# FTN Financial 15 Split Corp



## spdr1812 (Apr 8, 2016)

Can someone explain this please , what the hell is it and with a dividend distribution solid for years on end , why isnt everyone just pile $$ into it and collect the money ? 

I'm a newer investor with income based portfolio with some trading cash for the dips , but this one intrigues me to say the least .

Thanks


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## kelaa (Apr 5, 2016)

Take $25 of dividend stocks, and split it into capital shares ($10) and preferred shares ($15). All the dividends go to the preferred shares, which will boost the yield from say 4% nominal on the underlying securities to 5.5%. They also typically sell put options to have further income. Any changes in the market value of the underlying securities will be reflected in the value of the capital shares. They are chartered for say 10 years with 5 year extensions possible, etc, and can eventually dissolve and return funds to the investors. 

Why people don't like them? First of all, many people are looking for total returns in excess of that, say ~7-10%, so preferred shares don't cut it. For "fixed" income, I suppose it's okay. But you can buy your own preferred shares from major companies at similar yield. Then you have less risk than the common dividends, no risk at all from the split corporation (fraud, etc), and you won't be paying anyone 1% management fees.


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## spdr1812 (Apr 8, 2016)

Thanks Kelaa , so is it an ETF or a mutual fund . I like equities and dabbled in ETF's but would rather have the underlying securities . I wasnt going with the preffereds just the common shares . So is there a MER on those ? I own the BMO Covered call Bank ETf and want out . 

I just think its odd with a dividend staying at the level its at , for years and barely any movement on actual stock price , why not own for the income .


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## gibor365 (Apr 1, 2011)

spdr1812 said:


> Thanks Kelaa , so is it an ETF or a mutual fund . I like equities and dabbled in ETF's but would rather have the underlying securities . I wasnt going with the preffereds just the common shares . So is there a MER on those ? I own the BMO Covered call Bank ETf and want out .
> 
> I just think its odd with a dividend staying at the level its at , for years and barely any movement on actual stock price , why not own for the income .


It's ETF, and it should have MER. 


> But you can buy your own preferred shares from major companies at similar yield.


 I just don't want to have 15 preferred and prefer to hold DFN.PR.A (same provider as FTN.PR.A - just more diversified), not only financials like FTN . On the other hand FTN hold not only Canadian, but also US financials... for common shares I hold mostly individual stocks



> I own the BMO Covered call Bank ETf and want out .


 You cannot compare ZWB with FTN, as kella said FTN is more "fixed income",ZWB - not. I was holding ZWB when it just was launched, but soon soldit and was just buying banks common shares directly.


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## kelaa (Apr 5, 2016)

I wrote the wrong name for the options writing the split corp does. "Covered call" is the right one. 

For the split corps, whatever you do, it would be a bad idea to hold both the capital shares and the preferred shares together. The management fees will in the long run make the returns less than the underlying securities. I think when they are issued, they want to sell you a matched pair of shares. The fee is in the range of 0.75%. For $100k investment, that's $750 dollars per year. That'll cover a lot of trades, should you wish to buy securities yourself. I personally don't like paying this level of fees for Canadian equities.

For yield in the that range, there are plenty of options (preferred shares, Enbridge Income Fund, Pembina/Veresen, Altagas, Alaris Royalty, The Keg Royalties, etc.). And if you don't need eligible dividends, then plenty of mortgage investment corps and REITs will even give you 8% yield.


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## gibor365 (Apr 1, 2011)

> For yield in the that range, there are plenty of options (preferred shares, Enbridge Income Fund, Pembina/Veresen, Altagas, Alaris Royalty, The Keg Royalties, etc.)


 I personally hold ENF, ALA,KEG from what you listed. Also hold DFN.PR.A for more diversification


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## Eclectic12 (Oct 20, 2010)

kelaa said:


> Take $25 of dividend stocks, and split it into capital shares ($10) and preferred shares ($15) ...


The few I have looked at in enough detail are more like "buy for $25, split into capital shares ($12) and preferred shares ($17)". There's costs to setting up the underlying portfolio, releasing the prospectus, paying for the underwriter to make the brokers/clients aware of it etc. etc.

Once it is up and running, then there's usually a fee for managing the porfolio.




kelaa said:


> ... All the dividends go to the preferred shares, which will boost the yield from say 4% nominal on the underlying securities to 5.5% ...


Have you checked this?
https://www.theglobeandmail.com/glo...-and-downs-of-doing-the-splits/article622696/

Back in the late '90s when I first learned of the split share corporate structure, this was true. When I poked around in 2008 to find a way to leverage Canadian financial institutions, everything I looked at paid income to both the preferred and the capital shares. The difference I could find was that typically the capital share income could be suspended if the capital share's trading price dropped below a set point.

