PrefBlog

WFS.PR.A is an interesting issue and the fund was long at the end of August (current position not disclosed). With nearly 12.8-million shares outstanding (par value $10), it’s one of the bigger issues included in the SplitShare index.

It’s currently quoted at 8.55-04, 6×10. Some trades have gone through today at 8.50. The capital units are quoted at 4.62-84, 10×4. It’s hard to get a big position in these things, but patience is a virtue.

As with many split-share corporations, the prospectus for WFS describes a monthly retraction feature:

Regular Retraction: Preferred Shares may be surrendered at any time for retraction by the Company but will be retracted only on a monthly Valuation Date (as defined below). Preferred Shares surrendered for retraction by a holder of Preferred Shares at least five (5) business days prior to the last day of the month (a ‘‘Valuation Date’’) will be retracted on such Valuation Date and such shareholder will receive payment on or before the eighth business day following such Valuation Date. Shareholders whose Preferred Shares are retracted on a Valuation Date will be entitled to receive a retraction price per share equal to 96% of the lesser of (i) the NAV per Unit determined as of the relevant Valuation Date less the cost to the Company of the purchase of a Class A Share in the market for cancellation; and (ii) $10.00. The cost of the purchase of a Class A Share will include the purchase price of the Class A Share, commission and such other costs, if any, related to the liquidation of any portion of the Portfolio required to fund such purchase. See ‘‘Details of the Offering — Certain Provisions of the Preferred Shares — Retraction Privileges.’’

These monthly retractions are, in normal times, of very little interest to preferred shareholders and are neither noted on PrefInfo nor accounted for by HIMIPref™. But these are not normal times.

According to Mulvihill the NAV for WFS as of September 11 was $15.93.

Given the quote on WFS, there’s a pretty good chance (but only a chance!) that a preferred shareholder tendering for monthly retraction would find that the company had purchased the matching capital unit for less than $5.93 and that he would therefore receive (96% of $10.00) less liquidation costs; call it $9.50. There are lots of them trading now for less than $9.00 … this wouldn’t be a bad return at all for two weeks work!

There are risks, of course. There are always risks.

• The NAV could decline precipituously between the Sep 11 valuation noted and the Valuation Date. I think that the Valuation Date will be September 23, but anybody trying this should check with the company
• The company might pay more than net-NAV to purchase the matching capital unit (though the last trade was about 24% less than net-NAV).

It should be noted that as of June 30, the fund’s portfolio was 23.1% cash. I do not know whether more recent information is available.

There are risks, to be sure. But some investors might calculate that the risk/reward profile of taking a position below $9.00 and tendering for monthly retraction is worthwhile.

I have not checked the mechanics of such a move. It might be too late to initiate this for the September Valuation Date, given settlement times and delivery times … but, perhaps, an investor with a position in WFS.PR.A that he likes might buy additional shares in the next few days and tender out of his extant holdings. Or, to look at things arsey-versey, if he has an investment in WFS.PR.A that he doesn’t like, there is the potential for tendering rather than selling.

This entry was posted on Thursday, September 18th, 2008 at 2:41 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.