4.25% Investment Share Offer | DUCA Credit Union | Discussion forum

_Ax said
This is so cheeky... 4.25% minimum guaranteed if dividends are declared and paid at all!  

It's also non-cumulative, so there's no potential for catching up down the road if things go badly for a spell at DUCA and they suspend the divvie. Not to mention you'll have zero liquidity, because there's no third party market to facilitate disposal of your shares if you get fed up.

I don't think I would buy this issue even if it was supposed to be paying 6+% let alone 4.25%. Then again I'm probably not the kind of investor they're targeting anyway

These do not qualify for dividend tax credit if I am not mistaken.
4.25% yield from a FI is certainly not the highest and a lot of other options. e.g. Some big5 div >= and also tax credit eligible. Liquidity another key factor why I dont find the Meridian offering attractive.

davidgeorge said
Thank you for your replies. I am not familiar with dividend payment at all. If you invest $10,000, does a minimum dividend of 4.25% mean you will get at least $425 annually? Sounds better than current GIC rates.  

Yes, assuming the board of directors continues to pay the indicated dividend rate in subsequent years. The dividends aren't guaranteed, but generally speaking, it's to the board's advantage to pay the dividends because they could end up with a bunch of unhappy members who desire to redeem their investment shares and the credit union is required to hold, as percentages of their total assets and risk-weighted assets, a certain amount of equity (which can include, principally, retained profits or earnings, member shares, retained profits from business or credit union amalgamations, and member investment equity shares). "Non-cumulative" just means the board isn't obligated to pay any prior dividend payment that they opted not to pay.

Most, if not all, credit unions that do these equity raises have paid their indicated dividends and have not skipped any dividend payments. So, for me anyway (and perhaps @Loonie as well, although @Loonie doesn't generally invest in assets outside of GICs and HISAs), the inability to pay a dividend is not a significant concern.

The biggest concerns that investment shares represent include them being risk capital for regulatory purposes, meaning that they are (a) not guaranteed by any deposit insurer and (b) can be illiquid as redemption requests are subject to board of directors' approval.

Having said all of that, one of the reasons credit unions do these equity raises is, aside from the main reason using being their loan/mortgage book (their assets) having grown such that they need to raise regulatory risk capital to the required minimum level, at regular intervals (every year or two) is to accommodate redemption requests from members. Usually, the board will stipulate you hold your shares for a minimum of 5 years, after which they'll let you redeem between 10-30% of your shares per year at their par value (you get back per share what you paid).

As it is interest income, just like bank interest from a GIC, if you have available RRSP or TFSA contribution room, you can hold them in such a plan. Otherwise, it'll be taxed like GIC or HISA interest.

I can say that I'm a Sunova Credit Union Ltd member through Hubert Financial and they have paid a variable dividend, which is also non-cumulative, of between 4-7% annually in every year for the past 20-25 years or so (perhaps further, but that's far back as I've been able to obtain data).

In this way, it's actually a bit of a misnomer when we see banks doing lots of lending that they need more deposits. That's true, in the sense that the deposits are a source of funding to fund the mortgages they're onboarding; however, as far as regulatory necessity go, it's the equity they need. And, in terms of funding, credit unions and banks generally are awash in cash so they don't actually "need" deposits right now. Only time they "need" deposits is when their mortgage and loan book exceeds their deposits.

Cheers,
Doug

maxb said
And what happens after the end of 5 years ?
 

At the end of five years, 10% of the total issue becomes eligible for redemption, on a first come first served basis. I don't know the exact mechanism, but I believe a form is available to be submitted to request redemption.

If a subscriber fails eligibility, their investment is rolled over for a one year term at the then current rate. On maturity, again the 10% redemption rule is in effect.

All the terms can be seen in the DUCA, 213 page, PDF offering statement HERE

Info also on DUCA's FAQ page HERE
from which this is stated:

How do I redeem Investment Shares?
Shares will be redeemable 5 years or more after the Issue Date. Redemption requests will be approved monthly by the Board of Directors on a first come, first serve basis, as no more than 10% of the total Class B Investment Shares, Series 4 outstanding at the end of the prior fiscal year may be redeemed in any fiscal year. DUCA also has the option of redeeming all or a portion of Investment Shares 5 years or more after the Issue Date.

Stephen

I think it's been pretty well covered above.
The main "pro" is the possibility of a steady income stream of 4.25%. This is more than most CUs give for investment shares and compares favourably with corporate dividends.
The main "con" is lack of liquidity. You can't easily cash this investment in. And, unlike GICs, there is no absolute guarantee or insurance coverage.

