Wednesday, March 3, 2010

Ahead of the curve

The Globe and Mail has now reported the recent bond sale by Brookfield Asset Management.

I just learned from this article these bonds can be redeemed if the company suffers a credit rating downgrade.

That's a pretty safe feature and highlights another 'can't-lose' aspect to this bond issue which made it so attractive for individual investors.

The fact that I can report this story on my blog the day before a major financial reporting blog, with more detail and context, is due to two factors.

First, a skilled, experienced and involved investment advisor is a necessary precondition for developing a deeper knowledge of the investment community.

Second, my own willingness to follow the flow of information in fixed income markets and a willingness to interact and work with my investment advisor.

A skilled and connected advisor has years of experience working with markets and traders. They manage hundreds of millions and sometimes billions of dollars over decades. They protect the wealth of their clients during market crashes and they earn real, positive returns over the long term. In essence, they have seen people make millions and seen people go broke. They have survived and grown a large book of clients because they are stable wealth managers. They have the best ability to contextualize a clients personal needs and the financial environment within which they are living (ie. They understand better than most, through hands on experience, how the yield curve and interest rate cycles affect prices and yields for products and securities).

Having your own passion for knowing about the bond market isn't the easiest thing to have. It's something that usually happens late in life when you've finally tried every crazy scheme to make money and failed. Following the bond markets opens up a new world of medium and long-term investing where risk and return have inverted meaning compared to the mass-marketed, stock-market oriented education materials. The hidden world of Over-The-Counter (meaning corporate bonds are sold to retail customers privately- there is no central exchange to list sale prices for corporate bonds) fixed-income securities might seem to resemble a shadow cult, capable of mobilizing vast sums of money and deploying them for purposes of world domination. That might seem like something ridiculous, boring or unappealing for many forward thinking and capital gains/dividend-growth oriented individuals. The mainstream press would have you absolutely convinced half your savings must be in stocks and that bonds cannot be risked against stocks and must be kept in government securities. You must go out of your way and work to understand how you can personally take advantage of the bond market.

Without the willingness to reject a path-of-least-resistance way of thinking and investigate the real nature of the financial markets, and then applying that knowledge with a carefully selected advisor, the DIY investor will always be a day behind the headlines. Any individual who takes the time to find a skilled advisor (they can be young and well-trained, too), to educate themselves about the bond markets, and build a successful relationship with their advisor is truly ahead of the curve.

Tuesday, March 2, 2010


A-rated and BBB-rated investment-grade corporation.

5.2% interest for 6 years, a 5 year GIC yields approximately 3%. If interest rates remain relatively low, even if the bank of Canada raises its key lending rate by .25% every 8 weeks until it reaches 4% or 5%, this bond is of such a short term that it will likely never trade lower (at least not significantly lower) than it's par value.


Brookfield Asset Management has emerged from the global recession as a relatively strong company, according to recent press.

The executives of Brookfield are using their position of liquidity and prosperity to make up for previous losses and generate increased revenue and profits in the future. In order to increase profits they are buying properties from distressed and bankrupt sellers in the hopes of obtaining deeply undervalued properties and companies.

Some of the distressed properties and companies that Brookfield is pursuing carry long term debt. Servicing and repaying that debt was part of what led to the failure of these properties and corporations. Since a smaller, insolvent company cannot borrow money at any reasonable rate for any reasonable amount of time, the executives of Brookfield can use their investment-grade credit rating to roll-over the outstanding debt at a rate that satisfies the demands of fixed-income investors while keeping the debt service payments that Brookfield is assuming from rising. In this situation both the lender and borrower benefit and more economic activity is sustained overall and more money is made for all parties, than if the bond market had not been utilized.

Unless of course, the new properties and businesses that Brookfield purchases turn out to be less profitable than they anticipate. In that situation, Shareholders would realize dramatic decreases in earnings per share and suffer steep losses. Bond holders would keep their senior notes for 6 years and take their guaranteed interest payments and evaluate the company again when the bonds mature.

It hasn't been reported, but I know for a fact that this bond issue was sold out in approximately 3 minutes. That's all the time that the different banks not named RBC and CIBC had to decide if they were going to take a piece of this action. In this modern age of instant information, 3 minutes is hard to contextualize. Normally, new issues will be available for days or weeks (depending on market volatility and credit ratings). Compared with other 10 year bonds, yielding similar coupon payments that were floating around in December without a buyer in sight, 3 minutes tells you that there was zero doubt that this was an attractive investment product for any prospective buyer.

How do you get in on a deal like this? You have to have a good advisor who understands and works with the fixed-income desk regularly. Equally important, you have to work with your advisor regularly so that they are thinking about your account and your needs when new issues arise.