FTN Split Shares

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Phil D
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FTN Split Shares

Post by Phil D » 14 Sep 2017 12:58

James Hymas' Prefblog on September 13 carried the news that FTN ( a split share corp owning 15 financials ) is about to get larger with new share issuance. ( I don't know how to provide a link to just that article in prefblog ) I hold several split prefs but have never considered holding the capital shares or even looked at the economics of the capital shares. But this issuance is really puzzling....

The NAV of the whole unit ( pref plus capital ) was $ 16.39 at the end of August but the pref share and capital share are both being issued at about $ 10. Since the pref share has preference, unless I'm misunderstanding, this means that buyers of the capital shares are paying $ 10 for something worth $ 6.39. And this is also the current market price so current holders are doing the same thing.

More than that, the pref share pays a 5.3% dividend and the objective for the capital share is to pay a 14.5% dividend. Of course this will require significant capital gains or the NAV will drop further to pay the capital share dividend. And the prospectus says that capital share dividends cannot be paid if the unit NAV is below $15 so a 10% drop will require the suspension of capital share dividends.

I realise that capital share owners have a leveraged investment and receive the capital gain on $ 16.39 worth of shares for $ 10. But I can't see any reasonable set of assumptions which would make capital shares a sensible investment.

On the other hand, the new issuance is presumably favourable for current holders since it will increase the NAV per unit. I guess FTN is taking advantage of the current capital share price.

Does anyone have any insights to all this ?

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Re: FTN Split Shares

Post by Peculiar_Investor » 14 Sep 2017 14:46

Phil D wrote:
14 Sep 2017 12:58
James Hymas' Prefblog on September 13 carried the news that FTN ( a split share corp owning 15 financials ) is about to get larger with new share issuance. ( I don't know how to provide a link to just that article in prefblog )
Is this the article you read? FTN.PR.A To Get Bigger « PrefBlog
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Arby
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Re: FTN Split Shares

Post by Arby » 14 Sep 2017 15:48

PhilD...you have summarized the situation pretty well. I recall James Hymas said in one of his articles that the Capital shares are for suckers. I also own several split preferreds, but I would never consider buying the Capital shares.

One comment on your statement "capital share owners have a leveraged investment and receive the capital gain on $ 16.39 worth of shares for $10". When the split shares corp winds up on the termination date in 2020, the pref shares get the first $10 of the NAV, and the Capital shares get whatever is left. If the termination date NAV happens to be $16.39, then the Capital shares would only receive $6.39 at termination.

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Re: FTN Split Shares

Post by adrian2 » 14 Sep 2017 16:03

Arby wrote:
14 Sep 2017 15:48
PhilD...you have summarized the situation pretty well. I recall James Hymas said in one of his articles that the Capital shares are for suckers.
IIRC he later clarified that buying the capital shares through the IPO is for suckers.
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Re: FTN Split Shares

Post by Phil D » 15 Sep 2017 05:52

Thanks for posting the link, PI.

Well, we all seem to agree that owners of the capital shares at these levels are not making a reasonable investment. It is rather unsatisfying, though, to be unable to come up with any reason why the ' suckers ' might find them attractive. If the new share issuance is being made through retail brokers, I wonder what story the purchasers are being told...

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Re: FTN Split Shares

Post by Arby » 15 Sep 2017 10:12

I would guess they're being sold on the following basis - "Class A Shares will be offered at a price of $10.40 per Class A Share to yield 14.50%"

Most retail investors won't bother to read or understand the basic details of the split share offering. They won't understand that Capital share distributions will be suspended if the NAV drops below $15 (as happened in 2011-12 and 2008-09). They won't understand that the Capital shares may not get back the $10.40 IPO price on the termination date.

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Re: FTN Split Shares

Post by Arby » 15 Sep 2017 12:09

Here is a link to James Hymus blog where he discusses Capital shares. I particularly enjoyed the following excerpt:
Perhaps, as printed, my “sucker” epithet was too general – I certainly did not mean to suggest that all capital units were always bad all the time at all prices. If somebody offers to sell me capital units with an intrinsic value of $10 for a penny each, I’ll back up the truck! As I like to say, at the right price, even a bag of shit can be attractive: I buy fifteen of them every spring for my garden!

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Re: FTN Split Shares

Post by Phil D » 15 Sep 2017 12:38

Thanks Arby. The comments that James responded to in that blog post were quite revealing.

