# Canadian Banc Corp. (BK.TO)



## gibor365 (Apr 1, 2011)

doctrine on his bloq mentioned about stock BK.TO .
It is an interesting equity.... They somehow similar to what ZWB is doing, but outperfoming ZWB in a big way.... both in appreciation and dividends payments.
ZWB cut dividends in last 3 years almost by half , from 0.129 to 0.07, and BK raised from 0.053 to 0.076 (53%).

what is your opinion on this stock?
also BK.TO it's Canada-based mutual fund company, so I'm wondering if I buy and sell shares like regular stock? No any load?


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## andrewf (Mar 1, 2010)

It's a splitcorp. It buys a portfolio of equities, financed by an equal number of capital shares and preferred shares. The pref shares get a fixed dividend yield, while the capital shares get whatever is left over. Split shares pay management fees to whoever is managing the portfolio, plus some overhead (the usual management expenses--legal, audit, accounting, etc.), usually at least 1% from what I've seen. Effectively it's the capital shareholders that are paying the management fee, since it comes out of the 'whatever's left over'. You can trade it without loads, just like any other stock or ETF.


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## gibor365 (Apr 1, 2011)

So what are cons and pros of owning it?


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## doctrine (Sep 30, 2011)

They've been popping up on my screens because of their two large distribution increases in the last couple of months, but I'd have to take a closer look to see if they're covering the distribution out of earnings or if they'll need to dip into book value especially in a decreasing market. They also sell covered calls to generate income similar to ZWB but seems like they're more flexible in their approach.


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## andrewf (Mar 1, 2010)

It's leveraged. I don't know if that is a pro or not. A lot of the investing intelligentsia dislike split corps. I don't have much opinion. I always thought the prefs were more interesting.


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## gibor365 (Apr 1, 2011)

Just checked dividend history of BK, they increased dividends until 2008 , but when ressesion started they decreased dividends and even eliminated them for about 5 months (from Dec 2008 to Apr 2009). Since than they only increased dividends several times.... 

Regarding BK, as per http://www.quadravest.com/prime rate plus corp/press/PPL(BK) Oct16.13.pdf
"Under the new distribution policy, the monthly dividend payable on the Class A shares will be determined by applying a 10% annualized rate on the volume weighted average market price of the Class A shares over the last 3 trading days of the preceding month. As a result, Class A shareholders of record on October 31, 2013 will receive a dividend of $0.08608 per share based on the average volume weighted trading market price of $10.33 over the last 3 trading days in September, payable on November 8, 2013. Effectively, the actual amount of monthly distributions paid will vary with the market price, but the current yield will remain stable at 10% under this new distribution policy. "

I don't really understand how they got $10.33 (last 3 days of Sept closing price was 10.27, 10.25 and 10.11), but still it's a pretty nice... so if price will be the same until end of Oct , Dec dividend will be 0.092, but if BK will drop for example 20% , dividend will fall to 0.074... Looks like it's not bad income vehicle considering that if even BK falls 50% from current level, yield will be still 5%. 
What do you think?


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## james4beach (Nov 15, 2012)

Never heard of this before. I start with question #1 for evaluating a mutual fund or any other fund structure. What determines their NAV? If you're going to buy shares you've got to know the NAV. On their web site under 'Valuations' it says $21.59 at Oct 15. You can also see their 'monthly updates'.

So the NAV per unit is $21.59... part of that is preferred, part of it common. I believe the preferred shares are worth a fixed $10 NAV, is that right? So that makes the BK NAV per share = 21.59 - 10 = $11.59.

On Oct 15, BK was trading at $10.55 so that means BK trades at 9% discount to NAV? Is any of this right?

How do you determine the NAV of each of these shares, preferred and common?

Couple things I noticed in their semi-annual report (May 2013)

"The Company may also invest up to 20% of the Net Asset Value in equity securities of Canadian or foreign financial services corporations other than the core holdings listed above" --- well that's interesting. So you might end up holding some European banks too I guess, if they feel like it. Well that's useful to know!

"*The termination date of the Company is December 1, 2018* and may be extended thereafter at the Company’s discretion for additional terms of five years each."

"In accordance to their terms, each redeemable Preferred share is valued at the lesser of: (i) $10.00; and (ii) the Net Assets of the Company divided by the number of Preferred shares outstanding."

"All Class A shares and Preferred shares outstanding are redeemable on demand but are scheduled to be redeemed upon termination of the Company on December 1, 2018"


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## james4beach (Nov 15, 2012)

I would not recommend buying this until you are crystal clear about how the NAV per share is calculated and what those various rules are regarding preferred vs common, their different redeemability, the effects of warrants, etc.

