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Split Share Corporations

The "split share" structure is another unique type of financial structured product. The split share structure allows the risk-reward component of common shares to be broken down into two components and then allocated differently for investors who are more or less risk averse.

A split share corporation will hold common shares of one company or more, typically a portfolio of common shares (based on a sector or industry). The corporation then issues two classes of shares - capital shares and preferred shares. For preferred shareholders, the objective is to generate fixed cumulative preferential dividends and to return the original investment. For capital shareholders, the objective is to increase investors' participation in any capital appreciation (or depreciation) in the underlying portfolio shares and to benefit from any increase in the dividends paid on the portfolio shares. With the use of leverage, the capital shareholders can realize a greater proportionate change in the value of the capital shares vs. the underlying common share (e.g. $1 increase in the common share price translates into a $1.50 increase in the capital shares).

Using this structure, a portfolio of regular common shares can be divided into capital shares that have a higher level of risk than the underlying common shares and preferred shares that exhibit lower risk than the underlying common shares. Therefore, the distinction between the class of shares issued by a split share corporation is very important.

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