Well, well, well! The boys at Quadravest, fresh from extending the term of DFN.PR.A, are proving they haven’t run out of ideas!
In a press release today, they announced:
The Company intends to declare a special capital gains dividend, payable partially in cash and partially in Class A Shares, to holders of Class A Shares of record on June 4, 2007, which dividend will be payable on the date the Preferred Shares are issued under the short form prospectus. The number of Class A Shares being issued as a result of this special dividend will be equal to the number of Preferred Shares expected to be issued in the offering.
This is not particularly good news, but it isn’t necessarily bad, either. The NAVPU as of May 15, 2007 was $31.95, implying that the preferred shares had an extremely good asset coverage ratio of almost 3.2:1 – which DBRS wasn’t really giving them a lot of credit for, since the rating hadn’t changed from its initial setting of Pfd-2 on the initial coverage ratio of about 2.4:1.
How much will coverage deteriorate? Well, from the prospectus:
No regular monthly dividends will be paid in any year on the Class A Shares so long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00 (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’). Additionally, no special year-end dividends will be paid if after payment of such a special dividend the Net Asset Value per Unit (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’) would be less than $25.00.
So how bad will it be? I wouldn’t think that they’ll take the NAVPU down below $25 … but I do worry. They’re being rather coy about how they will be calculating the amount of the special dividend … and some of the more cynical souls among us might want to point out that the fund’s year end is November 30 … therefore the special dividend June 4 is not a year-end special dividend … therefore not restricted by the prospectus language.
In favour of the preferred shareholders is the idea that Quadravest has quite a nice little business going, packaging the flavour of the month into a split share corporation and flogging it through an established pipeline. I wouldn’t think they would contemplate doing anything that would jeopardize that goose and its bonus-filled eggs. Additionally, it won’t take much more than a rounding error to get the issue size over $100-million, and anything that improves liquidity is all right by me. It should also be noted that FFN.PR.A also experienced a term extension, has a NAVPU of $28.03 as of May 15, but did not have such a press release issued today.
But, until the point is cleared up, I recommend that no purchases of DFN.PR.A be made. I wouldn’t recommend a sale of existing positions (based on dilution risk, anyway … obviously, if DFN.PR.A rockets in price for some reason a sale should be contemplated) either. We’ll just have to wait and see.
Update: The quote from the prospectus regarding restrictions on dividends paid to capital shareholders was taken from the Summary. In the Details, we find (emphasis added):
Although there can be no assurance that the Company will be able to pay dividends to holders of Class A Shares, the initial policy of the Company will be to endeavour to declare and pay regular monthly dividends, initially targeted to be $0.10 per month to yield a minimum of 8.0% per annum on the original issue price, to holders of Class A Shares plus, if any amounts remain available for the payment of dividends, a special year-end dividend of such amount as of the November Dividend Record Date in each year.
No regular monthly dividends will be paid on the Class A Shares in any month as long as any dividends on the Preferred Shares are then in arrears or so long as the Net Asset Value per Unit is equal to or less than $15.00 (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’). Additionally, it is currently intended that no special year-end dividends will be paid if after payment of such a dividend the Net Asset Value per Unit (calculated as described under ‘‘Details of the Offering — Valuation of Assets’’) would be less than $25.00.
So … it looks like there are no restrictions at all on the size of this dividend, other than a hope that Quadravest will wish to keep that split-share pipeline throbbing (and remember that first, selling the prefs is rarely a problem, since they generally come with fat coupons; and that second, if the customers had any brains or memory at all, they wouldn’t be buying the capital units in the first place.
Fingers crossed!
[…] Desjardins crossed 50,000 at 10.50. Issue will be reopened shortly. Now with a pre-tax bid-YTW of 4.54% based on a bid of 10.50 and a hardMaturity 2014-12-1 at 10.00. […]
[…] I had been worried that the issue of units would dilute the asset coverage of the prefs substantially, but these fears were not realized. A reinvestment price of $19.55 ties in nicely with the May 31 NAV of $29.79 for the unit (which includes $10.00 for the prefs), given that the record date of June 4 implies an ex-date of May 31. Both values agree well with the May 15 NAV of $31.95, given a total dividend of $2.25. […]