Bombardier paper napkin valuation

Based on the slides on their investor day, looking at their 2020 financial roadmap, if the corporation is seriously able to reach $25 billion in revenues and 7-8% in EBIT, the quick calculation is the following:

$25 billion revenues
* 0.075 EBIT margin
= $1.875 billion EBIT
Less: $750 million interest expense (Assume $10 billion debt at 7.5%);
= $1.125 billion EBT
Less: $298 million (15% Federal + 11.5% QC = 26.5% taxes)
= $827 million net income

At this point they would likely have around 2.3 billion shares outstanding, so this would equate to about 36 cents a share. Just picking a P/E out of the cloud (15) and multiplying gives a $5.40 share estimate, or about 4.2x above existing market value, or about 33% CAGR if we use the full five years starting today.

Of course, for this to happen, a lot of execution risk (technical, marketing) has to be resolved, but management did a fairly good job solving the immediate financing risk – investors and customers no longer have to care whether the company is going belly-up or not (they are not).

I stress this is a total paper napkin exercise. Actual valuations under a more rigorous process can vary by a factor of 10!

Pinetree Capital – another debenture redemption

Previous articles on Pinetree Capital can be found with this link.

Today, they announced a redemption of $3 million in their senior secured debentures out of a total of $9.716 million outstanding. Interest accrued will be another 1.07% on principal. The redemption will be effective January 8, 2016.

The only wrinkle in this announcement is that $1 million of the $3 million principal will be redeemed in equity of Pintree Capital (TSX: PNP) and based on 95% of the weighted average price of trading from December 2 to December 31. So debentureholders will have 10.3% of their debt redeemed in equity of Pinetree Capital.

Based on Pinetree Capital’s equity, they have 201.9 million shares outstanding and are currently trading at 5 cents per share. If trading is around the 5 cent level, Pinetree will be issuing 21.05 million shares, representing a dilution of approximately 9.4% to existing shareholders. If the common shares start trading lower as a result of this announcement, each incremental decrease in trading will result in more dilution to shareholders – a mildly toxic convertible situation. For example, if the weighted average price is 4 cents a share, Pinetree will issue 26.3 million shares with 11.5% dilution. At 3 cents, the issuance is 35.1 million shares (14.8% dilution).

My guess at present is that the common shares will trade around 4 cents as a result of this announcement, but after the issuance of shares there will likely be a supply dump.

What was peculiar is the following quote in the news release:

The issuance of common shares in partial payment of the redemption amount is subject to the satisfaction of certain conditions contained in the indenture governing the Debentures, including the approval of the Toronto Stock Exchange, failing which the total redemption amount will be paid in cash.

I have guessed the motive of the company to do this redemption was to reduce interest expenses, but if they are opting to not deploy cash in exchange for (nearly worthless at this point) equity, then it is constructively like doing a secondary offering in the marketplace at a very low share price.

The other motive for this partial redemption might be management bracing for impact when they take an impairment expense on their Level 3 assets when they do the year-end audit. The deadline for the year-end annual report is the end of March 2016. They still have to abide by a debt-to-assets covenant of 33%. They are at 28% as of the Q3-2015 report. If there is a mild asset impairment then they will breach their covenant. There might be a temporary breach of the covenant (between the December 31, 2015 reporting period to January 8, 2016) which will be cured by this redemption, but investors will not know about this breach until the issuance of the annual report itself as they no longer report monthly NAV.

Pinetree also received a serious setback when Aptose Biosciences (TSX: APS) suspended a clinical trial, taking its stock price down 50% on November 20, 2015. This probably destroyed another $2.5 million in Level 1 assets (of which $14 million was remaining on September 30, 2015!).

In terms of estimating the shareholder value, the primary variable at this point is whether the board of directors has any plans on executing on a recapitalization-takeover of the company, utilizing its massive capital losses for an acquiring entity. I’m guessing this would be worth about 8-10 cents a share, but first they need to get rid of their remaining debt.

General portfolio thoughts leading up to US Thanksgiving

This week is the US Thanksgiving, where non-discriminating consumers go crazy purchasing tangible objects under the perception that they are discounted.

