March 26, 2017, Update: Peanut Convertible Debentures Power Rankings

This is fourth update of the Peanut Convertible Debentures Power Rankings, which are current to March 24, 2017.

For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger. 

 

The top-5 picks in the Power Rankings are described in more detail below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here. 

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.


General Commentary (March 24, 2017)

Eventful week.  The S&P 500 Index ended down 1.4% and the tech-laden NASDAQ fell 1.2%, leaving some market commentators to wonder if the (feckless?) rally in US equity prices since the November elections is starting to run out of steam.  It's possible.  By my count, the S&P has run up almost 13% since November 8 largely on hopes that the surprise new administration in Washington will cut taxes, slash regulations, and embark on large fiscal stimulus.  Well ok, but from an investment standpoint, on what basis can the new administration be reliably depended on to deliver such promises given the preponderance of lies, mistruths, fake news, ineptitude, racism, misogyny, homophobia, degradation of environmental protections, deference to deep-pocketed special interests, and possible treason(?!) that have pervaded thus far? Color me a cynic, but I'm not that confident.

On Friday, the divisions among Republicans were on full display as the GOP, even with full control of the White House, Senate, and House of Representatives, failed in their widely publicized effort to repeal the Affordable Care Act (a.k.a. Obamacare).  The effort failed because of, interestingly, the divergent positions of both moderate and conservative factions of the GOP ...  moderates balked at the prospect of 24 million Americans (according to the non-partisan Congressional Budget Office) losing their health care coverage under Trumpcare (i.e., it was too cruel), while conservatives didn't like Trumpcare because it still required insurance companies to provide coverage for such basic services as hospital stays, maternity care, and mental health and addiction treatment (i.e., Trumpcare wasn't cruel enough).   Yes, this one-line synopsis of the events is a gross oversimplification of course, but who knew health care could be so complicated, right?

Well, the tax code, fiscal stimulus, and deregulation are complicated topics too, and it's possible that the same divisions within the Republican Party which sunk one of President Trump's main campaign promises on Friday could resurface as the administration pivots its focus to these other priorities.  And if one puts two-and-two together, and one assumes that US markets have rallied since the election on the basis of Trump's promises ... well, let's just say, protect your capital, folks.

In Canada, the federal budget announced Wednesday was mostly notable in its projections of deficits for the foreseeable future.  For investors, the rumor of a hike in the capital gains tax never materialized, and the equity markets breathed a sigh of relief and the S&P / TSX Composite recovered to end the week down only about 0.3%.   Gold is up above US$1250 as at the time of writing; WTI Oil is still well below US$50.

Given the surfacing of worries in the equity markets, the Canadian bond market had a good week.  Yields fell in the neighbourhood of 5 basis points across the entire interest rate yield curve for Canadas.  This is good for bond prices; we will see if this is the start of a near- to medium-term trend.

We had one change in the Peanut Power Rankings Top-5 this week.  More details below. 

Peanut Power Rankings Top-5 Convertible Debentures (March 24, 2017)

1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).   TCN.DB.U has been the #1 since we started these rankings.  As we've indicated previously indicated, TCN.DB.U is part of an offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust.  The Silver Bay deal is transformative and should be accretive to the common shares, which would in turn drive the price of debentures.  In a declining Canadian dollar environment, the US-denominated issue and coupon is nice, too.  As at March 24, my quantitative model is pricing the fair value of the debentures at $114.55 vs. the market close price of $102.60.  Bottom line: good potential for the equity + generous US-dollar denominated coupon = lots of room for upside here.  I'm long TCN.DB.U at $100.00.


2. Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB), (Last week's ranking: #2). Both Gibson's common shares and its convertible debentures were down for a second consecutive week, as WTI oil prices continued to plumb below US$50 levels.  Quite frankly, US shale production remains high, and there's a glut of oil out there.  President Trump's approval of Keystone XL on Friday didn't give Gibson much of a bump, even though the company is involved in energy services.  Our quantitative model indicates GEI.DB is 8.27% undervalued.  Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as the current yield-to-hard-call-date is only 2.75% at it's Friday closing price.  Bottom line: you're here for the capital gains potential and because you like oil going forward.  I have no long position in GEI.DB.


3. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #3). This renewable energy producer is mostly focused on hydro and is known to have somewhat boring price action on its underlying shares.  I don't find this as a problem as I think renewable energy is an important secular theme for the future. Also, INE.DB.A's conversion price is now only 5.0% above where the common shares closed on Friday.  My quantitative model indicates the debentures, based on their closing price of $107.80, are 4.18% undervalued.   Bottom line: slow and steady wins the race. With about 2.5 years until the earliest possible date of the issue being hard called, the probability of the convertible debentures trading in-the-money is very good.   The yield-to-hard-call-date is still positive at 1.00%.  I like this issue; you'll participate in the upside of the shares and you still have a floor on your principal if it doesn't work out.  I'm long INE.DB.A at $102.75. 


4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #4). The dominant air cargo carrier in Canada, an investment in CJT.DB.C is effectively a play on the continued growth of online retail and shopping. Free cash flow generation remains strong and the outlook looks bright.  The conversion price of the underlying debentures is 27.2% above the closing price of the shares; yield-to-hard-call-date is 2.55% based on a debenture price of $107.50.  Bottom line: Cargojet operates in a sector which has good secular tailwinds, the company is well-operated, and at these prices, CJT.DB.C looks like a decent opportunity.  I've been long CJT.DB.C since it debuted at $100.00.


5. Chemtrade Logistics, 5.00% 31-August-2023, Series 'C' Convertible Debentures. (Ticker: CHE.DB.C), (Last week's ranking: #9). Chemtrade Logistics, which trades as an income trust on the TSX under the ticker CHE.UN, is one of North America's larger producers of industrial chemicals such as sulfuric acid, sodium chlorate, sodium nitrite, sodium hydrosulfite, phosphorus pentasulfide, and inorganic coagulants water treatment.  This is a somewhat economically sensitive cash flow business, but it isn't a huge grower.  Earlier in March, Chemtrade closed a takeover transaction for its former competitor Canexus, which is a potential positive for its growth rate.  Bottom line: with an investment in CHE.DB.C, you essentially get a long call option (the hard call date is more than four years away and the issue doesn't mature until 2023) on the Canexus deal adding value to Chemtrade's equity, while enjoying a 4.50% yield-to-maturity based on Friday's closing prices.  Worth a shot within a diversified convertible debentures portfolio.  I currently have no long position in CHE.DB.C.

Picture of the Day


The beautiful Vancouver skyline as seen from Stanley Park.  Vancouver, British Columbia, Canada. Copyright © 2016 Felix Choo / dingobear photography.  Photo is available for licensing from Alamy Images. All rights reserved. Photo may not be reproduced without permission. 

***
 

March 18, 2017, Update: Peanut Convertible Debentures Power Rankings

This is third update of the Peanut Convertible Debentures Power Rankings, which are current to March 17, 2017.

For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger. 

The top-5 picks in the Power Rankings are described in more detail below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here. 

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.


General Commentary (March 17, 2017)

On Wednesday, the US Federal Reserve went ahead and raised its benchmark rate another 25 basis points to 1.0%, its second increase in three months and the third since the depths of the financial crisis. The Fed noted that the US economy was expanding at a "moderate pace", and the Fed left the door open on future moves in 2017. As of now, the market seems to be expecting at least two more rate hikes before the end of the year, and the fact that Janet Yellen's comments seemed to not make it a foregone conclusion that it would be three (or more) increases seemed to put the richly valued equity markets at ease.  So while the music is still playing for now, but we remain vigilant - fortunes could change on a dime, especially with the bread-and-circuses spectacle (abomination?) that resides in Washington.

The Canadian bond market met the Fed interest rate hike with a relative shrug.  Although rates remain elevated relative to the last 12 months, yields across the entire curve moved very little in response to the Fed move.  Canadian equity markets, as measured by the S&P/TSX Composite Index, ended almost virtually flat at 15,490.49.

