One of the big winners for my portfolio last year were “busted” preferreds. Gramercy, RAIT, NCT, and MPG all represented huge winners for me, and, in hindsight, were such locks given their asset security I should have made them much bigger positions.
Even though I no longer have holdings in the preferreds (I do own Gramercy’s common though), I still follow the companies. So I was intrigued by the announcement that Brookfield is acquiring MPG for $3.15 per share (a very attractive purchase for Brookfield, IMO). As part of the deal, Brookfield is tendering for all of MPG’s preferreds.
I was a bit excited by this. MPG’s preferreds are trading hands at ~28 a share, but off the top of my head I knew their par value + accrued unpaid dividends were worth well more than $30. Unfortunately, a read of the merger announcement reveals Brookfield is tendering for MPG’s preffereds at $25 per share (par value) with no value for accrued dividends.
So why are preferreds trading hands at $28 per share? Pref owners can choose not tender and roll their prefs int oprefs in the new company. Owners must think the new prefs will have a good chance of getting current on dividends, perhaps thinking Brookfield will feel obligated to honor the prefs (maybe combined with thinking that Brookfield will be a better credit).
I’m not so sure this is a great strategy for two reasons.
- If more than 66% of prefs tender, Brookfield can force tender of everyone. Given where shares are trading, the market obviously doesn’t think this is an issue. I somewhat agree that there likely won’t be a forced tender, but it’s certainly a concern.
- I’ve seen plenty of these “private” busted preferreds, and in most cases the new owners simply don’t care about pref owners. The new owners try everything they can to strip asset value away from pref owners. Since Brookfield is showing such a lack of respect for pref owners in this deal, I have to think there’s a good chance that lack of respect continues once they go private and Brookfield tries to strip assets from pref holders.
Of course, I could be wrong. Maybe the shares deserve to trade at par + accrued because Brookfield will make good on the preferreds as soon as the new company is created. But at $28 per share, I think the risk of big downside is much greater than the 20% or so upside. If I still owned shares, I would hit sell, take the $28, and run.
Disclosure- Long GKK