On March 7, 2006, BCE (NYSE: BCE) announced it would combine its rural phone lines in Ontario and Quebec with those of Aliant Inc to form Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF). In October 2006, after four months of due diligence from the July 6 initial public offering, I added the newly minted income trust to the Canadian Edge Portfolio.

The results have been a mixed bag. Within a month after entry, the Halloween night announcement of the 2011 tax on trusts had driven our position down 20 percent. The unit price staged a recovery in 2007, besting our entry point for several months before getting caught up in the crash of 2008.

Bell Aliant’s ability to hold its dividend steady throughout kept its units generally steady. The unit price has since rebounded to the mid-20s, a range it’s held despite the announcement in early May 2010 that conversion to a corporation in January 2011 would involve a 34.5 percent reduction in the distribution to a quarterly rate of 47.5 cents Canadian.

In the May 2010 Portfolio Update, I stated the cut “was a bit steeper than I anticipated.” But as I pointed out, the future yield based on Bell Aliant’s then-current price was still generous. Further, there is potential for increases as debt is reduced and the company completes construction of a fiber optic network in Atlantic and rural Canada.

Like well-run rural phone companies in the US, Bell Aliant has been able to replace revenue lost to cable and wireless competition by up-selling customers to broadband and Internet television offerings. A handful of acquisitions and divestitures of non-core assets has focused the company and strengthened the balance sheet. Cable’s competitive footprint has mostly maxed out, resulting in declining line losses.

As a result, I advised sticking with Bell Aliant with the idea of holding through conversion despite the distribution reduction. And thanks to steady results, that’s paid off with a modest return of around 13 percent.

I still like Bell Aliant’s prospects for 2011 and beyond, which are similar to those of strong US rural phone companies like Windstream Corp (NYSE: WIN). Unfortunately, it appears there’s a complication with their conversion process that outweighs its strengths.

As is the case with Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF), the company’s legal counsel has taken the position that only “qualified US purchasers” can receive shares of the converted company’s stock in exchange for their fund units. That means anyone who can’t show they have either USD1 million or more in total investments (excluding their home) or at least USD200,000 in annual income will have their shares pooled together and sold, with no guarantees on the price received.

As I’ve pointed out before, Bell Aliant’s and Canfor’s assertions are at odds with the position taken by every US over-the-counter (OTC)/Toronto Stock Exchange (TSX) listed trust that’s already converted to a corporation. Every other trust explicitly states the following in their “Management Circular” pertaining to their conversion:

None of the (new company) shares to be issued to Unitholders and Exchangeable Shareholders in exchange for their securities under the Arrangement have been or will be registered under the 1933 Act, and such securities will be issued to such Securityholders in reliance on the exemption from registration set forth in Section 3(a)(10) of the 1933 Act.

That means trust units will not be listed in the US at this time. But they will be swapped seamlessly for new shares in the corporation. There will be no restrictions on trading them after the conversions, just as there were none before them. There may be a temporary interruption in OTC-listed trading. But if the resumption in Yellow Media’s (TSX: YLO, OTC: YLWPF) trading in November is any guide, it could be only a matter of hours.

The position that all US unitholders are entitled to shares in the new corporations without complications is the position taken by every trust conversion to take place thus far, including those of Portfolio Holdings Ag Growth International (TSX: AFN, OTC: AGGZF), AltaGas Ltd (TSX: ALA, OTC: ATGFF), Colabor Group (TSX: GCL, OTC: COLFF), Daylight Energy Ltd (TSX: DAY, OTC: DAYYF), Innergex Renewable Energy (TSX: INE, OTC: INGXF), Newalta Corp (TSX: NAL, OTC: NWLTF), Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF), Perpetual Energy (TSX: PMT, OTC: PMGYF), TransForce (TSX: TFI, OTC: TFIFF), Vermilion Energy (TSX: VET, OTC: VEMTF) and Yellow Media.

In none of these 11 conversions has there been any legal challenge or complication to investors no matter where they live. That’s set to be the case for all of the other trusts that will convert on Jan. 1, except for Bell Aliant and Canfor.

There’s one possible explanation for the restrictive position taken by this pair. Both are heavily owned by parent companies, BCE and Canfor Corp (TSX: CFP, OTC: CFPZF), respectively. That may make management particularly averse to legal proceedings and possibly vulnerable.

However, that’s in no way spelled out by either company in the legal documents they’ve filed pertaining to their conversions. As I’ve said before, I’m not a long-distance mind-reader. And in any case, both companies’ positions are diametrically opposed to our interests.

Both companies’ “Information Circular” on the conversion states that US investors who don’t meet the definition of “qualified” will have their shares pooled together and sold, with no guarantees on price. I have no way of knowing how many will find their shares pooled and sold. But the companies are quite adamant that they will do this.