Here at the Canadian Convertible Debentures Project, we're keeping an eye on the Canadian yield curve and where the TSX goes from here.  We didn't have any changes in the Peanut Power Rankings Top-5 this week.  However, our #1 pick the last two weeks, the Tricon Capital, 5.75% coupon 31-March-2022, Series 'U' Extendible Convertible Debentures, finally hit the market on Friday, and the reception (as we suspected) was positive.  More details below. 

Peanut Power Rankings Top-5 Convertible Debentures (March 17, 2017)

1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).  This highly anticipated US dollar-denominated convertible debenture hit the market for its first day of trading on Friday, and it didn't disappoint.  Almost $23.4 million in par value of the bonds traded, and the bonds closed at an above par price of $102.40 after trading as high as $103.40 and never trading below $102.00.  As far as convertible debentures go, this is about as successful of a debut as one can expect.  Based on our quantitative analysis and the qualitative factors associated with this particular issue, we still really like this issue even at these prices.  As previously indicated, TCN.DB.U is part of an offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust.  The Silver Bay deal is transformative and should be accretive to the common shares, which would in turn drive the price of debentures.  In a declining Canadian dollar environment, the US-denominated issue (and coupon) is nice, too.  As at March 17, my quantitative model is pricing the fair value of the debentures at $113.78.  Bottom line: there's still lots of room for upside here.  I'm long TCN.DB.U at $100.00.


2. Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB), (Last week's ranking: #2). Both Gibson's common shares and its convertible debentures were down during the week, as WTI oil prices languished under US$50.  Quite frankly, US shale production remains high, and there's a glut of the gooey stuff out there.  Gibson is energy services, so of course its prospects will rise and fall with the oil industry.  Our quantitative model indicates GEI.DB is 8.73% undervalued.  The underlying shares have some volatility associated with them, which increases the value of the conversion option.  Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as the current yield-to-hard-call-date is 2.69% at it's Friday closing price.  Bottom line: you're here for the capital gains potential and because you like oil going forward.  I have no long position in GEI.DB.


3. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #3). This renewable energy producer is mostly focused on hydro and is known to have somewhat boring price action on its underlying shares.  I don't find this as a problem as I think renewable energy is an important secular theme for the future. Also, INE.DB.A's conversion price is now only 4.0% above where the common shares closed on Friday.  My quantitative model indicates the debentures, based on their closing price of $107.00, are 5.06% undervalued.   Bottom line: slow and steady wins the race. With about 2.5 years until the earliest possible date of the issue being hard called, the probability of the convertible debentures trading in-the-money is very good.   The yield-to-hard-call-date is still positive at 1.34%.  I like this issue; you'll participate in the upside of the shares and you would still have a floor on your principal if it doesn't work out.  I'm long INE.DB.A at $102.75. 


4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #4). Cargojet stock had a little bit of a volatile week, but ultimately ended the week about 1% higher.  The Cargojet convertible bonds ended the week about 50 cents lower.  The dominant air cargo carrier in Canada, an investment in CJT.DB.C is effectively a play on the continued growth of online retail and shopping. Free cash flow generation remains strong and the outlook looks bright.  The conversion price of the underlying debentures is 26.1% above the closing price of the shares; yield-to-hard-call-date is 2.96% based on a debenture price of $106.00.  Bottom line: Cargojet operates in a sector which has good secular tailwinds, the company is well-operated, and at these prices, CJT.DB.C looks like a terrific opportunity.  I've been long CJT.DB.C since it debuted at $100.00.


5. Timbercreek Financial, 5.45% 31-March-2022, Series 'B' Convertible Debentures. (Ticker: TF.DB.B), (Last week's ranking: #5). When this series first hit the market early last month, its main attraction was the relatively low conversion price relative to where the underlying stock had been trading as it was issued with a premium of less than 20%.  The shares have quietly moved higher due to good operating results, and the premium is now only 6.2%.  Of course, as an alternative real estate lender that's a mortgage investment corporation (MIC), the company pays out substantially all of its cash flow, so volatility of the share price is generally low, which puts a damper on the value of the conversion option.  Still, with a 5.45% coupon (and a 5.17% yield-to-hard-call-date), I think one can sit and wait in the meantime.  This name isn't without risk as you have to be comfortable with the state of Canadian real estate at this point in the cycle.  Bottom line: nice coupon, with moderate optionality on getting into the money over the next four years.  I'm long this issue at $100.95.

