Canaccord Genuity Debenture amendment

A general cliche to remember in finance is that when things are complicated, they usually advantage the proposer of the complex terms.

Canaccord has an issue of convertible debentures outstanding (TSX: CF.DB.A) which are fairly typical: Unsecured debt, 6.25% coupon, matures December 31, 2023, convertible (by the holder) at $10/share at any time; it can be redeemed by the company after December 31, 2021.

Canaccord is reasonably solvent and payment of the debt is not an issue at present.

The stock (TSX: CF) is at $11.69/share, which means the debentures are in the money.

Canaccord proposed an amendment today with some terms I have not seen before. I have reformatted the below to make it easier to read:

The proposed amendments (the “Proposed Amendments”) are as follows:

The addition of a right of the Company to redeem, at its option and from time to time, between April 1, 2021 and October 31, 2021, any or all of the outstanding Debentures (the Amended Redemption Right”), for consideration of (for each $1,000 principal amount of Debentures held) cash equal to

(i) the greater of:
(a) 125% of the principal amount, being $1,250, and
(b) the sum of:
x) the amount calculated by multiplying 100 by the volume weighted average price of the common shares of the Company (the “Common Shares”) for the 20 trading day period ending two trading days prior to the date upon which the Company issues a press release announcing its intention to exercise the Amended Redemption Right; and
y) $40.00;

plus:
(ii) accrued and unpaid interest up to, but excluding, the date of redemption.

The Debentureholders’ right to convert their Debentures into Common Shares, at the current exercise price of $10.00, will be suspended until November 1, 2021.

The analysis of this offering took me a little bit of time to work out, but just like most complex transactions does not work well for the recipient.

The terms on initial glance seem attractive: Right now the debentures have an “intrinsic” value of $1,169 per $1,000 par (the assumption of a conversion and then a frictionless disposition on the open market). In scenario (a), you have $1,250, which is a higher amount, and in scenario (b), you have what you would have received otherwise in a conversion-and-sell scenario, plus an extra $40 for your efforts. Win-win, right?

No, for two reasons.

One is that the debenture holder is surrendering some time value of their equity call option (in the worst case scenario this would be eliminated by a December 31, 2021 redemption).

The second, and in my opinion, more valuable feature is that this amendment proposal is asking the holder to sell an information call option on the effective equity that their debentures have, for a very cheap price.

Specifically, the amendment proposal term of “for the 20 trading day period ending two trading days prior to the date upon which the Company issues a press release” is the offending term which gives away a lot of value to the holder, in this case, Canaccord.

The company controls the degree of information flow on its stock and to that extent, has some ability to talk up or down the stock price. The ability to issue a press release and retroactively determine a redemption price is a very powerful option given to the company.  It’s like buying and selling a stock using historical data.

If the company wants to get rid of the debentures without conversion dilution, it could launch a substantial issuer bid, but retiring the convertibles would likely involved a price higher than $1,250 per $1,000 par. Hence, this convoluted scheme to amend the debentures should be voted against.

The proposal requires 2/3rds of the debentures to be in support to pass the amendment.

A large Canadian asset manager, on behalf of certain of its managed accounts, has agreed to support the Proposed Amendments and has entered into an agreement with the Company to consent and vote in favour of the Proposed Amendments. These accounts hold approximately 55.4% of the outstanding Debentures.

What do I know? Nothing, it seems.

Atlantic Power – Goodbye!

January isn’t even half way done, and I’ve already had two of my companies receive takeover offers. The first one was FLIR Systems (Nasdaq: FLIR). Now it is Atlantic Power’s turn.

Atlantic Power (TSX: ATP / NYSE: AT) has been one of my longer term holdings, most of it purchased around the US$2 point.

I’ve written a lot about it in the past including my July 2018 post about a great company in a terrible industry.

This evening, they agreed to be acquired by i Squared Capital for US$3.03/share in cash, which is about a 44% premium to their last trade today. I Squared Capital, according to Wikipedia, has about $13 billion in assets under management, so this isn’t going to be an Input Capital type situation where the counterparty is questionable.

Other Atlantic Power securities will participate – the convertible debentures (TSX: ATP.DB.E) will be redeemed at 113.5, about a 10% premium at last trade; their preferred shares (TSX: AZP.PR.A/B/C) will all be taken out at CAD$22/share which is 27%/16%/29% above their last trade. This translates into a yield of 5.5% for the As and a 5.26% rate reset yield for B/Cs.

Until now, Atlantic Power has been one of the laggards in my portfolio. The way that this ended is somewhat bittersweet, but I’ll find a place to reallocate the capital. The power purchase agreements that were expiring would have become an issue in the next few years and I was expecting a strategic acquirer to come along.

There is a faint chance that there will be a higher bid, so I will not be selling immediately. However, I will not get my hopes up.

One thing I will be doing, however, is try to track where CEO James Moore goes to. If it is another publicly traded company I’d give it very good consideration – he was masterful.

The short squeeze of the year (to date) – Gamestop

GameStop has had very high short interest as a percentage of its float, and it was obviously the recipient of a short squeeze over the past two days that saw its stock price double:

Share volume yesterday was 144 million, which is over double the approximate 70 million shares outstanding. In other words, every day trader on the planet was flipping shares like pancakes. Today, about halfway through the market open, 53 million shares have been traded.

For the brave, the cost to borrow has also increased:

As readers here know, I do not speculate on these high volume issues – there are plenty of other intelligent (and not so intelligent) actors that are putting their two cents (or perhaps US$41) into the matter. But from a trading mechanics perspective, this one is an incredibly fascinating story considering that as far as I can tell, the underlying business is this decade’s version of Radioshack for gamers.

Waiting for the last dance

This article by now 82-year old investing giant Jeremy Grantham nails it. Well worth the read.

As for the canaries in the coal mine, a good one to follow would be in my back yard – Ballard Power (TSX: BLDP), a perennial cash burner that is currently cashing in on the Hydrogen rush. Notably since 2004 they have not made any cash through operations, and have not made any net income aside from 2008 when they had a one-time gain (my memory faintly recalls a one-time sale of tax loss credits!). Doesn’t mean they won’t be making money in the future, especially from federal government subsidies for our bold hydrogen energy economy!

A hint for Ballard executives (after you’ve cashed in stock options): Do a secondary offering.

Rising long-term interest rates

From the Bank of Canada (the 10-year and 5-year government bond yield):

From the end of 2020 (0.67%) to yesterday (0.84%) the 10-year bond yield has risen.

This could just be from the “white noise” of trading. A fixed equity/debt split would surely have resulted in equity selling and fixed income purchasing which to date has not occurred, prices would appear to have done the opposite. US 10-year treasuries are also up about 15bps or so from the beginning of the year.

The impact of rising long-term interest rates have a ripple effect through the market. If the trend continues, you’ll see a dampening effect across the investment spectrum. Right now it is not a lot, but if yields continue to rise another 20bps or so (totally arbitrary guess), more people will start noticing and you’ll start to see momentum effects occur, which would likely be concentrated with price contractions of yield-based instruments (which would have the immediate impact of increasing their yields, but interest rate increases would result in the expense of their ability to borrow money at low rates). Soros’ theory on reflectivity reflexivity really applies here!