Water Financial ‘A’ Preference Shares Issuance: Frequently Asked Questions

Water Financial has issued ‘A’ Preference Shares on Mesh.trade, aiming to raise R30 million to fund their growing lending business to serve their rapidly expanding client base. Water Financial offers homeowners over the age of 70 the ability to unlock the equity value in their homes, without the need to sell.

These are preference shares, and you may not be familiar with what this type of asset is and how it works. You may also be new to Mesh.trade’s cutting-edge capital markets platform. To help you along, here’s a quick guide to the details of this investment opportunity, the nature of preference shares, how to invest, and how you’ll receive your dividend payments.

The Basics

What is a share?

A share represents a unit of ownership in a company, giving the shareholder a claim on part of the company’s assets and earnings. The value of shares can change based on the company’s performance and market conditions. Dividends are paid out from the company’s profits and are not guaranteed.

What is a preference share?

A preference share is a type of share or equity that pays dividends to shareholders before any dividends are paid to common shareholders. This means that Preference share shareholders have a higher claim on the company’s assets and earnings than common shareholders, especially in the event of a liquidation.

Most preference shares have a fixed dividend, while common shares generally do not. Preferred share shareholders also typically do not hold any voting rights, but common shareholders usually do.

What does it mean when a preference share is cumulative?

There are four types of preference shares – cumulative (guaranteed), non-cumulative, participating and convertible.

A cumulative preference share means that if the company is unable to pay a dividend at any time, the unpaid dividends will accumulate and must be paid out before any dividends can be paid to common shareholders. This ensures that shareholders will eventually receive the dividends due to them, reducing the risk associated with missed payments.

What is a callable preference share?

A callable preference share means that the issuing company has the right to redeem (buy back) the shares at a predetermined price after a certain date. This option allows the company to potentially reduce its dividend payments if it can secure cheaper financing in the future, providing financial flexibility.

Why do companies issue preference shares?

Companies issue preference shares for several reasons, primarily related to their financing and capital structure strategies. 

Investors in preference shares generally prioritise fixed income over capital growth, as preference shares generally pay fixed dividends but provide additional protection from bankruptcy and liquidation. Preference shares may also offer some investors income that has been optimised for tax.

Preference shares are a unique asset type, sitting somewhere between common shares and bonds. Depending on how they are structured, issuing companies and investors can both benefit from the limited liabilities that preference shares offer.

For issuing companies preference shares are very effective funding instruments. Issuing these instruments allows the company to raise capital without diluting the control of their existing common shareholders. They also provide greater flexibility in structure, without increasing debt ratios.

How do preference shares differ from normal shares or equities?

Dividend Priority: Preference shares receive dividends before common shares, ensuring that preference shareholders are paid first.

Fixed Dividend: Preference shares typically offer a fixed dividend, providing consistent income, while common share dividends can vary based on the company’s profitability.

Voting Rights: Preference shares generally do not come with voting rights, unlike common shares, which often allow shareholders to vote on corporate matters.

Capital Repayment: In case of liquidation, preference shareholders are paid before common shareholders but after debt holders, giving them a higher claim on the company’s assets.

Accumulating Dividends: If the full preference dividend cannot be paid, the unpaid amount will accumulate and still be due in the future. Common shares do not offer this feature. If a dividend is not paid, it does not guarantee higher future dividends.

Voluntary Redemptions: For callable preference shares, the issuer has the option to redeem (or buy back) shares in the future. This is often done if the issuer can raise new capital at a lower cost. Common shares do not have this option.

Risk and Dividends

How risky is this as an investment?

While all investments carry some level of risk, preference shares are generally considered less risky than common shares due to their fixed dividend payments and higher claims on assets in case of liquidation. Cumulative preference shares also offer the advantage of accumulating unpaid dividends, ensuring that you will receive any missed dividend payments in the future, and further reducing investment risk. However, they are riskier than bonds as they do not have the same level of repayment guarantee, given that they are a type of equity.

What is the dividend rate?

The dividend rate is the annual return payable to shareholders as a percentage of the nominal/face value of their holdings. For this preference share, it is set at 87% of the Prime rate. 

Please note that the actual net dividend payments shareholders receive in their Mesh account will depend on their specific tax circumstances related to Dividend Withholding Tax (DWT).

