Category: Issue Comments

Issue Comments

BCE to Make Offer for All BCE / BC Preferred Shares

According to a news release issued today, BCE will “eliminate its holding company operations and convert Bell Canada into an income trust.”

As part of this transaction “BCE and Bell Canada to make cash offer to repurchase all of their outstanding preferred shares”, specifically:

BCE and Bell Canada expect that the cash offer prices for the preferred shares will be as follows (information from linked press release)

    – $26.05 per share for the Series R First Preferred Shares of BCE (BCE.PR.R closed 10/10 @ 25.45-79)
    – $25.60 per share for the currently redeemable Series S First Preferred Shares of BCE (BCE.PR.S closed 10/10 @ 24.85-05)
    – $25.60 per share for the currently redeemable Series Y First Preferred Shares of BCE (BCE.PR.Y closed 10/10 @ 24.40-54)
    – $25.75 per share for the Series Z First Preferred Shares of BCE (BCE.PR.Z closed 10/10 @ 25.50-59)
    – $25.65 per share for the Series AA First Preferred Shares of BCE (BCE.PR.A closed 10/10 @ 25.39-59)
    – $25.85 per share for the Series AC First Preferred Shares of BCE (BCE.PR.C closed 10/10 @ 25.65-72)
    – $25.60 per share for the currently redeemable Series 15 Class A Preferred Shares of Bell Canada (not tracked by HIMIPref™)
    – $26.05 per share for the Series 16 Class A Preferred Shares of Bell Canada (not tracked by HIMIPref™)
    – $25.95 per share for the Series 17 Class A Preferred Shares of Bell Canada (BC.PR.B closed 10/10 @ 25.10-24)
    – $25.60 per share for the currently redeemable Series 18 Class A Preferred Shares of Bell Canada (BC.PR.E closed 10/10 @ 25.13-25)
    – $26.25 per share for the Series 19 Class A Preferred Shares of Bell Canada (BC.PR.C closed 10/10 @ 25.46-51)

“BCE also intends to directly or indirectly make an offer to acquire any Series T First Preferred Shares of BCE that may be issued on conversion of the currently outstanding Series S First Preferred Shares.”

Data Changes

Quiet Disaster for SLF.PR.D

Readers will be familiar with my earlier comments on this issue … price-wise, things worked out much as expected – the closing quotation was $24.50-55, 14×61. The volume was a surprise, however, with only 12,300 shares trading on its first day out, which can be interpreted in a number of ways.

 I suspect that the correct interpretation is simply that the issue got sold in large chunks to long term investors (e.g., Balanced and Dividend funds run by the big fundcos), who don’t care what price they pay, as long as they can put eight-figures “to work” on a single ticket – and probably all committed before the issue was even thought about! But who knows? We’ll just have to see how this thing looks going forward.

 I never did issue the press release I had been intending. After some thought, I decided that given the presence of such a close comparable as SLF.PR.C (which closed at $24.64-70, 9×70, on volume of 6,300) made the HIMIPref™ evaluation of the new issue as expensive somewhat less than startling news.

SLF.PR.D has been set up on HIMIPref™ and will be added to “PerpetualDiscount” index and prefInfo in the very near future. The Preissue Security Code was P50005; the permanent code is A48983.

The price is actually quite reasonable at 24.50-55 … Now that the Street has given Sun Life it’s $6-million gift (12-million shares, overpriced by about $0.50, according to the first day of trading, if nothing else), the issue is looking like a much more reasonable investment.

Issue Comments

NA.PR.K / NA.PR.L Dividend Timing

Those fun-loving directors at the National Bank! Always joking around!

I looked up their Dividend Calendar today in order to update the HIMIPref™ database and there is little, if any, consideration shown for consistency in dividend declaration.

