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’.
I’m not skilled at reading such things, but I think Argo has already filed to delist both ARGO-A and ARGD and to stop filing for them: https://www.sec.gov/Archives/edgar/data/1091748/000110465923121236/tm2331225d2_1512g.htm
The rules they checked say this takes effect 90 days after they certify that the each security is held by less than 300 people: https://www.law.cornell.edu/cfr/text/17/240.12g-4
https://www.law.cornell.edu/cfr/text/17/240.12h-3
I have no idea what this means in practice, but for this and other reasons I’ve decided to take the consensus advice here and not be tempted by these.
Brookfield has a history of defaulting on preferred stocks from companies they’ve acquired. I wouldn’t touch anything they’re buying. Though their common stockholders like it because screwing a handful of over preferred investors benefits the bottom line more than the badwill hurts them. Bad rep for preferred stocks all around when things like that happen.
While my inclination is certainly with you not owning, I have a little different angle. This is something someone needs to be aware of the rules of the game before they play. Should the parent provide welfare to the subsidiary if it cant feed itself? Or should the subsidiary provide continual welfare payments to the parent? Own issues like the latter and you never have a concern about getting paid… When you own the former its always going to be a risk because the parent has all the financial resources and expects its children to contribute. If they dont, there is no reason for their existence.
Brookfield property is the former.. yet the specifics also matter. As Mr. Grid says though, you have to watch it carefully.
What I watch with the Brookfield property.
How many properties are remaining?
What is the quality of the properties?
How much of their properties is collateralized by individual mortgages or other recourse debt?
Is the parent or insiders buying back shares?
What is management saying?
Will the prefs be good if they save only one property?
Ok, the last question was too cute, but check out Brookfield west…
https://www.brookfield.com/news-insights/insights/new-city-rises-manhattan-0
Agreed Grid. I have owned multiple Brookfield issues and have had ZERO issues with them “defaulting on payment”
Their history of defaulting on payment is an old wives tale I believe based on when Brookfield bought some really weak companies at a discount that they tried to turn around. Alas they could not and Brookfield’s stance is along the lines of what you state. The subsidiary has to be able to stand on its own and support itself financially. Brookfield is not in the business of providing welfare to really weak subsidiaries that can not support themselves financially
That pretty much sums it up, Mav.
It’s not an old wives tale it’s an established fact that they defaulted, The debate is whether it was justified. Spinning off into a subsidiary can be considered a smart business decision to avoid paying bagholders, or a loophole around the regulations that exist fir good reasons.
Sorry but I have a much different experience with Brookfield than you do. And yes, I believe it is an old wives tale to say “Brookfield has a history of defaulting on preferred stocks from companies they’ve acquired. I wouldn’t touch anything they’re buying.”
You seem to be implying they do it all the time. That is not accurate. As Grid and I both noted, what Brookfield has a history of is making a subsidiary stand on their own financially. So yes, they may have defaulted on some preferreds of a struggling company they bought at a discount to try to turn around but that is more the exception than the rule and more about the company they acquired and the poor shape they were in than them. As to whether it is justified or not, I believe it is as Brookfield has an obligation to look out for themselves and their existing shareholders and not provide welfare to keep a struggling company they acquired afloat
That at least has been my experience and I hold several Brookfield issues and have never had a problem with them defaulting. But I agree, if you own a struggling company that Brookfield is acquiring, I would not hold onto any preferreds. A strong company being acquired is a different story and I would have no worries
Mav, I like buying stuff on credit but my bank was sold. Can I stop paying my credit debts if it is causing me weakness? Paying contracted debts isn’t welfare, Welfare is welfare.
Martin, I also wont buy preferreds from entities I dont trust. And there are a lot of them! But there is a lot of loose terminologies being used, including me. But you have to remember at the core, preferred dividends are definitely not contracted debts. In fact they arent contracted to pay anything. A companies fiduciary responsibility is directly to its common stock shareholders. Debt holders have legal contract protections. Preferred holders really just kind of hang out there in left field. In a figurative sense, preferreds are really “the enemy” of both sides, with no strong advocates being the hybrid issue they are. Management certainly doesnt view them as allies, especially after they collect the IPO money. Hence why you hear in conference calls “Take out of the preferreds” any chance they see to benefit the shareholders. They may say “stock buy backs” to “increase shareholder value”, but they never say “take out the common shareholder”. So to me there is natural inherent danger in preferreds from the get go.
If a parent owns the common stock of a subsidiary that is a money loser, they really have no obligation to pay the preferreds, as the original basis of a preferred is first in line fixed payments of a companies profits. If they are not making money and dont have any retained income on the balance sheet, there really is no reason for a preferred dividend to be paid.
