There is always a risk in investing in companies that are incorporated in offshore domains. Teekay Offshore is a partnership incorporated in the Marshall Islands jurisdiction. Normally this doesn’t make much difference, but sometimes the geography of incorporation makes a huge difference – laws that apply in Canada and the USA may not necessarily apply to other jurisdictions.
I’ve written about Teekay Offshore (NYSE: TOO) before (a bunch of posts here), but today, Brookfield initiated a “take-under” offer, offering to buy back the 49% of the company they do not own. They already took control from Teekay corporation (who themselves were over-leveraged and needed the cash). TOO was trading at $1.16 last Friday, and the offer was at $1.05/unit.
The issue is that one has to read the legalese on the partnership units, and the cross-section with applicable Marshall Islands law to figure out what they can and can’t do to make this transaction occur.
Of particular note are the preferred shares, which on paper have very good yields. For instance, TOO.PR.E has an 8.875% coupon and is now trading at $16/share (par value is $25) which gives it nearly a 14% yield.
Looks like a good return on investment, eh? Brookfield will certainly continue to pay those preferred dividends since they will want to certainly make distributions with the common units when offshore drilling becomes profitable again, right?
Not so quick.
We are dealing with Marshall Islands law, where wild west type rules prevail.
What makes preferred investors think that the wholly-owned partnership won’t have their assets stripped away and the preferred unitholders stranded? In Canadian jurisdictions, this would be a constructive dissolution, but who wants to take their chances in the Marshall Islands, a territory with 53,000 residents?
No positions but watching the whole story unfold.
You can look at Brookfield’s acquisition of Maguire Properties (I think) as an example of how one can choose to deal with preferreds. Brookfield never redeemed the preferreds which currently trade under the symbol DTLA.PR. They continue to accrue dividends, but are otherwise perpetual now and don’t cost Brookfield any cash outflow. Once Brookfield decides to wind up its LA office business and assuming there is sufficient value after Brookfield pays out certain obligations, preferred shareholders will generate a handsome return. But how long will that take and is it worth it?
Now that looks like perpetually trapped capital!
OMG. Brookfield, which always acted like vultures, for once relented and up their take under offer.
This one’s officially off my watchlist now. Shareholders should be happy to take the money, while all I can say to pref holders is “good luck!”.