PrefBlog

Quadravest has announced:

Financial 15 Split Corp. (the “Company”) is pleased to announce a reorganization that will provide for increased asset coverage and increased dividends for its Preferred shares and anticipated monthly distributions on its Class A shares.

In connection with the extension of the termination date of the Company until December 1, 2025, the Company’s Class A shares will consolidate such that each Class A shareholder will receive 0.40 Class A shares for each Class A share held. As at November 18, 2020, the pro forma NAV per unit of the Company after giving effect to this reorganization will be $17.88 ($13.15 pre-consolidated). The payment of monthly dividends to Class A shareholders at a rate of $1.20 per year are expected post-consolidation (with NAV per unit above $15).

As at the consolidation date, the resultant increase in the net asset value per Class A share will have the impact of increasing the asset coverage ratio for the Preferred shares. Based on the NAV per unit on November 18, 2020, the asset coverage ratio would increase from 132% to 179%. In addition, as previously announced on September 23, 2020, Preferred share dividends will increase from 5.5% to 6.75% annually effective December 1, 2020.

The aggregate intrinsic value of the Class A shareholders’ holdings will remain the same and as a result, the net asset value per Class A share will increase on a proportionate basis for each post-consolidation share on the consolidation date. In the event that the share consolidation would otherwise result in the issuance of fractional shares, no fractional Class A shares will be issued and the number of Class A shares each holder shall receive will be rounded down to the nearest whole number. The consolidation will be a non-taxable event. No action is required to be taken by Class A shareholders in connection with the consolidation.

The reorganization is required in order to maintain an equal number of Class A shares and Preferred Shares outstanding at all material times. More Preferred shares were tendered for retraction than Class A shares pursuant to the special retraction right offered to shareholders in connection with the extension of the termination date of the Company. Retracting shareholders will receive a retraction price based on the November 30, 2020 net asset value per unit.

It is expected that the Class A shares will trade on a post-consolidation basis at the opening of trading on or about December 17, 2020.

The impact of the Class A share consolidation will be reflected in the reported net asset value per unit as at
December 31, 2020.

The Company invests in a high quality portfolio consisting of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, Manulife Financial Corporation, Sun Life Financial, Great-West Lifeco, CI Financial Corp, Bank of America, Citigroup Inc., Goldman Sachs Group, JP Morgan Chase & Co. and Wells Fargo & Co.

The phrase:

the Company’s Class A shares will consolidate such that each Class A shareholder will receive 0.40 Class A shares for each Class A share held.

… is fascinating. The implication is that, at a minimum, 60% of the outstanding preferred shares were tendered for the special retraction. This is an interesting variant of the prisoners’ dilemma – it was entirely rational to tender to the special retraction due to low asset coverage and the fact that the shares were trading below par … but so many holders retracted that the remaining holders are laughing all the way to the bank, with investment-grade Asset Coverage, a dividend rate that was boosted to reduce redemptions and a market price of greater than par. Investing is a difficult game!

Assiduous Readers may be interested in reading cowboylutrell‘s comments on the issue on the September 17 post. And also read his follow-up prediction:

But instead it will be 6.75% for the first year of the new 5-year term only, and a minimum of 5.50% for years 2 to 5. And because of that, there likely won’t be enough enthusiasm from speculators to move the bid closer to $10.00 in the weeks ahead, so conservative holders likely won’t be able to sell their shares of FTN.PR.A on the market at or above $10.00 in the weeks ahead, and instead will massively surrender them for retraction.

BCE Inc. has announced:

BCE Inc. will, on December 1, 2020, 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, 2020, BCE Inc. determines that at least one million Series R Preferred Shares would remain outstanding. In such a case, as of December 1, 2020, 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, 2020 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 600%. The “Government of Canada Yield” is 0.503%. Accordingly, the annual dividend rate applicable to the Series R Preferred Shares for the period of five years beginning on December 1, 2020 will be 3.018%.

This follows an earlier announcement (2020-10-15):

Holders of fixed-rate BCE Inc. Series R Preferred Shares have the right to convert all or part of their shares, effective on December 1, 2020, on a one-for-one basis into floating-rate Cumulative Redeemable First Preferred Shares, Series Q of BCE Inc. (the “Series Q Preferred Shares”). In order to convert their shares, holders must exercise their right of conversion during the conversion period which runs from October 17, 2020 until 5:00 p.m. (Eastern time) on November 17, 2020.
…
Should Series Q Preferred Shares be issued following the conversion on December 1, 2020 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, 2020, they will continue to trade under the symbol BCE.PR.R.

Series Q, if issued, will be a Ratchet Rate Preferred, which in current conditions may be expected to pay dividends at 100% of Canada Prime paid on par … although if the price should exceed $25, this percentage will be reduced, with a minimum of 50% of Canada Prime.

As explained in the article on such pairs (which are interconvertible on a set schedule) the expected prices of each element of the pair are related by the level of their expected dividends. Alternatively, the break-even dividend rate for the Ratchet Rate element of the pair can be determined given knowledge of the other three variables (price #1, price #2 and dividend #1). These break even dividend rates are plotted for each FixedFloater / RatchetRate pair in the following graph:

Click for Big

The average breakeven prime for the BCE issues (seven pairs) currently trading is 3.07% (the outlying point is BAM.PR.G / BAM.PR.E, both of which trade with miniscule volumes). If we assume that the new pair, if created, will trade with the same relative valuation, the current bid of 13.41 for BCE.PR.R will imply a bid of 13.46 for BCE.PF.Q.

Therefore, I make no recommendation regarding whether or not to convert; holders should determine their preference according to their own financial position and their own views regarding the probable level of Canada Prime over the next five years.

Those who wish to convert must act quickly! The deadline is 5pm on November 17 and brokers’ internal deadlines could well occur before then – although they will generally take instructions on a ‘best efforts’ basis if you grovel in a sufficiently entertaining fashion.