Issue Comments

BCE on Credit Watch Negative : DBRS

Following the announcement that BCE is in talks with privatizers, DBRS has announced that they:

today placed the ratings of BCE, A (low)/R-1 (low)/R-2 (high)/Pfd-2 (low), and its wholly owned subsidiary, Bell Canada, “A”/R-1 (low)/BBB (high), (collectively, BCE or the Company) Under Review with Negative Implications following the Company’s announcement today that it is reviewing strategic alternatives with a view to maximize shareholder value….Given the Company’s current operating structure, DBRS notes that any transaction that takes leverage above 4.0 times debt to EBITDA could cause its ratings to decline below the investment-grade threshold of BBB (low).

No word from S&P yet. I’ll keep you posted.

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

Update: S&P has joined the fun:

Standard & Poor’s Ratings Services today said it placed its ratings, including its ‘A-‘ long-term corporate credit rating, on Montreal, Que.-based telecommunications provider BCE Inc. and its wholly owned subsidiary, Bell Canada (collectively, BCE), on CreditWatch with negative implications, following the announcement that it had entered into discussions with a group of leading Canadian pension funds to explore the potential privatization of the company.

…

Should the leveraged buyout of BCE be successful, we expect debt leverage and corresponding credit metrics will materially weaken from our current expectations; adjusted debt leverage will significantly increase from our expectations of 2.6x at year-end 2007, which could lead to a multinotch downgrade, possibly to speculative-grade.

In the event a privatization is not consummated, we believe the company will be faced with increasing shareholder pressures for some form of leveraging transaction over the near term, which could also lead to lowering the ratings, given that BCE/Bell Canada has modest debt capacity under the current ratings.

New Issues

New Issue : Royal Bank 4.5% Perpetual, Series AG

Can’t tell your players without a programme! Royal is continuing the pattern of opportunistic issuance I predicted in early February.

They have now announced the following:

Issue: 4.50% Non-Cumulative First Preferred Shares, Series AG

Size: 10-million shares, = $250-million @ the 25.00 issue price.

Redemption: Redeemable at $26.00 commencing May 24, 2012, call price declines by $0.25 every May 24 thereafter until redeemable at $25.00 from May 24, 2016 on.

Provisional ratings: Pfd-1 by DBRS, P-1 (low) by S&P

Closing: The expected closing date is April 26.

More Later.

Later, not much more: You know what? I’m not going to bother reviewing this one much at all. The dividend rate is identical to RY.PR.D & RY.PR.E, while the redemption schedule differs only in that the new issue’s schedule starts three months later. The curve price of the two comparables is in the 25.40-50 range, but a large part of this is the dividend payable on these issues – they both go ex-Dividend on 2007-04-23.

The new issue is entirely reasonable and maybe just a little bit cheap according to its curve price.

Issue Comments

BCE in Buyout Talks?

Reuters has reported:

BCE Inc. has entered talks with a group of Canadian pension funds that could lead to the company being taken private, Canada’s top telecommunications group said on Tuesday.

I have seen long Bell bonds offered at 270bp over Canadas – a widening of 50bp over yesterday.

I have previously noted the event risk on the BCE preferreds … which, while having been hurt lately, have suffered not nearly as much as the Bonds … a widening of 50bp in one day? on bonds with a duration of about maybe 12? That’s 6% on price.

Retail – which means holders of BCE preferreds – may well do what retail is best at: ignore the situation until they’ve been told 20 times, then over-react big time.

This could be interesting.

Market Action

April 16, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.14% 4.11% 43,992 17.08 2 +0.5045% 1,041.9
Fixed-Floater 5.02% 4.02% 93,975 17.06 6 -0.4046% 1,018.1
Floater 4.57% -15.74% 56,073 0.13 4 +0.0100% 1,055.8
Op. Retract 4.73% 3.17% 84,022 2.11 17 -0.0949% 1,033.8
Split-Share 5.02% 3.79% 156,666 3.17 12 -0.0604% 1,049.1
Interest Bearing 6.52% 5.60% 63,254 2.28 5 -0.0944% 1,044.5
Perpetual-Premium 5.04% 3.97% 186,958 5.31 53 -0.0256% 1,059.0
Perpetual-Discount 4.53% 4.56% 873,569 16.30 11 -0.0656% 1,064.8
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixedFloater -1.5758% Exchange/Reset date is 2011-05-01. The carnage in BCE issues continues! This issue traded as low as 24.17, a 52-week low, before closing at 24.36-84, 10×10.
CM.PR.P PerpetualPremium -1.0158% Odd! I haven’t noticed the CIBC walking into any sharp objects lately. Now with a very attractive pre-tax bid-YTW of 4.43% based on a bid of 26.31 and a call 2012-11-28 at $25.00.
Volume Highlights
Issue Index Volume Notes
SLF.PR.E PerpetualDiscount 80,935 Desjardins crossed 50,000 at 24.99. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.92 and a limitMaturity.
CU.PR.B PerpetualPremium 56,400 Nesbitt crossed 40,000 at 27.20, then Scotia crossed 10,000 at the same price. Perhaps the sellers were making room for the pending new issue – but then, what were the buyers doing? Now with a pre-tax bid-YTW of 3.06% based on a bid of 27.02 and a call 2008-07-01 at $26.00 … it won’t yield much more than bonds, unless CU decides to waive the call.
W.PR.H PerpetualPremium 51,200 Scotia crossed 50,000 at 26.65. Now with a pre-tax bid-YTW of 4.25% based on a bid of 26.63 and a call 2013-2-14 at $25.00.
PWF.PR.I PerpetualPremium 41,200 Nesbitt crossed 40,000 at 26.65. Now with a pre-tax bid-YTW of 3.81% based on a bid of $26.50 and a call 2008-05-30 at $26.00.
CM.PR.I PerpetualPremium 32,650 Now with a pre-tax bid-YTW of 4.56% based on a bid of 25.27 and a call 2016-03-01 at $25.00

