FFN.PR.A To Reset To 9.50%

Quadravest has announced:

North American Financial 15 Split Corp. (the “Company”) is pleased to announce the Preferred Share dividend rate for the fiscal year beginning December 1, 2023, will increase by 1.75% over the current rate. Monthly payments to FFN.PR.A will be $0.07917 per share for an annual yield of 9.50% on their $10 redemption value.

The Company invests in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal National Bank of Canada Bank of America Corp.
The Bank of Nova Scotia Manulife Financial Corporation Citigroup Inc.
Canadian Imperial Bank of Commerce Sun Life Financial Inc. Goldman Sachs Group Inc.
Royal Bank of Canada Great-West Lifeco Inc. JP Morgan Chase & Co.
The Toronto-Dominion Bank CI Financial Corp. Wells Fargo & Co

I find I can’t much to say about this that’s better than what I said last year:

I must say, I am growing to dislike these annual resets intensely. The minimum rate on these resets is only 5.5% and apart from this the company has full discretion. A prudent analysis must therefore assume that next year the rate will reset to 5.5% but there is every possibility, of course, that it will not. So refusing to buy these things might result in leaving money on the table. All in all, though, assuming the worst is always the way to go in securities analysis!

And actually, these things mature next year, so when they (almost inevitably) extend the Capital Units and refund the preferreds, there’s no minimum … except that holders of the current version of FFN.PR.A will get a $10.00 retraction option if they don’t like the dividend on the reissued preferreds, assuming that the NAVPU is higher than that.

However, one point of interest is that the current NAVPU of the fund is only $13.81. So for the next year the fund will be paying dividends at the rate of 9.50% on the $10.00 par value of the preferreds, which is $0.95, which must be earned by a portfolio worth only $13.81 … meaning that to break even BEFORE FEES the portfolio has to earn 6.88% income. Given that their base management expense ratio is 0.92%, the portfolio has to earn 7.80% income just to pay their preferred shareholders. That’s a helluva drag, when according to DBRS:

Holders of the Preferred Shares used to receive cumulative monthly cash dividends at a rate of 6.75% annually until November 2022. However, with effect from December 1, 2022, this rate has been increased to 7.75% annually.

The current Preferred Share dividend coverage ratio is approximately 0.43 times (x). The average grind on the Portfolio is expected to be 5.3% annually for the next two years.

While an argument can be made that capital gains will save the day, I don’t see any reason to believe that their highly touted covered-call writing programme is going to make any net difference. As a point of interest, the cash weighting in the portfolio was 13% as of 2023-8-31.

Thanks to Assiduous Reader niagara for bringing this to my attention!

6 Responses to “FFN.PR.A To Reset To 9.50%”

  1. niagara says:

    Hi James, thanks for the news on FFN.PR.A, I had actually posted the news release on FTN.PR.A (as did NEWBIEPREF above)….I forgot about FFN, mostly since I dont hold any. I note that FTN.PR.A, which has a termination date of December 1, 2025 (1 year later that FFN), has a NAV of $16.81 as of Sep 15 according the the Quadravest website, so considerable more downside protection than FFN prefs (which I why I have avoided these).

    I understand your disdain for the rather random nature of the annual reset rates on FTN/FFN prefs but, given that there is only a little over 2 years to redemption (in the case of FTN), decent downside protection and that there will be now at least 12 months of 9.25% divvys, I am happy to hold my nose and collect the cash. But if I was a captial share holder, I’d be pissed off.

  2. newbiepref says:

    There are a number of issues that are due for redemption next year and that do not pay « dividends » to the common shares. Most also have prefs trading below 10$.
    If the current interest rates and bear market in prefs continues until then, I suspect that QUADRAVEST will have to offer rates around 10%+ to avoid redemption. With such a drag, how can capital share holders eventually make a profit? Look at dfn for exemple, huge fund with NAV already below 15.
    It is a catch 22. If you pay the prefs the market rates, the capital shares are a tough difficult proposition and they will redeem. If you pay prefs holders a rate more align with the dividends paid by the underlying securities, they will redeem.
    I think the whole structure is at risk and most funds will shrink significantly if not fold altogether

  3. niagara says:

    newbiepref, essentially, I agree with what you are saying. No doubt when you say “huge fund”, you are referring to DFN (there is also DF, which has an even lower NAV) For the last two months, they have omitted paying capital shareholders as the NAV has fallen to below $15. The prefs are trading below $10 as the dividend is still 5.5%. But at a price of $9.46, the yield to redemption in Dec ’24 is well above 10% with very low risk in my view….The NAV has to fall by >30% for the pref shareholders to take a haircut.

    But as you point out this, is going to be a very significant issue for Quadravest to deal with next year…if rates are still at current levels, they might have to offer 7.5% or perhaps considerable more in NAV contracts more. Or, perhaps they want a large redemption by pref shareholders so that they can do a share consolidation of the capital shares which will push up the NAV of the whole unit structure. They did this will FTN a few years ago:

    Then, they can just go back to the trough and issue new whole units.

  4. niagara says:

    That series 20 pref is TD.PF.K, which last traded in the $21.80 range on Friday. Will this be the turning point for our beleaguered pref shares? Total surprise to me. Surely this has to give TD pref shares a bid next week, perhaps the other banks as well (though TD does have the highest CET1 of the big banks, others may be less inclined to redeem any prefs that have upcoming resets.

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