Bombardier Inc. has announced:
the basis for resetting the dividend rate on its Series 3 Preferred Shares in accordance with the terms applicable to those shares.
Holders of Bombardier Inc. Series 2 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2012, on a one-for-one basis into Series 3 Preferred Shares. Holders of Series 3 Preferred Shares have the right to convert all or part of their shares, effective on August 1, 2012, on a one-for-one basis into Series 2 Preferred Shares. Holders who do not convert their shares will retain their Series 2 Preferred Shares or Series 3 Preferred Shares, as the case may be.
In the case of the Series 2 Preferred Shares, starting as of August 1, 2012, holders will continue to receive a monthly floating adjustable cash dividend, as and when declared by the Board of Directors of Bombardier Inc., based on a dividend rate equal to a percentage of the prime rate, subject to certain adjustments in accordance with the terms of such shares.
In the case of the Series 3 Preferred Shares, starting as of August 1, 2012, holders will receive a quarterly fixed cash dividend for the following five years, as and when declared by the Board of Directors of Bombardier Inc., based on a fixed rate equal to 255% of the yield on five-year non-callable Government of Canada bonds determined as at July 11, 2012, in accordance with the terms of such shares. The annual dividend rate applicable to the Series 3 Preferred Shares will be published on July 12, 2012 in several newspapers.
Any registered shareholder who wishes to convert his or her Series 2 and/ or Series 3 Preferred Shares must complete and sign the conversion panel contained on the back of the Series 2 or Series 3 Preferred Share certificate as the case may be, and deliver it, at the latest by 5:00 p.m. (Montréal time) on July 18, 2012, to Computershare Investor Services Inc.
Shareholders who are beneficial owners and who wish to exercise their right of conversion should communicate as soon as possible with their broker or other nominee and follow their instructions. In that case, it is important that they follow such instructions and act in the time frame advised so as to provide enough time to their broker or other nominee to meet the July 18, 2012 deadline.
If, after July 18, 2012, Bombardier Inc. determines that there would be less than one million Series 2 Preferred Shares outstanding after the conversion date (being August 1, 2012), then all remaining Series 2 Preferred Shares will automatically be converted into Series 3 Preferred Shares on a one-for-one basis. However, if, after such date, Bombardier Inc. determines that there would be less than one million Series 3 Preferred Shares outstanding after the conversion date (being August 1, 2012), then all remaining Series 3 Preferred Shares will automatically be converted into Series 2 Preferred Shares on a one-for-one basis. In either case, Bombardier Inc. shall give a written notice to that effect to holders of such remaining shares no later than July 25, 2012.
Subject to the conditions mentioned in the previous paragraph, on August 1, 2017, and every five years thereafter, holders of Series 2 Preferred Shares and holders of Series 3 Preferred Shares will have again the right to convert their shares into shares of the other series.
At the current five-year Canada yield (GOC5) of 1.19% (!) the indicated new yield will be 3.0345% or a little over $0.75 p.a. – a steep decline from the current payment of 5.267%, or $1.31675.
I have expressed astonishment in recent editions of PrefLetter that the price differential between BBD.PR.D and BBD.PR.B (the Ratchet Rate issue with which it is interconvertible) has remained so high for so long (closing prices June 14 were 17.75 and 14.90, respectively). But the preferred share market is an inefficient place!
The last arbitrage opportunity was, of course, five years ago. Both BBD.PR.B and BBD.PR.D are tracked by HIMIPref™; both issues are relegated to the Scraps index on credit concerns.
Interesting that this announcement caused only half the gap to close between the BBD.PR.B/D prices. There is still $1.25 of profit (net of dividends for the deft arbitrageur) as of noon today. In 2007 the gap closed very slowly and then only briefly around July 11.
However, back then, prime was 6% bumping up to 6.25% and the Pr.D div fell from $1.37 to $1.317, which explains why the floater was higher priced.
This time, prime is 3% and the indicated fixed dividend is not much different, so a logical market should price these two issues about the same after the event. But, as BAM.PR.E/G (where the lower dividend floater is $2 more than the fixed) shows, logic is not always relevant so maybe there will be lots of BBD.PR.B/D swapping opportunity after the exchange, too.
[…] got whacked today after the announcement of the reset rate, closing down 1.40, or 7.89%, on heavy volume (for this issue!) of 32,479 shares. However, even at […]
[…] was also hammered, down 0.65 to close at 14.30. The interconversion has been discussed on PrefBlog; BBD.PR.D will reset to 255% of GoC5 – which at current levels will be only a hair above […]