DPS.UN : Results of Redemption Option

Sentry Select, much to my surprise, has released no news release regarding the results of their annual redemption option – I would have thought that such an announcement would be a regulatory requirement, but I’ll admit I’m not as familiar with the reporting requirements of public companies as I’d like to be.

Anyway, thanks to Financial Webring Forum and an Assiduous Reader, I can now say that they were forced to redeem about one-sixth of their units; according to their June 30 Semi-annual report, they used to have 13,071,383 units outstanding; now, according to the TSX, they have only 10,896,968.

That’s a difference of nearly 2.2-million units; at $21 each, that means that there was selling pressure in excess of $40-million hitting the market in the last half of October … readers may know that the PerpetualDiscount index fell about 2.5% in the latter half of October … and the fund made an unfortunately early shift into this sector at that time.

The fund’s raison d’etre is to sell liquidity! There was just too much on offer!

According to Sentry Select, the NAVPU of DPS.UN was 21.07 on November 28, while the market price was $20.20. This is a discount of about 4.1% … below the 5% required to trigger Mandatory Purchases for Cancellation … but not by much!

DPS.UN is still paying out an unsustainable dividend – according to the June financials, almost 28% of the 1H07 payout was return of capital, compared to 35.2% in 2006. Redemptions of higher coupon issues may be expected to exacerbate the unsustainability as time passes.

2 Responses to “DPS.UN : Results of Redemption Option”

  1. newbie says:

    11/21/07 market price was $20.03, while NAV was $21.11. The discount is more than 5.1%. Why didn’t it trigger mandatory purchase? Thanks.

  2. jiHymas says:

    From the prospectus linked in the main post:

    To enhance liquidity and to provide market support for the Units, the Trust has a mandatory market purchase program under which the Trust is, subject to certain exceptions contained in the Declaration of Trust (as described below) and in compliance with any applicable regulatory requirements, obligated to purchase Units for cancellation, on and subject to the terms described below. If, on the last business day of any week (any day on which the TSX is open for trading hereinafter referred to as a ‘‘business day’’) the closing price of Units is less than the amount which is 95% of the Net Asset Value per Unit determined as at the close of business in Toronto, Ontario on that day (the ‘‘Reference Closing Price’’), the Trust is obligated to purchase for cancellation any Units offered in the market at prices at or below the Reference Closing Price on the succeeding business day; provided, however, that the maximum number of Units to be purchased in any three month period will be 1.25% of the number of Units outstanding at the beginning of such period. The Declaration of Trust provides that the Trust is not obligated to make such purchases if, among other things, (i) the Trustees reasonably believe that the Trust would be required to make an Additional Distribution in respect of the year after the making of such purchases, (ii) the Trust lacks the cash, debt capacity or other resources to make such purchases, or (iii) in the opinion of the Trustees, such market purchases would adversely affect the on going activities of the Trust.

    So …
    (a) November 21 was a Wednesday, not the last business day of the week
    (b) the trustees may have used their escape clause (iii)
    (c) they are only obligated to buy shares that are offered on the TSX at a price below the Reference Closing Price. Shares could trade below this price without there ever being an actual qualifying offer.
    (c) DPS.UN might have actually executed a mandatory purchase but not reported it.

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