Pengrowth Debentures – To be redeemed

(Update, December 21, 2016: The proposal was shelved because PGF’s senior debt holders did not want cash to go to junior creditors.)

A short couple months ago I wrote an article about a “very likely 12% annualized gain” in the form of buying (TSX: PGF.DB.B) at 97 cents.

So it looks like I gave up that return (at least with some idle cash holdings, I do have a position from far cheaper prices earlier this year) as management announced today they are seeking consent from debtholders to allow the company to redeem them as if they have matured on March 30, 2017 (i.e. you’d get about 3 months of accrued interest paid out to you immediately).

So it looks like debtholders will be paid off at $1.03116 per dollar of debt. The redemption will occur on December 30, 2016.

The choice of getting paid today vs. getting paid the same amount in three months is a no-brainer: take the money today and move on.

I have no idea where I will re-invest the proceeds. There was nothing nearly as “safe” as this specific debt issue. Any suggestions out there?

20 thoughts on “Pengrowth Debentures – To be redeemed”

  1. I like DRM.PR.A.

    Last year when you suggested buying it as a form of arbitrage I was wary of it because management could convert them into regular shares.

    They could only be converted prior to july of this year. So now I’m getting a pretty safe 7% yield. But there is almost no upside since both the holder and the issuer can redeem then for cash at 7.16$/share.

    I also like AZP.PR.B. It’s a fixed reset pref with currently a 8.5% yield. I bought some at a much cheaper price last year but I’m thinking of adding to my position.

    I really like what the management is doing. They are paying debt fast, improving efficiency and they are shareholder friendly. I fully expect their debt to be re-rated above speculative grade in the next few year meaning the price on the pref should improve.

  2. Enjoy DRM.PR.A while it lasts. It will probably not be long-lived. As it naturally converts, it will get more and more illiquid and eventually DRM will pull the plug on it as it makes no sense for them to keep a 7% after-tax drain on their balance sheet.

    ATP/AZP I’ve examined and while I agree management appears to be getting the ship in better shape, they do not meet my risk/reward criteria at present prices for a purchase. I also question their equity buyback.

    Somebody also floated Aimia by me, my opinion on them has not changed.

  3. It isn’t becoming so cheap for Morguard to redeem these debenture issues. I did look at them when they were trading in the 70’s but dismissed the idea – the balance sheet and operations of the corporation were sub-par to say the least (not to mention blown mortgage covenants, Fort McMurray burning down some of their properties, etc.). I was wondering why Morguard wanted to wade into this one, and I guess this their strategy was to put in money bit-by-bit in case if the market actually recovered (when they could raise cheaper capital).

    The next two debentures (D and E) mature in 2017 so they’ll have to raise more money then as well.

    At current values (90 cents-ish) I don’t see this being too compelling.

  4. Etienne,

    If you own the AZP.PR.B, you should consider switching into the AZP.PR.C, which are the interconvertible floaters. Your annual return jumps to over 12% on an effective basis, all else being equal. Meanwhile, if you think the 90 day t-bill yield is going up in the next few years, your return could be even higher. The same situation is occurring with FTS.PR.H and FTS.PR.I although the total return is a lot lower there (8%), all else being equal.

    Sasha, do you still own GCM.DB.V? I still like the risk/reward there but a little perplexed by the strategic review.

  5. Not sure how you do your math on AZP.PR.C, it’s a 3 month GOC + 4.18%. The 3 month GOC is at 0.5
    So = (0.50 + 4.18 ) / 100 * 25 / 14.3 = 8.2%

  6. It’s interconvertible with AZP.PR.B, so all else being equal in December 2019, you pick up the extra $1.76 (difference between $16.06 and $14.30, the quotes for AZP.PR.B and AZP.PR.C, respectively). $1.76/14.30 = 12.3% spread out over about 3 years to conversion is ~4%. You can add that ~4% to the 8.2% to get ~12% (I’m simplifying the math because I’m lazy).

    I think this spread exists because retail investors are focused on current yield and don’t realize the interconversion option or don’t factor it in because its so far away. This of course is all else being equal but the spread between the two classes should close by the December 2019 one way or another so the outperformance should still be realized.

  7. Far, far too hairy as an answer to this question, but the ADK pref looks to offer a ~30% return until its likely redemption in 1 year.

  8. No worries. I’ll be curious if you will make the switch! I’ve explained it to others before and they appreciate it but they still buy the AZP.PR.B because the current yield is higher! As I mentioned, I also like the FTS.PR.I vs FTS.PR.H on the same basis.

  9. I won’t because I have more than 50% gain on it and it’s on a registered account, don’t wont to pay taxe on it 😉

    But, You got me curious on this. I’ll have to dig a bit deeper on this.

    For example, do you have past example of this kind of spread and how it settled ? Did the fixed reset went down, the fixed went up, or both at the same time and the met in the middle.

  10. Well if it’s in a registered account, you don’t have to worry about paying tax!

    I don’t have any past examples as I don’t think there have been any that have made it to the second reset (10 years) as I believe they began being issued in 2008 (please correct me if I’m wrong). Also, those initial issues had very large resets as they were issued during the financial crisis and were mostly redeemed at par.

    I have noticed some narrowing in other pairs, like in some of the insurance names like MFC.PR.F/MFC.PR.P. It’s hard to predict which way it will work itself out as I think that’s dependent on the market’s interest rate outlook. You could argue that, AZP.PR.C is fairly priced vs AZP.PR.B because the 90-day t-bill rate is going to plunge below zero in short order so the expected dividends will be much lower than the current dividend. I just don’t have that view on interest rates.

  11. All the TPH debentures have moved up as of late. I own all four which I bought in the 70s and 80s. TPH recently issued a rights offering… guess to pay out there 2017 debentures??? I think Morguard has completly commited itself to TPH. Any thoughts anyone?

  12. While I wouldn’t consider it a guarantee, it would be highly unlikely for Morguard to dump that much capital into TPH equity only to give it all up when the final debentures get redeemed. I don’t know what they are thinking financially (other than the obvious – they view the assets as likely to appreciate when oil goes higher, the provincial NDP get kicked out, etc.)

  13. I’ve read that there’s a demand for hotel rooms in Fort McMurray, with all the rebuilding going on. I’m sure TPH is getting a monthly check from a few insurance companies. Does anyone think one should wait for redemption , or sell out close to par……I got rid of the “C” at par.
    Morguard is well respected from all I’ve read…..I don’t think there rolling the dice solely on an immediate oil comeback.

  14. I’ve been looking at Morguard and their controlled entities… they seem to be cheap, but not ridiculously so.

  15. On a side note, PGF got strong-armed by the rest of their debt holders while they attempt to re-negotiate covenants on their senior debt so the proposal was cancelled.

    The risk to debenture holders here is that they will be getting an equity conversion instead of a cash conversion, but PGF is liquid enough that I do not believe this is a concern.

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