PrefBlog

Financial 15 Split Corp. has announced:

that its semi-annual financial statements and management report of fund performance for the period ended May 31, 2010 are now available at www.sedar.com and the Company’s website at www.financial15.com.

The Report (to 2010-5-31) states:

During April 2010, the Company issued 1,980,000 Class A and Preferred shares at a unit price of $20 for total net proceeds after the payment of agents fees of $37.5 million. As a result of this offering, one time issue costs and agents fees in connection with the offering increased the expense ratio during the period. The Company did not immediately invest the proceeds into the financial services stocks as reflected by the higher cash position as at May 31,2010 thus benefiting from the opportunity to purchase the core stocks at lower levels than those in April.

Net investment income was $1.1-million, while distributions on preferred shares amounted to $2.1-million, so income coverage for the six months to May 31, 2010, was 0.5+:1, a huge reduction from the 1.2+:1 recorded in 1H09.

Cash on the balance sheet represented 17% of total assets, but this does not explain the sharp decline in income coverage – the secondary offering closed in mid-April, so the cash was only there for about six weeks.

Instead, it appears that several other factors had dominance:

• Dividend receipts declined from about $3-million to about $2-million
• Management and Service fees increased to about $670,000 in 1H10 from about $340,000 (net) in 1H09

Note 6 to the financials reads in part:

The Company is responsible for all expenses incurred in connection with the operation and administration of the Company, including, but not limited to, ongoing custodian, transfer agent, legal and audit expenses.

Pursuant to the administration agreement, the Manager is entitled to an administration fee payable monthly in arrears at an annual rate of 0.10% of the transactional net assets of the Company, which includes the outstanding Preferred shares, calculated as at each monthly valuation date and an amount equal to the service fee payable to dealers on the Class A shares at a rate of 0.50% per annum. 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 in such calendar quarter.

Pursuant to the terms of the investment management agreement, Quadravest is entitled to a base management fee payable in arrears at an annual rate equal to 0.65% of the transactional net assets of the Company, which include the outstanding Preferred shares, calculated as at each monthly valuation date. In addition, Quadravest is entitled to receive a performance fee subject to the achievement of certain pre-established total return thresholds.

Total management fees of $519,631 (May 31, 2009-$373,315), incurred during the period, include the administration fee and base management fee. No performance fees were paid in 2010 or 2009.

Clearly, the Service Fee increased because the capital unitholders received all their dividends in the first half so all Service Fees were payable. In 1H09, no service fees were payable – there was even a rather odd recovery!

Management fees increased due to the increase in assets of the fund.

So it looks like the expenses are probably here to stay – provided the NAV holds up above $15.00 and the capital unit distributions are made – but it is rather odd that dividend receipts have declined so precipituously despite the increase in assets. At some point it will be most interesting to attempt to reconcile these data with the disclosed holdings – how much of this is the result of actual dividend cuts for the common shares held, and how much due to selection of lower yielding securities?

However, the income coverage should improve to some extent in the second half as the cash on the balance sheet is invested.

This entry was posted on Friday, July 30th, 2010 at 12:23 am 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.