Rate reset preferred shares are a hot commodity for investors, and Canadian companies aren't wasting any time getting their legal done work so that can tap into this demand.
Unlike typical preferred shares, which pay a fixed dividend in perpetuity, rate reset preferred shares pay a fixed rate for the first five years, and then recalibrate. At that point, investors can elect to either take the Government of Canada 5-year rate plus a fixed spread, or a floating rate that offers the 3-month T-bill yield plus a spread.
These shares are attractive to investors because they offer a tax advantage over buying bonds. Although the dividends are fixed, just like a bond coupon, they are taxed at a preferential rate over interest payments.
BCE Inc. , which has long history with these shares, is one of the latest firms to tap into this demand, closing a $345-million offering on Tuesday. These shares pay a fixed yield of 4.15 per cent for the first five years, and then investors have the choice to either take a rate equal to the Government of Canada 5-year yield plus 1.88 per cent, or a floating three-month T-bill rate plus 1.88 per cent.
Yet BCE isn’t alone. Intact Financial also just sold $225-million of these securities, as did Canaccord Financial. These two issues were a bit more surprising because both deals were the first time these firms offered this type of security.
Still, it makes a lot of sense. Much like Intact and Canaccord, firms such as GMP Capital and Bell Alliant also recently sold their first issue of rate reset preferred shares. If sales continue to be strong, don't be surprised if more first-time issuers jump on the bandwagon.