Quadravest has announced:
North American Financial 15 Split Corp. (the “Company”) invests in a high-quality portfolio consisting of 15 financial services companies made up of 40% Canadian and 60% U.S. issuers. The top five holdings currently held in the portfolio are as follows: JP Morgan Chase & Co., Goldman Sachs Group, Morgan Stanley, Wells Fargo & Co., and Bank of America.
The recent extension of the Company’s termination date included a retraction right for Class A shareholders and Preferred shareholders. The Company will not require a rebalance of shares and all retraction rights have been satisfied.
The Company may use the normal course issuer to repurchase Class A shares at or below intrinsic value. The current intrinsic value exceeds $8.00 per share.
As previously announced, the annual dividend rate for the Preferred Shares has been set at 8.75% (subject to a 5-year minimum of 7%). The dividend policy for the Class A Shares will remain at the current targeted rate of $0.11335 per month, or $1.36 per annum.
This retraction potential existed due to the extension of the fund’s term, which came with special retraction provisions.
As IrateAR remarks, the Capital Units have shown:
crazy price moves in that one the last few days.
… which may be the reason Quadravest saw fit to issue the above press release – nothing has yet been disclosed for other extended issues DF.PR.A, LFE.PR.B, FTN.PR.A and DFN.PR.A.
FFN showed a 2024-12-11 VWAP of 7.26 on normal volume of a little under 300,000 shares, but on 2024-12-12, volume spiked to nearly 700,000 shares with a VWAP of 7.12. Today’s VWAP was 7.04 (and it closed much higher) on volume of 1.36-million, which is all wild enough.
What makes it stranger is that, as hinted in the press release, the Capital Units are trading below intrinsic value – the NAVPU was 18.29 on 2024-11-29, so it’s easy to believe the claim that the current intrinsic value exceeds 8.00 per share. It’s not normal for a Capital Unit to trade below intrinsic! It is, effectively, a reasonably normal leveraged portfolio that is also long a put option (to the preferred shareholders, at a NAVPU strike price of 10.00) on the whole whack. To trade below intrinsic, Capital Unitholders would have to assign a value to the fees and expenses associated with the fund which, horrendous though they might be, are rarely accounted for.
So … something’s going on with the Capital Units that I don’t understand. Prior to the press release, it might have been uncertainty – a good sized consolidation of capital units would have:
- reduced the projected income of the shareholders, and
- decreased their leverage
both of which are considered undesirable. But, at around 2pm today the share price commenced to skyrocket, from the day’s low of about 6.85 to the close of 7.31; this was well after niagara posted the link to the press release (10:38am; I don’t know the time the press release itself was issued). So who knows? Maybe it was something as mundane as a big investor unloading a hatful of them (or a big retail advisor unloading on behalf of clients). If so, someone sure absorbed a high market impact cost for the privilege of getting out in a hurry.
Coming on top of DFN.PR.A’s high-volume price drop yesterday, it all leaves me quite befuddled!
HI James,
I don’t think that FTN.PR.A has a special retraction privilege this year, I think that it is next year. From the Quadravest webpage FTN Fund Features:
“(ii) on or about the termination date of December 1, 2025 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10 per Preferred Share.”
https://www.quadravest.com/ftn-fund-features
They did reset the dividend lower this year as they are entitled to do annually.
Of course, I might have missed something buried deep in the prospectus…
Re Capital units trading below intrinsic: As of March 2024 I noticed split Nav’s becoming much closer to market and now many are below market. Quadravest, Middlefield, Brompton e.g. ENS NAV $15.27 on 12/12/2024 with close @$13.69, LBS $10.12 nav, market $9.46, SBC nav $11.18 market 10.18 I conclude this has resulted in the frequent issue of Split share overnights declining to nothing; the last of note being June 18, 2024 LBS and LBS.PR.A
Right thanks Niagara. I knew that conceptually but was also forgetting about it yesterday.
The fun ones to watch are FTU and XMF.A with NAVs at below $10… there’s no reason for them not to be 100% pref retractions and shut down but presumably they will stumble onwards anyway…
I don’t think that FTN.PR.A has a special retraction privilege this year, I think that it is next year.
Right. Whoops!
FTN (and FTN.PR.A) have a long term habit of doing highly dilutive issuances (below market price) whenever their shares go up. I don’t know how they get away with listing among the goals of FTN as “capital appreciation”. Because of this I got out of the prefs.
FTN (and FTN.PR.A) have a long term habit of doing highly dilutive issuances (below market price) whenever their shares go up.
They may be below market price, but they have to be above the NAVPU and thus anti-dilutive on a fundamental basis. So it doesn’t bother me. Of course, I’m concerned only with the preferred share side of the equation.
And welcome to the board, DrT!
IrateAR, I have not much followed FTU.PR.B, mostly because of the fact that it trades below $10. But I see from the Quadravest website that there have been no capital share dividends paid May 2008. The Credit Crisis no doubt crushed the values here.
