Category: Canada

Do not rely on the reported “current yield” statistic on nearly any stock out there. There will very likely be changes.

Companies that have regular dividend policies always find it difficult to reduce them or even scrap them entirely since there is an expectation of a return from their shareholder base. However, never letting a good crisis go to waste, you’re starting to see some action on this front.

If you think the banks are immune, HSBC Hong Kong scrapped their planned 4th quarter dividend (amusingly, there is a news article about shareholders planning a lawsuit – good luck suing yourselves!). You’re probably wondering about the Canadian banks, and they are too – calculating what their net exposures are. Securitized residential mortgages they can dump to the Bank of Canada, but on the commercial loan side of things, I’d expect their losses to rise significantly. The question is how much? For psychological reasons I do not think they will cut dividends, but Canadian banks are very opaque entities to analyze and you just never know when they will go on the brink. Entities like Deutsche Bank (DB) have always looked good on paper, but without having good granularity on their loan portfolio, who knows what the heck you’re investing in?

Food Service: On April 1st, A&W (TSX: AW.UN) suspended distributions. Their historical rate used to give out 15.9 cents per month, but clearly the take-out business is not nearly as strong when there is zero foot traffic. I wouldn’t be surprised if the Keg (TSX: KEG.UN) followed (they have yet to announce) but their units have already gotten hammered 50% from their ambient levels pre-Covid-19. MTY Group (TSX: MTY), owner/operator of a couple thousand restaurant franchises, announced they will scrap their next quarterly dividend.

Aviation, not surprisingly, is not doing well. Chrous Aviation (TSX: CHR) is suspending dividends. CAE, maker of very good flight training simulators, suspended dividends.

The list will continue. REITs, in particular, I think are prone to have distributions reduced as they need to build capital on their balance sheets to restore their debt to equity ratios to proper proportions. Since real estate is not the most liquid asset, it will take time for those fair market values to be reflected, but anybody relying on the price-to-book ratio should be cautioned that fair market value adjustments go down as well as up!

Here’s a quick list of companies that reported purchasing their own stock on the open market last week:

TSX Company Buybacks - March 30, 2020 to April 3, 2020

Name	Ticker
5N Plus	VNP
Aecon Group	ARE
Alamos Gold	AGI
Alimentation Couche-Tard	ATD.A/B
Atlantic Power	ATP
Badger Daylighting	BAD
BMTC Group	GBT
Brookfield Asset Management	BAM.A
BSR REIT	HOM.UN
CAE	CAE
Canacol Energy	CNE
Canada Pacific Railway	CP
Canadian Western Bank	CWB
Capital Power	CPX
CGI	GIB.A
CIBT Education Group	MBA
Clarke	CKI
CRH Medical Corp	CRH
Crown Capital Partners	CRWN
Dream Hard Asset Alternatives	DRA.UN
Dream Office REIT	D.UN
Dream Unlimited	DRM
EcoSynthetix	ECO
Enterprise Group	E
Evertz Technologies	ET
Exco Technologies	XTC
Finning International	FTT
Gamehost	GH
Gear Energy	GXE
Grainte REIT	GRT.UN
iA Financial	IAG
Input Capital	INP
Invesque	IVQ
Logistec	LBT.A/B
Manulife Financial	MFC
Maxim Power	MXG
MBN Corp	MBN
Melcor Developments	MRD
Metro	MRU
Middlefield Can-Global REIT	RCO.UN
Mullen Group	MTL
Norbord	OSB
North American Construction Group	NOA
NorthWest Healthcare Properties REIT	NWH.UN
Nutrien	NTR
Pivot Technology	PTG
Points International	PTS
PrairieSky Royalty	PSK
Quebecor	QBR.A/B
Real Matters	REAL
Royal Bank of Canada	RY
Stantec	STN
TFI International	TFII
Toromont Industries	TIH
Tree Island Steel	TSL
Vecima Networks	VCM
Western Energy Services	WRG

No April Fools jokes on this site.

1. I’ll post a more comprehensive report later, but Q1-2020 is shaping up to be around -13% -11% performance for me, while:

Index / Total Return
S&P 500: -20.0% / -19.6%
TSX: -21.6% / -20.9%

I was caught badly out of position going into this CoronaCrisis and I do not consider my relative performance to be any sort of victory at all. You can’t eat on relative performance is a good cliche to describe this. I hate losing money.

2. CannTrust (TSX: TRST), after getting busted by Health Canada in July 2019 for not being able to run a legal marijuana operation, finally bit the bullet and did CCAA yesterday. The fact that they haven’t been able to publish any financial statements since Q1-2019 should have been enough of a hint to anybody that something really bad was going on. The marijuana sector is regarded as one positive recipient of everybody that is forced to go on lockdown (and anecdotally when biking around Vancouver I get the impression a lot more people are smoking it!), but my views on the economics of the entire sector is the same – I wouldn’t be a buyer unless if you get the impression that branding will result in premium pricing power. Although I do not smoke marijuana at all, from those that do, apparently the legal stuff isn’t nearly as good. The majors (Canopy Growth, Tilray, etc.) will stay alive but that’s about it.

Speaking of Tilray, remember when they were trading at US$150/share back in October 2018? They’re now a shade under $7. Canopy’s down to about CAD$20/share and still has a $7 billion market cap. I’d expect this to depreciate. Still too expensive to short (borrow is still at 22% cost although this has gone down significantly), so sad.

