Financial 15 Split Corp. has released the Management Information Circular for its May 14 meeting.
The Articles of the Company currently provide that the Preferred Shares and the Class A Shares shall be redeemed by the Company on the Termination Date, which is currently scheduled for December 1, 2015. Shareholders are being asked to pass a special resolution which would, among other things, extend the Termination Date initially to December 1, 2020.
OK, a five year extension is fine. What’s more, there is not just one, but two, count ’em, two Special Retraction Rights for preferred shareholders:
If the extension of the Termination Date is approved, a Shareholder who retracts a Class A Share under the 2014 Special Retraction Right will receive a retraction price per Class A Share equal to the net asset value per Unit calculated on June 13, 2014, less $10.00. A Shareholder who retracts a Preferred Share under the 2014 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on June 13, 2014. Shareholders wishing to take advantage of the 2014 Special Retraction Right must surrender their Shares for retraction no later than the close of business on June 4, 2014. Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2014 Special Retraction Right will be made no later than June 27, 2014.
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If the extension of the Termination Date is approved, a Shareholder who retracts a Preferred Share under the 2015 Special Retraction Right will receive a retraction price per Preferred Share equal to the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on November 30, 2015. Shareholders wishing to take advantage of the 2015 Special Retraction Right must surrender their Preferred Shares for retraction no later than the close of business on November 13, 2015. Payment for the Preferred Shares so tendered for retraction pursuant to the 2015 Special Retraction Right will be made no later than December 15, 2015.
They don’t want to take another vote in five years:
By approving the special resolution to extend the Termination Date of the Company to December 1, 2020, Shareholders will also be approving the extension of the Company for an additional term of five years as determined by the Board of Directors of the Company. The Termination Date may then be further extended for additional successive terms of five years each in the discretion of the Board of Directors. Shareholders will be able to redeem their Shares in connection with any such five year extension by exercising an additional retraction right (the Continuing Special Retraction Right) which is again designed to provide Shareholders with an opportunity to retract their Shares and receive a retraction price that is calculated in the same way that such price would be calculated if the Company were to terminate on its scheduled Termination Date.
Oddly, there is a strange price calculation in the event of a (semi-)forced liquidation:
In the event the Company were to receive notice from the TSX that the Preferred Shares and the Class A Shares are to be delisted by the TSX, or if the net asset value of the Company were on any Valuation Date (as defined below) be less than $5,000,000 (each such event a Liquidation Event), the Manager could determine to cause the Company to redeem all outstanding Preferred Shares and Class A Shares on a date determined by the directors of the Company (the Liquidation Date) upon payment:
(g) of an amount (the Preferred Share Liquidation Redemption Amount) in respect of each Preferred Share to be so redeemed equal to (i) (A) the net asset value of the Company on the Liquidation Date multiplied by a fraction, the numerator of which is the volume-weighted average trading price on the TSX (the VWAP) of the Preferred Shares calculated over the 20 trading days ending immediately prior to the announcement by the Company of the occurrence of the Liquidation Event and the denominator of which is the aggregate VWAP of the Preferred Shares and the Class A Shares calculated over the 20 trading days ending immediately prior to such announcement, divided by (B) the number of Preferred Shares outstanding on the Liquidation Date, plus (ii) all accrued and unpaid and declared and unpaid dividends on a Preferred Share to be so redeemed to but excluding the Liquidation Date; and
I don’t understand the necessity for this and don’t like it, but the chances of it being triggered are remote and the ill effects if it is are fairly muted, so we’ll let it pass.
A critical issue is the dividend rate on the preferreds:
The special resolution will permit the Company to file an amendment to the Articles that will permit the Company to determine the annual rate of cumulative preferential monthly dividends for the Preferred Shares for the one year period commencing December 1, 2015 and for each fiscal year of the Company thereafter, subject to prescribed minimum annual dividend. Such determination will be made no later than September 30 (or the first business day thereafter, if September 30 is not a business day) each year during the term of the Company and announced by press release.
The special resolution will also permit the Company to set the prescribed minimum dividend rate on the Preferred Shares for the five year period commencing December 1, 2015 and for any five year extension of the term of the Company thereafter. This minimum rate would be a specified percentage of the Preferred Share Repayment Amount. The Preferred Share Repayment Amount is the amount payable per Preferred Share on the Termination Date and is currently $10.00 per Preferred Share. In the event of any subdivision or consolidation of the Preferred Shares, the Preferred Share Repayment Amount would be adjusted accordingly. The press release referred to above announcing the annual dividend rate for the Preferred Shares would also specify the minimum dividend rate established by the Company.
The prescribed minimum dividend amount for the Preferred Shares would be set at 5.25% of the Preferred Share Repayment Amount for the initial five year extension term beginning on December 1, 2015 and ending on November 30, 2020. This change will provide the Board of Directors with the opportunity to make any appropriate changes to the amounts paid on the Preferred Shares in the context of market conditions existing at the relevant time. As there would no longer be a fixed Termination Date for the Company, the Board of Directors believes it important to provide for additional flexibility in this regard.