The preferred shares, OTOH could not have their income suspended plus on wind-up, had to be paid out first. For example, if the vote was to wind up where the underlying portfolio could only payout out the preferred shares with nothing left for the capital shares - then the capital share holders would be paid nothing.






kelaa said:


> ... Any changes in the market value of the underlying securities will be reflected in the value of the capital shares.


YMMV ... the TRP capital shares I bought should have been worthless but never traded below $1. As I felt there was enough time for management's moves to fix the problems (i.e. four years), after watching a while, I bought. In about the same time frame that the common shares doubled, the TRP capital shares went up six fold.




kelaa said:


> ... Why people don't like them?


This is true ... but there's lot of other reasons as well.

Some don't understand the structure so they stay away. Others understand the structure but don't like the liquidity or how hard it is to get a good feel for what the combination of shares are worth (especially if the capital shares are trading based on future hope instead of asset value).

Some are confusing as one of the split corps had a one preferred to four capital shares structure.


Cheers


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## gibor365 (Apr 1, 2011)

> This is true ... but there's lot of other reasons as well.


 imho, the major reason that people just not aware about such equities.... until DFN thread was published on CMF, I didn't have idea that trhey exist, even though I was invested into individual stocks and ETFs


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> spdr1812 said:
> 
> 
> > Thanks Kelaa , so is it an ETF or a mutual fund ....
> ...


I guess it depends on one's definition ... I'd call it more of a custom mutual fund. I'd have to dig deeper to be sure but what little checking I have done sounds like the fifteen were custom selected instead of following someone's index.




spdr1812 said:


> ... I just think its odd with a dividend staying at the level its at , for years and barely any movement on actual stock price , why not own for the income ...


Most are not aware of it and if they do find it - are intimidated by the structure that is harder to value / follow. Those looking to park some money for a while with a better yield who understand it, might use it.

This article is one of the few talking about it and even then, it warns people away from the capital shares.
https://www.theglobeandmail.com/glo...-and-downs-of-doing-the-splits/article622696/


If I hadn't put a % into the capital shares in addition to buying common shares in 2008/2009, I would have missed the 240% return (plus 60% in income) versus the common shares that went up about 110%, with about 20% dividend income.

I wouldn't want everything in it but at times, it can be a nice, cheap multiplier. Some of the common shares at cheapest were about $29 a share while the almost low I bought at was under $4.


Cheers


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> imho, the major reason that people just not aware about such equities.... until DFN thread was published on CMF, I didn't have idea that trhey exist, even though I was invested into individual stocks and ETFs


There have been few articles ... as I say, the first one I read was in the '90's.
Throw in that many people are struggling with common and preferred shares for run of the mill companies.


But there are lots of split share corps out there.
http://www.scotiamanagedcompanies.com/smc/home.do (five including a BNS split).
http://www.quadravest.com/productsgallery (around eleven splits or so).



The other wrinkle that intimidates people is the expiry date. Figuring out the prospects seems to be a challenge, without the possibility of a windup in four or six years time. Most I have held have voted to extend instead of wind up.


Cheers


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## james4beach (Nov 15, 2012)

spdr1812 said:


> Can someone explain this please , what the hell is it and with a dividend distribution solid for years on end , why isnt everyone just pile $$ into it and collect the money ?


It's an investment holding company that uses exotic techniques. This other recent thread might be useful. Same concept:
http://canadianmoneyforum.com/showthread.php/115442-Dividend-15-where-did-performance-go


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## Eclectic12 (Oct 20, 2010)

Not sure I'd call it "exotic" so much as "different".

An ETF or MF is taking their expenses then giving an equal portion based on ownership/trading values, with loaning out of securities income mixed in sometimes.

The split share is giving income preference to one unit type, with payout first privileges on wind up (i.e. preferred units). The other type gets the bulk of the capital appreciation as well as sometimes income, depending on whether the preferred units have already been paid out.


The original wind up date for FTN is Dec 2008 so it would seem the demand as well as the voting has been to extend.


Cheers


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## james4beach (Nov 15, 2012)

In any case, the split corps are very complicated. How much income is attributed to each share? Under what conditions? Which shares get the cap gain/losses? How is the corp's value divided up in case the shares plummet in value and/or dividends are cut?

And then you add into the mix option trading and maybe securities lending... yikes. The fee structure is also not transparent.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> In any case, the split corps are very complicated. How much income is attributed to each share?


Perhaps you are introducing the complication?

The income depends on the prospectus/updates ... from what I can see of this particular one:

a) preferred shares get *cumulative preferential monthly cash dividends currently in the amount of 5.25% annually* plus at wind up $10 per Preferred Share, paid first.

b) capital shares get *regular monthly cash distributions in an amount to be determined by the Board of Directors* plus all growth in the net asset value of the Company above $10 per Unit, such amounts as remain in the Company after paying $10 per Preferred Share.


As the preferred shares are first in line at wind up, their values tend to trade in a tight window. The capital shares vary quite a bit, including times where they can be observed to trade for more than the NAV would make them worth.


