PrefBlog

Faircourt Asset Management has announced:

that due to recent market conditions, it has decided to cancel its previously announced rights offering. Due to the current market conditions it was determined by the Manager, not to be in the best interests of Unitholders to proceed with the proposed rights
offering.

The Rights offering was finalized and discussed on PrefBlog on November 18 which, if my calender is still working, was TWO DAYS AGO! This is an epic crash, to be sure.

As of November 19, NAV per Capital Unit was $2.46 according to Faircourt and at 0.71 Capital Units per Pref, asset coverage of the prefs was – yesterday – 1.2-:1.

Canadian Utilities & Financials Split Corp. has announced:

The leveraging and de-leveraging mechanism offers the ability to increase leverage when the Company’s portfolio appreciates in value and reduce leverage when the portfolio declines in value. Leverage is actively managed by RBC Dominion Securities Inc. (“RBC”) in its capacity as the Company’s Leverage Agent. The value of the Company’s portfolio has declined significantly in recent months, a period characterized by extreme and unprecedented market conditions and economic weakness, and has declined by more than 34% since its inception. As a result, under the terms of the prospectus, RBC is required to sell portfolio securities and invest the proceeds in cash or cash equivalents in order to provide additional assurance that the Company’s objective to repay the $10.00 issue price of the Preferred Shares at maturity will be met and that the Preferred Shares continue to have a high rating from DBRS. Following the sale of portfolio securities, the Class A Shares will continue to have exposure to the portfolio on a non-leveraged basis and distributions on the Class A Shares will be suspended beginning in December. Should the portfolio continue to decline in value, the removal of leverage will lessen the impact of any further decline on the performance of the Class A Shares.

The Company has the ability to re-establish leverage as the portfolio’s value increases. If the remaining portfolio subsequently appreciates in value and the net asset value per Class A Share grew to approximately $7.37, RBC will be instructed to re-invest the cash raised in securities of the portfolio which will restore leverage on the Class A Shares and likely result in the resumption of distributions to holders of Class A Shares.

CFS.PR.A is tracked by HIMIPref™, but is a tiny issue. It was moved from the SplitShare index to Scraps in August 2007 on volume concerns.

M-Split Corp. has announced:

its regular monthly distribution $0.04375 for each Preferred share ($0.525 annually). Distributions are payable December 10, 2008 to shareholders on record as of November 28, 2008. There will not be a distribution paid to M-Split Class A Shares for November 28, 2008 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $12.50. The Net Asset Value as of November 14, 2008 was $10.13.

Since inception (April 18, 2007) Class A shareholders have received a total of $0.90 per share and Preferred shareholders have received a total of $0.85 per share inclusive of this distribution, for a combined total of $1.75 per share.

M-Split invests in common shares of Manulife Financial Corporation, the largest life insurer in Canada offering financial products and wealth management services.

The prospectus gives details of the Monthly Retraction option:

Priority Equity Shares may be surrendered at any time for retraction and will be retracted on a monthly basis on the last business day of each month (a ‘‘Retraction Date’’), provided such Priority Equity Shares are surrendered for retraction not less than 20 business days prior to the Retraction Date. Payment for any Priority Equity Shares so retracted will be made within 15 business days of the applicable Retraction Date.

Holders retracting a Priority Equity Share will be entitled to receive an amount per Priority Equity 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. For this purpose, the cost of the purchase of a Class A Share will include the purchase price of the Class A Share and commissions and costs, if any, related to the liquidation of any portion of the assets of the Company to fund the purchase of the Class A Share (to a maximum of 1% of the net asset value per Unit).

It isn’t clear to me whether

R = 96% (NAV-C)
or
R = (96%NAV) – C

Interested Assiduous Readers will have to call the company! Whatever it is, Capital Units closed today at 1.41-50, 50×30 and Preferreds closed at 7.23-50, 50×120. On the November 14th NAV date, MFC closed at 23.08 and it closed today at 20.97, implying a November 19 NAV of about
10.13 * 20.97 / 23.08 = 9.20 … so the Monthly Retraction is

R = (96%NAV) – C …. [guessing at the proper form of the equation]
= (96%*9.20) – 1.50
= 8.83 – 1.50
= 7.33

So the preferreds are trading around estimated retraction price.

XMF.PR.A was last mentioned on PrefBlog when it entered the Protection Plan.

XMF.PR.A is not tracked by HIMIPref™.

First Asset has announced:

Global 45 Split Corp. (TSX:GFV) the “Company”) announces that it will not pay a monthly distribution on its Class A Shares for the month-ended November 30, 2008.

