FTN.PR.A : Asset Coverage Skyrockets on Reorg

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce a reorganization that will provide for increased asset coverage and increased dividends for its Preferred shares and anticipated monthly distributions on its Class A shares.

In connection with the extension of the termination date of the Company until December 1, 2025, the Company’s Class A shares will consolidate such that each Class A shareholder will receive 0.40 Class A shares for each Class A share held. As at November 18, 2020, the pro forma NAV per unit of the Company after giving effect to this reorganization will be $17.88 ($13.15 pre-consolidated). The payment of monthly dividends to Class A shareholders at a rate of $1.20 per year are expected post-consolidation (with NAV per unit above $15).

As at the consolidation date, the resultant increase in the net asset value per Class A share will have the impact of increasing the asset coverage ratio for the Preferred shares. Based on the NAV per unit on November 18, 2020, the asset coverage ratio would increase from 132% to 179%. In addition, as previously announced on September 23, 2020, Preferred share dividends will increase from 5.5% to 6.75% annually effective December 1, 2020.

The aggregate intrinsic value of the Class A shareholders’ holdings will remain the same and as a result, the net asset value per Class A share will increase on a proportionate basis for each post-consolidation share on the consolidation date. In the event that the share consolidation would otherwise result in the issuance of fractional shares, no fractional Class A shares will be issued and the number of Class A shares each holder shall receive will be rounded down to the nearest whole number. The consolidation will be a non-taxable event. No action is required to be taken by Class A shareholders in connection with the consolidation.

The reorganization is required in order to maintain an equal number of Class A shares and Preferred Shares outstanding at all material times. More Preferred shares were tendered for retraction than Class A shares pursuant to the special retraction right offered to shareholders in connection with the extension of the termination date of the Company. Retracting shareholders will receive a retraction price based on the November 30, 2020 net asset value per unit.

It is expected that the Class A shares will trade on a post-consolidation basis at the opening of trading on or about December 17, 2020.

The impact of the Class A share consolidation will be reflected in the reported net asset value per unit as at
December 31, 2020.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Corp, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

The phrase:

the Company’s Class A shares will consolidate such that each Class A shareholder will receive 0.40 Class A shares for each Class A share held.

… is fascinating. The implication is that, at a minimum, 60% of the outstanding preferred shares were tendered for the special retraction. This is an interesting variant of the prisoners’ dilemma – it was entirely rational to tender to the special retraction due to low asset coverage and the fact that the shares were trading below par … but so many holders retracted that the remaining holders are laughing all the way to the bank, with investment-grade Asset Coverage, a dividend rate that was boosted to reduce redemptions and a market price of greater than par. Investing is a difficult game!

Assiduous Readers may be interested in reading cowboylutrell‘s comments on the issue on the September 17 post. And also read his follow-up prediction:

But instead it will be 6.75% for the first year of the new 5-year term only, and a minimum of 5.50% for years 2 to 5. And because of that, there likely won’t be enough enthusiasm from speculators to move the bid closer to $10.00 in the weeks ahead, so conservative holders likely won’t be able to sell their shares of FTN.PR.A on the market at or above $10.00 in the weeks ahead, and instead will massively surrender them for retraction.

6 Responses to “FTN.PR.A : Asset Coverage Skyrockets on Reorg”

  1. prefman says:

    I am one of those who tendered… and Not pleased!…. and I was about to buy back at $9.70 in early November… sigh…

  2. cowboylutrell says:

    I surrendered all my shares back in October. Payment should be received by December 15.

    I remember that a consolidation was made late last year on FFN, in the wake of its on Special Retraction, which boosted the protection for holders of FFN.PR.A, and I expected a similar move on FTN this year (though I was not 100% sure), but I didn’t expect FTN’s consolidation, and the corresponding improvement of FTN.PR.A’s protection, to be this large. Had I known with certainty, I would probably have kept my shares.

    With this move, Quadravest is smartly putting the duo FTN+FTN.PR.A closer to a trading range where it becomes more economical to eventually issue new shares at a combined premium to the full unit’s NAV as part of the at-the-market equity program.

  3. RAV4guy says:

    I surrendered my shares of FTN.PR.A on October 30. My Investor’s Edge statement shows a market price of $9.74 for that date. I am happy to get the $10.00. I have to wait until Quadravest pays and that is an annoyance.

    I fail to see how the consolidation of the Capital shares (C) makes it any better for the holders of the remaining Preferred shares (P). Let a Unit = U =C+P and say there were 10 Units to begin with a NAV of $13 on October 30.
    So 10C+10P=130. Retract 6P at $10 each. Then 10C+4P=70. The holders of the 4P have first dibs on $40 of the $70 NAV remaining.
    Then consolidate the old C by .4 into a new thing we will also call C. The equation becomes 4C+4P=70, or 4U (new Units?) =70 or each new Unit is valued at $17.50. All this means is the holders of the 4P still have first dibs on $40 of the $70 in NAV that exists.

    I believe the holders of the remaining Preferred shares are actually worse off with the consolidation of the Capital shares in that dividends can now be paid on the Capital shares since the NAV per Unit (new Unit?) is over $15. This will erode the Unit NAV because the income from the underlying portfolio does not even cover the dividends on the Preferred shares. So some of the portfolio will be sold and NAV will be paid to the owners of the Capital shares as dividends.

    The NAV threshhold for paying dividends on the Capital shares should be raised to $15/.4 or $37.50 per Unit. Then the remaining Preferred share holders would have the same protection they had before the Capital shares were consolidated.

    The Capital share consolidation does not really benefit the Preferred or Capital share owners. It does benfit Quadravest though, in the it may be able to issue new Units.

  4. jiHymas says:

    I fail to see how the consolidation of the Capital shares (C) makes it any better for the holders of the remaining Preferred shares (P).

    The improvement in Asset Coverage means the underlying portfolio can fall further before the preferred shareholders are underwater.

  5. RAV4guy says:

    I feel my suggestion of $37.50/Unit as the threshhold for dividends on the Capital shares is wrong. A more reasonable suggestion might be $10 +$5/.4= $22.50/Unit. This would better protect the existing Preferred share owners from erosion of the NAV that will happen with the payment of dividends to the Capital share owners.

    In response to Mr. Hymas’s comment I would argue the following. The Preferred share owners that did not retract seem to me to have given up something with the newly defined Unit and Quadravest leaving the NAV threshhold for paying dividends to the Capital share owners the same as before, at $15.00/Unit. Whereas Quadravest stands to benefit by potentially being able to issue Units at around $17.50 and so build FTN back up again. Quadravest might have trouble selling Units were the threshhold for Capital share dividends at $22.50 rather than $15.00.

    Then I look at the matter from the perspective of a new buyer of a Preferred share. They are paying slightly over $10.00 for a Preferred share with around $17.50 in assets backing it. I still believe the NAV of FTN units will deteriorate fairly rapidly because the dividend payments promised are quite a bit higher than the underlying investments actually earn.

  6. jiHymas says:

    The Preferred share owners that did not retract seem to me to have given up something with the newly defined Unit and Quadravest leaving the NAV threshhold for paying dividends to the Capital share owners the same as before, at $15.00/Unit.

    Why? A month ago, the NAVPU was ~$13, with a dividend stopper at $15.

    Now, the NAVPU is ~$17, with a dividend stopper at $15.

    I like now better.

    I remember that a consolidation was made late last year on FFN, in the wake of its on Special Retraction, which boosted the protection for holders of FFN.PR.A,

    It will be recalled that the consolidation of the FFN Capital Units was much more restrained, at 0.88:1.

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