BMO.PR.Q: 19% Conversion to BMO.PR.A

Bank of Montreal has announced:

that 2,174,393 of its 11.6 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 25 (the “Preferred Shares Series 25”) will be converted on August 25, 2016, on a one-for-one basis, into Non-Cumulative Floating Rate Class B Preferred Shares, Series 26 of the Bank (the “Preferred Shares Series 26”). As a result, on August 25, 2016, the Bank will have 9,425,607 Preferred Shares Series 25 and 2,174,393 Preferred Shares Series 26 issued and outstanding. The Preferred Shares Series 25 are listed and the Preferred Shares Series 26 will be listed on the Toronto Stock Exchange under the symbols BMO.PR.Q and BMO.PR.A, respectively.

BMO.PR.Q was issued 2011-3-11 as a FixedReset 3.90%+115 announced 2011-3-2. Its extension and reset to 1.805% have been reported on PrefBlog. It will be noted that the prospectus does not mention the NVCC rules except as follows:

The Basel Committee on Banking Supervision has announced new international bank capital adequacy rules (commonly called Basel III) which will amend the existing Basel II capital management framework. The Office of the Superintendent of Financial Institutions of Canada (‘‘OSFI’’) has announced that it plans to adopt the new Basel III rules for purposes of Canadian bank capital guidelines. Under the new Basel III rules, effective January 1, 2013, all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have, either in their contractual terms and conditions or by way of statute in the issuer’s home country, a clause requiring a full and permanent conversion into common shares of such bank upon certain trigger events at the point where such bank is determined to be no longer viable. The Preferred Shares Series 25 and, if and when issued, the Preferred Shares Series 26 as a result may not fully qualify as non-common Tier 1 capital under the new capital rules as no such conversion mechanism exists. For purposes of being included in the Bank’s regulatory capital under the new capital rules, the Preferred Shares Series 25 and the Preferred Shares Series 26 would be phased out beginning January 31, 2013 (their recognition will be capped at 90% of total Tier 1 capital from January 1, 2013, with the cap reducing by 10% in each subsequent year). As a result, the Bank may, with the prior approval of the Superintendent, redeem the Preferred Shares Series 25 and the Preferred Shares Series 26, if any, in accordance with their respective terms.

Accordingly, I treat these shares as having a DeemedRetraction for analytical purposes.

BMO.PR.Q is tracked by HIMIPref™ and assigned to the FixedReset subindex. I regret to say I neglected to make a recommendation regarding conversion.

7 Responses to “BMO.PR.Q: 19% Conversion to BMO.PR.A”

  1. adp4646 says:

    Just wondering James… Had you recommended against the conversion (as I think you probably would have), would the conversion rate have been so high ? 🙂

    More seriously though, can you share the table you usually produce where you compute the implied 3-month rate for the floater?

  2. adrian2 says:

    Had you recommended against the conversion (as I think you probably would have)

    I don’t remember ever reading a recommendation from James for the conversion. 🙂

  3. jiHymas says:

    Recommendation to convert in 2014.


    It’s a response to market sentiment. Joe Retail currently believes that low rates are here forever and will probably go negative. At some point – don’t ask me when that will be – he will believe that hyperinflation is just around the corner and the only way to avoid losing all your money and having to sleep naked on the streets will be to hold FloatingResets.

    And then they’ll be way overpriced and I will recommend conversion.

  4. brian says:

    I was looking at this pair today and noticed that is trading around $21.25 while is trading around $19.80 !! This seems rather ludicrous compared to other floating reset/fixed reset pairs. Presumably this is a temporary anomaly and will correct itself. Just wondering… is there some way to profit from this anomaly? (I don’t own either of the pair). Can one sell prefs short?

  5. adrian2 says:

    There are plenty examples of rate reset pairs where the floater trades well below the fixed sibling.

    One that I watch closely is
    GWO.PR.O (floater) $12.83 – $12.99
    GWO.PR.N (fixed) $14.31 – $14.45

    On a price percentage basis, I think it’s higher difference than the BMO example.

  6. brian says:

    Thanks Adrian2 but the one trading at the high price,, is the floater. It’s still trading at about $1.60 above the fixed reset!

    Again, does anyone know how to try and profit from an anomaly like this?

  7. jiHymas says:

    It’s very hard to exploit ab initio:

    Shorting Prefs

    Shorting Prefs: Part 2

    All you can really do, I think, is to remember just which issues have a Strong Pair counterpart, to check relative prices when taking a position and to check frequently when you hold a position in one of them.

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