# financial 15 split corp II



## 1sImage (Jan 2, 2013)

Anyone else got it? 15 total banks

Dont really know much about it. Only have 200s, pays a dividened.


----------



## HaroldCrump (Jun 10, 2009)

This is a complex derivative product.
If all you need is exposure and dividends of the Canadian banks, either buy ZEB or the top 5 banks individually.


----------



## andrewf (Mar 1, 2010)

Are you asking about the preferred shares or the capital shares?

A split corp is a fund that holds equity of dividend paying companies. It has two kinds of units: preferred shares and capital shares. The preferred shares get a fixed payout (almost like a bond), and has first claim on the value of the portfolio, so they are somewhat protected from declines in the share price of the underlying portfolio. The capital shares in turn get all of the residual return after the preferred shares are made whole. Thus, the capital units are leveraged to the return of the underlying portfolio.

I tend to agree with Harold, but if you are interested in talking about it, no harm in understanding how they work.


----------



## Eclectic12 (Oct 20, 2010)

^^^^

Any idea of when or why split corp capital shares starting paying cash distributions? (i.e. I'm not asking about Financial 15 but in general)

When I first learned of splits shares, many moons ago - the capital shares were strictly a play on the capital appreciation (i.e. no cash distributions). Having the cash distributions makes it harder to evaluate.


Cheers


----------



## andrewf (Mar 1, 2010)

I'm not entirely sure, but I imagine any dividends earned from the underlying portfolio in excess of what is needed to pay the preferreds is distributed to the capital shares. Some portfolios have seen significant dividend growth since the split corp was created.


----------



## 1sImage (Jan 2, 2013)

Preferred share.


----------



## 1sImage (Jan 2, 2013)

andrewf said:


> Are you asking about the preferred shares or the capital shares?
> 
> A split corp is a fund that holds equity of dividend paying companies. It has two kinds of units: preferred shares and capital shares. The preferred shares get a fixed payout (almost like a bond), and has first claim on the value of the portfolio, so they are somewhat protected from declines in the share price of the underlying portfolio. The capital shares in turn get all of the residual return after the preferred shares are made whole. Thus, the capital units are leveraged to the return of the underlying portfolio.
> 
> I tend to agree with Harold, but if you are interested in talking about it, no harm in understanding how they work.


Thanks that helps.


----------



## HaroldCrump (Jun 10, 2009)

Make sure you read the prospectus before buying into this.
There are likely to be several caveats for a product like this, even the preferred shares.

For instance, none of the underlying securities yield the 5.25% that they are promising.
At best, the underlying yield will be 3.5% or thereabouts (before fund expenses).

So you need to find out how they are planning to pay the rest.

Also, what is the liquidity of this security?
Is there enough volume for you to get in and out as needed?

The redemption value of these products is also usually not fixed to the initial face value i.e. it can vary depending on the NAV of the portfolio.
Check that as well.


----------



## andrewf (Mar 1, 2010)

^Agreed. The preferred won't necessarily return their stated yields. They often trade at a premium, and the company that issued them has the option to 'call' them (redeem them for cash) according to some rules. So, a pref share can trade at $12, with a 5.25% coupon, and the fund has the option to redeem the shares for $10 in Jun 2015. Obviously your yield is less than the coupon in this case, perhaps 3% (haven't crunched the numbers). This is what is called 'yield to worst', as in worst case yield for you the investor. It's safe to assume the worst case will happen, as worst case for you is best case for the issuer.

tl;dr: Preferred shares are complicated and require careful research.


----------



## andrewf (Mar 1, 2010)

Harold, I don't think the pref shares face any of the 'MER' of the split share corp. They get the stated coupon rate. If anything, the management fees comes out of the capital shares.


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> I'm not entirely sure, but I imagine any dividends earned from the underlying portfolio in excess of what is needed to pay the preferreds is distributed to the capital shares...


That would make sense. 

The problem is that the ones I looked at - tied the capital share cash distributions to the current market capital share price. 

I'm not sure the trading price has much to do with dividend growth.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> ...and the company that issued them has the option to 'call' them (redeem them for cash) according to some rules...
> tl;dr: Preferred shares are complicated and require careful research.


This is true for traditional preferred shares but I'm so sure it's true for split corp preferred units.

The ones I can recall investigating offered a quarterly redemption privilege (ex. 1 preferred + 2 capital could be redeemed, minus fees for stock or NAV) and a five year or ten year wind-up (which in the cases I looked at, ended up being a unit holder vote to extend for another five/ten years).

I don't recall any with a call option ... though it's been two years since I looked at any in detail so it might be a new wrinkle.:biggrin:


Cheers


----------



## HaroldCrump (Jun 10, 2009)

andrewf said:


> ^Agreed. The preferred won't necessarily return their stated yields.


These ones seem to have been issued at $10 apiece, promising 5.25% yield based on the issue price.
If $10 were used to buy a piece of the each of the constituent 15 securities, the yield cannot be 5.25% because none of the underlying yield anything close to that.

They are clearly using other strategies (covered calls, etc.) to boost the yield.
They also seem to have purchased put options to protect the Class A shares against capital loss.

The current price is $10.45, so the yield hasn't fallen by much since original issue.

Regarding MER, I am not sure if the Class A holders are footing the entire bill or the Pref. holders have to pay their share.
The prospectus should have those details.

I, personally, see no reason to buy something like this because I can easily implement the same strategies (stock + short call + long put) for less overhead cost.
But if the OP wants 5% yield through this, they should read the prospectus and understand the risks and costs of these strategies, as well as the implication of redemption of the shares by the fund at par value.


----------



## andrewf (Mar 1, 2010)

So, there's the Utility Split Trust (UST.un). It issued series b pref shares in 2011, at a lower coupon than the original series. (currently 5.25% vs. 6% originally)

http://www.firstasset.com/media/release.php?id=1252&loc=1&type=1

Also, I thought it was 1 pref + 1 capital share?


----------



## andrewf (Mar 1, 2010)

HaroldCrump said:


> These ones seem to have been issued at $10 apiece, promising 5.25% yield based on the issue price.
> If $10 were used to buy a piece of the each of the constituent 15 securities, the yield cannot be 5.25% because none of the underlying yield anything close to that.
> 
> They are clearly using other strategies (covered calls, etc.) to boost the yield.
> ...


Harold, the fund is created with an equal number of pref and capital shares, issued at 10$ and $15 respectively. So to yield 5.25% for the pref shares, the underlying portfolio has to yield 5.25%*10/25=2.1%, which is not hard to do. The pref shares get their coupon, and the 10$ back when the fund is closed, provided the NAV of the fund is sufficient to pay it. Thus, the pref shares don't pay the MER--it all comes out of the capital units, unless the NAV falls below $10.


----------



## 1sImage (Jan 2, 2013)

Its $3.60 a share. Up 0.07c today.
Financial 15 split core II


----------



## andrewf (Mar 1, 2010)

That's the capital share, ffn. The preferred share is ffn-a.

There's not a lot of downside protection here...


----------



## HaroldCrump (Jun 10, 2009)

andrewf said:


> Harold, the fund is created with an equal number of pref and capital shares, issued at 10$ and $15 respectively. So to yield 5.25% for the pref shares, the underlying portfolio has to yield 5.25%*10/25=2.1%, which is not hard to do.


Oh I see what you mean.
Meh, too convoluted for me.
There are other ways to get 5% yield.

So the Class A shares were issued at $15 and are now trading at $3.60? LOL
Should have called them Class Z shares.


----------

