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Alterna Savings looking to raise $50 million in 4% preferred share issuance
May 13, 2019
4:18 pm
Doug
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In browsing some Ontario credit union websites, I noticed that Alterna Savings and Credit Union, parent of Alterna Bank, has posted on its website its intention to issue $50 million in preferred shares with a Board of Directors-intended annual dividend yield of 4.00% for the period from 2019-2024 (inclusive).

As is customary, dividends are non-cumulative, which just means that if, for whatever reason, the Board of Directors does not declare an annual dividend in a given year, the credit union does not owe you a "missed" dividend payment.

While the Board of Directors has every intention of declaring an investment share dividend on this and its previous preferred share series issues, there is not a definitive guarantee that they will. However, in all likelihood, this chance is low as they would likely also then not declare dividends on other investment share issues. Moreover, the gross cost of paying those dividends each year, assuming they raise their intended $50 million (and it seems likely they will as they raised their goal of $75 million in the previous issuance), would be only $2 million.

They don't specify their intended use of the share issuance proceeds, but, presumably, it could be a combination of buffering regulatory capital, accelerating planned technology investments, building new branches (less likely; they're not as aggressive as Meridian in that regard), and repurchasing investment share issuances from other members in whole or in part (i.e., members' requests to redeem).

It should also be noted this is only an advance notice as their offering statement is waiting for approval from the Superintendent of the Financial Services Commission of Ontario ("FSCO"), which will later be amalgamated with DICO and renamed the Financial Services Regulatory Authority of Ontario, that the offering is limited is limited to Ontario residents only (too bad! I'd buy some! 🙁 ), and that the investment shares are not DICO insured. Still, as the 2nd largest credit union in Ontario and the 10th largest in Canada (excluding Desjardins), Alterna Savings is well capitalized and managed. Minimum purchase of 1,000 shares at $1.00 each; maximum purchase of 100,000 shares at $1.00 each. May be held in RRSPs, TFSAs, or non-registered accounts. Redeemable at par value (i.e., price paid to purchase) upon approval of the Board of Directors, on request, generally on or after the initial 5 year period.

Cheers,
Doug

May 13, 2019
4:45 pm
Briguy
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Very interesting-it's targeting a 4% per year dividend rate IF it declares a dividend that year, and it's not CDIC guaranteed. I wonder if it's worth getting that extra 0.85% interest for that slight added risk. In addition, you have to be a member to purchase shares, so having an Alterna Bank account would not qualify you.

May 13, 2019
4:51 pm
Doug
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Briguy said
Very interesting-it's targeting a 4% per year dividend rate IF it declares a dividend that year, and it's not CDIC guaranteed. I wonder if it's worth getting that extra 0.85% interest for that slight added risk. In addition, you have to be a member to purchase shares, so having an Alterna Bank account would not qualify you.  

Thanks for the reply, Briguy. You live in Ontario, so you're definitely eligible. You would need to at least hold the minimum membership shares ($5.00) in Alterna Savings and Credit Union, not Alterna Bank, but you can open an Alterna Savings membership entirely online, I believe. I think it's very likely the Board will pay that indicated annual dividend rate for the initial period. Liquidity can sometimes be an issue with credit union investment shares in that the Board has to approve redemptions but, generally speaking, so long as you can hold the shares for the initial five year period, they will do their best to let you redeem your shares (at par value, meaning the price you paid) by either (a) having another member buy your shares or (b) redeeming your shares with a portion of the proceeds of a future investment share issuance.

In terms of past investment share issuances, the Board has declared all dividends at the indicated rate, if that's helpful. As well, I've been a Sunova Credit Union member through Hubert Financial since 2011 and have been paid dividends in the form of surplus shares in every year 2012-2018 (2019's is due any day now) at a rate of between 4.25-6%.

In many ways, it's more like a corporate bond than a publicly-traded Canadian bank's preferred shares in that, since there's no secondary market, the shares don't have equity market volatility and level of risk. Sure, they're not guaranteed, but if you would be comfortable owning, say, shares in a mid-tier Canadian bank (i.e., Canadian Western Bank, Laurentian Bank, Equitable Group, or even HSBC Bank Canada's preferred shares), then I think this is a good option. The key is just make sure you won't need to access the funds before the initial period.

