Late Night Finance with Sacha, Episode 4
Date: Wednesday, June 17
Time: 6:00pm, Pacific Time *** NOTE NEW TIME
Duration: Projected 1 hour.
Where: Zoom (Registration)
Frequently Asked Questions:
Q: What are you doing?
A: I’ll be talking about TSX-traded debentures and discussing some of the specific ones that are trading. Questions during this presentation, both on and off topic, are accepted. The entire universe is linked here.
Q: Why are you doing this?
A: Continuing my experimentation in video broadcasting. Who knows, I might learn something from you as well.
Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state, and if you have any comments (or a debenture that you are interested in) just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.
Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.
Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.
Q: If I register and don’t show up, will you be mad at me?
A: No.
Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.
Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!
Q: Can I be a silent participant?
A: Yes.
Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.
Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.
Q: Is there a limit to the people that can participate?
A: Zoom limits me to 100. I really hope the number isn’t higher than 10.
Q: Will there be some other video presentation in the future?
A: Yes.
Being on the other side of the world, I cannot make these Zoom calls. This debenture topic is one I’m very interested in. I hope maybe someone can do a recap, please and thanks.
I’ll just post the agenda I used.
1. Why invest in convertible debentures?
a. Lower risk – Debt vs. equity
b. A final date for payout/resolution
c. Income (interest) vs. dividends – better in registered accounts for this reason
d. Yields vs. idle cash
e. Research threshold is lower for payout
2. Why NOT invest in convertible debentures?
a. In most cases, an equity investment would earn more %-wise than debt
b. The amount of ‘safety’ is usually over-stated
i. In CCAA (unsecured status)
ii. In stressful times, they still take a liquidity hit
3. Capital stack of companies (from senior to junior)
a. Secured debt (usually bank loans, sometimes bonds)
b. Unsecured debt (most of the TSX-traded debentures are these)
c. Preferred shares
d. Common shares
Examples with all 4: Atlantic Power, Just Energy
4. Brief overview of the Google Sheet
5. Dredging up the “fine print” of debentures
a. Indenture vs. Short-form prospectus: E.g. Goodfood (Feb 19, 2020 vs. Feb 26, 2020 on SEDAR)
6. Sacha’s mental stratification of debentures (roughly corresponding to credit rating)
a. Premium – will likely pay no matter what (Constellation, Element Fleet, Great Canadian Gaming, Premium Brands)
i. Market cap to debt size is large, cash flows positive, etc.
ii. Company can always equitize debt without share price taking a hit
b. Good – cash flow stability and/or asset value cover debt (Rogers Sugar, Firm Capital, Atlantic Power)
c. Some Concern – solvency or cash flow profile may put future refinancing in doubt (Chemtrade, Colabor, Melcor REIT)
d. Complete Trash – obvious issues and/or impending doom (Just Energy, Supreme Cannabis, Mogo, etc.)
i. Note the conversion to equity at 95% of market value
7. Going through some examples (GCL.DB.A, FC.DB.x, CHE.DB.x)
Finished at about 7:05pm. 8 participants. Q&A went on for another 25 minutes, primarily an examination of Supreme Cannabis (FIRE.DB). Thanks everybody for those that took the time to attend and especially the dialog.
Quite disappointed myself that I registered but couldn’t make it due to some unexpected issue with work.
What’s your take on Colabor? Last time in 2016, the debt holder got bailed out by a recapitalize transaction involving the Quebec government as a party. 1 year from now, do you think they can kick the can further down the road again or a conversion (sorry, didn’t check if that option is on the table).
Thanks.
I noted that they had some significant insider buying lately, plus that the positioning of the debentures in the capital stack was not that far behind the bank loan; but the operation itself is a negative tangible book value and cash flows are barely treading water. Seems to be a work in progress, and hence appears to be trading at a level that can be rationalized. Wasn’t interested in it at the existing price, but they bottomed out a good month after the peak March 23rd CoronaPanic.
Thanks for posting the agenda Sacha…..any other tidbits on GCL.DB.A or CHE.DB’s by anyone would be appreciated.
