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Heads up, Meridian bond issue.
February 7, 2017
6:03 am
Loonie
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I have it from usually-reliable-sources that Meridian will have a bond issue soon, to finance their banking operation. Should pay over 4% if anyone is interested in that sort of investment, which cannot be insured. I don't know what the term will be.
Something to think about maybe.

Someone else will no doubt have a better informed opinion about their financials. From my layperson's perspective they seem to be doing a pretty good job of filling the "corner store" market which the big banks have been abandonning to some extent, and with smaller footprints and significantly better terms, so far. So there seems to be room to grow an online bank version.
Customer service has been good so far, in my experience, although not perfect. Someone knows me when I go in there now, which never happened at BigBank in over 50 years of banking and with many more transactions and more money. The same people are still working there every time I have gone in since September - what a concept! Simple, but seems to have escaped the competition. Almost every branch is managed by a woman; interesting.

They even have a defibrillator in my branch, in a place where everyone can see it. I hope they also know how to use it. Sometimes going to the bank can indeed be enough to give one a heart attack!sf-wink

February 7, 2017
9:56 am
Bill
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Might be similar to (uninsured) "Prosperity Shares" I bought from Libro Credit Union, available only in Nov/15. They called them shares, with an annual
"dividend" (minimum 4%) but in fact for income tax purposes it's considered to be interest. Unlike bonds there's no secondary market but they can be redeemed, either by me or Libro, anytime after 5 years.

February 7, 2017
4:40 pm
2of3aintbad
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I have a Hubert account, and have been happy so far, because of the quarterly pay GIC. But I would be concerned about investing, for 4%, in a bond issue 'to finance their banking operation'.

I can understand issuing bonds to expand, ie to take over another institution, but until I have more details, I would not invest.

February 7, 2017
5:58 pm
Loonie
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I may have the terminology wrong. Perhaps it's not called a bond, but something like a bond. Yes, I don't imagine there would any secondary market And, yes, I would expect it to be fully taxable in a non-registered account.
Perhaps only available to members?

February 7, 2017
6:23 pm
Bill
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2of3, I agree, I noticed that too, that "to finance their banking operation" comment. When I bought my Libro "shares" I asked what they needed the money for and they were using it in the course of acquiring another (larger than them, I believe) credit union, i.e. to help fund expansion.

February 7, 2017
6:34 pm
Loonie
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It's all hearsay so far. We'll have to see what they say.
It does seem reasonable, though, that they would need capital to start a new venture.

So, you bought the Libro shares, Bill? (and here 'I thought you were in BC!) Any regrets?

February 16, 2017
3:09 am
Loonie
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The offer is out now. It's "shares", very similar to what Bill has described from Libro. Minimum of $5000 investment, can be registered or not. Supposed to give a minimum of 4.25% IF dividends are given. I don't quite follow that. Why would you have a high minimum if you aren't even sure if you're going to give any?
Not covered by deposit insurance.
https://www.meridiancu.ca/personal-banking/ClassA/default.aspx

What do y'all think? Would you invest in these?
To me, it sounds more or less like the CU amalgam of what banks issue as stocks and bonds, given that they couldn't or wouldn't use the market to raise capital, but with a few more restrictions - may be harder to cash, n only redeemable within the CU, etc. Functions sort of like a bond, with the five year minimum and interest, but sort of like shares with dividends but no capital gains, only the risk of losses.
Is that right?

Bank stocks offer dividends at least as high, some higher, which can be taxed as such, but perhaps more downside risk in terms of market value, over five years?

I am not sure where would be best to put these, if bought.
If in cash, you will pay full tax.
If in TFSA, your money is tied up and you might not get any income from it or might even lose capital. Might be forced to take your dividends in shares rather than cash.
If in RSP, that might be best, but if you are of the age where you have to move to RIF, wouldn't that create a problem because of the mandatory withdrawal rate which is often higher than 4.25%? Would they then be forced to redeem some of your shares earlier than intended? Or would this need to be part of a larger self-directed plan, so that you took the mandatory withdrawals from elsewhere?

Opinions?

February 16, 2017
6:43 am
Bill
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These instruments have their virtues, here are the main opposite-of-virtues (word?) I see:

1. Dividends are really interest, taxed as such.

2. 4.25% rate reset every 5 years, minimum 300 basis point above Bank of Canada 5-year bond rate, though the rate setting policy is subject to change by the Board at any time.

3. No guarantee a dividend will be paid in any year.

4. Not cumulative, i.e. if they miss paying in one year, it's gone, not carried forward.

5. Non-redeemable for 5 years, though they say they'll try to find a buyer if you want to sell.

6. After 5 years they only commit to redeem up to 10% of total amount outstanding in any year so you might not be able to redeem yours in any given year (they are constrained by regulatory requirements re capital structure, liquidity, etc).

7. Board can mandate whether interest is paid in more shares and/or cash.

8. No deposit insurance, and also "are not secured by any assets of the credit union" itself.

Here's the 250-page Offering Statement PDF if you want all the details, financial statements, etc:

https://www.meridiancu.ca/Meridian/media/images/PDFs/Meridian-OS-Series-17-Investment-Share-Offering-Statement.pdf

February 16, 2017
8:20 am
Loonie
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Thanks for your observations, Bill.