Now keep in mind I am referring to nuts and bolts situations, not nefarious strip off assets, and shell games etc. you were mentioning… To me Blackstone provided a worse example. It bought out PSB which was an A credit company, and delisted and levered up the company’s balance sheet to make it sub investment grade to tank the preferred. But, this can happen to any company getting acquired.
This is why I like what Moodys refers to as strong subsidiary weak parent, subsidiary preferreds. For example, Ameren is useless without its two subsidiaries providing the mothers milk of cash from operating profits.
Can’t the same logic be applied to all preferred issues? Once the money changes hands they are no longer accomplishing anything just sitting there as a debt obligation. There are restrictions to the common stock if preferreds are not paid but obviously there are ways around them. Spinning off to a subsidiary, vague clauses, creative terminologuy, etc. Essentially making certain types of preferreds unbuyable. Lesson learned, I don’t buy many sectors any more.
I think the difference of buying a troubled REIT or a troubled shipping company and merging one of your insurance companies with a target are very different. I am not saying that they might not default in the future but for one thing insurance companies have pretty close scrutiny by insurance regulators. They would not look kindly on BNRE or any of its subs going under. Nevertheless shenanigans can happen.
If only others would not take kindly on subs going under. Instead of calling it a good thing.
The ESGRO question on the Reader Initiated Alerts page led me to notice that ARGO-A looked really good on paper. It’s paying 7.39%, is well below par, and resets to 5 year + 6.712% next September. Searching then led me to this page, where reliable people say “run don’t walk”.
I tried to read the Prospectus, but I couldn’t really figure out what the downside was to the company (which company?) if they just stopped paying. On the other hand, it looks like they made their December payment, which is a little odd if they were planning to go dark.
Any updates since the last comment a year ago? Anyone brave enough to wade in?
Nathan read the comments below. Comes down to history and how Brookfield has done business. They rolled one of their own companies up into another because it wasn’t doing good and that was the easiest way to recapitalize it. Tim noted what happened to another company that was owned by them but not branded as Brookfield.
Mavrick said it best, he has had no problems with them when investing in the top tier of their companies, not the subsidiaries. Is the risk verses the reward of owning the subsidiary comparable to owning a Brookfield entity?
Personally, I love subsidiary preferreds, it mostly what I presently own. But only with entities where they need the actual subsidiary to survive. Such as Ameren subsidiary preferreds which in effect makes the preferreds structurally superior than the underlying Ameren hold co bonds are. But I agree here. I dont really want to own in situations like this. It doesnt mean they cant be good holds, but with preferreds, I dont want to be put in a position to get hosed possibly. I want that threat off the table.
Grid, speaking of subs and layers of complexity..
Care to guess which issue this is?
An independent board member bought ~14k shares of their pref last week.
One clue: The pref trades at ~$13.
Another clue: it is an issue (I assume) you would not touch.
One of those Brookfield property preferreds would be my guess?
Grid. I think you may be onto something.
Bonus points if anyone can name the issue and the insider that bought.
Buying prefs related to CRE is a minefield now.. but there are many Mis-understandings and there will be survivors. Place your bets!
BTW, I will bet heavily FBRT-E will indeed survive. It’s not cheap but it’s also not expensive.
Maine, I totally agree with you. And probably the vast majority will be fine. I just dont at this point want to play the game and pick the wrong horses! Last year, I made a lot of money on bank preferreds. Looking back it was just fortunate patience and timing and riding the wave and then not getting greedy in the end. No skill terms in financial deep dives and half baked financial understanding. Just basically being fortunate. I have nothing in banks and CRE now and no intentions for a while, as I used up a lot of my luck. And have no desire to research or rely on Moron and PennYlessY to help me either! Kind of just relaxing and having a mostly “risk off” year and just wait. Of course gotta have a little fun, so I have some higher yielders like the defunct AIC and SJIJ bought at good prices. Have another ~10% YTM trust issue and reentered DPL Capital Trust II on plus 9% YTM also.
My best returns though this current year has been running a big time heater in sports betting. 13 winning picks in a row capped off on a nice ML bet on Chiefs. Taking a little time out to savior this too, until Masters and NHL playoff series bets roll around ha…But no CRE bets for me. :). Actually thinking about rolling off some ~6% QDI perpetuals wasting away tax wise in my Roth and hitting that 5% 18 month noncallable CD! Pretty weak I know, but as Alpha says, there will be more opps down the road. I just have to wait for it to be in my personal comfort zone.