In addition, Doug recently reported that DUCA was on a path to going federal. There is a thread about this somewhere, and I can't remember the details, whether they were trying to convert to a federally regulated Cu or to open a bank.
There will be significant costs involved and perhaps different liquidity requirements for them. I don't know the details, but this could be the reason these shares have been available for so long. And, accordingly, I would want to know more about that plan before I invested in the shares.
I don't think there is room in the marketplace for another Motusbank, for instance. I don't know if motus has turned a profit yet, but in my opinion it's a dud. i would be worried if DUCA went the same way with no better plan.

I belong to DUCA and find it to be a good FI that treats its members decently, but I do have unanswered questions about this planned change.

Personally, I would not buy ANY CU shares simply because I don't want an investment where there is no clear timeline on redemption. It could be fine for someone who just wants to draw the dividend and accepts the fact that it is fully taxable if non-registered.
These shares are TFSA, RSP and RIF eligible. I would ask some questions before putting it into RSP or RIF. You would need to know for sure that they are able to redeem sufficient shares to meet minimum mandatory withdrawals for RIF.

P.S. The links to the "Offering Statement" and the FAQ page don't work, so I wonder if this is really still available?

You've raised a lot of issues, Jon.

I can't really comment on preferred shares in for-profit corporations as I don't know enough about them. For me, the comparison is only to GICs or govt bonds.

I am uncertain whether DUCA plans to open a bank subsidiary or become a federal CU, so can't answer that either. The info may have been in Doug's post. I had the impression it was more likely a federal CU, but not sure.

Certainly, becoming a federal CU doesn't seem to have done much for Coast Capital - at least not that I'm aware of - and they are not really using it to go national after having had that capacity for about a year now, I think. So, I too don't understand the logic.

AltaRed would tell you that bigger is the only way to go, but, then, he doesn't deal with CUs apparently, and I am not convinced her really appreciates their ethos.

I belong to a handful of CUs, large and small, local and out of province (MB).

I have attended precisely one AGM. Spouse and I were the only people there who were not either staff or board members. This was a small CU where one might expect members to have greater involvement.

I have voted in online elections once, in the largest CU. Their AGMs are not convenient for me to attend. Come to think of it, none of them are especially convenient. I would have to drive the better part of an hour at a minimum, in order to attend any of them - and I live in Canada's largest city!

I share your concern that the mantra about "members are owners" is mostly BS and has been reduced to a marketing slogan. Most "members" seem to take very little interest in how the CU is run - unless, of course, something goes very wrong.
But, even if they did, how many of us would be able to detect anything problematic or muster the votes among complete strangers to do anything about it? In that respect, I think it isn't much different than stock shareholders except that corporate AGMs seem to take place in more convenient locations and sometimes serve better food! But those too are not places where you can get very far with any disagreements as the votes are largely controlled by proxies.
Holding shares in the stock market doesn't protect you from mismanagement. Consider Home Capital Group, for example; and I'm sure you can think of others.

Banks are regulated to some degree, and so are CUs. And their insurers have something to say about their management as well. Really, that's all we have to depend on in either case as far as I can see, to ensure they are well-run. As you know, a lot of banks went down ca. 2008.

I think that a well managed CU, even a small one, can serve its members well and be responsible. I know that one of the small CUs that I belong to has significantly stricter criteria for mortgage loans than do the big banks. Some members walk away and go to the bank when they don't get what they want, but others will listen and realize that it's risky to take on such a big mortgage and will buy a less expensive property. They only had one default last year. So, who's being irresponsible, and who is enabling the personal debt crisis? In my limited examination of the details, I've always concluded that the larger the institution, the bigger risks they take. In some ways this is understandable, as they can spread it out. However, I prefer a slow and steady boring approach that does not support undue risktaking - especially in the current economy.

I sat on the board of a large charity for 9 years, and it seems to me that basically the management runs every organization, not the Board and not the shareholders or members or stakeholders. The board I was on was active, involved, had relevant skills, and so on; but still, I felt the CEO made the decision in reality.

Relationships between managers and boards and stakeholders can be quite tricky, and I don't see that there is one best way forward to ensure good decisions. When there is conflict and things get rough, somebody resigns (whether or not they had the best ideas and plans), sometimes more than one person; and occasionally somebody gets fired. It seems, if the news is to be believed, that managers at the highest levels with the richest salaries all have exit clauses that pay them handsomely; and then they move on to another fat cat job at another large corporation in a kind of unspoken no-fault system. Many of them have defined benefit pension plans designed to their specifications, in which they are the sole members.

Do you have a better idea?

Until Jan 24 2020

This investment share is very similar with preferred share on the market, the board of the issuer of preferred share can also decide do they want to issue dividend.

However, this investment is worst because it doesn't have a secondary market, and the interest rate can be arbitrarily determine by the board.

Are preferred share dividends stated when you buy the shares and completely guaranteed, or do they depend on the health of the company?