Sunday, May 21, 2017

May 21, 2017, Update: Peanut Convertible Debentures Power Rankings

This is sixth update of the Peanut Convertible Debentures Power Rankings.  This update is current to May 19, 2017.

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

The top-5 picks in the Power Rankings are also described in more detail in the corresponding section 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 (May 19, 2017)

Month-to-date, the major North American equity markets have been decidedly mixed.  The S&P 500 is down 0.1% as it appears that the daily drama in Washington is starting unsettle overall sentiment. The latest? Possibly treason. It's honestly difficult to keep up.  Meanwhile, the tech-laden NASDAQ Composite is up 0.6% but market breadth isn't super - quite frankly, the juggernaut FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks are doing most of the heavy lifting in this late stage of the cycle.  In Canada, the S&P/TSX Composite is down 0.8%, as financials have struggled in light of the bank run at alternative lender, Home Capital Group.  This, coupled with bubble-territory real estate markets in the GTA and the Lower Mainland means short sellers are hot on the warpath.  Caution could be warranted in equity markets with the summer doldrums around the corner.

Canadian bond yields have continued to trend lower since the start of May.  This is likely reflective of a bit of flight-to-safety, coupled with the view that the Bank of Canada is nowhere near in a position to raise rates in 2017.  This has been good for bond prices - and, everything being equal - convertible debenture prices, too.  

Speaking of the Canadian convertible debentures market, there have been several notable developments since our last update on April 29.  

First, as we mentioned above, the funding liquidity troubles of alternative mortgage lender Home Capital Group have caused some degree of contagion in financials big and small in the Canadian market.  We follow the convertible debentures of one alternative lender, Timbercreek Financial, which has made appearances in previous versions of our Peanut Power Rankings Top-5.  Unlike Home Capital and other alternative lenders such as the Equitable Bank, Timbercreek does not rely on deposit funding for its liquidity needs.  That said, a fundamental key strategy of investing in convertible debentures here at the Canadian Convertible Debentures Project is capital preservation and, as such, we took no chances and sold our position in TF.DB.B at a slight capital loss (but positive total return after accrued interest).  We will see how the whole Home Capital situation plays out, but for now anyway, we're sitting out alternative lenders.

Second, on May 2, Chemtrade Logistics closed its public offering of its 4.65% 31-May-2024, Series 'D' Convertible Debentures (ticker: CHE.DB.D).  Total proceeds were $201.25 million (including an over-alottment option of $26.25 million), which indicates considerable interest in this issue.  Here at the Canadian Convertible Debentures Project, we were unable to obtain any debentures in the offering but managed to buy some on the open market after it hit the TSX.  We'll talk some more about CHE.DB.D in the Peanut Power Rankings Top-5 in the section below.

Third, on May 10, DHX Media announced a fascinating US$345 million acquisition deal for the entertainment division of Iconix Brand Group Inc., which effectively includes an 80% controlling interest in Peanuts (Charlie Brown and Snoopy are becoming Canadians!) and 100% of Strawberry Shortcake.  For the Halifax-based producer of children's content and brands whose current portfolio includes such stalwarts as Teletubbies, Caillou, Inspector Gadget, and Degrassi, adding Charlie Brown, Snoopy, and the gang to the mix is a potential game-changer and I'm pretty excited about it.  Yes, leverage goes up, but the deal looks to be highly accretive - see here for some projections from DHX.  But what does this have to do with convertible debentures?  Well, to help finance the cost of the deal, DHX is issuing, via private placement with a syndicate of underwriters, up to $140 million of subscription receipts that will be automatically exercised into a 5.875% convertible debenture that will be convertible into common shares of the company at $8 a share.  Details are still forthcoming and the legalese in the associated press release is difficult to navigate, but based on my reading of it, a potentially very attractive convertible debenture for DHX may be hitting the market in the coming months should a prospectus be filed and the necessary hold periods pass.  We'll keep an eye on this one to see if this is, indeed, the case.    

