Fixed preference yield of 19% pa, page-7

Well done RStuff for spotting this arbitrage opportunity.

The gap has since steadily closed and I had to compete with the buy-back broker to acquire a holding.

The only caveat that applies to your analysis is if they run of franking credits - which is possible noting that dividends yields are declining and a material proportion of the portfolio is cash or foreign shares.

Based on past history, the preference shares aren’t really given much preference in practice when life gets tough.

Back in the GFC, only 3 of the expected 8 dividend distributions were made during the first 2 years of the life of CAMPA, and it was true that at that time they legally couldn’t make the distributions without an accounting profit.  Just the same they didn’t fall over themselves honouring the commitments made in the original upbeat prospectus for the preference shares, particularly the comments in S.2.1 (that dividends would be topped up to the pre-tax equivalent if insufficient franking credits were available) and S.2.5 (which indicated that the Directors may pay shortfall dividends if they consider it appropriate and there are sufficient funds to do so).

The Directors of Clime Capital Ltd resolved in 2010 to pay a shortfall quarterly dividend of 0.25 cents per Converting Preference Share, and advised that it was ‘the intention of the Board to continue to pay a shortfall dividend for each quarter, limited to the dividends not paid in previous quarters, or 22.5 cents’.  I was disappointed with this half-hearted gesture given that it would take over 22 years of increased quarterly payments to reach the 22.5 cent’s worth of dishonoured dividends - whereas the preference shares convert in 2017.  As a result, I sold out of the CAMPA shares I had held at the time.

I’m hoping for a better result this time and am hoping if the franking credits do run dry, they don’t forget what they said in the prospectus about topping up to the pre-tax equivalent.