I’ll reproduce their table here:

SHARES

BOARD APPROVAL

RECORD DATE

EX-DIVIDEND DATE

DIVIDEND PAYMENT  DATE

Common

2005-12-08

2005-12-29

2005-12-23

2006-02-01

Series 15

2005-12-08

2006-01-13

2006-01-11

2006-02-15

Series 16

2005-12-08

2006-01-13

2006-01-11

2006-02-15

Common

2006-03-02

2006-03-30

2006-03-28

2006-05-01

Series 15

2006-03-02

2006-04-17

2006-04-12

2006-05-15

Séries 16

2006-03-02

2006-04-17

2006-04-12

2006-05-15

Common

2006-05-25

2006-06-22

2006-06-20

2006-08-01

Series 15

2006-05-25

2006-07-07

2006-07-05

2006-08-15

Series 16

2006-05-25

2006-07-07

2006-07-05

2006-08-15

Common

2006-08-31

2006-09-28

2006-09-26

2006-11-01

Series 15

2006-08-31

2006-10-13

2006-10-11

2006-11-15

Series 16

2006-08-31

2006-10-13

2006-10-11

2006-11-15

Just because the ex-Date was on July 5 doesn’t mean that the October ex-Date will be anywhere near the 5th! Be careful! When I look at the past 14 dividends for NA.PR.K (not including the next one) I get the following frequency of ex-date-day-of-the-month:

Ex-Date Day of Month Frequency
4 1
5 3
6 3
7 3
8 1
9 1
11 1
12 1

The 11th and 12th are novel ex-dates, having been introduced only this year.

Yes, I know, it’s a small point. But I see strange trades going through all the time, with some poor retail guy putting through a trade where it’s obvious he hasn’t paid any attention to the ex-date. And by me, when somebody is kind enough to trade your debt on the secondary market, you try to keep things simple for them.

Issue Comments

FTS.PR.F Holds its Own!

The Fortis perpetuals, mentioned earlier as a new issue seemed determined to prove me wrong on their opening day: 152,035 shares traded at prices between $25.05 and $25.25, closing at $25.10-14.
This comes on top of the news that Sunlife is bringing out another new issue, paying 4.45% compared to Fortis’ 4.90%. The funny thing is, I think the Sunlife new issue is also expensive. And I think – on the other hand – that 45bp is actually a pretty reasonable spread between issues with these two credit ratings.
But look, for instance, at the PerpetualDiscount index (as it stands today! Rebalancing is tomorrow, and there may be changes!)

Issue Pre-Tax YTW
SLF.PR.C 4.52%
WN.PR.E 4.82%
GWO.PR.I 4.56%
IAG.PR.A 4.64%
MFC.PR.C 4.54%
RY.PR.A 4.50%

These are good traders and accumulating a stake would certainly take more than a day, but work pays off! These things have an average Modified Duration (of their YTW scenario, which is the 30-year HIMIPref™ limit) of about 16.25 years. Which means that every basis-point of yield is worth 16 basis-points of price … and 16bp on $25 is four cents.

It doesn’t sound like much, I know … but this is FIXED-INCOME analysis! This is the site where we CARE about our pennies … because four cents is nearly two week’s coupon.

 

Index Construction / Reporting

BAM.PR.B / Floating-rate Index

“You say you dislike floating rate issues. Why then does the system love BAM.PR.B?”

Well! That was a lovely eMail to receive! Don’t I have enough problems spouting my opinions without having to worry about consistency?

HIMIPref™ does love BAM.PR.B. It is ranked as the best single preferred share in the marketplace, so let’s dig into the numbers a little and see what’s what. Very briefly, the issue is currently callable at $25.00 and pays 70% of Canada prime, so the annual dividend is currently $1.05. It’s a member of the “Floaters” index, so let’s compare it with those issues:

