Some near-guarantees of interest income, how much will people pay for it? This is typically represented in a “yield to maturity” calculation but here is another way of looking at things which may be a little more intuitive – it involves capitalizing the cash stream to be received to the present, with a zero discount rate. It is a fun exercise:
* Bombardier 8.75% December 1, 2021 unsecured debt, not callable: Trading at bid/ask 104.35 / 105.65. Bombardier has completed their disposition of their transportation division with Alstrom, and has indicated they are exploring how to manage their debt. This one is the nearest term maturity and is a lock to mature. As there is 10 months left to maturity, the remaining coupon is worth 7.3% of par, so at the midpoint, an investor would be paying 105% to receive 107.3% over 10 months.
* Yellow Pages (TSX: YPG.DB) 8%, stated maturity November 30, 2022 but callable at par, May 31, 2021. Trading at bid/ask 101.2 / 102.4. Management has stated for the past few quarters they will be redeeming this debt as soon as they can. With 4 months of interest remaining, that is 2.7%. There is a tiny, tiny amount of optionality in the potential conversion (they can be converted into stock at $19.04/share but that is 55% above the current trading price and not too probable, although one quarterly report showing revenue stabilization would alter that conclusion).
We also have some “zero-coupon” equivalents in the form of merger arbitrage.
* Atlantic Power (TSX: ATP) will be bought out for at least US$3.03 in the second quarter. Right now, trading at US$2.96, that is +2.4% over an estimated 3-5 months (more attractive than the bonds presented above, in addition to the gain being on capital and not income account!). The risk of merger arbitrage, of course, is that the deal will fall through.
The baseline for cash is the high interest savings ETF (TSX: PSA) which gives out a yield of about 50 basis points at present. There’s almost no point in investing in this ETF at present, but they have a whopping 2.4 billion in AUM, skimming off 15bps of MER, so good for them.
The above are examples that will yield superior returns than the risk-free option. Indeed, there are plenty of options to skim a few hundred basis points of yield for very little risk, but it involves work and paying attention. It does come at the cost, however, of liquidity.
You always forget those HISA deals Sacha….I was well over 2.5% last year….Ive got 2.1% from Simply until March 31st this year….Tangerine is offering me 1.8%….yeah I know, time consuming moving your money from one account to another..lol
On ATP, I think the prefs are a better arbitrage play, less risky and a slight chance that they may see a price adjustment
The solution for the acquirer of ATP would be to simply say that the deal is not conditional on the preferred shareholders voting for the acquisition – they will remain publicly traded, and then holders can see if the 5.3% rate reset is an appropriate level of risk premium for APLP. Considering you can pick up some PPL prefs for roughly the same levels, good luck is all I can say to that!