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Is this the calm before the income trust storm?

What does a quiet summer mean for the income trust market, asks this Canadian advisory — and picks three trusts to buy in any season.

Everybody takes time off in summer. That includes the people in every corner of the investment world — investors, the companies they invest in, brokers, accountants, lawyers and market pundits.

Of course, things don’t shut down completely, folks are still investing, brokering, accounting and punditing, but you know what we mean. The pace just isn’t the same.

But why has it been so eerily quiet in the income trust market?

That’s the question asked by one of the leading advisories in the field, the Income Trust Guide published by the Money Reporter. Rocked by last fall’s tax announcement, income trusts spent the winter and spring going through a period of consolidation.

Then things slowed to a crawl. There are several good reasons for this inactivity, says this advisory — and at least one piece of evidence that suggests the wheels will start turning again before the autumn leaves do.

The Big Deal

First, a little background. It was the contention of the Income Trust Guide and other experts in the field that Mr. Flaherty’s tax on trusts would create a two-tier income trust market.

Smaller trusts who lacked the cash reserves to survive the advent of taxation in 2011 would follow one of three paths: return to corporate status, put themselves up for sale or, in a few cases, just fade out of the picture.

Large, cash-rich trusts would absorb the money flowing out of these second-tier trusts and become richer and more powerful, to the greater benefit of their unitholders.

For many months, this had all been going according to the script. If the script has been put aside temporarily, there are at least two good reasons for it, according to the Income Trust Guide.

One is the Big Deal for BCE.

“Corporate finance types, too, need time off now and then,” says the Income Trust Guide. “What better time is there than when coming off the biggest deal of the year. The BCE Inc. deal tied up hundreds and hundreds of professionals for months not just at BCE, but at Teachers [Pension Plan Fund], the other bidders, all the major law and accounting firms, as well as the major brokers.”

There’s another, slightly more sinister reason for the slowdown. It’s a familiar refrain these days, the tightening of wallets in the capital markets.

An investment world which was “so recently was awash in liquidity, allowing private equity firms to borrow at low rates and seemingly without limit, all of a sudden seems to be getting very choosy about who it will lend to, and in what circumstances,” says the advisory. “It’s not surprising that the takeover binge, especially the leveraged buyout side, has subsided dramatically in more recent times.”

One summer deal

But just when the quiet was becoming deafening, one bold shot was heard. A week ago, American energy firm Marathon Oil Corp. (NYSE-MRO) announced it was ready to pay $6.6 billion for Western Oil Sands (TSX-WTO) and Western agreed to the deal.

Western shareholders will get $35.50 in cash or 0.5932 of a Marathon share for each of theirs. But, says this advisory, the market doesn’t think that $35.50 is enough. The shares have risen almost 10 per cent ($37.55 at yesterday’s closing), “indicating a widely-held belief that a higher bid is in the offing.”

Is this a sign of things to come, or simply a one-off deal that gives a big U.S. firm a much-desired foothold in the oil sands?

The Income Trust Guide suggests that investors proceed with caution. It has put two energy trusts — ARC Energy Trust (TSX—AET.UN) and Pengrowth Energy Trust (TSX-PGF.UN) — on hold for the time being.

But the advisory feels quite certain that things are going to heat up again. Further consolidation is likely, among energy trusts in particular. “The Marathon-Western deal could be a sign of things to come,” concludes the advisory. “And that should be good for you, our subscribers.”

The advisory also has three income trusts it believes are good for investors right now, its “Best Buys” of the month.

Utilities look good

Cautious it may be about energy trusts for the moment, but the advisory states that “utilities look good, pipeline utilities even better,” and it makes Pembina Pipeline Income Fund (TSX-PIF.UN) its choice in the sector. “For now, buy it for its income. Later, when two expansion projects come online, growth should follow as well.”

No caution here. Canadian Oil Sands Trust (TSX-COS.UN) is a buy. “It has stability, an incredibly long reserve life index (33 years) and steadily growing production.” Anytime is a good time to buy more units of this trust, says the advisory. But in the wake of the Marathon-Western deal, it also moves closer to being a takeout target itself.

Canadian Apartment Properties REIT (TSX-CAR.UN) has more than half its properties in Canada’s largest market, Toronto. And for that it has been penalized by investors who seem to think it should have more in the hot western market, especially Alberta. But that, says the advisory, “is throwing out both bathwater and baby.” The unit price sank almost 11 per cent last month; as the price recovers, it’s a perfect time to buy this REIT for income.

As for the prevailing calm in the income trust market, don’t let it lull you to sleep, says the Income Trust Guide. When the storm windows go back up on all the cottages, there could be a perfect storm in income trusts.