Yet, still, market value of the capital shares is still ~$0.55 despite their being zero intrinsic value (total NAV was $8.43 a couple of weeks ago). so 55 cents of time value assigned to what are essentially call options that may (or may not) expired in 6 years. With a 10% div on the prefs based on prior month NAV, there must significant grind in the NAV. I guess capital sharesholders are an optimistic lot.
so I am curious how this whole shareholder retraction works for preferred share holders. For example the FFN.PR.A shares – the current NAV says $18.29 on their website but is that just for the common? what price does a preferred shareholder get when they submit for retraction? $10?
https://www.sedarplus.ca/csa-party/records/document.html?id=25eadbe942ba327010228d3108dd6956a38001aa278ec9232ea3a92b5bb7d958
“In connection with the term extension, the Company will offer a non-concurrent Special Retraction Right which will allow existing shareholders to tender one or both classes of Shares and receive a retraction price based on
the November 29, 2024 net asset value per unit. “
I noticed split Nav’s becoming much closer to market and now many are below market.
You’re quite right – I’m preparing PrefLetter at the moment, and having prepared the data, compared the NAVPU with the Capital Unit ask price.
I’m astonished! Not just many, but most Capital Units are trading at a discount to intrinsic.
porpoise1877
“For example the FFN.PR.A shares – the current NAV says $18.29 on their website but is that just for the common? what price does a preferred shareholder get when they submit for retraction? $10?”
If you had retracted your pref shares this year with the special retraction right, you would have gotten $10 plus any unpaid/accrued dividend. With FFN.PR.A trading well above this, it would have been irrational to retract your shares, you would have been better off just selling them in the market if you didn’t want to hold them any longer.
I think part of the answer to the capital units discount puzzle is they set the preferred dividend rates too high. The leverage for the capital units is basically financed through the dividend paid to the preferreds. FFN is committed to paying an unknown rate starting at 8.75% for a year with a minimum of 7%. This is awful – looks like IB’s worst margin rate is 4.6% right now. There’s some value to the put option at $10 but not that much when the NAV is around $18.
Accordingly the premium on FFN.PR.A has gone from 1-2% to 5-6% recently reflecting that it’s getting more interest than the pref holders needed to keep the price at $10.
All the retraction options until the end of the new five year term are based on the combined price of FFN + FFN.PR.A. Unless something changes I think that’s going to be the pattern… the sum of those two will be close to NAV but it’ll get there by having a discount on FFN and a premium on FFN.PR.A. Until the next five year window rolls around and the capital units can get their money back or they set a more reasonable interest rate. Similar story with the others.
My understanding from the prospectus is that if the capital units had had significant retractions the preferreds could be forced into a pro-rata retraction at $10 which would suck for them but not impact the capital units. Not sure if that’s what’s happened in practice in the past but if so I also have no clue what drove down FFN this week. I’m guessing just someone dumping a big position maybe worried about financials struggling.
porpoise1877 – What niagara said. The NAV on the page is the combined NAV. The prefs would get $10 and the capital shares 8.29.
niagara – Yeah that FTU price is something. Compare to XMF.A which had small value and trades cheaper somehow. As of Nov 29:
Ticker Intrinsic Last
XTD 1.15 2.07
XMF.A 0.13 0.485
FTU -1.63 0.66
I’ve just had a thought. It’s a red letter day!
Could it possibly be that the FFN seller is a custodian or brokerage back-office?
Usually, when I see stupid dumb trading in size, it’s for one of two reasons:
i) It’s during the credit crunch and all the prop traders have had their capital allotment cut to the bone
ii) A back office has made a mistake and is trying to eliminate their exposure as quickly as possible as well as they know how (which is not very).
The Special Recurring Retraction Right is described in the Annual Information Form as:
Did some back-office guy forget to tender?
If so, this would mean that payment is due to clients tomorrow, Monday 16th, at a rate of $8.29 / share and somebody’s just dumped about maybe 1.4-million shares at call it $7.00 / share, with the difference coming from his employer.
If my speculation is true, that would count as a whoopsy-daisy. There was a relatively large price drop from October 31-November 4, inclusive, which is consistent with the idea that the market price was supported by purchasing for redemption up until the tender deadline of COB November 1.
The October 31 NAVPU was 16.82, so maybe there were some people who were very perturbed by November’s rally.
Ha sure that’s fun I’m just going to assume that’s what happened. The biggest net seller over the last 2 days was TD who sold 1 million shares at 7.07. They also bought 785k shares at 7.10… they’re the RT on the stock so the market making desk might’ve stepped in and helped out in this (totally made up and speculative!) scenario.
DF and DFN posted basically the same updates today:
https://www.quadravest.com/_files/ugd/78f11d_e1fdbfab9e1e48418426f280b422c1a3.pdf
https://www.quadravest.com/_files/ugd/78f11d_ab7fc655bb2c4a3fa90dc828c0294814.pdf
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