  BAM.PR.B BAM.PR.K TOC.PR.B AL.PR.E
Credit (DBRS) Pfd-2(low) Pfd-2(low) Pfd-2(low) Pfd-2(low)
9/26 quote 24.20-27 24.25-38 25.33-46 26.60-74
Dividend 1.05 1.05 1.05 1.50
Average Trading 222,586 97,663 44,673 53,081
Curve Analysis performed for taxable accounts
Price due to Base Rate 22.04 22.05 22.34 23.33
Price due to Short-Term 0.10 0.10 0.10 0.14
Price due to Long-Term 0.70 0.67 0.67 0.90
Price due to Credit Spread (2) -0.91 -0.87 -0.87 -0.98
Price due to Liquidity 0.99 -0.03 -0.41 -0.40
Price due to FloatingRate 3.47 3.30 3.32 3.78
Price due to Credit Spread (low) -0.40 -0.38 -0.38 -0.43
Price due to Error 0.00 0.14 0.19 0.18
Curve Price 25.99 24.98 24.95 26.52
Price Disparity 1.72 0.60 -0.38 -0.08

 

The key figure here is the Price Disparity which is a major influence on valuation. “Price Disparity is high” implies “HIMIPref™ loves”.

In tracing the source of the price disparity, we find two table rows of note: the Liquidity adjustment and the Floating Rate adjustment – these are both elements of the Yield Curve Calculation. Briefly: the market is now placing a huge premium on liquidity. When the entire HIMIPref™ universe is analyzed, it is found that there is a very definite liquidity effect: issues with high Average Trading Values are generally a lot more expensive than a straightforward analysis of their expected cashflows would indicate. Similarly, Floating Rate issues are far more expensive than their expected cash flows would indicate (which is why I don’t like ’em!). Note that cash flow expectations for floating rate issues are calculated with the view that Prime is what it is and ever shall be, world without end.

So … that’s why HIMIPref™ loves BAM.PR.B! It’s not due to any particular factor – it is based on the idea that, should the market come to value its characteristics in the same manner as the market values those characteristics for all the other preferreds analyzed, then it will go up in price – big time!

Is this guaranteed? Of course not. There may be elements that the market is pricing that are ignored by HIMIPref™, most obviously “Company Specific Effects”, i.e., maybe the market just doesn’t like BAM. I have not been able to define, parameterize and test a formulation of such an effect that leads to better results, but that doesn’t mean that it doesn’t exist, and certainly doesn’t mean that it doesn’t exist right now at this moment for BAM only!

HIMIPref™ is a statistical system. The market is a sometimes illogical beast. All one can do is make lots of small “bets” when the odds are in your favour (rather than making one big bet!) to give the statistics a chance to work. Some trades will work out nicely, others won’t … the idea is to accept that and to keep rolling the slightly-loaded dice!

Data Changes

BAM.PR.E / BAM.PR.G Reset Rate Percentage Announced

Brookfield has announced – somewhat quietly! I couldn’t find anything on their site and had to look at SEDAR! – that the Selected Percentage Rate for the upcoming reset will be 108%.

So commencing November 1, 2006, the dividend rate paid on BAM.PR.G will be 108% of the Canada 5-year yield as computed on October 11. The 5-years closed today at about 3.84%, so this implies a yield of about 4.15% on the BAM.PR.G (assuming no change in rates over the next two weeks), or about $1.0375 annually per share.

Horrible! Especially compared with the 5.63% (or $1.4075) they’ve been paying for the last five years!

According to Brookfield’s “Notice of Conversion Privilege” the Designated Percentage (which varies only in accordance with trading price, not by company fiat) of prime paid on the BAM.PR.E is 81%, or currently 4.86%.

 Well, pays yer money and takes yer chances. Going with ratchet-rates means taking a risk on the Designated Percentage AND taking a risk on Prime for the next five years. It’s a tough call, just like the BCE.PR.T / BCE.PR.S conversion that’s coming up … although, mind you, BCE’s fixed-rate offer is 112% of the five year yield.