Picture of the Day


The heart of Basque Country. Bilbao, Spain.  Copyright © 2009 Felix Choo / dingobear photography.  Photo is available for licensing at Alamy Images.  All rights reserved. Photo may not be reproduced without permission. 

***
 

March 12, 2017, Update: Peanut Convertible Debentures Power Rankings

This is second update of the Peanut Convertible Debentures Power Rankings, which are current to March 10, 2017.

For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger. 

The top-5 picks in our power rankings are described in more detail below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here. 

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.


General Commentary (March 10, 2017)

It was a somewhat dour week for the Canadian investor.  The S&P/TSX Composite Index ended the week down roughly 100 points to 15,506.68, bond yields rose (5-year Canadas are now yielding 1.25%, the highest in a year), the Canadian dollar headed lower to 0.7424 cents US, WTI oil tumbled below US$49 a barrel, and gold is barely clinging to US$1,200.

The still-exhausting new administration in Washington continues to make headlines daily (this week only: Trumpcare, Russia's role in the fall election, new EPA head denying climate change, Trump dismissing 46 US attorneys, more attacks on the free press, etc.), which is troubling because it's normalizing chaos and polarization, among other things.  From purely a financial markets perspective, this kind of environment is unsettling and I'm of the belief that volatility lies ahead. Be forewarned.

It was a quiet week in the Canadian convertible debentures market, which highlights the diversification and capital preservation benefits of the asset class in these "interesting" times.  We have one new name in the Peanut Power Rankings Top-5 this week, which means one name fell out.  Specifically, that name was the Liquor Stores, 4.70% coupon 31-January-2022 Series B's.  While the price of the debentures did not markedly change (a win for capital preservation!), the common shares declined almost 11% on the back of some pretty weak Q4 earnings and, in particular, negative same store sales growth in its Albertan and Alaskan markets.  Note these markets are oil-dependent.  Always remember to diversify, folks!

Peanut Power Rankings Top-5 Convertible Debentures (March 10, 2017)

1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).  This US dollar-denominated convertible debenture is part of a brand new offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust.  The issue is expected to close this coming Friday (March 17) and start trading on the same day.   As we previously mentioned, the Silver Bay deal should be accretive to the common shares and help drive the price of debentures.  In a declining Canadian dollar environment, the US-denominated issue (and coupon) will be nice, too.  If you didn't successfully subscribe to the offering, don't fret: often, for new issues, the underwriters are quite willing to part with their inventory of new debentures at, or even lower than, par value to provide liquidity for the issue when it hits the market.  (Underwriters still make money because the fees they charge the issuer for the convertible bond issue more than cover whatever hit they take from selling at par or slightly below par).  As at March 10, my quantitative model is still pricing the fair value of the debentures at $113.69.  Bottom line: it's still the clear #1 in the rankings for our purposes.  I've subscribed to the issue and will be long the debentures at $100.00 on March 17.


2. Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB), (Last week's ranking: #2). Gibson had a good week.  Its common shares were up more than 8% on a week where it announced better-than-expected Q4 earnings and refinanced some senior notes at a lower interest rate going forward.  This is energy services, so of course its prospects will rise and fall with the oil industry.  The debentures moved up in price in sympathy the underlying share price during the week, but the quantitative model still indicates the issue is 7.48% undervalued.  The underlying shares have some volatility associated with them, which increases the value of the conversion option.  Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as the current yield-to-hard-call-date is down to 1.99%.  Bottom line: you're here for the capital gains potential and because you like oil going forward.  I have no long position in GEI.DB.


3. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #3). This renewable energy producer is mostly focused on hydro and is known to have somewhat boring price action on its underlying shares.  That's fine by me, as I think renewable energy is a big secular theme for the future and the fact that INE.DB.A's conversion price is only 5.0% above where the common shares closed on Friday.  My quantitative model indicates the debentures, based on their closing price of $108.00, are 3.92% undervalued.   Bottom line: slow and steady wins the race. With about 2.5 years until the earliest possible date of the issue being hard called, I like the chances of the underlying shares to trade above the conversion price and thereby taking along the debentures for a ride.  I continue to like this issue.  I'm long INE.DB.A at $102.75. 