And if I understood the NAV correctly, why is it trading at 9% discount to NAV?

Doesn't seem very transparent to me. I don't like the structure, I would not buy it.


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## MrMatt (Dec 21, 2011)

I thought these were an interesting concept, but it looks like the expenses eat up about 1-1.5%

Doesn't seem like a lot, but why not just buy the underlying bank stock directly and get everything? Or buy an XFN which has half the MER.

Did you read the MD&A off sedar? 
95% the big 5, 10% cash, and -5% "other".


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## HaroldCrump (Jun 10, 2009)

If I understand this product correctly, can this strategy not be replicated very easily by an individual investor by buying pref. shares of the same banks (prefs. of banks are very liquid), and also common shares of the same banks.
Then periodically sell covered calls against the common shares to generate more yield.

The pref. shares portion becomes the fixed dividend paying portion of the product, while the common share appreciation and the covered calls revenue becomes the capital shares portion.

Those that don't want to deal with options can simply skip the covered calls part - they may get a slightly lower yield but the core of the structure can still be replicated easily.

Why do we need this product?


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> It's leveraged. I don't know if that is a pro or not.
> A lot of the investing intelligentsia dislike split corps. I don't have much opinion. I always thought the prefs were more interesting.


Like other forms of leverage - if one catches it in the right direction, it requires less money to achieve a greater return, which is considered a pro. If one buys at a high, the drop is also magnified and is considered a con.

For example, when I was learning about split shares around 2001 - TransCanada Pipe's common stock had cut their dividend and dropped from something like $34 to $10. The capital split share was worthless according to the windup rules but traded at $1, with about four years to run before a vote to continue or wind it up. Note that in those days, capital shares were strictly capital and did not ever pay a dividend.

Something like 16 months later, the common stock was trading for $21 but the capital shares were trading for $7, where according to the wind up formula, they were worth $7 or slightly more.


I don't recall what the original capital shares were sold for when it was setup but as I recall, the drop for those buying at the high was magnified, just as the rise was as well.




Cheers


*P.S.* The attractions for the yield investor of the preferred share was that it cost roughly 2/3 of what the common share did but was paying a yield about 1% higher and provided downside protection. 

For example, as I recall at the point where the common shares had dropped $14, had the split corp wrapped up the preferred share owner would have been paid out at a $2 loss. 


The newer split shares where both types can pay dividends, not to mention any option selling, are far more difficult to evaluate.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Never heard of this before.


For better or worse, when I was looking at split corps in Jan/Feb 2008 - it seems that just about all have switched to paying dividends for both prefs and capital shares and tying the capital share payouts to the trading price.

For example, several suspended capital share dividends Dec 2008 through around April 2009 but kept paying the preferred share dividends.




james4beach said:


> How do you determine the NAV of each of these shares, preferred and common?


 ... with great difficulty as options sales and new share sales will affect the numbers, over and above the usual factors.





james4beach said:


> Couple things I noticed in their semi-annual report (May 2013)
> 
> "*The termination date of the Company is December 1, 2018* and may be extended thereafter at the Company’s discretion for additional terms of five years each."


Part of the risk evaluation is what's happening with the optional redemptions and whether the time window to the termination date. That said - just about all that I've read the details of have consistently voted (if it's a shareholder vote) or the company decided to extent for another five to ten years. 




james4beach said:


> "All Class A shares and Preferred shares outstanding are redeemable on demand but are scheduled to be redeemed upon termination of the Company on December 1, 2018"


This is another spot where the details matter. Most seem to offer either a redemption based on monthly or some sort of schedule. There's usually also a management fee tacked on as well, likely to discourage too many redemptions with a a solid reason.

Then too, I've seen split shares which are a basket, like all Canadian insurance companies - where the ratio was 2 preferred to one capital share.


Cheers


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## andrewf (Mar 1, 2010)

gibor said:


> I don't really understand how they got $10.33 (last 3 days of Sept closing price was 10.27, 10.25 and 10.11), but still it's a pretty nice... so if price will be the same until end of Oct , Dec dividend will be 0.092, but if BK will drop for example 20% , dividend will fall to 0.074... Looks like it's not bad income vehicle considering that if even BK falls 50% from current level, yield will be still 5%.
> What do you think?


This seems like another opportunity for me to say "yield doesn't matter". Why would you buy something for yield when the yield on your purchase price is constantly changing and can go to zero (it did this in the recent past)? Yield as it contributes to total return is fine, but the only thing that matters is total return. I think there's also a good chance that a 10% current yield is not sustainable, and that it will tend to decline over time.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> I thought these were an interesting concept, but it looks like the expenses eat up about 1-1.5%
> 
> Doesn't seem like a lot, but why not just buy the underlying bank stock directly and get everything? ...





