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Questions on the CLICO Investment Fund (CIF)

Disclaimer: This is for informational purposes only. Bondholders should review both the prospectus and Trust Deed and all other relevant material before deciding to accept the Offer.

Now that the CLICO Investment Fund (CIF or "the Fund") has been launched, Bourse has been receiving many questions from investors regarding the value of the CIF Units and what will happen to their Units as it becomes listed on the Trinidad and Tobago Stock Exchange (TTSE). In this article we seek to address those concerns and provide more insight into what happens after January 2, 2013, the scheduled listing date of the CIF.

Do I get $1 for $1?

At the time of exchange, Bond for Unit, you will receive $1 for $1. This compares favourably with the price that would be received with the sale of 11-20 Bonds, which, by our estimates, would be 45 cents on the $1 if sold at this time. For every $1,000 in Bonds, you will receive 40 units at an initial Net Asset Value (NAV) of $25 each.

Even though the Units in the Fund are being issued at $25, the NAV will vary (either increase or decrease) based on the underlying value of the assets in the Fund. In other words, as the price of the Republic Bank shares (RBL) and the Government Securities increase or decrease this will impact the value of the NAV. For example, if RBL's share price increases from $110, the price level at which the RBL shares were deposited into the Fund, to $120, the value of the Units will increase correspondingly. Assuming the price of the Government securities remains constant, the NAV will be $27.03. And if RBL's price falls to $100, the NAV will be $23.10.

Will I get $25 when I sell my Units?

On the trading date and subsequently, you are not assured the ability to sell your Units at the NAV of $25 which applied during the offer period. This is because the value of the assets that comprise the Fund will change on a daily basis. It is our understanding that the opening price on the first day of trading will be equal to the NAV. Once trading begins, the listed price that the Unit trades at on the TTSE can go up or down as demand and supply factors cause the units to trade at a premium or discount.

For example, if the price of RBL is $100 on the first day of CIF trading, the NAV of the Fund (with the price of the Government Securities being held constant) is estimated to be $23.10. Once trading begins, the listed price of the Unit on the TTSE will be determined by demand and supply.

If there is far greater supply than demand, then there will be downward pressure on the price as investors try to sell and the price of the Unit can be expected to fall. The opposite will happen if demand outstrips supply. If you decided to sell at a price of $23.10 per Unit, you would receive the equivalent of $0.92 for every $1.

What about the distribution of income?

The Fund would collect dividends paid by RBL and coupon payments from the Government Securities (collectively referred to as Fund Income). Eligible Unitholders will be paid distributions of not less than 95 per cent of the Fund Income less expenses. These are persons whose names appear on the Register as the holders of Units as at the Fund Record Date (15 Business Days prior to a Distribution Date). Payments will be made semi-annually on February 21 and August 21. However, payment of distribution is dependent on the receipt of Fund Income and most of the Fees payable by the Fund is paid out of the Fund Income received.

Using the following assumptions, we can estimate the distribution income per unit that you as a Unitholder may receive:

1. Fund Income received is equivalent to the most recent dividend paid of $4.25 by RBL on 40,072,299 shares and

2. The coupon payment of 4.25 per cent on $702,866,700 worth of Government Securities

3. Total Fees to be paid by the Fund amounts to approximately 1.5 per cent of Fund Income (1 per cent Fund Management fee and 0.5 per cent Administrative fees) with the exception of the first year when expenses will be approximately 4.8 per cent of Fund Income as payment to Distributors will be made.

4. Dividend paid by RBL will increase by 3 per cent on an annual basis.

From our calculations, the distribution income per unit received in the first year would be $0.89 and in the second year this would climb to $0.94, mostly due to a lower expense ratio. The yield on a NAV of $25 would be 3.55 per cent and 3.76 per cent respectively.

From Chart 1 we can see the inverse relationship between the NAV of the Units and the yield. As the listed price of RBL falls, the NAV of the Units will fall and the yield on the Units will increase.

Assumptions:

1. The amount of RBL shares invested in the Fund remain the same

2. The value, price and yield of the Government Securities remain the same

3. Dividend payment for RBL is held constant at $4.25

4. Distribution paid is 95 per cent of total income received by the fund less expenses

5. Expenses are equal to 1.5 per cent of Fund Income.

Should I sell or hold onto my Units?

Though the NAV and the listed price may fluctuate, you can still benefit from holding on to your Units. The NAV per Unit would have to fall by 55 per cent from $25 to $11.25 in order to match the 45 cents offer on the market for the 11-20 Bonds. This would mean that the price of RBL would have to fall 64 per cent from $110 to reach a price of $39.70. Assuming that the initial investments of the Fund remain the same and the price of the Government securities remain constant. The lowest price that RBL has been in the past 8 years is $68.

As an investor, you would need to compare the return on the Unit, the likelihood of depreciation in the value of the Unit and the return on alternative investments available. Selling or holding will depend on your particular circumstances. You may wish to consult directly with us at Bourse in this regard.

What is the outlook for RBL?

RBL's stock price has been steadily increasing since reaching its low of $68 in October 2010. Over the past 5 years RBL has paid dividends averaging $3.71 per share per year with the last dividend for financial year ended September 30, 2012 being $4.25 per share, representing a dividend yield of approximately 3.9 per cent. RBL's listed price will directly impact the NAV of the Fund.

When we look at Price/Earnings valuations (Chart 2), RBL is currently trading at 15.03 times, above its 5-year average of 12.5 times. We do anticipate there may be some downside risk given the influx of CIF Units into the market, which indirectly represents 40,072,299 RBL shares or 25 per cent of RBL shares in issue.

Many other questions have been raised with us. We will seek to answer more of these at our Bourse CIF seminars scheduled for Thursday at Capital Plaza, Port-of-Spain and November 29 at Cara Suites, Claxton Bay. You will need to call us at 628-9100 to reserve your seat today.

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