Wow, grats on the heater. I have a love/hate relationship with sports betting, in the hate category now. there is nothing better than winning silly bets.
I have the benefit of working in the industry in a past life, so I know enough but that could also be dangerous too. There is so much BS out there, half (actually 80%) the battle is sifting through it.
It’s been a good run, so I’ve been trying to use a similar strategy to lock in gains, and force myself to spend time away from the screen. My most recent bond purchase is an increase in the SJI 2031 note, which I found thanks to you. 8.7% 10 year IG paper?! Also have a ton of munis yielding about 5% at cost. It was a blast buying them last year, now they just sit there.
In terms of “investing for the challenge” and “investing to generate income to live,” I am probably 75% the former.. but I should switch that and spend time away from the markets. It’s hard to walk away when the “gettings good” though.
Ok, back to Brookfield. Property.. it’s refreshing to see an insider “put their money where their mouth is,” especially when the name has been trashed. They purchased a little less than $200k. The company has actually been buying back shares as well. This has been covered on prefblog.com and Twitter. And yet the shares trade from $9 to $15 still. I don’t blame people for avoiding another junky Brookfield sub, buts it’s also possible they keep this pup alive for many years. The whole thesis is that they have plenty of trophy assets left, and their value alone covers the prefs.
I still hold a position but have trimmed it significantly after the 35% run. Gotta takes whats I cans gets. Uncle Sam happy.
Maine, the more I think about it over time, the more I think there is no “good or bad investments”. Just investments to match each persons individual investing profile and strategy. And fully accepting the potential benefits and losses any one can have. People have suffered losses with the safest of IG fixed and the riskiest of the junk perpetuals. Timing and entry points decide as much as the quality chosen. I have found it relaxing to finally get a fair modest return on “risk off” assets unlike previous 10 years so I am going to take advantage of it and stick my nose in the corner for “investing time out” , ha.
Thanks, this is fine advice. Do you have thoughts on BIPI and BEPI? Are they on the “need the subsidiary to survive” side of things, or are there hidden risks that aren’t apparent here? My thought had been that because both are associated with something publicly tradeable they are likely to honor their debts if they can, but now I’m less sure.
Nathan you bring a fair point that gets forgotten. There are semi autonomous subsidiary preferreds and captured and buried subsidiaries. The ones like Infrastructure and Properties are largely more rated on their own profile. Sometimes from what I have read they may upgrade the credit rating a positive tick if parent is strong. Assumption being they will help them out if needed. But certainly no guarantees and credit rating agency doesnt state they will either….Its the “captured and buried” subsidiaries I would be more concerned about all things being equal.
Bipi and Bepi are perpetual sub notes not preferred and I believe are guaranteed by parent companies in some form
Keep in mind these are fake news notes. They are QDI and can be deferred indefinitely like a preferred. If it walks like a duck…….
Fair enough. I’d have to look but I do believe these remain sub debt and don’t convert to preferred in a bankruptcy/liquidiation like some of the other Brookfield sub debt (even with maturity dates). That might be the one slight credit enhancement of these besides that I think parent can’t pay common or pref dividends if these are not current. That’s just what I remember off top of my head so I could be inaccurate.
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?
Amen, Brookfield = Vampires…have always avoided their various companies.
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
BAM
BEP
BEPC
BIP
BN
Preferreds
BIPPRA
BPYPN
BPYPP
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?
BAM and BN are both 1099’s and qualified dividends per their guidance
https://bam.brookfield.com/sites/brookfield-bam/files/brookfield-corp/overview/tax-q-a-canadian-and-us-shareholders-dec-2022.pdf
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
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
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.
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.
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!
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.
https://cases.stretto.com/altera
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”
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.
Thanks much for the clarification, Tim!
I did some further ‘research’ and reading and yes, I can see why you’re not a fan.
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.
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.
One less to worry about- sold it last July. That reset ARGO-A 5yr + 6.712% would be nice to be a keeper.
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.
“ 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.
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
2wr–I sold at a breakeven–just too many other things to worry about other than what these folks MIGHT do.
2wr hit it on the head – its hard to tell what Brookfield will do. In most of their acquisitions, that seems to be true. Not irrational for them, but as an investor, I don’t like owning something subject to the “black box” decisions of a management team that has screwed investors before.
Tim, I am with you, but a bigger coward. I bailed on Argo issues last year.
ARGD is not a Junior Bond , how they can not to pay Interest on it without default ?
NIKOLAS–good question–but one I will not have to worry about after selling mine.
I sold the Argo preferred but kept ARGD debt (for now).
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.