With another prospectus out in the market, the next wave of energy trusts is taking another run at convincing investors that a promising new investment model can work.
And this time, it's likely to extend beyond energy, with new trusts bringing to market investments in foreign wind power, natural gas distribution and manufacturing assets.
First in line is Argent Energy Trust, which on Friday filed a preliminary prospectus ahead of an IPO bid the company hopes will raise $325-million. That comes after it failed in an IPO attempt last summer made during a down-cycle in markets. Argent hopes to capitalize on the continued thirst for yield, with 120,000 acres in Texas and Oklahoma that promise enough oil production to sustain a solid yield. Marketing is expected to start late in the month. But it's a tough time to sell energy stocks, which have been down across the board. As one investor put it: "can you imagine trying to sell an energy deal in this market?"
Argent chief executive Brian Prokop acknowledged that the timing looks tough, but said it's hard to predict swings in oil price.
"Trying to time the market is a fool's game," he said, adding that the company wanted to get out early enough to close the deal before summer, and to give markets plenty of time to digest the size of the offering. But, he said, "obviously, if things turn even worse in two weeks time, we would hold off."
And the potential for trouble hasn't dissuaded others, who are lining up to pursue this new model. Murray Lee, who leads PwC's cross-border tax practice, is aware of another energy trust and three other non-energy trusts that "have a realistic shot at filing their prospectuses by some time in the third quarter."
The reason: this generation of trusts, which uses foreign assets exempt from the rules that produced the 2006 Halloween "Massacre," produces both the yield investors want, and a vehicle for management teams to raise money for smaller overseas assets. In the U.S., for example, IPOs aren't typically launched for less than $500-million, leaving a void that Canadian-listed companies can fill.
"In Canada, you can come in, do a listing on the TSX and get it done quicker and at a smaller valuation," Mr. Lee said. "People misunderstand. They think it's a tax play. It's not. It's a capital markets play. We just happen to have overcome a tax problem to allow the capital markets to move more effectively and efficiently."
Plus, there are deals out there, which is why the model is quickly pushing beyond energy into other assets all over the world -- Asia, Latin America, Europe. "You go over to Spain or France right now, for example, and you may well find assets that are trading at very low values on the market because they just can't get financing," said Bob McCue, who leads Bennett Jones LLP's tax dispute resolution practice. He has, with Mr. Lee, been among the leaders in establishing the new trust model.
Argent, if it can complete the deal this time, will be the third trust using the new foreign asset model. It is attempting to enter a field with mixed success. One of its progenitors, Parallel Energy Trust, has had issues, with a reserve writedown and a unit price down 35 per cent from its IPO. Eagle Energy Trust has done better. Eagle, since it began trading in late 2010, has outperformed energy names like Suncor Energy Inc. and Crescent Point Energy Corp., while spitting out a hefty 9.4 per cent yield.
Both companies also successfully raised money in recent weeks, and Mr. Lee is convinced that this model will "resurrect the income trust."
"The demand for yield still exists and there's a lot of assets throughout the world," he said. "I think it's going to be a little bit slower, but it could become substantial."
The Argent deal is being co-led by Scotia Capital, CIBC World Markets and RBC Dominion Securities.