Canadian Finance, Economics and Fiscal Analysis
The following is a chart of the US Government 10-year and 30-year bond yield to maturity:
Up about 0.3% from their yield lows, which is fairly significant. Now the $64,000 question is: Is this just a short squeeze, or do yields shoot higher from present?
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.
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).
I notice that the local credit union, which used to offer prime minus 0.9% (equating to 2.1%) floating rate is now at prime minus 0.3% (2.7%).
The only conclusion that one can make is that retail credit is somewhat tightening and/or banks are getting concerned about their leverage linked to the real estate market. You wouldn’t see this in government debt rates – 1 year treasuries in Canada yield 0.90%. Five-year government bonds yield 1.35% and the best five-year mortgage rate you can find in Canada is about 3.19%.
Given the difference between the two (prime minus 0.3% versus 3.19% fixed), combined with the (albeit unlikely) potential for an interest rate spike would suggest that paying the half-percent spread for a five-year lock would be well-spent insurance money.
That said, anything around the 3% range is historically very, very, very low and would explain the high prices in the real estate market.
It is quite evident looking at bond trading that credit is coming to a halt, very quickly.
First of all, I notice debentures on various firms are plummeting – most of the underlying companies have lots of refinancings ahead in order to make it through. An example of this is Data Group (TSX: DGI.UN), which has had its debentures trade down to 60 cents on the dollar.
Sterling Shoes (TSX: SSI) announced they will not be making their interest payments on their debentures, effectively putting them in default – their interest payment is due on October 31, 2011 and will subsequently lead to a potential default sometime in November according to their prospectus (if enough debenture holders are able to declare a default).
Superior Plus (TSX: SPB) was lucky to get off a $75M debenture financing (with a 5-year term at 7.5%) in the middle of September before their common shares started to fall off a cliff – and took the debentures (series C, D, E, F) with them. Superior Plus is no stranger to this website, having predicted a dividend cut in the past.
Yellow Media is no stranger to this site either, but since I am still licking my wounds on this one, I will leave it at that with this company. Similar to Superior Plus, however, both companies are still free cash flow positive.
First Uranium (TSX: FIU) has had some serious issues regarding their operations and financing, and also some political risk thrown into the mix. As a result, its secured notes have traded down. Indeed, when looking at the management projections for the July to September quarter, management has projected they will be left with about $9 million cash on their balance sheet before they can make a (what they think) turnaround – instead, they just might be ready to default since they also have a CAD$150M debt payment on their unsecured debentures due June 2012. First Uranium is also no stranger to our site, having had the misfortune of investing in their notes and debentures in the past.
Finally, Connacher Oil and Gas (TSX: CLL) has had their common shares annihilated over the past couple months – their unsecured debentures are due on June 30, 2012 and are now trading at 85 cents on the dollar. This is quite interesting in light of the fact that the rest of the company’s debt is structured out until 2018 and they have set up a credit facility to be able to pay off these debentures. The risk is that the company will simply convert the debentures into equity and you end up with another Arctic Glacier (TSX: AG.UN) which underwent a lot of dysfunction after they did the same thing with a very low stock price. Those debenture holders would have been lucky to realize half the value of their debt, or if you timed it perfectly and had a small amount of debt to work with, about two-thirds.
A lot of credit-sensitive companies are trading lower. It is difficult to tell when it will end, but an investor picking up the scraps of companies that will, through organic business performance, be able to bounce back will be very rich – similar to how anybody investing in the corporate debt market in early 2009 made out very well.
Timing indeed is everything.