Canadian Finance, Economics and Fiscal Analysis
Nothing that most of the resource stocks are trading at a larger percentage down than their underlying commodities, so it’s clear that there is some sort of supply dump going on. The question is – how much and how far will this rotation go?
Although my portfolio is substantially all cash and this is pleasant for me to see, I think this brief downturn is just that – brief. Still being patient.
The market for high-yielding products continues to dwindle as anything with a yield has been bidded up to the roof, and the products remaining with a yield have qualities that warrant them trading as such. The following is a comprehensive list of convertible debentures that have a yield to maturity of 8% or above:
| Company | Ticker | Coupon | Date | Term | Price | YieldToMaturity |
| Yellow Media Inc | YLO.DB.A | 6.25% | 1-Oct-17 | 5.6 | 12.1 | 70.00% |
| Perpetual Energy | PMT.DB.D | 7.25% | 31-Jan-15 | 2.9 | 75.75 | 18.40% |
| Perpetual Energy | PMT.DB.E | 7.00% | 31-Dec-15 | 3.8 | 73.75 | 16.54% |
| Armtec Infrastructure | ARF.DB | 6.50% | 30-Jun-17 | 5.3 | 70 | 14.85% |
| Boyuan Construction | BOY.DB.A | 10.00% | 31-Oct-15 | 3.7 | 87 | 14.72% |
| Tree Island Wire | TIL.DB | 10.00% | 26-Nov-14 | 2.7 | 90 | 14.57% |
| Perpetual Energy | PMT.DB.C | 6.50% | 30-Jun-12 | 0.3 | 98 | 12.99% |
| Royal Host REIT | RYL.DB.B | 6.00% | 31-Oct-15 | 3.7 | 81.5 | 12.46% |
| Royal Host REIT | RYL.DB.D | 5.90% | 30-Jun-14 | 2.3 | 88.1 | 11.93% |
| Ivanhoe Energy | IE.DB | 5.75% | 30-Jun-16 | 4.3 | 80.5 | 11.62% |
| Lanesbourough REIT | LRT.DB.G | 9.50% | 28-Feb-15 | 3.0 | 95 | 11.53% |
| Royal Host REIT | RYL.DB.C | 6.25% | 30-Sep-13 | 1.6 | 92.64 | 11.52% |
| Data Group | DGI.DB.A | 6.00% | 30-Jun-17 | 5.3 | 82.5 | 10.36% |
| Altus Group | AIF.DB | 5.75% | 31-Dec-17 | 5.8 | 81.25 | 10.09% |
| Gen Donlee Income | GDI.DB | 7.00% | 30-Jun-14 | 2.3 | 94 | 9.96% |
| Brigus Gold Corp. | BRD.DB.U | 6.50% | 31-Mar-16 | 4.1 | 90.01 | 9.52% |
| Clearwater Seafoods | CLR.DB.B | 10.50% | 31-Dec-13 | 1.8 | 102 | 9.26% |
| Discovery Air | DA.DB.A | 8.38% | 30-Jun-16 | 4.3 | 98.5 | 8.79% |
| Superior Plus | SPB.DB.E | 5.75% | 30-Jun-17 | 5.3 | 88 | 8.61% |
| GreatBasin Gold | GBG.DB | 8.00% | 30-Nov-14 | 2.7 | 98.85 | 8.47% |
| Superior Plus | SPB.DB.F | 6.00% | 30-Jun-18 | 6.3 | 88.55 | 8.37% |
| Anderson Energy | AXL.DB.B | 7.25% | 30-Jun-17 | 5.3 | 97 | 8.07% |
Suffice to say, most of these companies have “issues” pertaining to the solvency of the underlying entity. They were also trading much lower during the mini-credit crisis back in October-November; for example, Data Group and Superior Plus, which are both cash-producing entities, were trading 25 cents on the dollar lower.
I don’t need to say anything about Yellow Media, which also makes money. Perpetual Energy has positive cash flow, but being in the oil and gas industry, has tremendous capital investment requirements and has debt ratios that is not terribly favourable to the subordinated debt holders.
First Uranium (TSX: FIU) sold all of its principal assets today, pending shareholder approval.
First Uranium had two assets: a profitable Mine Waste Solutions asset, which was sold to AngloGold Ashanti for $335 million in cash; and a woefully cash-sucking and unprofitable Ezulwini mine, which was sold for $70 million in cash.
