Category: Debt

Updates on TSX Traded Debentures list

I have been keeping the TSX traded debentures list actively updated for my own investment purposes and hopefully you find it useful as well. A few mistakes here and there slip into the spreadsheet, and when doing a sweep, there were enough changes to note:

1. Premium Brands first two debentures issues were initially listed as non-convertible, but I noticed that PBH.DB.E was trading at a negative yield to maturity and I was wondering what was going on, and indeed their debentures are all convertible. What had happened was when reading the financial statements it is not entirely clear they were convertible, nor their annual information form, but I had to dredge up the press releases in the 2016 offerings to get the proper conversion prices. Fixed!

2. I completely missed Polaris Infrastructure’s debenture offering (TSX: PIF.DB), which was done in April of 2019 and up-sized in May 2019 to its present $25 million size.

Sweeping the list, many marijuana-related entities’ debt are trading at discounts, but I am not finding any compelling value with anything I see. Perhaps any of my readers see things differently?

TSX Exchange-traded debt review

I have made some corrections to my initial TSX Exchange-traded debt spreadsheet. So far, this is turning out to be a great replacement for the old one that used to be at the old Financial Post website before it got taken down.

In terms of valuations, none of them appear to be errantly priced where I am tempted to dive in. The ones trading well under par are either visibly insolvent or marijuana companies. In either instance, purchasers of the debentures are likely to lose capital. The best of the worst of them appear to be DHX Media (TSX: DHX.DB) and Just Energy (TSX: JE.DB.C/D) but both of these businesses have issues which make the double-digit YTM warranted.

If your goal with these instruments is to make a relatively easy 5%, however, there are plenty of quality selections to be made, although I’d make the argument that for a non-tax sheltered account you would be much better off with preferred shares.

Gran Colombia Gold Notes – Part 2

Since gold is going crazy, I’ll just follow up from my previous post on Gran Colombia Gold’s senior secured notes (TSX: GCM.NT.U).

With gold at US$1,475/Oz, and assuming a call date on May 1, 2021, the notes at a purchase price of 104 will have a 13% YTM if gold continues at that price.

Unfortunately since the notes are amortized quarterly, it is very doubtful you can fully realize this, but as a buy-to-maturity investment, it gives you an equity-like return for a first-priority bond that is linked to a hot commodity. Only real risk is that the income you are being paid with is mostly derived from a single mine in Colombia – just hope for no earthquake in the next two years. Fortunately the only earthquakes presently are financial.

My notes were purchased near par and this one is looking like to be around a 15%er on debt. Not bad. Don’t think we will be seeing this again for a long time.

Gran Colombia Gold notes

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.

Why the junk debt market is not dead yet – Alaris Royalty Corp convertible debt offering

Somehow the junk debt market is not dead yet – I see offerings like this (Alaris Royalty Corp. Announces A $100 Million Bought Deal Financing) – unsecured debt, 5-year term, 5.5% coupon, and 30% out-of-the-money conversion rate (noting that the underlying equity is already giving out a dividend at nearly a 9% yield at the closing price of the day the bought deal was announced).

Talk about a low return, high risk deal! That said, Alaris should be giving their underwriters (CIBC Capital Markets, National Bank Financial Inc., RBC Capital Markets and Scotiabank) full price for finding investors to actually buy this offering, let alone $100 million of it.

Just glossing through the preferred share markets, one can speculate on a better risk/return scenario. There are many examples I can give, but I will choose one at random. Believers in Brookfield Asset Management can pick up a preferred share series (e.g. TSX: BAM.PR.Z) and buy an easy 6% tax-preferred yield, with a reasonably decent potential for capital appreciation (it is trading well below par), and BAM’s underlying business provides significantly better inherent diversification, coupled with a much better credit profile.

Is the equity call option of Alaris’ unsecured convertible debenture worth it? Why not just buy the common instead and pick up a 9% dividend? I can’t see any realistic scenario where an investor would choose purchasing the unsecured debt instead of the equity – and if you think the underlying company was questionable, why invest in this at all?

No positions in any names mentioned, and most definitely not going to be in Alaris’ convertible debt at par!