PrefBlog

BCE Inc. has announced that it:

will, on November 1, 2016, continue to have Cumulative Redeemable First Preferred Shares, Series T (“Series T Preferred Shares”) outstanding if, following the end of the conversion period on October 18, 2016, BCE Inc. determines that at least one million Series T Preferred Shares would remain outstanding. In such a case, as of November 1, 2016, the Series T 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 October 11, 2016 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 390%. The Government of Canada Yield” is 0.774%. Accordingly, the annual dividend rate applicable to the Series T Preferred Shares for the period of five years beginning on November 1, 2016 will be 3.019%.

Holders of BCE.PR.T may convert to BCE.PR.S:

Should you wish to continue receiving a fixed quarterly dividend for the five-year period beginning November 1, 2016, you do not need to take any action with respect to this notice. However, should you wish to receive a floating monthly dividend, you must elect to convert your Series T Preferred Shares into Series S Preferred Shares as explained in more detail in the attached Notice of Conversion Privilege.

In order to convert your shares, you must exercise your right of conversion during the conversion period, which runs from September 16, 2016 to October 18, 2016, inclusively.

Holders of both the Series T Preferred Shares and the Series S Preferred Shares will have the opportunity to convert their shares again on November 1, 2021, and every five years thereafter as long as the shares remain outstanding.

There is always a certain amount of confusion regarding how RatchetRate issues such as BCE.PR.S work, so I’ll quote that part too:

As of November 1, 2016, the Series S Preferred Shares, should they remain outstanding, will continue to pay a monthly floating dividend based on a dividend rate that will fluctuate over time between 50% and 100% of the Prime rate (“Prime”) for each month computed in accordance with the articles of BCE Inc. Accordingly, from November 1, 2016, the holders of Series S Preferred Shares will continue to be entitled to receive floating adjustable cash dividends, as and when declared by the Board of Directors of BCE Inc., to be paid on the twelfth day of the subsequent month. The dividend rate will be adjusted upwards or downwards on a monthly basis by an Adjustment Factor (as described below) whenever the Calculated Trading Price, being the market price of the Series S Preferred Shares computed in accordance with the articles of BCE Inc., is $24.875 or less or $25.125 or more, respectively. The Adjustment Factor for a month will be based on the Calculated Trading Price of the Series S Preferred Shares for the preceding month determined in accordance with the following table:

If the Calculated Trading Price for the preceding month is:	The Adjustment Factor as a percentage of Prime shall be:
$25.50 or more	– 4.00%
$25.375 and less than $25.50	– 3.00%
$25.25 and less than $25.375	– 2.00%
$25.125 and less than $25.25	– 1.00%
Greater than $24.875 and less than $25.125	nil
Greater than $24.75 to $24.875	+ 1.00%
Greater than $24.625 to $24.75	+ 2.00%
Greater than $24.50 to $24.625	+ 3.00%
$24.50 or less	+ 4.00%

Given that all BCE RatchetRate issues are currently bid in the 14.19-30 range, there is not much chance that the percentage of prime paid will be reduced below 100% any time soon!

BCE.PR.T and BCE.PR.S form a Strong Pair and can therefore be compared with other Strong Pairs of this form using the Pairs Equivalency Calculator:

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The BCE.PR.T / BCE.PR.S pair, at the bids of 14.36 and 14.35, respectively, will have an equivalent total return to the next Exchange Date if the average Prime Rate is 2.81%; this should mean the prices will be about equivalent (although note that this ignores the effect of the last dividend on BCE.PR.S of about $0.055).

Over the medium term I suggest that it is prudent to take the view that Canada Prime is much more likely to increase over the next five years than it is to decrease. Therefore, I recommend that holders of BCE.PR.T convert to BCE.PR.S, and that holders of the latter issue maintain their position.

Brookfield Asset Management Inc. has announced:

that the dividend rate on its Class A Preference Shares, Series 9 (the “Series 9 Preferred Shares”) (TSX: BAM.PR.G) for the five years commencing November 1, 2016 and ending October 31, 2021 will be 2.75% per annum. This dividend rate represents 357% of the interpolated yield, calculated as of October 11, 2016 at 10:00 a.m. (Toronto time), on the 0.75% Government of Canada bond due September 1, 2021 and the 2.75% Government of Canada bond due June 1, 2022. This dividend will be payable quarterly on the first day of February, May, August and November, commencing with the dividend payable on February 1, 2017. The implied yield on the Series 9 Preferred Shares based on the new fixed dividend rate that will apply for the five years commencing November 1, 2016 and today’s closing price for the Series 9 Preferred Shares is approximately 4.63%.

The annual rate currently paid on the company’s Series 9 Preferred Shares is 3.80%. The final quarterly dividend payable at this rate will be paid on November 1, 2016 to shareholders of record on October 15, 2016.

Conversion Rights

Holders of Brookfield’s Series 9 Preferred Shares have the privilege to convert, at their option, all or part of their Series 9 Preferred Shares on a one-for-one basis into the company’s Class A Preference Shares, Series 8 (the “Series 8 Preferred Shares”) (TSX: BAM.PR.E) effective November 1, 2016. The deadline for exercising this conversion privilege is 5:00 p.m. (Toronto time) on October 18, 2016. Holders of the Series 9 Preferred Shares who do not elect to convert their shares by this date will retain their Series 9 Preferred Shares and will receive the reset fixed-rate dividend as described above.

