Category: Issue Comments

Artis Real Estate Investment Trust has announced (on September 18):

that it has determined, based upon the election of holders of Preferred Units, Series E (“Series E Units”) (AX.PR.E), that less than 500,000 Series F Units would be issued on September 30, 2018 and consequently, no holders of Series E Units are entitled to reclassify their Series E Units to Series F Units on September 30, 2018.

Accordingly, all 4,000,000 Series E Units will remain issued and outstanding following September 30, 2018 and during the subsequent five year period commencing October 1, 2018, holders will be entitled to receive distributions, if, as and when declared by the Board of Trustees of Artis, in an annual amount per Series E Unit determined by multiplying the Annual Fixed Distribution Rate of 5.472% per annum by $25.00, payable quarterly on the last business day of each of March, June, September and December in each year during such period.

It will be recalled that AX.PR.E will reset at 5.472% effective October 1.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

I recommended against conversion.

The Toronto-Dominion Bank has announced (on September 12):

that it will exercise its right to redeem all of its 5,481,853 outstanding Non-cumulative Class A First Preferred Shares, Series Y (the “Series Y Shares”) on October 31, 2018 at the price of $25.00 per Series Y Share, for an aggregate total of approximately $137 million.

TD also announced that it will exercise its right to redeem all of its 4,518,147 outstanding Non-cumulative Class A First Preferred Shares, Series Z (the “Series Z Shares”) on October 31, 2018 at the price of $25.00 per Series Z Share, for an aggregate total of approximately $113 million.

On August 30, 2018, TD announced that dividends of $ 0.22246875 per Series Y Share and $ 0.18293750 per Series Z Share had been declared. These will be the final dividends on the Series Y Shares and Series Z Shares, respectively, and will be paid in the usual manner on October 31, 2018 to shareholders of record on October 10, 2018, as previously announced. After October 31, 2018, the Series Y Shares and Series Z Shares will cease to be entitled to dividends and the only remaining rights of holders of such shares will be to receive payment of the redemption amount.

With the announcement of the redemption of the Series Y Shares and Series Z Shares, the right of any holder of Series Y Shares or Series Z Shares to convert such shares will cease and terminate.

Beneficial holders who are not directly the registered holder of Series Y Shares or Series Z Shares should contact the financial institution, broker or other intermediary through which they hold these shares to confirm how they will receive their redemption proceeds. Inquiries should be directed to our Registrar and Transfer Agent, AST Trust Company (Canada), at 1-800-387-0825 (or in Toronto 416-682-3860).

TD.PR.Y was announced 2008-7-7 as a FixedReset, 5.10%+168, as the seventh FixedReset issue, and an extension was announced 2013-9-26. The issue reset at 3.5595%

Roughly 45% of the issue was converted to the FloatingReset, TD.PR.Z, in 2013, and the FloatingReset traded at a tiny premium over TD.PR.Y. It had an Implied Bill Rate of 2.01% on opening day, the lowest of five FixedReset/FloatingReset pairs at the time.

Both issues have been tracked by HIMIPref™. TD.PR.Y is currently included in the FixedReset (Bank Non-NVCC) subindex, while TD.PR.Z has been relegated to Scraps on volume concerns.

Bank of Montreal has announced:

it has closed its domestic public offering of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 44 (Non-Viability Contingent Capital (NVCC)) (the “Preferred Shares Series 44”). The offering was underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets. Bank of Montreal issued 16 million Preferred Shares Series 44 (which includes Preferred Shares Series 44 issued pursuant to the exercise in full of an underwriters’ option to acquire up to 4,000,000 Preferred Shares Series 44 as part of the offering) at a price of $25.00 per share to raise gross proceeds of $400 million.

The Preferred Shares Series 44 were issued under a prospectus supplement dated September 10, 2018, to the Bank’s short form base shelf prospectus dated May 23, 2018. Such shares will commence trading on the Toronto Stock Exchange today under the ticker symbol BMO.PR.E.

BMO.PR.E is a FixedReset, 4.85%+268, announced 2018-09-06. It will be tracked by HIMIPref™ and has been assigned to the FixedReset Discount subindex.

