ACB Tracking Blog

Popular TV personality Kevin O’Leary (Dragon’s Den, The Lang and O’Leary Exchange) and head of O’Leary Funds, has been very successful at raising money in the Canadian closed-end fund market over the past 18 months. O’Leary currently has six closed-end fund issues outstanding (O’Leary Global Equity Income Fund, O’Leary Global Infrastructure Fund, O’Leary Canadian Equity Income Fund, O’Leary Canadian Income Opportunites Fund, O’Leary Founder’s Series Income & Growth Fund and O’Leary Global Income Opportunities Fund) and recently filed a preliminary prospectus for the O’Leary BRIC Fund. To date, O’Leary funds have rasied in excess of $600 million on their initial public offerings.  O’Leary eats his own cooking, as he claims to be the largest individual unitholder in each of his own funds.  Most O’Leary closed-end funds convert to open-end funds after a period of between one and two years from their new issue, thus keeping the discount to net asset value at which these funds trade on the TSX from becoming too large. 

Warrants provide holders with a leveraged play on the shares or units of the underlying company or trust. Currently there are over 50 Canadian closed-end funds with warrants outstanding.  In recent years, it became popular for closed-end funds on their initial public offerings (IPOs) to issue “a unit”, with a unit consisting of one trust unit plus either a full warrant or half of a warrant. Typically, each full warrant entitles the buyer to acquire one additional trust unit at a price modestly above the IPO price for a period of approximately one to three years from the closing of the IPO.  Adding warrants to the offering gave IPO investors “something for nothing”. While the warrants upon issue have no immediate intrinsic value, they have a time value.   Once the two pieces are separated, the investor then has the choice to either retain the warrants received, or sell them in the market. Any sale results in a capital gain or capital loss depending upon the proceeds received and the adjusted cost base of the warrants sold.

Another way investors may find themselves holding warrants on closed-end funds is the result of them being “dividended” out to existing unitholders. Over the past 18 months, several fund managers (Copernican, Mulvihill, Brompton and First Asset) have elected to give warrants to existing unitholders. Typically, these warrants have a much shorter life span (usually no longer than six months) and the strike price of the warrants is set at, or close to, the prevailing NAV at the time of issue.  Warrants are being used by managers as an alternative to completing a rights offering, although the downside to the manager is that there is no assurance that the warrants will be exercised, and certainly no warrants will be exercised if the market value of the units declines between the time the warrants are issued and their expiry.

For investors who have no intention of exercising warrants received, consideration should be given to disposing of them when acquired, as this is when their time value will be at their maximum. Investors willing to “speculate” that the warrants will appreciate may wish to hold, with the view that they cost nothing in the first place.

During 2009, 27 new closed-end funds completed IPOs, and several existing funds completed follow-on offerings, raising in excess of $4 billion.  This was almost a four fold increase from the $1.1 billion raised in 2008.  Another $1 million was raised through the exercise of rights or warrants by unitholders.

2009 saw the largest number of closed end funds either convert from closed-end funds to open-end funds, or merge with existing open-end funds, in the history of the Canadian closed-end fund marketplace. The largest of these was Sentry Select Diversified Income Fund, a widely-held fund managed by Sandy McIntyre of Sentry Select Capital. The following 18 funds converted to open-end status, and as a result, were delisted from the TSX:

Ø       Charterhouse Preferred Share Index Corporation

Ø       Clarington Diversified Income + Growth  Fund

Ø       First Asset/Blackrock North American Dividend Achievers Trust

Ø       First Asset Global Infrastructure Fund

Ø       First Asset Income & Growth Fund

Ø       Focused 40 Income Fund

Ø       Front Street Performance Fund II

Ø       Front Street Resource Performance Fund Ltd.

Ø       Income & Equity Participation Fund

Ø       MSP Maxxum Trust

Ø       Pro-Vest Growth & Income Fund

Ø       Select 50 S-1 Income Trust

Ø       Sentry Select China Fund

Ø       Sentry Select Diversified Income Fund

Ø       Sentry Select Focused Growth & Income Trust

Ø       Sentry Select Lazard Global Listed Infrastructure Fund

Ø       Sentry Select MBS Adjustable Rate Income Fund II

Ø       Strategic Energy Fund

In the summer of 2009, Claymore Gold Bullion Trust completed an initial public offering of over 43 million units at $10 per unit, in one of the largest closed-end fund offerings seen in some time.  Subsequently, outstanding warrants were exercised by holders, bringing the size of this fund to over $800 million. On February 16, 2010, Claymore announced that the fund was being converted to an exchange traded fund (TSX symbol CGL), thus the units should no longer trade at either a discount or a premium to their underlying value.  For investors seeking exposure to gold bullion, holding units of Claymore Gold Bullion Trust ETF is an excellent way to do it.    

