Saturday, June 17, 2017

June 17, 2017, Update: Peanut Convertible Debentures Power Rankings

This is the eighth update of the Peanut Convertible Debentures Power Rankings.  This update is current to June 16, 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, click on the table below to view it larger.  Note that relative to the last update, the quantitative model prices of each issue have changed slightly, as we continue to make mathematical tweaks to the underlying model. 

The top-5 picks in the Power Rankings are also described with 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 Market Commentary (June 16, 2017)

Well, I guess I jinxed it.

Two weeks ago, I wrote: "it's still difficult to see a scenario where the Bank of Canada would be in a hurry to raise rates in any meaningful way in 2017."

So naturally, on June 12, Carolyn Wilkins, the Bank of Canada's Senior Deputy Governor, would follow that statement up with this in a speech in Winnipeg: "If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly. You don’t want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead.”

Oops.  I guess there's a good chance that rates are going up in 2017 after all, and the bond market agreed.  Yields shot up across the curve; a 5-year Canada closed the week up 20 basis points at 1.14%.  The Canadian dollar also moved higher, to 75.57 US cents.  

The Bank of Canada's change in tone has implications for the convertible debentures market in at least two ways.  First, as you know, an increasing rate environment means lower prices for existing bond issues, everything else being equal.  Second, a higher Canadian dollar has a negative impact on the value of US dollar-denominated convertible debenture issues.

Over in the stock market, the last two weeks have ranged from mediocre in the S&P 500 (-0.24%) to rather poor in the NASDAQ (-2.44%) and S&P / TSX Composite (-1.62%).  After an impressive bull run from the FAANG (Facebook, Apple, Amazon, Netflix, Google) cabal in the last three months, investors have clearly taken a bit of a breather in the last 10 trading sessions.

That said, Amazon sure made a big splash on Friday, announcing that it was paying US$13.7 billion in cash to buy out Whole Foods.  The shares of every grocer in North America, from Costco (-7.19%) to Wal-Mart (-4.65%) to Kroger (-9.24%)  to SuperValu (-14.36%) to Loblaw (-3.58%) to Sobey's parent, Empire (-3.60%), went into immediate panic mode.  After the way Amazon has laid waste to the department store sector, the market is starting to price in the possibility of a future where the world has only one retailer of absolutely everything - and that one retailer is Amazon.  Scary.

Despite Deputy Governor Wilkins' positive remarks on the Canadian economy, the Canadian stock market continues to wander the desert, lost.  Financials seem to have stabilized along with Home Capital, but energy continues to slide as the world finds itself awash in oil.  Although drilling activity in Western Canada does appear to be up somewhat, it won't be if the WTI oil price decides to keep sinking.  It closed Friday at $44.74.

Gold is lingering at around the $1,256 per ounce mark, looking ever-ready to spike at the prospect of geopolitical instability.  These days, that usually means Washington.   The latest?  Special counsel Robert Mueller is investigating President Trump for possible obstruction of justice.  Sounds about right.  And the best reality show on TV continues.  Stay tuned.

Notwithstanding the possible shift in direction by the Bank of Canada, the last couple of weeks for convertible debentures have been pretty quiet.  One small bit of news: the American Hotel Income Properties REIT US dollar-denominated convertible debenture issue (ticker: HOT.DB.U, ranking: #6) we mentioned last time closed on June 9, which was somewhat unfortunate timing given that the Canadian dollar sort of took off soon after.  Other than that, there isn't much to report except that we have one new re-entrant in our Top 5.  More on this in the Peanut Convertible Debenture Power Rankings Top-5 below. 

Peanut Power Rankings Top-5 Convertible Debentures (June 16, 2017)
  1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).   Yup, still #1, even after eight Peanut Power Rankings updates.  With the Silver Bay Realty Trust assets now safely in the stable, Tricon just needs to continue executing going forward, and TCN.DB.U should respond accordingly.  The Silver Bay deal was transformative, and Tricon is now effectively the fourth-largest single-family rental landlord in the US, with most of its SFR assets in the higher-growth Sun Belt markets.  At this point, the yield-to-hard-call date is still 3.34%, and the potential upside from the conversion option is compelling.  Bottom line: good potential for the equity + generous US-dollar denominated coupon + still decent yield-to-hard-call = TCN.DB.U is still our top choice if you have idle cash sitting around waiting to be deployed into the convertible debentures market.  We're long TCN.DB.U at $100.00.  

