Understanding BCE inc Preferreds

In this article "Understanding BCE inc Preferreds ", I explain the structure of the BCE inc preferreds and point out the pitfalls and opportunities presented. You as an investor have to take action at certain times to ensure best returns for your portfolio.

Written By Canadian Preferreds

On July 22, 2020
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 Understanding BCE inc Preferreds is a must for any investor wishing to hold telecom securities in their portfolio. BCE has issued 4 types of preferreds providing investors with a good selection set. I will review all 4 types and point out what you have to look out for. BCE is one of Canada’s largest telecom companies. Its the only one with a good set of preferreds. You can find a list and detailed information of these securities in our page Rank BCE Inc Preferreds.  Shaw is the other, but its a smaller company and has only 2 preferreds, their securities are ranked in our page Rank Shaw Communications Preferreds . 

Understanding BCE inc Preferreds through the prospectuses

I have reviewed the prospectus provided by BCE for each of their preferred shares.  For each, I have highlighted the most important information you need to be aware of, as holder of this preferred.  Here is a list of the locations for each preferred reviewed and highlighted for your review, if you wish to do so yourself as well. All of BCE inc preferred shares are cumulative.

BCE has issued a total of 21 preferred securities consisting of :

  1. Twelve “5 Year Resets ” of two variations
    1. Four  Based on the 5 Year Rate  plus a spread.
    2. Eight Based on the 5 Year Rate with a Negative spread.
  2. Two “3 Month” Floaters
  3. Seven Floaters based on the Prime Rate.

The “5 Year Resets” and the “3 Month” floaters follow the normal sturcture for their type. The “5 Year” with negative spread and the floater of the prime rate needs more investigation.

 

Understanding BCE Inc 5 Year Resets with Negative Spread

These 8 preferred stocks (BCE.PR.R, BCE.PR.T, BCE.PR.Z, BCE.PR.A, BCE.PR.C, BCE.PR.F, BCE.PR.G, BCE.PR.I) offer a negative spread. The yield of this security, is guaranteed to be >=80% OF 5YR RATE <=100%. In other words the yield will be always discounted between 20 and 0 %. BCE is the only issuer with a preferred structured this way. In the table below you can see how, this affects each of the preferreds at renewal, based on some what if scenarios.

Reset Scenarios Based on Various G.O.C. 5 Year Bond Yield Rates

The following table presents 6 scenarios, of the issues resetting based on different 5 Year Bond rates. Each scenario consists of 3 columns and grouped by color. The rates assumed for the reset are as follows:
  • Scenario 1: 5YR GOC Rate is set at -0.5%
  • Scenario 2: 5YR GOC Rate is set at 0.01%
  • Scenario 3: 5YR GOC Rate is set at 0.4%
  • Scenario 4: 5YR GOC Rate is set at 0.8%
  • Scenario 5: 5YR GOC Rate is set at 1.2%
  • Scenario 6: 5YR GOC Rate is set at 1.6%

