PrefBlog

BCE Inc. has announced:

Click for Big

The new rate of 3.904% is a little above the rate I estimated when making my recommendation, but the difference is not material. Accordingly, I reiterate that:

I recommend holders retain, or switch to, BCE.PR.Y.

For those punctilious souls out there, however, I will update the chart of Break-Even Prime Rates for this type of Strong Pair:

Click for Big

The average break-even Prime rate for the seven BCE pairs is 4.38%.

And the table of projected prices becomes:

As previously reported, BCE has sent conversion notices for BCE.PR.Z and BCE.PR.Y. The new dividend rate on BCE.PR.Z has not yet been announced:

As of December 1, 2017, the Series Z Preferred Shares, should they remain outstanding, 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 yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on November 10, 2017 by two investment dealers appointed by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate”. The “Selected Percentage Rate” determined by BCE Inc. is 231%. The annual dividend rate applicable to the Series Z Preferred Shares will be published on November 14, 2017 in the national edition of The Globe and Mail, the Montreal Gazette and Le Devoir and will be posted on BCE Inc.’s website at www.bce.ca.

I would greatly prefer to delay a recommendation until the announcement of the rate, but (emphasis added) …

In order to convert their shares, holders must exercise their right of conversion during the conversion period which runs from October 17, 2017 until 5:00 p.m. (Eastern time) on November 17, 2017.

… which doesn’t leave a lot of time for dissemination of my recommendation between the rate announcement and the notification deadline!

So for the purposes of this recommendation, I am assuming the five-year Canada rate, currently at 1.67%, will not change between now and the rate calculation date. Thus, since the rate will be set at 231% of the five-year Canada yield, I am assuming that BCE.PR.Z will reset at 3.858%. (note: actual rate reset to 3.904%)

In my terminology, BCE.PR.Y is a Ratchet Rate preferred, currently paying 100% of Prime, reset quarterly. BCE.PR.Z is a FixedFloater currently paying $0.788 p.a., or 3.152% of its $25 par value. The latter rate resets every Exchange Date; the next exchange date is imminent – 2017-12-1. Both issues have been relegated to the Scraps subindex on credit concerns.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g., BCE.PR.Z and BCE.PR.Y). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedFloater / RatchetRate Strong Pair graphically by plotting the implied average Prime rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The average break-even rate for the BCE pairs is 4.18%, while the average for all FixedFloater – RatchetRate pairs is 4.01%; the latter figure has been brought down by the very low reading for BBD.PR.D / BBD.PR.B.

Predictions are difficult, particularly when they are about the future! It will be remembered that Prime is currently at 3.20%; therefore, if we assume that future hikes are evenly sized and spaced, an average of 4.18% implies an end-value in five years of about 5.15%. I’m inclined to believe that it will turn out to be less than that, but if you disagree I won’t put up much of an argument!

Since credit quality of each element of the pair is equal to the other element, it should not make any difference whether the pair examined is investment-grade or junk, although we might expect greater variation of implied rates between junk issues on grounds of lower liquidity, and this is just what we see.

If we plug in the current bid price of the BCE.PR.Z FixedFloater, we may construct the following table showing consistent prices for its soon-to-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions and the estimated reset rate for the FixedFloater, I suggest that BCE.PR.Z will likely trade at somewhat less than the price of BCE.PR.Y, its RatchetRate counterpart. Therefore, I recommend holders retain, or switch to, BCE.PR.Y. Those with strong convictions regarding future movements in Prime will, of course, have an equally strong preference for one of the two issues; other investors may wish to select which of the pair they wish to hold for the next five years based on their personal circumstances (e.g., if you’re hedging a prime-linked mortgage with this issue [not a wise move], you will want to hold BCE.PR.Y).

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce it will undertake an offering of Preferred Shares and Class A Shares of the Company. The offering will be co-led by National Bank Financial Inc., CIBC Capital Markets, Scotia Capital Inc., and RBC Capital Markets and will also include BMO Capital Markets, GMP Securities L.P., Canaccord Genuity Corp., Industrial Alliance Securities Inc., Raymond James, Echelon Wealth Partners, Mackie Research Capital Corporation, Desjardins Securities Inc., and Manulife Securities Incorporated.

The Preferred Shares will be offered at a price of $9.90 per Preferred Share to yield 5.30% and the Class A Shares will be offered at a price of $10.50 per Class A Share to yield 14.40%.