4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #5). This moved up one slot from last week more because of Liquor Stores' stumbles than anything Cargojet did.  The story here is mostly still the same: the air cargo carrier has strong market share in the Canadian market (including a $1 billion-plus Purolator contract) and is effectively a play on the growth of online retail and shopping.  Online retail is only going to increase going forward and Cargojet is a great play on this.  The underlying shares have done exceedingly well since the depths of the financial crisis.  Cargojet recently increased the dividend on its shares and has good free cash flow generation.  The conversion price of the underlying debentures is 27.5% above the closing price of the shares; yield-to-hard-call-date is 2.84% based on a debenture price of $106.50.  Bottom line: secular tailwinds, good company, lots to like about this issue. I've been long CJT.DB.C since it debuted at $100.00.


5. Timbercreek Financial, 5.45% 31-March-2022, Series 'B' Convertible Debentures. (Ticker: TF.DB.B), (Last week's ranking: #7). The Timbercreek Financial Series B's debuts in the top-5.  When this series first hit the market early last month, its main attraction was the relatively low conversion price relative to where the underlying stock had been trading as it was issued with a premium of less than 20%.  This was a relatively Oxfam-level of generosity as far as new issues have gone as of late, as I've observed underwriters pushing 40% premiums as the general standard.   Of course, as an alternative real estate lender that's a mortgage investment corporation (MIC), the company pays out substantially all of its cash flow, so capital gains in the underlying stock are generally modest.  With a 5.45% coupon and still more than four years away from the earliest date of hard call, I think one can sit and wait in the meantime.  This name isn't without risk as you have to be comfortable with the state of Canadian real estate at this point in the cycle. Bottom line: nice coupon, with moderate optionality on getting into the money over the next four years.  I'm long this issue at $100.95.

Picture of the Day


High five under the ice dome. Edmonton, Alberta, Canada.  Copyright © 2016 Felix Choo / dingobear photography.  Photo is available for licensing at Alamy Images. All rights reserved. Photo may not be reproduced without permission. 

***
 

General Strategies for Investing in Convertible Debentures

As they say, investing is as much art as it is science, and convertible debentures (convertible bonds) aren't any different. Both quantitative and qualitative factors influence pricing of the market, and ultimately risk and return.

Investing your hard-earned money isn't easy.  To better the odds of success, I'm of the opinion that one's investment approach should be grounded in clear objectives. The next step is formulating sound strategies to achieve those achieve those objectives.  Finally, implementing on the strategies in a cost-effective manner and instilling the discipline to stick with the overall approach over the long-term are essential.  Successful long-term investing is like shampoo: lather, rinse, and repeat.

In this post, I discuss a few of the high-level strategies I follow to invest in the Canadian convertible debentures market.  As usual, my disclaimer is that these opinions are my own - your mileage may vary, and it's always a good idea to speak to a qualified investment professional before undertaking any investment actions.  

Diversification

Diversification is really the only "free lunch" in investing.  This is, of course, the don't-put-all-of-your-eggs-in-one-basket principle. Generally, one's wealth should be well-diversified among the major asset classes - bonds, equities (stocks), real estate, and the like.  Although portfolio-wide asset allocation isn't the focus of the Canadian Convertible Debentures Project, diversification, as a key principle is undeniable if one wants to achieve superior risk-return outcomes.

As a hybrid security, I'm of the belief that convertible debentures are a good fit for a portion (only a portion!) of the fixed income allocation of a portfolio.  And within the portion of one's portfolio that's earmarked for convertible debentures, I'm also strongly of the belief that any convertible debentures that form a part of the allocation should be diversified by issuer, industry sector, currency denomination, and maturity.  Diversification! And just so you know I'm being serious - diversification.

Capital Preservation

At the end of the day, a convertible debenture is a bond, and when in investing in a bond, your #1 priority is getting your money back. In other words, capital preservation is a key consideration, and key to capital preservation is knowing what credit risk you're taking.

