20SEP Semi-Annual Report. to Shareholders

Transcription

1 C O R P. I I 20SEP Semi-Annual Report to Shareholders August 31, 2018

2 Notice: The unaudited interim condensed financial statements of the Company have been prepared by and are the responsibility of the Company s management. The Company s independent auditor has not reviewed these financial statements.

3 C O 20SEP R P. I I REPORT TO SHAREHOLDERS The following presents the financial results of Allbanc Split Corp. II (the Company ) for the six months ended August 31, Financial Performance As at August 31, 2018, the net assets attributable to holders of Capital Shares were $28.96 per Capital Share as compared to $27.49 per Capital Share at February 28, 2018, representing a 5.3% increase over the six month period due to appreciation in the fair value of the common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (the Portfolio Shares ). The total fair value of the Company s Portfolio Shares at August 31, 2018 was $45.4 million (February 28, 2018 $43.8 million), reflecting unrealized appreciation of $21.6 million (February 28, 2018 $20.0 million). For the six months ended August 31, 2018, dividends and interest income less total operating expenses ( Net Investment Income ) was $0.6 million or $1.17 per Unit (2017 $0.6 million or $1.08 per Unit), with a Unit consisting of two Capital Shares and one Preferred Share. The increase of $0.09 per Unit, or 8.3%, is a result of increased dividend income of $0.12 per Unit offset by increased expenses of $0.03 per Unit mainly due to fixed operating expenses spread over fewer Units as a result of the February 28, 2018 annual retraction. The Company s Capital Share distribution policy is to pay holders of Capital Shares leveraged quarterly dividends in an amount equal to the Net Investment Income minus the fixed quarterly distribution payable on the Preferred Shares provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the original issue price of the Preferred Shares. Accordingly, during the six months ended August 31, 2018, the Company paid dividends of $0.30 million or $0.28 per Capital Share (2017 $0.27 million or $0.23 per Capital Share). Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $ ($ per annum) per Preferred Share, representing a yield of 4.75% per annum on their $25.67 offering price. During the six months ended August 31, 2018, the Company paid dividends of $0.33 million or $ per Preferred Share (2017 $0.36 million or $ per Preferred Share). This report, along with the accompanying financial statements of the Company, is respectfully submitted to you on behalf of the Board of Directors of Allbanc Split Corp. II. Toronto, Canada October 4, NOV Brian D. McChesney President and Chief Executive Officer 1

4 C O20SEP R P. I I INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION As at (unaudited) August 31, February 28, Assets Current assets Investments, at fair value $ 45,374,929 $ 43,788,905 Cash (note 5) 42,274 44,125 45,417,203 43,833,030 Liabilities Current liabilities Accrued liabilities 10,000 16,305 Class J and Class S shares (note 4) Preferred Shares (note 4) 13,945,715 13,945,715 13,955,965 13,962,270 Net assets attributable to holders of Capital Shares $ 31,461,238 $ 29,870,760 Redeemable shares outstanding (note 4) Capital Shares 1,086,538 1,086,538 Preferred Shares 543, ,269 Net assets attributable to holders of Capital Shares per Capital Share $ $ Redemption value per Preferred Share $ $ See accompanying notes to the interim condensed financial statements. On behalf of the Board: 18NOV Brian D. McChesney President and Chief Executive Officer 20APR D. Anthony Ross Chairman of the Board 2

5 C O 20SEP R P. I I INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the six months ended August 31 (unaudited) Income Investments Dividends $ 859,034 $ 858,771 Unrealized appreciation (depreciation) of investments 1,586,024 (2,034,160) Net gain (loss) on investments 2,445,058 (1,175,389) Interest 170 Total income (loss), net 2,445,058 (1,175,219) Expenses Administrative fees (note 5) 124, ,745 Directors fees 23,250 28,617 Insurance premiums 15,880 11,448 Audit fees 11,500 12,055 Filing fees 10,000 10,565 Transfer agent fees 7,545 4,357 Printing and mailing charges 7,500 7,500 Listing fees 6,650 5,963 Independent Review Committee fees 3,750 3,750 Legal fees 2,500 2,184 Custodian fees Other 11,897 11,772 Total operating expenses 225, ,654 Cost recovery (6,263) Distributions on Preferred Shares 331, ,187 Total expenses 550, ,841 Increase (decrease) in net assets attributable to holders of Capital Shares $ 1,894,709 $ (1,761,060) Increase (decrease) in net assets attributable to holders of Capital Shares per Capital Share $ 1.74 $ (1.50) See accompanying notes to the interim condensed financial statements. 3

