Just looking at the list of TSX-traded debentures (100 issues from 63 companies), price-wise, the company trading at the lowest price is Surge Energy (TSX: SGY). Their debentures (a total of $79 million, about half of which matures in the end of December 2022) are trading just a shade above 30 cents on the dollar.
Usually when a company’s debt is trading that low, a recapitalization is looming. Indeed, for Surge, it is a likely scenario, if not an outright CCAA proceeding. Q2-2020 was very rough for all oil producers, with WTIC going negative and all the Covid fallout. For Surge, the last corporate snapshot on July 30, 2020 showed a fairly dire financial picture, specifically the $307 million in senior bank debt. This credit facility goes to a redetermination on December 2020, and is otherwise payable on March 2021.
Although in a ‘normal’ environment, the corporation is cash flow positive (even after the capex), it isn’t going to be nearly enough to address the bank debt, let alone when the convertible debentures are due. The absolute amount of product being produced (17k boe equivalent with 80% crude) is well below what it needs to be to support the amount of financial leverage. Hence, the convertible debentures, being very low on the pecking order, are going to be incredibly disadvantaged if it comes to a recapitalization proposal, and are sure to be wiped clean in a CCAA arrangement. Hence, this is why they are trading in the low 30’s.
There is a winning scenario, and that involves a surge (pun intended) in oil prices. Right now the corporation is hoping they get bailed out by the commodity market before the banks close in for the kill.
I took a small loss in September bailing out what was a very small position in the debentures I took post-COVID. Sometimes debt is cheap for a reason! Or another way – just because it’s cheap doesn’t necessarily mean it’s a good value!
The next companies in line in terms of having the lowest trading prices: Supreme Cannabis (FIRE.DB), Invesque (IVQ.DB.U/.V), and Chorus Aviation (CJR.DB.A), all roughly in the upper 40’s or 50’s, and all for fairly obvious reasons when examining the businesses in question.
what do you make of Cardinal Energy CJ.DB trading 85 with just over 2 months to maturity and YTM off the charts 125% even with the replacement CJ.DB.A trading better lower yield?
Ask the lenders of their $205 million revolving facility.
Thanks Sacha. You’re one of the few people actually following and writing about the Cdn debenture market. I can’t even seem to buy them on interactive brokers.
I do think the Invesque debentures look attractive on a risk-adjusted basis. Obviously no one wants to be in a levered senior housing/LTC company right now. That being said, if you actually look at their results to date they seem quite strong. They’ve had some issues with one of their operators (Symphony) but in spite of those issues, they’ve had strong rental collections to date and are at a $0.60-$0.70 of AFFO per year. The other thing to remember with Invesque is that you have 150mn of preferreds sitting below you, and Magentar (the largest holder) has stepped in to provide capital before. I suspect that they’re in too deep at this point.
Also, when considering real estate companies the dynamic is different than your typical Opco, as you can always sell off properties to raise cash if you run into a liquidity crunch. Not that thats an issue, given that they only have ~15% of debt rolling over over the next 3 years.
Let me know if you see something glaring, that I don’t.
One of the few products IB doesn’t offer are TSX debentures. They probably involve some strange electronic process that isn’t worth it for them to code in that the other Canadian brokerage platforms have (which indeed is unusual given IB’s core competency).
I did post-COVID look at IVQ and my big issue with them (other than being in a COVID sensitive sector) is that they don’t appear to make a heck of a lot of money given their leverage amount. I think JE will be a good template for this management to conveniently alleviate convert holders from their capital.
Thanks Sacha. I was very surprised by the JE transaction. I can’t believe convert holders got swindled like that.
Have you seen many other examples like that? In theory, I think the converts should be worth their face value unless management somehow manages to divert capital from convert holders down to the pref/common holders. Will be an interesting one to watch.
Given the time to maturity, there’s a good chance all this COVID related stuff goes away by debt maturity and they are able to roll their debt without issue.
What a great blog. Added it to my weekly reading list. Found it searching for Surge Debentures. Here is some recent news that might help Surge make it though Covid and tread water for a little longer. I bought a very small amount of the Series 2 6.75% debentures and feel the reward is commensurate with the risk.
CALGARY, AB, Nov. 3, 2020 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce that it has received lender approvals for a total of $90 million in new credit commitments to the Company, subject to final documentation. These commitments include:
Subject to the closing of the Term Facility, the Syndicate has agreed to an extension of Surge’s Credit Facility. Maturity on the Credit Facility will be extended from March 31, 2021 to December 31, 2021 and the Company’s next semi-annual borrowing base redetermination will be shifted out from December 15, 2020 to June 30, 2021.
Surge anticipates that these new credit commitments, as well as the extension of the Credit Facility, will close on or about the week of November 16th, 2020. Closing is subject to final documentation.