HaroldCrump said:


> If I understand this product correctly, ... but the core of the structure can still be replicated easily.
> 
> Why do we need this product?


The point is that one would almost never buy both the preferred and the capital shares (from what I can tell, that would likely be some sort of arbitrage where one aims to combine then & cash out for the real shares or a cash amount that is over the purchase costs). 

If one is going to buy both - then yes, buying the underlying shares or other product is going to make more sense.


The idea is that one is either looking for a higher yield, with some level of down side protection *or* leveraged capital appreciation.


For example - in Mar 2009, I suspected the Canadian banks had been overly hammered. I wanted the leverage a split capital share could provide so I allocated most of what I spent into buying the common stock of a couple of banks and a percentage into a split corp capital share that was a 90% banks plus 10% dividend payers.

Let's compare how they performed for the twenty-five months I held the split share before selling:

a) Canadian bank stock - 100% rise in share price plus dividends that totaled 15% of the purchase price. Maybe someone familiar with options can comment on what selling options would have added to the mix.

b) capital split share - 205% rise is share price plus dividends which after they were restarted - totaled 55% of the purchase price.



Cheers


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Why would you buy something for yield when the yield on your purchase price is constantly changing and can go to zero (it did this in the recent past)? ...


Agreed ... though bear in mind that I understand it - the point of buying the preferred split shares is to be able use less money to obtain a leveraged capital gain or higher distribution. For the capital shares, any distributions paid on top of that capital gain is a bonus, not the aim.

As I posted up thread, I wanted the leveraged capital gain when I bought the capital shares and it paid off with double the gain compared to the stock held in the in the split corp. The fact that when the capital share dividends were re-started, it paid out over 50% of my purchase price was a nice bonus.


Personally - I don't understand why the split corps have muddied the waters by paying floating dividends to the capital shares. This IMO contradicts the core purpose of separating yield from capital appreciation.


Cheers


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## humble_pie (Jun 7, 2009)

HaroldCrump said:


> Why do we need this product?




HC there was a lively discussion in cmf forum a couple years ago about a similar product, or rather a pair of products, from the same manager.

toronto-based Quadravest is the manager. They have issued a large family of these paired products. The structure is always the same. There is a common share issue plus a preferred share issue.

the subject of the above-mentioned earlier discussion was a secondary offering in a canadian pair called Dividend 15. I read the prospectus, looked carefully at their financial statements & posted here in cmf forum that i believed the expected yield on the common shares was too high, ie the options trading was too aggressive.

the prospectuses for these pairs always state that the purpose of the secondary offerings is to protect the capital of the preferred shares until the maturity date of the issue. Thus it became my view that the common shares in secondary offerings were variations of ponzi schemes, designed to facilitate the high payouts on the common shares, while the preferred share issues were relatively safe.

there is an interesting new pair being IPO'd by Quadravest right now, the Prime US Banking Sector Split Corp. As usual, there will be common shares (class A) plus a sort of preferential entity called a Priority share.

again, the skeletons of these creatures are identical to quadravest's other paired income products.

an advantage i see in the Prime US Banking Corp priority issue is that USD dividends from the US banks & financial institutions will be transformed into eligible canadian tax credits. Of course the engineers - quadravest - will be taking their fee harvest.

still, if US markets do not collapse imminently; if the US banking sector does not go to hell in a hand basket; if stock markets continue robustly; if the quadravest protocol continues to hold up - in such a scenario the US Prime Bank Corp priority share issue could offer some value to canadians looking for temporary USD income vehicles as an alternative to low-paying USD money market funds.

those are a lot of ifs. The USD priority shares are expected to return a minimum of 5%. They are to pay 1.75% above US prime, which is presently 3.25%.


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## HaroldCrump (Jun 10, 2009)

Thanks, HP. I remember the Dividend 15 discussions now.

This product is neither here nor there IMO.
Even moderately skilled individual investors can replicate the results on their own, sans the management fees, by using leverage and options.
Even without the covered call options, most of the results can be replicated.

For those that don't understand this concept, they shouldn't be investing in these products anyway.

Are advisers selling these products to unsuspecting investors, promising high dividend yields and monthly income?


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## james4beach (Nov 15, 2012)

humble_pie said:


> the prospectuses for these pairs always state that the purpose of the secondary offerings is to protect the capital of the preferred shares until the maturity date of the issue. Thus it became my view that the common shares in secondary offerings were variations of ponzi schemes, designed to facilitate the high payouts on the common shares, while the preferred share issues were relatively safe.


