WFS.PR.A: Term Extension Proposed

Well, 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 a proposal to extend the term of the Fund for an additional seven years. The final redemption date for the Class A Shares and Preferred Shares of the Fund is currently June 30, 2011 and the Fund proposes to implement a reorganization (“Reorganization”) that will allow shareholders to retain their investment in the Fund until at least June 30, 2018.

In connection with the Reorganization, holders of Class A Shares will continue to benefit from the potential for leveraged capital appreciation in a high quality portfolio consisting principally of copmmon shares of the ten largest financial services companies in each of Canada, the United States of America and the rest of the world. If the Reorganization is approved and implemented, holders of Preferred Shares will continue to enjoy preferential quarterly cash dividends in the amount of $0.13125 per Preferred Share representing a yield of 5.25% per annum on the original issue price of $10.00 per Preferred Share.

As part of the Reorganization, the Fund is also proposing other changes including changing the monthly retraction prices for the Class A Shares and the Preferred Shares so that they are calculated by reference to market price in addition to NAV and changing the dates by which notice of monthly retractions needs to be provided and by which the retraction amount will be paid. The Fund will also allow for the calculation of a diluted NAV in the event the Fund should ever issue warrants or rights to acquire additional Class A Shares or Preferred Shares.

Mulvihill Capital Management Inc. the manager of the Fund (the “Manager”), believes the global financial services sector is poised for strong returns over the next several years after experiencing one of the worst financial crises in history over the 2007 – 2009 time period. Subsequently, regulatory oversight and capital requirements increased in order to reduce the risk of another crisis from happening. Despite a decline in 2010 due to the concerns regarding European Sovereign defaults, many of the companies within the Fund’s portfolio universe are well capitalized and are expected to return capital to shareholders in the form of increased dividends and share repurchases which the Manager believes should benefit share prices. The Manager also believes that the Reorganization will allow the Fund to increase in value as the global economy recovers and financial services companies around the world grow stronger.

If the Reorganization is approved and implemented, shareholders will be given a special retraction right to retract their Class A Shares or Preferred Shares at NAV on June 30, 2011 on the same terms had the final redemption date of the Fund not been extended. The redemption date of the shares will automatically be extended for successive seven-year terms after June 30, 2018 and shareholders will be able to retract their Class A Shares or Preferred Shares at NAV prior to any such extension.

A special meeting of holders of Class A Shares and Preferred Shares has been called and will be held on May 31, 2011 to consider and vote upon the proposal. Further details of the proposal will be outlined in an information circular to be prepared and delivered to holders of Class A Shares and Preferred Shares in connection with the special meeting. The Reorganization is also subject to all required regulatory approvals.

The warrants’ exercise price was $11.43 and the Whole Unit NAV is now about $11.47, so those who exercised their warrants have, basically, earned the coupon. The company raised $12.8-million on warrant exercise, implying that take-up was about 15%.

WFS.PR.A no longer has a credit rating, since DBRS withdrew the Pfd-4(low) rating last November at the request of the company.

I applaud Mulvihill for their conduct in making a special retraction right part of the reorganization package. Such a feature cost them considerable AUM when it became exercisable with the PIC / PIC.PR.A term extension. Granting of such a right should be automatic; but for as long as there are sponsors in the market with less sterling ethical standards, such as Manulife Asset Management (as shown in the ASC.PR.A term extension proposal) and such people remaining in the business as Paul Lorentz, Sheila Hart, Jennifer Mercanti and Warren Law (the directors of ASC, who approved the terms of the proposal and recommended that preferred shareholders vote in favour), I will give credit where credit is due.

The company’s prospectus specifies a NAV test for capital unit distributions:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears; or (ii) after the payment of the distribution by the Company, the NAV per Unit would be less than $15.00. In addition, the Company will not pay special distributions, meaning distributions in excess of the targeted 8% distributions, on the Class A Shares if after payment of the distribution the NAV per Unit would be less than $23.50 unless the Company would need to make such distributions so as to fully recover refundable taxes.

Despite these good things I am recommending a No vote on the term extension. With an Asset Coverage ratio of only 1.1+:1, the credit quality of the preferreds is simply insufficient to accept a term extension.

If the reorganization is approved anyway, I recommend exercising the special retraction right, while cognizant of the fact that, as in the case of the PIC.PR.A term extension, it is entirely possible that there might be sufficient preferred shares retracted that, on consolidation of the capital units, credit quality is restored to more acceptable levels. We can’t count on that, though!

It is my hope that, through voting No, preferred shareholders will get some kind of sweetener in a revised proposal. Most obvious, and perhaps least likely (and perhaps, given the extraordinarly low level of income coverage at present values, least desirable), is an increase in coupon. However, if a revised reorganization proposal provided, for example, for the forced redemption of a large number of preferred shares and the subsequent consolidation of the corresponding capital units with the combined effect of restoring Asset Coverage to more traditional levels, I would be very happy to recommend a favourable vote.

2 Responses to “WFS.PR.A: Term Extension Proposed”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « WFS.PR.A: Term Extension Proposed […]

  2. […] proposal to extend term was discussed on PrefBlog. WFS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit […]

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