Category: Debt

Clearwater Seafoods buys 3 months of time

I wrote earlier about Clearwater Seafoods Income Fund and their solvency issues. They had two maturities due – a small one in late September, and a much larger one on December 2010.

I have been an interested spectator to see how this resolves. I am not interested in purchasing either their equity or debt.

The first announcement in this refinancing game was on September 28, 2010, when Clearwater came to an arrangement with the September debt holders.

Of the CAD$11.9M debt that was due, three of the debtholders consisting of a majority ($8.8M or 74%) of the amount agreed to extend the debt to December 15, 2010, with the penalty of raising the coupon from 6.7% to 10.5% and the accumulated interest to date.

The rest of the minority holders (26% or $3.1 million) will be paid off the interest and debt principal.

So the company managed to pay off $3.1 million of debt, and deferred $8.8 million for less than three months.

The big maturity coming up (December 31, 2010) is a $45 million issue, which trades as CLR.DB on the TSX, with the last quoted value of 88 cents on the dollar. The relatively large price suggests the market anticipates that there will be a refinancing at relatively attractive terms for the underlying company. If Clearwater manages to get around this debt hurdle, there are successive hurdles to be cleared in 2012, 2013 and 2014.

Lack of fixed income candidates

I’ve been scanning the entire list of exchange-traded debt and asset-backed securities, and the number of securities that are trading at a substantial discount to par you can count with the fingers of one hand.

On the US side, you have subsidiaries of Ambac, AIG, and SLM Corp.

On the Canadian side, you have Clearwater Seafoods, First Uranium, Holloway Lodging REIT, Lanesbourough REIT, Newport Partners, Priszm, Royal Host and Sterling Shoes.

All of these companies have significant issues, so an investment in the debt of any of these issuers involve a substantial amount of risk, including their ability to refinance. Right now is the most debt-friendly time to finance, so one wonders what would happen in the event of a slowdown in the debt issuance market.

Questrade offering bonds

I notice that Questrade is offering bonds to their clients. More interestingly, they have a comprehensive list of securities available with tentative pricing. This method of offering is a good step, although they probably will need to automate the transactions.

They claim to be offering it “commission-free”, but the commission is embedded in the bid-ask spread. For example, a Government of Canada bond maturing on December 1, 2011 (a year and a couple months away) is quoted at bid 1.28%, ask 1.26%. This is not bad when you consider that 1-year T-Bills have a yield of 1.23%.

One of the big differences between retail investing and institutional investing is that if you have $100 million lying around, you just can’t dump it all into Ally or some retail savings bank and get your 2%; with large quantities of cash, you have to pile them into government securities in order to get a risk-free return – in this case, locking away $100 million you can get about 1.23%, at least using end-of-September quotations. If you want 2% or higher, you have to go all the way out to December 2015 for Government of Canada debt (2.04% on the ask); if you are willing to settle for a province, Quebec has June 2014 issues for 2.06%.

A retail investor does have the option of putting money risk-free into retail facilities, and thus this makes investing in government bonds quite useless since typically GIC rates (of up to 5 years of maturity) will be higher than prevailing government bond rates.

Corporate debt is another story – you can find higher yields there, but will have to take the appropriate amount of risk, and/or be willing to take debt with very long terms to achieve the desired yield. Most of the interesting issues are also exchange-traded, which alleviates the hassle of dealing with somebody over the telephone.

Finally, Interactive Brokers has a system that enables automated transactions on bonds, but it strongly depends on the corporate issue whether you will have any liquidity available.

Fairfax Fixed Income offering

Via James Hymas, Fairfax Financial is issuing $250M in preferred shares, with a 5% yield, and 2.85% above 5-year government bond rates thereafter, and the (holder’s) option to convert to preferreds yielding a floating rate of 2.85% above 3-month government treasury bill rates every five years.

5-year government rates were 2.16% on September 24, and the 3-month note rates were at 0.90%.

Cheap, cheap financing. As issuers start to pound away on the fixed income side (due to heavy demand), it makes you wonder when the party will end. My strong impression is that companies should be extending maturities and securing their debt financing since rates right now are about as good as they will get due to such voracious demand for fixed income securities.

A top to fixed income securities?

I don’t like calling tops and bottoms – it is nearly impossible to get the exact time correct, but it is possible to get close. The way you take advantage is by scaling in your orders and waiting for the executions.

Trends in the marketplace go on further than anybody usually expects. Fixed income securities (especially bonds) appear to be quite pricey at the moment. Also, I have been noticing a lot more sentiment on the retail side toward dividend-bearing equities, and doing a cursory scan on that side of the marketplace leads me to believe that performing screens on non-income bearing securities would bear more fruit at the moment.

Portfolio movement has been mainly selling securities and raising cash, due to lack of research time. In particular, there is quite a bit of US currency available for deployment, and it is has been nearly a year and a half since I have invested in US equities.

Yield is now down, but I am very liquid.