Archive for April, 2007

New Issue : Brookfield Asset Management 4.75% Perp

Monday, April 23rd, 2007

Brookfield has announced a new Cumulative Perpetual Preferred issue, Series 18.

Size : $200-million ( = 8-million shares @ $25.00) prior to over-allotment)

Closing : May 9, 2007

Dividends : 4.75%, first dividend payable July 31 (short first coupon)

Redemption Schedule :

BAM 4.75 Perp Redemption Schedule
From To Price
2012-07-31 2013-07-30 $26.00
2013-07-31 2014-07-30 25.75
2014-07-31 2015-07-30 25.50
2015-07-31 2016-07-30 25.25
2016-07-31 INFINITE DATE 25.00

Brookfield Asset Management is rated Pfd-2(low) by DBRS and P-2 (stable) by S&P.

More Later

April 20, 2007

Saturday, April 21st, 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 4.28% 4.29% 40,513 16.81 2 -1.1694% 1,007.6
Fixed-Floater 5.34% 4.37% 105,800 16.60 6 -0.2705% 958.6
Floater 4.56% -18.22% 56,292 0.13 4 +0.1090% 1,058.2
Op. Retract 4.72% 3.16% 84,054 2.10 17 +0.0865% 1,034.6
Split-Share 5.03% 3.97% 147,239 3.38 12 -0.0712% 1,046.5
Interest Bearing 6.52% 4.02% 61,776 1.91 5 -0.0602% 1,045.2
Perpetual-Premium 5.04% 4.09% 224,917 5.54 54 -0.0619% 1,057.7
Perpetual-Discount 4.54% 4.57% 815,195 16.27 11 +0.0079% 1,063.2
Major Price Changes
Issue Index Change Notes
BCE.PR.Y Scraps (would be ratchetRate, but there are volume concerns) -2.1829% Exchange/Reset date is 2007-12-1 (to BCE.PR.Z). Closed at 23.75-18, 21×9 on volume of 1,400 shares.
TOC.PR.B Scraps (would be Floater, but there are volume concerns) -2.1434% Contagion from the BCE issues? This was on volume of 200 shares. Closed at 25.11-75, 6×35.
BCE.PR.I FixedFloater -1.4880% Exchange/Resdet date is 2011-08-01 (counterpart is unissued series ‘AJ’); until then pay 4.65% of par. New low today of 22.50; closed at 22.51-87, 5×10
BCE.PR.S Ratchet -1.3344% Exchange/Reset date is 2011-11-01 (to BCE.PR.T). Did this on volume of 700 shares; closed at 24.40-89, 3×1
BCE.PR.R FixedFloater -1.0390% Exchange/Reset date is 2010-12-01; until then these pay 4.54% of par. Closed at 22.86-15, 2×10. Traded as low as 22.85 today, a new 52-week low.
Volume Highlights
Issue Index Volume Notes
PWF.PR.I PerpetualPremium 129,350 Desjardins crossed 124,100 at 26.75. Now with a skimpy pre-tax bid-YTW of 3.86% based on a bid of 26.75 and a call 2008-05-30 at 26.00. The buyer seems to be hoping that they last longer!
WN.PR.D PerpetualPremium 104,985 Scotia crossed 92,400 at 25.75. Now with a pre-tax bid-YTW of 4.81% based on a bid of 25.73 and a call 2014-10-31 at 25.00. Weston is still under Credit Watch Negative.
RY.PR.D PerpetualPremium 81,758 RBC crossed 65,000 at 25.35. Now with a pre-tax bid-YTW of 4.54% based on either a call 2016-3-25 at 25.00, or a limitMaturity, take your pick.
CM.PR.I PerpetualPremium 63,350 Now with a pre-tax bid-YTW of 4.59% based on a bid of 25.23 and a call 2016-3-1 at 25.00
WN.PR.E PerpetualDiscount 58,337 Now with a pre-tax bid-YTW of 4.81% based on a bid of 24.86 and a limitMaturity.

LCS.PR.A : Continuation of Analysis

Friday, April 20th, 2007

In the first part of this analysis, we got as far as estimating the two fundamental credit quality ratios as:

  • Asset Coverage Ratio : 2.3:1
  • Income Coverage Ratio: 0.5:1

As noted, the Income Coverage Ratio is a little scary (as the company will, in the absence of other income, have to dip into capital to make the preferred dividend payments), but on the other hand consider that there is a lot of capital to dip into! The shortfall is approximately $0.25 annually; the term of the investment is seven years (since the prospectus notes that the preferred shares will be redeemed at $10.00 on April 30, 2014); and therefore that the shortfall amounts to about $1.75 over the term of the investment.

