PrefBlog

BCE Inc. has announced:

BCE Inc. will, on December 1, 2015, continue to have Cumulative Redeemable First Preferred Shares, Series R (“Series R Preferred Shares”) outstanding if, following the end of the conversion period on November 17, 2015, BCE Inc. determines that at least one million Series R Preferred Shares would remain outstanding. In such a case, as of December 1, 2015, the Series R Preferred Shares will 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 product of: (a) the average of the yields to maturity compounded semiannually, determined on November 10, 2015 by two investment dealers selected by BCE Inc., that would be carried by non-callable Government of Canada bonds with a 5-year maturity (the “Government of Canada Yield”), multiplied by (b) a percentage rate determined by BCE Inc. (the “Selected Percentage Rate”) for such period. The “Selected Percentage Rate” determined by BCE Inc. for such period is 390%. The “Government of Canada Yield” is 1.059%. Accordingly, the annual dividend rate applicable to the Series R Preferred Shares for the period of five years beginning on December 1, 2015 will be 4.130%.

Five years ago the rate was reset to 4.49% and there was no conversion into the RatchetRate.

According to the conversion notice issued by BCE (emphasis added):

This letter and the attached Notice of Conversion Privilege have been sent to the holders of BCE Inc. Cumulative Redeemable First Preferred Shares, Series R (the “Series R Preferred Shares”).

Beginning on October 16, 2015 and ending on November 17, 2015, holders of Series R Preferred Shares will have the right to choose one of the following options with regards to their shares:
1. To retain any or all of their Series R Preferred Shares and continue to receive a fixed quarterly dividend; or
2. To convert, on a one-for-one basis, any or all of their Series R Preferred Shares into BCE Inc. Cumulative Redeemable First Preferred Shares, Series Q (the “Series Q Preferred Shares”) and receive a floating monthly dividend.

Effective December 1, 2015, the fixed dividend rate for the Series R Preferred Shares will be set for a five-year period as explained in more detail in paragraph 5 of the attached Notice of Conversion Privilege. Should you wish to continue receiving a fixed quarterly dividend for the five-year period beginning December 1, 2015, you do not need to take any action with respect to this notice. However, should you wish to receive a floating monthly dividend, you must elect to convert your Series R Preferred Shares into Series Q Preferred Shares as explained in more detail in the attached Notice of Conversion Privilege.

In order to convert your shares, you must exercise your right of conversion during the conversion period, which runs from October 16, 2015 to November 17, 2015, inclusively. We would like to draw your attention to the fact that should Series Q Preferred Shares be issued following the conversion on December 1, 2015 of Series R Preferred Shares, the Series Q Preferred Shares so issued will begin trading under the symbol BCE.PF.Q. This is not to be confused with BCE Inc.’s Cumulative Redeemable First Preferred Shares, Series AQ which currently trade under the symbol BCE.PR.Q. Should any Series R Preferred Shares remain outstanding after December 1, 2015, they will continue to trade under the symbol BCE.PR.R.

Holders of both the Series R Preferred Shares and the Series Q Preferred Shares will have the opportunity to convert their shares again on December 1, 2020, and every five years thereafter as long as the shares remain outstanding.

Should you require advice as to whether to exercise your conversion privilege, please contact your investment advisor.

If you cannot locate your share certificate or have any questions about the steps to be followed, please contact CST Trust Company at 1-800-561-0934, the transfer agent and registrar for BCE Inc.’s preferred shares.

Please see the attached Notice of Conversion Privilege for further details.

So, there are two things to note very carefully: first, the deadline for notifying the company of an intent to convert is November 17, Tuesday, and not only that, but brokers will generally have earlier internal deadlines so you’ll have to act quickly if you want to convert! Second, the symbol will be BCE.PF.Q – rather confusing, really, but the company made a mistake when converting the BAF.PR.E issue into a BCE issue in September 2014 and it’s too late to fix it.

The conversion notice itself explains the mechanics of how RatchetRate preferreds work, but includes the following important point:

The Designated Percentage for the month of December 2015 will be 80% so that the annual floating dividend rate for the month of December 2015 will be equal to 80% of Prime.

All other RatchetRate preferreds are paying 100% of prime (since they’ve been priced so far below par for so long), and at the maximum rate of change (which is expected to be effective), it will be five months before the new issue’s dividend finally adjusts. This means that the price of 15.60, which is the logical expected trading price for the new issue, will probably not actually be attained until late Spring – until then, a price lower than 15.60 for the RatchetRate should be expected.

If we look at the implied break-even prime rates for the various FixedFloater / Ratchet strong pairs while assuming that the new RatchetRate will, if issued, eventually trade at 15.60 (the approximate level where other RatchetRates are trading), we can draw the following relationships:

Click for Big

Clearly, the implied rate of 2.99% for this pair is lower than the other pairs and is more likely to increase than decrease. It is unreasonable to assume that the price of the RatchetRate will change, because there are lots of these trading from the same issuer at about the level assigned, of 15.60. Therefore, it is more reasonable to assume a decrease in the price of BCE.PR.R, from its current bid of 16.70 to a target bid of 16.07, which will result in an implied break-even prime rate of 3.64%, which is the average of the other pairs. It will be noted, however, that this is still a higher bid than is expected for the Ratchet Rate! Therefore, I recommend retaining BCE.PR.R for those who insist on holding one element of the pair.

If you disagree with me and want to convert, remember you’ve got to act fast! The company deadline for receipt of notifications is November 17, and brokers’ internal deadlines will be earlier.

This entry was posted on Friday, November 13th, 2015 at 4:10 am 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.