I’ve said earlier I own CHE.DB.x, specifically I think Chemtrade’s business is good and cash flowing, just their leverage is going to bite unitholders in the rear since I think they’ll have to cut distributions again. At the upper 50’s and lower 60’s you would get ~8% yield plus the (double digit) implied capital gain on maturity, and this debt will continue to be serviced. Equity right now gets 12% but this is with considerable risk that comes with the amount of leverage in the operation. They’re trading more appropriately to their risk level but as their stability improves (whatever the equity distribution level ends up as) I think the unsecured debt will compress down to single digit YTMs eventually. This one is like watching paint dry.
From the Agenda you posted that sounds like an awesome hour, sad I missed it (next time!)
Debentures are kind of a dud for me unless there’s some kind of angle you can shoot. Some examples I can think of over the years
1. Yellow Pages basically saying they will close the Deb early so you have a high likelihood 1 year 10% return
2. A few years ago IBG.TO hovered at par and the stock traded at the conversion price so you could go long the Deb and short the stock and pocket about 6% since the stock didn’t pay a dividend … i find these situations rarely line up. This is one of their now retired debentures
3. Gold operating companies debentures that generate operating cash flow can go loco if the gold price takes off or they uncover another deposit – example was Kirkland Lake
4. Gold explorers that have the cash on the books to cover but get bought out – example was Lake Shore Gold
5. Something like EFR.DB where you are gambling that you either get your debenture paid out at expiry or the Uranium price goes loco and you get a multibagger without the ugly downside of the equity
Otherwise for most everything else I just find that you’re getting near equity like downside and a capped upside since most debentures trade at par while the stock is well below the conversion price
They’re still way better than Canadian Pref shares though 🙂 Talk about a basket of turds!
I think that investing in debentures (if well chosen) is more of a hybrid investment. They have some characteristics of stocks and some of bonds. In some cases it is lower risk, lower return. Like Sacha pointed out in a previous blog entry with Ag Growth – you’d likely have a higher return holding the common stock than holding their debentures. But in the case of Chemtrade you are much better off with the debentures than with the stock.
Most of the debentures are not really worth it at par but some were quite cheap in March and continue to trade cheaply now. A lot of it is about timing.
I agree with you on the angle part – and i think that holds true for all of investing. I hold the debentures of Medexus and they mature at 125 percent of the par value. That’s an angle. I wouldn’t be very interested in them if they did not have that feature.
I think you have to treat Debentures like you do all financial instruments – there is a right time and place.
Also Canadian Prefs have sucked but I would argue that now might be a great time to invest in them…. but again you have to pick and choose.
“Debentures are kind of a dud for me unless there’s some kind of angle you can shoot” – I’d agree with this statement. They’re easy to generate a relatively low-risk 5% in stable times (which usually means you’re giving up higher gains elsewhere in the equity side of things, not necessarily in the debenture issuer’s common stock!) and I’ve generally only found myself engaging with debentures when there is some sort of stress involved.
It is also similarly the case with preferred shares as well, although with prefs the leveraged trade looks alluring in normal times until you get a blow-up in the market, where you’ll get cleaned out.
Great discussion here by all….thanks.
I see Cardinal energy just extended their debentures by 2 yrs,
“Cardinal Energy Ltd. (“Cardinal”) (TSX: CJ) announces that 99.54% of the holders of our 5.50% convertible debentures that voted at the extraordinary meeting of debentureholders held earlier today have voted in favour of a resolution approving certain amendments to the debentures. As a result, all debentureholders now have the right to exchange their debentures for a new series of 8.00% convertible debentures. This right must be exercised prior to 5:00 p.m. (Eastern time) on Monday, July 20, 2020 (unless otherwise terminated, extended or amended by us). ”
I’m not a holder…but have a question on the above paragraph. Is this implying that some holders can refuse the conversion…or if they forget to exercise their right by July 20…..what happens?
Status quo for those that don’t exercise their rights.