If we deduct this amount from the capital available (which we previously calculated as approximately $23.55), we are left with $21.80 to cover our $10.00 investment. So, even after setting aside some capital to meet the income requirements, we still have a fair amount of danger space.

We can also take comfort from one of the committments in the prospectus:

No distributions will be paid on the Class A Shares if (i) the distributions payable on the Preferred Shares are in arrears, or (ii) in respect of a cash distribution, after payment of the distribution by the Company, the NAV per Unit would be less than $15.00. In addition, it is intended that the Company will not pay special distributions, meaning distributions in excess of the targeted $0.075 per month in distributions, on the Class A Shares if after payment of the distribution the NAV per Unit would be less than $25.00 unless the Company would need to make such distributions so as to fully recover refundable taxes.

So, if the Asset Coverage Ratio falls below 1.5:1, then at least distributions to the capital unitholders will not be a drain on corporate resources, which is a comfort. The “intention” regarding special distributions is appreciated, but as hard-nosed fixed income investor, we don’t really care a lot about their precious “intentions”. It’s their committments that matter.

In sum, I have no problems with the rating of this issue as Pfd-2(low) by DBRS.

OK, so the issue looks like it’s investment grade. It’s only just investment grade; carnage in their underlying portfolio of life insurance companies could add to our worries; but it’s a reasonable investment and worth looking at further.

The issue is currently quoted on the TSX at $10.55-65. What’s the yield if purchased at $10.65?

Using Keith Betty’s Yield Calculator (broken link redirected 2024-2-1) (remember, we can’t use a generic bond calculator, since bonds trade with accrued interest and preferreds don’t), we plug in the following values:

Parameterization of Yield Calculation
Current Price 10.65
Call Price 10.00
Settlement Date 2007-04-25
Call Date 2014-04-30
Quarterly Dividend 0.13125
Cycle 2
Pay Date 10
Include First Dividend 1
First Dividend Value If Different 0.01917

Some of the above values require explanation … this is a simple generic calculator, not one designed for six decimal places of precision.

I have told the calculator that it will receive payments on the 10th day of February, May, August & November, as promised in the prospectus. This is indeed the date of receipt but the date of accrual is actually the last business day of January, April, July, October. Thus, the final payment has been marked down a bit; the calculator pro-rates the final dividend to what it thinks it will have accrued and not paid to April 30, which underestimates the final payment by ten-day’s-worth of accrual.

In the “Include First Dividend” field, I have indicated to the calculator that I expect to receive a payment on May 10. I won’t, but it’s the best way to indicate to the calculator that the first payment, in August, will be larger than usual ($0.15042, rather than $0.13125).

I have double checked the calculated cash-flows (in the blue highlighted area, cells G2:H31), to ensure that it reflects reality – or, at least, the best approximation of reality achievable with a generic spreadsheet. They look OK to me.

And finally, after looking at the answer (4.2%), I have performed an independent sanity check: it’s a seven year investment. Since I’m buying at 10.65 and being called at 10.00, that’s a total loss of $0.65, or $0.093 annually. I’m getting paid $0.525 annually, so after deducting my projected capital loss, I have a net income of $0.432 from an investment of $10.65 that will decline to an investment of $10.00 over time, which is an average investment of 10.33. Therefore, I can make a very (very!) rough approximation of the total yield as $0.432/$10.33 = 4.18%. OK. I’m happy that the calculator is working properly, especially after looking at the two-digit calculation in cell U105, which is simply copied to the one-digit answer in cell B21.

I can compare this value with bonds by multiplying by my Interest Equivalency Factor of 1.4 … to get the same after-tax income from interest payments, I’d need a yield of about 5.9%. And I can compare this with other comparable preferred shares, such as, for instance, whatever has been recently recommended in PrefLetter.

However, I have to remember the issue size. This issue might be liquid enough now that I can invest everything I want at a price of $10.65. And I might have every intention of simply holding the issue until it’s redeemed. But there’s many a slip twixt the crouch and the leap … if I have a lot of shares, and need to sell them in 2010, will I be able to do it? If I only have a few shares, will the lack of liquidity mean that potential buyers will discount what they would otherwise pay to account for their liquidity problems? These worries must be accounted for at all times, and particularly when the issue capitalization is only $30-million.