Where's the complication for income?




james4beach said:


> ... Under what conditions?


What's set out in the prospectus then what the market trades them at.




james4beach said:


> ... Which shares get the cap gain/losses?


The preferred shares as they trade in a tight range should have almost zero CG with just income. The capital shares should have a leveraged CG plus whatever income was paid.




james4beach said:


> ... How is the corp's value divided up in case the shares plummet in value ...


The prospectus lays it out ... in basically all that I have read for split share setups, *the preferred shares are first in line ... whether it is income or wind up on a set date.

If there is nothing left after paying off the preferred share owners, the capital share owners get nothing, beyond any income they were paid before the wind up date. If there has been any growth, the capital shares get all of the capital growth.


Keep in mind that if there's say four years to run before wind up - the capital shares will bounce around where the preferred shares typically keep trading in the same range. It won't be until the NAV is below $10 that the preferred share would see much affect and possibly close to a wind up date. 


If there's a long time left to run before wind up, there may be no impact on the preferred shares and the capital shares might trade for more than their portion of the NAV.




james4beach said:



... and/or dividends are cut?

Click to expand...

Preferred shares should almost never have their income cut.

Capital shares usually have something in the prospectus. FTN's prospectus says if preferred share income is in arrears or the NAV is equal to or below $15, then the capital shares will not be paid income.

Other split corps have tied the capital share income to a set trading value for the capital shares for a set period.




james4beach said:



... And then you add into the mix option trading and maybe securities lending ... yikes.

Click to expand...

Is that any different than an ETF mixing in option trading and just about everything including brokers mixing in securities lending. :biggrin:




james4beach said:



... The fee structure is also not transparent.

Click to expand...

YMMV ... some are, some are not.

Either way, if there aren't buyers on both sides of the split (i.e. preferred and capital), then it wouldn't be worth the issuing company's time. 



Cheers*


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## james4beach (Nov 15, 2012)

Maybe it's just me but all that sounds pretty complicated and I wonder how many investors have read the prospectus.

I'm not a fan of ETFs mixing in options trading and securities lending either  It's why I still say XIU is one of the best, with its plain vanilla structure, minimal securities lending (though there is still some) and as far as I can tell, no sign of any derivatives


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Maybe it's just me but all that sounds pretty complicated and I wonder how many investors have read the prospectus ...


*shrug* ... how many read their MF manager was making 2.5% or more? :wink:

How many read the fee schedule as well as the stream of updates for their bank account/cc?


Cheers


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## Waldo (Jun 23, 2017)

james4beach said:


> Maybe it's just me but all that sounds pretty complicated and I wonder how many investors have read the prospectus.


What they don't look at is the current NAV. Cap shares in DFN are trading for way more than their asset value. Excellent dividends, but you pay lots to get in, the div will get cut off when the NAV goes below $15 (I think), and the fund is scheduled to wind up in 2 1/2 years and pay out only the NAV value in excess of the $10 going to preferreds. I don't see any realistic chance of even breaking even on the cap shares! Preferreds look safe enough unless the market (especially financials) gets kicked hard but there's still a premium to get in and only a short time to recoup that premium in dividends. Net result is a yield lower than a GIC. Why bother?
It may get extended again, and make the preferreds more viable, but I don't see the market gaining enough, even with 2:1 leverage, to make the cap shares worthwhile.


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## gibor365 (Apr 1, 2011)

> Preferreds look safe enough unless the market (especially financials) gets kicked hard but there's still a premium to get in and only a short time to recoup that premium in dividends. Net result is a yield lower than a GIC. Why bother?


 I hold DFN.PR.A , if market gets kicked hard , can you imagine what gonna happen with commons?! I bought it around $10 - 10.15, collecting aound 5.25% dividends and in 2 1/2 years gonna get $10 per share back... how come result will worse than GIC that hardly yielding 2%?


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## agent99 (Sep 11, 2013)

Waldo said:


> What they don't look at is the current NAV. Cap shares in DFN are trading for way more than their asset value.


The overall NAV of the Div Split 15 fund is about $19. Of that $10 "belongs" to the preferred side of the split. That leaves about $9 for the capital shares. They are trading at about $11.13 today. Premium of 22-23%. For that you get a 10.7% current yield. Problem is that you don't know what the NAV of the capital shares will be down the road. If markets don't get any worse for next 2.5 years, holders would make about 3.3% if they then sell. But this could be worse or better. Too much risk to pay current price for cap shares, I would think.

Don't see any problem with preferreds. NAV of the 15 shares held would have to drop by almost 50% over next 2.5 years for yield to be affected. 48% downside protection if my math is correct? Could happen, but not likely. 

With split corporation, I would like to know what happens to the underlying shares if the managing company (in this case Quadravest) fails. What protection would shareholders have? I haven't yet found an answer to this, so never keep much in any one such corporation.


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