PrefBlog

BCE Inc. has announced:

BCE Inc. will, on September 1, 2022, continue to have Cumulative Redeemable First Preferred Shares, Series AA (“Series AA Preferred Shares”) outstanding if, following the end of the conversion period on August 22, 2022, BCE Inc. determines that at least 2,500,000 Series AA Preferred Shares would remain outstanding. In such a case, as of September 1, 2022, the Series AA 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 an annual fixed dividend rate equal to 4.94%.

BCE.PR.A is a FixedFloater that was issued with a 5.45% coupon in 2002 and reset to 4.80% in 2007; about half were converted to the RatchetRate BCE.PR.B.. It then reset to 3.45% in 2012 and there was a small net conversion back to the FixedFloater. It reset to 3.61% in 2017 and there was a 6% net conversion in the FixedFloater. Notice of extension in 2022 was announced previously.

BCE.PR.B is a RatchetRate preferred that is interconvertible with BCE.PR.A every five years.

The most logical way to analyze the question of whether or not to convert is through the theory of Preferred Pairs, for which a calculator is available. Briefly, a Strong Pair is defined as a pair of securities that can be interconverted in the future (e.g. BCE.PR.A and BCE.PR.B). Since they will be interconvertible on this future date, it may be assumed that they will be priced identically on this date (if they aren’t then holders will simply convert en masse to the higher-priced issue). And since they will be priced identically on a given date in the future, any current difference in price must be offset by expectations of an equal and opposite value of dividends to be received in the interim. And since the dividend rate on one element of the pair is both fixed and known, the implied average rate of the other, floating rate, instrument can be determined. Finally, we say, we may compare these average rates and take a view regarding the actual future course of that rate relative to the implied rate, which will provide us with guidance on which element of the pair is likely to outperform the other until the next interconversion date, at which time the process will be repeated.

We can show the break-even rates for each FixedReset / FloatingReset Strong Pair graphically by plotting the implied average 3-month bill rate against the next Exchange Date (which is the date to which the average will be calculated).

Click for Big

The market seems to love the RatchetRate issues, with most BCE pairs trading with breakeven yields well in excess of the current 4.70% Prime Rate – exceptions are BCE.PR.T / BCE.PR.S (3.13%), BCE.PR.A / BCE.PR.B (4.93%) and BCE.PR.C / BCE.PR.D (4.45%). The average breakeven prime rate for the BCE pairs (without including the BCE.PR.T / BCE.PR.S outlier) is 5.65%.

If we plug in the current bid price of the the BCE.PR.A FixedFloater, we may construct the following table showing consistent prices for BCE.PR.B following the expiration of the conversion privilege given a variety of Implied Breakeven yields consistent with issues currently trading:

Based on current market conditions, I suggest that RatchetRate issue, BCE.PR.B, is likely to trade above the price of its FixedFloater counterpart, BCE.PR.A. Therefore, I recommend that holders of BCE.PR.A tender for conversion to BCE.PR.B. It may then be possible, for holders for whom portfolio considerations make the FixedFloater preferable, to swap back in the market with a good take-out in price. There are no guarantees – my recommendation is based on the assumption that current market conditions with respect to the pairs will continue after the conversion period has elapsed and that the relative pricing of the two new pairs will reflect these conditions.

One important consideration that must be given particular attention for this pair of issues is: do you want to hold either one? Other BCE RatchetRate preferreds are trading in the 18.30-40 range, well below the 19.30 bid for BCE.PR.B; whatever one might think of fixed rates in general, or the BCE.PR.A fixed rate in particular, one RatchetRate is pretty much like another – suggesting that the current market price of both elements of this pair have been elevated by the excitement of a reset and conversion.

Those who wish to convert are advised that the deadline for notifying the company of such a desire is 5:00 p.m. (Eastern time) on August 22, 2022.. Brokers and other intermediaries generally set their internal deadlines a day or two in advance of this date, so don’t waste time! Note that brokers will, in general, try to execute the instruction on a ‘best efforts’ basis if received between the two deadlines, provided that the procrastinating shareholder grovels entertainingly enough.

This entry was posted on Wednesday, August 10th, 2022 at 9:35 pm 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.