Category: Issue Comments

BCE Inc. has announced:

that 7,904,105 of its 14,577,100 fixed-rate Cumulative Redeemable First Preferred Shares, Series AF (“Series AF Preferred Shares”) have been tendered for conversion on February 1, 2015, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AE (“Series AE Preferred Shares”). In addition, 34,872 of its 1,422,900 Series AE Preferred Shares have been tendered for conversion on February 1, 2015, on a one-for-one basis, into Series AF Preferred Shares. Consequently, on February 1, 2015, BCE will have 6,707,867 Series AF Preferred Shares and 9,292,133 Series AE Preferred Shares issued and outstanding. The Series AF Preferred Shares and the Series AE Preferred Shares will continue to be listed on the Toronto Stock Exchange under the symbols BCE.PR.F and BCE.PR.E, respectively.

The Series AF Preferred Shares will pay on a quarterly basis, for the five-year period beginning on February 1, 2015, as and when declared by the Board of Directors of BCE, a fixed cash dividend based on an annual dividend rate of 3.110%.

The Series AE Preferred Shares will continue to pay a monthly floating adjustable cash dividend for the five-year period beginning on February 1, 2015, as and when declared by the Board of Directors of BCE. The monthly floating adjustable dividend for any particular month will continue to be calculated based on the prime rate for such month and using the Designated Percentage for such month representing the sum of an adjustment factor (based on the market price of the Series AE Preferred Shares in the preceding month) and the Designated Percentage for the preceding month.

BCE.PR.E closed at 20.50-65 today, while BCE.PR.F closed at 19.64-71, which means that those who took my advice and converted F to E have made a very profitable switch! According to the Pairs Equivalency Calculator, the breakeven Prime Rate for the next five years at these prices is 3.93%, which is more or less in line with the breakeven rates for other FixedFloater / Ratchet Rate Strong Pairs.

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Bombardier announced a ‘pause’ today and the market paused its bids:

Bombardier Inc. (BBD/B) tumbled the most in at least 26 years after moving to cut about 1,000 jobs and book $1.4 billion in pretax fourth-quarter costs as it halts work on the Learjet 85 business aircraft.

The dismissals will take place in Kansas and Mexico, and result in severance expense of $25 million this quarter, said Bombardier, which didn’t predict when the Learjet 85 program will resume. Profit in the aerospace and trainmaking units for 2014 will fall short of previously announced targets.

Bombardier’s pullback on the Learjet 85, which was described as a “pause” in the face of weak demand, underscored the company’s struggle in developing new planes. The Learjet 85 is already more than a year behind schedule, and Montreal-based Bombardier eliminated about 3,500 aerospace jobs last year as it postponed the CSeries airliner for the fourth time.

“It’s really not clear to me what ‘pause’ means,” said Cam Doerksen, an analyst at National Bank of Canada Financial in Montreal who rates Bombardier as sector perform. “This is a pretty sizable charge, and this suggests to me this may be longer than a typical delay. This appears to be an indefinite pause.”
…
The cost to protect Bombardier’s debt from default within 5 years jumped 125 basis points to 481 basis points at 4:17 p.m., according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. The contracts are at the highest level since January 2012.

and S&P cut their credit rating by a notch:

• •Montreal-based Bombardier Inc. announced it would pause its Learjet 85 program due to weak demand and has revised its business aircraft market forecast downward.
• •In addition, the company revised its 2014 guidance, including reduced earnings before interest and taxes margins at both the aerospace and
  transportation divisions.

• •Because of Bombardier’s reduced profitability, pricing pressures on new aircraft, and revised escalation assumptions in the transportation division on some contracts that affected estimated future revenues, we
  have reassessed our comparable rating modifier on the company and revised it to “neutral” from “positive”.

• •As a result, we are lowering our ratings on Bombardier, including our long-term corporate credit rating to ‘B+’ from ‘BB-‘
• •The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than previously forecast.

…
The ratings on Bombardier reflect what we view as the company’s “satisfactory” business risk profile and “highly leveraged” financial risk profile. Our ratings take into consideration the company’s leading market positions in the transportation and business aircraft segments, as well as its product range and diversity. These positive factors are partially offset, in our opinion, by the continued execution risk associated with the entry into service of the CSeries jet, high leverage, and reported profitability that has been weak in both the aerospace and transportation divisions.
…
The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than we previously forecast. Furthermore, the outlook incorporates our opinion that, given Bombardier’s current leverage and debt-to-cash flow metrics, there remains very limited room for delays on project execution or margin
deterioration.

