A short squeeze on Bombardier
Back on July 29th, I posted I had purchased preferred shares in Bombardier. I wish I had started my averaging a couple weeks later (did pick up a few on the dip), but nonetheless what I expected to happen has happened over the past week, especially over the past couple days.
The catalyst (or rather the assumed story to cause all the excitement) was that a “crown corporation” in China was interested in purchasing lump-sum the rail division for a huge amount of money (enough to pay off nearly all the debt the company had).
While this may be the cited story, the reality is that sentiment was horribly depressed in the marketplace for a company, while clearly having operational issues, that was punched well below what should be a fair valuation range. It took a catalyst event for the mindsets of the traders, investors and institutions to re-value the company in-line to something that was more reasonable.
There will likely be a few slip-ups in the preferred share pricing between now and over the next year, but anybody picking up preferred equity is likely to receive their stated cash flows for quite some time to come.
While in general I think the market is still not showing many investment opportunities (at least from my eye), this was a rare opportunity in a very well-known Canadian TSX 60 issuer in the large-cap space (or at least they were large cap before this all began!). I very rarely dip my toes into the large cap sector.
The bond yield curve has also taken a similar descent.
If my nominal scenario comes through you’ll see the preferred shares at around a 7.5-8.0% yield range in a year. This will be about $20 for the BBD.PR.C and $9 for the BBD.PR.B series (interest rates are still projected to be very low going forward), which represents another 50% capital appreciation or so for much less risk (albeit slightly less reward) than the common shares.
I remain long Bombardier preferred shares.
A nice time to be holding cash
This is a rambling post.
Downward volatility is the best friend of an investor that has plenty of cash.
You will also see these punctuated by magnificent rallies upwards which will get everybody that wanted to get in thinking they should have gotten in, until the floor drops from them again which explains today.
By virtue of having well over half cash and watching the carnage, I’m still not finding anything in fire-sale range except for items in the oil and gas industry which are having their own issues for rather obvious reasons. Examples: Penn West (TSX: PWT) and Pengrowth (TSX: PGF) simultaneously made announcements scrapping and cutting the dividends, respectively, and announcing capital expenditure reductions and their equity both tanked over 10% today. Crescent Point (TSX: CPG) had a fairly good “V” bounce on their chart, but until oil companies as an aggregate start going into bankruptcy and disappearing, it is still going to be a brutal sector to extract investor value from.
I just imagine if I was one of the big 5 banks in Canada and having a half billion line of credit that is fully drawn out in one of these companies. Although you’re secured, you don’t envy the train wreck you have to inherit if your creditors pull the plug.
The REIT sector appears to be relatively stable. Looking at charts of the top 10 majors by market capitalization, you don’t see a recession in those charts. If there was a true downturn you’d expect to see depreciation in the major income trusts. I don’t see it, at least not yet.
Even when I exhaustively explore all the Canadian debentures that are publicly traded, I do not see anything that is compelling. The last debt investment which was glaringly undervalued was Pinetree Capital (TSX: PNP.DB) – but this was in February. They recently executed on another debt redemption which puts them on course to (barely) fulfilling their debt covenants provided they can squeeze more blood from their rock of a portfolio. I wouldn’t invest any further in them since most of what they have left is junk assets (Level 3 assets which will be very difficult to liquidate). One of those investments is a senior secured $3 million investment (12% coupon!) in notes of Keek (TSXV: KEK) which somehow managed to raise equity financing very recently.
The preferred share market has interesting elements to them as well. Although I’m looking for capital appreciation and not yield, it is odd how there are some issuers that are trading at compellingly low valuations – even when factoring in significant dividend cuts due to rate resets (linked to 5-year Government of Canada treasury bonds yielding 0.77%!). I wonder if Canada’s bond market will go negative yield like some countries in Europe have – if so, it means those rate reset preferred shares will have even further to decline!
Inattention to the site caused errors
A very rare administrative post.
For some reason, the links on the specific articles were breaking. I’ve now fixed them. I have no idea why this happened and do not care to investigate further in case if something else breaks. It had to do something with the permalink structure of the site.
This affected commenting and thank you to Safety once again for sending me an email informing me of the problem on this site.
Plunge in the markets
It is very obvious that there was a forced liquidation at the beginning of today’s market session and also parts of the morning. There are some securities out there that were clearly force-sold at the bid. Unfortunately when I am scouring the entrails of this market vomiting, I still don’t see anything terribly compelling that is at insanely clearance prices. There are discounts, but nothing on wholesale liquidation at present. While my expectations might be too high, I remember when Sprint corporate debt was trading at 30 cents on the dollar during the 2008-2009 economic crisis. I don’t expect these types of discounts on large cap corporations, but something close would be nice.
That said, I believe this episode of market panic will end shortly and we’ll probably get some form of a “dead cat bounce”. I find it interesting that despite the fact that Japan went through exactly the same thing that China is going through presently that North American equity markets continued to rocket upwards.
China’s Shanghai index also, despite everything happening recently, is still up year-to-date.
Days like today are a good reminder why one holds cash – even if you were invested in “safe” securities, liquidating safe securities in market panic situations is not easy – you will still receive adverse pricing due to the bid-ask spread.