PrefBlog

It is the time of year for the annual retraction privilege for BSD.UN Capital Units and the Whole Units:

Concurrent Annual Redemption: A Unitholder who surrenders a Capital Unit together with a Preferred Security will receive an amount equal to the Redemption Proceeds Per Combined Security minus an amount equal to the aggregate of all brokerage fees, commissions and other costs incurred by the Trust in connection with such payment, including, but not limited to, expenses incurred in liquidating underlying Portfolio securities and securities movement charges.

Annual Redemption of Capital Units: A Unitholder who surrenders a Capital Unit for redemption (without surrendering a corresponding Preferred Security for repayment) will receive an amount equal to the Redemption Proceeds Per Combined Security, minus the price paid by the Trust for one Preferred Security in the market or, if the Trust is unable to purchase a Preferred Security in the market, pursuant to the Call Right (as hereinafter defined), and minus an amount equal to the aggregate of all brokerage fees, commissions and other costs incurred by the Trust in connection with such payment, including, but not limited to, expenses incurred in liquidating underlying Portfolio securities, securities movement charges and costs relating to the purchase of one Preferred Security. The price paid by the Trust for Preferred Securities in the market may be higher than the price the Trust would pay if it redeemed Preferred Securities pursuant to the Call Right.

The Preferred Securities don’t get the ‘naked’ privilege – they can only be retracted as part of a Whole Unit.

This means that a surplus of Capital Unit retractions can be expected; the only practical question is the degree of the surplus:

In 2017, unitholders tendered 81,978 combined securities (2016 – 139,491 combined securities) (being one capital unit and a $10.00 principal amount of preferred securities) and 88,614 capital units (2016 – 155,236 capital units) were tendered alone. In accordance with the Declaration of Trust, 88,614 preferred securities (2016 – 155,236 preferred securities) were purchased in the market at a total price of $914,253 (2016 – $1,574,295) to match the capital units tendered alone, and total redemption proceeds of $1,154,257 (2016 – $1,989,918) were paid to settle the capital units and combined securities surrendered through the redemption process.

Performance has long been an issue with this fund, and in the 2017 Annual Report it was stated:

If interest on the preferred securities are included, the return based on NAV of the combined units for the twelve-month period ended December 31, 2017 is positive 1.55%. During the same timeframe the S&P/TSX Composite increased 9.10%.

Sadly, but understandably, the company did not disclose Whole Unit performance for a longer period; only for the components, as required by regulations. But performance is horrible, as illustrated by the following table for the Capital Units:

Amusingly, the above table includes the preceding year, a decidedly non-standard presentation. I can only suppose the Manager wanted to highlight his one good year … but rational investors will look at the longer term periods, which include that run of luck, laugh and move on.

However, it seems likely that there will be quite a few Capital Unit retractions this year. given that the Capital Unit NAV has declined from 1.98 on 2017-12-29 to 0.83 on 2018-11-2, while income on these units is … sporadic:

On October 23, 2008, the Trust announced that it was suspending its distributions on its capital units, in accordance with its Declaration of Trust, as the Trust’s net asset value was below the required 1.4 times coverage ratio. The distribution was suspended for the remainder of 2008 and was suspended for each month from January 2009 to January 2011. On February 17, 2011, when it was anticipated that a distribution could be paid without violating the 1.4 times coverage ratio, a quarterly distribution of $0.01 per capital unit was declared, reflecting a current annualized rate of $0.04 per unit. Subsequent to the June 2011 payment, the Trust suspended the distribution.

So, there might be a lot of naked Capital Unit retractions in the works, which – if true – will give rise to a fair amount of buying pressure for the highly illiquid BSD.PR.A shares. Shareholders who are – quite justifiably – getting nervous about the prospects for default on the scheduled maturity date of 2020-3-31 (there is also a “Preferred Special Repayment Right” in case they get extended again), may wish to watch the market closely for signs that demand forced by Capital Unit retractions is outpacing supply. At the moment the quote is 9.65-84, 200×176, a reasonably rational level but huge size considering the average trading volume on this instrument.

As an aside, I note that the manager charged management fees of 273,655 in 2017, which is nice work if you can get it.

Long time Assiduous Readers will remember that I was outraged when the company decided to suspend retractions; I am pleased to pass on the news that:

On March 16, 2015, the Trust announced that the annual redemption right available to preferred securities (together with an equal number of capital units) in November of each year would no longer be suspended in circumstances where the asset coverage on the preferred securities is less than 1.4 times. Recent changes in applicable securities laws have resulted in the Trust terminating the suspension of the annual redemption right in these circumstances.

A change in applicable securities laws. Sometimes even a blind squirrel can find the nut.

This entry was posted on Thursday, November 8th, 2018 at 3:53 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.