It is quite apparent, however, that floor retail is getting smashed by online retailing. This has been my underlying theory for quite some time and leads me to the theory that avoiding retail-heavy REITs such as Riocan will be a money-saving procedure. If you can’t compete with Amazon, then the entire structure of your business should be examined.

What’s going to be interesting is if this Amazon-ification of retail will impact corporations like Walmart – certainly their equity is being eroded by Amazon, but I think there is a limit to the erosion where people will simply want to look at tangible stuff in a consolidated warehouse environment. The success of Costco is an example of this – eroding Costco would be the holy grail for Amazon and Walmart, but even Walmart couldn’t pull it off with Sam’s Club.

I have been looking for distressed entities and right now anything resource-based (especially energy) is clearly stressed. I still do not find a lot of value in this sector, but there are ancillary businesses that seem to be a case of throwing the baby out with the bathwater. Anything related to bulk dry shipping is also getting killed, but most corporate entities that are publicly traded come from Greece, and this is a country I do not want my money invested in for a lot of reasons.

I still remain relatively defensively positioned. It is odd how my normal investment patterns is to go for capital gains and growth, but every component in my portfolio right now is giving off a substantial amount of income. There will probably be a time to shift to growth but it doesn’t appear that now is that time.

Bombardier Bailout, part 2

Today’s big news is that Bombardier is selling 30% of its transportation division to the Quebec Pension Plan (CDPQ) for $1.5 billion.

The quick analysis is the following:

1. BBD will have received a cash injection of US$2.5 billion as a result of selling 49% of its C-Series aircraft interest and 30% of its transportation division; this will alleviate any short-term solvency concerns (from the September 30, 2015 balance sheet, they will have over CAD$5 billion liquidity to deal with). This capital is obtained with zero interest cost and some potential dilution of shareholders if the common share price ever gets above the US$1.66 exercise point (which one would hope it does in the recovery scenario!). Near-term bond yields (2018 maturities) are trading at 6.8%, while mid-range debt (2022 maturity range) is between 10-11%. The market is still skeptical of the financial recovery of the corporation.
2. BBD issues another 106 million warrants at an exercise price of US$1.66 on their subordinate voting shares. This is in addition to the 200 million they issued with the previously announce US$1 billion investment from the Quebec government.
3. BBD is required to maintain a cash balance of US$1.25 billion otherwise control on the board will start to erode.
4. This will save BBD from the hassle of doing an IPO (i.e. going through a regulatory quiet period, doing an institutional investor road-show, etc.), but noting that the CDPQ will have rights to trigger an IPO after 5 years of investment. CDPQ will also have significant minority shareholder rights.
5. If the Government of Canada wishes to tag along with some sort of contingent financing offer or backstop, BBD is in a considerably better position to negotiate as they will have sufficient financial reserves to do so.

I view this generally as a positive for the corporation, although they will still need to execute on getting the C-Series jet out the door and be able to generate sales. However, they seemed to have tackled the immediate perception issue of financial trouble, and have shown the financial world that the Quebec government will do whatever it takes to ensure Bombardier’s survival. If the Government of Canada chips in some cash, it will be icing on the cake.

My assessment of the preferred shares is still the same – they will likely pay dividends for the foreseeable future. At CAD$6/share, BBD.PR.B gives off a 11.25% yield, while BBD.PR.C is sitting at around 16%, with the risk that they’ll be force-converted to 12.5 shares of BBD.B – something I doubt management will do, but financially speaking it would make sense to issue 118 million shares to save CAD$14.7 million/year cash flow – with the way they are treating their equity holders, they might as well eliminate this headache off the books. This is the most likely reason why there is such a yield spread between the preferred share series.

The endgame for Pinetree Capital

Long-time readers will know of my investment in Pinetree Capital Debentures (TSX: PNP.DB) and the various amounts of volumes written on this company in the past, probably more than anywhere else on the internet and if I may modestly say so, in higher quality.

The debentures caught my eyes when the underlying company blew their debt-to-assets covenants and while having questionable asset quality, they still had enough blood that could be squeezed from the stone which would flow through to the bondholders.