6 C O20SEP R P. I I INTERIM CONDENSED STATEMENTS OF CASH FLOWS For the six months ended August 31 (unaudited) Operating activities Increase (decrease) in net assets attributable to holders of Capital Shares $ 1,894,709 $ (1,761,060) Adjustments for: Unrealized (appreciation) depreciation of investments (1,586,024) 2,034,160 Accrued liabilities (6,305) (76) Net cash flow provided by operating activities 302, ,024 Financing activities Dividends paid on Capital Shares (304,231) (269,531) Net cash flow used in financing activities (304,231) (269,531) Net (decrease) increase in cash (1,851) 3,493 Cash, beginning of period 44,125 43,942 Cash, end of period $ 42,274 $ 47,435 Supplemental cash flow information* Dividends received $ 859,034 $ 858,771 Interest received $ $ 170 * Classified as operating activities. See accompanying notes to the interim condensed financial statements. 4

7 C O 20SEP R P. I I INTERIM CONDENSED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF CAPITAL SHARES For the six months ended August 31 (unaudited) Net assets attributable to holders of Capital Shares, beginning of period $ 29,870,760 $ 30,571,840 Increase (decrease) in net assets attributable to holders of Capital Shares 1,894,709 (1,761,060) Capital Share transactions Dividends paid on Capital Shares (304,231) (269,531) Net assets attributable to holders of Capital Shares, end of period $ 31,461,238 $ 28,541,249 See accompanying notes to the interim condensed financial statements. 5

8 C O20SEP R P. I I SCHEDULE OF INVESTMENTS As at (unaudited) Number of % of Portfolio Common Shares Company Adjusted Cost Base Fair Value at Fair Value August 31, February 28, August 31, February 28, August 31, February 28, August 31, February 28, ,109 66,109 Bank of Montreal $ 4,484,962 $ 4,484,962 $ 7,071,680 $ 6,441, ,276 56,276 Canadian Imperial Bank of Commerce 4,488,510 4,488,510 6,882,555 6,595, ,926 37,926 National Bank of Canada 1,184,215 1,184,215 2,476,946 2,361, ,225 99,225 Royal Bank of Canada 4,557,545 4,557,545 10,285,664 10,030, ,406 95,406 The Bank of Nova Scotia 4,495,398 4,495,398 7,206,015 7,584, , ,608 The Toronto-Dominion Bank 4,586,044 4,586,044 11,452,069 10,774, $23,796,674 $23,796,674 $45,374,929 $43,788, See accompanying notes to the interim condensed financial statements. 6

9 C O 20SEP R P. I I NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS August 31, 2018 (unaudited) 1. GENERAL INFORMATION Allbanc Split Corp. II (the Company ) is a mutual fund corporation incorporated under the laws of Ontario on December 7, The address of the Company s registered office is 40 King Street West, Toronto, Ontario M5W 2X6. Scotia Managed Companies Administration Inc. ( SMCAI or the Administrator ), a wholly-owned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, provides all administrative services for the Company. The Capital Shares and Class B Preferred Shares, Series 2 are scheduled to be redeemed by the Company on or about February 28, 2021 (the Redemption Date ). The Company holds a portfolio (the Portfolio Shares ) of common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, The Bank of Nova Scotia, Royal Bank of Canada and The Toronto-Dominion Bank in order to generate income for the holders of the Company s preferred shares (the Preferred Shares ) and to enable the holders of the Company s capital shares (the Capital Shares ) to participate in any capital appreciation in the Portfolio Shares and to benefit from any increase in the dividends payable on the Portfolio Shares. The policy of the Company is to invest in Portfolio Shares and not engage in trading except in limited circumstances, including to fund retractions or redemptions of Capital Shares and Preferred Shares. The Company will sell or purchase Portfolio Shares on a pro rata basis based on the weightings of Portfolio Shares at the time of the purchase or sale. The Company s Capital Share distribution policy is to pay holders of Capital Shares quarterly dividends in an amount equal to the dividends received by the Company on the Portfolio Shares minus the fixed quarterly dividend distributions payable on the Preferred Shares and all administrative and operating expenses provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the $25.67 original issue price of the Preferred Shares. These financial statements were authorized for issuance by the Board of Directors of the Company (the Board ) on October 4, BASIS OF PRESENTATION Statement of Compliance These interim condensed financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ), including IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board ( IASB ). Accordingly, certain information and footnote disclosure included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. The Company adopted IFRS 9, Financial Instruments on March 1, 2018 and accordingly, certain accounting policies have changed in preparing these financial statements from those used for the February 28, 2018 audited financial 7