Cheers,
Doug

May 13, 2019
5:18 pm
Briguy
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Interesting times- another possibility is with the Chinese-USA trade war escalating bringing a buying opportunity in the stock mart- eg. XBAL ETF that I mentioned previously has dropped from 22.92 to 22.50 per share in the last 5 days.

May 13, 2019
6:15 pm
Bill
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If these are like the previous series seems to me these are really like bonds, the "dividends" are taxed as interest, i.e. no preferential tax treatment like usual share dividends.

May 13, 2019
6:22 pm
Doug
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Bill said
If these are like the previous series seems to me these are really like bonds, the "dividends" are taxed as interest, i.e. no preferential tax treatment like usual share dividends.  

Yeah, I'm not sure what what provision in the Income Tax Act (Norman1 no doubt knows and likely has mentioned it elsewhere on these forums) it is that makes it so credit union share dividends aren't treated as either "eligible dividends" or "other than eligible dividends" and instead taxed as "interest income". So, yeah, that is another good point that makes these more like bonds than equity. In a way, they're like bonds on the equity side of the balance sheet. 🙂

Do you live in Ontario, Bill, and would thus be eligible (if an Alterna Savings member)?

Cheers,
Doug

May 13, 2019
6:39 pm
Bill
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I do live in Ontario, Doug, and while I do business with Alterna Bank I don't normally support credit unions so won't be participating in this offering.

May 13, 2019
7:09 pm
Doug
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Bill said
I do live in Ontario, Doug, and while I do business with Alterna Bank I don't normally support credit unions so won't be participating in this offering.  

Ah, that makes sense. And, by being a customer of Alterna Bank, you're technically not a credit union member since it is not a credit union. 😉

Cheers,
Doug

May 13, 2019
9:15 pm
Norman1
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Doug said

Yeah, I'm not sure what what provision in the Income Tax Act (Norman1 no doubt knows and likely has mentioned it elsewhere on these forums) it is that makes it so credit union share dividends aren't treated as either "eligible dividends" or "other than eligible dividends" and instead taxed as "interest income". …

In earlier post, we looked into that situtation.

Essentially, credit unions don't pay regular corporate income tax, like their bank and trust company competitors do. Government is not willing to further subsidize credit unions by letting their members claim a dividend tax credit on "dividends" from their credit union.

May 13, 2019
10:04 pm
Loonie
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We used to have a business membership at Alterna CU. They were friendly enough but the fees and rates were unimpressive. I would not re-join for the purpose of buying these shares. I wish I liked them better as there is a physical branch that is convenient.

However, I doubt I would buy the shares of any CU. I might if I were younger, but for someone in their 70s or older, I don't think it makes a lot of sense to tie up your money in something where you can't be sure you'll get it out at any particular point in time. If there should be a financial crisis either in the CU or more generally, they might hang on to it for quite a while. This makes it unsuitable for RIFs (if even allowed).
From my perspective at least, the reward is not high enough to justify this inconvenience.

Some, however, may like it as an income stream similar to stock market dividends, but without the same kind of market risk.

The best application might be for TFSA, for people who don't intend to use theirs until they're running low on other assets, down the road. There is no dividend tax credit to be lost within TFSA, and no mandatory withdrawals as with RIFs which might be difficult to access (if allowed at all - I don't know). However, such a person may have other things they'd rather do with their TFSA money.

Unlike Bill, I would like to support CUs, and I understand that this is the way they must raise funds, but they seem to do well raising them from other people so my contribution is not crucial.

May 14, 2019
7:01 am
Doug
West Kelowna
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Loonie said
We used to have a business membership at Alterna CU. They were friendly enough but the fees and rates were unimpressive. I would not re-join for the purpose of buying these shares. I wish I liked them better as there is a physical branch that is convenient.

Oh, I didn't realize you'd had your prior business with Alterna Savings. I wonder if their fee structure for business accounts has improved significantly? I do note, though, that they have a no fee seniors' chequing account. If nothing else, would you ever use potentially as a TDCT replacement for your main day-to-day banking chequing account, or is TDCT's branch still equally convenient to Alterna Savings?

However, I doubt I would buy the shares of any CU. I might if I were younger, but for someone in their 70s or older, I don't think it makes a lot of sense to tie up your money in something where you can't be sure you'll get it out at any particular point in time. If there should be a financial crisis either in the CU or more generally, they might hang on to it for quite a while. This makes it unsuitable for RIFs (if even allowed).

From my perspective at least, the reward is not high enough to justify this inconvenience.