So far this has been the case – purchasing my 70 cent stones has yielded one dollar blood droplets, plus a generous annual coupon of 10%. In addition, security is granted on all assets of the company, so even if things went wrong, there was a first-in-line claim to picking what was left of the carcass.

By virtue of going from $54 million in debt to about $10 million presently, I’ve had over 80% of my initial position redeemed in cold, hard cash. There’s a bit of residual that I continue to hold. I had an order set to liquidate the position above par, but I am content on riding it until maturity (or CCAA proceedings, whatever the case may be!).

This brings me to my latest post on the company, which is subsequent to their third quarter release. The information contained in the news release is relatively useless for analysis purposes, but their financial statements on SEDAR are much more relevant and I will quote some of the material.

First of all, they were in breach of their covenants and failed to cure them and were under forbearance with a committee of debtholders. This has now passed and the company’s debt-to-assets ratio is once again under 33% (it is approximately 28% as of the end of October). As a result, the debtholders no longer have any direct control of the company’s operations.

What will follow is a simple mathematical exercise in terms of the cash requirements of the company vs. their capacity to actually pay it.

The company still has about $9.8 million in secured debt to pay off, which matures on May 31, 2016. They have an approximate $0.5 million coupon to pay off on November 30 and assuming no further maturities, another $0.5 million in May 2016.

They are sub-leasing their offices and paid somebody $1.55 million so they could get rid of their lease. $1 million is to be paid in Q4-2015, and the remainder on February 1, 2016. They pay about $0.6 million/year for their lease so they gave somebody a 2.5 year inducement on a lease contract that expires on December 2023. They vacate their office effective February 1, 2016. It is not known where they will be moving to, but one can reasonably expect that Pinetree Capital can be run out of a lawyer’s office in the near future instead of a 9,928 square foot behemoth employing less than 10 people.

The company’s burn rate otherwise is $0.8 million/quarter, so operationally they will spend about another $2 million, plus likely professional fees if they are going to do anything financially sophisticated (like liquidating their tax losses!).

So their total cash requirements to May 2016 is likely to be around the $14 to $15 million range – $10.8 million for debenture principal and interest payments, and the rest of it the usual G&A and professional expenses that all publicly traded companies must incur.

In terms of their ability to pay, they had $2.3 million cash on the balance sheet at September 30, 2015. We know they redeemed $5 million in debentures (plus $0.2 million interest) in October, so this functionally put them at a negative $2.9 million balance.

Level 1 assets included $14.2 million in equities – likely consisting of PTK, APS and AAO equities. They do have a minor amount of PRK and LAT, but disposal of these equities will prove to be difficult given the lack of liquidity.

Let’s pretend they liquidated enough Level 1 assets to pay the $2.9 million residual (or they were actually successful in liquidating some of their Level 3 assets, which would be a minor accomplishment). This leaves them with $11.3 million in Level 1 assets remaining to bridge a $14-15 million expense requirement over the next 7 months.

In other words, even if they were to get perfect liquidity on their Level 1 assets the next half year, they still are going to be short on cash.

The remaining assets are Level 3 assets, which total $24 million. However, most of these assets are private investments and hints of what these are can be dredged through previous press releases. SViral was a $5 million investment that nothing could be heard of over the past year in terms of that company’s operations (indeed if any exist at all).

Keek was a slightly more transparent case as it is publicly traded. Pinetree had invested $3 million in their secured notes and they cut a deal to sell them for an undisclosed amount of money. Did Pinetree receive 100 cents on the dollar? Or did they take a slab of equity that they can’t possibly choke through the marketplace?

Due to management not disclosing any information at all about Pinetree’s investment portfolio, one can only guess what else is in there. However, as the year-end audit comes closer, the auditors will have to determine whether management performed a proper test for asset impairment (IAS 36 for those in the accounting world reading this – I am an accountant, after all!) – i.e. is the book value as stated on Pinetree’s books actually what the fair value of those assets are? I would find it very difficult to believe that a $5 million equity investment in SViral is still worth $5 million presently.

My gut instinct says the real value of this Level 3 portfolio is worth about 25% of what management says it is, but without any real disclosure of the components, who knows?

