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)
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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!