Holders of Brookfield’s Series 8 Preferred Shares also have the privilege to convert, at their option, all or part of their Series 8 Preferred Shares on a one-for-one basis into the company’s Series 9 Preferred Shares effective November 1, 2016. The deadline for exercising this conversion privilege is 5:00 p.m. (Toronto time) on October 18, 2016. Holders of the Series 8 Preferred Shares who do not elect to convert their shares by this date will retain their Series 8 Preferred Shares and will continue to receive a floating-rate dividend based on the prime rate.

If, after the close of business on October 18, 2016, the company determines that there would be fewer than 500,000 Series 9 Preferred Shares outstanding after the conversion date, it will automatically convert all of the remaining shares of this issue into Series 8 Preferred Shares and return all Series 8 Preferred Shares submitted for conversion. Similarly if, after the close of business on October 18, 2016, the company determines that there would be fewer than 500,000 Series 8 Preferred Shares outstanding after the conversion date, it will automatically convert all of the remaining shares of this issue into Series 9 Preferred Shares and return all Series 9 Preferred Shares submitted for conversion.

Holders of the company’s Series 8 and Series 9 Preferred Shares will again have the opportunity to convert their shares into the other series on November 1, 2021 and every five years thereafter.

Brookfield Asset Management Inc. is a global alternative asset manager with approximately US$250 billion in assets under management. The company has more than a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. Brookfield offers a range of public and private investment products and services, and is co-listed on the New York, Toronto and Euronext stock exchanges under the symbol BAM, BAM.A and BAMA, respectively.

For more information, please visit our website at www.brookfield.com.

BAM.PR.G and BAM.PR.E form a Strong Pair and can therefore be compared with other Strong Pairs of this form using the Pairs Equivalency Calculator:

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The BAM.PR.E / BAM.PR.G pair, at the bids of 14.83 and 14.79, respectively, will have an equivalent total return to the next Exchange Date if the average Prime Rate is 2.71%; this figure is a little lower than the average for this type of pair and about equivalent to the current Prime Rate of 2.70% (although note that this ignores the effect of the last dividend on each issue; BAM.PR.G will pay about $0.18 more than BAM.PR.E).

In the short term, I would expect this Pair to trade more in line with the overall average for FixedFloater / RatchetRate preferreds of (currently) 2.92%, which should provide a small boost in the price of BAM.PR.E relative to BAM.PR.G; over the medium term I suggest that it is prudent to take the view that Canada Prime is much more likely to increase over the next five years than it is to decrease. Therefore, I recommend that holders of BAM.PR.G convert to BAM.PR.E, and that holders of the latter issue maintain their position.

Lowe’s Companies, Inc. and its subsidiary RONA inc. have announced:

that Lowe’s, through a wholly owned subsidiary, and RONA have entered into a definitive agreement for the acquisition of RONA’s outstanding Cumulative 5-Year Rate Reset Series 6 Class A Preferred Shares and Cumulative Floating Rate Series 7 Class A Preferred Shares (collectively, the “Preferred Shares”) for C$24 per share in cash pursuant to a plan of arrangement under the Business Corporations Act (Québec).

The board of directors of RONA, after consultation with its financial and legal advisors, has unanimously approved the transaction and has resolved to unanimously recommend that holders of the Preferred Shares (the “Preferred Shareholders”) vote in favour of the transaction at a meeting of Preferred Shareholders to be held to consider the transaction. RBC Capital Markets has provided a fairness opinion to RONA’s board of directors that, subject to the assumptions, limitations and qualifications set out in such fairness opinion, and as of the date of such opinion, the consideration under the transaction is fair from a financial point of view to the Preferred Shareholders.

The transaction is subject to court approval and the requisite approval of the Preferred Shareholders. Assuming the required approvals are received, the transaction is expected to be consummated before the end of the year.

Fidelity Investments Canada ULC, a large institutional investor that owns a significant portion of the Preferred Shares, has agreed to vote its Preferred Shares in favour of the transaction.

The terms and conditions of the transaction will be disclosed in further detail in the information circular to be mailed to Preferred Shareholders in advance of their meeting to approve the transaction. In addition, a copy of the definitive agreement and the information circular and certain related documents will be filed with the Canadian securities regulatory authorities and will be available under RONA’s profile at www.sedar.com.

So first of all: mea culpa. It looks like my recommendation at the time of the takeover was not optimal:

I don’t understand the rationale that might support a higher offer. The post suggests it is because of “emails and phone calls from pissed off retail investors making a big stink about the whole situation.” Now, in this day and age of governance by Internet meme it may well be that the Public Relations department is perturbed. But from a hard-headed point of view, who cares? RON.PR.A represents cheap financing, it is unlikely that Lowe’s will be issuing equity of any kind in Canada in the future, and the $34.5-million additional cost to acquire at par isn’t chump change.

I’ve been wrong before and I’ll be wrong again, but in this case I suggest that the rational course of action is to vote in favour of the Preferred Share Resolution. Be quick though, voting closes very soon! The safest course of action is, however, to sell on the market – the price is very close to $20 and such a sale would eliminate the potential for nasty consequences should either the common or preferred shareholders vote against their respective resolutions.

When we take another look at the comparators I cited in that post:

So, while there have been gains in the market since 2016-3-24, these pale beside the $4 pickup in the price of RON.PR.A.

What I don’t understand is why Lowe’s is doing this. At today’s closing bid of 23.95, RON.PR.A yield 3.34% to perpetuity, the equivalent of 4.34% interest at the standard conversion factor of 1.3x. Perhaps the requirement to be a reporting issuer in Canada adds enough cost to make this a good financing play for them; perhaps there is also concern about not having a capital structure that US investors will consider ‘clean’. I don’t know.

But one way or another, RON.PR.A (and the FloatingReset RON.PR.B) has provided a great deal of entertainment and food for thought this year!