PrefBlog

Quadravest has announced:

US Financial 15 Split Corp. (the “Company”) is pleased to announce it has extended the termination date of the Company a further six year period from December 1, 2018 to December 1, 2024.

In connection with the extension, the Company will also amend the dividend entitlement of the FTU.PR.B Preferred Shares (“Preferred Shares”) effective December 1, 2018, to pay a cumulative preferential monthly dividend at an annual rate equivalent to 10.00% based on the net asset value per unit as at the end of the preceding month to a maximum of $0.0833 per Preferred Share per month (10.00% of $10.00 original issue price). This represents an increase of 4.75% in the rate from the current annual policy of 5.25% of the preceding month end net asset value.

The dividend policy for the FTU Class A Shares (“Class A Shares”) will remain unchanged.

In connection with the extension, the Company will offer a Special Retraction Right which will allow existing shareholders to tender one or both classes of Shares and receive a retraction price based on the November 30, 2018 net asset value per unit.

Since inception of the Company, Class A Shares have received a total of $3.70 per share and Preferred Shares have received a total of $5.58 per share, for a combined total of $9.28.

US Financial 15 invests in a portfolio consisting of 15 U.S. financial services companies as follows: American Express, Bank of America, Bank of New York Mellon Corp., Citigroup, CME Group Inc., Fifth Third Bancorp, The Goldman Sachs Group, J.P. Morgan Chase & Co., Morgan Stanley, PNC Financial Services Group Inc., Regions Financial Corp., State Street Corp., SunTrust Banks, U.S. Bancorp, and Wells Fargo.

FTU.PR.B is currently backed by a NAVPU of 9.14 as of 2018-09-14 against a par value of 10.00 – the fund is underwater! The fund has total assets of 26-million as of 2018-08-31, all of which is due to the preferred shareholders. The fund got whacked in the Credit Crunch – there has not been a distribution to Capital Unitholders since May, 2008.

According to the 2018 Annual Information Form:

In the event that the Termination Date is extended in any Extension Year, each holder of Preferred Shares or Class A Shares shall have the right to retract such Preferred Shares or Class A Shares effective December 1 of such Extension Year (the “Recurring Special Retraction Right”). The price payable per Preferred Share so retracted shall be equal to (i) the sum of (A) the lesser of (x) $10.00 and (y) the net asset value of the Company calculated on November 30 of such Extension Year, divided by the number of Preferred Shares then outstanding, plus (B) an amount equal to the accrued and unpaid dividends on each Preferred Share to but excluding November 30 of such Extension Year, plus (ii) all Dividends Owing thereon to but excluding November 30 of such Extension Year. The price payable per Class A Share so retracted shall be equal to the greater of (i) the net asset value per Unit calculated on November 30 of such Extension Year less $10.00, and (ii) zero. Holders of Preferred Shares or Class A Shares wishing to take advantage of the Recurring Special Retraction Right must surrender their Preferred Shares or Class A Shares for retraction no later than the close of business on November 1 of such Extension Year (or, if November 1 of such year is not a business day, on the immediately preceding business day). Payment of the retraction price per Preferred Share or Class A Share owing in respect of the exercise of the Recurring Special Retraction Right will be made on or before December 15 of such Extension Year (or, if December 15 of such year is not a business day, on the immediately succeeding business day).

November 1 is a Thursday this year, so the deadline to notify the company of a desire to retract is November 1 (brokerages will set their internal deadlines a few days earlier).

This is important, because it is virtually certain that I will recommend retraction.

In the previous extension, preferred shareholders got warrants – all of the 2014 warrants were exercised, as were many of the 2013 warrants (see SEDAR and search for “US Financial 15 Split Corp. Apr 4 2013 10:25:30 ET News release – English PDF 18 K” and then write your friendly neighborhood regulator and ask why I can’t link this public document directly).

The warrants were not enough to prevent any intelligent person from exercising the Special Retraction Right, but this is the preferred share market.

Look. The NAVPU is below the preferred share par value. This means that every dime, now or in the future, should accrue to the preferred shareholders. But in the event of a miraculous upsurge in the US market, it doesn’t and it won’t. The Capital Units will get all the money over the preferred share par value of $10.00 on liquidation. If things are miraculous enough, they might even get interim distributions. Why? What are they paying preferred shareholders for this privilege? Nuthin’. They will not share any future losses, because they’ve lost everything already, but they may share future profits. Why give them this sweet deal for free? Preferred shareholders will be far better off if they retract for cash and reinvest the proceeds in a US portfolio. As it stands, they are now invested in an expensive mutual fund (MER = 1.53% according to the 18H1 Semi-annual report) with cruddy returns (-1.09% since inception, vs. +3.62% for the S&P 500 Financial Index, according to the 2017 Annual Report).

