A brief update on TSX: GCM.NT.U – the company is required to sell 3,900 ounces of gold on the open market, take the first $1,250 of the sale price and amortize the notes, and the remainder gets distributed to noteholders.
Gold today is roughly US$1,410 an ounce, so I calculate that noteholders will receive an extra 0.79% premium on their notes this quarter, assuming that is the average sale price.
(Update, July 16, 2019: Price received was US$1,412.40/ounce, thus the premium is 0.81%)
If the price of gold remains steady for this quarter and the subsequent 3 quarterly transactions, the total premium received will be an extra 3.53% par value on the notes – the same amount of gold (3,900 ounces) is amortized over a smaller principal of notes as they are amortized, so each quarterly payment becomes slightly larger (0.85%, 0.91% and 0.98%, respectively) – sort of like the effect on EPS of a company executing a share buyback with fixed earnings. This commodity-linked debt amortization arrangement is very uncommon in exchange-traded fixed income securities.
In my estimation, there is a high probability that the notes will be called out shortly before April 30, 2021 for the 3 year government of Canada bond yieldUS Treasury Note yield plus 100bps, so this can be used in your YTM calculations. At par and present gold values, right now investors are looking at about a 13% YTM on senior secured debt, but this will fluctuate depending on gold and 3 year bond yield pricing.
(Update, July 16, 2019: The above paragraph is totally incorrect. Please see the comments below for elaboration.)
Unfortunately for people interested in getting in, the notes have been trading lately above par, which will reduce the yield to maturity.
I have a full position in these notes and I am not interested in adding as they are amortized.
These notes are really a sweet investment. Thanks for all the work on the website. I always enjoy reading your thoughts on various investing related topics.
I thought if they called early, it is at 104
After April 30, 2021 the first year is 104.13.
“At any time prior to April 30, 2021, on one or more occasions and in whole or in part, the Company may redeem the Notes at a redemption price equal to 100% of the principal amount of the Notes plus a premium equal to the greater of 1% of the principal amount of the Notes or the three-year U.S. Treasury Rate plus 100 basis points.”
http://s21.q4cdn.com/834539576/files/doc_downloads/GCM-Gold-Linked-Notes-FAQ-v2-2018-10-10.pdf
never mind – re-read the trust indenture again.
My math is failing me, what would the estimated redemption price be at current rate of 2.81% (1.81 3-yr treasury rate+ 1%)
Would that not be 102.81?
LOL – what the heck am I thinking, I was reading the indenture section about how it is the present value of note discounted at treasury rate + 1% and then I re-read the thing ……..
Going through the bond pricing formula from school …………
That part of the FAQ section isn’t very clear. The present value of all of the interest payments up to April 30, 2021 are also due on redemption. This makes it very unlikely they will want to pay that kind of premium unless the gold price has moved significantly higher and is expected to stay high.
“Applicable Premium” means, with respect to any Note on any Redemption Date, the greater of:
(d) 1.0% of the principal amount of the Note; and
(e) the excess, if any, of (i) the present value at such Redemption Date of (1) the redemption
price of the Note at April 30, 2021 (such redemption price being set forth in Section
4.1(c)) plus (2) all required interest payments due on the Note through April 30, 2021
(excluding accrued and unpaid interest to but excluding the Redemption Date), computed
using a discount rate equal to the Treasury Rate plus 100 basis points and discounted to
the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) over (ii) the principal amount of the Note.
I appreciate your work on Gran Colombia…..going back as far as the last debentures.
Thanks.
thank you for bringing Gran Columbia Gold notes to light – picked some up a couple months ago and will hold until called. Any more comments on higher yielding fixed income ideas would be appreciated (ie. convertible debentures which are not well covered in Canada)
@Safety: It is interesting how massive amount of cognitive biases can creep into one’s brain over time – I’ve made a lot of errors on my interpretation. Even more shamefully, I’ve read the indenture before and clearly don’t remember a thing from it.
Mistakes I made:
1. The “Treasury Rate” is a function of the US Treasury Bond, not the Canadian. (this is strictly a function of my terrible reading comprehension – my flawed brain contradicting my own eyeballs)
2. I don’t see any reference to a 3 year rate in the indenture. Assuming any call will happen after April 30, 2020 (not 2021) we have the following:
“… provided, however, that if the period from the Redemption Date to April 30, 2021 is less than one year, the weekly average yield on actively traded United States Treasury securities adjusted to a constant maturity of one year will be used.”
3. Let’s break apart “Applicable Premium”:
[I also note an amusing MS-Word formatting flaw in that they begin the lettered sequence at (d) when clearly it was supposed to be (a), but they forgot to reset it from the previous definition of “Acquired Indebetness” – a stark reminder that human beings actually produce these documents]
Greater of:
* 1% of Principal of the Note (easy enough to understand) AND
* the excess, if any, of
(i) the present value at such Redemption Date of
(1) the redemption price of the Note at April 30, 2021 (such redemption price being set forth in Section 4.1(c)) [THIS WOULD BE 104.13%] plus
(2) all required interest payments due on the Note through April 30, 2021 (excluding accrued and unpaid interest to but excluding the Redemption Date), computed using a discount rate equal to the Treasury Rate plus 100 basis points [THIS WOULD BE 8.25%/12 PER MONTH, LET’S SAY THE TREASURY RATE IS 2%, WOULD MAKE THE DISCOUNT 3%, AND PRETEND THE CALL WAS MAY 1, 2020 – THE PV SUM IS ROUGHLY 8.12%]
and discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) [ADDING THE ABOVE, SEMI-ANNUAL PV IS 108.96%]
over (ii) the principal amount of the Note. [THIS WOULD BE 100%]
The point of this is:
a) The 3 year treasury rate just doesn’t apply anywhere (the FAQ is totally incorrect)
b) A call date before April 30, 2021 looks improbable on costs – the payment would be a lot higher than 104.13. So I was totally incorrect in the post above.
I guess the most likely outcome will be this thing get called at 104.13 for Apr 30 with gold at current level.
If management didn’t own so much of them, I would agree but Serafino might want to keep them outstanding just for that reason.
They will also likely issue some similar type debt at some point to fund part of the Marmato expansion. Marmato drops out of the collateral package in April 2020, I think, assuming they stay current on their payments.
@Safety: It could also be possible they don’t redeem because at that point in time the absolute value in prinicpal is so small that the percentage bonus they are giving out on gold doesn’t count for that much money (e.g. the October 31, 2023 gold bonus at $1,400/Oz would be 4% for that quarter alone – but there’d only be $6M outstanding after the redemption).
The other more relevant reason why I think they’d redeem sometime after April 2021 is because it can release the security on the assets and get rid of certain covenants. After April 30, 2021 there will be US$42.5 million outstanding and assuming GCM doesn’t blow it all on SSP or some other misguided ventures, they should be able to pay it outright with gold at present levels.
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