Divestor – Page 7 – Canadian Finance, Economics and Fiscal Analysis

No free lunch – CASH ETFs revisited

On October 31, 2023, OSFI gave out a huge “trick or treat” to high-interest savings ETF owners (CASH, PSA, etc.) in the following technical bulletin.

There is a transitional period until January 31, 2024 whereby banks and HISA ETF operators will come to a separate rate structure that will most likely involve another haircut of gross yield – the media quoted one analyst from TD that claimed it would be about 50bps, but my suspicion it will be about half of that.

This will still make cash ETFs competitive, but not the no-brainer compared to alternatives, which include high-credit short-duration corporate bond funds.

In other words – there is no free lunch.

CASH.to right now yields a net 5.18%, while the nearest corporate bond alternative (looking at ZST.to as a reasonable proxy for this – they survived March 2020 fairly intact) is netting 5.47% for half a year duration risk. Government of Canada 6 month debt is at 5.11%. CBIL.to is an average 1.8 month duration government bond ETF that yields a net 4.92%. Another relatively innovative product is target date maturity ETFs (looking at RBC’s RQL.to), which has an average duration of 0.63 years and a 5.16% net yield and by all accounts looks inferior to ZST.

What other proxies for Canadian short-term investment-grade corporate debt are out there? Most of them have duration of 2-4 years which involves a significant interest rate component exposure. The other question is whether half a percentage point is adequate compensation for (albeit very low) credit risk.

The yield curve continues to remain heavily inverted – 1 year to 30 year is roughly a -146bps differential, while the more quoted 2-10yr spread is -80bps.

The glacial speed of quantitative tightening

Bank of Canada bond holdings

Maturity	Coupon rate	ISIN	Par value	Of which on repo
2024-02-01	0.75	CA135087M920	3,566,474,000
2024-03-01	2.25	CA135087J546	6,611,368,000	95,000,000
2024-04-01	0.25	CA135087L690	23,275,739,000	1,775,000,000
2024-05-01	1.5	CA135087N423	1,005,000,000
2024-06-01	2.5	CA135087B451	6,304,081,000	30,000,000
2024-09-01	1.5	CA135087J967	10,042,352,000	1,352,000,000
2024-10-01	0.75	CA135087M508	4,062,206,000	572,000,000
2025-03-01	1.25	CA135087K528	12,055,174,000	643,000,000
2025-04-01	1.5	CA135087N340	600,000,000
2025-06-01	9	CA135087VH40	545,039,000	31,000,000
2025-06-01	2.25	CA135087D507	4,281,933,000
2025-09-01	0.5	CA135087K940	25,819,675,000
2026-03-01	0.25	CA135087L518	20,536,229,000	362,000,000
2026-06-01	1.5	CA135087E679	7,715,229,000	244,000,000
2026-09-01	1	CA135087L930	8,403,101,000	435,000,000
2026-12-01	4.25	CA135087VS05	440,000,000
2027-03-01	1.25	CA135087M847	2,194,445,000
2027-06-01	8	CA135087VW17	2,454,089,000
2027-06-01	1	CA135087F825	8,534,306,000	1,091,000,000
2028-06-01	2	CA135087H235	8,435,363,000
2029-06-01	5.75	CA135087WL43	4,909,719,000
2029-06-01	2.25	CA135087J397	7,890,136,000	169,000,000
2030-06-01	1.25	CA135087K379	17,477,505,000
2030-12-01	0.5	CA135087L443	17,051,478,000
2031-06-01	1.5	CA135087M276	10,856,641,000
2031-12-01	1.5	CA135087N266	3,648,167,000
2031-12-01	4	CA135087WV25	406,000,000
2032-06-01	2	CA135087N597	595,000,000
2033-06-01	5.75	CA135087XG49	5,099,690,000	5,000,000
2036-12-01	3	CA135087XQ21	440,000,000
2037-06-01	5	CA135087XW98	7,740,024,000	880,000,000
2041-06-01	4	CA135087YQ12	6,953,855,000
2041-12-01	2	CA135087YK42	429,000,000
2044-12-01	1.5	CA135087ZH04	424,600,000
2045-12-01	3.5	CA135087ZS68	8,925,652,000
2047-12-01	1.25	CA135087B949	392,700,000
2048-12-01	2.75	CA135087D358	6,371,150,000
2050-12-01	0.5	CA135087G997	76,000,000
2051-12-01	2	CA135087H722	18,006,997,000
2053-12-01	1.75	CA135087M680	2,965,110,000
2064-12-01	2.75	CA135087C939	2,194,182,000
			279,735,409,000	7,684,000,000