Most notably is the impact to the debtholders. The subordinated convertible debentures get the following (if they approve of the various changes proposed):
Furthermore, Debenture holders will agree to accept on closing of the Transactions a cash payment of 95% of the principal amount of the Debentures, an additional 2% of the principal amount if they have executed and delivered a validly completed form of election proxy voted in favour of the Company’s proposals on or before the early consent deadline to be set (the 2% will be allocated pro rata to holders tendering by the deadline) and an additional payment of the lesser of (i) 3% of the principal amount or (ii) the total amount released to the Company from the Escrows, in priority to any distribution to FIU shareholders from the Escrows.
It is likely that these holders will receive 97% of principal value, which is significantly better than the 70% the market had them pegged at a week ago. The debenture holders will have no choice to accept the deal since otherwise they will be converted into common equity of the company.
Debentures (TSX: FIU.DB) are trading at bid/ask 90/91 cents on the dollar, so people wanting to pick up the cigar butt off the street for one last puff still have a shot here.
The noteholders will get paid 100% of par value, and also accrue interest up to March 31, 2012. They are likely to be made whole whether they vote for or against the agreement; in the event they vote against the agreement, it brings up an interesting risk scenario. I am wondering why the company did not include a small sweetener for the noteholders as they have the ability to really botch things up for the company by voting against a change in their sledgehammer clause which gives them security over both Mine Waste Solutions and Ezulwini.
Notes (TSX: FIU.NT) are trading at bid/ask 96.5/98.5, so again, there is opportunity to squeak out a few percentage points at the risk of having your capital wound up in some calamity in the unlikely event the vote fails.
Once this is done, the rest of the corporation is going to be winded up.
This ends the sad, sad tale of First Uranium. Onto bigger and better things.
Tim Hortons (TSX: THI) dodged a lawsuit concerning the methods that it uses to bake goods and cost allocation between franchisees and the parent company.
The key quotation is the following:
Under what’s known as the “Always Fresh Conversion” several years ago, the company stopped making baked goods from scratch in each location every day, and instead started shipping partially baked items that had been flash frozen before final baking in ovens at all Tims locations every morning.
This “several years ago”, to my own experience was nearly a decade ago. While I was not a huge consumer of doughnuts to begin with, they were good for parties and the like. After they did this conversion I no longer purchased them and notably did not find any substitute products that were baked of sufficient quality that I could go to.
I’m somewhat surprised that Tim Hortons is able to retain such a high amount of customer share despite the perception of product quality being somewhat worse than McDonalds (NYSE: MCD). Financially, Tim Hortons is quite well managed, with them reporting a 2011 fiscal year earnings that was about 11% better in operating income than in 2010 (adjusting from a one-time gain from the sale of their bakery). Their balance sheet is relatively clean, with a year’s worth of income of long term debt.
They do appear a tad expensive, with a valuation of 22.5 times 2011 earnings.
The lesson for investors is that product branding is a very strong intangible asset of a business. It takes more than flash-frozen not-so-fresh doughnuts to turn off consumers and their fast food habits.
I guess my sour grapes is still remembering staring at my computer screen in 2003 and seeing McDonalds trading at $15 a share and thinking that despite its operational woes at the time, the company was worth purchasing. The original parent of Tim Horton’s, Wendy’s (NYSE: WEN) just doesn’t have the allure at current valuations either – their branding is much, much less valuable. Everybody around the planet knows about McDonalds and this is what makes their brand so powerful.
I am so tempted to short 30-year bonds right now. I might soon.
There are a few ways to represent this position:
1. Short bond futures (CME) – this is the world’s most liquid proxy to treasury bonds (other than dealing with the underlying product directly!). It has the advantages of liquidity and dealing strictly with the capital and not income component of the bond.
2. Purchase/short a liquid ETF that deals with long-term treasuries. There are a few to choose from:
– iShares 20-year+ government bond fund (TLT) – MER is 0.15%; average term of bond is 27.8 years – fund is highly liquid and shortable;
– Proshares Ultra/short (2x) 20-year+ (UBT/TBT) – MER is 0.95%; linked to TLT performance above as basis index. UBT is not very liquid, while TBT is very liquid.
ETFs have the advantage of being tradable in smaller amounts than futures (Future contracts are for $100,000 face value of product, which currently trade around 142% of par for the June contract). Futures typically have a spread advantage ($31.25 per $142,000 notional value), but liquid ETFs such as TLT have typically had penny spreads, resulting in comparable slippage. As previously mentioned the futures have an advantage with stripping the income-related aspects of the bond, and also tax advantages (both in the USA and Canada).