Following the completion of the Conversion, Trilogy completed an internal reorganization (the "Internal Reorganization") resulting in an organizational structure comprised of Trilogy and Trilogy Resources Ltd. (formerly Trilogy Energy Ltd.), a wholly-owned subsidiary of Trilogy, being the only partners of Trilogy Energy (formerly Trilogy Energy LP). Trilogy Energy was continued from a limited partnership to a general partnership in conjunction with the Internal Reorganization and owns all of Trilogy's oil and gas properties and assets. 

It is expected that Trilogy's common shares will commence trading on the Toronto Stock Exchange under the symbol "TET" on or about Wednesday, February 10, 2010 at which time the Trust's trust units will be delisted from the Toronto Stock Exchange. In addition, in connection with the completion of the Conversion the Trust's distribution reinvestment plan was terminated.

Holders of various Citadel closed-end funds found themselves on a roller coaster ride last summer after Crown Hill Capital acquired the management contracts for Citadel Premium Income Fund, Citadel HYTES Fund, Citadel S-1 Income Fund, Equal Weight Plus Fund, Citadel Stable Income Fund, Energy Plus Income Trust, Sustainable Production Energy Trust and Citadel SMaRT Income Fund.  In July, Brompton Group made a bid to bring some of these funds under their umbrella.  After unitholder votes left the situation in a stalemate, the net result was a negotiated compromise between the two parties that saw Brompton acquire Citadel Diversified Investment Trust and Series S-1 Income Fund, which Brompton subsequently renamed Blue Ribbon Income Fund. This fund is managed by Bloom Investment Counsel.  Crown Hill merged Citadel Premium Income fund, Citadel HYTES Fund, Citadel S-1 Income Fund, Citadel Stable S-1 Income Fund and Equal Weight Plus Fund into the Crown Hill Fund, and renamed it Citadel Income Fund.  This fund is now managed by Jarislowsky, Frazer.  The merger of Citadel SMaRT Income Fund into the Citadel Income Fund was not approved by unitholders, and it continues to trade as a stand alone fund on the TSX, along with Energy Plus Income Fund and Sustainable Production Energy Trust which were never part of the merger proposals. 

Arc Energy  intends to use a portion of the net proceeds of this offering to repay bank indebtedness of $180 million that was incurred to fund the purchase of assets in the Ante Creek and other areas of Northern Alberta which was completed on December 21, 2009. The remainder will be initially used to partially repay other outstanding bank indebtedness, thereby freeing up borrowing capacity to fund a portion of the Trust's future capital program.

Late in 2009, Brookfield Investment Funds Management obtained unitholder approval to merge its three closed-end funds (Brascan SoundVest Focused Business Trust, Brascan SoundVest Total Return Fund and Brascan SoundVest Diversified Income Fund) into a single fund renamed the Brookfield Soundvest Equity Fund.  The merger became effective January 1, 2010.  As a single merged fund, the Brookfield Soundvest Equity Fund (lead manager, Kevin Charlesbois) will have lower operating costs and thus should achieve greater operating synergies to the benefit of unitholders.     

In July 2009, unitholders of Adjustable Rate MBS Trust (ADJ.UN) approved a merger with Claymore Global Monthly Advantaged Dividend ETF (CYH.A).  Holders who did not wish to participate in the merger were offered the choice of taking cash.  Those who opted for units of the ETF, received units with a larger market capitalization and thus greater liquidity, as well as a fund with a lower management expense ratio --  all positive for investors who elected to take units in the ETF.  As with ADJ.UN, distributions made by CYH.A are expected to consist primarily of capital gains and returns of capital, thus very tax efficient.  Claymore has introduced several new ETFs in recent years and, between the various classes of funds, now have over 60 offerings. 

• Unitholders will receive common shares of Algonquin Power Inc. in exchange for their trust units of the Fund, on a one-for-one basis, and the shares of Algonquin Power Inc. will be listed for trading on the Toronto Stock Exchange.
• Unitholders will continue to receive the same monthly dividend on their Algonquin Power Inc. common shares as they would have received as distributions on their units in the Fund (presently $0.24 per unit annually).
• Excluding Algonquin Power Inc. shares that may be issued under the CD Exchange Offer, the number of common shares of Algonquin Power Inc. outstanding immediately after completion of the transactions will be exactly the same as the number of Fund trust units outstanding immediately before the transactions.
• Unitholders will hold shares in a dividend paying company rather than units in a distribution paying trust; Canadian taxable shareholders would be expected to benefit by paying lower income taxes on dividends than taxes previously paid on distributions.
• The exchange of trust units for shares of Algonquin Power Inc. is expected to be a tax deferred rollover for unitholders of the Fund resident in Canada.
• Algonquin Power Inc. will have additional tax attributes of approximately $192 million in addition to the existing tax attributes of the Fund.

