In June 2012, it was announced that each share of LFE.PR.A had been exchanged for
- One share of LFE.PR.B
- One LFE.WT.A (exercise price $12.00 for a unit, expiry 2013-6-3)
- One LFE.WT.B (exercise price $12.60 for a unit, expiry 2014-6-2
Now, Quadravest Capital Management Inc. has announced:
Canadian Life Companies Split Corp. (the “Company”) today announced that it has exercised the call option on its 2013 Warrants (Symbol: LFE.WT.A) (the “Warrants”). The call option permits the Company to elect an earlier expiry date for the Warrants than June 3, 2013.
The expiry date of the Warrants will now be March 27, 2013 (the “New Expiry Date”). The exercise price for the 2013 Warrants is $12.00. Warrants that are not exercised prior to 5:00 p.m. (Eastern time) on the New Expiry Date will be void and of no value.
Warrantholders that wish to exercise Warrants must provide the CDS Participant holding their Warrants with instructions and the required payment sufficiently in advance of the New Expiry Date to permit the proper exercise of their Warrants. CDS Participants will have an earlier deadline for receipt of instructions and payment.
Additional information regarding the 2013 Warrants is contained in the Management Information Circular dated March 14, 2012 prepared in respect of the June 2012 Preferred Share Capital Reorganization, or in the Company’s annual information form dated February 20, 2013 each available on SEDAR at www.sedar.com or on the Company’s website www.lifesplit.com.
For further information, please contact Investor Relations at 416-304-4443, toll free at 1-877-4-Quadra
(1-877-478-2372), or visit www.lifesplit.com.
The “Call Option” on the warrants was described in the Management Information Circular:
The Company will have the right, but not the obligation, to call the Warrants at any time (the “Call Option”). The Company must issue a press release when it decides to exercise the Call Option and deliver a notice within five business days to all Warrantholders if it decides to exercise the Call Option.
The 2013 Warrant Expiry Date will be June 3, 2013, unless the 2013 Warrants are called by the Company, in which case the 2013 Warrant Expiry Date will be 20 business days from the date the Call Option is exercised by the Company. 2013 Warrants not exercised prior to 5:00 p.m. (Eastern time) on the 2013 Warrant Expiry Date will be void and of no value.
The 2014 Warrant Expiry Date will be June 2, 2014, unless the 2014 Warrants are called by the Company, in which case the 2014 Warrant Expiry Date will be 20 business days from the date the Call Option is exercised by the Company. 2014 Warrants not exercised prior to 5:00 p.m. (Eastern time) on the 2014 Warrant Expiry Date will be void and of no value.
The NAV as of February 28, 2013 has been reported as:
Canadian Life Companies Split $13.71 (Diluted: $13.03*)
(LFE & LFE.PR.B)*Does not account for estimated warrant subscription fee of $0.13 per unit.
I don’t understand this calculation, frankly, which echoes my previous bafflement at the dilution calculation. The Management Information Circular – posted on SEDAR, dated March 21, 2012) states:
If at any time while any 2013 Warrants are outstanding the net asset value per Unit is in excess of the 2013 Warrant Subscription Price, or while any 2014 Warrants are outstanding the net asset value per Unit is in excess of the 2014 Warrant Subscription Price, a diluted net asset value per Unit will be calculated in addition to the basic net asset value per Unit, and any payment of retraction proceeds will be based on the diluted net asset value per Unit. The diluted net asset value per Unit of the Company at any such time shall be calculated by dividing (a) the net asset value at that time plus the product of the number of 2013 Warrants then outstanding and the 2013 Warrant Subscription Price plus (if the net asset value per Unit exceeds the 2014 Warrant Subscription Price) the product of the number of 2014 Warrant then outstanding and the 2014 Warrant Subscription Price, by (b) the number of Units then outstanding plus the number of Units to be issued on the exercise of all 2013 Warrants then outstanding plus (if the net asset value per Unit exceeds the 2014 Warrant Subscription Price), the number of Units to be issued on the exercise of all 2014 Warrants then outstanding. The diluted net asset value per Unit shall be deemed to be the resulting quotient. If the Company were to issue additional warrants in the future, it would similarly calculate a diluted net asset value at any time when such warrants were “in the money”.
A further complication is:
Subscription Fee
The Company will pay a subscription fee of $0.25 per Unit in respect of each subscription procured by a CDS Participant on behalf of their clients.
My previous bafflement was explained by the fact that the Subscription Fee was accounted for in the published calculation, although it was not mentioned in the Information Circular’s calculation methodology.