In 2024, $55 billion will mature, and in 2025, $43 billion, in addition to a couple billion in mortgage bonds. This is still below the $130 billion that are held in reserves at the bank, but at the rate things are going, coupled with projected deficits of the Government of Canada, means the reserves will be drained out sometime in 2025. Things will indeed get interesting once again, but it will require patience. That said, anticipation of illiquidity may cause it to occur earlier!

Farmer’s Edge – that’s all folks!

Fairfax is generously offering 25 cents per share for the shareholders of Farmer’s Edge (TSX: FDGE).

This offer is about 24 cents more generous than it needed to be. Shareholders are getting really, really lucky!

They ended September 30 with negative $32 million in stockholder’s equity, and the three months they blew through $13 million in cash. They had $75 million in debt (lent to them from Fairfax) and $9 million in cash. Needless to say you did not need a CFA to know how this one was going to end up.

What does Fairfax get out of it? The following from the 2022 annual report:

The Company has not recorded any current or deferred income tax benefit for its tax losses in any of its reporting periods. The Company had $470.0 million of accumulated non-capital losses as of December 31, 2022, with expiry dates ranging between 2030 and 2042. These losses may be used to offset future taxable income. In addition, the Company has undeducted Scientific Research and Experimental Development expenditures of approximately $39.0 million which may be carried forward indefinitely and unused investment tax credits of approximately $3.0 million which expire between 2034 and 2039.

Fairfax just needs to find some assets in the same field of business to utilize these NOLs and they are all set.

Here’s one last fun calculation. The stock nearly doubled today on the announcement since it will not take two brain cells for the “independent committee” of directors to come to the conclusion there’s no choice.

Let’s pretend you were a fly on the wall of Fairfax and had 10 trading days of prior notice that this deal was occurring. Let’s also pretend that you were able to capture 100% of the liquidity of the stock that actually traded in those 10 trading days.

You would have been able to purchase 77,495 shares for $8,096.22. Those shares would be worth $19,373.75 if sold at 25 cents. No institutional manager would get remotely close to this even if they had the information in advance. Would have made for a perfect FHSA trade though!

Late Night Finance with Sacha – Episode 26

Oh my, this one is a little late!

Date: Thursday November 16, 2023
Time: 7:15pm, Pacific Time *** NOTE the odd start time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: Quarterly review, quarter-to-date review, reviewing the losers of 2023, economic thoughts, and some crystal ball gazing, and finally time permitting, Q+A. Please feel free to ask them on the zoom registration if any questions.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state and country, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: If you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me, but the majority will be on “screen share” mode with MS-Word / Browser / PDFs as I explain what’s going on in my mind as I present.

Q: Will I need to be on video?
A: I’d prefer it, dress code is pajamas and upwards.

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Will there be some other video presentation in the future?
A: Most likely, yes.

Aimia – the gift that keeps on giving

I just can’t keep my eyes away from Aimia (TSX: AIM) which is a huge corporate soap opera that I am so glad I do not own.

According to Aimia’s posted statement of claim, we have one of the Mittlemen brothers going rogue, coupled with a Saudi-owned Cayman Islands corporation (Mithaq) that chose one of the worst Canadian publicly traded companies to target with their excess in capital. While they have likely blown over a hundred million or so on this venture, they apparently could not hire some junior security lawyer to write up a two paragraph memo explaining that once you get over the 20% threshold that some special rules take place. Or perhaps if they couldn’t afford a few billable hours, they could have just used Google.

84. Mithaq was aware of the take-over bid regime and understood the implications of crossing the 20% threshold. On February 2, 2023, Mr. Seemab sent an email to Mr. Mittleman with the subject line “Exceeding 20%?” and asked for help understanding “the process/implications if an investor exceeds the 20% equity threshold in the Canadian market?”

85. Mr. Mittleman advised Mr. Seemab that “if an activist’s goals can be achieved without incurring the complications of crossing the mandatory build [sic] threshold, that’s probably the easier / less expensive / better path. So I think 19.9% is probably sufficient”.

Oh my, this made for entertaining reading.