All in all, this isn’t a bad issue at the current price. You could do worse.

Update: And never forget credit quality! This is on the very edge of investment grade; while it’s good enough for a conservative investment portfolio, it’s not good enough to be a huge chunk of an investment portfolio.

And, of course, this does not constitute specific investment advice, one way or the other. I am a financial advisor – but I am not necessarily YOUR financial advisor.

Update: On April 30, the issuer announced:

that it has completed the issuance of an additional 150,000 preferred shares at $10 per share and 150,000 Class A shares at $15 per share representing total gross proceeds of $3,750,000. This issuance was pursuant to the exercise of the over-allotment option granted to the agents in connection with the Company’s recently completed initial public offering. With the exercise of the over-allotment option, the total amount raised by the Company was $76,750,000.

Connection Test for HIMIPref™

Friday, April 20th, 2007

There are periodic problems with accessing HIMIPref™ over a network – problems that appear to flummox networking specialists. I know I’m flummoxed!

The problem arises from the length of time it takes to perform the calculations: in the full institutional version of HIMIPref™ all calculations are performed from scratch. It’s done this way because I want to provide massive amounts of intermediate data to clients for verification and explanatory purposes and it’s easier to produce all this stuff de novo than to write it to files then read it and transmit it separately.

Anyway, when logging in to HIMIPref™, you see notifications of fundamental data coming in (dividends, options …) then a wait screen while the calculations are performed. In some systems, particularly with proxy-servers, the system will hang as the client programme waits for data from the server that just ain’t coming. I never see this problem with direct connections.

Rather than endure any more speculation from network technicians that I just plain can’t write code, I have developed a Connection Test [Link updated 2024-3-22]. It uses the same technology as HIMIPref™ but just sleeps for input number of seconds and returns an integer vector of the input length (in case anybody suspects that the volume of data is a contributory factor).

Full source code is available to HIMIPref™ clients.

Update: A note regarding the availability of this test has been added to the HIMIPref™ documentation, “System Requirements“.

April 19, 2007

Thursday, April 19th, 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 4.23% 4.22% 41,772 16.92 2 -0.3265% 1,019.5
Fixed-Floater 5.33% 4.35% 104,168 16.63 6 -1.3177% 961.2
Floater 4.57% -16.72% 56,123 0.13 4 +0.0993% 1,057.1
Op. Retract 4.73% 3.20% 84,517 2.16 17 +0.0425% 1,033.8
Split-Share 5.02% 3.98% 147,534 3.38 12 -0.1060% 1,047.3
Interest Bearing 6.51% 5.23% 62,026 2.27 5 +0.0040% 1,045.9
Perpetual-Premium 5.03% 4.03% 225,592 5.58 54 -0.0264% 1,058.4
Perpetual-Discount 4.54% 4.57% 829,295 16.27 11 -0.0144% 1,063.1
Major Price Changes
Issue Index Change Notes
BCE.PR.R FixedFloater -4.1494% Exchange/Reset date is 2010-12-01; until then these pay 4.54% of par. Closed at 23.10-34, 6×1. Traded as low as 23.10 today, a new 52-week low. Each one of those three prices is exactly $1.00 below yesterday’s number, amusing if you don’t own it.
BCE.PR.T Scraps (would be FixedFloater, but there are volume concerns) -2.4230% Exchange/Reset date is 2011-11-01 (to BCE.PR.S); until then, pays 4.502% p.a. Closed at 23.76-00, 8×4. New 52-week low of 24.00
BCE.PR.Z FixedFloater -2.2774% Exchange/Reset date is 2007-12-1 (to BCE.PR.Y); until then they pay 5.319% of par. Afterwards … I bet it’s less! Closed at 23.60-17, 20×1. New 52-week low of 23.51.
BCE.PR.C FixedFloater -1.7034% Exchange/Reset date is 2008-03-01 (to series AD, not issued); until then they pay 5.54% of par. Closed at 23.66-02, 12×4. Traded as low as 23.50 today, a new 52-week low.
CGI.PR.C SplitShare -1.5625% It did this on zero volume. Now with a pre-tax bid-YTW of 3.86% based on a bid of 25.20 and a softMaturity 2016-6-14 at 25.00.
BCE.PR.Y Scraps (would be ratchetRate, but there are volume concerns) -1.3810% Exchange/Reset date is 2007-12-1 (to BCE.PR.Z). Closed at 24.28-98, 10×10, on zero volume.
Volume Highlights
Issue Index Volume Notes
BMO.PR.I OpRet 103,825 RBC crossed 47,700 at 25.20, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 4.59% based on a bid of 25.20 and a call 2007-12-25 (er … give or take a few days!) at 25.00
TD.PR.N OpRet 67,500 TD crossed 32,800 at 26.99, then another 17,200 at the same price. Now with a pre-tax bid-YTW of 2.82% based on a bid of 26.82 and a call 2009-5-30 at 26.00.
CM.PR.I PerpetualPremium 57,789 Now with a pre-tax bid-YTW of 4.59% based on a bid of 25.22 and a call 2016-3-1 at 25.00
GWO.PR.I PerpetualDiscount 49,000 RBC crossed 40,000 at 24.85. Now with a pre-tax bid-YTW of 4.55% based on a bid of 24.85 and a limitMaturity
POW.PR.D PerpetualPremium 26.23 Now with a pre-tax bid-YTW of 4.27% based on a bid of 26.23 and a call 2014-11-30 at 25.00.

