Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners, has announced:
the reset dividend rate on its Class AAA Preference Shares, Series P (“Series P Shares”) (TSX: BPO.PR.P) ….
Series P Shares
If declared, the fixed quarterly dividends on the Series P Shares for the five years commencing April 1, 2017 and ending March 31, 2022 will be paid at an annual rate of 4.161% ($0.260063 per share per quarter).
Holders of Series P Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on March 16, 2017, to convert all or part of their Series P Shares, on a oneforone basis, into Class AAA Preference Shares, Series Q (the “Series Q Shares”), effective March 31, 2017.
The quarterly floating rate dividends on the Series Q Shares have an annual rate, calculated for each quarter, of 3.00% over the annual yield on threemonth Government of Canada treasury bills. The actual quarterly dividend rate for the April 1, 2017 to June 30, 2017 dividend period for the Series Q Shares will be 0.86762% (3.48% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.216905 per share, payable on June 30, 2017.
Holders of Series P Shares are not required to elect to convert all or any part of their Series P Shares into Series Q Shares.
As provided in the share conditions of the Series P Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series P Shares outstanding after March 31, 2017, all remaining Series P Shares will be automatically converted into Series Q Shares on a oneforone basis effective March 31, 2017; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series Q Shares outstanding after March 31, 2017, no Series P Shares will be permitted to be converted into Series Q Shares. There are currently 12,000,000 Series P Shares outstanding.
The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series Q Shares effective upon conversion. Listing of the Series Q Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series Q Shares will be listed on the TSX under the trading symbol “BPO.PR.Q”.
BPO.PR.P is a FixedReset, 5.15%+300, that commenced trading 20101021 after being announced 20101013.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BPO.PR.P and the FloatingReset BPO.PR.Q that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3month bill rate and the averages for investmentgrade and junk issues are both well below current market rates, at 0.13% and 0.59%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the BPO.PR.P FixedReset, we may construct the following table showing consistent prices for its soontobeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Estimate of FloatingReset BPO.PR.Q (received in exchange for BPO.PR.P) Trading Price In Current Conditions 

Assumed FloatingReset Price if Implied Bill is equal to 
FixedReset 
Bid Price 
Spread 
0.00% 
0.50% 
1.00% 
BPO.PR.P 
20.32 
300bp 
19.15 
18.65 
18.14 
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of BPO.PR.P continue to hold the issue and not to convert, but I will wait until it’s closer to the March 6 notification deadline before making a final pronouncement. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
Insofar as the relative valuation of BPO.PR.P is concerned, Implied Volatility analysis indicates it’s fairly priced relative to other BPO issues:
Click for Big
BCE.PR.O : Convert or Hold?
Friday, March 10th, 2017It will be recalled that BCE.PR.O will reset to 4.26% effective March 31.
Holders of BCE.PR.O have the option to convert to FloatingResets, which will pay 3month bills plus 309bp on the par value of $25.00, reset quarterly. The deadline for notifying the company of the intent to convert is 5:00 p.m. (Montréal/Toronto time) on March 16, 2017; but note that this is a company deadline and that brokers will generally set their deadlines a day or two in advance, so there’s not much time to lose if you’re planning to convert! However, if you miss the brokerage deadline they’ll probably do it on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion. The ticker for the new FloatingReset, if it is issued, will be BCE.PR.P.
BCE.PR.O came into existence by way of conversion from BAF.PR.C. This was a mandatory exchange following the BCE takeover of Bell Aliant.
BAF.PR.C was a FixedReset, 4.55%+309, that commenced trading 2011127 after being announced 20111121.
The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BCE.PR.O and the FloatingReset BCE.PR.P that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higherpriced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.
We can show the breakeven rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3month bill rate against the next Exchange Date (which is the date to which the average will be calculated).
Click for Big
The market appears to have a distaste at the moment for floating rate product; most of the implied rates until the next interconversion are lower than the current 3month bill rate and the averages for investmentgrade and junk issues are both well below current market rates, at 0.42% and 0.47%, respectively! Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.
Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investmentgrade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.
If we plug in the current bid price of the BCE.PR.O FixedReset, we may construct the following table showing consistent prices for its soontobeissued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:
Price if Implied Bill
is equal to
Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BCE.PR.O continue to hold the issue and not to convert. I will note that, given the apparent cheapness of the FloatingResets, it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good takeout in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.
Insofar as the relative valuation of BCE.PR.O is concerned, Implied Volatility analysis indicates it’s a little cheap relative to other BCE issues, but this conclusion may be distorted because BCE.PR.Q is so expensive:
Click for Big
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