PrefBlog

It will be recalled that BCE.PR.Q will reset at 4.812% effective September 30.

BCE.PR.Q is a FixedReset that came into being through an Exchange from BAF.PR.E which in turn commenced trading 2013-2-14 as a FixedReset, 4.25%+264, after being announced 2013-1-30.

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.Q and the FloatingReset that will exist if enough holders convert). 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 FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; most of the implied rates until the next interconversion are scattered around the current 3-month bill rate although the averages for investment-grade and junk issues are have diverged slightly, at +1.73% and +1.46%, respectively – pretty close to the market rate. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

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.Q FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts. Therefore, I recommend that holders of BCE.PR.Q continue to hold the issue and not to convert.

If you do wish to convert, note that the deadline for notifying the company is 5:00 p.m. (Montréal/Toronto time) on September 14, 2018. Brokerages and other intermediaries will normally set their internal deadlines a few days prior to this, so if you want to convert don’t waste any time! Such intermediaries may accept instructions after their internal deadline (but prior to the company deadline, of course) if you grovel in a sufficiently entertaining fashion, but this will only be done on a ‘best efforts’ basis.

I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.

Manulife Financial Corporation has announced (although not yet on their website):

that after having taken into account all election notices received by the September 4, 2018 deadline for conversion of its currently outstanding 8,000,000 Non-cumulative Rate Reset Class 1 Shares Series 13 (the “Series 13 Preferred Shares”) (TSX: MFC.PR.K) into Non-cumulative Floating Rate Class 1 Shares Series 14 of Manulife (the “Series 14 Preferred Shares”), the holders of Series 13 Preferred Shares are not entitled to convert their Series 13 Preferred Shares into Series 14 Preferred Shares. There were 140,179 Series 13 Preferred Shares elected for conversion, which is less than the minimum one million shares required to give effect to conversions into Series 14 Preferred Shares.

As announced by Manulife on August 21, 2018, after September 19, 2018, holders of Series 13 Preferred Shares will be entitled to receive fixed rate non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors of Manulife and subject to the provisions of the Insurance Companies Act (Canada). The dividend rate for the five-year period commencing on September 20, 2018, and ending on September 19, 2023, will be 4.41400% per annum or $0.275875 per share per quarter, being equal to the sum of the five-year Government of Canada bond yield as at August 21, 2018, plus 2.22%, as determined in accordance with the terms of the Series 13 Preferred Shares.

Subject to certain conditions described in the prospectus supplement dated June 17, 2013 relating to the issuance of the Series 13 Preferred Shares, Manulife may redeem the Series 13 Preferred Shares, in whole or in part, on September 19, 2023 and on September 19 every five years thereafter.

It will be recalled that MFC.PR.K will reset at 4.414% effective September 19.

MFC.PR.K is a FixedReset, 3.80%+222, that commenced trading 2013-6-21 after being announced 2013-6-17. The announcement of extension has been previously reported. The issue is tracked by HIMIPref™ and is assigned to the FixedReset subindex. Since it is an insurance holding company issue without a NVCC clause, a Deemed Maturity at par as of 2025-1-31 has been added to the redemption schedule as is my normal practice.

I previously recommended against conversion.

Brookfield Asset Management Inc. has announced:

that it has determined the fixed dividend rate on its Cumulative Class A Preference Shares, Series 32 (“Series 32 Shares”) (TSX: BAM.PF.A) for the five years commencing October 1, 2018 and ending September 30, 2023…
…
Series 32 Shares and Series 33 Shares

If declared, the fixed quarterly dividends on the Series 32 Shares during the five years commencing October 1, 2018 will be $0.3163125 per share per quarter, which represents a yield of 5.019% on the most recent trading price, similar to the current yield. The new fixed dividend rate that will apply for the five years commencing October 1, 2018 represents a yield of 5.061% based on the redemption price of $25 per share.

Holders of Series 32 Shares have the right, at their option, exercisable not later than 5:00 p.m. (Toronto time) on September 17, 2018, to convert all or part of their Series 32 Shares, on a one-for-one basis, into Cumulative Class A Preference Shares, Series 33 (the “Series 33 Shares”), effective September 30, 2018.

The quarterly floating rate dividends on the Series 33 Shares will be paid at an annual rate, calculated for each quarter, of 2.90% over the annual yield on three-month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the October 1, 2018 to December 31, 2018 dividend period for the Series 33 Shares will be 1.11131% (4.409% on an annualized basis) and the dividend, if declared, for such dividend period will be $0.2778275 per share, payable on December 31, 2018.

Holders of Series 32 Shares are not required to elect to convert all or any part of their Series 32 Shares into Series 33 Shares.

As provided in the share conditions of the Series 32 Shares, (i) if Brookfield determines that there would be fewer than 1,000,000 Series 32 Shares outstanding after September 30, 2018, all remaining Series 32 Shares will be automatically converted into Series 33 Shares on a one-for-one basis effective September 30, 2018; and (ii) if Brookfield determines that there would be fewer than 1,000,000 Series 33 Shares outstanding after September 30, 2018, no Series 32 Shares will be permitted to be converted into Series 33 Shares. There are currently 11,982,568 Series 32 Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series 33 Shares effective upon conversion. Listing of the Series 33 Shares is subject to Brookfield fulfilling all the listing requirements of the TSX and, upon approval, the Series 33 Shares will be listed on the TSX under the trading symbol “BAM.PF.K”.

BAM.PF.A is a FixedReset, 4.50%+290 that commenced trading 2012-3-13 after being announced 2012-3-5. It is tracked by HIMIPref™ and assigned to the FixedResets subindex.

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., BAM.PF.A and the FloatingReset BAM.PF.K that will exist if enough holders convert). 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 FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market appears to be relatively uninterested in floating rate product; the implied rates until the next interconversion bracket the current 3-month bill rate as the averages for investment-grade and junk issues are at +1.44% and +1.34%, respectively. Whatever might be the result of the next few Bank of Canada overnight rate decisions, I suggest that it is unlikely that the average rate over the next five years will be lower than current – but if you disagree, of course, you may interpret the data any way you like.

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 BAM.PR.A FixedReset, we may construct the following table showing consistent prices for its soon-may-be-issued FloatingReset counterpart given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that the FloatingResets, BAM.PF.K, that will result from conversion are likely to be cheap and trading below the price of their FixedReset counterparts, BAM.PF.A. Therefore, it seems likely that I will recommend that holders of BAM.PF.A continue to hold the issue and not to convert, but I will wait until it’s closer to the September 17 notification deadline before making a final pronouncement. I will note that once the FloatingResets commence trading (if, in fact, they do) it may be a good trade to swap the FixedReset for the FloatingReset in the market once both elements of each pair are trading and you can – presumably, according to this analysis – do it with a reasonably good take-out in price, rather than doing it through the company on a 1:1 basis. But that, of course, will depend on the prices at that time and your forecast for the path of policy rates over the next five years. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue until the FloatingResets commence trading and that the relative pricing of the two new pairs will reflect these conditions.