We could lower the rating on Bombardier should its new aircraft program experience further delays or order levels do not allow for profitable production, resulting in a reassessment of the company’s business risk profile. In addition, we could take a negative rating action should Bombardier face liquidity pressures, which could result from either deteriorating headroom under its covenants or an inability to refinance upcoming maturities.

These issues have previously been downgraded to P-4(low) by S&P in February 2014 and to Pfd-4(low) by DBRS. All are tracked by HIMIPref™ and all are relegated to the Scraps index on credit concerns.

Update, 2015-1-26: Moody’s has placed Bombardier under Review-Negative:

Moody’s Investors Service placed Bombardier Inc.’s Ba3 Corporate Family rating (CFR), Ba3-PD probability of default rating and Ba3 senior unsecured ratings under review for possible downgrade. Moody’s also lowered the company’s speculative grade liquidity rating to SGL-3 from SGL-2.

The rating’s review follows Bombardier’s announcement yesterday that it has materially lowered its earnings and cash flow expectations for 2014. Consequently, Moody’s believes Bombardier will need to raise additional debt to fund the cash shortfall and address its weakened liquidity position, which would further pressure the company’s adjusted leverage from an already high level of approximately 7x currently. As well, given ongoing execution challenges in its Transportation division, relatively weak order flow for certain of its aircraft, and the potential for further cost escalation related to its CSeries aircraft program, Moody’s believes the company will continue to consume cash through at least 2015. Bombardier’s $2.4 billion of cash and $1.4 billion of available revolvers provides adequate liquidity, however continued covenant compliance through the next year is a concern in Moody’s opinion.

Moody’s review will focus on Bombardier’s plans to strengthen its liquidity position, as well as the company’s prospects for improving its earnings and reducing its cash consumptiveness through 2016.

Bombardier’s unsecured notes, which do not benefit from upstream guarantees, could be lowered by more than the CFR, particularly if the company obtains secured debt with any funding initiatives.

BCE Inc. has announced (emphasis from original) that it:

will, on February 1, 2015, continue to have Cumulative Redeemable First Preferred Shares, Series AF (“Series AF Preferred Shares”) outstanding if, following the end of the conversion period on January 19, 2015, BCE Inc. determines that at least one million Series AF Preferred Shares would remain outstanding. In such a case, as of February 1, 2015, the Series AF 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 January 12, 2015 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 259.4%. The “Government of Canada Yield” is 1.199% . Accordingly, the annual dividend rate applicable to the Series AF Preferred Shares for the period of five years beginning on February 1, 2015 will be 3.110%.

The rate was reset in 2010 to 4.541%, so this is a 32% cut to the dividend, which will no doubt cause much wailing and gnashing of teeth.

This is not much of a premium over the 3.00% (100% of Prime) paid by the RatchetRate issue, BCE.PR.E, and as it turns out the breakeven prime rate as determined by the pairs equivalency calculator is only 3.55% given today’s closing bids of 20.04 for BCE.PR.F and 20.50 for BCE.PR.E.

That is to say that IF BCE.PR.E continues to trade below par and therefore continues to pay 100% of prime, and if the average prime rate from now until the next interconversion date in 2020 exceeds 3.55%, THEN BCE.PR.E will have been the better choice.

As one can see, this is a fairly modest hurdle, compared to that implied by other FixedFloater/RatchetRate Strong Pairs:

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Given that there is a presumed immediate gain of $0.46 available by converting BCE.PR.F to BCE.PR.E and that the risk of this being reduced during the period between the decision date and the date that converters receive their replacement shares is small (since, all else being equal, a reduction in the price of BCE.PR.E implies a reduction in the Break-Even Prime Rate, which is already on the low side), I recommend that holders of BCE.PR.F convert to BCE.PR.E. Holders of BCE.PR.E should retain their shares.

Note that while the company requires notification of conversion prior to 5:00 p.m. (Eastern time) on January 19, 2015, brokerage houses will have deadlines a day or two in advance of the company deadline – so there’s not much time to waste!

S Split Corp. has released its Semi-Annual Report to June 30, 2014.

Figures of interest are:

MER: According to the report:

The management expense ratio (“MER”) is the sum of all fees and expenses for the stated period, including federal and provincial sales taxes but excluding transaction fees and Preferred share distributions, divided by the average net asset value, excluding the Redeemable Preferred Share liability.

Given that the NAVPU at the beginning of the period was 19.86, and 20.97 at the end, we may approximate the total assets as double the amount ‘excluding the Redeemable Preferred Share liability’, which results in a MER for analytical purposes of about 1.25%.

