PrefBlog

BCE has sent a reminder to holders of its Series AC preferreds (BCE.PR.C) that there is a conversion option to the as-yet non-existent BCE.PR.D to take effect March 1.

They advise:

Holders wishing to convert their shares will have to exercise their conversion privilege between January 16, 2008 and February 20, 2008.
…
BCE Inc. will, by January 16, 2008, communicate in writing with holders of Series AC Preferred Shares additional information pertaining to the manner of exercising the conversion privilege and to the method of computing the fixed dividend rate that will be payable on the Series AC Preferred Shares for the five year period beginning March 1, 2008.
…
Under and subject to the terms and conditions of the Definitive Agreement entered into by BCE Inc. in connection with its acquisition by an investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC, the purchaser has agreed to purchase all outstanding Series AC Preferred Shares for a price of $25.76 per share, together with accrued but unpaid dividends to the Effective Date (as such term is defined in the Definitive Agreement). The purchaser has also agreed, on and subject to the terms and conditions of the Definitive Agreement, to purchase all outstanding Series AD Preferred Shares for a price of $25.50 per share, together with accrued but unpaid dividends to the Effective Date.

I do not have any information regarding the fixed rate to be paid for the five years commencing 2008-03-01 on the BCE.PR.C. All there is to go on at the moment is the prospectus:

BCE Inc. shall determine on the 25th day prior to the first day of each Subsequent Fixed Rate Period the annual dividend rate for each Subsequent Fixed Rate Period, which shall not be less than 80% of the five-year Government of Canada Yield, and give notice thereof. See “Details of the Offering”.

A decision regarding the attractiveness of the conversion privilege requires a certain amount of scenario analysis! The first consideration is whether or not the Teachers’ deal will proceed.

According to the notice, if the deal proceeds then holders will receive $0.26 more for the currently outstanding BCE.PR.C than they will for the potential conversion proceeds of BCE.PR.D. So mark this scenario as a (narrow) win for BCE.PR.C.

There is not enough information available to make a good decision possible for the alternative scenario, that the deal does not go through – we don’t even know the rate that will be paid on the BCE.PR.C. The rate offered on the last conversion of this type, BCE.PR.Y / BCE.PR.Z was 4.331% – note that five-year Canadas now yield under 3.5%, so any kind of reasonable rate on the prefs will have to greatly exceed the 80%-of-Canadas minimum.

However, I offer the following argument: if the deal fails, I believe that the credit quality of BCE will be seen as impaired. While BCE bonds may rally on a failure (they are currently pricing in, as far as I can tell, a dramatic loss of quality should the deal succeed), I do not think the preferreds are pricing in the full implications of everything that has happened to BCE over the past year that will be felt if they remain outstanding. Also, floating rate issues (and fixed floaters) have been hurt over the past few months as Bank of Canada credit-crunch-inspired easings have diminished the attractiveness of floaters versus fixed-rate perpetuals.

Thus, I suspect, BCE.PR.D (if issued) will trade below par. Therefore, I suspect, BCE.PR.D will pay 100% of Canada Prime, currently 6.00%.

What will prime average over the next five years? I don’t know. But I suspect that it will average well over 5.00% and that the rate offered on the BCE.PR.C reset will be well under 5.00%.

Therefore, I suspect, most holders will elect to convert their BCE.PR.C to BCE.PR.D on the grounds that, on a balance of risks, they should have a higher return.

This entry was posted on Friday, January 18th, 2008 at 4:43 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.