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BCE INC. SERIES AI PREFERRED
SHARES
On June 13, 2011 holders of the BCE Inc. Series AI preferred shares (BCE.PR.I
- ADP B103687) were mailed a Notice of Conversion Privilege which entitles
them to decide which dividend option they would prefer to receive for the
next 5-years effective August 1, 2011. On July 11th, 2011 the new fixed
dividend rate of 4.15% was announced and as a result we have prepared the
following information that you may find useful when helping your clients
determine the best option with regards to their holding.
VOTING CUT OFF:July 20, 2011 6:00 pm
Clients should be referred to the Notice of Conversion Privilege for full
details.
Series19_conversion_notice_en.pdf
Option #1 - Convert To Floating Rate Dividend (BCE.PR.J)
- Starting August 1, 2011, the Series AJ preferred
shares, if issued, will pay a monthly floating dividend based on a dividend
rate that will fluctuate over time between 50% and 100% of the bank prime
rate (Prime).
- The first monthly distribution will commence
on September 12, and will use a rate equal to 80% of Prime for the annual
floating rate dividend.
- Based on a Prime rate of 3.00%, par value
of $25.00 and where other BCE Inc. floating rate preferred shares are trading
in the market the next six months payments are expected to be as follows:
If less than 2 million shares
are converted to Series AJ (Floating Rate Dividend), BCE.PR.J will NOT
be created and holders will be forced to hold BCE.PR.I (Fixed Rate Dividend).
Benefits:
- This type of security should perform well
in a rising interest rate environment as the dividend will begin increasing
as prime increases.
- A floating rate security can be used as a
hedge against rising interest rates.
Risks:
- Holders do not know their dividend payments
ahead of time and will subject to fluctuations in the prime rate. Depending
on the economic environment the prime rate may be at depressed levels for
an extended period of time.
Option
#2 - Take No Action - Receive Fixed Dividend Rate (BCE.PR.I)
- As of August, 2011, the Series AI preferred
shares, should they remain outstanding, pay, on a quarterly basis, a fixed
cash dividend of $1.0375 for the following five years.
- On July 11th 2011 the new annual dividend
rate was announced as 4.15%. BCE Inc's requirements were that the new annual
dividend rate be greater than or equal to 80% of Government of Canada 5-year
bond yield which was 2.13% on July 11, 2011.
- Based on the new dividend rate of 4.15%,
and a par value of $25.00, holders will receive a quarterly dividend of
$0.25938 beginning November 1, 2011.
If
less than 2 million shares of BCE.PR.I will be outstanding after the conversion
privilege BCE Inc. will automatically convert all remaining Series I (Fixed
Rate Dividend) preferred shares into Series J (Floating Rate Dividend)
preferred shares.
Benefits:
- Clients will collect a fixed quarterly dividend
for the next 5 years.
Risks:
- Holders will be exposed to interest rate
risk as there is an inverse relationship between interest rates and the
price of preferred shares
Summary:
Holders of both the Series AI preferred shares and the Series AJ preferred
shares will have the opportunity to convert their shares again on August
1, 2016 and every 5- years after as long as the shares remain outstanding.
Depending on the clients income needs and view of interest rates, the decision
may be different for various clients. In
general, income investors will likely receive a higher cash flow in the
near term by holding the fixed dividend rate (BCE.PR.I). Those clients
who want to hedge against higher interest rates in the future may find
a floating rate dividend rate (BCE.PR.J) more beneficial for their needs.
Contact me if you have any questions.
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