Average Net Assets: We need this to calculate portfolio yield.The beginning of period assets is the sum of Capital Unitholders equity and Preferred Share value: ($30.73-million + $31.16-million) = 61.9-million, while end of period assets are (32.11-million + 29.26-million) = 61.4-million. So call the average assets $61.6-million.

Underlying Portfolio Yield: Total Income (dividends, securities lending and interest) of $1.753-million over half a year (but getting three quarterly dividends, due to Scotia’s strange dividend policies, so only multiply by four-thirds!) divided by average net assets of $61.6-million is 3.79% p.a. This is reasonably close to Scotia’s currently quoted yield of 4.19%.

Income Coverage: Two thirds of dividend income (see above) is 1.168-million and expenses are 0.772-million, for net income of 0.396-million to cover preferred dividends of $0.818-million is 48%.

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%:

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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):

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Strathbridge Asset Management Inc. has announced (although not yet on their website):

that securityholders of the Funds have approved a proposal to change the investment restrictions and/or investment strategy of each of the Funds.

As a result, the Manager will have greater flexibility in managing each Fund’s portfolio securities such that each Fund may (i) invest in certain portfolio securities (known as the basket) to enhance returns beyond the Fund’s core portfolio holdings, (ii) invest in other investment funds (including exchange traded funds and other Strathbridge funds) to assist in achieving its investment objectives in an efficient manner, (iii) invest up to 10% of its net assets to purchase call options on securities in which it is permitted to invest and (iv) invest portfolio assets entirely in cash or cash equivalents, in the Manager’s discretion, for defensive or other purposes.

The special meetings were previously reported on PrefBlog.

There are now about 1.66-million shares of AZP.PR.C outstanding following a 42% conversion from AZP.PR.B – which are going to be a nightmare for novices to trace, since this was issued as EPP.PR.B, then changed to CZP.PR.B, then changed to AZP.PR.B and finally converted to AZP.PR.C.

AZP.PR.C is a FloatingReset, paying the three-month bill rate +418bp, reset quarterly. It is convertible back to AZP.PR.B on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The Toronto Stock Exchange reports no volume on its debut.

Vital statistics are:

The Pair Equivalency of AZP.PR.C to its FixedReset sibling AZP.PR.B shows it to be very cheaply bid at 12.50, compared to the 13.30 bid on the latter issue; but given that there was no volume at all and that the quote was 12.50-14.00, no real conclusions can be drawn. At the bid prices, three-month bills need only average 0.42% over the next five years to achieve equivalent total returns.

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There are now about 4.0-million shares of FFH.PR.D outstanding following a 40% conversion from FFH.PR.C.

FFH.PR.D is a FloatingReset, paying the three-month bill rate +315bp, reset quarterly. It is convertible back to FFH.PR.C on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns.

The Toronto Stock Exchange reports 29,200 shares trading on its debut in a very wide range of 22.60-23.99 (!) before closing at 23.87-25.

Vital statistics are:

The Pair Equivalency of FFH.PR.D to its FixedReset sibling FFH.PR.C shows it to be expensive at 23.87, compared to the 22.75 bid on the latter issue. At the bid prices, three-month bills will have to average 2.55% over the next five years to achieve equivalent total returns.

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There are now about 12.0-million shares of TRP.PR.F outstanding following a 57% conversion from TRP.PR.A.

TRP.PR.F is a FloatingReset, paying the three-month bill rate +192bp, reset quarterly. It is convertible back to TRP.PR.A on 2019-12-31 at the option of the holder.

This issue will be tracked by HIMIPref™ and is assigned to the FloatingReset subindex.

The Toronto Stock Exchange reports 37,925 shares trading on its debut in a range of 22.41-85 before closing at 22.26-75.

Vital statistics are:

The Pair Equivalency of TRP.PR.F to its FixedReset sibling TRP.PR.A shows it to be very rich at 22.26, compared to the 20.65 bid on the latter issue; but potential sellers in retail won’t have received access to their shares yet. At the bid prices, three-month bills will have to average 2.89% over the next five years to achieve equivalent total returns.

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I must emphasize that the headline judgement of “extremely rich” applies only within the TRP.PR.A / TRP.PR.F pair: with a yield to perpetuity of 3.11%, the issue looks reasonably priced, if not a little cheap, against other investment-grade Floating Rate perpetuals (BAM.PR.B, BAM.PR.C, BAM.PR.K and PWF.PR.A). Note that the only other investment grade FloatingResets at this time are NVCC non-compliant banks; the presumption of a Deemed Maturity makes them not particularly comparable to TRP.PR.F.