There were thirteen other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

PrefLetter

PrefLetter Live!

I am very pleased to announce that PrefLetter is now accepting subscriptions (from Ontario residents and those registered with the Quebec securities commission).

Top recommendations for “Best of Class” for each type of preferred share!

You may purchase the previous issue, the next issue, or subscribe for a year. Subscribing for a year gets you the previous issue as a bonus.

PrefLetter is prepared from market conditions at the close of the second Friday of each month and is delivered to subscribers prior to the opening of the TSX on the following Monday. Enjoy!

Miscellaneous News

Synthetic Floating Rate Preferreds : Better than BCE?

Readers will have noticed that the market’s extreme dependence upon a single issuer as a source of Floating Rate issues. This dependence has even led to the closing of a major fund to new investment.

So: this is where financial engineering comes in. There is very little need to actually have floating rate issues … one can have a portfolio of perpetuals and swap the income stream into floating rate, via Interest Rate Swaps. Interest rate swaps are a huge market, big enough that the Chicago Board of Trade has designed a thirty-year swap contract to complement its wildly successful 10-year contract.

Swaps in Canada are traded Over-the-Counter by the bigger banks. Essentially, one party agrees to pay a fixed rate for a definite term – this fixed rate will be very closely related to the fixed rate the bank pays on its direct obligations of similar term. In return, the counterparty agrees to pay the three-month Bankers’ Acceptance rate, reset periodically, for the same term. Obligations are netted, to minimize credit risk as far as possible.

Therefore, there is no real need to rely on BCE for floating rate preferreds! You can buy a portfolio of bank-issued perpetuals and swap the income stream into something based on the BA rate.

It’s not a perfect hedge. There’s basis risk (bank prefs might not trade the same way as bank bonds, just for starters!), there’s tax risk (if short rates go to 25% then sure, you’ve got a pre-tax hedge, but not a post-tax one!) and there’s term risk (however much I may assume it in the programming, thirty years is not equal to infinity), to name but three.

On the other hand I, for one, would much rather have a bank-floater-equivalent than a BCE floater (all else being equal), so a few risks are acceptable, as long as they are quantified and understood.

I’ve uploaded a more detailed proposal. Does anyone have, say, $50-million in perps they want to convert to floaters?

Market Action

April 13, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.17% 4.14% 45,838 17.04 2 -0.2605% 1,036.7
Fixed-Floater 5.00% 4.01% 92,841 17.10 6 -0.0208% 1,022.3
Floater 4.57% -18.59% 56,979 0.13 4 +0.0592% 1,055.7
Op. Retract 4.72% 3.07% 84,123 2.12 17 -0.0130% 1,034.8
Split-Share 5.01% 3.68% 158,554 3.18 12 +0.0095% 1,049.7
Interest Bearing 6.52% 5.36% 63,646 2.29 5 +0.1509% 1,045.5
Perpetual-Premium 5.04% 3.95% 188,012 5.07 53 -0.0032% 1,059.3
Perpetual-Discount 4.53% 4.55% 890,245 16.31 11 -0.0473% 1,065.5
Major Price Changes
Issue Index Change Notes
BCE.PR.I FixedFloater -1.4022%  Exchange/Reset date is 2011-08-01
BCE.PR.R FixedFloater +1.0971%  Exchange/Reset date is 2010-12-01
Volume Highlights
Issue Index Volume Notes
PWF.PR.I PerpetualPremium 209,690 Now with a pre-tax bid-YTW of 4.35% based on a bid of $26.34 and a call 2008-05-30 at $26.00
TD.PR.O PerpetualPremium 60,100 NationalBank crossed 50,000 @ 26.35. Now with a pre-tax bid-YTW of 4.05% based on a bid of 26.29 and a call 2014-11-30 at $25.00.
PIC.PR.A SplitShare 87,305 National Bank spent the day buying from Nesbitt. Now with a pre-tax bid-YTW of 3.93% based on a bid of $15.87 and a hardMaturity 2010-11-1 at $15.00.
BNS.PR.M PerpetualDiscount 52,600 Recent new issue. Scotia crossed 20,000 @ 24.90. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.90 and a limitMaturity.
BCE.PR.A FixedFloater 35,650 RBC crossed 30,000 @ 24.95. These are convertable into the not-currently-extant series ‘AB’ Ratchet Rates, 2007-9-1, at which point the current dividend of $1.3625 (5.03% of par) will be reset. Bet it’s lower!

