{"id":2029,"date":"2008-04-08T15:29:58","date_gmt":"2008-04-08T19:29:58","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=2029"},"modified":"2008-04-08T15:29:58","modified_gmt":"2008-04-08T19:29:58","slug":"ftupra-how-to-analyze","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=2029","title":{"rendered":"FTU.PR.A : How to Analyze?"},"content":{"rendered":"

In the list of March’s good and bad performers<\/a>, I suggested that FTU.PR.A should, perhaps, be analyzed as an equity substitute … I’ve been thinking a bit more about this, on a very casual basis.<\/p>\n

The issue is fully described on the fund’s website<\/a>. The underlying portfolio is 15 US Financials, the asset coverage is only a little over 1.4:1 and the chance of a formal default is more than some might really be comfortable with – which is, presumably, why DBRS has them under review<\/a>.<\/p>\n

But hear me out! They’re currently quoted at 8.76-97 on the TSX and, given a bid of 8.76, yield 8.62% (dividend\/capital gain) to maturity 2012-12-1. They may have been marked down too far, due to the “US Financials” angle and the relatively low asset coverage. If you assume you can take a good-sized position at $9.00 then your asset coverage on the actual amount invested is 1.6:1. If you further assume that:
\n(a) all dividend payments ($0.04375 monthly = $0.525 annually) are made
\n(b) the NAV declines by 37.5% to $9, implying a total return on US Financials over the next 4 3\/4 years of -20% (after allowance of 17.5% for dividends paid) see update, below<\/b>
\n(c) then the entire $9 will be paid to the pref holders
\n(d) and the return on the investment will be approximately $0.525\/$9.00 = 5.8% annually.<\/p>\n

Better performance by the US Financials would increase the investment return, to a maximum of the non-defaulting 8.62% rate.<\/p>\n

That would be a fixed-incomey way of analyzing them … are there other ways? We have this … thing … worth $14.41 as of March 31<\/a>. We can say that preferred shareholders have written a deep in the money call on the position, at $10 strike price, exercise 2012-12-1, after buying it at $9 (the assumed invested capital in the prefs). So, perhaps, in option terms, we’ve paid $14.41 for the position in US financials and received $5.41 for writing our call.<\/p>\n

I know some Assiduous Readers LOVE options … perhaps some might have comments as to whether we’re happy or sad about the price we’ve received for the call?<\/p>\n

Update<\/b>: Assiduous Reader prefhound<\/i> points out in the comments that expenses for the fund, plus withholding taxes on US dividends, will reduce the NAV by $1.58 over the remaining life of the fund. Therefore, point (b) of the analysis above should read:<\/p>\n

(b) the NAV declines by 37.5% to $9, implying a total return on US Financials over the next 4 3\/4 years of -20%<\/s> -8.7% (after allowance of 17.5% for dividends paid and 11.3% for withholding & expenses and 0.0% for capital share dividends<\/u>)<\/p><\/blockquote>\n

Mea culpa! I was too interested in casting the problem as an option exercise to do a proper job on the regular fixed-income style analysis.<\/p>\n","protected":false},"excerpt":{"rendered":"

In the list of March’s good and bad performers, I suggested that FTU.PR.A should, perhaps, be analyzed as an equity substitute … I’ve been thinking a bit more about this, on a very casual basis. …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[],"class_list":["post-2029","post","type-post","status-publish","format-standard","hentry","category-issue-comments"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2029","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2029"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/2029\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2029"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2029"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2029"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}