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Megawide [MWIDE 2.18, down 1.8%] [link] Series 6 Preferred Shares went on sale at the start of the week, for P100/share, with an annual dividend rate of 7.6283% for MWP6A, 7.9606% for MWP6B, and 8.2993% for MWP6C. MWIDE is looking to raise P6 billion through the sale, which is on now and will continue through April 4th. MWIDE representatives have said that the proceeds will be used to strengthen the company’s balance sheet and pursue real estate development. Assuming full take-up of the over-allotment, MWIDE expects to spend approximately 67.3% of the proceeds refinancing debt (redeeming Series 4 prefs), and 27.7% of the proceeds on “partial financing of pipeline projects”. It’s worth noting that the majority of the over-allotment is allocated to those pipeline projects. Assuming no take-up of the over-allotment, MWIDE plans to spend 84.3% of the proceeds on redeeming those Series 4 prefs.
MB bottom-line: I’ve seen a few posts in recent days talking about how selling preferred shares is some kind of infinite money glitch that companies are exploiting to steal money from the public. While that’s not true at all, I absolutely get how some might come to that conclusion through a misunderstanding of what preferred shares are, how shareholders get paid, and the recent high-profile failures of Phoenix [PNX suspended] and Cirtek [TECH 0.82 unch] to make payments on several tranches of prefs. As to what prefs are, it’s best to say what they’re not: they’re not bonds. Bonds are pure debt with no ownership interest, and defaults on bonds (that’s what it’s called when a company fails to make a payment) are treated with an existential level of severity. Preferred shares, on the other hand, are best thought of as an equity interest with “debt-like” features. The key distinction is that payments made to preferred shares are actually just dividends that must be approved and distributed by the board of directors. Bond payments are interest payments made to service debt. Preferred share payments are dividends, and it’s legally possible for the board to simply decide not to declare and distribute them. That’s why the pricing of the preferred share is important. Do you think PNX or TECH would have an easy time selling prefs with just a boring/average dividend rate? Not anymore. Once bitten, the market learns (or should learn). The higher rates are meant to compensate holders for the risks associated with the dividend streams. I’m not saying that MWIDE prefs are for everybody, but I am saying that MWIDE should not be thrown together with some of the exchange’s sketchier firms when it comes to categorizing the risk of its preferred shares.
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