BCE.PR.G : HIMIPref™ Valuation Warning

As has been noted, BCE.PR.G is the new symbol for BC.PR.B, and there have been technical problems within HIMIPref™ over the conversion.

The reorgDataRecord for this conversion has been set up with the reorgType REORG_TERMCHANGE. This decision was made due to the lower credit rating on the new shares, as discussed by DBRS:

DBRS notes that prior to this exchange, the Bell preferreds were rated at Pfd-2 with a Stable trend. However, upon exchanging for new BCE preferred shares, the former holders of the Bell preferreds will now have a security that is rated lower resulting from the structural subordination that legally still exists between Bell and BCE. This exchange will now result in approximately $2.7 billion of preferred securities at the BCE holding level.

It was decided that the change in credit rating was significant enough that prior data regarding the trading of this issue should be discarded, just as it is when embeddedOptions or annualDividend gets changed … which happens seldom enough that there is little way of testing any procedures.

On its initial day of trading, volume of BCE.PR.G was 19,081 shares, which set its initial liquidityMeasure to a value greater than the YIELD_CURVE_COMPONENT_CALCULATION_LIQUIDITY_MAXIMUM; that is, HIMIPref™ now thinks that this is a highly liquid instrument, with liquidity for which the market will pay a hefty premium. This state of affairs will last until (and assuming!) the liquidityAverage is reduced through the operation of the instrumentVolumeInfoDecay. This process will probably take about a month at current settings.

The high calculated volume has set the curvePriceComponent corresponding to yieldCurvePremiumLiquidity to a very high value, that is almost certainly spurious – I do not expect the issue to trade 19,081 shares every day just because it’s now a borderline credit.

Therefore, Users of HIMIPref™ are urged to disregard valuations and trade recommendations for BCE.PR.G until the situation has normalized.

I find it fascinating that this warning is not necessary for users of the portfolio method, which has been discussed recently. This is because the optimizableParameter instrumentPriceDisparityValuation has a much lower value in the portfolioMethod (0.086) than in the issueMethod (1.035).

Update & Bump, 2007-03-14 : In response to the comment/query from Drew, I have uploaded the following charts prepared by HIMIPref™:

The outlier confused things and the recent relatively heavy volume has confused things even more! I believe the indicated averageTradingValue is too high at the moment and will require a little more time to determine whether the reasonable value. We should know by month-end.

Note that this caution only applies to users of the issueMethod, which trades like crazy and for which liquidity is very important (since it’s not just enough to get into a position, you have to get out!). Users of the portfolioMethod may use the HIMIPref™ values without a qualm.

One Response to “BCE.PR.G : HIMIPref™ Valuation Warning”

  1. Drew says:

    Can the HIMPref recommendations in respect of BCE.PR.G be accepted now, or should we continue to ignore them?

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