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.

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