Difference Capital

Difference Capital (TSX: DCF) was the venture capital corporation created by Michael Wekerle in 2012 (done via reverse merger of an existing corporate entity). It invested in a whole bunch of private entities in the hopes of making superior returns. While the going was initially good, it has steadily eroded in value as demonstrated by the five year chart.

dcf

In its modern incarnation, it has about $79 million invested (mostly in equity, and the rest of it in debentures and real estate) along a smattering of mostly private entities. They did employ some leverage in the form of a convertible debt offering and they did get in a bit of financing trouble as a result of the debt issuance, but for the most part they cleaned this up in 2015-2016 through buying back the debt at a discount, from $47 million outstanding at the beginning of 2015 to $32 million on June 30, 2016. The debt has an 8% coupon.

They also have $16 million in cash, and an extra $3 million in receivables if some of their prior asset sales do not incur claims by the end of 2017.

The math is simple – can they cover the $32 million in debt over the next couple years? Assuming there are no material claims, they have $37 million to pay off in interest and principal (interest expense assuming no buybacks), which leaves them about $18 million short if you completely dedicate their existing cash and receivables against their debt. Their burn rate is also about $3 million a year, excluding interest, offset by about $1 million in investment income.

The equation then becomes a matter of raising $22 million over the next couple years to service their debt, or to obtain an extension of their debentures (with some sort of sweetener). I view the latter to be the more likely scenario, but it is quite conceivable that they could cash out an investment or two and partially chip away at the $22 million figure. The other option is to equitize the debt at maturity, but this would be done at a significant discount to their proclaimed NAV.

The debt is trading at 97 cents on the dollar and given everything I have seen, I would view it as over-valued at present. The market is weighing the probability of a clean maturity to be too high.

No positions.

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