State of the Canadian Debenture Market

I find the Financial Post’s compilation of Canadian exchange-traded debentures to be a very handy list to refer to. It is not comprehensive (there are a few issuers here and there missing) but for the most part is a full snapshot of the market environment.

Looking at the list, I think it is a very good time for Canadian companies of questionable credit quality to be issuing debt. Most of the debt on this list is trading at yields that do not properly represent (my own evaluation of) their risk.

Accordingly my research time is increasingly on the equity side of things in the non-indexed space. A great example of my readings included the Kinder Morgan Canada prospectus, worthy of a future post!

With regards to the debentures, I’ve sorted the debt by yield to maturity and decided to arbitrarily cut things off at 8%:

IssuerSymbolCouponMaturityYTMPithy Notes
Discovery AirDA.DB.A8.38%30-Jun-18118.28%Way behind secured debt, no control
Lanesbourough REITLRT.DB.G5.00%30-Jun-2259.10%Insolvent
Gran Columbia Gold CorpGCM.DB.U1.00%11-Aug-1843.99%81% mandatory equity conversion
Primero MiningP.DB.V5.75%28-Feb-2021.85%Operational mess, solvency issues
Argex Mining Inc.RGX.DB8.00%30-Sep-1919.07%Illiquid, no revenues!
Toscana EnergyTEI.DB6.75%30-Jun-1817.27%Senior Debt to cash flow is high
Gran Columbia Gold CorpGCM.DB.V6.00%02-Jan-2015.14%I own this
Westernone EquityWEQ.DB6.25%30-Jun-2013.94%Likely equity conversion June 30, 2018
Entrec Corp.ENT.DB8.50%30-Jun-2113.02%Cash flow negative, senior debt high
Temple HotelsTPH.DB.D7.75%30-Jun-1711.78%One month to maturity
Difference CapitalDCF.DB8.00%31-Jul-189.56%Payback not certain
Temple HotelsTPH.DB.E7.25%30-Sep-179.47%4 months to maturity
Fortress PaperFTP.DB.A7.00%31-Dec-199.22%Never figured them out
Temple HotelsTPH.DB.F7.00%31-Mar-188.11%How much $ does Morguard have?

I really don’t see anything worth locking capital into in this table at present prices. I do own one of these convertible debentures, but it is at a price where I would not buy (or sell) – my purchase price is from much lower prices and it is the only debt on this list that gives a warm and fuzzy “secured by all assets and nobody can step in front of me” arrangement.

I also note that the table is missing Yellow Media and Grenville Royalty which are both trading at 9% and 16%, respectively, but they are both unattractive for various reasons.

19 thoughts on “State of the Canadian Debenture Market”

  1. Entrec debentures are interesting (they were much better value a few months ago). They have two strategic shareholders that, together with management, own 50% of the shares and the company just eliminated their rights plan. While the operations have been slightly cash flow negative, they have been selling equipment to improve utilization and to reduce debt. They can continue to do that. Finally, they have to redeem at par 14% of the series in October 2017.

  2. Michael,

    Can the debenture be redeemd by issuing shares?


    MIC is creeping down toward $30 and potentially below – coming back in for or is the risk profile materially changed due to housing environment?

  3. Entrec has announced that it will complete the partial redemption in October 2017 for cash. Generally speaking, though, the indenture does allow the company to satisfy redemptions and repayments in shares. My expectation is that this will not happen because of the presence of well-capitalized strategic investors who do not want to be diluted and also because the debentures represent a small part of the company’s overall capital structure. Even if the debentures were equitized, that would give debentureholders a substantial, if not controlling, ownership of the entity that would be cash flow positive and that would have lots of marketable assets to be liquidated.

  4. @Will: MIC is likely down due to both BC/ON political dynamics in real estate and also GNW uncertainty. They’re at a price where I’m watching but not pulling any triggers yet. Fundamentally they are still a cash machine and their last quarter (which I will write about eventually) was a (positive) killer. A key insider bought CAD$100k recently as well, not exactly a vote of non-confidence.

    @Michael: ENT is getting closer and closer each quarter to the ~$21M available credit amount where they will be subject to financial covenants that they can’t make. The 15% debt redemption is not going to help matters for them. I also suspect when it goes for renewal they are not going to get the rate they are presently getting. The question of whether the value of their assets on their balance sheet is realizable in a sale is a relevant one. Let’s just put it this way – there is a reason why those debentures are trading below par. The risk isn’t trivial.

  5. Also looking forward to that MIC post. I did buy some this week, back to my largest position.

  6. Would be interested in a post on KML!

    Re: your comment on non-indexed equities – have you read any of the commentary on that by Horizon Kinetics? Very interesting.

  7. I have it so I won’t complain. But I never get it – isn’t it far more advantageous to keep buying below par via NCIB?

  8. In theory yes, but I don’t think they can find any blocks to buy. The buyback rules only let them make one block exemption purchase a week and they cannot buy on an uptick. Maybe this development will take the bonds up to a level that more will come out. From the press release, it seems like if some blocks show up in the next 6 weeks (because the bonds trade up) they can still use the buyback.

  9. Well it looks like Temple will try to extend the debt by three more years. The proposed deal looks rotten to me but you can count on the general apathy of investors to see it approved….

  10. I sold mine at par for D,E and F over the last few months. I would imagine they will want to extend “F” if they are successful with “E”. “E” is at 97 today….could go lower, might be a play there for the remaining 6 weeks, as I don’t believe it will be approved.

  11. What a crappy deal! Debtholders would be insane to vote in favour of this proposal.

    @Chessman: While I haven’t read the prospectus, the typical terms of these unsecured debentures allows the company to convert them to common at 95% of TSX VWAP or a $2 floor on maturity with notice, but again, have to check the fine print.

    But as a side note, I am really wondering whether Morguard finally ran out of money to put into this cash sink (i.e. they finally figured out that the hotel industry, concentrated in Alberta, isn’t exactly the best place to be)

  12. Very sadly it seems that it was pulled. Another freely available finance service that bites the dust. With Google gone and Yahoo degrading to the point of no longer being net useful anymore, there isn’t a whole lot left anymore that I’ve found to be of use…

Comments are closed.