My eagle-eyed readership will have noticed that the FixedFloater index is not doing very well recently.
This is largely due to the fact that it is entirely comprised of BCE issues: BCE has been in the news lately due to speculation that Ontario Teachers might take a run at it … or at least try to pump up the shareholder value … and I don’t mean the PREFERRED shares!
DBRS had this to say today:
DBRS notes that the Company’s largest shareholder, Ontario Teachers’ Pension Plan Board (OTBP or Teachers), has recently changed its long-standing position from being a more passive shareholder to an active shareholder. This change could place further pressure on the Company and thereby heighten its event risk.
DBRS’s current expectations for BCE include the Company maintaining a stable and conservative balance sheet and the balanced deployment of the Telesat proceeds. Should the Company’s response to recent pressure be outside of DBRS’s expectations, DBRS may reconsider the appropriateness of the Company’s A (low)/“A” ratings.
However, DBRS currently expects that any changes in the Company’s financial policy as outlined above would likely result in one-notch rating change at BCE to BBB (high)/A (low).
Nice, eh? I tell people and tell people : Floating prefs are not money market instruments, no matter how much they quack like those ducks, but nobody ever listens.
A more aggressively pro-shareholder stance by BCE will not lead to another offer for the preferreds – if anything, such an event will be less likely. I bet the old Bell Canada pref holders are now feeling a little blue : they voted to switch to an inferior credit for a trivial consideration and this could be nasty.
How will all this work out? I have no idea. I’d be buying options like crazy if I did. But I did want to ensure that readers understand that the recent decline in the FixedFloater index (down to 1,039.4 today from a peak of 1055.7 on March 15) is not necessarily due to any market disenchantment with FixedFloaters – it is more likely BCE related.
Geez this stuff is opaque. I was actually planning to buy some more of these (BCE.PR.S) as they are trading around par. Naively, I like them because the floating mechanism seems to give some capital value insurance and they do regualarly pass through par value.
I read your note but the only thing I can get from it is that you’re not keen on them!
It all depends on credit. Credit, credit, credit: the foundation of fixed income investing. If the company goes bankrupt tomorrow, your total return could be as low as -100%.
You are quite right: the floating mechanism does give capital value insurance AS LONG AS THE CREDIT IS GOOD!
BBD.PR.B has the same floating mechanism: it is rated Pfd-4 by DBRS and is currently quoted at $19.76-80.
NTL.PR.F has the same floating mechanism: it is rated Pfd-5(low) by DBRS and is currently quoted at $18.90-95.
Both have ratcheted up to pay a rate of 100% of prime, though, so choose your motivation: greed or fear. But as the credit-worthiness of these issues declines, it becomes more difficult to value them as fixed income and you have to pay more attention to the balance sheet of the issuer. They become “junk bonds” and should not be considered fixed income for asset allocation purposes but (to a greater or lesser extent) equities.
If you like the BCE name, you might want to consider their bonds. I see that long Bell Canadas are trading at Canadas + 220 bp this morning. That’s about maybe 6.45% interest yield, equivalent to 4.60% dividend yield, for a long bond with the advantage of actually having a maturity date and is closer to the front of the line in the event of any nastiness.
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