One thing I do know, however, is that management has a huge incentive to ensuring that reported value is kept as high as possible, because they don’t want their assets to fall to the point where the debt-to-assets covenant (33%) gets breached again! My calculations show if they had to impair $6 million of their $24 million in Level 3 assets (without any offsetting gains in their remaining Level 1 asset investment portfolio), they’d once again breach the debenture covenant and have to go through the charade of curing the default.

There are a couple other options for Pinetree and both of these have been discussed before.

One is that in their indenture agreement they are allowed to redeem up to 1/3rd of the debentures in the form of Pinetree equity. The equity redemption of the remaining debentures would dilute existing shareholders by a significant fraction at current market prices (6 cents per share).

Another solution is a monetization of the capital losses the company has incurred to date in a financial transaction. Pinetree has had the dubious distinction of losing half a billion dollars in its investments over the past few years and these tax losses can theoretically be monetized by some sort of recapitalization transaction. Using a theoretical capital gains tax rate of 13% and a willing partner buying the tax credits at 40 cents on the dollar would suggest there’s about $20-25 million left to be harvested here after legal expenses. This is really the only reason why I’m holding onto the secured debt.

Either way, management is still going to be financially creative to get their debt albatross off their backs. It still does not look good in any manner for the equity holders and the debtholders will actually face some risk in terms of getting paid their due in cold, hard cash.

Disclosure: Still holding onto some of those debentures!

Genworth MI Q3-2015 report

Late last month, Genworth MI (TSX: MIC) reported their 3rd quarter results for 2015.

The headline results were quite positive – premiums written were up from $217 to $260 million in 2015 vs. 2014 for the same quarter. As a result of premiums written increasing, revenues (premiums earned) will also be booked at an increasing rate for years to come. The loss and expense ratios remained in-line (at 21% and 19%, respectively) which still give an extraordinarily low combined ratio of 40%.

Management during the conference call pre-emptively went out of its way to explain the situation in Alberta and how they are well prepared for the upcoming onslaught of the double-whammy of increased unemployment (triggering mortgage defaults) and lowering property prices (triggering an increase of loss severity when mortgage claims do occur).

Balance-sheet wise, there were a couple negative developments. One is that the company dipped into preferred shares (selling their common share portfolio at the beginning of the year and investing in preferred shares) and are currently (as of September 30, 2015) sitting on an unrealized loss position of $42 million or 18% under the cost they paid for them (which in the preferred share market is huge!). It is currently 3.4% of their investment portfolio.

The company announced it is increasing its dividend to 42 cents per share quarterly instead of 39 cents, which is consistent with previous years’ behaviour to increment the dividend rate. They did telegraph on the conference call that they will likely not be repurchasing shares with their minimum capital test ratio at 227% even though their goal is to be “modestly above 220%”. The diluted shares outstanding has dropped from 95.6 million to 92.2 million from the end of Sepetember 2014 to 2015, but as I have discussed before, I generally view these period when market value is considerably under book value to be a golden opportunity to repurchase shares instead of issue dividends.

Conflicting with this apparent excess capital is the recent announcement that they are considering a debenture offering, which would allow them to raise more cheap capital. Would this be for leveraging purposes? They were quite successful at their last capital raising attempt – $160 million of debt raised on April 1, 2014 at a coupon of 4.242% and maturity of 10 years. Current market indications suggest they would receive roughly the same yield and maturity terms if they attempted another debt financing. Raising another $250 million in debt financing and attempting a dutch auction tender at around CAD$33/share seems to be a possibility at this stage.

Finance wise, it seems like a win-win: Raise money at 4.5%, fully tax-deductible interest expense. Use to repurchase shares that yield 5.1% (which is not a tax deductible cash outlay for the company). At a corporate tax rate of 26.5%, it is a gain of 1.8% after taxes! Remains to be seen if this is what they are thinking.

This might also be because the Genworth MI subsidiary is 57% owned by subsidiaries of Genworth Financial (NYSE: GNW), which are facing financial challenges of their own – perhaps this will be an inexpensive way for Genworth Financial to raise a cheap $140 million of equity financing and still not give up any ownership in their prize profit-generating subsidiary?

