Canadian Finance and Economics
On November 5, 2010, I wrote a post stating that Superior Plus was likely to cut their dividend by about 25%.
Today when they announced their quarterly results, they did so – from $1.62/share to $1.20/share.
It will be interesting to see the effect on the share price on Friday.
A couple charts: One of the S&P 500 and one of the TSX Composite over the past year:
Over the past half year has been a straight trendline up. Naturally anybody that has invested in anything has seen the winds of the marketplace at their backs. The only question is – when does it end?
The economic recovery is being priced in – in addition to cash being deployed in assets that will yield any sort of return. The only question now is whether this is a rational valuation, or whether these prices have not priced in future unknowns – or perhaps the existing prices have not priced in enough of a recovery and we will continue to see a monster run continue in the indexes.
Encana’s deal with PetroChina, where it sold a 50% interest for $5.4 billion dollars in their Cutbank Ridge property is likely a signal that management believes natural gas prices will remain depressed relative to the run-up experienced in the middle of 2008. The management of PetroChina likely disagrees or is trying to rapidly deploy capital even if they have to pay an expensive price in doing so.
Although the exact terms of the deal are not known, an injection of $5.4 billion in cash leaves Encana in a fairly unleveraged financial position – their total debt at the end of December 2010, net of cash is about US$6.5 billion. Encana will also be spending most of its operating cash flows on capital projects in 2011.
OPTI Canada owns an equity stake in an oil sands operation. Equity investors in OPTI Canada (TSX: OPC) have not been feeling too good lately – the latest catalyst to their downfall has been them sacking their prior consultants that they employed failed to find “strategic alternatives” (a.k.a. creative financing or an outright sale).
The following is a chart of their recent trading:
Equity investors have lost about 60% of what remains of their investment.
Looking quickly at the financial statements is a company that has a massive amount of debt and little chance of being able to pay it off. They have a total debt of about $2.6 billion. One major maturity will start on December 15, 2012 – approximately $525 million. As there is no chance of internal cash flows being able to pay off this amount in the next 22 months, they will either have to renegotiate some package with their creditors or take their chances in bankruptcy court. Either way, the equity investors in OPTI still look like they are holding an overvalued stock.
Bond traders are not faring much better – OPTI has two issues of senior secured notes, due 2014 and par value of $1.75 billion – they are now trading at 49 cents on the dollar, down from 80 cents back in November 2010. These bonds are effectively junior to $850 million of other debt that is due to mature at an earlier date.
I have been writing a lot about Priszm Income Fund – a horribly broken trust going through massive financial restructuring.
Today, they announced:
TORONTO, Jan. 19 /CNW/ – Priszm Income Fund (TSX: QSR.UN) (“Priszm” or the “Company”) reported today that the Company has executed a forbearance agreement to extend the maturity date of its senior debt facility, including the payment of all interest accrued but unpaid to January 31, 2011. In addition the senior debt lender will temporarily suspend action to exercise its remedies for the Company’s defaults in respect of the existing terms of its senior debt facility. As part of the agreement, the Company is not permitted to make payments in respect of obligations that are subordinated to the senior debt facility, other than those relating to the direct operation of the business in ordinary course.
The senior debt lender and the Company also executed a separate short-term financing agreement that provides the Company a supplemental facility of up to $4 million to ensure the business has sufficient liquidity to continue operations while a longer-term plan is developed. The facility bears interest of 10% per annum with a maximum one draw per week and matures January 31, 2011.
Translating this into English, the company received a $4M bridge loan in exchange for the creditors not pushing the company into bankruptcy. As part of this loan, the company cannot make payments to subordinated obligations, which would also include the subordinated convertible debentures, amongst other things.
After my January 8, 2011 post regarding the convertible debentures (TSX: QSR.DB), I entered into the market on January 10 and bought $20k face of the debentures at 19 cents on the dollar. My expectations were that the debentures would settle at a value of around 30-35 cents on the dollar. I was aiming for a bit more size on the position, but QSR.DB is illiquid and I did not catch many liquidators on the bid. Today, I sold $19k face for an average of 21.95 cents on the dollar, approximately a 9% gain over my January 10th purchase. After commissions, this will pay for a few sushi dinners. I still hold $1k face value (approximately $230 market value) for entertainment and educational purposes – I want to see how this drama resolves itself. There is also a very slight (and I emphasize very slight, as in less than 5%) chance that the debentures will be redeemed at par by June 2012.
My theory about the valuation of the company changed significantly after some subsequent research and deeper analysis – when the company announced it was exploring a “sale of all assets”, any cash flow generation would have been likely gutted out of the company, leaving purely administrative expenses associated with running a publicly traded company. The company does not have a massive amount of future tax assets which ordinarily gives such unprofitable operations some market value. Assuming the $200k/franchise level that was achieved in the previous sale applied across the 200 remaining franchises would have rendered the company with approximately $40 million further cash, which would have not been enough to pay liabilities, let alone the debentures.
When you bake in costs of restructuring and/or bankruptcy, there is not much value in the debentures – they will likely be given some sort of settlement offer at a deep discount to face value to get them out of the way. This is when I will get rid of the other $1k face value I own.