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Novation Companies, Inc. Message Board

  • keekefretter keekefretter Apr 18, 2004 11:35 PM Flag

    NFI-C question for Mr. Hill

    Dear Mr. Hill

    I purchased NFI-C and an investor friend asked me why NFI would issue such an instrument instead of additional common shares to raise money.

    I also told my friend that even if NFI's earnings were to be 95% lower, NFI would still have enough earnings to pay the preferred stockholders first.

    I hope I didn't lie to him, and I would like you to let me know if I am way off. I am not a financial wizzard, I am just looking for some income w/o losing my sleep.

    Thank you so much,

    Kiki

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    • Check the terms of the preferred -- it's perpetual and callable, and the dividend *can* be suspended at the choice of the Board of Directors. All that allows the underlying note to be a deductible debt instrument for corporate purposes and equity for balance sheet purposes... It was really made popular as a vehicle by small banks (good for regulatory capital), insurance companies and utilities, but has also been embraced by REITs.. Note the special tax circumstances and heavy regulation on each of these types of companies.

      Anyway, since they made 58.9% return on equity last year, I love it as a common shareholder anytime they can get new equity by promising to eventually pay 8% to 9%...and not dilute my holdings a bit. Note that if they defer the preferred coupon for too long, the preferred holders get to put people on the Board, and no common dividend can be paid until the prefered is brought current. I think some of the other REITs out there are up series J or K by now... (Istar Financial comes to mind).

 
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