Convertible preference shares - equity method

[hubertd]

Hi Everyone,

I'm curious to hear what people are thinking. We invested via convertible preference shares which are irredeemable, pay dividends on par with ordinary shares at Board discretion and can be converted 1:1 into ordinary shares at any time at our discretion or mandatorily in certain circumstances. They offer a liquidation preference of higher of: 1.5x of invested capital or amount which we would get if converted.

We have 1 Board seat as well as a Board observer. We also have some consent rights over Reserved Matters including approval of budgets and nomination/termination of key execs. We assessed that we have a 'significant influence'.

My question is: would we account for our 'associate' at equity method or treat our investment as a 'long term interest' in associate to be held at FVTPL? Key question to answer here is 'do the preference shares provide the returns consistent with ordinary shares returns' and I'm not entirely sure how I should look at the liquidation preference in making such an assessment?

Any ideas?

[Ketan Marwah]

Hi,

What is your judgement I.e. whether you are invested in companies growth or you have made the investments for the sole purpose of capital appreciation, investment income (such as dividends, interest or rental income), or both. While via the contracted terms, it seems that you have secured your return on capital by obligating the issuer with a 1.5x return which is independent of available economic resources of the entity but this fact alone in my view would not override the overall judgement about how you want to stay invested within the investee.

[hubertd]

We’re a policy bank so financial considerations play second fiddle in everything we do. First we want to fulfil our mandate of supporting net zero transition and creating regional and local jobs. So yes, we’re out there to support growth of the companies and particular business models, etc. Liquidation preference is just a downside protection option.