The issue traded 1,362,183 shares today in a range of 24.90-99 before closing at 24.98-00. Vital statistics are:

The new issue is quite expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair value of the new issue on September 17 is 24.15.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BMO.PR.D, FixedReset, 4.40%+317, is bid at 25.10 (theoretical fair value of 25.28, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.10 p.a. in dividends until it resets 2022-8-25, sure, but you’re getting a significant amount of protection in the event of a market downturn, and more dividend afterwards if not called. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

The Toronto-Dominion Bank new issue closed today without a formal announcement from the company.

TD.PF.K is a FixedReset, 4.75%+259, announced 2018-09-04. It has been assigned to the FixedReset-Discount subindex.

TD.PF.K traded 946,070 shares today in a range of 24.86-98 before settling at 24.92-93. Vital statistics are:

The new issue is quite expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair value of the new issue on September 13 is 24.12.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, TD.PF.E, FixedReset, 3.70%+287, is bid at 24.71 (theoretical fair value of 24.84, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.25 p.a. in dividends until it resets 2020-10-31, sure, but you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

The Brookfield Infrastructure new issue closed today without a formal announcement from the company.

BIP.PR.F is a FixedReset, 5.10%+292M510, announced 2018-09-05. It has been assigned to the FixedReset-Discount subindex.

There are two non-standard elements to this issue, as we can specify when examining the prospectus (see SEDAR, “Brookfield Infrastructure Partners L.P. Sep 5 2018 22:59:56 ET Prospectus (non pricing) supplement – English PDF 913 K”). I regret that the Canadian Securities Administrators have made direct links to this public document illegal.

First, distributions are not dividends: they are Return of Capital and (potentially fully taxable) other things:

For Canadian federal income tax purposes, holders of Series 11 Preferred Units and Series 12 Preferred Units will be allocated a portion of the taxable income of the Partnership based on their proportionate share of distributions received on their units. The allocation of taxable income to such holders may be less than the distributions received and this difference is commonly referred to as a tax deferred return of capital (i.e., returns that are initially non-taxable but which reduce the adjusted cost base of the holder’s units). See “Certain Canadian Federal Income Tax Considerations” for further details. The below table reflects certain information regarding the taxable income allocation for the 2013 through 2017 period, with all periods updated to reflect the three-for-two unit split that occurred during September 2016. As shown in the table below, the historical 5 year average per unit return of capital (i.e., excess of distributions over allocated taxable income) expressed as a percentage of the annual distributions in respect of units of the Partnership for the period 2013 through 2017 was approximately 45%. Management anticipates a 6 year average per unit return of capital percentage of 50% for the period 2018 through 2023; however, no assurance can be provided this will occur.

	2017	2016	2015	2014	2013
Total distribution	C$2.2320	C$2.0313	C$1.8511	C$1.4252	C$1.1922
Total taxable income	C$0.7661	C$1.0552	C$1.0228	C$1.4024	C$0.4638
Return of capital	C$1.4660	C$0.9761	C$0.8283	C$0.0228	C$0.7284
Income %	30.77%	51.62%	55.25%	98.40%	38.9%
Return of capital %	69.23%	48.38%	44.75%	1.60%	61.1%

Second, it is likely, although not certain, that conversion of this issue into a FloatingReset when the time comes may be a Deemed Disposition and therefore trigger a capital gain or loss:

The reclassification of a Series 11 Preferred Unit into a Series 12 Preferred Unit or a Series 12 Preferred Unit into a Series 11 Preferred Unit, whether pursuant to an election made by the Resident Holder or pursuant to an automatic reclassification, may be considered to be a disposition of the Series 11 Preferred Unit or Series 12 Preferred Unit by the Resident Holder. The CRA’s position is that the conversion of an interest in a partnership into another interest in the partnership may result in a disposition of the partnership interest by the holder if the conversion results in a significant change in the rights and obligations of the holder in respect of the converted interest, including a significant change in the percentage interest in the profits of the partnership. Whether or not the reclassification of Series 11 Preferred Units into Series 12 Preferred Units or Series 12 Preferred Units into Series 11 Preferred Units would result in a significant change in the percentage interest of a Resident Holder in the profits of the Partnership is a question of fact that depends upon the facts and circumstances that exist at the time of the reclassification.