I found the answer to one of my questions on page 20:
"A Member holding shares in his or her RRIF will be responsible for ensuring that there are assets in the RRIF other than the Grow Your Tomorrow Class A Investment Shares, Series 17, to satisfy the minimum statutory withdrawal requirement for the RRIF annually."
So, I guess it has to be in self-directed, along with other investments. It does limit your options in terms of where to take the mandatory withdrawals.

Page 34 shows the rates at which they have paid dividends on previously-issued shares.

I must admit that I'm uncomfortable with the idea that there is no guarantee you will ever be able to redeem them. I also didn't find any info on how many had been redeemed in the past or what the backlog might be for redemption requests. As a senior, this is a concern. The doc says there is no problem redeeming them if I die, but that does not help me to live! This, coupled with the RIF problem and the attribution as interest income makes it difficult to want these. I see the liquidity problem as being a big one for older people.

February 16, 2017
9:02 am
Koogie
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Luminus CU did something very similar in the fall of 2015. It must be a popular way for Ontario CU to raise capital.

Luminus called their offering "investment shares" Initial annual payout at 4% and then it reset at 3.00% above their weighted one year term deposit rate. They called it an "annual dividend" but it was in reality fully taxable interest income as well.

It also had many of the same "gotchas" written into the offer as the above Meridian one. Not secured, not insured and redeemable at their discretion and to their advantage.

I said, spanks but no spanks.

February 16, 2017
12:19 pm
julio
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If a FI was 100% sure, that it can and will pay it's obligations, it would offer the same great rate as a corresponding term deposit, without a 250 page fine print, wouldn't it?

February 16, 2017
5:45 pm
Loonie
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julio said
If a FI was 100% sure, that it can and will pay it's obligations, it would offer the same great rate as a corresponding term deposit, without a 250 page fine print, wouldn't it?  

Yup. It's all about risk versus return, as with everything.

Speaking of which, Meridian also offered me another investment, a kind of mutual fund I suppose. The deal was that it promises you 5% annually (not sure if interest or dividend as this was in relation to LIF). The catch is that the investment itself goes up and down with the market, so that what is 5% this year may not be the same in dollars next year. In addition, it had a 2.3% MER. I think but am not sure that it invested in dividend stocks. I thought that was an extravagant fee. Might as well just buy well known large cap dividend stocks ETF in the first place and save the fee. Maybe I'm missing something but I couldn't see the point of the fee, as a consumer. I said "no", and he dropped the idea. then he went on to suggest these "shares", but clearly they are unsuitable for a small LIF as there would be nothing to offset them for mandatory withdrawals.

February 16, 2017
7:16 pm
julio
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Good choice! The market-linked stuff is great for the FIs, not so for consumer. Although the principal is guaranteed at a future date, the growth is capped at a meager number. And isn't their pitch the "almost certain, but not guaranteed, look at history, ...", that the principal will go up? So why cap it. If one trusts this pitch (and needs to take a higher risk), then why not go into the market directly, with ETFs.

February 16, 2017
7:28 pm
Loonie
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This one wasn't actually a market-linked fund. The rate of 5% was guaranteed (more than you'd get theses days on any market-linked) and there was no cap on profit. But there was real market exposure and risk, unlike market-linked.
I agree, there are similarities. When he got to the part about how the MER is "hidden" (as if to say it wasn't real), then I knew for sure I was "out". I find it depressing that CUs promote this way. Most, if not all, of their employees come to them from bank backgrounds and perhaps it has become second nature for them to talk this way. But we are not fooled. If you watch TV at all, there are some great ads on now from (I think) Questrade (or similar) where the client asks about fees and says how much it will cost her over her lifetime. Great ad!

I'm actually starting to think that market-linked funds may soon make sense if interest rates continue their downward spiral! Not much left to lose.

February 17, 2017
11:21 pm
Norman1
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Loonie said
This one wasn't actually a market-linked fund. The rate of 5% was guaranteed (more than you'd get theses days on any market-linked) and there was no cap on profit. But there was real market exposure and risk, unlike market-linked.
I agree, there are similarities. When he got to the part about how the MER is "hidden" (as if to say it wasn't real), then I knew for sure I was "out". I find it depressing that CUs promote this way. Most, if not all, of their employees come to them from bank backgrounds and perhaps it has become second nature for them to talk this way. But we are not fooled. …

Sounds like one of those guaranteed income funds, like the Manulife Income Plus, with a guaranteed lifetime 5% withdrawal benefit.

RetireHappy.ca: Misconceptions of Guaranteed Income funds explains that they are like a segregated fund, except the guarantee is on the lifetime withdrawals instead of on the original invested capital.

If the fund's return ends up being less than the guaranteed withdrawals, then the original investment makes up the difference and original investment won't be fully returned on death.

