Keg Royalties Income Fund – Impact of the Keg franchise buyout by Cara Group

The Keg chain of restaurants were acquired today by the owner of Harvey’s and Swiss Chalet (both of these names are much more prominent in Ontario than they are in British Columbia). In general, this does not bode well for food quality, but it does bode well for the continued corporatization of the brand name.

More specific to Canadian investors, the Keg Royalties Income Fund (TSX: KEG.UN) is one of those few royalty funds remaining. It’s sole purpose in life is to distribute cash obtained by its 4% revenue share in anything that the Keg sells. It was interesting to see its reaction to the news today:

The market believes the buyout is a revenue-negative event for the Keg.

Financially, KEG.UN is easy to analyze. The trick for an investor is determining the proper fraction to pay for the royalty income (currently investors are purchasing a KEG.UN unit in exchange for $1.13 of distributions, which at a $19/unit price means a 5.95% ratio), plus factoring in the future trajectory of the Keg franchise’s gross sales.

Personally the last time I ate at the Keg was 2009.

Teekay Corporation – Raising money

Teekay (NYSE: TK) is raising capital in the form of US$100 million in convertible unsecured debt (maturing 2023) and 10 million shares of common stock. Their former daughter entity, Teekay Offshore, raised some preferred share capital last week.

Teekay’s existing unsecured debt issue (disclosure: I own some) maturing in January 15, 2020 has been trading above par for quite some time. The stock is trading at relative highs ($10.70/share) and this action only has one reason: getting capital while the window of opportunity is still open. Their January 2020 unsecured debt is the majority of their existing debt.

I was not convinced and still am not convinced that oil and oil service companies are coming back from the dead. Teekay’s management choosing to sell equity at existing prices is another datapoint that supports this.

I hope management does not call out the January 2020 debt issue, but it seems to be likely. I will be holding on and collecting interest payments as much as I can before the inevitable call-out. I’m still quite stuck when it comes to investing cash at this stage in the market.

The “interest rate noose” that is slowly being tightened on the necks of the market will eventually hit the panic point when the market starts to have difficulty breathing. It’s pretty smart for players like Teekay to be doing what they’re doing right now – while they still can. I’d carefully look at companies that have upcoming maturity profiles from a position of credit weakness and ask whether you want to be invested in their equity.

How low can crypto go?

The answer is “to zero”.

Over the past two weeks, investors have seen their bitcoins go up 10% in a day, down 10% in a day, down another 10% over 4 days, down 20% in a day, and down 15% in a day.

Having a bitcoin fork (Bitfinex) distributing its own fraud of a cryptocurrency shutting down isn’t helping matters any. There’s plenty of others out there which have no purpose in life to exist except to suck up cash in favour of their incumbent creators.

Stop to think what would happen if you had three-quarters of your networth (measured at the beginning of the year – after all, Bitcoin did go to USD$20,000 at one point) go through a string of days like the above.

I see a lot of obviously young and inexperienced investors in the reddit forums (e.g. /r/bitcoin) that have never been involved in anything resembling a bear market in their lives, and their mentality will be “buy the dips and hold on”. This is financially ruinous when holding an asset going to zero (see: Nortel investors). Another group will be “diversify into other cryptocurrencies”, but what good does diversification do when the entire asset class (if you want to call it an ‘asset class’) is garbage, just like the dot-com stocks in the late 1990’s? Is your bitcoin truly going to be one of the survivors like Amazon (which went down about 95% from peak-to-trough after the tech wreck) or is it going to more likely be like Alta-Vista, Lycos, Excite, Infoseek, or a zombie like Yahoo that never was able to resume its glory days?

My only regret is that they haven’t opened options trading yet on Bitcoin, although the implied volatility on those puts would be extreme.

Canopy Growth

In a nutshell, this is why it is dangerous to short companies on the basis of valuation – something over-valued can get even more over-valued:

Many people lost their financial lives shorting .com stocks in 1998-2000 due to their valuation. Many people will be losing money shorting cryptocurrency and marijuana stocks (if they haven’t already). Timing this is nearly impossible, but whoever gets it right will become quite rich.

No positions in WEED (now nor likely ever).