Pundits have been predicting the rebirth of the income trust almost from the moment federal Finance Minister Jim Flaherty, on Oct. 31, 2006, closed the tax loophole that had Canadian corporations—especially oil and gas producers—converting into trusts en masse. Six years later, the renaissance is finally here, if you count four as a trend.
Crius Energy Trust successfully completed its public offering, joining Eagle Energy Trust, Parallel Energy Trust and Argent Energy Trust at the vanguard of the reinvented energy trust vehicle. On the surface, the new trusts are almost identical in structure to the old income funds. The difference: they hold only foreign assets, keeping them tax-efficient yet onside with Canadian tax law, and off the radar of any overly concerned finance minister.
“What’s driving this is the demand for yield product,” says Murray Lee, tax services partner with PricewaterhouseCoopers in Calgary. The trusts distribute much of their cash flow to investors each month, at higher rates than corporate or government debt yields (which are now hitting record lows).
But if the appetite for yield hasn’t gone away, investors’ recklessness has certainly cooled since 2006, and the new trusts’ march to the markets hasn’t been easy. Eagle Energy Trust threw down the gauntlet back in 2010 but, despite overall good performance, did not start a stampede. A year later, Parallel followed and almost immediately stumbled, shaking investors’ confidence in the vehicle. Argent had to pull its IPO off the shelves in the summer of 2011 as European markets began to crumble again.
Even as Argent navigated a successful offering in August 2012, the market’s attitude toward trusts continued to be cautious. Crius, the first non-oil-and-gas trust of the new wave (it holds electricity and natural gas marketing and retailing assets instead), closed its IPO in early November. But another trust shopping at the same time, Meranax Energy, had to abort its attempt to raise $150 million. The lesson: slapping the income trust label on a collection of assets is not a licence to print money.
“Every deal that went to market either worked or didn’t work based on quality of asset and general conditions of market,” says Robert McCue, a partner with Bennett Jones LLP who has played a role in the legal structuring of each of the new trusts. The market is still scarred from its 2008–09 swoon, and therefore rational. The days of 2005–06, when “almost any piece of garbage could become an income trust,” as McCue puts it, are definitely not with us again.
More trusts are in the pipe, though. “We’re talking to people about trusts every day. It’s definitely a trend that is going to grow and expand,” says Lee. He predicts the trusts will diversify beyond American to global assets, as well as to different industries—as per, for example, Dundee International REIT, a real estate income trust effectively structured on the oilpatch cross-border trust model, to enable it to invest in assets overseas. Ironically, this just puts it on a level playing field with all-Canadian REITs, which were exempted from the Halloween Surprise of six years ago.