There were seventeen other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.

Index Construction / Reporting

BCE, Event Risk and the FixedFloater Index

My eagle-eyed readership will have noticed that the FixedFloater index is not doing very well recently.

This is largely due to the fact that it is entirely comprised of BCE issues: BCE has been in the news lately due to speculation that Ontario Teachers might take a run at it … or at least try to pump up the shareholder value … and I don’t mean the PREFERRED shares!

DBRS had this to say today:

DBRS notes that the Company’s largest shareholder, Ontario Teachers’ Pension Plan Board (OTBP or Teachers), has recently changed its long-standing position from being a more passive shareholder to an active shareholder. This change could place further pressure on the Company and thereby heighten its event risk.

DBRS’s current expectations for BCE include the Company maintaining a stable and conservative balance sheet and the balanced deployment of the Telesat proceeds. Should the Company’s response to recent pressure be outside of DBRS’s expectations, DBRS may reconsider the appropriateness of the Company’s A (low)/“A” ratings.

However, DBRS currently expects that any changes in the Company’s financial policy as outlined above would likely result in one-notch rating change at BCE to BBB (high)/A (low).

Nice, eh? I tell people and tell people : Floating prefs are not money market instruments, no matter how much they quack like those ducks, but nobody ever listens.

A more aggressively pro-shareholder stance by BCE will not lead to another offer for the preferreds – if anything, such an event will be less likely. I bet the old Bell Canada pref holders are now feeling a little blue : they voted to switch to an inferior credit for a trivial consideration and this could be nasty.

How will all this work out? I have no idea. I’d be buying options like crazy if I did. But I did want to ensure that readers understand that the recent decline in the FixedFloater index (down to 1,039.4 today from a peak of 1055.7 on March 15) is not necessarily due to any market disenchantment with FixedFloaters – it is more likely BCE related.

Market Action

April 12, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.16% 4.13% 46,302 17.05 2 -0.2194% 1,039.4
Fixed-Floater 5.00% 4.01% 90,778 17.11 6 -0.4378% 1,022.5
Floater 4.58% -18.29% 57,706 0.13 4 +0.0493% 1,055.1
Op. Retract 4.72% 3.06% 85,131 2.12 17 +0.0688% 1,035.0
Split-Share 5.01% 3.71% 159,692 3.19 12 +0.0231% 1,049.6
Interest Bearing 6.53% 5.19% 63,809 2.29 5 -0.2553% 1,043.9
Perpetual-Premium 5.04% 3.93% 188,093 5.09 53 +0.0536% 1,059.3
Perpetual-Discount 4.53% 4.55% 906,951 16.32 11 +0.0367% 1,066.0
Major Price Changes
Issue Index Change Notes
BCE.PR.R FixedFloater -1.0454% Quick, says someone, get out of BCE before a leveraged buy-out turns the credit to junk! This one pays 4.54%, with the rate being reset 2010-12-01, at which point it is also exchangeable into a ratchet-rate.
Volume Highlights
Issue Index Volume Notes
BCE.PR.A FixedFloater 255,890 Desjardins crossed 140,000 at 24.50, then another 98,000 at the same price. Somebody took a real haircut to get out of BCE in size – yesterday it was bid at 25.01, and closed today at 24.83-04. I tell people: this kind of instrument is not money market! Not with perpetual credit risk, it isn’t. But nobody ever listens.
SLF.PR.B PerpetualPremium 44,100 Nesbitt crossed 40,000 at 25.82. Now with a pre-tax bid-YTW of 4.35% based on a bid of $25.80 and a call 2014-10-30 at $25.00.
CM.PR.I PerpetualPremium 24,011 Now with a pre-tax bid-YTW of 4.51% based on a bid of 25.35 and a call 2016-3-1 at $25.00
SLF.PR.D PerpetualDiscount 16,785 Now with a pre-tax bid-YTW of 4.51% based on a bid of 24.76 and a limitMaturity.
BNS.PR.M PerpetualDiscount 16,650 Recent new issue. Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.89 and a limitMaturity.

There were eleven other “$25 p.v. equivalent” index-included issues with over 10,000 shares traded today.