10 C O20SEP R P. I I statements of the Company. There has been no impact to the financial statements on adoption of IFRS 9. The additional disclosures required by IFRS 9 are outlined in Note SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim condensed financial statements have been prepared using the same accounting policies as the annual financial statements for the year ended February 28, 2018 with the exception of accounting policies as set out below. The disclosure in these interim condensed financial statements does not include all requirements of IAS I, Presentation of Financial Statements. Accordingly, the interim condensed financial statements should be read in conjunction with the audited financial statements for the year ended February 28, Financial assets and liabilities The Company has applied the resulting changes in accounting policies for financial instruments retrospectively; however in accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. (i) Recognition The Company initially recognizes deposits, receivables and liabilities on the date that they were originated. All other financial assets and liabilities are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. All financial assets and liabilities are initially measured at fair value, plus or minus transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability, if not measured at fair value through profit or loss. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in a transferred financial asset that is created or retained by the Company is recognized as a separate asset or liability. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount is presented in the statements of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. ii) Classification and fair value measurement IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income ( FVOCI ) and fair value through profit or loss ( FVTPL ). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial 8

11 C O 20SEP R P. I I asset is managed and its contractual cash flow characteristics. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. The adoption of IFRS 9 has not had a significant effect on the Company s accounting policies for financial assets and financial liabilities see Note 9. Financial assets A financial asset is classified as subsequently measured at amortized cost if it meets the following criteria: hold-to-collect business model test the asset is held within a business model whose objective is to hold the financial asset in order to collect contractual cash flows; and SPPI contractual cash flow characteristics test the contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest ( SPPI ) on the principal outstanding on a specified date. The Company s business model is to manage its investment in the Portfolio Shares on a fair value basis and accordingly, is measured at FVTPL. All other financial assets are held to collect contractual cash flows and the cash flows pass the SPPI test and accordingly, are measured at amortized cost. Financial liabilities The Company classifies all financial liabilities, not otherwise held for trading, as subsequently measured at amortized cost. iii) Impairment IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss (ECL) model. The new impairment model applies to financial assets measured at amortized cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognized earlier than under IAS 39. There have been no allowances made to financial assets for credit losses on transition to IFRS 9 because the Company determined that the expected credit losses on its financial assets were nominal. 4. REDEEMABLE SHARES The Company is authorized to issue an unlimited number of Preferred Shares, Capital Shares, Class J shares and Class S shares. An unlimited number of Class B, C, D and E capital shares and Class C, D and E preferred shares are also issuable in series. 9

