for general corporate purposes, including repayment of "certain bank and other indebtedness." Change of Control Provisions, require 101% of their principal amount, plus accrued interest. The debt would have to be repaid no later than 90 days after a triggering event. The most interesting of the Change of Control Provisions are "Below Investment Grade Rating Event." If 3 of 4 Ratings Agencies rate the notes below Investment Grade, there will be deemed a change of control. If only one Ratings Agency reduces the rating to below Investment Grade, there is no Change of Control. The notes would be put on an "Extension Period" if a number of the Ratings Agencies have placed the notes on "publicly announced consideration for possible downgrade...." and at the same time a number of Ratings Agencies downgraded below investment grade. The Extension Period would terminate when two of the Ratings Agencies or one of the Ratings Agencies have confirmed that the notes are not subject to consideration for a possible downgrade, and have not downgraded the notes, to below an Investment Grade Rating. Agency Current Credit Rating Minimum Credit Rating Allowed Fitch BBB+ BBB- S&P A- BBB- Moody's Baa2 Baa3 DBRS A (low) BBB (low) Covenants restrict BAM's ability to create certain liens; declare or pay dividends or acquire capital stock or debt of the Company; consolidate or merge, and incur certain payment restrictions that third parties may impose. The covenants will be discussed below, and are crucial to understand for this issue. Earnings Coverage Ratios - Includes all preferred shares, and is adjusted to a before tax equivalent using an effective tax rate of 28%. Coverage including Series 22 (announced just prior to this filing) on a pro-forma basis was 1.2X on December 31, 2008 and 1.1X on March 31, 2009. Restricted Payments - Company must maintain a Consolidated Net Worth (GAAP Stockholder's Equity) of > or = to US$2B. This would limit the company from paying dividends, paying distributions or for various other subsidiary payments in kind or cash. This would have to be re-reviewed if such an event were to occur. Observations: 1. Notes were priced at 8.95% for 5 year paper. This is 5 year UST (2.45) +~ 650 BPS. I would think that A- paper would be issued at less of a yield than that. Something to watch. I checked Egan Jones, and the BAM issue seems to be priced much higher than other similar credit rating issues. Egan Jones is showing several A- similar rated and duration issues to be yielding in the mid 5.50%'s. Here is another issue I pulled up from Finra with similar characteristics. This bond comes due 6 months prior and has a call provision. Hence, not apples to apples. Issuer Name Coupon Maturity Callable Moody's S&P Fitch Price Yield D.GC DOMINION RESOURCES INCORPORATED VA 6.63 12/01/2013 No Baa2 A- BBB+ 106.605 4.999 2. I do not ever recall seeing such strict covenants with BAM in prior offerings. I could be incorrect on that. 3. The Short Form Base Shelf Prospectus filed on January 12, 2009 had no mention of credit rating assurances or events. I only mention this, as this CAD$500M has such Investment Credit Rating requirements. This is the first time, I have seen BAM to be credit rating reliant. I have a ton of research not posted here at the following link.http://rbcpa.com/companies/BAM.html
Agency Current Credit Rating Minimum Credit Rating Allowed Fitch BBB+ BBB- S&P A- BBB- Moody's Baa2 Baa3 DBRS A (low) BBB (low)
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