As set out in the Company’s articles of incorporation, the Company may not pay a distribution on the Class A Shares if, after the payment of the distribution by the Company, the Net Asset Value per Unit would be less than $15.00.

The Manager will assess the ability to pay distributions, and the amount thereof, on a monthly basis.

GFV.PR.A had asset coverage of 1.5+:1 as of November 13. The issue has a monthly retraction feature:

Preferred Shares may be surrendered at any time for retraction by the Company and will be retracted on a monthly basis on the second last business day of each month (a “Valuation Date”). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least ten business days prior to a Valuation Date will be retracted on such Valuation Date and payment of proceeds will be made on or before the tenth business day following such Valuation Date. Except in the case
of the Annual Concurrent Retraction described below, holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of: (i) 96% of the Net Asset Value per Unit (as defined herein) determined as of the relevant Valuation Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation; and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase (not exceeding 1% of Net Asset Value per Unit). See “Details of the Offering – Certain Provisions of the Preferred Shares – Retraction
Privileges”.

The Annual Concurrent Retraction is in September.

The first trade of the Capital Units after the November 13 NAV was on Nov. 17, when they closed at 5.01. The Preferred Shares closed at $8.75 on November 14.

The estimated monthly retraction price using the last valuation data is:
R = 96% (NAV – C)
R = 96% (15.42 – 5.01)
R = 96% (10) … [Maximum Value]
R = $9.60

The monthly retraction feature is supportive … but mind you, the capital units closed today at 4.95-65, 62×2 and presumably the NAV is now below $15.00. The Preferreds closed at 8.86-54, 7×5.

GFV.PR.A was last mentioned on PrefBlog in the report that it had been caught up in the DBRS Mass Review of Splits. GFV.PR.A is not tracked by HIMIPref™.

Assiduous readers will be well aware of my disdain for market timing. The market goes up, the market goes down … the characteristics of the asset class don’t change very quickly and the steady drip, drip, drip of dividends eventually overwhelms the transient excitement of day to day noise. You just have to make sure you’re well diversified, invest in companies of good, solid investment grade, don’t get excited … and did I mention diversification? Lightning can strike at any time and you should never be in a position where it can wipe you out.

Up, down, piffle, that’s what I say!

But I do get highly annoyed when I see the market behaving in a stupid way. You wan’t to say a proper risk premium is 20bp – that’s fine. You want to say the risk premium should be 1000bp – that’s fine too. I don’t have any problems with that. We all have our individual investment objectives, risk tolerances, views on predicted apocalypses … overall market spreads, their proper levels and interpretation are always open for discussion and analysis.

But let’s not be stupid, OK? Let’s not be like the June 2008 market when it appeared that the market assigned a negative value to embedded call options. And let’s have similar issues from a single issuer at least trade within shouting distance of each other!

Almost a year ago, I wrote a post on yield differences, amazed that the market for Weston Prefs could be so inefficient. It’s true, of course, that there are fewer players in the Pfd-3 playground and so a certain lack of efficiency is to be expected … but never-the-less, a 34bp spread between the high- and low-yielding Weston Pref was rather extreme. I also looked at the spreads on investment-grade issuers at that time, just to show what a more efficient market looked like.

And now I’m going to update that table to last night’s close:

The fund I manage, Malachite Aggressive Preferred Fund, has been doing quite a bit of intra-issuer trading in the past several months – I highlighted an example of this for August 2008. These wide intra-issuer spreads are symptiomatic of a market starved for liquidity – suppliers of that liquidity can (if patient) very often get an extremely good price for it.

Financial 15 Split Corp. II has announced:

its regular monthly distribution of $0.04375 for each Preferred share ($0.525 annually). Distributions are payable December 10, 2008 to shareholders on record as at November 28, 2008. There will not be a distribution paid to Financial 15 II Class A Shares for November 28, 2008 as per the Prospectus which states no regular monthly dividends or other distributions will be paid on the Class A Shares in any month as long as the net asset value per unit is equal to or less than $15.00. The Net Asset Value as of November 14, 2008 was $14.06.

FFN.PR.A was last mentioned on PrefBlog when it implored unitholders NOT TO PANIC!!!!. There was a query regarding possible suspension of dividends on this thread; I concurred with the querant’s suggestion; both comments were posted *ahem* after the time-stamp of the press release. Well, it still hasn’t been posted on the fund’s website as of noon, that’s all I can say!

