Big Pharma Split Corp will soon be added to the HIMIPref™ database.
The preferred shares pay eligible dividends; the cash drag on the portfolio is massive.
DBRS rates the issue Pfd-3(high):
DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by Big Pharma Split Corp. (the Company). The Company invests in a portfolio of approximately equally weighted common shares and securities (the Portfolio) convertible into or exchangeable for common shares (Equity Securities) of 10 issuers from the investable universe that must (1) be listed on a North American exchange, (2) pay a dividend, and (3) have sufficiently liquid options for their Equity Securities to permit the Portfolio Manager (i.e., Harvest Portfolio Group Inc.) to write options regarding such securities. The Portfolio Manager reconstitutes and rebalances the Portfolio at least semi-annually. No more than 20% of the net asset value (NAV) of the Company can be invested in securities other than from the 10 largest pharmaceutical issuers.
Holders of the Preferred Shares receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per year on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.
As of August 31, 2022, the downside protection available to the Preferred Shares was 57.2%. Considering the main focus of the Portfolio is the pharmaceutical industry, the underlying share prices may be sensitive to the market and industry developments. The dividend coverage ratio was 0.4 times. Regular distributions to holders of the Class A Shares, along with the Company’s operational expenses, are projected to cause an average annual portfolio grind of about 6.6% in the remaining term. To supplement Portfolio income, the Portfolio Manager engages in call option writing.
On June 7, 2021, the Company announced the establishment of an at-the-market equity program (the ATM Program) that is effective until December 4, 2022. The ATM Program allows the Company to issue up to $75 million of each of the Preferred Shares and the Class A Shares to the public from time to time at the Company’s discretion. Under the ATM Program, 166,300 Class A Shares and 166,300 Preferred Shares were issued during the year ended December 31, 2021, raising gross proceeds of $2.3 million and $1.7 million, respectively.
The redemption date for both classes of shares is December 31, 2022. The Company’s board of directors may extend the term beyond the redemption date for additional terms of five years each. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.
Considering the credit quality and diversification of the Portfolio, as well as the amount of downside protection available to the Preferred Shares and a consistent dividend-paying history of the underlying companies in the Portfolio, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).
The main constraints to the rating are the following:
(1) Market fluctuations resulting from high inflation, interest rate hikes, oil prices, and global supply chain issues could further affect the Company’s NAV. The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.
(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares dividend coverage or downside protection from time to time.
(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(4) The concentration of the Portfolio in one industry.
(5) Potential foreign-exchange risk because the income received on the Portfolio is not hedged.
What happened to this pref? Ever since extension volume has dried up. Were most shares retracted due to the inadequacy of the dividend?
What happened to this pref? Ever since extension volume has dried up. Were most shares retracted due to the inadequacy of the dividend?
According to the 2022 Financial Statements:
That’s quite a chunk, considering that at year end – following the retraction – they had 985,438 remaining outstanding.
Illiquid indeed.
I have been trying to buy a few shares for a while and today, finally, I am the guy who triggered the drop of 5+% because I was able to buy 100 shares @$9.26 which is a good enough price.
There are very few ways to have “sector diversification” with preferred shares so it’s good to have something else than financials and energy.
Funny that I checked this website a few hours following this purchase and you talk about this split pref.
Well… hum… it didn’t last long… sold at $9.76 :-/
@Yomgui: I was expecting the price to drop given the 5% dividend on par but its holding up on near zero volume. I certainly won’t be buying at these levels. I guess the manager is content with the evaporation of shares? You’d think they would want to attract more capital to generate fees, not drive it away.
Yes, it barely trades indeed and the bid/ask spread is ludicrous (although you can use it at your advantage sometimes).
In the end, based on the dowside protection this pref provides, the sector it covers and the fact that the YTRetraction is slightly over 7%… this is not a bad investment imo if you can get filled at a price in the 9.2s (or lower obviously).
If you want something with vastly better liquidity and much superior yield to retraction, I suggest DFN.PR.A and FTN.PR.A, both with yields to retraction of ~10% (give or take 25bp). Down side protections are approx 35 and 41.5% respectively. Unless you believe that there will be a significant collapse in the prices of the underlying (high-quality) stocks, this seems to be easy money. Disclosure: I do have significant positions in both.
I also own both of them 😉 but I don’t like the term “easy money” ah ah.
Maybe my trading platform shows inaccurate pricing but even though I was never around to see it live, every now and then it seems that FTN.PR.A drops like 10% to $8+ before going back to the mid $9s range so it appears that liquidity sometimes vanishes or there may be another explanation.
But yeah, much easier to trade it than PRM.PR.A.
My point was rather than in Canada, sadly, if you want to create a portfolio focused on preferred shares, your choice is like 60% financials, 35% energy so I’m willing to accept a lower yield to diversify a bit.
Same for Thomson Reuters for example, the credit rating is lower than Brookfield and Power financial, yet, their prime-linked pref trades at a premium (sometimes by a good margin).
I understand your point on diversifying. You might also consider the RS.PR.A (real estate-based) and GDV.PR.A (diversified global portfolio). Liquidity is not as good as FTN or DFN, but better than PRM and both offer decent downside protection (i have neither at the moment but am considering for diversification) Also, the PVS prefs have great downside protection, but only one underlying stock (Brookfield) and liquidity is similar to RS and GDV.
Also, FTN.PR.A has not dropped below $9 since March 2020. It does have odd, inexplicable 10 cent drops from time to time not associated with ex-div dates or any other news that I have ever seen….just liquidity issues? I just collect my divvys.
Yes, I actually have some RS.PR.A and GDV.PR.A in my portfolio 🙂
Over the past I have been in and out on PVS.
When the YTM is too close to the yield you can get with Brookfield’s perpetuals, I don’t see the value to own them but at some point, the difference was like 200+bps and it was a much better opportunity.
Today it’s around 7.2% vs. 6.5% so too close for me.
Sure it’s a great yield for 5/6 years to maturity depending on the series (J or K for me) but I’d rather have 6.5% “forever”.
As for FTN.PR.A, on May 5th, it lasted a couple of minutes maybe but it dropped to $8.77.
It’s rare but not the first time it happens.
I don’t know if it bothers James that we discuss like this on his blog but it is fun to be able to talk about preferred shares as Canadians since there are not many places to do it.
Thank you for jogging my memory on FTN.PR.A dropping to $8.77! I think that I had blotted that out of my memory! Felt like March 2020 all over again….
Apologies to James if our discussion is out of place here. I too enjoy the exchange of ideas.