Pengrowth Energy Debentures – cash or CCAA

A quick research note. Pengrowth Energy debentures (TSX: PGF.DB.B), something I have written in depth about in the past as being one of the easiest risk/reward ratios in the entire Canadian debt market, has reached the “point of no return” with regards to its redemption. They are to be redeemed on March 31, 2017 for cash (and an extra half year of accrued interest at 6.25% annually). For the company to exercise its option to redeem them for shares (of 95% of TSX VWAP), they needed to give 40 to 60 days of notice from the redemption date.

(Update, February 21, 2017: Pengrowth announced they will be redeeming the debentures on maturity at March 31st. Also on their senior debt covenants, it looks like somebody is trying to steal the company… they might be forced into making an equity offering.)

My math says that the next market opening, February 20, 2017, will be 39 days before March 31st.

Barring some sort of mis-interpretation of the legalese, this means that the company must redeem this debt (CAD$126.6 million) for cash. The alternative is CCAA, which I do not deem is likely considering Seymour Schulich would likely have something to say about that particular option (he controls 109 million shares or 19.9% of the company at present). There is no longer any time to negotiate an extension with debenture holders.

This debenture issue was acquired as a result of the NAL acquisition back in 2012. It was originally CAD$150 million but they company repurchased some at a considerable discount to market earlier this year.

Pengrowth is in the middle of a silent negotiation with their senior creditors as they are in covenant troubles. Their senior creditors will no doubt be unhappy with the fact that some company cash is going towards a junior creditor.

Sadly I have no good candidates for re-investment at this time. Suggestions appreciated.

10 thoughts on “Pengrowth Energy Debentures – cash or CCAA”

  1. btw, why not add to gcm.db.v – decent yield-to-maturity with some upside optionality. Potential sale from strategic review may have the debenture redeem prior to maturity.

  2. @Will: Y is an odd case. They clearly won’t be making enough cash flow to pay off their $310M outstanding by November 2018, but they stand to be in a reasonable position to refinance if they can really focus on generating cash. But if that window closes, the debtholders hold the hammer, so this one is turning more into a binary case on the equity side.

    As for GCM.DB.V, while on paper this is a lock, there is too much of a “betting on a single mine in a foreign country” which keeps my position modest. Learned that lesson through First Uranium. At least GCM’s operation is in the western hemisphere.

  3. I own some ZAR.DB which has been a nice ride but now I’m wondering if its worth owning post dutch auction but pro forma debt is just the debentures and there seems to be some upside in the common.

    I also own EFR.DB which I admit I own as a way of having some exposure to uranium while having some downside protection. The conversion option here seems underpriced in my view but I’m also not interested in hedging the equity.

    Agreed on GCM.DB.V.

  4. @Safety: Both entities’ risk profiles are fairly easy to analyze. Basically depending on commodity price increases to get cash flows necessary to repay the debt (or end up with a huge slab of equity at maturity).

    I guess the question then becomes – if betting on these debentures is implicitly a bet on a commodity price increase, why not just buy the equity in the first place?

  5. @Sacha

    Definitely agree on ZAR.DB. It’s a big capital gain for me so I’ve been reluctant to take the profit but you are right on the common being almost equivalent.

    On the EFR.DB, I think its a little more interesting with the partial put option for a portion in June and that its a relatively small part of the capital structure such that they will raise money to settle these debs if the stock doesn’t work by then or try to renegotiate again like they did last year.

    You are definitely much more of a credit expert than I am, though!

  6. Tph.db.f…..7% for one more year, if buy at par….may be able to get it at 97 or 98, but you better hurry.
    Just sayin…….

  7. @Marc: TPH equity over the past week is a sign how unhealthy this market is getting. Morguard gave the debtholders a huge gift with this one and unfortunately that ship has sailed. I still don’t like the fact that we’re 10 US dollars (per barrel) away from the Alberta economy going into the tank again.

  8. My latest add is Rite Aid NYSE:RAD as a merger arbitrage.

    Since the deal was amended, a lot of people got pissed off and the price did plunge badly while I think the odd of the deal happening are still good. I’m already up more than 10% and holding until something the deal is approved (or cancelled!).

    I wouldn’t allocate a huge sum of my portfolio in it, but I decided to put some money to work on this one.

  9. I must admit that I haven’t looked at this merger arbitrage (it is not normally my game) but on a side note, have you ever been to a Rite Aid in the USA? One wonders why they weren’t offered zero for the franchise… (this comment is mildly sarcastic). I guess it is like how Loblaws paid up significant money for taking over Shopper’s Drug Mart – having location presence is a significant competitive advantage (and liability if over-saturated).

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