BCE has announced that the fixed rate for the next five years on BCE.PR.T will be 112% of the rate on 5-year Canadas, determined on October 11 and published October 12.
The Canadas are currently trading to yield a little under 4.00% … so for the sake of some commentary, we can assume that the yield on the BCE.PR.T will be something like 4.45%-4.50%.
The BCE.PR.T do not currently exist, but can be issued in exchange for BCE.PR.S at the option of the holder. The BCE.PR.S were quoted at the close 2006-09-19 at 24.71-80, which is below the price at which – subject to the Official Calculation of Trading Price – the percentage of prime paid will increase. Given that Prime is currently 6.00% and the last monthly dividend paid on these shares was $0.08, the rate paid on the shares is now 3.84%, or … hmm, carry 1 …. 64% of prime.
Holy Smokes! I don’t know about my readers, but these rates sound pretty chintzy to me! These things are PERPETUAL and BCE is not a particularly good credit, rated Pfd-2(low) by DBRS. I’d want something more like 4.80% to hold a Pfd-2(low) perpetual – that’s what WN.PR.E is trading at nowadays, and it’s not even a particularly cheap issue, at least according to HIMIPref™.
“Oh yeah, smart guy?” I hear someone calling from the back of the room “What about the potential for floating rate adjustment, huh? That’s worth a lot of money, that is!”
Well, ‘pays yer money and takes yer chances’, that’s my motto. If we presume prime to be constant at 6% for the next five years, then to get 4.8% out of BCE.PR.S we need 80% of prime, compared to the current 64%. It might happen … it might not. Prime might go up … or down. You can consider this kind of instrument to offer insurance … but pretty expensive insurance, I call it!
It’s interesting to compare with the fairly recent BC.PR.C conversion offer … Bell offered a fixed rate of 4.65% to the BC.PR.C holders and an insufficient number of them wanted to exchange into the ratchet-rates for Bell to create the issue. Bell’s a slightly better credit, too, rated Pfd-2 as opposed to BCE’s Pfd-2(low).
So, it seems to me that BCE’s being a little aggressive here and wants to get shareholders to convert to the ratchets. But what do I know? I don’t like either issue!
[…] Well, pays yer money and takes yer chances. Going with ratchet-rates means taking a risk on the Designated Percentage AND taking a risk on Prime for the next five years. It’s a tough call, just like the BCE.PR.T / BCE.PR.S conversion that’s coming up … although, mind you, BCE’s fixed-rate offer is 112% of the five year yield. […]
It seems to me likely that the ratchet rate instrument will tend to trade around par – other things being equal that’s what the effect of the ratchet will be. When the price dropped precipitously a while ago I thought “oops, falling rates – floater not so good” but I now think that was some kind of oddball excursion and par is the expected value. That means that these will retain their usefulness as a cash stash IF YOU WON’T NEED THE MONEY IN A HURRY.
I take it from your analysis James that you expect the T’s to trade below par along with the other recent 4.4x issues. I’ll bow to your knowledge of comparables.
I guess in the end I’ll keep my S’s for now. If I was going to trade them in I’d sell them at par when I can and buy something less gimmicky than the T’s.
Well, I hope you’ve read my paper Are Floating Prefs Money Market Vehicles?!
Remember, par was the expected value for the similar ratchet issue BBD.PR.B which … er … isn’t trading near par any more.
I certainly don’t intend to cast any aspersions on the credit-worthiness of BCE, but bad things do happen in this wicked world. And the last dividend on this stuff was $0.08375, or just a shade over $1 per annum … not enough incentive for me to hold it, anyway.
I did read it james. I would never call the floaters money-market equivalents. There is for sure an issuer credit risk and a liquidity risk. The tax advantage over a high interest account may not be worth it.
[…] This issue is not currently outstanding, but is being offered in exchange for BCE.PR.S, a ratchet-rate issue. […]