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Brookfield Reinsurance Takes Out Argo

Most that read the comments section already know that Brookfield Reinsurance has agreed to purchase Argo Group Holdings (ARGO) which has a baby bond and a preferred stock issue outstanding.

Argo has had plenty of financial issues in the last year and publicly announced they were searching for alternatively (i.e. selling the company) so this was not a major surprise.

I had held the 6.50% debt issue (ARGD) which I have now sold–1 simple reason–I want nothing to do with anything named “Brookfield”. I suspect the issue will be fine, but just the same I have no trust in Brookfield so to keep it simple I just sold. The various Brookfield companies have a history of not paying dividends on acquired company’s–and in the most recent case of Altera Infrastructure took the company into chapter 11.

If I were an owner of the 7% resettable preferred shares (ARGO-A) I would ponder the risk that Brookfield will declare and pay the dividend (it is non-cumulative). The share price is now $24.40 which is up from a low of around $18. Historically Brookfield will only pay dividends on a portfolio company shares if the portfolio company is “carrying its own weight”–they are not going to ‘chip in’ to pay the dividends. Company’s that are in financial distress may well have their dividend suspended.

This is simply a note to make sure that preferred share holders weight their options and go into the acquisition with a well thought out plan. I have no ‘dog in this fight’.

24 thoughts on “Brookfield Reinsurance Takes Out Argo”

  1. When I look at the risk of preferred dividends being suspended, using very rough latest rounded numbers, I see that the cost of paying them is about $10 million per year, meanwhile, the company has about $100 million cash on balance sheet and is currently paying about $40 million dividends on the common, so it seems that ARGO is in a good enough position to be able to continue to pay preferred dividends. Please, critique my argument, what is it that I am not seeing here?

    1. Ha, and here I am owning a large number of Brookfield issues that have on the whole treated me quite well. Brookfield is a money making machine

      Common Brookfield I own




      1. Can you tell me then, I had owned BAMR because it gave a 1099, but they exchanged it for bam and bnre. Am I stuck with a k-1 (or 2) now?

      2. Maverick I think the story I am reading is the companies that Brookfield takes over are either decent or having issues. Investors are holding the preferred or debt of these companies looking for higher returns or hoping for a turn around. Brookfield comes in and buys them.
        So the two sides are Brookfield investors profit while investors in the companies taken out are at higher risk.
        So your the Brookfield investor and others are the ARGO investors.
        Lesson here, sell companies Brookfield is buying and buy Brookfield. I see both your point and Tim’s

        1. Charles, yes many times Brookfield buys distressed assets or companies having issues. It is not Brookfield’s responsibility to bail out shareholders of those acquisitions if those assets or companies can’t do it on their own.

          That is just good business by Brookfield for it’s shareholders. May not be appreciated by shareholders of the company being acquired but those companies were typically in trouble to begin with so those shareholders already had taken on extra risk

          But yes, it’s better to be a Brookfield shareholder vs one of their distressed acquisitions

    2. Been a long time Brookfield shareholder. Why I have maintained my ownership is management has delivered.

      Understandably their business model put them in the line of fire. Buy deeply distressed assets, turn them around, and hopefully recycle the capital by selling them for a premium. None of these steps involves protecting existing investors interests.

      Easily understand angst in the investor community but Brookfield type companies are needed in any functioning society or the assets inside Zombie, distressed, or mismanaged companies would become totally unproductive.

    3. I’m sure like a lot of Canuck investors I’m holding BAM ,BN, BAM infrastructure and a number of their prefs. After seeing Hindenburg’s impact on Gautam Adani I’ve always had in the back of my mind what if BAM is also a house of cards. Whenever a CDN PM is interviewed about Brookfield they all say its a complicated spider’s web of companies but Bruce Flatt is a genius and we trust him. Also no doubt all the CDN investment firms have a lot of dealings with Brookfield and are hesitant to ever say anything negative in order to keep doing business with them. Just food for thought and I too sold my Argo pref this week just to be safe.

  2. Tim, “I have no trust in Brookfield”, does that include the CEF ‘Brookfield Real Assets Income Fund’, ticker RA?
    Can you explain in one or two sentences why you feel so strongly? TIA!

    1. PierreK–no my opinion is not for CEFs. The various Brookfield company’s are not doing charity work–so investors have to watch their pocketbook. When one of the Brookfields bought Altera Infrastructure a few years ago folks thought Brookfield money would be a plus–but instead they took them into chapter 11 and restructured all their debt and if I remember right preferred holders got zip. The chapter 11 case is here.

