Sunday, March 12, 2017

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. 


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