Given that BAM.PR.G closed today at 25.12-32, 3×5 on volume of 2500 shares, I don’t think they’re much of an option … or, to be more explicit, if they’re the best option there is, holders are better off selling them, because a Pfd-2(low) (DBRS) credit on a perpetual paying $1.0375 (at least for the next five years) sure ain’t going to be trading above par for long!

And I just don’t like floaters, anyway, especially ratchet rates. Hard to analyze, hard to plan for, really, really hard to make any capital gains from. Given the current trading price, the percentage of prime will be declining in the near future … perhaps, eventually, to the same level as BCE.PR.S (which have the same credit rating, after all) and then be paying only 64% of prime.

So I’d say these thingies are a “sell” right now. I don’t like either alternative, not when I can get better than par by selling them now.

Hat-tip to Financial WebRing for bringing this to my attention!

Note added 2006-09-28: I have just received an eMail from a concerned user of www.prefInfo.com. The summary information regarding dividend rates for BAM.PR.G is stated as:

1.41  

  • Floating Rate Start Date : 2006-11-01
  • Floating Rate Index ID : Canada Prime
  • FR Formula : Ratchet (#0)
  • Max Ratchet Rate Formula ID : 100% of index (#1)
  • Min Ratchet Rate Formula ID : 50% of index (#2)

My correspondent went to the trouble of reading the prospectus and confirmed for himself that the BAM.PR.G do not, in and of themselves, change to floating rate.

These things are difficult to handle, particularly in the period when, as now, the upcoming reset rate is only “sort-of” known. For the “reset” side of every  Ratchet-Rate-Preferred-Pair, HIMIPref™ assumes that the rate paid on the resettable prefs (which in this case is the BAM.PR.G) will be so lousy that investors will be virtually forced into the “ratchet side” (in this case, the BAM.PR.E).

It’s a conservative assumption, but a difficult one to explain in a brief summary! I’ll put together some kind of post, essentially re-stating this point, and link to it from the appropriate cells on the prefinfo.com table … eventually!

Data Changes

FAL.PR.F / FAL.PR.G to be redeemed

Xstrata has announced that the two captioned issues will be redeemed on November 1, 2006.

each series F share will be redeemed for C$25.50 in cash, each series G share will be redeemed for C$25.00 in cash … plus accrued and unpaid dividends in respect of each share up to, but excluding, 1 November 2006.

FAL.PR.F became a ratchet rate preferred on 2005-07-06 and its most recent dividends have been $0.115 monthly, or $1.38 annually, or 5.52% on the issue price, or 5.41% against the redemption price. It ended today quoted at 25.33-55, 83×100 (big size for this issue!), but with no trading.

FAL.PR.G was its opposite number, and has been paying $0.38125 quarterly, or $1.525 annually, or 6.1% on its issue price (= redemption price).

These shares used to be Noranda and the provisions stated on Page C-6 of the 2005-06-02 Information Circular (sorry, I don’t have the original prospectus handy!) states that the fixed rate option could be as low as 80% of the 5-year Canada Yield. I can only presume that XStrata decided it could not bank on the ratchet-rate prefs yielding a low enough percentage of prime to make a lousy rate on the fixed-rate side worthwhile.

So anyway, there’s a ratchet-rate pref gone!

Issue Comments

BCE.PR.T Reset-Rate Calculation (Conversion from BCE.PR.S)

BCE has announced that the fixed rate for the next five years on BCE.PR.T will be 112% of the rate on 5-year Canadas, determined on October 11 and published October 12.

The Canadas are currently trading to yield a little under 4.00% … so for the sake of some commentary, we can assume that the yield on the BCE.PR.T will be something like 4.45%-4.50%.

The BCE.PR.T do not currently exist, but can be issued in exchange for BCE.PR.S at the option of the holder. The BCE.PR.S were quoted at the close 2006-09-19 at 24.71-80, which is below the price at which – subject to the Official Calculation of Trading Price – the percentage of prime paid will increase. Given that Prime is currently 6.00% and the last monthly dividend paid on these shares was $0.08, the rate paid on the shares is now 3.84%, or … hmm, carry 1 …. 64% of prime.

