WFS.PR.A on Review-Negative by DBRS; Warrant Prospectus Filed

DBRS has announced that it:

has today placed the Pfd-4 (high) rating of the Preferred Shares issued by World Financial Split Corp. (the Company) Under Review with Negative Implications.

In February 2004, the Company raised gross proceeds of approximately $471 million by issuing 18.85 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each.

The NAV and the dividend income of the Portfolio have declined significantly over the past few years because of the high Portfolio concentration in global financial institutions. The current dividend income of the Portfolio does not fully cover the Preferred Share distribution; however, less than one year remains until the termination of the Company, mitigating the negative impact of the shortfall.

The NAV of the Company declined over the past four months, dropping from $13.35 on March 31, 2010, to $11.60 on July 31, 2010. The current downside protection available to the Preferred Shareholders is approximately 14% (as of July 31, 2010). As a result of the decreased protection available to the Preferred Shares, the rating has been placed Under Review with Negative Implications. The resolution of the Under Review status will depend on the performance of the Portfolio during August and September.

The final redemption date for both classes of shares issued is June 30, 2011.

I must say, I find the “Review-Negative” status a little surprising for a SplitShare corporation. I mean, the whole rating process is supposed to be formula driven, isn’t it? What are they reviewing? It’s not like the company has announced surprisingly poor earnings and they have to wait a month until they can meet management.

Waiting for performance for August and September to be learnt? That doesn’t make any sense to me at all. What is the percentage chance, NOW, of the issue defaulting?

But I suppose they had to say something – the warrant issue prospectus was filed today:

World Financial Split Corp. (the “Fund”) is pleased to announce that it has filed a final short form prospectus relating to an offering of Warrants to holders of its Class A Shares. Each Class A shareholder of record on August 23, 2010 will receive one Warrant for each Class A Share held.

Each Warrant will entitle its holder to acquire one Class A Share and one Preferred Share upon payment of the subscription price of $11.43.

The Toronto Stock Exchange has conditionally approved the listing of the Warrants under the symbol WFS.WT.A and the Class A Shares and the Preferred Shares issuable upon the exercise thereof. It is expected that the Warrants will commence trading on August 19, 2010 and will remain trading until noon (Toronto time) on the expiry date of January 17, 2011.

WFS.PR.A was last mentioned on PrefBlog when they announced preparations for the warrant issue. WFS.PR.A is tracked by HIMIPref™, but is relegated to the Scraps index on credit concerns.

9 Responses to “WFS.PR.A on Review-Negative by DBRS; Warrant Prospectus Filed”

  1. old_trucker says:

    hi there, i own shares, what will happen to my shares if i still own them come june 2011 at expiration? what are my options here? please email me at, thanks so much

  2. jiHymas says:

    On expiration the preferred shares, WFS.PR.A, will receive the $10 issue price back and all dividends.

    The capital unitholders, WFS, will receive everything that’s left over.

    The above assumes that the unit NAV exceeds $10. If it’s less than $10, the preferred shareholders get everything and the capital unitholders get nothing. The most recent unit NAV was $11.23.

    It is possible that the company will attempt to extend term – that is, change the expiration date from June 2011 to some later date. There’s no way of telling, at the moment, whether the company will attempt to do this – but I suggest that the fact that they are issuing warrants less than a year prior to expiry makes this more likely than otherwise. In such a case, you will (almost certainly) have the option of either redeeming on the original date for your share of the NAV (as if they did expire) or of holding on to them.

    You may be interested in reading my essay Split Shares, which introduces this class of share. Other articles may be found by clicking the boxes (usually green) on the right-hand panel of this blog, or viewing all posts in the category “Publications”, by clicking that link under the heading “Categories”, also in the right-hand panel.

  3. old_trucker says:

    hi there, thanks for the reply, i need to clarify a few things though, i really hope you can help, i own my shares through cibc investors edge, given the recent news, is there any chance of the company defaulting and me losing my entire investment? again, i am invested in, not the preferred shares, i am very worried about this, and need as much info as possible to act accordingly, i didn’t forsee this happening, thanks for taking the time to reply, i look forward to hearing back from you, thanks so much

  4. jiHymas says:

    given the recent news,

    I’m not sure what recent news you mean. There’s always something going on in the financial markets, but things seem relatively calm at the moment.

    is there any chance of the company defaulting and me losing my entire investment?

    I have to say that yes, there is a significant chance of the capital unitholders being wiped out.

    Given the current unit value, WFS is a highly leveraged investment: a NAV of $11.23 means that, effectively, $1.23 of equity has been levered up about 9:1 with funds borrowed from the preferred share investors.

    A drop of 11% in the value of the portfolio held will result in a reduction of the NAV from $11.23 to $9.99, which will wipe out the capital units.

    A drop of this magnitude would certainly be unusual but, as the last two years have shown us, can happen quite easily. The portfolio listing at the Mulvihill site is not up to date, but gives the general idea: the fund is invested in the common shares of large global financial corporations.

    Naturally, the extreme degree of leverage also has its good side: an increase in the value of the portfolio of 11% will raise the unit value from $11.23 to $12.48, raising the intrinsic value of the capital units from $1.23 to $2.48. Again, such a gain would be unusual, but by no means unprecedented in the past few years.

    It should be noted, however, that the liquidation of the company will only take place on the date originally agreed in the prospectus. Thus, for instance, the NAV could decline below $10.00 and then go right back up again before liquidation – you would not actually lose your investment just because the value became zero at some point before liquidation. The only measurement date that really counts is the liquidation date.

    When the NAV is so close to $10.00 the capital units are priced more like options than like normal closed-end funds.

  5. too fast says:

    Why would I buy warrants for 11.43 ea. when I can buy the preferred shares and the common shares on the market for 10.69 which I think means this thing is sinking

  6. jiHymas says:

    The NAV was 11.23 as of August 19 and the warrants don’t expire until January … given that the price of the warrants is only five-and-a-half cents with a strike price of 11.43, I suspect they could make quite an interesting little speculation … but I will leave the calculation of implied volatility as an exercise for the student!

  7. adrian2 says:

    The understatement of the week : I suspect they could make quite an interesting little speculation.

    Yesterday’s close for WFS.WT = $0.06
    Today’s close for WFS.WT = $0.12
    Percentage change = 100%

    I’ll leave the calculation of the annualized gain as an exercise to other Assiduous Readers.

    HTML coding copyedit by JH

  8. […] was last mentioned on PrefBlog when it was placed on review-negative by DBRS. WFS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit […]

  9. […] this wasn’t particularly hard to see coming, after the company’s warrant issue expired less than six months before dissolution! Mulvihill’s World Financial Split Corp. has announced: its Board of Directors has approved […]

Leave a Reply

You must be logged in to post a comment.