Last Updated: Market Data Jul-21 17:18, Model Metrics Jul-21 17:20
Credit Rating Symbol Reset Date Y/M/D Fixed Rate Base Current (Yield | Dividend)
5Yr @ -0.5%. Reset (Yield | Dividend)Scenario: 1 yield and dividend based on GOC 5yr Rate of 5Yr @ -0.5%.
5Yr @ -0.5%. Blended (Yield | Dividend) 5Yr @ -0.5%. Rate Increase (percent | to value )
5Yr @ 0.01%. Reset (Yield | Dividend)Scenario: 2 yield and dividend based on GOC 5yr Rate of 5Yr @ 0.01%.
5Yr @ 0.01%. Blended (Yield | Dividend) 5Yr @ 0.01%. Rate Increase (percent | to value )
5Yr @ 0.4%. Reset (Yield | Dividend)Scenario: 3 yield and dividend based on GOC 5yr Rate of 5Yr @ 0.4%.
5Yr @ 0.4%. Blended (Yield | Dividend) 5Yr @ 0.4%. Rate Increase (percent | to value )
5Yr @ 0.8%. Reset (Yield | Dividend)Scenario: 4 yield and dividend based on GOC 5yr Rate of 5Yr @ 0.8%.
5Yr @ 0.8%. Blended (Yield | Dividend) 5Yr @ 0.8%. Rate Increase (percent | to value )
5Yr @ 1.2%. Reset (Yield | Dividend)Scenario: 5 yield and dividend based on GOC 5yr Rate of 5Yr @ 1.2%.
5Yr @ 1.2%. Blended (Yield | Dividend) 5Yr @ 1.2%. Rate Increase (percent | to value )
5Yr @ 1.6%. Reset (Yield | Dividend)Scenario: 6 yield and dividend based on GOC 5yr Rate of 5Yr @ 1.6%.
5Yr @ 1.6%. Blended (Yield | Dividend) 5Yr @ 1.6%. Rate Increase (percent | to value )
Pfd3 BCE-R BCE.PR.R CA05534B7034 2020DEC01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 08.71% | $1.0324 -0.84% | $-0.1 -0.36% | $-0.0 111% | -0.84% 0.01% | $0.00 00.45% | $0.05 111% | 0.01% 0.67% | $0.08 01.07% | $0.12 111% | 0.67% 1.35% | $0.16 01.71% | $0.20 111% | 1.35% 2.03% | $0.24 02.35% | $0.27 111% | 2.03% 2.70% | $0.32 03.00% | $0.35 111% | 2.70%
Pfd3 BCE-T BCE.PR.T CA05534B8107 2021NOV01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 06.32% | $0.7544 -0.83% | $-0.1 00.59% | $0.07 110% | -0.83% 0.01% | $0.00 01.27% | $0.15 110% | 0.01% 0.67% | $0.08 01.79% | $0.21 109% | 0.67% 1.34% | $0.16 02.33% | $0.27 109% | 1.34% 2.01% | $0.24 02.87% | $0.34 109% | 2.01% 2.68% | $0.32 03.40% | $0.40 109% | 2.68%
Pfd3 BCE-Z BCE.PR.Z CA05534B8289 2022DEC01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 07.51% | $0.9760 -0.76% | $-0.1 02.95% | $0.38 092% | -0.76% 0.01% | $0.00 03.38% | $0.44 092% | 0.01% 0.61% | $0.08 03.71% | $0.48 092% | 0.61% 1.23% | $0.16 04.05% | $0.52 092% | 1.23% 1.85% | $0.24 04.39% | $0.57 092% | 1.85% 2.46% | $0.32 04.73% | $0.61 092% | 2.46%
Pfd3 BCE-A BCE.PR.A CA05534B7943 2022SEP01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 07.06% | $0.9025 -0.78% | $-0.1 02.35% | $0.30 095% | -0.78% 0.01% | $0.00 02.83% | $0.36 095% | 0.01% 0.62% | $0.08 03.20% | $0.40 095% | 0.62% 1.25% | $0.16 03.57% | $0.45 095% | 1.25% 1.88% | $0.24 03.95% | $0.50 095% | 1.88% 2.50% | $0.32 04.32% | $0.55 095% | 2.50%
Pfd3 BCE-C BCE.PR.C CA05534B7869 2023MAR01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 07.56% | $1.0950 -0.69% | $-0.1 03.43% | $0.49 072% | -0.69% 0.01% | $0.00 03.78% | $0.54 072% | 0.01% 0.55% | $0.08 04.05% | $0.58 072% | 0.55% 1.10% | $0.16 04.33% | $0.62 071% | 1.10% 1.66% | $0.24 04.60% | $0.66 072% | 1.66% 2.21% | $0.32 04.88% | $0.70 072% | 2.21%
Pfd3 BCE-F BCE.PR.F CA05534B7455 2025FEB01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 07.01% | $0.9663 -0.72% | $-0.1 05.85% | $0.80 081% | -0.72% 0.01% | $0.00 05.96% | $0.82 081% | 0.01% 0.58% | $0.08 06.04% | $0.83 081% | 0.58% 1.16% | $0.16 06.13% | $0.84 081% | 1.16% 1.74% | $0.24 06.22% | $0.85 081% | 1.74% 2.32% | $0.32 06.30% | $0.86 081% | 2.32%
Pfd3 BCE-G BCE.PR.G CA05534B7372 2021MAY01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 05.87% | $0.6875 -0.85% | $-0.1 -0.18% | $-0.0 113% | -0.85% 0.01% | $0.00 00.60% | $0.07 114% | 0.01% 0.68% | $0.08 01.20% | $0.14 113% | 0.68% 1.37% | $0.16 01.81% | $0.21 114% | 1.37% 2.05% | $0.24 02.42% | $0.28 114% | 2.05% 2.73% | $0.32 03.04% | $0.35 113% | 2.73%
Pfd3 BCE-I BCE.PR.I CA05534B7117 2021AUG01 NEGATIVE_SPREAD(>=80% OF 5YR RATE <=100%) at least 0.28% 05.98% | $0.6875 -0.87% | $-0.1 00.15% | $0.01 118% | -0.87% 0.01% | $0.00 00.91% | $0.10 118% | 0.01% 0.69% | $0.08 01.48% | $0.17 118% | 0.69% 1.39% | $0.16 02.07% | $0.23 117% | 1.39% 2.09% | $0.24 02.67% | $0.30 118% | 2.09% 2.78% | $0.32 03.26% | $0.37 117% | 2.78%

Understanding BCE Inc Negative Spread

As you can see from the table above the effect of the reset will be devastating to your holdings. Lets review in detail what will happen. Lets take for example BCE.PR.R.

This will reset in DEC of 2020. To find out resetting dates just use our tool Preferreds Resetting Within In 180 Days.

Current yield is 08.71%  with a yearly dividend of  $1.0324. How is the reset going to affect this security. 

  1.  Based on today’s 5yr rate of 0.35% the new yield will be 00.99%  and new annual dividend  $0.11. That is about 1/10th of today’s yield.
  2.  Based on  5yr rate of  0.8% the new yield will be 1.35%  and the yearly dividend  $0.16

You can view 6 scenarios in the above table.

Its clear in the current environment choosing to renew is a mistake. This is the default option.

Conversion is the better option.

All of the 5 year resets have a conversion option to a “floating 80% of prime” equivalent preferred.  For example BCE.PR.R. can convert to a new issue of “First Preferred Series Q”.  Based on today’s prime rate of 2.45% you can expect a yield of around 4.2% and yearly dividend of about $0.50. As you can see this is by far the better choice.  To convert you must inform BCE you plan to do so within the allotted time period.

It may also be an opportunity depending on what happens to the price of the BCE.PR.R after it resets. With a crazy low yield I would expect to get this for a couple of dollars.  For a patient investor this is definitely an intriguing situation.

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