The closing price on the TSX of each of the Preferred Shares and the Class A Shares on November 6, 2017 was $10.08 and $10.70, respectively.

Since inception of the Company, the aggregate dividends declared on the Preferred Shares have been $7.33 per share and the aggregate dividends paid on the Class A Shares have been $17.14 per share, for a combined total of $24.47. All distributions to date have been made in tax advantage eligible Canadian dividends or capital gains dividends.

The net proceeds of the offering will be used by the Company to invest in an actively managed, high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows:

Bank of Montreal	National Bank of Canada	Bank of America Corp.
The Bank of Nova Scotia	Manulife Financial Corporation	Citigroup Inc.
Canadian Imperial Bank of Commerce	Sun Life Financial Services of Canada Inc.	Goldman Sachs Group Inc.
Royal Bank of Canada	Great-West Lifeco Inc.	JP Morgan Chase & Co.
The Toronto-Dominion Bank	CI Financial Corp.	Wells Fargo & Co.

The Company’s investment objectives are:
Preferred Shares:
i. to provide holders of the Preferred Shares with fixed, cumulative preferential monthly cash dividends currently in the amount of 5.25% annually, to be set by the Board of Directors annually subject to a minimum of 5.25% until 2020; and
ii. on or about the termination date, currently December 1, 2020 (subject to further 5 year extensions thereafter), to pay the holders of the Preferred Shares $10.00 per Preferred Share.

Class A Shares:
i. to provide holders of the Class A Shares with regular monthly cash dividends in an amount to be determined by the Board of the Directors; and
ii. to permit holders to participate in all growth in the net asset value of the Company above $10 per Unit, by paying holders on or about the termination date of December 1, 2020 (subject to further 5 year extensions thereafter) such amounts as remain in the Company after paying $10 per Preferred Share.

The sales period of this overnight offering will end at 9:00 a.m. EST on November 8, 2017. The offering is expected to close on or about November 15, 2017 and is subject to certain closing conditions including approval by the TSX.

So the Whole Units are being flogged for $20.40, not bad when you consider that the Whole Unit NAVPU was 17.95 as of October 31. It’s a lovely business when it works!

This offering comes hard on the heels of their September, 2017, offering which raised 79.1-million

I am a little surprised that the summary of investment objectives given in press release did not mention the one year dividend boost to 5.50% for the preferreds that was recently announced.

There’s a thread on Financial Webring Forum which has attracted the attention of one big fan who is putting money into these things, although not directly. I admit, I cannot think of a reason for buying the capital units at such a large premium over intrinsic value other than a belief that the distributions will go on forever … in which case an investor would be much better off buying the underlying issues on margin.

Update, 2017-11-8: The offering was quite successful:

Financial 15 Split Corp. (the “Company”) is pleased to announce it has completed the overnight marketing of up to 5,361,000 Preferred Shares and up to 5,361,000 Class A Shares of the Company. The total proceeds of the offering are expected to be approximately $109.4 million.

HSBC Bank Canada has announced (2017-11-6):

its intention to redeem all of its issued and outstanding Non-Cumulative Redeemable Class 1 Preferred Shares Series C (“Series C Preferred Shares”) and Non-Cumulative Class 1 Preferred Shares Series D (“Series D Preferred Shares”) in accordance with their terms, on 31 December 2017, for a cash redemption price of $25.00 per share.

There are 7,000,000 Series C Preferred Shares and 7,000,000 Series D Preferred Shares outstanding, representing $350,000,000 of capital. The redemption will be financed out of the general corporate funds of HSBC Bank Canada.

Separately from the redemption price, the final quarterly dividend of $0.31875 and $0.3125 for each of the Series C Preferred Shares and Series D Preferred Shares will be paid in accordance with their terms in the usual manner on 31 December 2017 or the first business day thereafter to shareholders of record on 15 December 2017.

All the issued and outstanding Series C Preferred Shares and Series D Preferred Shares will be cancelled following their redemption.

Both of these issues have been around for a while – HSB.PR.C since 2005-4-19 and HSB.PR.D since 2005-11-9. Both were Straight Perpetuals and have been treated as DeemedRetractibles since OSFI brought in the NVCC rules. HSB.PR.C paid 1.275, or 5.10%; HSB.PR.D paid 1.25, or 5.00%.