12 C O20SEP R P. I I A summary of the Company s issued and outstanding shares is as follows: Series 2 Preferred Capital Class J Class S Shares outstanding on February 28, 2017 and August 31, ,936 1,171, Retractions on February 28, 2018 (42,667) (85,334) Shares outstanding on February 28, 2018 and August 31, ,269 1,086, The weighted average number of Preferred Shares and Capital Shares outstanding for the six months ended August 31, 2018 was 543,269 and 1,086,538, respectively (February 28, ,412 Preferred Shares and 1,168,824 Capital Shares). A Unit represents two Capital Shares and one Preferred Share. The Company will ensure that two Capital Shares continue to be oustanding for every Preferred Share. The Preferred Shares rank prior to the Capital Shares, the Class J shares and the Class S shares with respect to the payment of dividends, distributions upon a redemption, retraction or return of capital and distributions upon a dissolution, liquidation or winding-up of the Company. The market value of the Capital Shares on August 31, 2018 was $28.01 (February 28, 2018 $25.50) per share. The market value of the Preferred Shares on August 31, 2018 was $26.15 (February 28, 2018 $25.75) per share. 5. RELATED PARTY INFORMATION For its services to the Company, which includes the provision of key management personnel, SMCAI is entitled to receive an administrative fee equal to 0.50% per annum of the fair value of the Portfolio Shares. For the six month period ended August 31, 2018, the total administrative fees paid to SMCAI were $124,013 (2017 $129,745). For the six month period ended August 31, 2018, administrative and operating expenses (excluding transaction costs) of $225,435 (2017 $228,654) were paid and satisfied by way of dividends on the Company s Class S shares. At August 31, 2018, the Company had cash on deposit with SCI and The Bank of Nova Scotia of $2,241 (February 28, 2018 $2,317). At August 31, 2018, the Company held investments in The Bank of Nova Scotia common shares with an aggregate fair value of $7,206,015 (February 28, 2018 $7,584,777). AllBanc Split Holdings II Corp. owns all of the issued and outstanding Class J shares of the Company. Three independent directors of the Company each own % of the common shares of AllBanc Split Holdings II Corp. SMCAI owns all of the issued and outstanding Class S shares of the Company. 10

13 C O 20SEP R P. I I 6. CAPITAL MANAGEMENT The Company s capital is represented by net assets attributable to holders of Capital Shares and Preferred Shares. The Administrator, with oversight from the Board, is responsible for managing the Company s Portfolio Shares in line with its mandate and the business affairs of the Company, including receipt of income and the payment of distributions to shareholders. The Company s Capital Share distribution policy is to pay holders of Capital Shares quarterly dividends in an amount equal to the dividends received by the Company on the Portfolio Shares minus the fixed preferential distributions payable on the Preferred Shares and all administrative and operating expenses provided the net asset value per Unit at the time of declaration, after giving effect to the Capital Share dividend, would be greater than the original issue price of the Preferred Shares. Any excess cash will be reinvested in short term money market instruments. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at August 31, 2018 and February 28, 2018 as follows: Level 1 Level 2 Level 3 Total As at August 31, 2018 Investments $ 45,374,929 $ $ $ 45,374,929 As at February 28, 2018 Investments $ 43,788,905 $ $ $ 43,788,905 All fair value measurements are recurring. The carrying amounts of cash and accrued liabilities approximate their fair value because of the short term nature of these items. Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. Instruments are classified as Level 2 when the related security or derivative has inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. The Company s policy is to recognize transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstance giving rise to the transfer. There were no transfers between levels during the current period and prior year presented. 8. FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Company is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. As it is the Company s mandate to be fully invested in a fixed portfolio and pay distributions from cash flows to the maximum extent possible, the Company s overall risk management program focuses on compliance and execution of the Company s investment objectives. 11