BIP.PR.F traded 414,753 shares today in a range of 24.70-89 before settling at 24.88-89. Vital statistics are:

The new issue is extremely expensive according to Implied Volatility Analysis:

Click for Big

According to this analysis, the fair value of the new issue on September 12 is 23.30, but note that it appears that the issue would be closer to the regression line if Implied Volatility was permitted to exceed the arbitrary limit of 40%. It is the level of Implied Volatility that is the real problem with this issue, not the distance to the fitted line.

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.

Part of the problem may be that all but one of the BIP FixedReset series have minimum reset guarantees. There are many naifs out there (many of them stockbrokers; many others egged on by their stockbrokers) who consider this to be an effective guarantee that the issues will always trade near par. They have evidently forgotten that spread widening is a very common cause of price declines.

Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, BIP.PR.D, FixedReset, 5.00%+378M500, ROC + Interest, is bid at 25.01 (theoretical fair value of 25.25, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.025 p.a. in dividends until it resets 2022-03-31, sure, but that’s hardly a big deal and you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.

It will be recalled that BCE.PR.Q will reset at 4.812% effective September 30.

BCE.PR.Q is a FixedReset that came into being through an Exchange from BAF.PR.E which in turn commenced trading 2013-2-14 as a FixedReset, 4.25%+264, after being announced 2013-1-30.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BCE.PR.Q and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BCE.PR.Q FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BCE.PR.Q continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Montréal/Toronto time) on September 14, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

It will be recalled that AX.PR.E will reset at 5.472% effective October 1.

AX.PR.E is a FixedReset, 4.75%+330, that commenced trading 2013-3-31 after being announced 2013-3-12. It must be remembered that these are not actually preferred shares, as the term is usually used; they are preferred units and the distributions will be characterized in the same manner as distributions to the Capital units. The company publishes the characterization of the distributions on its website. Because of the company’s structure, conversion between the FixedReset and FloatingReset is probably (!) a taxable event; i.e., investors will take a capital gain or loss for tax purposes on conversion and reset the Adjusted Cost Base on their new position.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., AX.PR.E and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the AX.PR.E FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of AX.PR.E continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 17, 2018.. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

It will be recalled that BAM.PF.A will reset at 5.061% effective October 1.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BAM.PF.A and the FloatingReset, BAM.PF.K, that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BAM.PF.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart, BAM.PF.K, given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BAM.PF.A continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Toronto time) on September 17, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

BCE Inc. has announced:

NOTICE IS HEREBY GIVEN THAT:

1. Holders of BCE Inc. fixed-rate Series AQ Preferred Shares have the right to convert all or part of their shares, effective on October 1, 2018, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AR of BCE Inc. (the “Series AR Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period, which runs from September 4, 2018 until 5:00 p.m. (Montréal/Toronto time) on September 14, 2018.

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 AQ Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 4 below. However, but subject to paragraph 6 below, on September 30, 2023, and every five years thereafter, holders of both Series AQ Preferred Shares and Series AR Preferred Shares will have the right to convert their shares into shares of the other series.

3. In order to exercise its conversion right in respect of all or part of its Series AQ Preferred Shares, the registered holder must provide a written notice thereof, accompanied by its Series AQ Preferred Share certificates with the transfer form on the back thereof or other appropriate stock transfer power of attorney duly endorsed, and deliver them, at the latest by 5:00 p.m. (Montréal/Toronto time) on September 14, 2018, to one of the following addresses of AST Trust Company (Canada):
By Mail:
By Personal Delivery, Courier or Registered Mail:
P.O. Box 1036 Adelaide Street Postal Station Toronto, (Ontario) M5C 2K4
CANADA Attention: Corporate Actions
1 Toronto Street, Suite 1200
Toronto (Ontario) M5C 2V6
CANADA
Attention: Corporate Actions
Delivery may be done in person, by courier, by registered mail or by mail. However, if share certificates are delivered by courier, by registered mail or by mail, the registered shareholder must ensure that they are sent sufficiently in advance so that they are received by AST Trust Company (Canada) by the above-mentioned deadline.
Beneficial holders who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period.

4. The Series AQ 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 sum of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on August 31, 2018 in accordance with the articles of BCE Inc., of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years, and (b) 2.64%. The “Government of Canada Yield” computed on August 31, 2018 is 2.172%. Accordingly, the annual fixed dividend rate applicable to the Series AQ Preferred Shares for the period of five years beginning on September 30, 2018 will be 4.812%.

