Back on July 29th, I posted I had purchased preferred shares in Bombardier. I wish I had started my averaging a couple weeks later (did pick up a few on the dip), but nonetheless what I expected to happen has happened over the past week, especially over the past couple days.
The catalyst (or rather the assumed story to cause all the excitement) was that a “crown corporation” in China was interested in purchasing lump-sum the rail division for a huge amount of money (enough to pay off nearly all the debt the company had).
While this may be the cited story, the reality is that sentiment was horribly depressed in the marketplace for a company, while clearly having operational issues, that was punched well below what should be a fair valuation range. It took a catalyst event for the mindsets of the traders, investors and institutions to re-value the company in-line to something that was more reasonable.
There will likely be a few slip-ups in the preferred share pricing between now and over the next year, but anybody picking up preferred equity is likely to receive their stated cash flows for quite some time to come.
While in general I think the market is still not showing many investment opportunities (at least from my eye), this was a rare opportunity in a very well-known Canadian TSX 60 issuer in the large-cap space (or at least they were large cap before this all began!). I very rarely dip my toes into the large cap sector.
The bond yield curve has also taken a similar descent.
If my nominal scenario comes through you’ll see the preferred shares at around a 7.5-8.0% yield range in a year. This will be about $20 for the BBD.PR.C and $9 for the BBD.PR.B series (interest rates are still projected to be very low going forward), which represents another 50% capital appreciation or so for much less risk (albeit slightly less reward) than the common shares.
I remain long Bombardier preferred shares.
Congrats! An analysis well done.
For what its worth, I switched my BBD.PR.B’s into BBD.PR.D for similar prices. It wasn’t easy because of liquidity but I got to lock in a tax loss on my B’s (not a problem for you I’m sure) and I get a yield pick up for a few years. Since they are interconvertible at the reset my only real additional risk is that prime soars in the next two years and I miss out on some incremental dividends.
Assuming rates don’t change the dividend differential is 11 cents a year, so if you swapped for the D’s and paid a tiny bit more for it, it would be a fairly good way of crystallizing the capital loss.
The medium-term bond yields (i.e. stuff maturing around 2022) is now 10-11%, which is a lot better than it was a few weeks ago (where it got up to about 15% in a panic liquidation). Institutions that were able to grab that debt were smart.
The irony of most pension funds is that since BBD is no longer investment grade, they can’t invest in things that would net them the superior returns they so desperately need to pay off their liabilities.
That differential between the pref classes is getting huge but I don’t have any more BBD.PR.Bs to sell. Others might want to think about it as it can add a decent amount to your yield to conversion.