PrefBlog

Brookfield has announced the results of the BAM.PR.E (Series 8 ) / BAM.PR.G (Series 9 ) conversion privilege, last discussed in this blog here.

Holders of 272,614 Series 8 Preferred Shares have elected to convert these shares into an equivalent number of Series 9 Preferred Shares, and holders of 1,028,770 Series 9 Preferred Shares have elected to convert these shares into an equivalent number of Series 8 Preferred Shares.

These conversions will be effective on November 1, 2006. Following these conversions, there will be 1,805,948 Series 8 Preferred Shares and 6,194,052 Series 9 Preferred Shares issued and outstanding.

So the Series 9, the fixed-reset issue paying 4.35% commencing with the Feb. 1, 2007, payment, will be much more liquid than the ratchet-floaters … on the other hand, there will be more of the ratchets than there were before, so perhaps they’ll make it into the HIMI Index!

Nortel has announced the dividend rate payable for the next five years on the Series 6 shares to which holders of Series 5 shares (NTL.PR.F) are entitled to convert. If they do not convert (or should conversion be cancelled due to insufficient orders), holders will retain their NTL.PR.F shares under the existing terms and conditions.

Nortel Networks Limited announced that the fixed dividend rate for its Cumulative Redeemable Class A Preferred Shares Series 6 will be equal to 80% of the yield on five-year non-callable Government of Canada bonds to be determined on November 10, 2006.

Pretty skimpy! Especially for an issue rated Pfd-5(low) by DBRS! I rather suspect that there will be no conversions.

BCE has announced that, of the 8-million BCE.PR.S shares currently outstanding, 5,918,209 will be converted to BCE.PR.T on November 1.

BCE.PR.T has commenced trading on the TSX today, quoted at $24.75-25, 5×5, zero volume. This issue will be added to the HIMIPref™ database shortly. As previously noted, the BCE.PR.T will pay $1.1255 per $25 p.v. share. There is an offer for both issues that is conditional upon the BCE / Bell Canada Income Trust Conversion proceeding.

We had a look at POW.PR.A yesterday, as an example of an issue in the PerpetualPremium index with a negative YTW; now let’s look at RY.PR.K (previously commented upon on August 22). This is particularly interesting in light of the RY.PR.O redemption recently announced. RY.PR.O was also at an intermediate stage of its call schedule and also had a call price declining by $0.25 p.a. The important differences between these issues are:

• the “K” is retractable and is therefore included as debt on the balance sheet. RY.PR.O is perpetual and therefore may be included in Tier 1 Capital.
• the “K” has an annual dividend of $1.175; the “O” pays $1.375.

This issue was quoted at the close of business, 2006-10-19, at $25.66-62 and has the embedded option schedule:

• Redemption      2003-08-24      2004-08-23  26.000000
• Redemption      2004-08-24      2005-08-23  25.750000
• Redemption      2005-08-24      2006-08-23  25.500000
• Redemption      2006-08-24      2007-08-23  25.250000
• Redemption      2007-08-24   INFINITE DATE  25.000000
• Retraction      2008-08-24   INFINITE DATE  25.000000

So it is currently redeemable at $25.25 and, while one can never be absolutely certain of anything in this world, the idea that it will be redeemed prior to becoming retractible in 2008 is a safer bet than most.

These options, run through the HIMIPref™ software, give rise to the following optionCalculationList:

• Call  2006-11-18 YTM: -6.24 % [Restricted: -0.51 %] (Prob: 31.99 %)
• Call  2007-09-23 YTM: 2.61 % [Restricted: 2.42 %] (Prob: 1.14 %)
• Soft Maturity  2008-08-23 YTM: 3.64 % [Restricted: 3.64 %] (Prob: 66.87 %)

So HIMIPref™ is accounting for the possibility of an immediate call (one maturityNoticePeriod hence) at $25.25, which will result in a realized yield of -6.24%. This is a very odd issue, quite frankly! I noticed it when I was working on my article about Yield-to-Worst as a predictor of future returns (A Call, too, Harms) … at one of the year-ends studied it was among the issues with the lowest YTW but was not called, making my point a little less emphatic, but returning poorly over the ensuing year anyway. I drew attention at that point to the issue:

The other retractable in the low yield-to-worst lists for 2000-2002 that was not called was RY.PR.K. Although it managed to avoid the worst case scenario (a call nine months subsequent to its appearance in the list), it underperformed the index by a cumulative total of about 6% in the following three years. Clearly, dodging the redemption bullet was not, in and of itself, a great cause for celebration!

The continuing oddness can be illustrated over the past year by looking at a graph of the bid price over the past year. The high prices for this issue lead to YTWs that have been negative more often than not.

I don’t understand! Fortunately, however, I don’t need to understand. Knowing where to find the “Sell” button is good enough for me!