BCE.PR.F To Reset Effective February 1; Holders May Exchange to BCE.PR.E

BCE Inc. has announced:

1. Holders of BCE Inc. Series AF Preferred Shares have the right to convert all or part of their shares, effective on February 1, 2015, on a one-for-one basis into Cumulative Redeemable First Preferred Shares, Series AE of BCE Inc. (the “Series AE Preferred Shares”).

2. Holders not wishing to convert or who do not comply with the instructions set out in paragraph 3 below by the appropriate deadline will, subject to paragraph 6 below, retain their Series AF Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 5 below. However, but subject to paragraph 6 below, on February 1, 2020, and every five years thereafter, holders of both Series AF Preferred Shares and Series AE Preferred Shares will have the right to convert their shares into shares of the other series.

3. Registered holders electing to convert all or part of their Series AF Preferred Shares into Series AE Preferred Shares must complete and sign the conversion panel on the back of their Series AF Preferred Share certificate and deliver it, at the latest by 5:00 p.m. (Eastern time) on January 19, 2015, to one of the following addresses of CST Trust Company:…


5. As of February 1, 2015, the Series AF Preferred Shares will, should they remain outstanding, 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 yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on January 12, 2015 by two investment dealers appointed by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 259.4%. The annual dividend rate applicable to the Series AF Preferred Shares will be published on January 14, 2015 in the national edition of The Globe and Mail, the Montreal Gazette and La Presse and will be posted on the BCE Inc. website at www.bce.ca.

Given that the GOC-5 rate is currently 1.22%, paragraph 5 implies that the new rate will be about 3.165%, although the precise figure won’t be known until January 12 … at which point, according to paragraph 3, holders will have only a week to make their decision regarding conversion and instruct their broker. Note that broker deadlines will, in almost all cases, be prior to the January 19, 2015, deadline of the company.

Holders of BCE.PR.E also have the right to convert to BCE.PR.F. Note that the company can force conversion to (or retention of) a particular element of this Strong Pair if there will not be many of the other one outstanding if everybody gets their first choice. However, given recent conversion ratios of AZP.PR.B / AZP.PR.C, FFH.PR.C / FFH.PR.D and TRP.PR.A / TRP.PR.F, it seems reasonably likely that both elements will remain outstanding.

Following the 2010 conversion, only about 1.4-million BCE.PR.E (the RatchetRate issue) were left outstanding, compared to about 14.6-million BCE.PR.F (the FixedFloater). BCE.PR.F reset to 4.451% in 2010 implying that the projected future rate of 3.165% is a 29% reduction in dividend.

The current Strong Pair prime breakeven rates are widely scattered, but average about 3.8%:

PL_150109_App_FR_Chart_34
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If we assume that the new rate on BCE.PR.F will be 3.165% and that the pair will have a break-even prime rate of 3.84%, then the current bid of 20.67 on BCE.PR.E implies a bid of 19.96 on BCE.PR.F, compared to its actual current bid of 20.27, so we may see a little bit more of a drop once the new rate is announced. One way or another, it looks likely at this point that conversion to the RatchetRate BCE.PR.E will be the preferred course of action at decision time.

The price difference over the past year of the two issues (bid price BCE.PR.F less bid price BCE.PR.E):

BCEPRF_BCEPRE_bidDiff_150109
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