PrefBlog

Quadravest has announced:

Prime U.S. Banking Sector Split Corp. (“The Company”) is pleased to announce the filing of a preliminary prospectus dated September 30, 2013 for a proposed new offering. The offering is an investment in common shares of a portfolio consisting primarily of 15 U.S. financial services companies selected from a portfolio universe consisting of 20 companies. The Company will offer two investment choices: Priority Equity Shares at $10 per share and Class A shares at $10 per share.

The Company’s Priority Equity Shares will provide holders with monthly cumulative preferential floating rate cash dividends at an annual rate of U.S. prime plus 1.75% (Min: 5.0% / Max: 7.0%) based on the original issue price.

The Company’s Class A Shares offer regular monthly cash dividends initially targeted to be 6.5% per annum based on the original issue price. The Class A shares will be entitled on redemption to the benefit of any capital appreciation in the market price of the shares in the portfolio.

The Company has been created to provide investors with an opportunity to invest in a portfolio of 15 U.S. financial services companies whose shares will likely continue to benefit from an improving economy. The Company will employ a covered call writing strategy to generate additional income to the portfolio.

The 15 portfolio companies will be selected from a portfolio universe consisting of the following 20 companies:

American Express Company	City National Corporation	Northern Trust Corporation
Bank of America Corporation	Fifth Third Bancorp	The PNC Financial Services Group Inc.
The Bank of New York Mellon Corporation	The Goldman Sachs Group, Inc.	Regions Financial Corporation
BB&T Corporation	JPMorgan Chase & Co.	State Street Corporation
Capital One Financial Corp.	KeyCorp.	SunTrust Banks Inc.
Citigroup Inc.	M&T Bank Corporation	U.S. Bancorp
Morgan Stanley	Wells Fargo & Company

The proposed offering is co-lead by RBC Capital Markets and CIBC World Markets Inc. The other members of the syndicate are BMO Capital Markets, National Bank Financial Inc., Scotiabank, TD Securities Inc., GMP Securities L.P., Raymond James Ltd., Canaccord Genuity Corp., Desjardins Securities Inc. and Mackie Research Capital Corporation.

Please visit our website at: www.primeusbanking.com

According to the preliminary prospectus:

The Shares will be redeemed by the Company in connection with its termination, scheduled to be on or about December 1, 2020, subject to the right of the Board of Directors of the Company, on the advice of Quadravest, to extend the termination date for further terms of five years each (the day the Company terminates being the “Termination Date”). The Company may also be terminated and the Shares redeemed prior to the Termination Date in certain circumstances. See “Termination of the Company”.

There is a NAV Test:

No regular monthly dividends will be paid on the Class A Shares in any month as long as any dividends on the Priority Equity Shares are then in arrears or so long as the net asset value per Unit is equal to or less than $15.00. 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 would be less than $20.00.

There is annual and monthly retractibility:

Shareholders retracting Shares on an Annual Retraction Date will be entitled to receive a retraction price per Share equal to the net asset value per Unit on the Annual Retraction Date, less any costs associated with the retraction including commissions and other such costs, if any, related to the liquidation of any portion of the Portfolio required to fund such retraction.
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Except as noted below, holders of Priority Equity Shares whose shares are surrendered for [monthly] retraction will be entitled to receive a price per share (the “Priority Equity Share Retraction Price”) 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 in either case the cost to the Company of the purchase of a Class A Share in the market for cancellation and less any other applicable costs.

The Management Expense Ratio looks like it will be somewhere around 1.50%:

Quadravest is entitled to a management fee at an annual rate equal to 0.75% of the Company’s net asset value calculated as at the last Valuation Date in each month, plus an amount equal to the service fee (the “Service Fee”) payable to dealers, together with applicable taxes. Quadravest will pay the Service Fee to each registered dealer whose clients hold Shares. The Service Fee will be calculated and paid at the end of each calendar quarter and will be equal to 0.50% annually of the value of the Class A Shares held by clients of the dealer, plus applicable taxes. For these purposes, the value of a Class A Share at any time is the net asset value per Unit at such time less $10.00. No Service Fee will be paid in any calendar quarter if regular dividends are not paid to holders of Class A Shares in respect of each month of such calendar quarter.
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The Company will pay for all other expenses incurred in connection with the operation and administration of the Company, estimated to be approximately $300,000 per annum.

Income coverage will be a major problem:

Based on the current dividends paid by the companies in the Portfolio Universe, the Company is initially expected to generate dividend income, net of withholding tax, of approximately 1.53% per annum. The Company would be required to generate an additional return, net of withholding tax, of approximately 6.0% per annum, including from dividend growth, capital appreciation and option premiums from the Portfolio, in order for the Company to pay these initial targeted distributions and maintain a stable net asset value.

Those who have read some of my writings about Split Share Credit Quality will understand the combined effects of cash shortfalls and portfolio volatility. It’s not pretty!

As usual, a lot of space is used up blathering about the ever so wonderful covered call writing strategy. I have never seen any Split Share Corporation publish any evidence that such a strategy has amounted to a row of beans. I find it rather amusing that they present earnest calculations of “Required Call Writing at Various Volatility Levels to Achieve Target Distribution”, without taking into account the idea that Black-Scholes specifies the fair price; i.e., any option premium earned may be assumed to be offset by capital gains foregone. But there’s one born every minute ….

This issue will not be tracked by HIMIPref™; the dependence upon the US Prime Rate means there are insufficient comparables.

Update, 2013-10-28: I understand that the new issue has been withdrawn. However, there is no confirmation of this as yet on the Quadravest website, the fund’s website or SEDAR.