Fair enough. The dividend rate will not go down for the first extension (and if it doesn’t go up enough, we can take advantage of the 2015 Special Retraction Right. The “minimum dividend rate” appears to be setting up for a potential floating rate with a cap and collar, such as is the case with Canadian Banc Corp.
The monthly retraction formula is being changed in favour of retractors and the manager, to the disadvantage of the continuing shareholders:
Shareholders are being asked at the Meeting to approve a reduction in the discount to net asset value applicable on monthly redemptions of Shares from 4% to 2%. That is, holders of Preferred Shares would be entitled to receive a price per share equal to the lesser of (i) $10.00 and (ii) 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs and holders of Class A Shares would be entitled to receive a retraction price per share equal to 98% of the net asset value per Unit determined as of the applicable retraction date, less the cost to the Company of the purchase of a Preferred Share in the market for cancellation and less any other applicable costs.
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It is therefore proposed that the 2% discount would be payable to the Manager to partially compensate the Manager for this reduction in management fees.
The manager has the ability to earn a performance ha-ha fee:
Under the Investment Management Agreement, the Manager is currently entitled to a performance fee equal to 20% of the total return per Unit of the Company for a financial year (which includes all cash distributions per Unit made during the year and any increase in the net asset value per Unit from the beginning of the year after the deduction on a per Unit basis of all fees, other expenses and distributions) that exceeds 112% of the Bonus Threshold. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is payable, is equal to the net asset value per Unit at the beginning of that financial year. The “Bonus Threshold”, for any financial year immediately following a year for which a performance fee is not payable, is equal to the greater of (i) the net asset value per Unit at the end of the immediately prior financial year; and (ii) the Bonus Threshold for the prior year, minus the Adjustment Amount. The “Adjustment Amount” for any financial year is the amount, if any, by which the net asset value per Unit at the end of the immediately prior financial year plus dividends paid in that prior year exceeds the Bonus Threshold for that prior year.
It will be somewhat easier for the manager to “earn” a performance fee:
Accordingly, Shareholders are being asked to pass a resolution to approve changes to the Investment Management Agreement to provide for the deletion of the $25.00 Condition and the Ratings Condition. In their place, a new condition would be imposed, such that no performance fee could be paid to the Manager in respect of any fiscal year of the Company unless, at the end of such fiscal year, the net asset value per Unit of the Company was at least two times the amount of the Preferred Share Repayment Amount (representing a minimum coverage requirement of 200% for the Preferred Shares).
The performance fee is nonsensical and constitutes yet another reason not to buy the Capital Units. The return on the fund is going to be overwhelmingly determined by the performance of the benchmark; manager skill is secondary. If they really wanted to be paid for performance, the calculation would depend on the fund performance relative to a benchmark over a period of not less than four years.
But it doesn’t matter to preferred shareholders. Nothing will be payable unless there’s Asset Coverage of at least 2:1, which is fine, and every penny of the fee comes out of the Capital Unitholders’ hide anyway. So who cares?
The final item fraught with interest is the NAV test, whereby there are no distributions to Capital Units if the NAV is less than $15.00. This will remain unchanged.
All in all, it’s a good deal for preferred shareholders. I recommend that Preferred Shareholders vote in favour of the Special Resolution.
This entry was posted on Thursday, April 17th, 2014 at 10:08 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed.
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FTN.PR.A: Term Extension Proposal Details
Financial 15 Split Corp. has released the Management Information Circular for its May 14 meeting.
OK, a five year extension is fine. What’s more, there is not just one, but two, count ’em, two Special Retraction Rights for preferred shareholders:
They don’t want to take another vote in five years:
Oddly, there is a strange price calculation in the event of a (semi-)forced liquidation:
I don’t understand the necessity for this and don’t like it, but the chances of it being triggered are remote and the ill effects if it is are fairly muted, so we’ll let it pass.
A critical issue is the dividend rate on the preferreds:
Fair enough. The dividend rate will not go down for the first extension (and if it doesn’t go up enough, we can take advantage of the 2015 Special Retraction Right. The “minimum dividend rate” appears to be setting up for a potential floating rate with a cap and collar, such as is the case with Canadian Banc Corp.
The monthly retraction formula is being changed in favour of retractors and the manager, to the disadvantage of the continuing shareholders:
The manager has the ability to earn a performance ha-ha fee:
It will be somewhat easier for the manager to “earn” a performance fee:
The performance fee is nonsensical and constitutes yet another reason not to buy the Capital Units. The return on the fund is going to be overwhelmingly determined by the performance of the benchmark; manager skill is secondary. If they really wanted to be paid for performance, the calculation would depend on the fund performance relative to a benchmark over a period of not less than four years.
But it doesn’t matter to preferred shareholders. Nothing will be payable unless there’s Asset Coverage of at least 2:1, which is fine, and every penny of the fee comes out of the Capital Unitholders’ hide anyway. So who cares?
The final item fraught with interest is the NAV test, whereby there are no distributions to Capital Units if the NAV is less than $15.00. This will remain unchanged.
All in all, it’s a good deal for preferred shareholders. I recommend that Preferred Shareholders vote in favour of the Special Resolution.
This entry was posted on Thursday, April 17th, 2014 at 10:08 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.