LFE.PR.A: Recirculating?

Yesterday, in the post LFE.PR.A Tight-Lipped Regarding Special Retraction Results I expressed my irritation that results of the Special Retraction for LFE.PR.A had not been reported by the company immediately following the effective date of the Special Retraction.

I eMailed the company:

Knowledge of the consolidation ratio is critical to evaluation of the credit quality of LFE.PR.A and the option value of LFE.

What purpose is served by the delay?


… and received a reply …

In the best interest of the shareholders, the Company has an obligation to attempt to recirculate the shares submitted for the special retraction, prior to the payment date. Therefore it does not mean that all shares submitted for the special retraction will be cancelled. Any cancellations will not occur until after the June 19th payment date.

Well, fair enough, although I consider it rather odd that the company is holding the position as treasury shares for almost three weeks.

Say that: (i) they have not yet raised the cash, and (ii) the underlying portfolio value plummets. Then they’re screwed, because they have, effectively, levered up the portfolio in a down market.

So to avoid this possibility, one might assume that a prudent person would have raised the cash as of the NAV calculation date (May 31).

So say that: (i) they have raised the cash, and (ii) the underlying portfolio value skyrockets. This gets a little complex, so say there were two units outstanding May 30, of which one was retracted May 31 at a price of $11. They raise the cash, so that their assets on May 31 are $11 securities and $11 cash, against two units outstanding, one of which is a treasury unit.

Then the underlying doubles, so on June 17 their assets are $22 securities and $11 cash, with two units outstanding, one of which started the period as a treasury. The unitholders will be happy or sad to the extent to which the company was able to sell units at prices reflecting their ability to invest the cash in the underlying portfolio. It gets a little hairy, especially when there are two classes of shares to worry about.

Attempting to recirculate units after the calculation of the cash payment obligation seems like a risky enterprise to me. But, of course, the numbers have been chose to make understanding simpler – the underlying portfolio is unlikely to either double or halve in the three week holding period.

In fact, they might well get away with it, given that the Capital Units are trading at a fat premium to the intrinsic value reported on May 31, which was $11.32. Despite this, the low price for the entire period for the capital units by the Toronto Stock Exchange was $1.70.

Those who have seen my seminar on SplitShares will know there is nothing automatically wrong with capital units trading at a premium – they can, to a certain extent, be modelled as options and may have time value that can be quite considerable. There’s more discussion of this nuance (for free, you cheap bastards) in the post Split Share Capital Unit Debate. But – and it’s a big but, as the Bishop said to the Actress – there will be a considerable cash drag on the portfolio following the reorganization and any attempt to model the capital units as options have to include this effect. I’m sure a lot of models don’t.

One way or another, however, I suspect that the company will be successful in flogging any Capital Units retracted for a price in excess of their redemption price of $1.32. Just what might happen to the preferred shares is much less clear. We shall see!

One Response to “LFE.PR.A: Recirculating?”

  1. […] the last post on this issue, LFE.PR.A: Recirculating?, I noted that the May 31 (pre-consolidation) NAVPU was 11.32; thus the fund lost approximately […]

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