PrefBlog

World Financial Split Corp has released its Semi-Annual Report to June 30, 2011:

Distributions to Class A shareholders remained suspended in accordance with the terms of the prospectus which states: “No distribution will be paid to 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 Fund, the net asset value per unit would be less than $15.00”.
…
During the six months ended June 30, 2011, the total return of the Fund was negative 4.1 percent reflecting a decline in value of the securities in the portfolio. The MSCI World Financials Index (the “Financials Index”) total return in Canadian dollar terms during the same period was negative 1.1 percent. As a result of the Fund being limited to a specific universe of stocks and utilizing a covered call writing strategy to generate income, comparison with a market index may not be appropriate. The Financials Index is calculated without the deduction of management fees and fund expenses, whereas the performance of the Fund is calculated after deducting such fees and expenses.

MER:

The MER for 2011 excluding warrant exercise fees and special resolution expense
is 1.65%.

Average Net Assets: This is difficult to calculate from the financial statements, but if we accept that MER is based on the average, and that the expenses used for this calculation were the “Subtotal Expenses” on the income statment, we arrive at Average Net Assets of 56.5-million, which looks like a reasonable figure.

Underlying Portfolio Yield: Investment income (sum of interest, dividends and withholding taxes) of $1.244-million received multiplied by two (since it’s a six month figure) divided by average net assets of $56.5-million is 4.40%.

Income Coverage: Net investment income of $1.244-million less expenses before special resolution expense of $0.932-million is $0.312-million, to cover preferred dividends of 1.894-million is about 16%.

With respect to the Monthly Retraction Right, the Special Resolution (which was approved) states:

If the Reorganization is approved and implemented, shares will have to be surrendered for retraction by a holder of Class A Shares or Preferred Shares at least ten business days prior to a Valuation Date in order to be retracted on such Valuation Date and such shareholder will receive payment on or before the tenth business day following such Valuation Date.
…
Shareholders whose Preferred Shares are retracted on a Valuation Date will be entitled to receive a retraction price per share (the “Preferred NAV Retraction Price”) equal to 96% of the lesser of (a) the NAV per Unit as of the applicable Valuation Date less the cost to the Fund of purchasing a Class A Share in the market for cancellation and (b) 10.00.
…
Under the Reorganization, the monthly retraction price for the Preferred Shares will be changed and shareholders whose Preferred Shares are retracted on a Valuation Date will be entitled to receive a retraction price per share equal to the lesser of:
(a) the Preferred NAV Retraction Price; and
(b) 96% of the lesser of (i) the Unit Market Price less the cost to the Fund of purchasing a Class A Share in the market for cancellation and (ii) $10.00.

For this purpose, the cost of the purchase of a Preferred Share or a Class A Share will include the purchase price of the share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio to fund the purchase of such share. Any declared and unpaid distributions payable on or before a Valuation Date in respect of Class A Shares or Preferred Shares tendered for retraction on such Valuation Date will also be paid on the retraction payment date. In addition, the following terms have the meanings set forth below.

Class A Market Price: means the weighted average trading price of the Class A Shares on the principal stock exchange on which the Class A Shares are listed (or, if the Class A Shares are not listed on any stock exchange, on the principal market on which the Class A Shares are quoted for trading) for the 10 trading days immediately preceding the applicable Valuation Date.

Preferred Market Price: means the weighted average trading price of the Preferred Shares on the principal stock exchange on which the Preferred Shares are listed (or, if the Preferred Shares are not listed on any stock exchange, on the principal market on which the Preferred Shares are quoted for trading) for the 10 trading days immediately preceding the applicable Valuation Date.

Unit Market Price: means the sum of the Class A Market Price and the Preferred Market Price.

This is somewhat more complex than it used to be! Using current figures from the Mulvihill site:
NAV: 10.29
Preferred Share Price: 8.66
Class A Share Price: 1.07

And assuming that the average trading price (determined after the shares are tendered) is equal to the current price and that the NAV also doesn’t change (always a risk with this type of retraction; sometimes significant!) we may derive:

Preferred NAV Retraction Price = 96% of lesser of (a) 10.29 – 1.07 and (b) 10.00
= 96% of 9.22
= 8.85

The Unit Market Price is 8.66+1.07 = 9.73; the cost to the fund of purchasing a class A share is assumed to be 1.07; so part (b) of the calculation is now
96% of the less of (i) 9.73 – 1.07 = 8.66
and (ii) 10.00
= 96% * 8.66
= 8.31

So, careful examination of the above will reveal that the monthly retraction privilege is now useless for preferred shareholders: the price you get may be assumed (given prudence) to be 96% of what you would get on the market, so what’s the point? Very clever, Mr. Mulvihill … but “Clever Dick came to a bad end” is a Victorian nursery proverb that comes to mind.

This entry was posted on Saturday, August 27th, 2011 at 4:39 pm 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.