An exchange of comments on PrefBlog about the captioned subject led to an exchange of eMails with Canoe Investor Relations, which I think is sufficiently interesting to warrant a post. I may be wrong!
I commenced by sending them an eMail:
I have a question regarding the captioned issue.
According to the prospectus at LINK , “Subject to the provisions of any equity securities of the Fund ranking prior to or pari passu with the Series 1 Preferred Units, and to the provisions described under “− Restrictions on Distributions and Retirement and Issue of Series 1 Preferred Units”, a Series 1 Preferred Unitholder may require the Fund to retract such Series 1 Preferred Units (by delivering notice to the Manager of the intention to have Series 1 Preferred Units retracted not less than 30 days prior to the applicable retraction date) on or after March 15, 2024 for a cash price of $25.00, together with any accrued and unpaid distributions up to but excluding the date of retraction and less any tax required by law to be deducted therefrom.”
My question relates to dividends that are paid by the company on retracted shares.
There are four important dates: the notification date, the retraction date, the record date of the current dividend and its payment date. It is not clear to me how the calculations work if the sequence of these dates for a particular retraction is notification – record – retraction – payment.
Say, for instance, that an investor gave notice on May 10 of his desire to retract and delivers EIT.PR.A shares to the Manager on that date in accordance with the prospectus. The retraction date is therefore June 9. In the interim, however, the shares earn a dividend with a record date of May 23, payment date June 15.
Therefore, it seems to me that the investor earns the full dividend of $0.30 payable June 15 and is also paid the accrued dividend of slightly less than $0.30 that has accrued from March 15 until the retraction date of June 9.
It does not appear likely to me that the issuer will actually pay such an excessive rate on shares submitted for retraction. How is this situation resolved in practice?
Sincerely,
Canoe responded:
Thank you for your email.
In the example that you noted, where the unit holder provides notice before the record date, and the retraction is after the record date (but before the June 15 payment date), the unit holder would receive $25/unit plus interest only. The interest would be calculated from March 16 to the retraction date. They would not get the $0.30/unit distribution, but instead only interest based on the number of days. Unitholders that retract are not eligible for a ‘double payment’.
Well, that seems clear enough! But how exactly does that work? So I asked:
Thank you for this.
What is the legal foundation for unitholders being ineligible for a ‘double payment’? Is there something involved such as a letter of transmittal that is specifies that the shares are ineligible for the regular dividend payment in such a situation?
Sincerely,
… and they answered:
When a unitholder submits their notice of retraction, the units are withdrawn from the exchange/CDS and the record date will not be applicable to the affected units. Going further, what they are paid will depend on the calculations described in the certificate of amendment.
I confess I find it surprising that the “units are withdrawn” prior to the company paying for them. What happens if the issuer goes bankrupt in between withdrawal and payment? This is very unlikely, particularly given that the issuer is a fund, but still … I’m surprised.
Do these withdrawn units continue to exist outside the Book Based System? Maybe: the prospectus doesn’t state that the issue is only Book Based, merely that:
Book-entry only certificates representing the Series 1 Preferred Units will be issued in registered form to CDS Clearing and Depository Services Inc. (“CDS”) or its nominee and will be deposited with CDS on the Closing Date.
I also suspect that there’s some kind of Letter of Transmittal that goes from the brokerage to the issuer that specifies exactly what’s gping on, but to my disappointment Canoe did not address that issue.
Perhaps I should note that I do not suspect that there’s any skullduggery or even any sloppiness in the procedures used … I just like to understand things and I will admit my understanding of the entire process is incomplete. But we can’t understand everything thoroughly in this big world, so I will leave the rest of the investigation to others!
Thanks James,
This is a case where I need to sell soon. I could sell in the next 30 days and get something south of $25, or I could retract for $25 plus “interest” in 30 days. Seems like an easy decision.