5. The Series AR Preferred Shares, if issued, will pay, for each quarterly period beginning with the quarterly period from and including September 30, 2018 up to but excluding December 31, 2018, as and when declared by the Board of Directors of BCE Inc., a quarterly floating dividend rate equal to the “Floating Quarterly Dividend Rate” for such quarterly period. The “Floating Quarterly Dividend Rate” for any such quarterly period shall be equal to the rate, expressed as a percentage, equal to the sum of: (a) the “T-Bill Rate”, calculated in accordance with the articles of BCE Inc. on the 30th day prior to the first day of the new quarterly period, and (b) 2.64%, calculated on the basis of the actual number of days in such quarterly period divided by 365. The “T-Bill Rate” means, for any quarterly period, the average yield expressed as a percentage per annum on three-month Government of Canada Treasury Bills, as reported by the Bank of Canada, for the most recent treasury bills auction preceding the applicable calculation date. The “Floating Quarterly Dividend Rate” computed on August 31, 2018 and applicable to the Series AR Preferred Shares for the quarterly period beginning on September 30, 2018 will be 1.04578% (annual rate of 4.149%, based on an initial T-Bill Rate of 1.509%).

6. After the end of the conversion period on September 14, 2018, if BCE Inc. determines that there would be less than 1,000,000 Series AQ Preferred Shares outstanding after the conversion date (October 1, 2018), BCE Inc. will automatically convert all remaining Series AQ Preferred Shares into Series AR Preferred Shares. However, if BCE Inc. determines that there would be less than 1,000,000 Series AR Preferred Shares outstanding after the conversion date, then no Series AQ Preferred Shares will be converted into Series AR Preferred Shares.

7. For any questions about the steps to be followed, please contact AST Trust Company (Canada) at 1-800-561-0934, the transfer agent and registrar for BCE Inc.’s preferred shares.

DATED in Montréal, this 31st day of August, 2018
(signed)
Glen LeBlanc
Executive Vice-President and Chief Financial Officer
BCE Inc.

BCE.PR.Q is a FixedReset that came into being through an Exchange from BAF.PR.E which in turn commenced trading 2013-2-14 as a FixedReset, 4.25%+264, after being announced 2013-1-30.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BCE.PR.Q and the FloatingReset that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.34%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BCE.PR.Q FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, it seems likely that I will recommend that holders of BCE.PR.Q continue to hold the issue and not to convert, but I will wait until it’s closer to the September 14 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 32 (“Series 32 Shares”) (TSX: BAM.PF.A) for the five years commencing October 1, 2018 and ending September 30, 2023…
…
Series 32 Shares and Series 33 Shares

If declared, the fixed quarterly dividends on the Series 32 Shares during the five years commencing October 1, 2018 will be $0.3163125 per share per quarter, which represents a yield of 5.019% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing October 1, 2018 represents a yield of 5.061% based on the redemption price of $25 per share.

Holders of Series 32 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on September 17, 2018, to convert all or part of their Series 32 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 33 (the “Series 33 Shares”), effective September 30, 2018.

The quarterly floating rate dividends on the Series 33 Shares will be paid at an annual rate, calculated for each quarter, of 2.90% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the October 1, 2018 to December 31, 2018 dividend period for the Series 33 Shares will be 1.11131% (4.409% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.2778275 per share, payable on December 31, 2018.

Holders of Series 32 Shares are not required to elect to convert all or any part of their Series 32 Shares into Series 33 Shares.

As provided in the share conditions of the Series 32 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 32 Shares outstanding after September 30, 2018, all remaining Series 32 Shares will be automatically converted into Series 33 Shares on a one-for-one basis effective September 30, 2018; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 33 Shares outstanding after September 30, 2018, no Series 32 Shares will be permitted to be converted into Series 33 Shares. There are currently 11,982,568 Series 32 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 33 Shares effective upon conversion. Listing of the Series 33 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 33 Shares will be listed on the TSX under the trading symbol “BAM.PF.K”.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets subindex.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BAM.PF.A and the FloatingReset BAM.PF.K that will exist if enough holders convert). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.34%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BAM.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets, BAM.PF.K, that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts, BAM.PF.A. Therefore, it seems likely that I will recommend that holders of BAM.PF.A continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.