Fourth, on May 15, Cargojet announced the early redemption of its 5.50% 30-June-2019, Series 'B' Convertible Debentures (ticker: CJT.DB.B), effective July 4.  In other words, thanks to the lofty share performance of Cargojet in the last year-and-a-half or so, the debentures have been "soft called" by the company. Thus, if you're a lucky debenture-holder, it's time to act now and either sell the debentures on the open market or convert them into common shares to crystallize your gains.  For those who have been holding CJT.DB.B since the beginning, the gains will be sweet with the debenture closing on Friday at $154.00. (Congratulations).

Ok, let's take a look at the Peanut Power Rankings Top-5.

Peanut Power Rankings Top-5 Convertible Debentures (May 19, 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 still has a strong grip on #1 in our rankings.  The transformative Silver Bay Realty Trust deal closed on May 9, and Tricon Capital is now effectively the fourth-largest single-family rental landlord in the United States, with most of its SFR assets in the attractive, high-growth Sun Belt markets.  Added bonus: the USD-denominated TCN.DB.U is an attractive security to own in a declining Canadian dollar environment.  As at May 19, our quantitative model is pricing the fair value of the debentures at $115.53 vs. the market close price of $106.00.  Bottom line: good potential for the equity + generous US-dollar denominated coupon = room for upside.  We're long TCN.DB.U at $100.00.  

  2. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Last week's ranking: #6). The Edmonton Oilers' exciting playoff run inspired more than just the Cup dreams of long-suffering fans ... it also encouraged considerable booze consumption and, Liquor Stores, as an Alberta-based purveyor of the squiffy stuff, presumably made fistfuls of cash in the process.  Furthermore, after the Oil bowed out to the Ducks, things for Liquor Stores got even more interesting as PointNorth Capital, an activist investor, decided to start a good, old-fashioned proxy fight on May 15.  Seems as if PointNorth, a 10% investor in LIQ, is getting impatient and wants to shake up the Board a little.  Liquor Stores responded with guns blazing in a press release full of mudslinging fun.  Bottom line: I don't know what will end up happening, but the recent end-to-end action is breathing life back into LIQ shares and, by extension, LIQ.DB.B.   We're long this issue at $99.96.

  3.  Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #2). 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.  Cargojet's first quarter looked pretty good to me and the outlook for free cash flow generation is promising. Bottom line: Cargojet has a super market position in an area of long-term, secular growth.  I'd say it's cleared for take-off.  We've been long CJT.DB.C since it debuted at $100.00.

  4. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #4). This renewable energy producer's first quarter wasn't especially outstanding (thanks to mediocre electricity generation), but it did lay some important groundwork for the future by commissioning an 81.4 MW hydro facility on the Upper Lilooet River in British Columbia and acquiring a 44.0 MW wind farm in France.    INE.DB.A's conversion price is only about 5.3% above where the common shares closed on Friday - so in-the-money trading of the issue is well within sights.  Bottom line: gonna remain patient on this one as slow and steady wins the race in convertible debentures investing.  We're long INE.DB.A at $102.75.  

  5. Chemtrade Logistics, 4.75% 31-May-2024, Series 'D' Convertible Debentures. (Ticker: CHE.DB.D), (Last week's ranking: #3). The benefits of the Canexus acquisition are already starting to show for Chemtrade Logistics.  Chemtrade's legacy sulphuric acid business struggled in the first quarter, but this was largely offset by the sodium cholrate business that came over from Canexus.  Bottom line: with an investment in CHE.DB.D, you essentially get a long call option (the hard call date is five years away and the issue doesn't mature until 2024) on the Canexus deal adding value to Chemtrade's equity, while enjoying a 4.75% yield-to-maturity if based on Friday's $100.00 close.  CHE.DB.C (ranked #7), which matures in 2023, is also a viable option - you give up about 50 basis points in per annum yield to the hard call date but benefit from a premium to conversion price that's about 9% less.  We currently have no long position in CHE.DB.C, but we've initiated a position in CHE.DB.D at $99.96. 
Picture of the Day
Canadians in Northern California. Aquatic Park Pier, San Francisco, California. 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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