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

LCS.PR.A : A Good Issue, but just too Small

Thursday, April 19th, 2007

I was asked recently to comment on Brompton Lifeco Split Corp., a split share issue that commenced trading yesterday, April 18.

From the first page of the prospectus we learn that:

The Preferred Shares and the Class A Shares are offered separately but will be issued only on the basis that an equal number of each class of shares will be issued and outstanding.

Then, from page 2 we see that the preferreds are being offered at $10.00, with the company paying the agents $0.30 for each one sold, while the capital units are being offered at $15.00 with a commission of $0.90.

Hence, for each matched-pair sold, the company will receive $23.80 net after commission. We also note that:

Before deducting the expenses of issue estimated at $675,000 in the case of the minimum offering and $725,000 in the case of the maximum offering (but not to exceed 1.5% of the gross proceeds of the Offering) which, together with the Agents’ fees, will be paid out of the proceeds of the offering.

. So, for the sake of analysis, let’s assume that the expenses will be $700,000, charged over 3-million units.

Hindsight helps when guessing issue size on this sort of issue, obviously. When you don’t have a precise number, make a conservative guess. In this case, the approximations in the above paragraph lead to an estimate of issue expenses of $0.23 / unit. Round it to $0.25, to be conservative.

Hence, we are estimated that the company will receive a net total of $23.80 – 0.25 = $23.55 after fees and expenses, as assets which will cover the preferred share obligation of $10.00. That’s an Asset Coverage Ratio of 2.3:1 (being conservative!). To compare this with some other issues, look at the posts regarding LBS.PR.A and SXT.PR.A.

When looking at the Asset Coverage Ratio you also have to look at the nature of the assets! In this particular case, the company informs us that the investment portfolio will be four major, equally weighted, life insurance companies. As preferred share investors, we would prefer a more diversified portfolio … but then, perhaps, nobody would want to buy the capital units and therefore not want to borrow our money at all – we can’t have everything! Still, the assets are fairly solid. These aren’t junior uranium explorers who are risking everything on one throw of the dice!

Now we turn to the Income Coverage Ratio. Page one of the prospectus advises that the portfolio generates 2.3% annual dividends. We want to be conservative, so we’ll assume they make no money at all on their options strategy (but we’ll be optimistic and assume that it won’t actually cost them anything!).

When we look for expenses, we find on page 42 of the prospectus that management fees will be 0.60% of portfolio value. Page 43 advises that they are paying a trailer fee of 0.40% on the value of the capital units; since the capital units will have an initial value of $23.55 – $10.00 = $13.55, we can estimate the initially payable trailer as 0.40% * (13.55 / 23.55) = 0.23% of portfolio value … let’s round it to 0.25%, just so we can continue to brag about how conservative we are!

And, finally, the fund will have expenses … for things like audit, filing, reporting and other good things. Page 43 of the prospectus estimates this as $235,000 p.a., based on an issue size of $100-million. We estimated, earlier, an issue size of $75-million. The expenses will be a bit smaller with a $75-million portfolio, but not a lot smaller and certainly not proportionately smaller. To maintain our conservative attitude, we’ll assume that $235,000 will be the actual expenses … which comes to 0.31% on the portfolio.

So: The portfolio as a whole will have income of 2.3%. From this we subtract 0.60% Management Fees, 0.25% Trailer Fees and 0.31% expenses, which comes to a net income of 1.14% on the portfolio.