I assume CU shares are permitted in a RIF, but your points are well taken and, at any rate, Alterna Savings seems to only offer them in non-registered, RSP, and TFSA accounts.

Some, however, may like it as an income stream similar to stock market dividends, but without the same kind of market risk.

Great summary for who they would be good for. Essentially, those willing to take corporate bond or dividend paying equity risk, but without the risk of stock market volatility.

The best application might be for TFSA, for people who don't intend to use theirs until they're running low on other assets, down the road. There is no dividend tax credit to be lost within TFSA, and no mandatory withdrawals as with RIFs which might be difficult to access (if allowed at all - I don't know). However, such a person may have other things they'd rather do with their TFSA money.

A TFSA would be great for these CU shares. 100% agree.

Unlike Bill, I would like to support CUs, and I understand that this is the way they must raise funds, but they seem to do well raising them from other people so my contribution is not crucial.  

Exactly. I, too, respect most CUs (except when they start to behave like, and want to be like, the "Big 5" banks - Coast Capital Savings, First West, and Meridian seem to be in that "camp") and would definitely support them. It's certainly within Bill's prerogative to not support them directly, and I respect that, too.

Cheers,
Doug

May 14, 2019
7:08 am
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Norman1 said

Essentially, credit unions don't pay regular corporate income tax, like their bank and trust company competitors do. Government is not willing to further subsidize credit unions by letting their members claim a dividend tax credit on "dividends" from their credit union.  

From the 2018 Government of Manitoba Budget -

The special tax deduction which currently allows credit unions and caisses populaires to pay a lower rate of tax on a portion of their income is being phased out over five years beginning on January 1, 2019. As an offsetting measure, the credit unions profit tax is eliminated, as announced below. Credit unions and caisses populaires will continue to have access to the small business deduction as do Canadian-controlled private corporations.

https://www.mnp.ca/en/posts/2018-manitoba-budget-implications-to-credit-unions

May 14, 2019
9:42 pm
Loonie
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The problem with putting these in RIFs is that RIFs, by law, require annual withdrawals. These bonds don't allow for corresponding annual redemptions. In order for the bonds to be RIF-eligible, the CU would have to make special arrangements, which they probably won't want to do.
There might be another way around it if you have a brokerage account of which these are only a component, if the CU is willing. In that case, the annual withdrawals could come from other investments. Still, I doubt they'd go along with this as they would have no control over your liquidity.

I probably wouldn't re-join Alterna CU unless my TD branch closes. It will take me a long time to use up my existing cheques, some from previous century lack modern details.
When and if we run out of cheques or move or if TD makes themselves less useful, I'll reconsider available options for day to day banking.
I will always keep at least one local bricks and mortar FI. When there is a problem, i's almost always more productive for me to deal with someone in person.

May 15, 2019
5:53 am
Doug
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Loonie said
The problem with putting these in RIFs is that RIFs, by law, require annual withdrawals. These bonds don't allow for corresponding annual redemptions. In order for the bonds to be RIF-eligible, the CU would have to make special arrangements, which they probably won't want to do.
There might be another way around it if you have a brokerage account of which these are only a component, if the CU is willing. In that case, the annual withdrawals could come from other investments. Still, I doubt they'd go along with this as they would have no control over your liquidity.

Yeah, for the reasons you've outlined, credit union shares, due to their lack of liquidity, are unsuitable for RIFs. Now, having said that, they are the credit union's own shares so one may be able to negotiate with their credit union employee/financial advisor, who would communicate with the Board of Directors, to see where an annual redemption of enough shares and/or accumulated surplus shares (from dividends) to satisfy the minimum annual RIF withdrawal requirement, then it could be useful. However, it'd be a lot more work and I'm not sure the credit union's Board would want to start having to add member credit union RIF-held share withdrawal requests to their board agendas. sf-cool

I probably wouldn't re-join Alterna CU unless my TD branch closes. It will take me a long time to use up my existing cheques, some from previous century lack modern details.
When and if we run out of cheques or move or if TD makes themselves less useful, I'll reconsider available options for day to day banking.
I will always keep at least one local bricks and mortar FI. When there is a problem, i's almost always more productive for me to deal with someone in person.  

Very true, and your executor(trix) will thank you for having a branch-based financial institution to deal with (a trip to Selkirk, Manitoba - hopefully in the summer time at least - probably not so much 😉 ).