Although there are currently some 130 different convertible issues, not all are good credit risks. Thus, it pays (or, saves) to have knowledge of the balance sheets and business prospects of the issuers of debentures that you are interested in.  To get your money paid back, the company has to at the very least stay solvent until your convertible debenture matures. Know the potential risks.  Investing in convertible debentures is not the same as investing in a GIC or term deposit whose principal is guaranteed by deposit insurance.  

Like the Equity

My general rule is this: if you don't like the prospects of the underlying shares of the issuing company, then don't buy the convertible debenture either.  Out-sized gains in convertible debentures are primarily driven by increases in the underlying common shares and, specifically, beyond the conversion price. In other words, if the common shares have potential, then the convertible debentures will have potential as well.

Look for Value

The Canadian convertible debentures market is relatively small and illiquid, and doesn't garner a whole lot of attention.  This means this isn't the most efficient market and, as such, offers potential for returns above market returns.

What you pay for a particular convertible bond issue matters.  I use the Peanut Power Rankings and the quantitative model which supports it as an indicator for absolute and relative value.

Important: cheap does not necessarily mean good value.  We'll cover the concept of "busted convertibles" in a future post, but for now, know that if the debenture price is well below par value and yields are abnormally sky-high, there are special risks to consider. 

Read and Research

When investing in inefficient markets, information is valuable.  Read company annual reports, financial statements, and investor presentations on investor relations websites.  Know the business before investing in the business - looking before you leap is just common sense. 

Also, read prospectuses for convertible bond issues.  To find a given prospectus, get familiar with the Canadian Securities Administrators' SEDAR website, which has an accessible database of all regulatory filings (in PDF format) of all Canadian public issuers.  Although prospectuses are filled with legal jargon, they are an invaluable of source of information that describes the exact terms of the issue, risk considerations, and company considerations.  

Tax Efficiency

Coupon payments from convertible debentures are fully taxable as income and, currently, 50% of any capital gains earned on sales of a debenture are also taxable.  As such, an ideal place to hold convertible debentures for investment is in registered plans such as a TFSA or RRSP, where interest and capital gains are sheltered (in the case of TFSA) or effectively deferred (in an RRSP) for the purposes of income tax.  

Limit Orders

When placing an order to buy or sell a convertible debenture, never use a market order.  Bid-ask spreads can be wide given the illiquidity of the market and placing a market order can commit you to paying (or selling at) a price that could drastically affect your ultimate rate of return.  Instead, know your price and set a limit order instead.

Take Profits

One of the main potential benefits of convertible debentures is equity-like returns.  When I'm fortunate enough to have equity-like returns in what is effectively a type of bond, I don't hesitate to sell the debentures and take the profits.  As the old adage states, no one ever went broke taking profits.

Picture of the Day

 
Avoid frustration by having a strategy for investing in Canadian convertible debentures.  A female sea otter (Enhydra lutris) at the Vancouver Aquarium in Vancouver, British Columbia, Canada.  Copyright © 2016 Felix Choo / dingobear photography.  Photo is available for licensing at Alamy Images. All rights reserved. Photo may not be reproduced without permission.

*** 

Inaugural Peanut Convertible Debentures Power Rankings

This is the inaugural installment of the Peanut Convertible Debentures Power Rankings, which are current to March 3, 2017.

For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger. 

The top-5 picks in our power rankings are described in more detail below.

For background information on the Peanut Power Rankings, please see our FAQs by clicking here. 

Important: the Peanut Power Rankings are provided as information and opinions only and are not intended to be a provision of investment advice or a recommendation of any investment action in any form.  As with all information concerning investments, it is highly recommended that an individual consult with a qualified investment professional before making any investment decisions.


General Commentary (March 3, 2017)

Here in early March 2017, the Western world is in a strange, anxious place.  The Chicago Cubs have started spring training as World Series champions(!), scientific data states that 2016 was the warmest year on record (surpassing previous records in 2015 and 2014), and the daily Orwellian drama out of Washington, DC, is exhausting and disturbing.  Yet, with all of this, North American equity markets have rocketed to record levels on a post-election sugar high, fueled by the three-pronged hopes of fiscal stimulus, tax cuts, and loosened financial (and other) regulation.  

