LFE.PR.A Reorganization Details Announced

Canadian Life Companies Split Corp. has announced the details of its reorganization, as promised when the proposal was approved and in accordance with announced terms.

The critical part of today’s announcement is:

Shareholders who do not wish to remain invested in the Company under its reorganized share structure will have until the close of business on May 17, 2012 to provide the Company with notice through their CDS participant that they wish to have their Preferred Shares or Class A Shares redeemed pursuant to the 2012 Special Retraction Right, and to surrender their Shares for retraction. On such a special retraction, each holder of a Preferred Share will receive the lesser of (i) $10.00 and (ii) the net asset value per Unit calculated on May 31, 2012; while holder of a Class A Share will receive the net asset value per Unit calculated on May 31, 2012, less $10.00. Shareholders interested in exercising such retraction right should contact the CDS Participant through which they hold the Shares for further information and instructions as to how to exercise this right. Shareholders should note that the requirements of any particular CDS Participant may vary, and that Shareholders may need to inform their CDS Participant of any intention to exercise this retraction right in advance of the May 17 deadline. Payment for the Class A Shares or Preferred Shares so tendered for retraction pursuant to the 2012 Special Retraction Right will be made no later than June 19, 2012.

Each broker will have a different deadline for notification of desired exercise of the Special Retraction Right, so make sure you know the date applicable to you! It should also be noted that there will be no maturity or retraction available on the previously scheduled wind-up date of 2012-12-1. That’s been wiped out.

The question is whether or not to retract. The NAV as of 2012-4-13 is $12.64. I believe that due to the increased coupon paid on the shares (it will be 6.25%) and the presence of warrants, it is now more appropriate to consider the preferred shares to be common shares in a closed-end fund trading at a discount rather than “preferred” in the normal sense.

Credit Quality Analysis
Template Start 2002-12-8
End 2010-12-8
Symbol xfn.to
Initial NAV
MER 1.04%
(10bp reduction)
Cap Unit Div
Above Test
Cap Unit Div
Below Test
NAV Test 15.00
Whole Unit Par Value 25.00
Months to Redemption 80
Analysis Probability of Default 28.60%
Loss Given Default 22.42%
Expected Loss 6.40%
(from 4/13)
Current Price 10.00
Maturity Date 2018-12-1
Yield to Maturity 6.29%
Expected Price 9.36
Yield to Expectations 5.48%

It will be noted that the yield calculations presented above have been performed from April 13 and hence reflect receipt of the April monthly dividend. Valuation of the options is complex; if the preferreds are considered best analyzed as common shares in a discounted closed-end-fund, there must be some allowance made for the fact that extant capital unitholders will receive some fraction (possibly 100%; possibly as little as 33%) of any final NAV in excess of $10.00.

It will also be noted that there will be many who consider the expected total return of the underlying portfolio, estimated above as 7%, to be overly generous, considering all the current, expected and potential capital rule changes that will be imposed on the insurance industry over the next six years. Others will look at the fat coupon on the new preferreds and reason that this will, essentially, allow them to suck out the excess NAV over the next six years even if the industry doesn’t do very much (it will be noted that in the analytics above, the 50-percentile for the expected final NAV is 12.41 – thus, even given a 7% expected total return of the underlying portfolio, the extant capital unitholders should not expect to make a dime until maturity – no dividends, no capital gain!).

So, some will be attracted to this as an equity investment. But I don’t think these things should be considered “preferred shares” any more. For those who wish to hold preferred shares and accrue the benefits of holding the asset class, I recommend that the Special Retraction Right be exercised or that the shares be sold on the market if they should trade at a premium.

One Response to “LFE.PR.A Reorganization Details Announced”

  1. […] will be recalled that LFE.PR.A is undergoing a reorganization; a very important part of this reorganization was: Shareholders who do not wish to remain invested […]

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