Canadian Finance and Economics
Canadian government bond yields:
3-month: 1.63%
1-year: 1.68%
2-year: 1.55%
5-year: 1.48%
10-year: 1.59%
This would be one explanation why those 5-year rate reset preferred shares aren’t doing so good price-wise.
The 5-year yield also dropped under 1% between June 2015 to October 2016 – these were not happy times for rate resets.
The most obvious safety mechanism appears to be cash – but is one willing to endure the pain of taking a 2% pre-tax return?
Atlantic Power (TSX: ATP) today announced they are selling their largest power producing plant (Manchief) on May 2022 for $45.2 million. In the meantime, Manchief will continue operating and contributing cash – in 2018, the cash generated from Manchief was 12.2 million (and indeed this number was somewhat lower than it could be given there was a turbine installation performed in 2018).
Manchief’s power purchase agreement expired on May 2022 and the primary customer of the electricity had an option to purchase which was exercisable on May 2020 or May 2021.
I’m guessing instead of stranding the asset (such as what happened in their San Diego operation, which was located on US Navy leased land which they could not further extend the agreement on), they decided to take the money and run. Clearly getting rid of an asset generating $12 million a year in cash for $45 million is not the best economics, but this is a part of dealing with a legacy business with power purchase agreements that were signed at much more favourable terms than what is available today.
Mansfield produced 300 MW of power, which makes it nearly a quarter of ATP’s net generating power (1,259 MW, not including the biomass plants that it will be acquiring).
In the meantime, the company continues to chip away at its debt and is on a relatively comfortable trajectory to doing this even as their legacy PPAs expire. In 2020 the next PPAs due to expire had a FY2018 EBITDA of 9.6 million (out of a total of 185.1 million for all projects) and distributed cash of 13.9 million (198.0 million). There are no PPA expirations in 2021.
Somehow the junk debt market is not dead yet – I see offerings like this (Alaris Royalty Corp. Announces A $100 Million Bought Deal Financing) – unsecured debt, 5-year term, 5.5% coupon, and 30% out-of-the-money conversion rate (noting that the underlying equity is already giving out a dividend at nearly a 9% yield at the closing price of the day the bought deal was announced).
Talk about a low return, high risk deal! That said, Alaris should be giving their underwriters (CIBC Capital Markets, National Bank Financial Inc., RBC Capital Markets and Scotiabank) full price for finding investors to actually buy this offering, let alone $100 million of it.
Just glossing through the preferred share markets, one can speculate on a better risk/return scenario. There are many examples I can give, but I will choose one at random. Believers in Brookfield Asset Management can pick up a preferred share series (e.g. TSX: BAM.PR.Z) and buy an easy 6% tax-preferred yield, with a reasonably decent potential for capital appreciation (it is trading well below par), and BAM’s underlying business provides significantly better inherent diversification, coupled with a much better credit profile.
Is the equity call option of Alaris’ unsecured convertible debenture worth it? Why not just buy the common instead and pick up a 9% dividend? I can’t see any realistic scenario where an investor would choose purchasing the unsecured debt instead of the equity – and if you think the underlying company was questionable, why invest in this at all?
No positions in any names mentioned, and most definitely not going to be in Alaris’ convertible debt at par!
Bitcoin has been going through a remarkable surge in the past few months:
It looks like a classic short squeeze, but the open interest on the CME futures (4,800 times 5 coins) is not a material portion of trading that occurs on the higher volume exchanges (which is cleverly charted here).
So who the heck is firing a bunch of capital at Bitcoin? Good mystery.
There is no fundamental case to be made for any price of bitcoin at this level (four thousand, eight thousand, twenty thousand…) – its utility ultimately is derived from its participants and right now, it is clearly higher than it was a couple months ago!
When things start getting interesting again will be if it goes above USD$10k again – that should be the price level where it will start getting a lot more mainstream media attention.
Dynasil (Nasdaq: DYSL) is a micro-cap company in the business of selling specialized optics. Their company fundamentals (or how they got to be on my radar) is not terribly relevant to this post.
Their market cap is US$19 million at present. Compliance costs for micro-cap companies are extremely expensive in relation to their capitalization, and hence they want to go private, which they announced on May 2nd (form 8-K). The terms and conditions were that they were going to do a 8000-for-1 reverse share split, and subsequently split the stock 1-for-8000 and this would cash out sufficient numbers of stockholders to less than 300, which is the number required in order to enable them to go through with their privatization.
The stock traded down to about $1.02-$1.03 after their announcement – nobody wants to hold an illiquid stock in a privately held firm. In addition, people holding more than 8,000 shares in non-multiples of 8,000 would have their residual portion taken away without compensation (which would prompt a bunch of people to sell to a division of 8,000 shares).
Specifically, the Board recommended and approved a transaction whereby the Company would effect a 1-for-8,000 reverse stock split of the Company’s common stock (the “Reverse Stock Split”), followed immediately by a 8,000-for-1 forward stock split of the Company’s common stock (the “Forward Stock Split,” and together with the Reverse Stock Split, the “Transaction”). Stockholders owning fewer than 8,000 shares of common stock at the effective time of the Transaction would receive $1.15 in cash, without interest, for each share of common stock held by them at the effective time of the Transaction
It would make sense to buy 7,900 shares of the company at $1.03 and then have them cashed out by the company at $1.15, correct? That sounds like a nearly risk-free $948 before commissions and taxes.
Not so fast… reading the fine print later on, we have the following passage:
If consummated, the Reverse Stock Split and Forward Stock Split would apply directly only to record holders of the Company’s common stock. Persons who hold shares of the Company’s common stock in “street name” are encouraged to contact their bank, broker or other nominee for information on how the Transaction may affect any shares of the Company’s common stock held for their account.
Almost all investors that do their transactions through brokerage platforms have their shares held in street name. The registered owner is typically the brokerage firm, while the beneficial owner is the account holder. So if a brokerage firm has three customers, and each customer has 7,900 shares of DYSL, there might be a hidden consequence – the brokerage will receive 2 shares of the company after the reverse split, and has to figure out how to divide that among their 3 customers. Each customer would subsequently be beneficial owner of 5,333 shares of an illiquid private company and not receive any anticipated returns of a cash-out!
It sometimes pays (or avoids unintended consequences) to read the fine print.