Valuation-wise, Genworth MI is still trading at 15% below diluted book value which still puts it in value range, but this market valuation is clearly influenced on negative market perceptions of the Canadian real estate market – Genworth MI has still not recovered fully from the aftermath of the effects of the drop of crude oil prices. Still, if they effected a buyback at around CAD$33/share, it would still be accretive to their book value!

The company did dip below (dividend-adjusted) CAD$27/share on a couple occasions on single days in late July and August, but I was nowhere near nimble enough to capitalize on that freak trading activity. At such valuations (25% below book value) it would be difficult to not re-purchase shares that I sold in 2014 when MIC was trading at and above $40. The fundamentals of the company are that of a bond fund asset management, sprinkled with the profit generator of Canadian home mortgage insurance.

The other elephant in the room is questioning the effects of the change in the federal government – the new mandate for CMHC might be to get it more involved in mortgage insurance instead of being (relatively) non-interventionist like the previous Conservative government. This might functionally increase the competitive space for Genworth, but it remains to be seen what the Liberal Party’s intentions are with CMHC. The only line in the Liberal Platform is the following:

We will direct the Canada Mortgage and Housing Corporation and the new Canada Infrastructure Bank to provide financing to support the construction of new, affordable rental housing for middle- and low-income Canadians.

This does not appear to conflict with the profitability of Genworth MI. But one can never depend on any new majority government to stay strictly within their platform points!

Bombardier bailout

Bombardier reported their financial results on October 29, which were ugly as expected – they bled through about $315 million cash on the operating side and a gross $500 million on the investment side for the 3 month period.

This and the next quarter should be the the worst of it.

There are a few tail-winds now that will make an investment in their preferred shares likely to pay off beyond the receipt of dividend coupons.

I did not mention this in my July 29th post, a strong component of this investment is due to the political factor – the Government of Quebec, and now by extension by virtue of the Liberal Party’s recent victory nationally, the Government of Canada is not going to let Bombardier fail due to the political connections existing between the controlling shareholder and the government apparatus.

In other words, the company will not fail due to liquidity concerns alone – it may fail due to simply being unable to produce a jet, but it won’t be for financial reasons.

Bombardier took a billion dollars from the government of Quebec for a half equity interest in the liabilities of the new jet they are producing. They also issued 200 million warrants to purchase Class B shares at a strike price that is a premium of approximately 50% above the existing market rate – which would dilute shareholders in the event that things went well.

Examining the market reaction (which on net was rather mute), the BBD.PR.C issue, in particular, is trading at an increased yield, presumably due to conversion threat (they can be converted into BBD.B shares at the higher of 95% of market value or $2/share – and at current market prices, this means 12.5 Class B shares per preferred share).

The short end for Bombardier’s bond yield curve also came down – with their new term issue (March 2018) suddenly trading at par from about 94 cents a month earlier.

The new federal government is sworn in on November 4, 2015. It is virtually certain the new government will table an interim budget measure that will announce the easy to implement campaign platforms during the past election campaign – ratcheting down TFSA contribution limits, adjusting marginal tax rates for middle income earners, creating a new tax bracket for high income earners, etc. But one of the early decisions the new government will face is whether they wish to throw some money at Bombardier. I do not believe a federal investment is likely right now (just simply due to transition and the lack of immediate political necessity), but it remains a distinct possibility in the 2016 budget which will probably be tabled around February or March.

The Quebec investment is on the equity side – and preferred shareholders should benefit from this transaction.

I find it very difficult to believe at this juncture that Bombardier will suspend dividends on their preferred shares and they will muddle their way through what has been a financially disastrous investment in the C-Series jet.

The preferred shares continue to be a high risk, very high reward type investment if things proceed to fruition.

Q3-2015 Performance Report

Portfolio Performance

My very unaudited portfolio performance in the third quarter of 2015, the three months ended September 30, 2015 is approximately -0.9%. The performance for the nine months ended September 30, 2015 (year to date) is approximately +9%.

Portfolio Percentages

At September 30, 2015:

43% preferred share equities
17% common equities
11% corporate debt
29% cash

USD exposure: 23%

Portfolio is valued in CAD;
Equities are valued at closing price;
Equity options valued at closing bid;
Corporate debt valued at last trade price;
Portfolio does not include accrued interest.