      Way, way back Brookfield bought a REIT–MPG Properties (just a guess from an old brain)–it is now Brookfield DTLA. The preferred dividend was suspended–here is the current scoop on this one–it is cumulative–so far $227 million of accrued dividends and the shares trade at $3.44/share.

      Series A Preferred Stock
      As of March 31, 2022, the Series A preferred stock is reported at its redemption value of $470.2 million calculated using the redemption
      price of $243.3 million plus $227.0 million of accumulated and unpaid dividends on such Series A preferred stock through March 31, 2022.
      No dividends were declared on the Series A preferred stock during the three months ended March 31, 2022 and 2021. Dividends on the
      Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share.

      So there is a history with Brookfield companies–the lesson is (at least for me) that Brookfield will not bail out a company they acquire–if the company has financial issues (like Argo) the company will need to stand alone financially.

      As for the various Brookfield companies they seem to be pretty good company’s–but as an investor “buyer beware”

      1. The rating agencies typically provide a one notch uplift for Brookfield’s ownership. But if your starting point is deep junk CCC equivalent like Altera, then it’s only bumping you to CCC+ which is still basically a 50/50 chance of default within 5 years. So Brookfield is hardly guaranteeing these companies but their ownership is positive nonetheless.

      2. Thanks much for the clarification, Tim!
        I did some further ‘research’ and reading and yes, I can see why you’re not a fan.

  3. Sold half my position for 24.20 with a bid of 23.80 and asked of 24.30. Wide spread. There seem to be a lot of attractive issues in insurance: Allstate and CNO baby bonds and AELA.

    1. Potter, CNO baby bond, hadnt really followed that one. The old nasty reincarnated Canseco insurer. Got me some at $17.88 today for a 7.15%. CNO the common is bouncing around its all time high. Worth a few in the ol risk bucket for me.

  4. One less to worry about- sold it last July. That reset ARGO-A 5yr + 6.712% would be nice to be a keeper.

  5. What is unclear to me so far is how Brookfield will treat ARGD in particular. In other words, although they have said “Merger Sub will merge with and into the Company in accordance with the Bermuda Companies Act 1981 (the “Merger”), with the Company [Argo] surviving the Merger as a wholly owned subsidiary of Brookfield Reinsurance (such entity, the “Surviving Company”),” they have not said whether or not Brookfield Re will assume the debt of the Company…. Credit wise, if assumed, that has to be considered a positive, right? But in this day and age, one has to wonder what the risks are of this ending up being an event heading toward darkness? I had cut my position in ARGD by 75% back in late April when ARGO announced its plan to seek alternatives due to that potential risk… I’m up in the air on the balance wondering if this announcement increases or decreases that risk of it going dark eventually as a wholly owned sub.

    1. “ they have not said whether or not Brookfield Re will assume the debt of the Company”

      Why would they assume that debt? It would be credit negative for BNRE.

      That said, just because they don’t assume it doesn’t mean ARGO won’t continue paying its preferreds and bonds so long as they have the financial capability to do it and they’re currently a BBB- rated company even after all the bad news.

      I think the BNRE acquisition takes the biggest risk to ARGO off the table — that BV is wildly overstated due to unaccounted for liabilities. Brookfield has surely done their due diligence.

      However, I don’t know that BNRE would be interested in continuing to make SEC filings and pay listing fees for ARGO to remain listed. This could end up like the Arch/Watford merger with the preferreds going dark (although ultimately called).

      I do think the Brookfield ownership is credit positive and provides a backstop. The rating agencies provide a one notch uplift to Brookfield’s other entities due to an implicit backing/lifeline.

      1. They would assume the debt if they had to, but I think the structure whereby ARGO survives and ends up being a wholly owned sub most likely avoids that based on the prospectus language…. Still it would be nice to hear a definitive statement of sorts either way…..

        Agree that either way Brookfield Re adds a credit positive to the ARGO story, however I share Tim’s mistrust of the maze of companies that is Brookfield… And although being a part of them may add to the credit worthiness of ARGO through to maturity, I know I will mature before ARGD will. So if going dark is a true risk, I’d prefer not to leave my heirs with the headache of trying to figure out what to do. At least with WTREP you had a pretty clearly defined path toward them being called pretty quickly after going dark anyway…. You’ll not have that with ARGD, so I’m not certain what I’m going to do

    2. 2wr–I sold at a breakeven–just too many other things to worry about other than what these folks MIGHT do.

    1. NIKOLAS–good question–but one I will not have to worry about after selling mine.

    2. You would have to go read the ARGD documents. Lots of notes and other debt instruments that trade on the markets have provisions that allow for the borrower to suspend payments for very long periods, etc. I haven’t read the docs, so I can’t say what the terms are for ARGD.

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