Based on what we’ve seen when a lot of shares come on the market even for larger companies, the result is likely to be a temporary plunge in price. And if you’re one of those cashed out, you’ll have to accept whatever comes out.

What to Do Now

Consequently, I advise all US investors who do not meet the definition of “qualified” to sell both Bell Aliant Regional Communications Income Fund and Canfor Pulp Income Fund sometime before Dec. 31, the last day they’ll trade as income trusts.

You still have roughly two weeks to do this, so the best idea is to take your time. If you find others have rushed out and the price has plunged, wait on a rebound.

Second, I now advise all qualified US investors to also sell their units of Bell Aliant and Canfor Pulp. The reason is not that you’ll be cashed out. Rather, it’s management’s apparent insistence that you’ll only receive restricted shares for your units. Canfor Pulp management, for example, now states shares received by qualified US investors will be “restricted under the 1940 Act” and can only be resold to the company or to another “qualified purchaser.”

As for Canadians, you face no problems holding either company through the conversion. That should also be true of other foreign nationals, as only US investors are being singled out. My expectation is the pooling and selling of non-qualified US investors’ shares in an orderly way will be impossible. As a result, you could see a steep gap downward.

Within a few days or months, however, the buyers should be back at Bell Aliant, which pays a competitive yield. They should also be back at Canfor Pulp, provided management doesn’t slash its distribution more than the market expects. Expectations are for an annual rate of CAD2 per converted share, paid quarterly.

As a result, shares should rebound back to current levels within a few weeks or months. The question is are they worth holding through that, or are there better places to put your money?

There’s nothing I hate more than selling a stock or trust that I believe to have bright growth prospects and to be undervalued. That’s the case with both Bell Aliant and Canfor Pulp now. But given these needless, self-imposed complications on their conversions–which, frankly, cast some doubt on management’s competence and even good intentions–I see no reason for anyone on either side of the border to hold either Bell Aliant or Canfor Pulp now.

Accordingly, I’m closing both out of the Canadian Edge Portfolio, and eating whatever loss occurs. One idea is to use any tax losses to balance off profits taken by paring back holdings in steeply appreciated shares. That’s a discipline that will reduce future portfolio risk and there should be plenty of candidates in the CE Portfolio.

I’ll continue to cover Bell Aliant and Canfor Pulp in How They Rate. Depending on how events play out, we may add them back at a future date.

More Conversion Updates

As for the rest of the converting trusts, I continue to expect at least some confusion on Jan. 3, 2011, the first trading day after the scheduled Jan. 1 conversion date. All of them are clear there will be no complications with the swap, however.

Second, Canadian Oil Sands Trust (TSX: COS-U, COSWF) and FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF) have now declared their post-conversion dividends. FP is cutting from a monthly rate of CAD0.06 to a monthly rate of CAD0.05. Canadian Oil Sands is cutting to a quarterly rate of CAD0.20.

FP’s rate supports the current price and then some. Canadian Oil Sands’ was deeper (60 percent) but also supports the current price, given its leverage to oil prices and growth plans. Canadian Oil Sands Trust is still a buy up to USD28. Hold FP Newspapers Income Fund.

Note that the former Enbridge Income Fund completed its restructuring last week. Enbridge (TSX: ENF, OTC: EBGUF) now trades under the TSX symbol “ENF” and will retain its OTC symbol, “EBGUF.”

Dividend rates and growth set prices for dividend-paying equities like these in the long haul. Setting post-conversion dividends has, therefore, eliminated the real uncertainty of 2011. Investor realization of that after 2011 will push many of these stocks a lot higher, including those that have cut. That’s a bullish portent indeed.

Below is an update of a table that appeared in the December Feature Article, showing trusts that will change their dividends as they convert to corporations on Jan. 1. Dividends of all other converting trusts will remain the same. Note Yellow Media converted in November but the new payout rate will begin in 2011.

As I wrote last month, we’ll get the new TSX and OTC symbols updated in How They Rate as soon as possible. Until then, you’ll be able to track prices for most on the TSX just by eliminating the “-U” suffix from their current symbols.

The four exceptions are companies that have changed their names with conversion. One of these is Portfolio pick Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF), which will convert into Enercare Solutions Inc (TSX: ECI). The others are Fort Chicago LP (TSX: FCE, FCGYF), which will be Veresen. As a limited partnership, Fort Chicago hasn’t been open to US investors but will be as a converted corporation.

Jazz Air Income Fund (TSX: JAZ-U, OTC: JAARF), is converting into Chorus Aviation (TSX: CHR/A). Swiss Water Decaffeinated Coffee Income Fund (TSX: SWS-U, OTC: SWSSF) is changing its name to Ten Peaks.

Again, we’ll get symbols up as soon as possible for all of these companies as they become effective.