 Holy Smokes! I don’t know about my readers, but these rates sound pretty chintzy to me! These things are PERPETUAL and BCE is not a particularly good credit, rated Pfd-2(low) by DBRS. I’d want something more like 4.80% to hold a Pfd-2(low) perpetual  – that’s what WN.PR.E is trading at nowadays, and it’s not even a particularly cheap issue, at least according to HIMIPref™.

“Oh yeah, smart guy?” I hear someone calling from the back of the room “What about the potential for floating rate adjustment, huh? That’s worth a lot of money, that is!”

Well, ‘pays yer money and takes yer chances’, that’s my motto. If we presume prime to be constant at 6% for the next five years, then to get 4.8% out of BCE.PR.S we need 80% of prime, compared to the current 64%. It might happen … it might not. Prime might go up … or down. You can consider this kind of instrument to offer insurance … but pretty expensive insurance, I call it!

It’s interesting to compare with the fairly recent BC.PR.C conversion offer … Bell offered a fixed rate of 4.65% to the BC.PR.C holders and an insufficient number of them wanted to exchange into the ratchet-rates for Bell to create the issue. Bell’s a slightly better credit, too, rated Pfd-2 as opposed to BCE’s Pfd-2(low).

So, it seems to me that BCE’s being a little aggressive here and wants to get shareholders to convert to the ratchets. But what do I know? I don’t like either issue!

Issue Comments

BCE.PR.S

Here’s an interesting issue.

 You can get quick overview of it at BCE’s website or go through all the detail in the prospectus (which BCE has published on their site! Good for them!).

There are a few major points:

  • BCE.PR.S is a “ratchet-rate” preferred, that is, its dividend is based on a variable proportion of Canadian prime.
  • This variable proportion will be increased upwards when the Calculated Trading Price (as defined in the prospectus) is less than $24.875, and downwards when the CTP is greater than $25.125.
  • They are about to become convertable into reset-rate preferreds. BCE has not yet announced the rate (applicable for five years) on the reset-rate issue, but they have issued a reminder notice to BCE.PR.S holders.
  • BCE.PR.S is currently paying monthly dividends of $0.08, which is $0.96 annually, which is 3.84% of face value, which is 64% of Canadian Prime.
  • The limits on the variable-proportion of Canadian Prime are 50% and 100%.
  • Bell can force conversion (from the less popular series) if voluntary holders of either series amount to less than 1,000,000 shares.
  • BCE.PR.S closed today at $24.35-61 5×5

Looking at all the above information, we can draw some interesting conclusions: like, f’rinstance, for people who actually want to own floating-rate prefs, this seems like a reasonable deal (PROVIDED, of course, that you can trade cheaply! Full-Service brokerage charges of $0.25/share bugger up ALL the calculations!).

Say we can buy this issue in the size we want at $24.50. There are two things that can happen:

  • The price remains below $24.875 … maybe even lower than our purchase price. In this case, the dividend rate will increase to 100% of Canadian Prime on Face Value … pretty good for a floater!
  • The price increases above $24.875. Then we can’t depend on the variable proportion of Prime increasing … but we make a pretty good capital gain … and can flip the thing for something else.

BCE Inc. was recently confirmed at Pfd-2(low) by DBRS. Short of default, the only* risk I can see to this strategy is that BCE might announce a really lousy rate on the Series T shares, but practically all holders of the Series S converts anyway.

It is interesting! I wonder who’s selling and forcing the price down? People may be comparing to BC.PR.C and assuming that there will be a forced-conversion into an issue with a 4.65% coupon that will trade below par … but BC.PR.C is holding its own, quoted at 25.05-23 today on heavy volume.

 

*I mean, “only risk” OTHER THAN that of actually holding a floater, of course. I don’t like floaters, not in this environment at these prices, I don’t. But they can make sense for people who are offsetting a specific liability.