Split Share Corporation - Volatility and Risk Considerations

Volatility and Risk Considerations

The capital shares bear greater risk than the preferred shares in the event that the value of the underlying basket of conventional shares falls in value. Dividend payments to the holders of capital shares may be reduced or even suspended entirely before reductions can be considered in the dividends paid to the holders of the preferred shares. The value of the capital shares on the secondary markets may fluctuate considerably and may be reduced to zero. Over the longer term, the risk to the holders of capital shares should be moderated by the usually high quality of the underlying dividend-paying shares, typically blue-chip, in the basket.

The preferred and capital shares of a split share corporation are independently tradeable securities, and hence their value is subject to market forces. If the volume of traded shares is relatively small, then the price of split share corporations can be volatile as with any other thinly traded security. Close to the expiration date, however, the value of the preferred shares will tend to converge on the initial issue price if the split share corporation is judged by the market to have sufficient equity to fully pay back the preferred shareholders.

Some split share corporations provide an exchange mechanism, in which units of the split share corporation can be converted into shares of the underlying basket of shares, and vice versa. This mechanism would allow arbitrage trading to keep the aggregate value of the units close to the value of the underlying basket of shares, hence reducing the tracking error between the market value of the underlying shares and the risk-adjusted present value of the preferred and capital shares.