The actors might be slightly different but we've seen this movie before in various forms - and arguably, they all ended badly when the music stopped, most recently with the 2007-08 financial crisis.  With equity valuations now looking stretched, a dose of caution seems warranted.  And, as always, diversification is very, very important.

Regarding the Canadian convertible debentures market, this might not be a bad place to park as world events swirl this way and that.  The downside protection may come in handy if equity markets become unhinged in the next year or so, but if you choose the right issues, you may still get to participate in the equity upside if markets continue to surge ahead, seemingly unabated by reality.  Several interesting issues have come to market in the last six months or so, many of which have made the Peanut Power Rankings.

Peanut Power Rankings Top-5 Convertible Debentures (March 3, 2017)

1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U).  This US dollar-denominated convertible debenture is part of a brand new offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust.  In fact, this offering is so new, it's not even trading on the TSX yet - the offering is expected to close on March 17.  There are a number of things to like here.  Tricon, an established real estate asset management firm, is purchasing Silver Bay in an earnings-accretive deal which will establish Tricon as a top-5 owner of mid-market single family rental homes in the United States.  In other words, the underlying equity is quite attractive on its own.  In this interest rate environment, the 5.75% US dollar denominated coupon is also attractive for the perceived credit risk, as Tricon is not especially leveraged, even with this issue.  Further, the conversion price associated with the debentures is a reasonable 29.1% above today's closing price of the underlying shares.  Based on the issue's characteristics, my quantitative model is valuing the debentures at $114.73, which makes the offering price of $100.00 attractive.  One caveat: if the deal for Silver Bay falls through, the debentures immediately mature, but even if this happens, I don't believe there is any downside associated with this event.  Bottom line: this is a clear #1 in the rankings for our purposes.  I've subscribed to the issue and will be long the debentures at $100.00 on the expected closing date of March 17.


2. Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB). This Alberta-based energy services firm currently holds some appeal as the conversion price associated with the debentures is only 15.8% above the closing price of the underlying shares.  The underlying shares have some volatility associated with them, which increases the value of the conversion option.  Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as at its closing price of $108.56, the yield-to-hard-call-date is only 2.58%.  My quantitative model indicates that it is 6.28% undervalued.  I have no long position in GEI.DB.


3. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A). This renewable energy producer is mostly focused on hydro.  I tend to think that renewable energy is a big secular theme, and an attractive place to invest despite of the obvious interest rate sensitivity of utilities.  The conversion price associated with the debentures is only 4.0% above the closing price of the underlying shares today.  My quantitative model indicates the debentures, based on their closing price, are 5.49% undervalued.  I like this issue.  I'm long INE.DB.A at $102.75. 


4. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B). This consolidator of private liquor stores and outlets is mostly exposed to western Canadian markets (especially Alberta).  The company has struggled with poor economic conditions in Alberta.  However, cash flow generation is decent and I think it's a reasonable credit risk with some rather deep out-of-the-money optionality on growth based on any recovery in the oil (and Alberta) economy.  At a debenture price of $102.00, it has a yield-to-hard-call-date of 4.14%, which is ok.  All-in-all, not bad.  My quantitative model indicates the debentures, based on its current close price, is 9.26% undervalued.  I'm long this issue at $99.96.


5. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C). The air cargo carrier has strong market share in the Canadian market (including a $1 billion-plus Purolator contract) and is effectively a play on the growth of online retail and shopping.  This is certainly a growth industry and a great secular trend to play.  The underlying shares have done exceedingly well since the depths of the financial crisis.  Cargojet recently increased the dividend on its shares and has good free cash flow generation.  The conversion price of the underlying debentures is 22.7% above the closing price of the shares; yield-to-hard-call-date is 2.45% based on a debenture price of $108.00.  Lots to like about this issue.  I've been long this issue since the offering, at $100.00.

Picture of the Day


Jaume Plensa's spectacular 'Wonderland' sculpture in downtown Calgary, Alberta, Canada. Copyright © 2016 Felix Choo / dingobear photography.  Photo is available for licensing at Alamy Images. All rights reserved. Photo may not be reproduced without permission. 

***