As BearNJ correctly points out in the comments Compass Diversified Holdings (CODI) is NOT converting to a Corporation structure, but is electing to be taxed as a corporation.
This is similar to many of the shipping partnerships which have elected to be taxed as a C Corp.
Resultantly dividends should be qualified in the future instead of non qualified.
My apologies for the error.
8 thoughts on “Correction of Compass Diversified Holdings”
I ran across this today. Do your own due diligence.
The change in taxation by CODI triggers a “Tax Redemption Event”. Here is the wording from the CODI-C prospectus:
If a Tax Redemption Event (as defined herein) occurs prior to January 30, 2025, we may, at our option, redeem the Series C Preferred Shares, in whole but not in part, at a price of $25.25 per Series C Preferred Share plus any accumulated and unpaid distributions thereon (whether or not authorized or declared) to, but excluding, the redemption date.
Tax Redemption Event” means, after the date the Series C Preferred Shares are first issued, due to (a) an amendment to, or a change in official interpretation of, the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, or administrative guidance or (b) an administrative or judicial determination, (i) we are advised by nationally recognized counsel or a nationally recognized accounting firm that the trust or the company will be treated as an association taxable as a corporation for U.S. federal income tax purposes or otherwise subject to U.S. federal income tax (other than any tax imposed pursuant to Section 6225 of the Code, as amended by the Bipartisan Budget Act of 2015), or (ii) the company files an IRS Form 8832 (or successor form) electing that the trust or the company be treated as an association taxable as a corporation for U.S. federal income tax purposes.
Thus, CODI can now give 30-day notification to call CODI-C at $25.25. Given that the purpose of this change to C-Corp taxation was to lower the cost of capital, and given that CODI should be able to issue preferred stocks with much lower yields than CODI-C currently pays, the logical thing for CODI to do is to call their preferred stocks as soon as possible.
The fact that CODI would be crazy not to call their preferred stocks does not guarantee that they will call them, but the risk of a call is now high. With CODI-C trading over $26.00 and having only accrued 7 cents since its last dividend pay date, there is certainly risk of a loss from a call.
Thanks JB/AZ–very interesting will be interesting to see this play out.
Does anyone know if this applies to the B preferreds as well?
I think if their intention was to call the preferreds, then they would have said that instead of saying that preferreds will be converted to a new series with identical terms as a result of the transaction. Of course, that doesn’t stop them from calling them but if it was their plan — and if they wanted to be transparent to preferred holders (a big “if”) — then they would have noted that one of the effects of the transaction was triggering the possibility of a tax redemption event instead of saying the effect on the preferreds would be conversion to a new series.
I sold my B preferreds for 26.40s yesterday. My basis was about 25.05. Will see how this plays out.
Once every 3 years or so?
You’re allowed, Tim 😉
As long as the takeaway message is ‘no k-1s’
Your’re too kind Original D