PrefBlog

BCE Inc. has announced:

NOTICE IS HEREBY GIVEN THAT:

1. Holders of BCE Inc. fixed-rate Series AQ Preferred Shares have the right to convert all or part of their shares, effective on October 1, 2018, on a one-for-one basis, into floating-rate Cumulative Redeemable First Preferred Shares, Series AR of BCE Inc. (the “Series AR Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period, which runs from September 4, 2018 until 5:00 p.m. (Montréal/Toronto time) on September 14, 2018.

2. Holders not wishing to convert or who do not comply with the instructions set out in paragraph 3 below by the appropriate deadline will, subject to paragraph 6 below, retain their Series AQ Preferred Shares and, accordingly, will continue to receive a fixed quarterly dividend as described in paragraph 4 below. However, but subject to paragraph 6 below, on September 30, 2023, and every five years thereafter, holders of both Series AQ Preferred Shares and Series AR Preferred Shares will have the right to convert their shares into shares of the other series.

3. In order to exercise its conversion right in respect of all or part of its Series AQ Preferred Shares, the registered holder must provide a written notice thereof, accompanied by its Series AQ Preferred Share certificates with the transfer form on the back thereof or other appropriate stock transfer power of attorney duly endorsed, and deliver them, at the latest by 5:00 p.m. (Montréal/Toronto time) on September 14, 2018, to one of the following addresses of AST Trust Company (Canada):
By Mail:
By Personal Delivery, Courier or Registered Mail:
P.O. Box 1036 Adelaide Street Postal Station Toronto, (Ontario) M5C 2K4
CANADA Attention: Corporate Actions
1 Toronto Street, Suite 1200
Toronto (Ontario) M5C 2V6
CANADA
Attention: Corporate Actions
Delivery may be done in person, by courier, by registered mail or by mail. However, if share certificates are delivered by courier, by registered mail or by mail, the registered shareholder must ensure that they are sent sufficiently in advance so that they are received by AST Trust Company (Canada) by the above-mentioned deadline.
Beneficial holders who wish to exercise their conversion right should communicate with their broker or other nominee to obtain instructions for exercising such right during the conversion period.

4. The Series AQ Preferred Shares will, should they remain outstanding, 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 sum of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on August 31, 2018 in accordance with the articles of BCE Inc., of a Canadian dollar denominated non-callable Government of Canada bond with a term to maturity of five years, and (b) 2.64%. The “Government of Canada Yield” computed on August 31, 2018 is 2.172%. Accordingly, the annual fixed dividend rate applicable to the Series AQ Preferred Shares for the period of five years beginning on September 30, 2018 will be 4.812%.

5. The Series AR Preferred Shares, if issued, will pay, for each quarterly period beginning with the quarterly period from and including September 30, 2018 up to but excluding December 31, 2018, as and when declared by the Board of Directors of BCE Inc., a quarterly floating dividend rate equal to the “Floating Quarterly Dividend Rate” for such quarterly period. The “Floating Quarterly Dividend Rate” for any such quarterly period shall be equal to the rate, expressed as a percentage, equal to the sum of: (a) the “T-Bill Rate”, calculated in accordance with the articles of BCE Inc. on the 30th day prior to the first day of the new quarterly period, and (b) 2.64%, calculated on the basis of the actual number of days in such quarterly period divided by 365. The “T-Bill Rate” means, for any quarterly period, the average yield expressed as a percentage per annum on three-month Government of Canada Treasury Bills, as reported by the Bank of Canada, for the most recent treasury bills auction preceding the applicable calculation date. The “Floating Quarterly Dividend Rate” computed on August 31, 2018 and applicable to the Series AR Preferred Shares for the quarterly period beginning on September 30, 2018 will be 1.04578% (annual rate of 4.149%, based on an initial T-Bill Rate of 1.509%).

6. After the end of the conversion period on September 14, 2018, if BCE Inc. determines that there would be less than 1,000,000 Series AQ Preferred Shares outstanding after the conversion date (October 1, 2018), BCE Inc. will automatically convert all remaining Series AQ Preferred Shares into Series AR Preferred Shares. However, if BCE Inc. determines that there would be less than 1,000,000 Series AR Preferred Shares outstanding after the conversion date, then no Series AQ Preferred Shares will be converted into Series AR Preferred Shares.

7. For any questions about the steps to be followed, please contact AST Trust Company (Canada) at 1-800-561-0934, the transfer agent and registrar for BCE Inc.’s preferred shares.

DATED in Montréal, this 31st day of August, 2018
(signed)
Glen LeBlanc
Executive Vice-President and Chief Financial Officer
BCE Inc.

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; 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 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, it seems likely that I will recommend that holders of BCE.PR.Q continue to hold the issue and not to convert, but I will wait until it’s closer to the September 14 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.

Tim Kiladze wrote a piece in the Globe today titled Dundee Corp. faces investor spat over preferred share repayment:

On Tuesday, Maryland-based Roumell Asset Management, which says it holds 3.6 million shares, or 6.4 per cent of Dundee, released a public letter to the company’s board of directors asking for Dundee’s preferred shares that come due in 2019 to be extended and given a new, discounted price.
…
Dundee declined to comment Tuesday, but on an August conference call, executive chairman Jonathan Goodman addressed the complexity of the matter. “We’re in the very unique position that the preferred shareholders don’t want us to give them stock and neither do a lot of the common shareholders. But I think we have to be pragmatic,” he said, alluding to the company’s cash levels.

Assiduous Readers will remember that I wrote about DC.PR.E in August – that post contains links to posts from all the huffing and puffing in 2016 about the previous arrangement that gave rise to the existence of the issue.

The Roumell letter advocates:

We believe the company should offer the current Series 5 preferred shareholders appropriately discounted (from par value), and extended, preferred shares. Dundee’s financial position has deteriorated significantly since January 2016 and the discount offered to the Series 5 preferred shareholders must reflect this new reality. In the absence of the Series 5 preferred shareholders accepting a newly discounted, and extended, security, Roumell Asset Management would support honoring the obligation by issuing common stock. While we speak only for ourselves, we believe other large shareholders view the situation similarly.

So who’s Roumell? They run a fund:

The Roumell Opportunistic Value Fund (Institutional share/RAMSX) follows the same deep-value, Opportunistic Capital Allocation (OCA) strategy that we have adhered to since 1998. The Roumell Opportunistic Value Fund seeks to achieve its objective by holding a combination of equity, debt and cash reflecting a broad mandate to pursue value where we find it. In the absence of sufficient investment opportunities, the Fund will hold cash. The Fund is managed by Jim Roumell.

The appropriate benchmark for this kind of fund is difficult to determine, but they mention the Russell 2000 Value Index in their quarterly fact sheet, so let’s go with that until we’re told differently. The fund has achieved an “Average Annual Total Return as of Quarter Ending 6/30/2018” of 0.77% over the past five years compared to 11.72% for the Vanguard Russell 2000 Value Index Fund Institutional Shares VRTVX in the five years to 2018-8-31. Sorry about the period mismatch, but it seems we’re not talking about fractions of a basis point here! Let’s just say I’m not busy mortgaging my house so I can place money with Roumell! They do give returns for other strategies in the 18Q2 Investors’ Letter … you can decide for yourselves whether you want to mortgage your houses.

DC.PR.E closed at 18.47 today … a good bounce off the lows, but hardly a vote of confidence in the company’s ability to redeem at par next year.