Canoe EIT Income Fund has announced:
that it has entered into an agreement with a syndicate of underwriters (the “Underwriters”) led by Scotia Capital Inc. (“Scotia Capital”) to sell, 2,800,000 Cumulative Redeemable Series 2 Preferred Units (3,220,000 Cumulative Redeemable Series 2 Preferred Units if the over-allotment described below is exercised in full) of the Fund (“Series 2 Preferred Units”), on a “bought deal” basis, at a price of $25.00 per Series 2 Preferred Unit (the “Offering Price”) for gross proceeds of approximately $70 million (approximately $80.5 million if the over-allotment option is exercised in full) (the “Offering”).
Holders of the Series 2 Preferred Units will be entitled to fixed cumulative preferential cash distributions of $1.20 per Series 2 Preferred Unit per annum, as and when declared, which will accrue from the date of issue and will be payable quarterly on the 15th day of March, June, September and December in each year. On or after March 15, 2025, the Series 2 Preferred Units will be retractable for cash, at the option of the holder, for $25.00 per Series 2 Preferred Unit, together with any accrued and unpaid distribution in respect of such Series 2 Preferred Units, less any tax required by law to be deducted therefrom. The Series 2 Preferred Units are provisionally rated Pfd-2 (high) by Dominion Bond Rating Service Limited.
The Fund has agreed to grant the Underwriters an over-allotment option to purchase up to an additional 420,000 Series 2 Preferred Units at the Offering Price on the same terms and conditions, exercisable in whole or in part at any time for a period of up to 30 days following closing of the Offering.
The Fund intends to use the proceeds from the Offering in accordance with the investment objectives and investment strategies of the Fund, subject to the investment restrictions of the Fund.
DBRS has issued a provisional rating of Pfd-2(high):
DBRS Limited (DBRS) assigned a provisional rating of Pfd-2 (high) to the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units) to be issued by Canoe EIT Income Fund (the Fund) that will rank pari passu with the existing Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units; collectively with the Series 2 Preferred Units, the Preferred Units). The Fund can issue an unlimited number of capital units (the Fund Units) and can also issue in series Preferred Units up to a maximum aggregate amount equal to 25% of the Fund’s total assets after giving effect to the proposed offering of Preferred Units
As of March 14, 2018, assuming no capital distributions or special dividends paid, the net asset value of the Fund would have to fall by approximately 81% for the holders of the Preferred Units to be in a loss position. The Series 1 Preferred Unit holders currently receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% per-annum return on the issue price of $25.00. The holders of the Fund Units receive targeted monthly cash distributions of $0.10, amounting to $1.20 per annum. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024.
In assigning the provisional rating, DBRS has considered the expected level of downside protection available to holders of the Series 2 Preferred Units and the composition and diversification of the portfolio. In addition, DBRS has taken into account the potential grind on the portfolio arising from the distributions to the Units and redemption rights, the potential foreign exchange risk because of some investments in foreign currencies not being hedged and the fact that the lenders under the Credit Facility have priority over the Fund’s assets up to the amount of credit outstanding. Because of the amount of the Credit Facility compared with the current total assets, DBRS does not consider the latter risk to be significant.
Investors should note that distributions will be a mix of eligible dividends, capital gains and return of capital. I anticipate that the following language from the EIT.PR.A prospectus will be essentially repeated:
A Holder will generally be required to include in computing the Holder’s income for tax purposes in each year the amount of income and net taxable capital gains, if any, paid or payable, or deemed to be paid or payable, to the Holder in the year by the Fund to the extent that the Fund deducts such amount in computing its income for tax purposes. The Fund’s income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.
The amount of the non-taxable portion of any net realized capital gains of the Fund that is paid or payable to a Holder in a taxation year will not be included in computing the Holder’s income for the year. The Holder will not be required to reduce the adjusted cost base of the Holder’s Series 1 Preferred Units by such an amount.
Any other amount in excess of the income for tax purposes of the Fund that is paid or payable to a Holder in that year generally will not be included in the Holder’s income for the year, but the Holder will be required to reduce the adjusted cost base of the Holder’s Series 1 Preferred Units by that amount. To the extent that the adjusted cost base of a Series 1 Preferred Unit would otherwise be a negative amount, the negative amount will be deemed to be a capital gain and the adjusted cost base of the Series 1 Preferred Unit to the Holder will then be nil. The taxation of capital gains is described below (see “Capital Gains and Capital Losses”).
Provided that appropriate designations are made by the Fund, such portion of: (a) the net realized taxable capital gains of the Fund; (b) the foreign source income of the Fund and foreign taxes paid by the Fund eligible for the foreign tax credit; and (c) the taxable dividends (including eligible dividends) received, or deemed received, by the Fund on shares of taxable Canadian corporations, (including distributions from SIFT trusts or SIFT partnerships deemed to be taxable dividends under the SIFT Rules) as is paid or payable to a Holder will effectively retain their character and be treated as such in the hands of the Holder for purposes of the Tax Act. Amounts which retain their character in the hands of a Holder as taxable dividends on shares of taxable Canadian corporations will, in the case of a Holder who is an individual, be eligible for the normal gross-up and dividend tax credit rules under the Tax Act; and will, in the case of a Holder who is a corporation, generally be deducted in computing taxable income.
For the 2017 tax year the breakdown was:
| EIT Distribution Taxation 2017 |
|
| Actual Amount of Eligible Dividends | 4.7% |
| Capital Gains | 46.8% |
| Return of Capital | 48.5% |
Announcement of this issue knocked hell out of the trading price of EIT.PR.A, (also with a 4.8% coupon, retractible one year prior to the new issue) which commenced trading 2017-3-17 after being announced 2017-3-8 with marketting beginning 2017-2-22. It closed with a quote of 25.55-26.55 yesterday (last price 25.75) and today was 25.35-38, last price 25.28 on volume of 21,200. Today’s relative prices seem about right to me.