BCE.PR.K Reopening: Ridiculous Rip-Off Wrinkle

BCE Inc. has announced:

that it has entered into an agreement to issue and sell 10,000,000 Cumulative Redeemable First Preferred Shares, Series AK (series AK preferred shares), at a price of $25.00 per share, for aggregate gross proceeds of $250 million on a bought deal basis to a syndicate led by RBC Capital Markets, BMO Capital Markets and TD Securities Inc. This offering constitutes an additional issuance to the 13,800,000 series AK preferred shares that BCE initially issued on July 5, 2011.

The underwriters have also been granted an over-allotment option to purchase, at the offering price, up to an additional 1,200,000 series AK preferred shares exercisable until the date that is 30 days following the closing. Should the over-allotment be fully exercised, the total gross proceeds of the offering will be $280 million.

The series AK preferred shares will have the same terms and conditions as the existing series AK preferred shares and will pay on a quarterly basis (with the first quarterly dividend to be paid March 31, 2012), for the initial fixed rate period ending December 31, 2016, if, as and when declared by the Board of Directors of BCE, a fixed cash dividend of $0.25938. The dividend rate will be reset on December 31, 2016 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 1.88%. The series AK preferred shares are redeemable by the issuer on or after December 31, 2016, in accordance with their terms.

Holders of series AK preferred shares have the right, at their option, to convert their shares into Cumulative Redeemable First Preferred Shares, Series AL, (series AL preferred shares) subject to certain conditions, on December 31, 2016 and on December 31 every five years thereafter. Holders of series AL preferred shares are entitled to receive quarterly floating adjustable cash dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 1.88%.

The series AK preferred shares will be offered for sale to the public in each of the provinces of Canada pursuant to a short form prospectus to be filed with Canadian securities regulatory authorities in all Canadian provinces. The offering is scheduled to close on or about January 4, 2012, subject to certain conditions, including obtaining all necessary regulatory approvals.

The net proceeds of this offering will be used for general corporate purposes.

The extant issue traded today slightly above 25.00, but IIROC halted trading shortly before the close.

I’m surprised the underwriters are letting BCE get away with this, but all’s fair in love, war and investments!

BCE.PR.K is a 4.15%+188 FixedReset that began trading in July. At the time of its announcement on June 20, the GOC 5-Year yield was about 2.20%. Since then it has tumbled to about 1.33% … implying that the normal structure would require an Issue Reset Spread of about 275bp if a new issue was done today. Naturally, the company prefers to issue new shares with a spread of 188bp!

One reason the structure evolved the way it did was because of all of the bank issuance – OSFI will allow index-based coupons in Tier 1 Capital, but only if there’s no future step-up implied in the calculation on approval date. I wonder how they feel about step-downs!

I had a number of things to say about the price effect of projected reset rates for discounted and near-par FixedResets in the December edition of PrefLetter which was published early this morning. Correlation or Causation?

Update: DBRS rates Pfd-3(high), Trend Stable.

4 Responses to “BCE.PR.K Reopening: Ridiculous Rip-Off Wrinkle”

  1. observer says:

    Hi James, the BCE.PR.K is a 4.15% re-set preferred.

    Great site, enjoy your commentary.

  2. […] is interesting to compare this with the BCE.PR.K reopening announced yesterday … BCE.PR.K is a 4.15%+188 FixedReset trading at around […]

  3. jiHymas says:

    Hi James, the BCE.PR.K is a 4.15% re-set preferred

    Oops! There was a typo in a previous post, which was copied without thinking and has now been corrected.

    Thanks for keeping me on my toes! You win a free copy of PrefLetter for spotting the error – send me an eMail to tell me whether you want the last one or the next one.

  4. […] why not bring new issues to market while forecasting declining resets? It hasn’t done BCE.PR.K, an egregious offender any […]

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