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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Peculiar_Investor
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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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adrian2
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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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Phil D
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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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Arby
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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!

Phil D
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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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