October 25, 2020

Discounted Equity Offers You a Choice

Keith Heim

“Discounted equity gives eligible equity holders a choice,” says Keith Heim, CEO.

The MaxYield Cooperative board of directors conducted its annual review of equity management in 2014. Directors evaluated various solutions and unanimously approved a plan to offer discounted equity.

“As part of MaxYield’s equity servicing efforts, your board is committed to getting more current on deferred equity,” said Keith Heim, CEO. “Discounted equity gives eligible equity holders a choice, since they can have some portion of their equities redeemed earlier than historically has been possible at MaxYield.”

MaxYield’s board approved up to $300,000 in cash to be paid out for the program, along with two groupings of equities. The first priority grouping included all equities from 1989-1998, which were redeemable at 75% of face value. The second grouping included the equities from 1999-2004, which were redeemable at 60% of face value.

“MaxYield offered these two options in addition to retiring some of the oldest, outstanding equity at full face value, as we’ve done in the past,” said Howard Haas, MaxYield’s board chairman, who noted that the program had a Jan. 31, 2015, deadline. “While this program won’t fit everyone, it did work for some people, and we had a great response.”

When the final requests were tabulated, the totals were as follows: the total equity balance requested from Group 1 was $370,916 with a payout of 75%, or $278,187 to be paid out in cash. The total equity balance requested from Group 2 was $192,648 with a payout of 60%, or $115,589 to be paid out in cash.

The board approved 100% of the requests and $393,776 will be returned to members.

These checks will be mailed in March with a letter describing the full balance, the amount paid in cash, and the discounted amount to claim as a loss on the 2015 tax return, if deemed appropriate by your tax preparer.

Offering new options
While discounted equity is not common in the ag cooperative system, it is often used in telephone and rural electric cooperatives. “If we want to make progress, we can’t get stuck doing things just because we’ve always done them that way,” Haas said. “We need to look at new options and be open to new ideas.”

Some people have questioned whether discounted equity indicates financial woes at MaxYield.
“If we were in financial trouble, we wouldn’t be able to revolve any equity,” Haas added. “We are strong financially and are glad we can offer more equity servicing options to our members.”

Offering the discounted equity option made a lot of sense for MaxYield, which gave equity holders a choice to opt for discounted equity or forego this option, leaving their equity intact.

“Some people wanted their older equity, some want the newer equity, and some didn’t want to do anything,” Heim said. “There are lots of different situations, and clients have lots of different needs that this program could accommodate.”

Those who chose to take the discounted equity option may be eligible to claim the deduction on their 2015 taxes. “It could be claimed as an ordinary business loss on the difference between the face value and actual cash received against your current year ordinary income,” Heim said. A tax advisor should be consulted to determine eligibility.

Discounted equity will also accelerate the rate that MaxYield is able to revolve qualified allocated equity to past and current members. “We have a goal of attaining a 10- to 12-year revolvement cycle within the next five years,” Heim said. “This will strengthen us financially and enhance our competitiveness in the industry.”

MaxYield’s board will once again review equity retirement in the fall of 2015. Chances are good they will look at discounted equity again. “I suspect this won’t be a one-hit wonder, based on the response this year,” Haas said.

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