The monthly retraction feature for FFN.PR.A is supportive:

Holders retracting a Preferred Share will be entitled to receive an amount per Preferred Share equal to the lesser of (a) $10.00 and (b) 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 and less any related commissions and other costs (to a maximum of 1% of the Net Asset Value per Unit). Payment for any shares so retracted will be made within 15 days of the Retraction Date.

NAV on November 14 was $14.06. The capital units closed that day at $7.01; the preferreds closed at $7.00. Support was only mild as of that day’s prices (what on earth were the capital units doing, trading at a 75% premium to their NAV?) but today looks much better.

As I write this, FFN is quoted at 4.75-99 (still way above NAV!) and FFN.PR.A is quoted at $6.06-24. Using XFN as a proxy (not a particularly good proxy, since it’s all Canadian, and FFN is 1/3 American) … it closed at $18.60 on the 14th and is now trading at $17.12. That’s a loss on XFN of 8% in the period, so estimate the current NAV of FFN + FFN.PR.A units at $14.06 * 0.92 = 12.93.

Estimated Retraction Price:
R = 96% (NAV – C)
R = 96% (12.93 – 4.93) …. [cheating on the price a little bit!]
R = 96% (8.00)
R = $7.68.

So even with grossly over-valued capital units (although option players might have something to say about the value of the capital unitholders’ options) the monthly retraction is now looking extremely profitable.

Update, 2008-11-20: I have received the following communication from a very nervous Assiduous Reader:

I noticed your post on prefblog.com yesterday about FFN.PR.A. With coverage of the preferreds at 1.4:1 now and with today’s sharp declines in the price of Canadian financials, which make up the bulk of FFN’s assets, isn’t there a danger that it won’t pay dividends on the preferreds next month? Wouldn’t that also lead to a downward revision of
the NAV for the next monthly retraction?

Asset coverage of 1.4:1 is a lot. Maybe not when considering the long term, and maybe not when the underlying security is Consolidated Internet Mines & Telecom, Inc., but when the time scale is a matter of days and the underlying is blue-chip (well … as blue as they get, nowadays!) financials, it’s a lot. Asset coverage of 1.4:1 means the the underlying has to drop by 1 – (1/1.4) = 29% before the preferred shareholders become exposed to loss … and remember, that’s EXPOSED to loss, I’m talking about! At that point (asset coverage of 1:1), they basically own the portfolio of underlying equities.

My XFN proxy is now trading at 15.66, down a lot from the 17.12 I used above. That’s a loss of
about 8.5%, so estimate the current NAV of FFN + FFN.PR.A units at $12.93 * 0.915 = 11.83. This is incredible. Look at the 10-day chart:

This is epic. I pointed out the epic nature of this crash on October 31 and now it’s even … um … more epic.

And you STILL have asset coverage of just under 1.2:1; the underlying can STILL go down ANOTHER 15%-odd; the capital unit-holders can lose even more money – before the preferred shareholders even have direct exposure. They haven’t lost anything at that point, not even on paper; but it takes all this before they can even become exposed.

So while the cushion is being eroded, there’s still a cushion.

As far as the preferred share dividends are concerned … well, the company can suspend them any time they like. That would be an enormous step and I consider it highly unlikely. Now that the capital unit dividends have been suspended, the company is cash-flow positive after expenses and dividends (assuming constancy of incoming dividends) and their assets are easy to sell if they need some money. I can remember only one case in which a split-shares’ preferred dividends were suspended … that was GT.PR.A a few years back. I suspect that they wanted to suspend dividends to the capital units when their NAV got low, but there was no mechanism in the prospectus regarding an NAV test – so they left one single dividend on the preferreds unpaid, restarted preferred payments and left capital units hanging out to dry … because capital unitholders, under the terms of GT.PR.A’s prospectus, could not receive dividends if the company was in default to the preferreds.

Your concerns about a dividend cut on the preferreds are … well, nothing’s impossible, but the probability is miniscule. And anyway, the dividends are cumulative. On windup of the company, the preferred shareholders would get their $10 principal and all unpaid dividends before the capital unitholders saw a single penny.

However, non-payment of preferred dividends would have no effect on NAV. The cash would remain in the company, but so would a liability for unpaid dividends. There could well be an effect on market price, however!

You seem extremely worried about the FFN.PR.A position you hold. Although your worries seem overblown to me, it’s your money, not mine! You may wish to consider reducing your position to the point where you can sleep again … but I earnestly suggest that if you do reduce, you give consideration to retraction rather than market sale, because selling into this market is a highly unpleasant experience.