Research : Closed-End Preferred Funds : Effects of Calls

There are three major Preferred Share funds currently trading on the Toronto Stock Exchange : DPS.UN, PFD.PR.A and PFR.UN
There was an indication on the Financial Webring Forum that some people, at any rate, thought the dividends paid on these funds were secure and sustainable … so I wrote an article calculating just what would happen to the pay-outs on these funds as the underlying portfolios got called away and replaced with current-coupon issues.

Look for the Research Link!

  • Note: The “Y” axes of the two charts at the bottom left of the first page were mislabelled.
    • The “Y” axis of the chart “Projected Absolute Net Dividends” should be labelled “Projected Annual Dividend (dollars)”
    • The “Y” axis of the chart “Projected Relative Gross Dividends” should be labelled “Projected Relative Dividend (Current = 100)”
  • The following “extras” are provided here:

10 Responses to “Research : Closed-End Preferred Funds : Effects of Calls”

  1. like_to_retire says:

    Bad links for the spreadsheet, all tables and charts, even more tables….

  2. jiHymas says:

    Fixed. Sorry about that.

  3. […] SEDAR has a copy of this – there has been no news release. I have an interest in this vehicle having written about it, so thought I’d point out the prospectus. […]

  4. […] Charterhouse Preferred Share Index Corporation, which I reviewed last year, is introducing a rather odd shareholders’ resolution: with respect to the Corporation, a special resolution approving an amendment to the Articles of Incorporation to permit the Corporation without obtaining approval of the Securityholders, to issue Securities at a price per Security that is less than the net asset value per Security at such time. […]

  5. realboomer says:

    I received the Annual Retraction Notice for DPS.UN, which provides two options for retraction:
    Option 1: Cash (Consent to Resale)
    Option 2: Cash (Without Consent to Resale)

    Based on my reading of the prospectus, my interpretation is as follows:

    1. Resale option – I instruct the Trust to attempt to sell my units on the open market, and I will receive the amount for which the units were sold. The sale price cannot be less than NAV.
    2. No Resale option – I elect to receive NAV for the units. A pro rata share of the underlying assets of the fund are sold, and my units are cancelled.

    Based on my understanding, it is better to choose Option 1, because there is a slim chance the units will be sold on the open market for more than NAV. If the Trust is unable to resell my units on the open market, then I will still receive NAV.

    It seems to me there should be some downside to choosing Option 1, but I can’t find any downside. Is my understanding correct?

  6. jiHymas says:

    I think your understanding is correct, but the prospectus is poorly written with respect to this option – note that there are actually two prospectuses for this issue, 2006 and 2003.

    The problem I have with the interpretation of the prospectus is in the section titled “Resale of Units Surrendered for Retraction”. This includes the assurance:

    Any Units for which the Trust requests the Recirculation Agent to find purchasers will remain outstanding, except that Units for which purchasers are not found will be retracted on the applicable Retraction Payment Date at a price equal to the retraction price described above.

    The phrase “Retraction Payment Date” is a defined term – it is October 31 of the applicable year, about two weeks after the “Valuation Date”, which is October 16.

    They are also saying that units will be resold to give the unitholder an amount “not be less than the applicable retraction price described above.” It is not clear to me why they would blather on about “applicable retraction price described above”, when they’ve got a perfectly good defined term for the October 16 valuation: “Net Realized Proceeds per Unit”.

    However, the retraction price that is the fallback for this option is NOT a defined term. Without wishing to play lawyer any more than I have to, it seems to me that the letter of the prospectus would allow them to calculate a new NAV, calculated as of the “Retraction Payment Date” and pay this price … because they are not specifying that the “retraction price” is the same thing as the “Net Realized Proceeds per Unit” which is a defined term.

    If this interpretation is correct, then there are a variety of prices that could be received by the retractor: the October 16 NAV, being the “Net Realized Proceeds per Unit”; the actual sale price of the recirculated units, which would not be less than the NAV on the day on which they were sold; or the NAV on the “Retraction Payment Date”.

    I suspect I’m being overly cautious here. I think that they are offering one floor price, the “Net Realized Proceeds per Unit” and the opportunity to maybe get a nickel or two more if they’re able to sell them above this price in the two weeks after the “Valuation Date”. This makes much more sense than the alternatives. But it’s a poorly written prospectus, they aren’t using defined terms when there appears to be no reason not to use them, I’m not a lawyer and, while I am a financial advisor I am not YOUR financial advisor.

    I suggest you clarify matters directly with the company.

  7. jiHymas says:

    I should also point out that my use of the defined term “NAV” above is incorrect; the “Net Realized Proceeds per Unit” is possibly dependent upon the price they actually receive for selling the Portfolio Securities, and NOT necessarily on their quotation as of the Valuation Date. See, for instance, the warning on page 40:

    The Net Realized Proceeds per Unit may, in the event of a retraction of a large number of Units on any Valuation Date, be adversely affected by the sale in the market of the large number of Portfolio Securities which would be required to be sold to fund such cash retraction.

  8. […] I reviewed Charterhouse as part of my review of closed end funds. […]

  9. […] DPS.UN is still paying out an unsustainable dividend – according to the June financials, almost 28% of the 1H07 payout was return of capital, compared to 35.2% in 2006. Redemptions of higher coupon issues may be expected to exacerbate the unsustainability as time passes. […]

  10. […] and FixedResets – which have a Current Yield well in excess of their Yield-to-Worst, it should be clear that today’s Current Yield is not sustainable. Nevertheless, as the banks go, so goes […]

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