On a per-unit basis, the portfolio has an initial value of $23.55, so net income per unit will be roughly $0.27. And each unit has one preferred share, paying 5.25% of par, so the income required to cover the dividend is $0.525.

Need $0.525 per year, estimate will get $0.27 per year, income coverage is just over 50%, which is a little scary. It means that to meet their obligations, in the absence of capital gains and options winnings, they’ll have to dip into capital. Which is not the end of the world in and of itself, but it’s not as nice as an income coverage of 200%, for instance!

More Later ….

Catching up on Posts

Thursday, April 19th, 2007

There are a number of posts that will be forthcoming. In the near future. I swear!

Drew asked some questions on April 5:

1. HIMIPref currently gives high valuation scores to several P3 issues. You, however, have noted that HIMIPref is less reliably values P3’s as compared with investment grade. Is the credit risk worth the potential reward? The yield differential alone does not seem to warrant taking on the risk.

2. Widely accepted equity portfolio theory says that adding risk in small amounts to an otherwise conservative portfolio can increase returns and actually decrease risk, where risk is measured in terms of volatility. Does the same hold true for preferred shares where risk is measured in terms of credit and not duration?

3. My intuition is that not all P3’s are in principle alike in terms of risk/return potential. A P3 (high) of a utility-like business such as Yellow Pages seems substantially less risky from a credit perspective than a cyclical issuer with a P3 rating. Further, a P3(high), it seems, has substantially higher reward potential than any P3 due to the bump in price that will no doubt result from a credit upgrade. Should these issues – issuer specific and differences between P3(high) and all other P3’s – play a role as we move down the food chain?

I will answer these briefly in this blog, but this is high-level fixed-income stuff … I think it’s probably worthy of an article.

I have been asked recently to comment on Brompton Lifeco Split Corp, LCS.PR.A. This is too small an issue to warrant inclusion in the HIMIPref™ universe but since I was asked by a subscriber to PrefLetter (cough, cough) I will write something more formal shortly. Not article-formal, not full-analysis-formal, but something.

Also, I haven’t yet commented on the closing of CIU.PR.A, other than to note its role in the redemption of CU.PR.T, CU.PR.V & CU.PR.D. This will be rectified shortly.

No rest for the wicked!

April 18, 2007

Thursday, April 19th, 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 4.22% 4.21% 42,189 16.95 2 -0.9105% 1,022.9
Fixed-Floater 5.25% 4.29% 101,369 16.75 6 -1.9197% 974.0
Floater 4.57% -15.95% 55,877 0.13 4 +0.0296% 1,056.0
Op. Retract 4.73% 3.23% 84,458 2.10 17 -0.0308% 1,033.3
Split-Share 5.02% 3.86% 150,742 3.38 12 -0.0201% 1,048.4
Interest Bearing 6.52% 5.25% 62,518 2.28 5 -0.0784% 1,045.8
Perpetual-Premium 5.03% 4.04% 227,197 5.53 54 +0.0083% 1,058.6
Perpetual-Discount 4.54% 4.56% 843,879 16.28 11 -0.1240% 1,063.2
Major Price Changes
Issue Index Change Notes
BCE.PR.G FixedFloater -3.0534% Exchange/Reset date is 2011-05-01. Closed at 22.86-23.88, 2×5 … nice spread, eh? New low today, 22.81.
BCE.PR.H RatchetRate -2.3984% Exchange/Reset date is 2011-05-11; they exchange with the BCE.PR.G above, which makes pairs trading an interesting speculation. Closed at 24.01-49, 10×10 … it did this on zero volume.
BCE.PR.C FixedFloater -2.2736% Exchange/Reset date is 2008-03-01; until then they pay 5.54% of par. Closed at 24.07-34, 2×8. Traded as low as 23.54 today, a new 52-week low.
BCE.PR.R FixedFloater -2.2709% Exchange/Reset date is 2010-12-01; until then these pay 4.54% of par. Closed at 24.10-34, 4×2. Traded as low as 24.10 today, a new 52-week low.
BCE.PR.Z FixedFloater -2.2267% Exchange/Reset date is 2007-12-1; until then they pay 5.319% of par. Afterwards … I bet it’s less! What a resilient issue this is! It didn’t set a new low today (so the low is still 23.72), closing at 24.15-34, 8×2.
BCE.PR.I FixedFloater -1.0435% Exchange/Reset date is 2011-08-01; until then they pay 4.65% of par. New low today, 22.76. Closed at 22.76-25, 7×9.
Volume Highlights
Issue Index Volume Notes
BPO.PR.I Scraps (would be OpRet, but there are credit concerns) 150,945 Now with a pre-tax bid-YTW of 4.13% based on a bid of 26.00 and a call 2010-12-31 at 25.00
RY.PR.D PerpetualPremium 63,300 Now with a pre-tax bid-YTW of 4.54% based on a bid of 25.35 and a call 2016-3-25 at 25.00 … or a limitMaturity, take your pick.
CIU.PR.A PerpetualPremium 61,950 New issue settled today … and yes, I know I haven’t written it up yet! Later, OK? Now with a pre-tax bid-YTW of 4.61% based on a bid of 25.00 and a limitMaturity.
PWF.PR.F PerpetualPremium 42,500 Now with a pre-tax bid-YTW of 4.32% based on a bid of 25.77 and a call 2010-12-30 at 25.00.
BNS.PR.M PerpetualDiscount 40,027 Now with a pre-tax bid-YTW of 4.54% based on a bid of 24.87 and a limitMaturity.

