Commerce Split Corp. has announced:
Commerce Split Corp. (“the Company”) was required to sell the majority of its holdings in CIBC. The proceeds of these sales have been used to purchase fixed income securities under the Priority Equity Protection Plan as per the prospectus.
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The Company, subject to all necessary Board and regulatory approvals, expects to send out the full details of this proposal to all shareholders through a Management Information Circular sometime in January, 2009 with a shareholder vote to follow in February, 2009. The key aspects of the proposal are discussed below.The Plan will recommend the fixed income instruments purchased under the Priority Equity Protection Plan be liquidated and the proceeds be re-invested in common shares of CIBC.
The Plan will propose that each Priority Equity share be exchanged for the following three securities: i) one new $5 preferred share to yield 7.5% per annum; ii) one $5 par value equity share that will receive dividends of 7.5% per annum if and when the Company’s net asset value exceeds $12.50; and also iii) one half warrant to purchase a full unit (consisting of one new preferred share, one new equity share and a Class A share) of the Company at a price of $10 at specified times during the first two years subsequent to the approval date. The warrant will effectively provide upside potential on the performance of CIBC shares. The Company believes that the proposed package of securities will provide Priority Equity shareholders with substantial value added compared to their existing investment.
The Class A shares will remain the same except that the threshold for reinstatement of dividends on the Class A shares will only occur if the net asset value per unit reaches $15.00 per unit (current threshold is $12.50 net asset value per unit.) Increases in the net asset value per unit above $10 (current net asset value per unit was $9.15 as at November 28, 2008) will continue to accrue to the Class A shareholder. The value of this opportunity is that it is similar to an option on CIBC and the Company believes this provides substantial shareholder value relative to Class A shareholders’ existing investment.
At first blush, this sounds like a pretty lousy option for the preferred shareholders. Right now their dividends are impaired – or soon will be impaired – but they have full ownership of a portfolio of fixed income securities worth $9.15. If they proceed with this exchange, they will be getting 3.75% (approx) on their money as a dividend because the new class of shares will only pay dividends if there is significant price appreciation.
The new class of share will be fully exposed to declines in the value of the underlying CM shares, but will participate in future capital gains only to the extent of the $0.85 current price difference. The new class won’t even get dividends until there’s been a 25%+ increase in capital value.
I am open to arguments based on the value of the option they are being granted – feel free to write in and analyze! – but it looks to me like they should probably VOTE NO!
XCM.PR.A was last mentioned on PrefBlog when the company announced it was mulling over a reorganization plan. XCM.PR.A is not tracked by HIMIPref™.
Update: After further thought, I have decided that I am not open to arguments based on the value of the option. The preferred shareholders – currently holding a perfectly good fixed-income portfolio – are being asked to provide all the funding for the new company, taking all the downside risk of the portfolio holdings and giving away, free, gratis and for nothing an option on a big chunk of the upside. VOTE NO!
I would not be inclined to vote for this either, but the warrant to buy a future current pref equivalent and A share is a call option at $10 for something worth $9.15 today — so has value and is the source of the potential upside for these securities. Indeed, if CIBC recovers, all of these options will be exercised, and A share holders will get only half the returns of the next 2 years. After that, the new and old A share holders are on the same footing.
A 2-year 10% out of the money call option on CIBC is currently worth at least 25% of the stock price, or about $2.25 on the XCM.PR.A.
I don’t quite see why they need to split the pref into a dividend paying and contingent dividend paying piece based on the NAV because the dividends from CIBC are (at the moment) independent of its price. I guess this is an attempt to build up the NAV over time to give the Capital unit holders some hope.
When I buy fixed income, I want fixed income. I hate it when it morphs into something else — especially when there are lots of fees attached. But then again, I hate structured products I can reproduce some other way at lower cost — presuming I wanted to.
As to the vote, people do crazy things when there is a warrant attached (witness all the junior company new issues that float successfully), so it will be interesting to see what happens with the vote.
I would not be inclined to vote for this either, but the warrant to buy a future current pref equivalent and A share is a call option at $10 for something worth $9.15 today — so has value and is the source of the potential upside for these securities.
I’m not so sure I buy all that. Exercise of the warrants will serve only to dilute the existing capital units a little. It can’t be considered as a normal warrant because the proceeds from exercise will be invested in CM shares at the market price at that time.
A 2-year 10% out of the money call option on CIBC is currently worth at least 25% of the stock price, or about $2.25 on the XCM.PR.A.
If you turn that around a little, you could say that the preferred share holders are being asked to make a gift to the capital unitholders of $2.25, which may be diluted to $1.125 if all warrants are exercised.
The critical point is: who is entitled to the company’s assets now? At this point, the preferred shareholders have $9.xx in fixed income securities; they are entitled to every single penny of the company’s assets; they are being asked to sell out of these, buy CM shares, and give away an option to the extant Class A shareholders.
You have cited 2 reorganizations of split share corps, xcm.pr.a and xmf.pr.a and it’s probably reasonable to surmise that there will be more in the coming weeks and months, given the decimation of the capital of many of these split corps.
You have brought up an important issue for preferred shareholders in these split corps.
You ask “who is entitles to the company’s assets now?”, to which I concur belong to the preferred shareholders.
Is it a reasonable assumption that the company/promoter will, given the opportunity, put it’s interests ahead of both preferred and capital shareholders?
Aside from voting on the proposal, for which the corporation/promoter has a decided advantage to assert it’s will, what other abilities does a preferred shareholder have to prevent such reorganizations that will or may impair value?
Is good corporate governance something that should be quantified to the extent that it can and part of assessing value to securities?
surmise that there will be more
Maybe, but XCM.PR.A and XMF.PR.A are rather a special case: their “Portfolio Insurance” strategy has left them entirely in fixed income. Most splits that get hammered can continue with smaller versions of their original strategy.
Is it a reasonable assumption that the company/promoter will, given the opportunity, put it’s interests ahead of both preferred and capital shareholders?
Perhaps not a reasonable assumption, but certainly a possibility that needs to be addressed.
Aside from voting on the proposal, for which the corporation/promoter has a decided advantage to assert it’s will, what other abilities does a preferred shareholder have to prevent such reorganizations that will or may impair value?
If something totally abusive was done by management fiat, holders could complain to the OSC. However, such abuse would need to be extremely clear cut – I complained, for example, about the proposed buy-back of capital units of Global Telecom when the preferred shares (GT.PR.A) were underwater, but didn’t get very far (although my letters written to the directors may have had a non-public effect).
It’s very difficult to argue that a shareholder vote is unfair. If the preferred shareholders are stupid enough to vote for this plan – and remember, preferred shareholders of Bell Canada were stupid enough to vote overwhelmingly in favour of transferring the obligations to BCE – then all you can do is walk.
Is good corporate governance something that should be quantified to the extent that it can and part of assessing value to securities?
It would be nice if it could be quantified, but I have grave doubts that meaningful quantification is possible. Various organizations put together long, detailed lists of so-called best practices … women on the board? independent directors? fully committed to recycling? kind to small furry animals? … that really don’t mean squat when it comes to decision time.
Was the attempted BCE takeover an example of good governance or bad? In large part the answer is determed by whether you held their equity or their bonds. Very, very subjective.
Rely on the prospectus for your protection. That’s your contract.
[…] discussed at the time of announcement, I recommend … VOTE NO!: The preferred shareholders – currently holding a perfectly good […]