Scanning the TSX fixed-income trading list, one name stuck out at me: MOGO. They amalgamated with Difference Capital to shore up their balance sheet.
They have $12.7 million in debentures outstanding (TSX: MOGO.DB) which are trading at 93 cents on the dollar. Considering the short term maturity date (June 6, 2020) it makes for an effective 26% yield to maturity when adding on the 10% coupon they give out. What gives?
Mogo’s balance sheet has a lot of high-interest debt (especially in relation to its cash-negative operations), but they are slightly further back in maturity dates than the debenture’s June 6, 2020 maturity. In particular, they have (secured debt) $46.6 million outstanding due July 2, 2020 (with an interest rate of LIBOR+12.5%!) and $31.9 million due August 31, 2020 (LIBOR+8.00%).
These ridiculously high premiums over LIBOR should give an investor an idea as to what risk the banks are (thinking they are) taking in this firm, so at the very minimum, an investor should demand a higher rate of return on unsecured debt.
My guess is that management will be in a position to extend these credit facilities (barely), but one condition (among many) will be that the debentures are converted into equity.
Many convertible debentures have a clause that allows a company to convert them into equity based off of 95% of the volume-weighted average price for the past 20 days of trading on the TSX (usually 30 to 60 days of notice is required, so an investor can have a fairly good grasp as to what the conversion price will be), but I notice that MOGO’s is at the VWAP and not 95% of the VWAP.
It is likely an investor in the convertible debentures is going to receive shares. Today, Mogo’s market cap is 106 million, so a conversion of about 12 million par value is not going to take the stock down too much upon management giving notification of conversion.
Enterprising investors would think about shorting MOGO equity and purchasing the debentures, but sadly the borrow cost of over 20% makes this a prohibitively expensive trade.
I’m not interested in the debentures, but if you’re bullish on Mogo’s equity valuation (I’m not either) it is worth a gander.
I still don’t get why a while back Michael Wekerle would get out of the debenture and buy shares instead. Unless he can lend his share to shortsellers at 20%
“Unless he can lend his share to shortsellers at 20%” – yes, probably the only way he’ll be getting a yield out of the stock for the foreseeable future!
I’ve really wondered why the stock has been kept up so high for so long. I must say the DCF merger was a great way to prolong the inevitable.
January 2, 2020: “The amendments lower the effective interest rate from a maximum of LIBOR plus 12.5%, with a LIBOR floor of 2% to LIBOR plus 9%, with a LIBOR floor of 1.5%, effective July 2, 2020”
Still wondering how the heck they can make money with these rates. Stock happily trades at a $100 million market cap.
Mogo got rid of $31.9 million gross receivable (plus $12.4 million already written off loan) for $31.9 million and potentially $1.5 million more in performance fee. That sounds like a huge win considering the type of loan loss allowance they are booking.