How often will I receive a dividend?

Investors in Water Financial preference shares will receive dividends every month.

How are the dividend payments calculated?

Initial Dividend Rate Determination:

On the date the preference shares are issued, the Prime rate is recorded and multiplied by 87% to determine the initial dividend rate. This rate is used to calculate the first dividend payment.

Subsequent Dividend Rate Determination: 

For each subsequent dividend payment, the current Prime rate on the dividend payment date is recorded and multiplied by 87% to determine the new dividend rate for that period.

Using the Dividend Rate to get the Monthly Dividend Income: 

Multiply the dividend rate by the amount invested to get the Annual Dividend Income. If dividends were payable annually, this would be the actual amount paid out at the end of the year. Because these dividends are paid monthly, the Annual Dividend Income amount must be divided by 12 to get the monthly dividend. Note that dividing by 12 results in an estimated amount and is a simplification of the actual formula, where instead the Annual Dividend Income is multiplied by the fraction: days since last dividend ÷ 365 days. 

At the end of each month when a dividend is paid, the next dividend amount is calculated by using the Prime rate on that day. If the Prime rate stayed constant throughout the year, this calculation would be very straightforward and predictable, but because the Prime rate is subject to change, the resulting dividend rate will also change.

Example Calculation:

Current South African Prime Rate: 11.75%

Dividend Rate Formula: 87% of Prime

Number of shares: 10

Price per share: R1 000

Step 1: Calculate the Dividend Rate.

Dividend Rate = 0.87 x Prime

Dividend Rate = 0.87 x 11.75%

Dividend Rate = 10.2225%

Step 2: Calculate the Total Investment Amount.

Total Investment = Number of Shares x Price per Share

Total Investment = 10 shares x R1 000

Total Investment = R10 000.00

Step 3: Calculate the Annual Dividend Income.

Annual Dividend Income = Total Investment x Actual Dividend Rate

Annual Dividend Income = R10 000 x 10.2225%

Annual Dividend Income = R1 022.25

Step 4: Calculate the Monthly Dividend Income.

Estimate Income:

≈ Annual Dividend Income ÷ 12

≈ R1022.25 ÷ 12

≈ R85.19

Actual Income (for 31 days since the last dividend):

= Annual Dividend Income x (Days since last dividend ÷ 365)

= R1 022.25 x (31 ÷ 365)

= R86.82

With a dividend rate of 10.2225%, if you buy 10 shares at R1 000 each, your total investment would be R10 000. You would receive approximately R1 022.25 annually in dividends, assuming the Prime rate stays constant at 11.75%. Therefore, your expected monthly dividend income would be approximately R85.19.

What is the term of the investment?

The investment term is 5 years, with the shares being callable by the issuer after 3 years. This means the company has the option to buy back the shares at a predetermined price after the 3-year mark.

How to Invest

How do I invest in Water Financial?

Start by opening a Mesh account and completing the verification process. Once your account is verified, fund it by clicking on the ‘Fund Account’ button and making an EFT using the provided bank account details. Finally, click on ‘Join the Waiting List’ to ensure you are notified as soon as the subscription book opens.

Is there a minimum investment amount?

Each ‘A’ Preference Share has a subscription price of R1 000 per share, with a minimum subscription required of 10 ‘A’ Preference Shares. This means the minimum investment amount is R10 000. 

Any investment over the minimum amount of R10 000 can be in R1 000 increments. So it is possible to make an investment of R12 000.

Can I subscribe for a fraction/part of a preferred share?

No. You have to subscribe for a whole number of preference shares. 

Each share is valued at R1 000 with a required minimum investment of 10 units.

Will there be a secondary market?

Yes, the shares will be tradeable on the Mesh platform once the secondary market for Water Financial preference shares is enabled. The actual trading of the instrument will be dependent on there being buyers who are willing to acquire the shares and the willing buyer and willing seller agreeing to transact with each other on a bilateral basis. 

What is mZAR?

mZAR is a fully collateralised South African ZAR stablecoin, based on the open fiat stablecoin framework of Mesh. mZAR is fully redeemable for ZAR held in an account managed by Mesh. 1 mZAR equals 1 ZAR. At all times.