Divestor

Since a good deal of investors put their federally mandated $5,000 into the Tax Free Savings Account at the beginning of the year, the next logical question is what to invest it in.

A 1-year GIC, at best, can yield you about 1.75%. Other banks give you teaser rates, roughly around 2% for a floating rate. So naturally the eyes waver to more riskier options, mainly the corporate debt market.

The following is an exhaustive list of TSX-traded debentures that are scheduled to mature by December 31, 2011:

Maturity	Ticker	Coupon	Price	Conv. Price	Share Price	ITM
1-Jan-2011	NPF.DB.A	7.00%	75	6.9	0.39	5.7%
30-Apr-2011	PVE.DB.D	6.50%	101.01	14.75	8	54.2%
31-May-2011	PWT.DB.E	7.20%	101.8	75	24.5	32.7%
30-Jun-2011	KEY.DB	6.75%	302	12	34.96	291.3%
30-Jun-2011	NPI.DB	6.50%	126.04	12.5	15.79	126.3%
31-Jul-2011	AG.DB	6.50%	84.5	12.6	1.12	8.9%
15-Aug-2011	WEQ.DB	9.00%	105	4.2	4.5	107.1%
16-Aug-2011	WEQ.DB.B	8.50%	101	5.25	4.5	85.7%
30-Sep-2011	PRQ.DB.A	6.25%	102.01	24	12.5	52.1%
1-Dec-2011	AAV.DB.D	7.75%	102	21	6.81	32.4%
31-Dec-2011	GCL.DB	7.00%	121.6	10.25	12.06	117.7%
31-Dec-2011	EQU.DB	8.00%	102.5	27.75	6	21.6%
31-Dec-2011	FEL.DB	6.50%	102.5	13.5	4.34	32.1%
31-Dec-2011	FBK.DB	7.00%	100.2	4.32	1.15	26.6%
31-Dec-2011	IRG.DB	7.75%	100.1	10	2.4	24.0%
31-Dec-2011	LRT.DB.G	7.50%	77	7	0.4	5.7%
31-Dec-2011	PWT.DB.F	6.50%	102.75	51.55	24.5	47.5%
31-Dec-2011	UUU.DB	4.25%	98.75	15.76	4.77	30.3%
31-Dec-2011	WRK.DB.E	6.30%	102	20.63	20.17	97.8%

The last column gives you an indication of how much the embedded call option is a factor in the underlying bond pricing – KEY.DB is well within the money, while NPI.DB, WEQ.DB, WEQ.B.DB, GCL.DB and WRK.E.DB are roughly at the money.  For all of these issues, the debenture then becomes a strong exercise in equity valuation rather than debt valuation, which involves a whole different type of analysis to properly perform.

The rest of the candidates leave a lot to be desired; the high yielding candidates appear to be Fibrek (FBK.DB) and Imvescor (IRG.DB) but both of these companies appear to have issues that would not exactly make them low risk candidates.  Fibrek used to be known as SFK Pulp, and people that remember SFK should know about their chronic debt problems – although they have made good strides since the beginning of the year in reducing their debt, there is still $85 million of first-order debt that is in front of the $50M convertible debentures.  It is likely they will be able to roll-over the debt, but not a slam dunk by any measure.

It should be pointed out that the pulp and paper industry has had a major cyclical turnaround and Fibrek appears to be greatly benefiting from it at present.  Contrarian investors made a killing if they invested in the middle of 2009; the equity is up from roughly 20 cents to $1.15 presently, but it should also be noted that in the middle of 2009, a bankruptcy liquidation was a very real possibility.

Imvescor is a restaurant and franchising company that can only be described as a mess – they also have $45M in other debt that ranks ahead of the $22M of convertible debentures.  I have not spent much time analyzing this company other than to briefly gloss over its financials.

If you split your money between both of them and were able to cash out at maturity, you’d be looking at around 7.2% yield to maturity, which doesn’t seem like a lot of compensation for a year’s worth of risk in these less than ideal investment candidates.  One has to dig deeper into the markets to find acceptable risk/reward in both the tax sheltered and non-registered accounts.