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

CU.PR.T, CU.PR.V, CU.PR.D to be Redeemed

Wednesday, April 18th, 2007

Well, that didn’t take long!

When CU announced their new issue (which is trading as CIU.PR.A, by the way – I have no idea why it’s not in the “CU” ticker family) I predicted that the CU.PR.T & CU.PR.V would be redeemed (missed the D! But it wasn’t in the HIMIPref™ universe anyway) and, lo and behold, as soon as the new issue settles, CU is announcing:

that, as a result of the successful closing of the CU Inc. issue of $115,000,000 4.60% Cumulative Redeemable Preferred Shares Series 1, it will redeem on May 18, 2007 all of its outstanding Cumulative Redeemable Second Preferred Shares Series Q, R and S at a price of $25.00 per share plus accrued and unpaid dividends per share.

That’s a total of 5,050,105 shares, so it’s a net paydown of debt for them … and a massive decrease in coupon! The average dividend rate on the redeemed shares is just a hair under 5.75% … so payback time on issuance costs won’t come to much.

BCE Pairs

Tuesday, April 17th, 2007

Boy, BCE and its credit problems is just taking over this blog, aren’t they?

With the confusion and losses, though, comes volatility. And volatility is your friend. I have previously noted the BCE.PR.Y / BCE.PR.Z pair … let’s make a list of all of them!

 

BCE Pairs
Fixed Ratchet Exchange Date
BCE.PR.Z BCE.PR.Y 2007-12-01
BCE.PR.F BCE.PR.E 2010-02-01
BCE.PR.G BCE.PR.H 2011-05-01
BCE.PR.T BCE.PR.S 2011-11-01

A number of BCE issues are not listed here because only one member of the pair is trading.

These pairs are interesting because, in theory, the prices of the elements of the pair should move in lockstep, given that they are exchangeable into each other on the Exchange Date. There will be some degree of uncertainty due to the fact that changes in prime – and changes in percentage of prime paid – will change … but it’s fun to watch.

There would be a fair amount of risk involved in putting on a long/short position to arbitrage the differences for the three longer-dated pairs, due to these uncertainties. If a debt-holder-unfriendly deal goes through, we can assume (or, at least, I will) that retail will panic and all the issues will trade not just below par, but below a reasonable valuation that takes account of the actual risk. This will imply that the Floating-Rate issues will quickly ratchet up to pay 100% of prime … a very different kettle of fish from the other major alternative, that nothing happens. So playing the arbitrage game on the three longer issues could just possibly be a little risky … at least until the uncertainty clears up a little.

But the BCE.PR.Y / BCE.PR.Z pair … that’s more interesting.

 

Comparison as of 4/17
Ticker BCE.PR.Z BCE.PR.Y
Type Fixed Ratchet Floater
Estimated Dividends to Exchange Date $1.00 $0.59 (@ 4% annual rate)
4/17 Quote 24.70-83 24.60-25.20
averageTradingValue 89,605 3,280

So, based on this very brief analysis, it looks as if the BCE.PR.Z are very cheap compared to BCE.PR.Y. Of course, putting a position on could be a major exercise in frustration, given the volume-average of the BCE.PR.Y … but never-the-less, if I was the owner of some Y right now AND if I still liked the BCE name, I know what I’d be doing!