The Bank of Nova Scotia has announced:
BNS Split Corp. II (the “Company”) announced today that the final condition required to extend the term of the Company for an additional five years to September 22, 2020, has been met as holders of 89.2% of Class A Capital Shares (“Capital Shares”) have elected to extend. Holders of Capital Shares previously approved the extension of the term of the Company subject to a minimum of 800,000 Capital Shares remain outstanding after giving effect to the special retraction right (the “Special Retraction Right”).
Under the Special Retraction Right, 137,506 Capital Shares were tendered to the Company for payment on September 22, 2015. The holders of the remaining 1,138,286 Capital Shares will continue to enjoy the benefits of a leveraged participation in the capital appreciation of the Company’s portfolio of common shares of The Bank of Nova Scotia while potentially deferring any capital gains tax liability which would otherwise be realized on the redemption of their Capital Shares.
The Company’s Class B Preferred Shares, Series 1 will be redeemed by the Company on September 22, 2015 in accordance with the redemption provisions at a price per share equal to the lesser of $18.85 and the Net Asset Value per Unit. In order to maintain the leveraged “split share” structure of the Company, the Company intends to create and issue a new series of Class B Preferred Shares to be called the Series 2 Preferred Shares, which are expected to be issued immediately following this redemption.BNS Split Corp. II is a mutual fund corporation created to hold a portfolio of common shares of The Bank of Nova Scotia. Capital Shares and Preferred Shares of BNS Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols BSC and BSC.PR.B respectively.
… and the new issue was assigned a provisional rating of Pfd-2(low) by DBRS:
DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-2 (low) to the Class B Preferred Shares, Series 2 (the Preferred Shares) to be issued by BNS Split Corp. II (the Company). The Preferred Shares will be issued as part of a share capital reorganization, which permits holders of Class A Capital Shares (the Capital Shares) to extend their investment in the Company beyond the redemption date of September 22, 2015, for an additional five years to September 22, 2020. The Preferred Shares will be issued to maintain the leveraged split share structure of the Company, so that the number of issued and outstanding Capital Shares are twice the number of issued and outstanding Preferred Shares. The Preferred Shares and Capital Shares will be redeemed by the Company on September 22, 2020.
There is a preliminary short form prospectus available on SEDAR dated August 25, which I am not permitted to link to directly since the Canadian Securities Administrators think it’s bad enough that investor scum have any access at all to public documents and are doing their level best to make access inconvenient.
The critical bits of information, such as coupon rate, have not yet been filled in but there are some items of interest:
The Series 2 Preferred Shares may be surrendered for retraction at any time by the holders. Retraction payments for Series 2 Preferred Shares will be made on the 22nd day of a month or, where such day is not a business day, on the preceding business day (a “Retraction Payment Date”) provided the Series 2 Preferred Shares have been surrendered for retraction no later than the first business day before the 8th day of that month.
A holder who surrenders a Series 2 Preferred Share for retraction will receive on the Retraction Payment Date the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing two Capital Shares in the market; and (ii) $1.00.
That’s a pretty awful retraction price; it won’t support the preferred share value very much in the event of a crash in the underlying portfolio of BNS common.
Any Series 2 Preferred Shares still outstanding on the Redemption Date will be redeemed by the Company on the Redemption Date at a price per share equal to the lesser of the issue price of a Series 2 Preferred Share and the Unit Value. See “Description of the Securities Distributed – Attributes of the Series 2 Preferred Shares”.
In addition, the Company may also redeem Series 2 Preferred Shares on any Annual Retraction Payment Date (defined herein) at a price per share equal to the issue price of a Series 2 Preferred Share. The Company will only redeem Series 2 Preferred Shares in these circumstances to the extent that unmatched Capital Shares have been tendered for retraction under the Special Annual Retraction (defined herein). Where less than all the Series 2 Preferred Shares are to be so redeemed, Series 2 Preferred Shares shall be redeemed on a pro rata basis or in such other manner as is approved by the Board of Directors of the Company. The Company may also redeem Series 2 Preferred Shares in the circumstances described under “Changes Affecting Portfolio Securities.”
In addition to the annual redemption right as described above, Series 2 Preferred Shares may be redeemed by the Company at any time prior to the Redemption Date at a price (the “Premium Redemption Price”) which, until September 2016, will equal
the issue price of the Series 2 Preferred Shares multiplied by a premium which will initially be 4% and which will decline by 1% each year to nil after September 22, 2019.
And that’s a pretty onerous redemption condition. Split Shares which can be redeemed annually at par are rarely a good investment unless they’re pretty well discounted, since there’s a lot of uncertainty about redemption and less possibility of capital gain.
There is no NAV test for Capital Unit distributions, but according to the July Information Circular:
Holders of Class A Capital Shares are entitled to receive dividends as declared by the Board of Directors.
The policy of the Board of Directors is to only pay a dividend on the Class A Capital Shares provided that the Unit Value ras herein described) at the time of declaration of such dividend is, after giving effect to the dividend, greater than or equal to the original issue price of the Series 1 Preferred Shares. The current running yield on the Class A Capital Shares is 2.97% based on the closing price of the Class A Capital Shares of $19.85 on June 26, 2015.
Policies are nice things to have. Contractual obligations are better.