I am still considering an e-mail subscription service for these updates. When I am in a position to do so, I may give an abbreviated summary of the report on the website, but send something more detailed through email.

Portfolio Commentary and Outlook

Relative performance is great if you are a fund manager, but it is not so good from the perspective of an individual investor. That said, I can take some minor satisfaction that I have been able to navigate the stormy seas of the markets over the past quarter. The S&P 500 is -6.9% over the quarter and the TSX is -8.6%. My performance, at -0.9%, is roughly flat.

Despite the markets dropping, I still have not been able to find many suitable candidates for investment. I published my purchase of Bombardier preferred shares (of which is the minority of my 43% preferred share position, there are other low volatility issues in the mix there) which was the only real purchase of risk taken in the portfolio. Currently it is roughly at my purchase price and I would expect it will continue to deliver both income and capital gains over the upcoming quarters. I will let my prior writings speak for themselves although the actual research has been done in much more depth than I presented.

The performance of Genworth MI (TSX: MIC) has been lacklustre despite having reasonably good fundamentals. It trades as a proxy for the fortunes of the Canadian real estate market. There is also the pressure that its parent, Genworth Financial (NYSE: GNW), is facing (one look at Genworth Financial’s stock chart should tell the entire story) and this may cause pressure on Genworth to dump its 57% majority share of Genworth MI to some other suitor. Genworth Financial’s issues are significantly different than Genworth MI (i.e. GNW’s issue deals with liabilities created from ill-thought out life insurance policies, something that Genworth MI does not have).

Companies that are connect to the Canadian real estate market, especially mortgage financing, include Home Equity (TSX: HCG) and Equitable (TSX: EQB). Other comparable entities include the staple REITs (e.g. Canadian Apartment Rentals, RioCan, H&R, etc.) that generally show little sign of slowing down – is this because they are trading on the basis of income or asset value? One would believe that if there is going to be some impairment of asset value that the market would have reflected this somewhere.

Pinetree Capital (TSX: PNP) announced at the end of September that they will be redeeming another $5 million in par value of their debentures. This will bring the total outstanding from $14.8 million to $9.8 million at the end of October. They had to do this because otherwise they would have most likely (once again) breached their debt covenant which states their debt-to-assets ratio can be no higher than 33%. Without the redemption they would have been sitting at around 36%, while with this redemption they are at around 27%. My position in their debt has been reduced by 4/5ths since they started their redemptions and with the residual position I can sleep tight knowing that I’m first in line to be paid out. The 10% interest payment is a reasonable incentive to keep my money there instead of dumping it out at 99% of par value.

They have a funny situation where they have few level 1 assets remaining and they will have to dredge up another $10 million to pay the maturing debtholders on May 31, 2016. They will be able to do this, but it has been a grave cost to the corporation and a lesson on how borrowing money to invest can be dangerous. There is likely some residual value beyond what the existing market cap implies ($13 million), but can you depend on management and insiders to actually monetize the tax losses, sell out, and move on? I doubt it.

In terms of studying for future investments, while I have been time limited over the past couple months, my focus has been on debt securities of energy companies. There is a lot of junk out there, and most energy firms are currently locked into a race to see who goes insolvent first. Simply put, companies with better balance sheets will survive longer. Those that have weaker balance sheets are going to get squeezed in this brutal war of attrition. The likely portion of the capital structure that will be profiting off the industry will not be the equity, but rather the people that hold the debt.

There is no shortage of energy debentures that trade on the TSX that warrant valuations far south of 100 cents on the dollar. Most of these debentures are going to be very dangerous to hold, especially considering that Alberta’s government is obviously doing what they can to make further oil sands development impossible.

Over the last quarter of the year, I do not anticipate any outsized gains. About 30% of my portfolio I could see trading 10-20% higher than present values, but the rest of it is mostly fixed income-type investments that is simply parked and waiting for better days. There is currently nothing in the pipeline that would constitute a good potential for a double or triple. Still looking.