I suspect that my current bafflement is affected by the Normal Course Issuer Bid:
As of January 2, 2012, there are 7,930,113 Preferred Shares and 7,930,113 Class A Shares issued and outstanding.
… while TMX Money reports:
Shares Out.: 8,181,613
… which is a change in the wrong direction, unless there have been warrant exercises in the interim, which is permitted by the Information Circular:
each 2013 Warrant can be exercised to purchase one 2012 Preferred Share and one Class A Share (together a “Unit”) for an exercise price of the lesser of $13.25 and 103% of the net asset value of the Company on the Conversion Date (the “2013 Warrant Subscription Price”) on any business day during the period commencing at market open
I have sent an inquiry to the company and will update this post if and when I receive an answer.
At any rate, let us assume that they have done their calculations properly (I’m sure they have; I just don’t understand it) and the adjusted diluted NAV is $13.03 less warrant exercise fees of $0.13 = $12.90 as of February 28.
Now let’s see if the NAV has changed since last month-end:
| Estimate of LFE Unit NAV As of 2013-3-6 |
|||
| Holding | Price 2/28 |
Price 3/6 |
Change |
| MFC | 15.30 | 15.39 | +0.58% |
| SLF | 28.81 | 28.64 | -0.59% |
| GWO | 27.40 | 27.55 | +0.55% |
| IAG | 37.00 | 36.90 | -0.27% |
| Portfolio (Assuming equal weighting) |
+0.07% | ||
Thus we may assume that the NAVPU of LFE is currently virtually equal to the month-end value, maybe a penny more. But nothing dramatic. About $12.90, fully diluted and adjusted for subscription fees.
Since the exercise price of LFE.PR.A is $12.00, this implies that the intrinsic value of the warrants is about $0.90. But LFE.WT.A closed today at $0.37. And they’ve been trading in good size for the past few weeks, too. The problem is that the Units are trading at a substantial discount to intrinsic value: LFE closed today at $2.31, while LFE.PR.B closed at $10.08, total is $12.39, approximately equal to the warrant price plus the subscription price.
What’s going on? Why is LFE trading so far below intrinsic value?
Update, 2013-3-8: The manager doesn’t know how the diluted NAV is calculated either:
Good morning,
The Company’s NAV is calculated by RBC Dexia. In the past 30 days there have been capital changes, making it difficult to calculate the NAV without having all of the relevant information. For example, there were significant warrant exercises along with corporate buybacks that impacted the NAV.
Kind regards.
Quadravest Investor Relations
[JH] Assiduous Reader LD writes in and says [/JH]
Sorry, I misplaced my user ID for posting comments on your blog. This was going to be my comment regarding your previous post about LFE warrants:
I’ll take a stab at this. My apologies if I’ve missed something. I’m not very familiar with this particular fund, but I’ve had experiences with similar products. The two issues that you mention are: 1) the warrants trading at a good discount to NAV; and 2) the capital and preferred trading at a good discount to NAV.
First, the warrants are for the capital units, not the NAV. To make money, you would need to buy the warrant, and hedge with something. It doesn’t work to short the capital units/preferred (even if you could borrow them) since they are priced below NAV to the same degree as the warrants as you have pointed out. So your strategy would need to be: buy a warrant and short $13 of the insurance stock that drives the NAV. In one year, exercise the warrant, and approx one year later (in Mar) use the retraction feature of the fund to receive the NAV. That 8% will get eaten up by NAV erosion from the fund’s MER, and dividends paid on the shares you shorted. You of course will not receive any dividends (until year 2) since you only hold the warrants.
Second, the package of capital unit and preferred share is trading at an 8% discount because (as far as I know) we just passed the deadline for notice for the special annual retraction (20 bus days before the end of March). The strategy would be to buy 1 capital unit and 1 preferred share, then short the insurance companies that drive the NAV. Over the whole year, you will make approximately 8%, less the MER, less transaction fees associated with the retraction up to 1%. In this scenario, the dividends you pay on the short are returned to you by being long both the capital unit and the preferred. It seems like your return might be between 4.5% and 6.5% for holding the investment for the year. To me this is only mildly attractive. It appears to be low risk, but it would tie up a lot of capital and is somewhat complex. The strategy still has numerous risks, including the fact that managers of these kinds of funds are notorious for doing shifty things. Again, sorry if I’ve missed something.
[…] as noted in the post LFE.WT.A Exercise Date Changed, some warrants were exercised prior to the expiry date, but this number has not been released. So […]