The Bombardier bailout

This is going to be good.

Our illustrious government has figured out a headline-free way to bail out Quebec firms, such as Bombardier, and do it in a ‘governmentally distant’ manner, shielded by a crown corporation business development corporation.

The name of this will be through the Large Employer Emergency Financing Facility (LEEFF).

Reassuringly, money to be loaned will be conditioned upon:

Companies seeking support must demonstrate how they intend to preserve employment and maintain investment activities. Recipients will need to commit to respect collective bargaining agreements and protect workers’ pensions. The LEEFF program will require strict limits to dividends, share buy-backs, and executive pay. In considering a company’s eligibility to assistance under the LEEFF program, an assessment may be made of its employment, tax, and economic activity in Canada, as well as its international organizational structure and financing arrangements. The program will not be available to companies that have been convicted of tax evasion. In addition, recipient companies would be required to commit to publish annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, including how their future operations will support environmental sustainability and national climate goals.

Let the gravy train flow! Bombardier gets another low-interest rate loan of a billion dollars.

Gran Colombia Notes indenture amendment

Gran Colombia Gold (TSX: GCM.NT.U) posted an update to their note indenture regarding the proportional change of the amortization in the event of a redemption or repurchase.

(Attached amendment)

Amendments. Article 4 of the Indenture is hereby amended by adding the following as Section 4.11:

In the case of any partial redemption or repurchase of Notes (for greater certainty, other than pursuant to an Amortizing Payment), the principal amount of Notes redeemed or repurchased shall be proportionately allocated among all remaining scheduled Amortizing Payments set out in Appendix C and shall be allocated to the pro rata reduction of each remaining Amortizing Payment. Within five Business Days of the completion of a partial redemption or repurchase, the Issuer shall deliver to the Trustee an updated Appendix C and Appendix D reflecting the effect of such redemption or repurchase; provided, however, that in respect of the Partial Redemption, the updated Appendix C and Appendix D shall be delivered on the date hereof.

It was not at all clear from the text of the original indenture (indeed, it wasn’t there at all) that the amount of gold held in trust is reduced in the event of a redemption or repurchase.

If you assume that there isn’t a reduction (indeed, there is nothing in the language to suggest that there is a reduction), it dramatically increases the economic value of the notes in periods subsequent to the redemption.

Indeed, on March 26, 2020 you can see my strike-through comments with the said interpretation.

I do not have enough in these notes anymore where it is economically feasible to mount a legal case that this indenture amendment is illegal and that noteholders should receive the full entitlement of gold, unreduced by the redemption.

Indeed, it is going to be somewhat of a moot point, as I would deem it likely the company will redeem for 104.13 on or after April 30, 2021. Even with the reduced amortization, at a US$1,700/Oz gold price, the company will be paying an extra 11.3% on the notes in the upcoming four quarters.

However, if somebody out there owns a few million of these notes, there would be a pretty powerful claim to be made. I suspect that despite receiving an “Opinion of Counsel” from the Trustee that this “defect and inconsistency” wouldn’t be seen as such in the eyes of the court – it instead looks like retrospective contract re-writing, of course in the favour of the issuer.

There is one obvious insider that had to disclose on SEDI that he owns a large volume of notes, but he is unlikely to sue his own company and is likely to claim economic rent through other methods. Any other large holders would probably make due by just settling with the company, away from the public spotlight. The differential amount would not be considered material and likely would not be too visible on the financial statements short of a few extra bucks of legal expenses.

If anybody was wondering, the difference is (at US$1,700/Oz) a total 20.7% payment over the next 5 quarters (April 30, 2020 to April 30, 2021) vs. 13.3% under the revised scheme. This 7.4% difference over the $44.7 million outstanding post-redemption is around a $3 million payment difference (this accounts for the reducing principal amount of the notes over the quarters), not a trivial chunk of change.

Even with all of the regulatory protections of public markets, I’m not surprised to see this happening. I’m happy to have my position reduced and eliminated with the inevitable call-out of notes.

If I were Shopify

Shopify (TSX: SHOP) is the new technological wunderkid of the TSX, following in the footsteps of Nortel, RIM, Valeant Pharmaceuticals and now SHOP. Good for them for achieving a market capitalization of $100 billion – a proud accomplishment to say the least. They deserve it.

The question is whether SHOP will retain its competitive advantage in the future. For now, things are great, but just like what happened to Nortel and Blackberry, you can lose your competitive advantages in technology more quickly than one anticipates, especially if you’re Canadian!

But what got my attention was their secondary offering where they raised US$1.3 billion (selling shares at US$700).

I should charge them for this advice, but I will offer it freely: If you can, raise more equity capital at this price. Like, try to raise $10 billion.

You’ll thank me in five years.

USA negative fed funds rates

I forgot to check my quotations but I see now the markets are predicting a negative short-term interest rate from the US Federal Reserve (a projected -0.06% fed funds rate for 2021):

I note that Interactive Brokers charges you -0.808% to hold CASH Euro balances over 100,000 Euro. Conversely they charge you 1.5% to borrow up to 100,000 Euro (and 1% for the next 900,000 Euro, and 0.5% for the next 149 million).

Notably, at this point, the Bank of Canada is still projected to be steady for the next two years.

However, as economic conditions deteriorate and monetary policy continues on quantitative easing forever, this might not be sustainable.

As we already have some history on European institutions (in addition to Japanese ones) in negative rate environments, there are some general guidelines as far as investment is concerned.

Although the government risk-free rate is going to be suppressed by central bank actions, the ripple effect in the non-government markets will be huge. This is playing out in asset prices right now. It’s not going to end up well for most other than the most financially nimble participants. I’d suggest throwing out the conventional playbook. While COVID-19 is not the cause of this, it definitely accelerated matters.

Retailers going belly-up

So far of note: J. Crew (clothing), Neiman Marcus (sort of like HBC – higher end generalized department store), Aldo (shoes).

Pier 1 (homewares) didn’t even need the Coronavirus to take it down.

These are all American, but in Canada some other notables (it’s actually odd how there aren’t a lot of retail companies publicly traded on the TSX – I’m excluding the food-related companies here):

Reitmans (TSX: RET.A) – stock trading at 12 cents – this one isn’t as clear-cut, mainly because at the end of January 2020 they had $89 million in cash in the bank, and the only liabilities were their massive lease payments outstanding. Their business (mid-stream business casual women’s fashions) is a terrible sector. They did caution “the Company estimates that it will need financing to meet its current and future financial obligations”, which is never something you want to be reading, but a bit paradoxical given their still relatively strong cash position. At a market cap of just under $6 million, the market is saying this one is worth way more dead than alive.

Roots (TSX: ROOT) – looks pretty ugly. Debt on the balance sheet combined with an operation that’s not making money, means they’ll have to get more credit in order to continue. Margins are decreasing, expenses are rising, it isn’t looking very pleasant.

Indigo (TSX: IDG) – The only big debt they have is their lease payments, while their retail operation isn’t bleeding THAT much. It’s kind of surprising to think on a normal full-year cycle they do make money. But from March 1, 2018, their stock graph has been a 30-degree ski slope downhill. It’s rare to see declines this smooth. Also, at the end of December 2019, they have $66 million in unredeemed gift card balances. Amazing.