BCE.PR.Z To Reset To 3.152%

BCE Inc. has announced:

BCE Inc. will, on December 1, 2012, continue to have Cumulative Redeemable First Preferred Shares, Series Z (“Series Z Preferred Shares”) outstanding if, following the end of the conversion period on November 19, 2012, BCE Inc. determines that at least one million Series Z Preferred Shares would remain outstanding. In such a case, as of December 1, 2012, the Series Z Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the average of the yields to maturity compounded semi-annually, determined on November 13, 2012 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period.

The “Selected Percentage Rate” determined by BCE Inc. for such period is 243%. The “Government of Canada Yield” is 1.297%. Accordingly, the annual dividend rate applicable to the Series Z Preferred Shares for the period of five years beginning on December 1, 2012 will be 3.152%.

The company has previously published

Similarly to to my recommendation in the BCE.PR.A / BCE.PR.B interconversion, I recommend that holders of BCE.PR.Z convert to BCE.PR.Y. The total dividends paid over the next five years will greater for the latter issue if the average prime rate exceeds 3.152% (provided that this issue continues to pay 100% of prime, which it will do unless the current price of a little under $22 increases to over $25). This condition will be met if prime increases steadily to 3.5% at the end of five years, and doesn’t miss by much if there’s only a single hike to 3.25%. This is a reasonably good bet, even with the Fed announcing continued financial repression through mid-2015. Additionally, I judge the chance of an overshoot of this figure to be much greater than the chance of an extreme undershoot; in other words, I judge the chances of average prime being 5% to be much greater than the chance of average prime being 2%.

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