Morneau Sobeco Income Fund (TSX:MSI.UN) (the "Fund") has announced that it has completed its previously announced bought deal offering of units (the "Offering"). Pursuant to the Offering, the Fund issued 6,666,700 units of the Fund at a price of $8.25 per unit, for net proceeds, after payment of underwriting fees and expenses, of $51,500,000.

The Fund has elected to use the entire net proceeds from the Offering to prepay a portion of a $75 million vendor take-back note (the "Note") due July 2, 2009 related to the purchase by the Fund of Shepell-fgi in June 2008. The Fund has agreed to pay Clairvest Group Inc. (the holder of the Note) and other vendors of Shepell-fgi an additional $23,230,000 on June 30, 2009, which shall constitute full satisfaction of the Fund's obligation under the Note.

The net proceeds of the financing will be used to fund a portion of the Trust's recently announced acquisition of assets from affiliates of Talisman Energy Inc.

The first cash distribution in which these trust units will be entitled to participate will be for the month of March 2009, which will be paid on April 15, 2009.

Due to distribution cuts by various trusts, the following closed-end funds managed by the Citadel Group announced reductions to their indicated monthly distribution rates. 

• Citadel Diversified Investment Trust from $0.085 per month per unit to $0.055 per month per unit  
• Citadel HYTES Fund from $0.14 per month per unit to $0.09 per month per unit  
• Citadel SMaRT Fund from $0.28 per month per unit to $0.208 per month per unit  
• Citadel Premium Income Fund from $0.085 per month per unit to $0.045 per month per unit  
• Energy Plus Income Fund from $0.0833 per month per unit to $0.0425 per month per unit  
• Sustainable Production Energy Trust from $0.075 per month per unit to $0.03 per month per unit  
• Equal Weight Plus Fund from $0.07 per month per unit to $0.045 per month per unit

Many closed-end fund of funds reduced their payouts reflecting lower receipts from the underlying funds they hold.  See our blog of January 31, 2009 for further commentary.

Deans Knight Income Corporation issued 10,036,890 units at $10 per unit to raise over $100 million in the largest closed-end fund offering in Canada in 2009 to date.  

The manager will use the proceeds of the offering to buy corporate debt securities rated BBB or lower by S&P.  A poplular view these days is that debt spreads over benchmarks are unusually wide, particularly for below investment grade credits.  A narrowing of these spreads over the coming months would result in capital gains from positions held by this fund.  The units trade on the TSX under the symbol.  DNC.   

The Edmonton-based trust said Saturday it has suspended its monthly distribution, which the trust had cut in half last month to 4.17 cents a unit - equivalent to 50 cents a unit per year - as the recession deepened and auto industry sales continued to decline.

During 2008, Commercial & Industrial Securities Income Trust, a fund managed by Sentry Select Capital, merged with Sentry Select Canadian Income Fund, an open end fund.  During 2009, two listed closed-end funds have “open-ended”.  In January, unitholders of Strategic Energy Fund approved the conversion to an open-end fund by merging with Sentry Select Energy Income Fund.  Also in January, Charterhouse Preferred Share Index Corp. merged with Jov Leon Frazer Preferred Equity Fund, an open-end fund.  We expect more closed-end funds will convert to open-end funds over the next year or so.  This would include several that, under the terms of their initial public offerings, are designed to convert to open-end status. This would include:  Sentry Select China Fund and Sentry Select Lazard Global Listed Infrastructure Fund, both of which will convert to open end funds this spring. . 

Canadian Closed-end fund of fund managers are taking a hard look at the monthly distributions that they are paying out, particularly in light of the numerous distribution cuts that have been announced by many of the energy trusts over the past month or two.  If a closed-end fund pays out more than it takes in, its net asset value declines.  This is referred to as net asset value grind.  To better balance cash outflows with cash inflows, the managers of the following funds have announced monthly distribution reductions:

• ACTIVEnergy Income Fund
• Acuity Focused Total Return
• Acuity Growth & Income Trust
• Brascan SoundVest Diversified Income Fund
• Brascan SoundVest Focused Business Trust
• Brascan SoundVest Total Return Fund
• COMPASS Income Fund
• INDEXPLUS Income Fund
• MINT Income Fund
• Sentry Select Diversified Income Fund
• YIELDPLUS Income Fund

We believe that is this only the beginning – and expect to see more fund of funds cut monthly distribution rates during the first half of 2009.    

Yesterday, Canada's largest oil & gas trust, Penn West Energy Trust, announced that it was coming to market with a $250 million issue of trust units priced at $14.10 per unit. The net proceeds of the offering will be used to partially fund capital expenditures and to reduce debt. Earlier this month Penn West, in order to help reduce expenses, cut a number of senior management positions and slashed its 2009 capital budget. At approximately the same time, the trust reduced its monthly distribution from $0.34 to $0.23 per unit, and although it stated that this was only for two months, it will be subject to changes in commodity prices and production levels. Penn West almost doubled in size in the past year through the takeovers of Canetic Resources, Endev Energy Inc. and Vault Energy Trust.

