DBRS has tersely announced that it:
has today discontinued its ratings on the Preferred Shares issued by US Financial 15 Split Corp. at the request of Quadravest Capital Management Inc. (the Promoter).
DBRS had downgraded the issue to Pfd-5 [Trend Negative] on September 30. The asset coverage at September 30 was just under 1.1:1 according to the company, but there have – ahem! – been further developments in the financial markets since then. S&P reports that the S&P 500 Financials were down 14.54% month-to-October 14, and I think it’s reasonably safe to say the figure is now worse than -20%. So say that NAV is now about $8.50.
One thing I find interesting about the issue is the monthly retraction:
Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (i) $10.00; and (ii) 96% of the Net Asset Value per Unit determined as of the Retraction Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation. Payment for any shares so retracted will be made within 15 days of the Retraction Date.
Unfortunately, hope is springing eternal for the capital unitholders – FTU closed at $2.65 today. The termination date is Dec. 1, 2012, so quick! What’s the fair value of a call option on US Financials currently worth $8.50, with strike price $10.00 and a four year term? Don’t forget the management fee grind! Whatever it is, I bet it’s less than $2.65!
FTU.PR.A closed at $5.50. Assuming the $8.50 NAV (an extremely approximate number, don’t anyone dare take market action without doing their own work!) then the preferred share monthly retraction price is (96% * $8.50) – $2.65 = about $5.50. It’s surprisingly close!
Ignoring management fee grind and dividends, a 4 year option on an $8.50 stock with exercise price of $10 is $2.65 if implied volatility is about 40% (simple Black Scholes model). 4 years is a long time in the option world, and recent bank volatility (even of the index) is probably more than 40% (today’s Vix (S&P-500 index volatility) is 69.25% for 1-month options).
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