I think that all this makes me feel even better about investing in split prefs. If the capital shares are a bad deal then the other side, the prefs, must be a good deal. ( Unless I suppose all the benefit goes to the issuer.) The most recent FTN issuance is certainly a good deal for the FTN prefs because it will boost the NAV of existing units.

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Re: FTN Split Shares

Post by jiHymas » 04 Oct 2017 04:50

Perhaps a little off-topic, but you may be interested in my article Split Share Credit Quality.

The spreadsheet referred to in the text is still available. I have often thought that it would be an interesting exercise to modify that spreadsheet so that instead of estimating the credit quality of the preferred part of the split, it estimated a probability distribution of returns for the capital units.

With the FTN Capital Units trading at such an enormous premium nowadays, I suspect that chart would look pretty ugly!

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Re: FTN Split Shares

Post by thegov » 05 Oct 2017 12:41

FYI:
After the recent offering at $9.90 (if you bought the matched units), FTN.PR.A is now trading $10/$10.01.
After the similar offering last night FFN.PR.A is currently $9.98/$9.99.
Possibly interesting chance to get in at or below par without going through the IPOs and getting involved in the capital units.
Both announced increases to their divs from 5.25% to 5.5% (based on $10) starting Dec 1, I believe.
Of course, they could continue to drift lower if interest rates continue to rise.

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Re: FTN Split Shares

Post by shellybear » 18 Oct 2017 22:02

FTN is one of the split shares from Quadravest that i recently bought into.
Usually when these funds do an overnite offering the stock shares sell off a bit and this was the case with FTN as the stock dropped from 10.60 to about 10.34 when the news was announced. That was a buying opportunity. So i initiated a small position 1000 shares , which pays 125.70 per month in distributions.
I found the same happened with DGS, another split share stock from Brompton group. That one i have been in for over a year , first buying in at about 6.75 range , ( now trading at 8.14 or so), and it currently pays about 14.7 % dividend, .10 per month per share. I now have 4600 shares.
DGS did two offerings in the past year, one in MArch 2017 which saw the stock drop about .40 or so within a few days, and was a great buying opportunity and so added to my initial position. The second offering was a few months ago, in JULY for 74.25 million $ and the stock again dropped from the 8.30 range down to the 7.80 to 7.90 range in the next week, another buying opportunity.
Originally i was looking for investment income stocks and was given the heads up to look into DGS, which holds a lot of the stocks i was interested in, but pays a superior distribution.
These are the stocks they currently have in their portfolio ... from their website:
http://www.bromptongroup.com/static/pdf ... ummary.pdf
Needless to say i have been very happy with the returns. Not as much capital appreciation as some single stocks have, but great yield.

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Re: FTN Split Shares

Post by shellybear » 20 Oct 2017 12:35

FTN up another .11 today to 10.61, and my inital buy should have been bigger it seems, now almost back to where the selloff began when they announced the overnite offering.

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Re: FTN Split Shares

Post by shellybear » 03 Nov 2017 12:37

FTN just filed another short from base prospectus, which means in the next while they are planning another offering... am out of this one for now.... will buy after the shorts attack again. Apparently the underwriters are the likely shorters..

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Re: FTN Split Shares

Post by shellybear » 07 Nov 2017 15:08

AND THERE IT IS... another chance to buy after the sellers, ( whoever they are) knock it down .40 or .50 again
Wow cant believe they are doing another one so soon after the last offering ( completed end of September) ...that one was same price for preferreds , but only 10.40 for the A shares.
Financial 15 Split Corp. Announces Overnight Offering

A high quality portfolio consisting of 15 North American Financial Services Companies


TORONTO, ONTARIO--(Marketwired - Nov. 7, 2017) - Financial 15 Split Corp. (the "Company") is pleased to announce it will undertake an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC Capital Markets, Scotia Capital Inc., and RBC Capital Markets and will also include BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Industrial Alliance Securities Inc., Raymond James, Echelon Wealth Partners, Mackie Research Capital Corporation, Desjardins Securities Inc., and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $10.50 per Class A Share to yield 14.40%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on November 6, 2017 was $10.08 and $10.70, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $7.33 per share and the aggregate dividends paid on the Class A Shares have been $17.14 per share, for a combined total of $24.47. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:


Bank of Montreal National Bank of Canada Bank of America Corp.
The Bank of Nova Scotia Manulife Financial Corporation Citigroup Inc.
Canadian Imperial Bank of Commerce Sun Life Financial Services of Canada Inc. Goldman Sachs Group Inc.
Royal Bank of Canada Great-West Lifeco Inc. JP Morgan Chase & Co.
The Toronto-Dominion Bank CI Financial Corp. Wells Fargo & Co.

