Behind RioCan’s decision to redeem its first-of-its-kind rate reset preferreds

A piece of credit history will be made next month when RioCan Real Estate Investment Trust redeems a problem of cumulative rate reset preferred trust units.

When occurring C and holders receive the return of the original $125 million investment as well as the payment from the quarterly distribution C you will see another REIT with preferred trust units as part of its capital structure. Artis REIT raised $75 million in September 2012 and $100 million six months later.

But RioCan was the very first: In January 2011 it raised $125 million at 5.25 per cent at a spread of 262 basis points above five-year Canada bonds.

But a minimum of 3 years of labor was required to get RioCan to the level where it might issue such securities. Those steps included: Canadianizing the notion that have been extremely popular among Australian REITs; getting approval from RioCan’s unitholders to issue such a security (an issue taken care of at its June 2010 annual meeting); obtaining an advanced tax ruling from Revenue Canada (received in October 2010); and dealing with the rating agencies (DBRS assigned a Pfd-3 high rating for the units.)

So in late January 2011, RioCan launched its breakthrough deal. RioCan liked the security enough that later in 2011 it did another issue. It raised $149.50 million at 4.70 per cent along with a spread of 318 basis points.

RioCan’s decision to redeem C and not give holders a choice of converting their stake either to another fixed rate preferred unit or a floating rate preferred unit C surprised some market participants. Those participants argued for RioCan to take benefit of the low spread (262 basis points) and the low five year Canada bond yield (about 50 basis points) to garner $125 million of inexpensive capital.

But those arguments didn’t cut the mustard with Cynthia Devine, RioCan’s chief financial officer.

In an interview, Devine, who has heard from some holders, listed three good reasons for deciding to redeem:

Preferred units inside a REIT are now treated as 100 percent debt by the rating agencies. This means that RioCan doesn’t get any equity credit on its balance sheet for having issued preferred units. “They view it as more of an obligation similar to debt,” said Devine who noted the rating agencies have a different view when it comes to corporations. And assigning one hundred per cent debt towards the securities seems different from what prevailed 5 years back. When Artis completed its deal in 2012, it said rate resets were an alternative to debentures “with the overriding feature that there will be equity on our balance sheet.”The refinancing rate of 262 basis points isn’t that attractive. “Both of these spreads [on the new fixed and floating rate preferreds] are greater than spreads we are able to borrow at,” she said. Apart from its operating lines [which are priced at “125 basis points over” the U.S. or Canadian prime rate] RioCan can borrow five-year money on an unsecured basis about 50 basis points less than the 262 basis points it might be necessary to pay if it extended the maturing preferreds.In December, RioCan announced the sale of their U.S. assets. “We have a lot of proceeds and we make it clear that one from the primary uses would be to pay down debt. This is easy to execute because it’s coming due in March,” she said.

bcritchley@postmedia.com