14 C O20SEP R P. I I Price Risk The value of the Capital Shares is dependent on the value of the Portfolio Shares. The value of the Portfolio Shares will be influenced by factors outside of the Company s control, including the financial performance, operational risks relating to specific business activities, quality of assets owned by respective issuers, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and other financial market conditions. If the prices of the Portfolio Shares as at August 31, 2018 increased or decreased by 5%, all other variables held constant, the net assets attributable to holders of Capital Shares would have increased or decreased, respectively, by $2.09 (February 28, 2018 $2.02) per Capital Share or 7.2% (February 28, %) of which $0.64 (February 28, 2018 $0.64) per Capital Share or 2.2% (February 28, %) is the result of leverage to which holders of Capital Shares are exposed. In practice, the actual trading results may differ materially from this sensitivity analysis. The value of the Preferred Shares is dependent on the prevailing level of market interest rates and on the level of downside protection on the Preferred Shares which is a function of the price of the Portfolio Shares. Downside protection is the percentage by which the net assets can decline and still cover the $25.67 redemption price of a Preferred Share. Downside protection on the Preferred Shares was 69.3% as at August 31, 2018 (February 28, %). Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates, resulting in fluctuations in the value of interest-bearing financial instruments. The majority of the Company s assets are non-interest bearing. However the Company is indirectly exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its Portfolio Shares, all of which are banks where interest rate fluctuations can impact their profits and therefore (among other factors) the ability to pay dividends. Any excess cash is invested in short-term money market instruments. Currency Risk The assets and liabilities are predominately held in the functional currency of the Company, which is the Canadian dollar. The Company is not exposed to significant foreign currency risks except to the extent that the business activities of the Portfolio Shares are subject to foreign currency fluctuations. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company maintains all its cash and cash equivalents at its custodian or in bankers acceptances or term deposits with financial institutions with a minimum debt rating of A. All transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when the Company has received payment. Payment is made on purchases once the securities have been received by the Company. Should either party not meet its obligation, the trade will fail. 12

15 C O 20SEP R P. I I Liquidity Risk The Company is exposed to annual retractions and receives notification at least 5 business days prior to the Valuation Date. The Portfolio Shares are traded in an active market and can normally be readily disposed of. There can be no assurance that an adequate market for the Portfolio Shares will exist at all times, or that the prices at which the Portfolio Shares trade, accurately reflect their net asset values. Low trading volumes for a security could make it difficult to liquidate holdings quickly. The Company s redeemable Capital Shares and Preferred Shares represent a financial liability. The Capital Shares become payable when retracted by shareholders in accordance with the retraction rights described in the prospectus dated February 17, 2016 and ultimately on the Redemption Date. The Preferred Shares are redeemable on demand. As at August 31, 2018, the maturity of the Company s financial liabilities other than its redeemable shares, based on the remaining period between the financial statement date and the contractual maturity date was $0.01 million due in up to 6 months and $0.01 million due greater than 1 year (February 28, 2018 $0.01 million due in up to 6 months and $0.01 million due greater than 1 year). 9. TRANSITION TO IFRS 9 FINANCIAL INSTRUMENTS The following table shows the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company s financial assets and financial liabilities as at March 1, Measurement Category Carrying Amount March 1, 2018 IAS 39 IFRS 9 IAS 39 IFRS 9 Difference Financial Assets Investments Fair Value Fair Value $ 43,788,905 $ 43,788,905 Cash Amortized cost Amortized cost 44,125 44,125 Financial Liabilities Accrued liabilities Amortized cost Amortized cost 16,305 16,305 13

16 C O 20SEP R P. I I NOTES

17 C O20SEP R P. I I CORPORATE INFORMATION Principal Office Registrar & Transfer Agent Scotia Plaza, 35th Floor Computershare Investor Services Inc. 40 King Street West 100 University Avenue Station A, P.O. Box 4085 Toronto, Ontario Toronto, Ontario M5J 2Y1 M5W 2X6 Telephone: (416) Legal Counsel Facsimile: (416) Osler, Hoskin & Harcourt LLP mc.allbanc2@scotiabank.com Toronto, Ontario Web site: Directors and Officers David McD. Mann * Director and Chairman of the Audit Committee Brian D. McChesney Director, President and Chief Executive Officer D. Anthony Ross * Director and Chairman of the Board Stephen D. Pearce, CPA, CA Director, Chief Financial Officer and Secretary Auditor PricewaterhouseCoopers LLP Toronto, Ontario Stock Exchange Listing The Toronto Stock Exchange Symbols Capital Shares ALB Preferred Shares ALB.PR.C Kenneth G. Copland * Director Robert Hall Director * Audit Committee Member Independent Review Committee Kenneth G. Copland (Chairman) David McD. Mann D. Anthony Ross

18 ALLBANC SPLIT CORP. II 40 KING STREET WEST, SCOTIA PLAZA, 35TH FLOOR TORONTO, ONTARIO M5W 2X6