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Arby
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Re: FTN Split Shares

Post by Arby » 07 Nov 2017 16:14

shellybear wrote:
07 Nov 2017 15:08
Wow cant believe they are doing another one so soon after the last offering...
It's not that hard to believe that Quadravest is doing another offering. The new offerings are very lucrative for Quadravest. They are selling the whole units for $9.90 + $10.50 = $20.40, and their cost for the underlying stocks is only $17.95 (which is the last reported NAV). What is hard to believe is that they continue to find suckers to buy the new offerings.

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Re: FTN Split Shares

Post by AdrianDunn » 08 Nov 2017 10:50

I understand why someone may want to *trade* FTN or FFN, as there are somewhat predictable trading patterns after an offering:

- Price drops by $0.30 or $0.40 due to the offering discount / underwriters willing to trade or sell even lower as their cost is even lower than the announced price.
- Offering is completed, selling pressure lessens
- Once underwriters have unloaded all of the common shares (they have no problem selling the preferreds, and basically are stuck with the common shares that they were unable to place, and end up selling them in the open market), price creeps back up due to the extremely high yield

What I can't understand is why a rational investor would ever want to own these names more than a month or two after an offering.

<begin rant>

1. Another offering will eventually be in the offing, although not usually a scant 2 months later, which will knock the stock price down all over again
2. You are paying well above NAV to own the name - if and when the markets drop, it won't take too much to knock the NAV under $15, which may well cut the trading prices of these names in half, as they tend to trade a lot closer to NAV once the fat distributions are halted.

Look at OSP for a good example of this. Back in January they did an offering @ $9.75 / unit, when XEG (a decent proxy for their underlying energy holdings) was trading around $13. This wasn't actually *that* much above their NAV of $9 / unit at the time, however in the ensuing energy sell-off, their NAV started by falling to about $6, while the trading price managed to stay close to $9. The trading price then fell as low as $5 / unit when their dividend was suspended, before rebounding back to $6.70 more recently, which is still a loss of over 25% when you take the $0.40 of distributions received post-offering, versus a loss of about 1% had you just bought XEG.

You are getting hit at least three different ways when you buy these things for more than NAV:

1. You are paying an above-market interest rate on the preferred shares. These payments come out of the NAV, and since the preferreds are relatively decent investments, that means the common shareholders are losing.

2. You are paying more than the assets are worth, sometimes substantially more! FTN and DF are egregious examples of this, and OSP used to be. Watch what will happen with DF if their portfolio of dividend-paying stocks drops by a few %, and the distribution is halted - that name will drop from $8 to $6 in the blink of an eye.

3. You are paying a high management fee - this is paid on all the assets, although since the bulk of the assets are pledged to the preferred shareholders, the effective management fee on the remaining assets owned by the common shareholders is anywhere from 3 to 5%.

<end rant>

James Hymas is a very respected figure in the analysis of preferred shares, and brings an incisive outsider's perspective to the twisted incentives present in investment management, and he has repeatedly indicated what bad investments these products are:

http://prefblog.com/?p=35682
http://prefblog.com/?p=35451
http://prefblog.com/?p=29218

Anyway, caveat emptor for anyone looking to own these names, and who think they are nimble enough to clip the massive distributions but get out in time before distributions are halted at some point in the future. Worrying about the eventual redemption @ NAV would be logical too, although in most cases these redemption dates come and go, with common shareholders (very reasonably!) voting for a fund extension, as have no interest in only receiving NAV for the units they own.

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Re: FTN Split Shares

Post by AltaRed » 08 Nov 2017 12:52

Arby wrote:
07 Nov 2017 16:14
It's not that hard to believe that Quadravest is doing another offering. The new offerings are very lucrative for Quadravest. They are selling the whole units for $9.90 + $10.50 = $20.40, and their cost for the underlying stocks is only $17.95 (which is the last reported NAV). What is hard to believe is that they continue to find suckers to buy the new offerings.
:thumbsup: Seems James is on a similar theme (see Nov 7th commentary).
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