On an unrelated thread, Assiduous Reader prefhound writes in and says:
Why is BPO.PR.I still outstanding? As of Jan 1 this year, the company could have redeemed at par $25 and the investor could have retracted at a discount for common shares of value $26.04.
In spite of this, the pref trades at a dividend adjusted price of about $25.10. Why wouldn’t the “astute” buyer buy the pref, retract and pocket an expected $1 profit (all be it with a bit of risk on the common performance until paid)?
Why is BPO sitting on the fence? It either wants the balance sheet equity from conversion (so would call the issue), or it doesn’t.
How do these issues normally evolve at and past retraction (“maturity”) date and how do you calculate a YTW?
The 2010 Annual Report shows 7,130,228 shares outstanding, the same as is currently reported by the TMX. So none have been cancelled since year-end.
On and after December 31, 2008, the Corporation may, at its option: (i) upon not less than 30 days and not more than 60 days prior written notice, redeem for cash the Series I Preference Shares, in whole at any time or in part from time to time, at $25.75 per share if redeemed before December 31, 2009, at $25.50 per share if redeemed on or after December 31, 2009, but before December 31, 2010, and at $25.00 per share if redeemed thereafter, plus, in each case, all accrued and unpaid dividends up to but excluding the date fixed for redemption; or (ii) upon not less than 30 days and not more than 60 days prior notice, subject, if required, to stock exchange approvals, convert the outstanding Series I Preference Shares into freely tradeable Common Shares. The number of Common Shares into which each Series I Preference Share may be so converted will be determined by dividing the then applicable redemption price per Series I Preference Share, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $2.00 and 95% of the then Current Market Price (as defined herein) of the Common Shares at such time. See ‘‘Details of the Offering’’.
On and after December 31, 2010, upon at least 30 days notice, each Series I Preference Share will be convertible at the option of the holder on the last day of each of March, June, September and December in each year into that number of freely tradeable Common Shares determined by dividing $25.00, together with all accrued and unpaid dividends up to but excluding the date fixed for conversion, by the greater of $2.00 and 95% of the then Current Market Price (as defined herein) of the Common Shares. If a holder of Series I Preference Shares elects to convert any of such shares into Common Shares, the Corporation may, on not less than 20 days notice prior to the conversion date, elect to redeem such Series I Preference Shares for cash or arrange for the sale of those shares to substitute purchasers. See ‘‘Details of the Offering’’.
prefhound later wrote:
Hmmm, I think I have my answer:
According to the prospectus, BPO can give $25 cash to a pref owner who wants to convert to common, or get a third party to buy the pref for $25. Obviously, if the price is $25.10 it won’t be hard to find such parties!
Thus, it seems to me that this clause means that YTW should be based on a $25 maturity price, not $26.04.
How common is this type of clause?
Thoughts?
Yes, you’re quite right – but the YTW is always based on the $25.00 rather than the $26.04, since the issuer always has the right to pre-empt retractions for shares. Always? Well, as far as I know.
Note that this “Mexican stand-off” is inherently unstable: the company has to be prepared to pay cash at any time, so the issue is basically a demand loan; and the shareholders have to be prepared to get cash at any time, but can treat the investment as (rather low-grade) money market paper. But for now the arrangement seems to meet the needs of both parties.
HIMIPref™ calculates the YTW by assuming OptionCertainty one month hence on all calculation dates.
[…] is an interesting issue, since (as discussed in the post BPO.PR.I: What is the Meaning of Existence?), it has been both redeemable and retractible at par for quite some time … but both the […]