BBD.PR.D to Reset to 3.134%

Bombardier Inc. has announced:

As of August 1, 2012, the Series 3 Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of Bombardier Inc., cash dividends for the following five years that will be based on a fixed rate equal to the product of (a) the average of the yield to maturity, designated on July 11, 2012 by National Bank Financial and CIBC World Markets Inc., that would be carried by a Government of Canada bond with a five-year maturity, multiplied by (b) 255%.

The average yield of this Government of Canada bond is 1.229%. Accordingly, the annual dividend rate applicable to the Series 3 Preferred Shares for the period of five years beginning on August 1, 2012 will be 3.134%.

The old rate was 5.267%, or 1.31675 p.a.

The new rate of 3.134% is 0.7835 p.a.

BBD.PR.D is interconvertible with BBD.PR.B every five years; the deadline for the current conversion is July 18, 2012. Note that brokers may have internal deadlines a day or two in advance of the company’s deadline at Computershare, so if you intend to convert there is absolutely no time to be lost!

BBD.PR.B currently pays 100% of prime on its par value of $25; therefore 3%. The percentage of prime paid will not be reduced unless and until the market price exceeds the par value. This seems rather unlikely, so it is reasonable to assume that the rate paid on BBD.PR.B will be equal to prime, recalculated monthly, for the next five years.

Given that the rate on BBD.PR.D is only 3.134%, it won’t take a lot of monetary tightening for BBD.PR.B to pay more dividends than BBD.PR.D until the next interconversion possibility five years hence – one 25bp increase just before the half-way point of the period will do it and anything more is gravy.

Therefore, I recommend that holders of BBD.PR.D convert to BBD.PR.B.

Leave a Reply

You must be logged in to post a comment.