Bombardier has announced:
In the case of the Series 3 Preferred Shares, starting as of August 1, 2007, holders will receive a quarterly fixed cash dividend for the following five years, as and when declared by the Board of Directors of Bombardier Inc, based on a fixed rate equal to 115% of the yield on five-year non-callable Government of Canada bonds determined as at July 11, 2007, in accordance with the terms of such shares. The annual dividend rate applicable to the Series 3 Preferred Shares will be published on July 12, 2007 in several newspapers.
At 115% of Five-Year Canadas, the fixed rate may be estimated to be just a hair over 5.25% to be paid on BBD.PR.D following August 1, while the BBD.PR.B will probably continue to pay 100% of Canada Prime. The latter prediction assumes that a Pfd-4 (trend negative) [DBRS] or P-4 (stable) [S&P] issue will not trade above par in the near future, which would start ratcheting down the percentage.
These issues have been discussed in the context of arbitrage. The Bs (ratchet) closed today at 20.63-75, the Ds (fixed) closed at 19.83-11.
I received the following eMail this morning, with permission to publish it if I so desired. Since it’s so complimentary I am, naturally, taking full advantage! JH
Hi James:
I hope you are doing well. A fine job all around on Pref Letter — the volatile markets make for an ever-changing landscape and changing recommendations.
I also thought you did a good job in the prefblog on the recent (we hope) spike in longer term interest rates.
I have a question or two about the BBD.PR.B/D exchange privilege coming up. I didn’t post it as a comment on the blog because I wasn’t sure a comment would be responded to. You are welcome to put this note there if you like.
Anyway, to my knowledge:
$235M face Pref D (Fixed Rate) are outstanding (9.3M shares) with an outlook of 5.25 to 5.3% fixed on July 11.
$65M face Pref B (Floating Rate) outstanding (2.7M shares) with an outlook of 6, 6.25 or 6.5% floating after Aug 1 (depending on your view of the Bank of Canada rumblings).
BBD can force conversion of remainders if there would be 1M shares of either issue outstanding after tenders are in. This would eliminate one of the issues (and any potential for future arbitrage — which, as you know, I am into my second round of in the past five years).
Seems to me that most people who pay attention to the conversion notice will convert to B (Floating) because of 1+% higher yields for a year or two at least (giving protection down to an average of 4.5% prime in years 3-5 to end up no worse than Pref D). With time value of money, B seems even better. Of course, for my arbitrage trade, I plan to tender the long D’s, convert into B’s and then cover my short B’s. Hopefully I should not get squeezed on the short because the B’s don’t have to do anything to keep their shares. [Interestingly, a $1 premium of B over D still existed last week with only 6 weeks to go and the D going ex div 35 cents July 11 vs B ex 12.5 cents June 28 and July 28 — a $1.10 or 5.5% arbitrage play if the bid-ask doesn’t kill the trade].
What is interesting is the prospect that it only takes 11% of Pref D holders to do nothing for the 1M share threshold to fail to eliminate Pref D all together for the next five years. For holders who are long D and expect D to trade at a discount to B post-exchange on Aug 1, exchanging D for B makes immediate sense. However, if one believes that a number of D holders will take no action (out of a desire for fixed income, lack of understanding of the circular, or plain sloth), an investor who enjoys the occasional B/D arbitrage opportunity might help the odds of D surviving by tendering only 88% of net long holdings for conversion to B.
Since the prior conversion between BBD.PR.B/D issues ocurred in 2002 when the floating rate was about 4%, and 22% of the shares remained floating rate, I suspect the odds of Pref D surviving this time are good. So good, in fact, that I think I plan to tender 100% of all longs.
Thus, my question is:
Based on your experience with other pref share conversion privileges, do you expect the Pref D to survive past Aug 1?
I note the results of the October/06 BAM.PR.E / BAM.PR.G conversion: ~22% Fixed Rate @ 4.35.
October 06 BCE.PR.S / BCE.PR.T conversion: 74% Fixed Rate @ 4.502%
April 06 BC.PR.B / BC.PR.E conversion: 75% Fixed Rate @ 4.35%.
It should be noted that all these conversion were done millions of years ago, when rates were going down and would continue to go down forever and the Mortgage Fairy was planning to buy us all a new house, which may have skewed the results in favour of the fixed rate.
I really can’t express a firm opinion regarding whether the Ds will survive past August 1. Given that prime must decline by 75bp over the next five years … and not just reach 5.25%, but average 5.25% or less for the fixed-rate to outperform, I suggest that investors would only keep the D-Fixed if they held them for a very particular purpose. Given that there are lots of fixed-rates to choose from, the logical answer is ‘No: the Ds will not survive.’
The market is illogical, however. Given that there are so many Ds now outstanding, and that the issue has been around for a while and probably trickled gradually into retail hands, and that retail often becomes frozen in fear of doing the wrong thing and, as you say, that retail sloth is a factor and, finally, that given returns for the past few months a lot of retail just doesn’t want to think about it any more … well, I’ll bet a nickel they survive. But only a nickel, so don’t go taking market action with the other view and looking to me to hedge your bet!
[…] As discussed earlier, the BBD.PR.B will continue to pay a ratcheted floating rate that may be expected to be 100% of Canadian Prime, currently 6.25%. Given that the issues are both rated Pfd-4 by DBRS, I do not recommend them for inclusion in fixed-income portfolios – they’re equity-substitutes for heavens’ sake! If you must hold either of them, I recommend the BBD.PR.B – I consider the chance that Canadian Prime will average less than 5.25% over the next five years to be pretty slim. […]
Any recent news and your opinion on these issues?
Well, their ability to sell private jets is all over the papers … but the debt is junk. I consider these issues to carry too much company-specific equity-like risk to be analyzed as fixed-income investments.
The issues may well be good investments; I’m not taking any view at all on their merit. It’s simply that equity analysis is not what I do.