Why? Why would anybody in his right mind hold this issue, when you can get the full NAVPU with a special retraction?

It closed at $8.85 today, a slight (just over 3%) discount to the September 14 NAVPU of 9.14, so after hedging costs there’s hardly any incentive to try to arbitrage the difference.

So the 10% coupon they’re offering is best characterized as flim-flam. All the money should belong, and can belong, to the preferred shareholders. Retract!

The Bank of Nova Scotia has announced:

that it intends to exercise its right to redeem all outstanding Non-cumulative Preferred Shares Series 20 of Scotiabank (the “Series 20 Shares”) and Non-cumulative Preferred Shares Series 21 of Scotiabank (the “Series 21 Shares”) on October 26, 2018, at a price equal to $25.00 per share, together with all declared and unpaid dividends. Formal notice will be issued to holders of the Series 20 Shares and Series 21 Shares in accordance with the share conditions. The redemption has been approved by the Office of the Superintendent of Financial Institutions.

On August 28, 2018, the Board of Directors of Scotiabank announced a quarterly dividend of $0.225625 per Series 20 Share, and $0.187403 per Series 21 Share. This will be the final dividend on the Series 20 Shares and Series 21 Shares, and will be paid on the date of the redemption, October 26, 2018, to shareholders of record at the close of business on October 2, 2018. After October 26, 2018, the Series 20 Shares and Series 21 Shares will cease to be entitled to dividends.

BNS.PR.Q (Series 20) was announced 2008-05-27 as a FixedReset, 5.00+170, and commenced trading 2008-6-10. After an extension announcement it reset at 3.61% in 2013.

At that time, there was a partial conversion to BNS.PR.B, the FloatingReset.

Brookfield Asset Management Inc. has announced:

that after having taken into account all election notices received by the September 17, 2018 deadline for the conversion of the Cumulative Class A Preference Shares, Series 32 (the “Series 32 Shares”) (TSX: BAM.PF.A) into Cumulative Class A Preference Shares, Series 33 (the “Series 33 Shares”), the holders of Series 32 Shares are not entitled to convert their Series 32 Shares into Series 33 Shares. There were 79,681 Series 32 Shares tendered for conversion, which is less than the one million shares required to give effect to conversions into Series 33 Shares.

It will be recalled that BAM.PF.A will reset at 5.061% effective October 1.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets subindex.

I recommended against conversion.

BCE Inc. has announced (on September 14):

that none of its fixed-rate Cumulative Redeemable First Preferred Shares, Series AQ (Series AQ Preferred Shares) will be converted into floating-rate Cumulative Redeemable First Preferred Shares, Series AR (Series AR Preferred Shares) on October 1, 2018.

On August 31, 2018, notice was provided that holders of Series AQ Preferred Shares could elect to convert their shares into Series AR Preferred Shares subject to the terms and conditions attached to those shares. Only 93,593 of BCE’s 9,200,000 Series AQ Preferred Shares were tendered for conversion on October 1, 2018 into Series AR Preferred Shares. As this would result in there being less than one million Series AR Preferred Shares outstanding, no Series AQ Preferred Shares will be converted on October 1, 2018 into Series AR Preferred Shares, as per the terms and conditions attached to those shares.

The Series AQ Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbol BCE.PR.Q. The Series AQ Preferred Shares will pay on a quarterly basis, for the five-year period beginning on September 30, 2018, as and when declared by the Board of Directors of BCE, a fixed quarterly cash dividend based on an annual dividend rate of 4.812%.

It will be recalled that BCE.PR.Q will reset at 4.812% effective September 30.

BCE.PR.Q is a FixedReset that came into being through an Exchange from BAF.PR.E which in turn commenced trading 2013-2-14 as a FixedReset, 4.25%+264, after being announced 2013-1-30.

I recommended against conversion.

Artis Real Estate Investment Trust has announced (on September 18):

that it has determined, based upon the election of holders of Preferred Units, Series E (“Series E Units”) (AX.PR.E), that less than 500,000 Series F Units would be issued on September 30, 2018 and consequently, no holders of Series E Units are entitled to reclassify their Series E Units to Series F Units on September 30, 2018.

Accordingly, all 4,000,000 Series E Units will remain issued and outstanding following September 30, 2018 and during the subsequent five year period commencing October 1, 2018, holders will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series E Unit determined by multiplying the Annual Fixed Distribution Rate of 5.472% per annum by $25.00, payable quarterly on the last business day of each of March, June, September and December in each year during such period.

It will be recalled that AX.PR.E will reset at 5.472% effective October 1.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

I recommended against conversion.