BCE has released:
- Notice to Holders of BCE Inc. Series AE Preferred Shares (BCE.PR.E) [Ratchet]
- Notice to Holders of BCE Inc. Series AF Preferred Shares (BCE.PR.F) [FixedFloater]
Since BCE isn’t much good at this technology stuff, the notices are scans, which makes copy-pasting and searching non-functional. But that’s not a bug, that’s a feature!
Each issue converts into the other and the conversion notice period is 2009-12-18 to 2010-1-18. Conversion takes effect 2010-2-1, and if there aren’t enough volunteers for one of the issues, then holding the other will become mandatory.
The Ratchet will continue to pay its ratchet rate, currently 100% of Prime, a proportion that will start to decrease if the price goes above 25.125. Canada Prime is now 2.25%.
The FixFloat will pay 168% of the 5-Year GOC rate determined on Jan 11. This determination will be published on January 12, and be effective from 2010-2-1 until the next Exchange Date 2015-2-1.
Five year Canadas now yield 2.44%, so the best current now for the fixed rate is 4.10%. I don’t know where Canadian 5-Year swaps are trading, but US five-year swaps (to receive 3-month LIBOR) are at 2.65% with the former rate now at 0.45%.
BCE.PR.F was last mentioned on PrefBlog when it was added to TXPR. BCE.PR.E was last mentioned when BCE Preferreds were downgraded by DBRS and S&P.
BCE.PR.F is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns. BCE.PR.E is not tracked by HIMIPref™ (there are less than 2-million outstanding) but I may add it to the list if there’s a rush to convert.
The BCE.PR.E/F pair is one I watch for arbitrage opportunties and have made some money on earlier trades this year.
I am surprised that the fully expected conversion notice did not cause a closing of the arbitrage gap here as investors should have woken up to the arbitrage potential:
By Feb 1 a purchaser/owner of BCE.PR.F will get one dividend of 0.275 ex dec 29 on today’s closing price of $18.45
The purchaser/ower of BCE.PR.E at today’s closing of $17.70 will get two dividends of 0.047 (ex late each month).
The investor long BCE.PR.E and short BCE.PR.F will tender his long PR.E for conversion, most likely receiving PR.F on Feb 2 and then use it to cover his short. Likewise, the short PR.F is unlikely to be called in because the owner will probably choose to keep it.
Profit: $18.45 -0.275 + 0.047*2 – 17.70 = $0.57 or 3.2% in 6 weeks.
I’ve seen this profit range as high as $2.00 this year — and be negative at other times, so 57 c is not that big a deal despite its low risk and certain time frame. Of course, both PR.E and .F are not very liquid, but perhaps liquidity will improve as the conversion date approaches.
Other interesting pairs are BBD.PR.B/D with a profit of $3.62 in 2.5 years, and BAM.PR.G/E which has been fluctuating wildly in recent days with profit potentials of $1 to nearly 3.00 in 2 years. It doesn’t take years for these relationships to eliminate or greatly reduce the arbitrage gaps — it can take months or sometimes weeks or days.
These big potential profits seem to exist because too many players read only the headline current yield and do not calculate a yield to conversion. When and if floating rates start increasing, floating rate prefs like BBD.PR.B, BAM.PR.E may play even faster catch up (while increasing the profit potential).
Sad to say, but I will miss BCE.PR.E/F for a couple more years until it becomes interesting again.
Sad to say, but I will miss BCE.PR.E/F for a couple more years until it becomes interesting again.
Don’t worry, prefhound, I’m sure there will be many more.
Those who wish to learn more about this sort of arbitrage / trading profit opportunity may wish to view the video on Floating Rate Preferreds.
[…] BCE.PR.F was last discussed on PrefBlog when the conversion notice was published. […]