3. What happens when a province goes bankrupt? Newfoundland is on the brink and only got bailed out by the rest of Canada…

4. Dividends will be cut. Do not depend on the historical dividends of any corporations. Another example is Corus (TSX: CJR.B) reported this morning and they will “review” their next quarterly dividend in June as they, along with the rest of the universe, has no idea what will happen to business going forward. Although quite cash flow positive, they are also heavily leveraged and this leverage is forcing them to be more conservative than what their P/E of 3 would otherwise indicate. Good luck raising debt financing in this environment unless if your investor is the Government of Canada!

If Canadian real estate valuations continue to drop and banks start taking baths on bad debt, I also wonder if they will be forced to cut dividends in an attempt to shore up their Tier 1 ratios. Remember how I described Genworth MI as picking up twenty dollar bills in front of a steamroller? With unemployment spiking up to double digits, we’re going to find out what happens when we get a whole bunch of credit defaults. The question is whether the market is pricing this in or not.

It’s starting…

https://www.theglobeandmail.com/business/article-caisse-sets-aside-4-billion-to-finance-quebec-businesses-affected-by/: The Caisse de dépôt et placement du Québec says it’s ready to pump up to $4-billion into Quebec businesses affected by the COVID-19 pandemic.

https://pm.gc.ca/en/news/news-releases/2020/03/31/prime-minister-announces-new-partnerships-canadian-industries-fight: The Government of Canada is investing $2 billion to support diagnostic testing and to purchase ventilators and protective personal equipment, including for bulk purchases with provinces and territories. Personal protective equipment includes things like more masks and face shields, gowns, and hand sanitizer.

The Government of Canada has signed new procurement agreements with Canadian companies Thornhill Medical, Medicom, and Spartan Bioscience to purchase and boost capacity to manufacture equipment and supplies including portable ventilators, surgical masks, and rapid testing kits. The government has ordered millions of supplies to ease the pressure on health care facilities. It has also signed letters of intent with five companies – Precision Biomonitoring, Fluid Energy Group Ltd., Irving Oil, Calko Group, and Stanfield’s – to produce additional test kits, hand sanitizer, and protective apparel including masks and gowns.

(Who wants to make a bet the government is not going to be too price sensitive?)

Anybody standing in the way (by being short) on these “protected” industries had better cover.

A story of some collateral damage of the Coronavirus: A public example of a margin call – Royal Bank taking one of its clients to the cleaners.

The juicy details are here: 1257000-1257010-https-ecf-nysd-uscourts-gov-doc1-127126628149

3. Specifically, on March 23, 2020, Defendants issued margin calls to Plaintiffs on
the purported basis that the “Market Values” of Plaintiffs’ commercial mortgage-backed
securities (“CMBS”) that are financed through the parties’ Master Repurchase Agreements
(“MRAs”) have drastically declined in value as a result of the current market crisis. According
to Defendants, their calculations of these “Market Values” reveal a purported “Margin Deficit”
that permits them to require Plaintiffs to post large sums of additional cash or securities to meet
margin requirements. Defendants’ margin calls, however, are based on their entirely subjective
and self-serving calculation of “Market Value,” and do not come close to reflecting the
fundamental value of the securities or following the contractually-mandated means of assessing
those values. Indeed, because the “Market” is temporarily frozen, there currently is no objective
means of calculating “Market Value.” Moreover, the MRAs provide that “Market Value” shall
be based on a “price … obtained from a generally recognized source agreed to by the parties or
the most recent closing bid quotation from such a source.” MRA ¶ 2(j). It is entirely unclear
what “source” Defendants have been using to calculate “Market Value” in this illiquid market,
but it is crystal clear that Plaintiffs have not agreed to use it.

…

5. Yesterday (Sacha’s note: this was filed March 25, 2020), Plaintiffs learned that Defendants intend to conduct an auction that
includes nearly $11 million of Plaintiffs’ CMBS—at 11:00 a.m., EDT, this morning.

…

33. Notwithstanding the various government actions designed to return liquidity to
the markets and stave off mass foreclosures, on March 23, 2020, Defendants made multiple
margin calls on Plaintiffs in the total amount of $10,794,000.

Ouch. When playing with debt and leverage, playing with fire. Effectively, this mREIT got cleaned because they believed their definition of “Market Value” was what they believed they will get the assets for, while RBC’s definition appears to be “whatever you can auction the thing for”. Also I truly wonder what’s going to happen with all of this private equity and infrastructure investments going on that don’t have any active market – you can be sure that the level 3 value on balance sheets for the funds and such that own these assets are likely going to get downgraded pretty soon!

And for a final note, take a look at your Canada Pension Plan and ask yourself whether you can trust the stated value on 44% of the portfolio or so (I’m being generous and considering the “Other Real Assets” to be things like gold bars in a vault somewhere)…

When you have $400 billion in assets under management, you’re probably allowed to use your own definition of “Market Value” and not RBC’s.

Accounting-wise, I think the largest scandal-in-waiting is the proper valuation of private and infrastructure assets, or basically anything that doesn’t have an actively trading market. It would not shock me at all to discover there are plenty of assets out there being held on books of funds that are overstated by a significant magnitude.