Careful humble_pie, we don't want _another_ forum member getting sued by a bankrupt holding company! [ Disclaimer: the previous sentence is meant to be humorous, and is not an assertion that the aforementioned company is bankrupt. ]


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## humble_pie (Jun 7, 2009)

HaroldCrump said:


> Thanks, HP. I remember the Dividend 15 discussions now.
> 
> This product is neither here nor there IMO.
> Even moderately skilled individual investors can replicate the results on their own, sans the management fees, by using leverage and options.
> Even without the covered call options, most of the results can be replicated



HC there's one thing we cannot do.

when our overly-aggressive options protocol goes bad, when markets collapse, when the price of our common tumbles, *we* cannot issue secondary offerings for ourselves. Nor can *we* conjure up fresh new money from investors who are greedy to get their hands on our alleged "high" income from our common shares.

only Quadravest can do that.

i'm glad you remember the discussion. I kept on quoting the prospectus. It is, after all, the binding document of record. The prospec was crystal clear that all new money from the secondary offering was going to be used to protect the preferred shares.

at the time, though, there was one of those classic grumpy old men in the forum. He kept on reading the news release. Now news releases are not binding documents, as we all know; they're just advertising verbiage dreamed up by a public relations house. Sometimes, not even accurate. Anyhow the news release said the purpose of the secondary offering was to expand the company, buy more common shares & write more options. & poor old Grumpy was determined to believe this, lock stock & barrel.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Careful humble_pie, we don't want _another_ forum member getting sued by a bankrupt holding company!


james4 i was hoping you wouldn't read about US Prime Bank Splits or whatever they're calling themselves, i was worried that the irises of your eyes might sear from the horror of it all


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## james4beach (Nov 15, 2012)

HaroldCrump said:


> For those that don't understand this concept, they shouldn't be investing in these products anyway.
> 
> Are advisers selling these products to unsuspecting investors, promising high dividend yields and monthly income?


Probably. The current dividend chasing mania plus love for Canadian bank stocks is an ideal environment to sell this to unsuspecting investors. I'm sure the marketing line "they only invest in the big Canadian banks" is used to give the product an air of safety and reliability -- perhaps to seniors. I bet that's exactly how they pitch it. Plus the claim isn't even true, as the financial statements indicate they could also buy foreign banks.

Overall I think this product (Canadian Banc Corp aka Prime Rate Plus) is way too complicated and too exotic for most investors. By complicated and exotic I mean that it has too many caveats and a non-obvious structure. The interplay between the two types of shares is suspicious to me and I don't like it. I would not buy it. And from what I can tell, the common shares trade at a very steep discount to NAV.

If the overall goal of the investor is to perform leveraged investment in banks & dividend payers, there are other ways to do it. This product offers 2:1 leverage and I think it's better for an investor to use another method to obtain leverage, since it's going to be more transparent what's going on overall.

In the greater scheme of things though, I do not recommend leveraged investment in financial stocks, as the banks themselves are already very highly leveraged entities (we're talking about 30:1 leverage at the big banks, using conservative measures of capital). I think that investing with 60:1 net leverage is beyond insane. Surely 30:1 leverage is already thrilling enough for bank investors? My opinion: forget about additional leverage. If the markets tumble or bank loans turn sour, the highly leveraged banks are already going to plummet plenty hard without the added magnification of a 2x lense.


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## andrewf (Mar 1, 2010)

HP, I don't think there is any real benefit from converting foreign (ie US) dividends to eligible Canadian dividends. They only become eligible because the split corp is paying full whack taxes on the dividends they receive, whereas dividends of Canadian corps flows through tax free.


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## Eclectic12 (Oct 20, 2010)

HaroldCrump said:


> ... Are advisers selling these products to unsuspecting investors, promising high dividend yields and monthly income?


I'm not sure if any advisors are selling these ... at least I don't know of any that are familiar with them, let alone recommending them. 

You can also add some of Canada's major banks to the list as:

a) TD Securities has "Big 8 Split" created in 2003, "5 Banc Split" created in 2001, "TD Split" created in 2000.

b) Scotia Managed Company has "allBANC one" created in 1998, "allBANC two" created in 2006, "New Growth Corp" created in 1992, "BNS Split 2" created in 2005 among others.


When I went looking after reading the Financial Post article about the TransCanada split share around 2001, I seem to recall the Scotia Managed list being around fifteen or so, including a Utilities split, an International Bank split etc.


So there's definitely a market for the product as I doubt many individual investors (or advisors to the average Canadian) were buying in 2000 or so.



Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> The current dividend chasing mania plus love for Canadian bank stocks is an ideal environment to sell this to unsuspecting investors. I'm sure the marketing line "they only invest in the big Canadian banks" is used to give the product an air of safety and reliability -- perhaps to seniors. I bet that's exactly how they pitch it. Plus the claim isn't even true, as the financial statements indicate they could also buy foreign banks ..


Maybe ... I can certainly see with the growth in discount brokers and DIY investing.

The question for me is who was buying in 1998 through 2000 as bank split corps run at least that far back. The tone I recall from the Financial Post article around 2001 was that split corps were nothing new - just not common knowledge. These products likely go back farther than 1998.


Cheers


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## james4beach (Nov 15, 2012)

I didn't realize these structures were so common. I still advise staying away, unless you particularly like this kind of complexity.

But as I posted there, I don't think leveraged investment in banks is wise. That's just me ... 2x leverage on top of a 30x bank is way too much in my view.


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## andrewf (Mar 1, 2010)

I guess the question is whether the structure creates sufficient value to justify the fee drag. I don't really see how it could, so someone is losing out.


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## doctrine (Sep 30, 2011)

Well, it's an interesting concept, but I think the bottom line is the leverage has allowed them to have great returns and thus are able to return more capital to the shareholders. Their revenue from writing covered calls has been quite low as well. I own enough of the banks directly and the 20-30% returns of the last 12 months are more than enough for anyone including me, no need to squeeze more yield out of them. 

I definitely did not like ZWB and that means of 'squeezing yield' and I thought it quite unlikely they could sustain a distribution double that of the banks themselves, which turned out to be true. In fact in the recent past you could have had either CIBC or National Bank directly for almost the same yield as ZWB.

I'll continue to hold the banks directly though; that has been quite a fruitful investment.


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## MrMatt (Dec 21, 2011)

What leverage? It wasn't really that clear to me where that showed up in the financials.
To be fair, I just skimmed them.


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## humble_pie (Jun 7, 2009)

doctrine said:


> Well, it's an interesting concept, but I think the bottom line is the leverage has allowed them to have great returns and thus are able to return more capital to the shareholders.



imho quadravest is not consistently getting juicy returns from option writing, although it is possible to goose the financials now & then via option trading - selling farther out in time is just one simple way - i used to explain these when bmo & horizons first launched ZWB & HEX a couple years ago. In the first few months, those debut CC etfs had double-digit returns, probably in order to attract a large book of new investors to the infant funds. Those unusually high double-digit returns were goosed.

just in my own portf, i could goose my own income in exactly the same manner via options trading. But i don't. Because the option goose that lays 2 golden eggs today is going to be too tired to lay even one tomorrow.

instead, my belief is that, consistently over time, quadravest's higher income returns for its products are coming from the stream of new secondary offerings, ie incoming capital from new investors is patched into the structures so as to maintain capital of the preferred shares, protect the preferred share dividend & deliver remainder to general purposes including supporting the common dividend. The prospectuses for the secondary offerings usually state this.

it's the *P* word.

afaik the bmo covered call etfs do not have histories of repeated secondary share offerings, ie they are not repeatedly soliciting fresh capital in order to pay out high income streams to shareowners. I don't believe the horizons beta CC etfs are doing this, either.


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## Eclectic12 (Oct 20, 2010)

doctrine said:


> Well, it's an interesting concept, but I think the bottom line is the leverage has allowed them to have great returns and thus are able to return more capital to the shareholders ...





MrMatt said:


> What leverage?
> It wasn't really that clear to me where that showed up in the financials.
> To be fair, I just skimmed them.


It's a good question ... the leverage that I've seen in split corps is because the corp has sold the capital share and is assigning all gains above paying off the preferred shares first. But that's leverage for the investor buying the capital share - not the split corp.


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Overall I think this product (Canadian Banc Corp aka Prime Rate Plus) is way too complicated and too exotic for most investors. By complicated and exotic I mean that it has too many caveats and a non-obvious structure. The interplay between the two types of shares is suspicious to me and I don't like it. I would not buy it ...


I'm not sure what is suspicious about the interplay between shares ... it seems pretty standard that for each preferred share issued, a capital share was also issued.

From a quick glance though - the major suspicious part for me is why introduce the prime rate at all? 
Why have a cap on the dividends as well?

This makes no sense to me.


Cheers


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## andrewf (Mar 1, 2010)

I don't think anything nefarious is going on here, besides the burying of fees. These aren't going to be stellar investments (with the absence of hindsight) because of the fee/cost drag and mediocre diversification.


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