Novel Redemption Terms for Copernican International Financial Split Corp.

This is an otherwise unremarkable split share issue investing in international financial companies.

One of the great headaches for those who invest in the Capital Units of Split-share companies is the immediate drop in NAV on issue – all issue costs come out of their part of the investors, while the preferred shareholders sit back and grin. This, I believe, is one reason why the terms on the Preferred Share portion of these offerings is both so good and restricted to those who also buy capital units … if there’s a fat coupon on the preferred, it should rise in price instantly on issue day and therefore give the investors something, at least, to smile about.

In this issue – Copernican filed a prospectus today – the situation is a little different. Issue expenses estimated to be $750,000 as well as the selling commission of 4.25% of the total raised will be paid by the manager.

They’re not doing this just for their health, of course. The manager will be getting a fee of 1.95% and will be compensated by the company for the service fee of 0.40% of the Capital Unit Value that they will pass on to the agents. And – just to make sure that everybody’s good and locked in – there’s a redemption fee payable to the MANAGER (not the company!) that starts a $1.05 per $20 unit (over 5%!) and declines until it is $0.55 per unit (still 2.75% of original investment!) in June 2013. Then it’s zero for the last six months of the fund’s life.

Deferred Sales Charges come to the split share world!

Still – there won’t be that instant drop in NAV as soon as the Capital Units start trading! That will be meaningful to some.

Unless hounded by vast crowds of importunate clients, I won’t be adding this particular split-share corporation preferred issue to the HIMIPref™ database. The fact that pref holders will only get their original $10 back on any redemptions means that even a small increase in price will lead to a negative YTW and the YTW scenario will always be sufficiently short-term that the system won’t want to trade it.

It would certainly be possible to improve the programme so that the disincentive for early redemptions was recognized … somehow … but until there are a lot of issues like this it hardly seems worth the effort. I will be watching this issue with great, if informal, interest.

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