PrefBlog

Lawrence Asset Management has announced:

On June 30, 2008, HI PREFS has its annual redemption feature. Investors who wish to participate must notify their broker of their intentions to do so at least five business days in advance of the redemption date. Proceeds from the redemption will be paid within ten business days into a shareholders brokerage account. For more details on how the annual and monthly redemption values are calculated for each of HPF.pr.a and HPF.pr.b, please click through to the next page.

Tendering HPF.pr.a to the Annual Redemption

The annual redemption value for the Series 1 share (HPF.pr.a) is calculated as the lowest of:

a) $25.00 per Series 1 Share
b) the Equivalent Canada Bond Value
c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 2 Share and one Equity Share.

Based on calculations as of May 21, 2008, it is expected that the lowest of these three for the purposes of the annual redemption value calculation will be a) $25.00 per Series 1 Share. Therefore at this time, shareholders of HPF.pr.a are expected to receive $25.00 per share if they choose to redeem on June 30th, 2008. This is an estimate only to assist Series 1 Shareholders in deciding if they wish to tender to the redemption and may change between now and the annual redemption date.

There is also a monthly redemption feature on months other than the annual redemption date on which a redeemer would receive 95% of the annual redemption calculation. The monthly redemption value for redemptions received on April 30th, 2008 was $23.75.

Tendering HPF.pr.b to the Annual Redemption

The annual redemption value for the Series 2 share (HPF.pr.b) is calculated as the lowest of:

a) $14.70 per Series 2 Share
b) the Equivalent Canada Bond Value
c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 1 Share and one Equity Share.

Based on calculations as of May 21, 2008, it is expected that the lowest of these three for the purposes of the annual redemption value calculation will be c) the Net Asset Value per Unit determined as of the relevant Redemption Date after deducting the cost to the Company of the purchase for cancellation of one Series 1 Share and one Equity Share. The NAV of the Unit is calculated by adding the NAV of the Series 1 Share ($25.00) plus the NAV of the Series 2 Share ($14.36 as at May 21, 2008). The cost to the Company to purchase for cancellation one Series 1 Share includes the cost to purchase the Series 1 Share on the TSX (currently trading at $24.00) plus commission of $0.04 and the fee that the Company pays to cancel the forward contract related to that Series 1 Share (approximately $0.50). As per the Prospectus, for the purposes of the redemption calculation the cost of the Equity share is deemed to be $3.54. Therefore at this time, shareholders of HPF.pr.b would be projected to receive approximately $11.28 per share if they choose to redeem on June 30th, 2008. This is an estimate only to assist Series 2 Shareholders in deciding if they wish to tender to the redemption and will change between now and the annual redemption date as the calculation is subject to market values that fluctuate daily.

It seems very odd that HPF.PR.A should be quoted today at 24.00-50, 5×7; the quote for HPF.PR.B makes a lot more sense at 10.00 – 12.00 (nice little $2 spread there!), 62×2. The NAVs are touted as $25.00 and $14.05 respectively, as of May 30.

However, nothing about this particular vehicle makes any sense at all; I’ve puzzled over it many times over the years, most recently in HPF.PR.A / HPF.PR.B : DBRS Affirms Ratings Despite Dividend Suspension.

Update: PrefBlog’s Department of Things that Make No Sense has discovered that the prospectus does not have any mechanism whereby holders can submit a unit – that is, HPF.PR.A & HPF.PR.B – and get the Unit Value. This is partly because Equity Shares are all held by the manager:

HI PREFS capital structure consists of Series 1 Shares (HPF.PR.A) and Series 2 Shares (HPF.PR.B) owned by the public and Equity Shares owned by Lawrence Asset Management Inc. (“the Manager”)

and – this is the best part (emphasis added):

In the event that any Series 1 Shares, Series 2 Shares or Equity Shares are tendered for redemption on a Redemption Date, the Company will purchase in the market for cancellation Series 1 Shares, Series 2 Shares and/or Equity Shares, as applicable, (or if the Equity Shares are not traded on a public market, redeem Equity Shares at an amount per share equal to the greater of the Net Asset Value per Equity Share and $3.54) in order that, to the extent practicable, the ratio of outstanding securities of each class remains constant.

I guess it’s the price guarantee that makes them “Equity Shares”!

So, potentially, you could buy a big block of HPF.PR.A at – say – $24.00, tender for retraction with the expectation of getting $25.00 … but then find that everybody else had done the same thing and the manager had bought a matching number of HPF.PR.B at – say – $16.00 (a high price due to forced buying … and what do they care anyway?), so you would get Unit Value of (May 30) $39.13 less Redemption price of Equity Share to Manager $3.54 less cost of buying HPF.PR.B (nasty assumption) $16.00 … and get not $25.00 but rather $19.59. Ouch!

Is there anything about this issue that is not wierd?

This entry was posted on Wednesday, June 4th, 2008 at 6:04 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.