Divestor Portfolio - 2015-Q3 - Historical Performance

YearPerformanceS&P 500TSX 60General Comments
9.75 Years:+14.4%+4.5%+1.7%Compounded annual growth rate.
2006+3.0%+13.6%+14.5%Performance marked by several "wins" and several "losses" which nearly offset each other.
2007+11.7%+3.5%+7.2%One holding was acquired at a moderate premium; nothing otherwise remarkable about this year.
2008-9.2%-38.5%-35.0%Avoided market meltdown by holding significant cash; bought heavily discounted corporate debt at and around year-end.
2009+104.2%+23.5%+30.7%Most gains this year were in the corporate debt market. Anybody holding anything from February onward would have made money, but I mostly selected securities that were more heavily depreciated. I completely realized the once-in-a-generation opportunity that occurred here and was able to take advantage of it.
2010+28.0%+12.8%+14.4%Continued to realize gains and lighten up on corporate debt holdings which were mostly trading at par at year's end.
2011-13.4%+0.0%-11.1%Very poor performance, most of which stemmed from poor decisions around the August timeframe, and also completely missing on two targeted trades which completely fizzled. Wounds in this year were completely self-inflicted.
2012+2.0%+13.4%+4.0%Spent most of the year in cash, which explains the relative underperformance. Did not feel confident about significantly getting into equity or debt, but did dive into "value" equities at the end of the year.
2013+52.9%+31.8%+10.6%Despite making several unforced errors in the year, not to mention having a generally bearish outlook on the marketplace, insurance industry holdings appreciation and one very timely trade contributed for the bulk of performance. Half the year had more than 20% cash in the portfolio.
2014-7.7%+11.8%+7.7%Spent the most of this year about 1/3rd in cash; given my performance, probably a good decision. Performance was negatively affected by a series of unforced errors, and having absolutely nothing work out this year.
2015 (Q1-Q3)+9.4%-6.7%-9.1%

A short squeeze on Bombardier

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.

A nice time to be holding cash

This is a rambling post.

Downward volatility is the best friend of an investor that has plenty of cash.

You will also see these punctuated by magnificent rallies upwards which will get everybody that wanted to get in thinking they should have gotten in, until the floor drops from them again which explains today.

By virtue of having well over half cash and watching the carnage, I’m still not finding anything in fire-sale range except for items in the oil and gas industry which are having their own issues for rather obvious reasons. Examples: Penn West (TSX: PWT) and Pengrowth (TSX: PGF) simultaneously made announcements scrapping and cutting the dividends, respectively, and announcing capital expenditure reductions and their equity both tanked over 10% today. Crescent Point (TSX: CPG) had a fairly good “V” bounce on their chart, but until oil companies as an aggregate start going into bankruptcy and disappearing, it is still going to be a brutal sector to extract investor value from.

I just imagine if I was one of the big 5 banks in Canada and having a half billion line of credit that is fully drawn out in one of these companies. Although you’re secured, you don’t envy the train wreck you have to inherit if your creditors pull the plug.

The REIT sector appears to be relatively stable. Looking at charts of the top 10 majors by market capitalization, you don’t see a recession in those charts. If there was a true downturn you’d expect to see depreciation in the major income trusts. I don’t see it, at least not yet.

Even when I exhaustively explore all the Canadian debentures that are publicly traded, I do not see anything that is compelling. The last debt investment which was glaringly undervalued was Pinetree Capital (TSX: PNP.DB) – but this was in February. They recently executed on another debt redemption which puts them on course to (barely) fulfilling their debt covenants provided they can squeeze more blood from their rock of a portfolio. I wouldn’t invest any further in them since most of what they have left is junk assets (Level 3 assets which will be very difficult to liquidate). One of those investments is a senior secured $3 million investment (12% coupon!) in notes of Keek (TSXV: KEK) which somehow managed to raise equity financing very recently.

The preferred share market has interesting elements to them as well. Although I’m looking for capital appreciation and not yield, it is odd how there are some issuers that are trading at compellingly low valuations – even when factoring in significant dividend cuts due to rate resets (linked to 5-year Government of Canada treasury bonds yielding 0.77%!). I wonder if Canada’s bond market will go negative yield like some countries in Europe have – if so, it means those rate reset preferred shares will have even further to decline!