February 18, 2017
9:32 am
Loonie
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Yes, I think you're right, Norman - and an MER of 2.3 is consistent with the higher MERs typically found on seg funds, although not quite as high.
The difference would be, I suppose, that seg funds are insurance products and the rate of return may be under a more stringent guarantee than a mutual fund. I have not seen the specs, but it occurred to me that there might be nothing in the fund I was offered to prevent them from "adjusting" the rate of return by updating their prospectus, as a mutual fund. It also seems to be the habit of mutual fund companies, when faced with a fund that is not working the way they intended it, to dissolve the fund by morphing it into another, with different rules. I'm not sure if seg funds are equally flexible.

This is one of the things I detest about mutual funds, that the fund you buy today is not necessarily the fund you own 10 years from now, even though the selling feature is always the "long term gains". I have seen them change hands and mandates more than once. For example, I know of one that was bought as a US health sector fund originally. Now it's a US large cap fund with emphasis on tech and is owned by a different parent company and has a completely different name. If you aren't watching, your money just gets moved around without your say-so.

February 18, 2017
12:35 pm
Norman1
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I don't think that 5% is a guaranteed rate of return. Instead, I think that is a guaranteed payout or withdrawal rate like that of a life annuity. That probably cannot be changed by updating the prospectus.

You would be receiving payouts of 5% a year until death. If the investment growth of the underlying mutual fund doesn't keep up with the 5% payout plus 2.3% MER, then your estate or heirs won't be getting all of your principal back at the end.

February 18, 2017
12:44 pm
Norman1
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Loonie said
… It also seems to be the habit of mutual fund companies, when faced with a fund that is not working the way they intended it, to dissolve the fund by morphing it into another, with different rules. I'm not sure if seg funds are equally flexible.

This is one of the things I detest about mutual funds, that the fund you buy today is not necessarily the fund you own 10 yeas from now, even though the selling feature is always the "long term gains". …

Those "fad" funds are like that. For example, the high tech, telecom, and dot com mutual funds that were started around the year 2000.

Most of the funds I invest in have been around for decades. The Mawer Canadian Equity Fund has been around since 1991. The Phillips, Hager & North Canadian Equity Fund was started in 1971.

March 5, 2017
4:20 pm
Doug
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Loonie said
I have it from usually-reliable-sources that Meridian will have a bond issue soon, to finance their banking operation. Should pay over 4% if anyone is interested in that sort of investment, which cannot be insured. I don't know what the term will be.
Something to think about maybe.

Someone else will no doubt have a better informed opinion about their financials. From my layperson's perspective they seem to be doing a pretty good job of filling the "corner store" market which the big banks have been abandonning to some extent, and with smaller footprints and significantly better terms, so far. So there seems to be room to grow an online bank version.
Customer service has been good so far, in my experience, although not perfect. Someone knows me when I go in there now, which never happened at BigBank in over 50 years of banking and with many more transactions and more money. The same people are still working there every time I have gone in since September - what a concept! Simple, but seems to have escaped the competition. Almost every branch is managed by a woman; interesting.

They even have a defibrillator in my branch, in a place where everyone can see it. I hope they also know how to use it. Sometimes going to the bank can indeed be enough to give one a heart attack!sf-wink  

Agree with you on their branch network strategy, Loonie. They may not be in the smallest of Ontario markets but they do a really good job and their marketing is pretty (i.e., the TV commercials about someone's "money" not working hard enough for them, with "money" depicted as an adult child living in their parent's basement).

I've never seen a credit union do a bond issue. How common is this? And, it'll be interesting to see whether they make the "pitch" to potential retail investors or distribute this exclusively to institutional investors. Usually, credit unions would either raise deposits or, also common, do an "investment share" issue whereby they hold no additional voting rights but pay a dividend in preference to the common shares held by its voting members. 🙂

Cheers,
Doug

March 5, 2017
4:22 pm
Doug
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Loonie said
I have it from usually-reliable-sources that Meridian will have a bond issue soon, to finance their banking operation. Should pay over 4% if anyone is interested in that sort of investment, which cannot be insured. I don't know what the term will be.
Something to think about maybe.

Someone else will no doubt have a better informed opinion about their financials. From my layperson's perspective they seem to be doing a pretty good job of filling the "corner store" market which the big banks have been abandonning to some extent, and with smaller footprints and significantly better terms, so far. So there seems to be room to grow an online bank version.
Customer service has been good so far, in my experience, although not perfect. Someone knows me when I go in there now, which never happened at BigBank in over 50 years of banking and with many more transactions and more money. The same people are still working there every time I have gone in since September - what a concept! Simple, but seems to have escaped the competition. Almost every branch is managed by a woman; interesting.

They even have a defibrillator in my branch, in a place where everyone can see it. I hope they also know how to use it. Sometimes going to the bank can indeed be enough to give one a heart attack!sf-wink  

Also, AEDs aren't that difficult to use. The trick is in being absolutely certain someone's heart has stopped when using it but they do save lives. I've trained with similar replica as part of first aid training, though my first aid certification has since lapsed. 🙂

But, that's cool. As far as I know, locally, London Drugs has an AED on site but I don't know of any other businesses that do.

Cheers,
Doug

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