  2. Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #2). Quick recap: this company is big on renewable energy (specifically hydro, wind, and solar), with hydro being most prominent in its portfolio.  Electricity generation (and hence, cash flow) is somewhat dependent weather and waterflow, and the underlying common shares are decidedly low-beta.  Renewable energy is an important secular theme in my view and this company is a good operator in the right sector in the right time.  INE.DB.A itself continues to be an attractive investment because it's on the brink of trading in-the-money, with the common shares closing only 2.0% below conversion price.  With a Friday close of $108.02, the yield-to-hard-call date for INE.DB.A is at 0.58%. Bottom line: we want renewable energy in our portfolio and INE.DB.A, at current prices, allows for participation in the upside of the common stock with a safety net floor provided by the par value of the debentures.  We're long INE.DB.A at $102.75.

  3. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Presumed ticker: DHX.DB), (Last week's ranking: #3). Note: this issue is not yet trading.  We had first mentioned DHX Media's intriguing acquisition of 80% of Peanuts (i.e. Charlie Brown, Snoopy, and the gang) and 100% of Strawberry Shortcake on this blog a couple of updates ago.  Based on my reading of the SEDAR filings, the Peanuts / Strawberry Shortcake transaction will close around June 30 and, at that point, this convertible debenture issue should be available for trading provided that DHX Media files for a prospectus to allow for wider distribution.  As this issue has technically been completed via private placement, the liquidity of the issue is an open question and may be very limited.  If so, this will affect our view of this issue.  For now though, we will reiterate that, for investors, the terms of this DHX Media convertible debenture are outstanding. The 5.875% coupon is sizable, and an $8 conversion price is an ok 41.6% over the Friday close price of $5.65 for the Series B shares.  Furthermore, the issue cannot be soft called until September 30, 2020, and unless the common shares are trading at 35% over the conversion price - which is better than the standard 25% provision that is typical of most Canadian convertible debenture issues. Bottom line: a unique media content company with growth and prized trophy assets like Peanuts + excellent terms in the convertible debentures = superb potential.  The caveat, however, is the liquidity concerns, so this is a developing story to stay tuned on.  Another caveat: although the Peanuts deal appears to be highly accretive, DHX is in danger of having its credit rating downgraded due to the additional leverage it's taking on to close this deal.  We have no position in DHX.DB, but are interested in acquiring one if and when the issue becomes available for trading on the TSX.

  4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #4). Still not much new to report here: Cargojet continues to be the dominant air cargo carrier in Canada, and an investment in CJT.DB.C is still effectively a play on the continued growth of online retail and shopping.  The underlying common shares have done well the last two weeks and will move with its fundamentals and reported financial results.  To my eyes, Cargojet reported a good first quarter in May.  CJT.DB.C closed Friday at $109.00; the yield-to-hard-call is now down to 2.00%. Bottom line: Cargojet has a super market position in an area of long-term, secular growth; get on board.  We've been long CJT.DB.C since it debuted at $100.00.  

  5. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Last week's ranking: #6).  Well, the time is almost here: Liquor Stores' annual general meeting is on Tuesday, June 20, and the bare-knuckle proxy fight that's broken out between the entrenched Board of Directors and activist investor PointNorth Capital should settled once and for all in Edmonton.  Who will score the knockout blow?  Hard to say, but for what it's worth, two proxy advisory firms have sided with the board.  However, one can't deny that this dirty little secret: while shares of LIQ are treading water just above $10, five years ago, they were at $20.  We'll see if shareholders continue to have patience with the current board.  Bottom line: I don't know what will end up happening, but shares in LIQ could move materially either way depending on what happens on Tuesday, and LIQ.DB.B may go along for the ride. We're long this issue at $99.96.
Picture of the Day
The Edmonton skyline and the North Saskatchewan River from the back of a speedboat.  Edmonton, Alberta, Canada. Copyright © 2017 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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