It's interesting that, if you were to use up your supply of TDCT cheques and/or TDCT was to become less useful, you'd consider switching. In terms of customer service and personalization, does the TDCT branch staff all know your name like a few do at Meridian and is the service as good or better than you receive at Meridian?

Cheers,
Doug
Shareholder, The Toronto-Dominion Bank

May 15, 2019
3:17 pm
Loonie
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You jest, I'm sure!
Rest assured that NOBODY knows me at TD after over 30 years of business there. My anonymity is secure, even without sunglasses.
Are you revving up for your next shareholders' meeting?

There used to be one woman there who did recognize me, but she was older and has since disappeared. The staff turnover is so rapid that I don't know how they could recognize me really. It must be a horrible place to work.

May 15, 2019
5:49 pm
Norman1
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Loonie said
The problem with putting these in RIFs is that RIFs, by law, require annual withdrawals. These bonds don't allow for corresponding annual redemptions. In order for the bonds to be RIF-eligible, the CU would have to make special arrangements, which they probably won't want to do.

RRIF withdrawals don't have to be in cash. The withdrawals can be in-kind.

One could just withdraw the appropriate number of shares out of the RRIF and hold the shares outside of the RRIF. If the minimum withdrawal were 5.4% and one had 55 shares, one could withdraw at least 5.4% x 55 = 2.97 shares or three shares to satisfy the minimum.

May 15, 2019
6:06 pm
Doug
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Norman1 said

Loonie said
The problem with putting these in RIFs is that RIFs, by law, require annual withdrawals. These bonds don't allow for corresponding annual redemptions. In order for the bonds to be RIF-eligible, the CU would have to make special arrangements, which they probably won't want to do.

RRIF withdrawals don't have to be in cash. The withdrawals can be in-kind.

One could just withdraw the appropriate number of shares out of the RRIF and hold the shares outside of the RRIF. If the minimum withdrawal were 5.4% and one had 55 shares, one could withdraw at least 5.4% x 55 = 2.97 shares or three shares to satisfy the minimum.  

Good point, Norman. What about the withholding tax on the in-kind withdrawal? Is there a CRA election form that allows the financial institution not to withhold any taxes provided you've pledged a portion of your non-registered assets to satisfy the withholding tax remittance?

Cheers,
Doug

May 15, 2019
6:18 pm
Briguy
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Norman1 said

Loonie said
The problem with putting these in RIFs is that RIFs, by law, require annual withdrawals. These bonds don't allow for corresponding annual redemptions. In order for the bonds to be RIF-eligible, the CU would have to make special arrangements, which they probably won't want to do.

RRIF withdrawals don't have to be in cash. The withdrawals can be in-kind.

One could just withdraw the appropriate number of shares out of the RRIF and hold the shares outside of the RRIF. If the minimum withdrawal were 5.4% and one had 55 shares, one could withdraw at least 5.4% x 55 = 2.97 shares or three shares to satisfy the minimum.  

This strategy would only work if you were withdrawing the minimum amount from the RRIF and thus there was no withholding tax that the bank would have to remit. If you transferred more in kind and incurred this withholding tax you would need to have something cashable in that RRIF to pay the tax.

Edit: Didn't see Doug's post above when I posted 🙂

May 15, 2019
6:19 pm
Norman1
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Doug said

Good point, Norman. What about the withholding tax on the in-kind withdrawal? Is there a CRA election form that allows the financial institution not to withhold any taxes provided you've pledged a portion of your non-registered assets to satisfy the withholding tax remittance?

Unfortunately, there isn't. One would have to provide cash from elsewhere for the financial institution to send to CRA for any required withholding.

The preferred shares being discussed are intended to pay a 4% per annum distribution. With 55 shares, one would also have 4% x 55 = 2.20 shares worth of cash in the RRIF after a year.

A minimum withdrawal of 5.4% works out to be 5.4% x (55 + 2.20) = 3.0888 shares.

One could withdraw one share in-kind plus 2.0888 shares worth of cash (out of the 2.20 shares worth cash). There would enough cash to cover a tax withholding of up to 2.0888/3.0888 = 67.62%!

May 15, 2019
6:32 pm
Briguy
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From what I understand, the extra cash to remit to Revenue Canada for withholding tax has to be in the RRIF, not just cash lying around in some other account. And we don't know if the FI will allow you to cash in these 4% bonds.

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