Historically, closed-end funds with excess income or capital gains to distribute in a year, declare special distributions in the month of December.  In December 2007, over 40 funds declared specials, either as cash or “phantom” non-cash distributions, or a combination of both.  With equity markets down sharply, there were significantly less special distributions paid in 2008.  The following is the short list of closed-end funds that paid special year-end distributions in 2008:

Copernican British Banks Fund*

Copernican International Premium Dividend Fund*

diversiTrust Income Fund

diversiTrust Income + Fund

O’Leary Global Infrastructure Fund

SCITI Trust II

Signature Diversified Value Trust

Triax Diversified High-Yield Trust

*  Paid as "phantom" non-cash distributions

Closed-end funds submitted under annual retraction privileges that have valuation dates in December, but where the proceeds are not received until January, are considered disposed of in 2009.  Thus, they are a 2009 transaction for tax purposes.  The fact that the price to be paid is a date determined in 2008,is not relevant for income tax purposes. 

In August 2008, five Barclay’s-managed exchange traded funds split on a four-for-one basis, with two others splitting two-for-one.  Funds or trusts may elect to split their units when the unit price gets too high.  Stock splits make it easier for the smaller investor to buy a “board lot”, which is 100 shares, as the price of the units in the market adjusts for the split.  For example, if units were trading at $80 each before a four for one split, it would cost the investor $8,000 to buy a board lot, or 100 shares.  After the split, those units would trade in the market for $20 each reflecting the split, and it would only cost the investor $2,000 to buy 100 units. 

The Barclay’s funds that split four-for-one, which resulted in unitholders holding four units for each unit they previously held, were: iShares CDN S&P/TSX Capped Energy Index Fund, iShares CDN S&P/TSX Global Gold Index Fund, iShares CDN S&P/TSX Capped Composite Index Fund, iShares CDN S&P/TSX 60 Index Fund, and the iShares CDN S&P/TSX Completion Index Fund. 

Two other Barclay’s funds split two-for-one at the same time:   iShares CDN S&P/TSX Capped Financials Index Fund and the iShares CDN S&P/TSX Capped Materials Index Fund. 

Effective August 7, 2008, Diversified Income Trust II merged with Premier Value Income Trust.  Premier Value Income Trust is the surviving fund. Diversified Income Trust II holders received in exchange, 1.1864599 units of Premier Value Income Trust for each unit of Diversified Income Trust II previously held.

The preferred securities of BG Income + Growth Split Trust were left outstanding after the merger of the split share corporation with Brompton VIP Income Fund in the summer of 2008, and were automatically exchanged for preferred securities of Brompton VIP Income Fund on a one for one basis.  However, there was no “tax-deferred rollover” here -- holders will be considered to have disposed of their BG Income + Growth Split Trust preferred securities for proceeds equal to $10.00 per preferred security on the exchange.  These securities trade under the symbol VIP.Pr.A on the TSX, and are scheduled to terminate on May 31, 2009, at which time unitholders should expect to receive $10.00 per share.   

In July the Brompton Group completed the largest consolidation of closed-end funds in Canadian history.  Brompton Stable Income Fund, Brompton Equal Weight Income Fund, Business Trust Equal Weight Income Fund, BG Top 100 Equal Weighted Income Fund, Brompton Tracker Fund and BG Income + Growth Split Trust merged with Brompton VIP Income Fund.  Holders of each of these funds received units of Brompton VIP Income Fund based on their respective net asset values and the net asset value of Brompton VIP at the time of the merger.  Brompton VIP is actively managed by a team of managers at MFC Global Investment Management led by Alan Wicks. 

Effective July 4, 2008, Select 50 S-1 Trust II merged with Select 50 S-1 Trust.  Select 50 S-1 Trust is the surviving fund. Select 50 S-1 Trust II holders received in exchange, 1.01233435 units of Select 50 S-1 Trust for each unit of Select 50 S-1 Trust II previously held.

In June, UBS Global Allocation Trust merged with UBS Total Return Trust, with UBS Global Allocation Trust the surviving trust.  The mandates of these two funds were very similar, so the manager felt it made sense to merge them.  These were the only two funds managed by UBS listed on the TSX, and now there is only the one, trading under the symbol GAT.UN.   

Effective May 26, 2008, HTR Total Return Fund and Middlefield Equal Sector Fund merged with INDEXPLUS Income Fund, with holders of each fund receiving units of INDEXPLUS.  Both of the merging funds were small funds, with this latest merger just one of several that the manager, Middlefield Group, have completed over the past couple of years in order to provide better liquidity for unitholders.  Look for more down the road.