In my last post, I laid out why I think the market price for ENS (and many common share components of Splits) have shifted from a Premium to a Discount.
What I didn't address is: What will happen to the ENS Premium/Discount going forward?
My best guess is that we can count on the greed of the fund managers (Middlefield for ENS) going forward.
If interest rates keep dropping, will Middlefield (and other Split fund managers) drop the payout to the Prefs? If I had to guess, I would say YES.
If the payouts to the Prefs get reduced, I expect we will see an immediate reversal towards Commons trading at a Premium to their NAV's because the drop in payouts to the Pref holders reduces the depletion to the NAV of the Common shares.
The movement to a lower payout on the Prefs will be a risky move for the first one or two Split funds, but as soon as it happens, I expect the other Splits will follow suit in a similar fashion to the way that they all increased the payouts to the Pref holders as soon as one fund manager took the lead.
Since the E Split is a comparably safe Split in terms of preservation of its NAV, I expect that Middlefield might lead the charge to lower payouts to the Pref holders.
There is a big incentive for the fund managers to flip the script on the Premium/Discount story. It is important to realize that the fund managers (Middlefield in our case) make their Real money when they do a Raise. A Raise obviously increases the pool of capital that they manage for fees, but unless I'm reading the statements wrong, there is more to it.
When I dug into the summary of Raises in 2023, the cost of each Raise always seemed much higher than the sum of the identifiable parts. I looked at the components including commissions paid to investment dealers and legal fees etc and the math didn't add up. The guys that write the public reports are very CLEVER at disguising things that the fund managers don't want disclosed.
I believe that the fund managers make extraordinary fees on each Raise. As such, it shouldn't be a surprise that the share price of the Common shares take such a large hit with every Raise. I can't get anyone to confirm my suspicion of course, but it is my best guess of how the fees end up being so high.
All one has to do is look at the managment fees in the semi-annual and annual reports to see the disconnect. Middlefield advertises that their MER is only 0.75%. However, the reports show that the fees are actually about 1.75%, How does it get so high you ask. My best guess is that Middlefield earns substantial Advisory fees from each Raise.
What does all of the gibberish above mean?
I believe there is a powerful incentive in the form of huge fees for fund managers to do Raises. In order for that to happen, Discounts need to be flipped back to Premiums. The only realistic pathway to that happening that I can see is for the fund managers to lower the payouts to the Prefs which will be somewhat palatable as it can be justified by the lower interest rate scenario.
If I'm correct, Split Pref holders should start paying attention and be thinking about an exit strategy. Keep in mind that the Pref portion of Units are designed to trade at Par ($10.00 for the ENS.PR.A) and the current 7% premium represents an entire year of return. If I have figured it out, you can be sure that Middlefield and other funds have figured it out.