Sunday, June 4, 2017

June 4, 2017, Update: Peanut Convertible Debentures Power Rankings

This is the seventh update of the Peanut Convertible Debentures Power Rankings.  This update is current to June 2, 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 2, 2017)

Since our last update about two weeks ago, American and Canadian markets have gone in separate directions.  Big tech continues to drive NASDAQ (up 3.6%) in the States - Facebook, Amazon, Apple, Netflix, and Google (a.k.a. Alphabet) are all at 52-week highs.  Amazon cracked the $1,000 a share mark, and Google came within 40 cents of doing the same.  Breadth isn't that impressive which is perhaps a reason for concern, but the juggernauts are acting like the heavyweights they are and tech bull runs on.  The S&P 500 (up 2.4%) has had a positive past two weeks, largely due to the performance of large multinationals, which stand to benefit from improving economic conditions in the EAFE zone, and especially Europe.

Meanwhile, the S&P/TSX Composite (down 0.1%) is stuck in neutral.  Although quarterly bank earnings were essentially positive (except maybe BMO, which had an off-quarter from its US operations), it seems as if concerns about Canadian real estate and perhaps the lingering Home Capital situation in the background have investors wary about financials.  Meanwhile, energy continues to suffer.  Although the results of the British Columbia election, which looks to result in a minority NDP-Green government hostile to pipeline development, seemed to get more ink in the press, I would surmise that the growing glut of US oil inventories is the real culprit in pushing WTI below US$50 yet again. Oil looks increasingly range-bound between US$45 and US$55, which bodes badly for higher cost jurisdictions like Canada.

The latest from the DC swamp: President Trump announced that he will withdraw the US from the Paris climate change accord. "I was elected to represent the citizens of Pittsburgh, not Paris," said Trump, in a move that was supported by his narrow core base and Republican cheerleaders, but was broadly panned by other global political leaders, business executives, environmentalists, and even leaders of the largest municipalities and cities in the United States.  These leaders include Pittsburgh's mayor, Bill Peduto, who promptly took to Twitter to state, "As the Mayor of Pittsburgh, I can assure you that we will follow the guidelines of the Paris Agreement for our people, our economy & future" ... and for good measure, to also point out "Fact: Hillary Clinton received 80% of the vote in Pittsburgh. Pittsburgh stands with the world & will follow Paris Agreement."  Oh, burn!

Canadian bond yields have remained at low levels, perhaps reflecting nervousness in the Canadian stock market.  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.  This is helping to lend support to bond prices, including convertible debenture prices.

On convertible debentures, there are two upcoming issues on the horizon that seem particularly interesting.  More on these in the Peanut Convertible Debenture Power Rankings Top-5 below. 

Peanut Power Rankings Top-5 Convertible Debentures (June 2, 2017)
  1. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).   With the Silver Bay Realty Trust assets now safely in the stable, Tricon is starting to reap the benefits, and TCN.DB.U is really starting to move up with the common stock now.  TCN.DB.U last traded on Friday at $109.25 per debenture, which implies a 9.25% capital gain plus almost three months of accrued interest for investors that were lucky enough to get in on the offering that closed on March 17.  In the same timeframe, the S&P/TSX Composite has returned a moribund -0.77% on a price basis.  So, in other words, on both a relative and absolute basis, TCN.DB.U has been a very good performer.  At $109.25, it isn't as cheap as it was, but the value is still there if one believes in the Tricon story.  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 3.16%, and upside from the Silver Bay deal alone may drive the common shares higher - and take TCN.DB.U with it.  Bottom line: good potential for the equity + generous US-dollar denominated coupon + still decent yield-to-hard-call = TCN.DB.U is still our #1 pick for now.  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: #4). Sure, Trump may have pulled the US out of the Paris climate change agreement, pandering to a dwindling number of coal miners, powerful fossil fuels industry lobby interests, and a zealous base that seems intent on turning back the clock on America in lieu of future progress.  Yes, that's an opinion.  But another opinion is that renewable energy is here to stay, and assuming everything else being equal, it's not hard to see that clean is better than dirty for the planet, environment, and future generations.   Yes, some things really are that clear and easy.  So, what about Innergex?  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.  But this has never really worried me; this company is in the right sector at the right time, and is a good operator in its space.  INE.DB.A itself is attractive because it's on the brink of trading in-the-money, with the common shares closing only 2.4% below conversion price.  With a Friday close of $108.50, the yield-to-hard-call date for INE.DB.A is down to 0.44%. Bottom line: the time is now for renewable energy. INE.DB.A, where it's trading now, 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: unranked). 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 in our last update.  Since that time, the $140 million private placement of subscription receipts that are intended to help pay for the deal closed May 31.  Again, distribution of the subscription receipts were completed via private placement to a syndicate of underwriters led by RBC Capital Markets and Canaccord Genuity.  Based on my reading of the SEDAR filings, the Peanuts / Strawberry Shortcake transaction will close around June 30 and, at that point, the subscription receipts will ultimately be automatically exercised into convertible debentures.  According to the legal-ese in the trust indenture for the debentures, it appears the intention for the parties involved is to have DHX Media file for a prospectus to allow for the underwriters to further distribute the eventual convertible debentures to a wider investor set.  This is my reading of the situation, anyhow.  As such, I expect the convertible debentures to hit the market June 30 or slightly thereafter.  If I'm incorrect and no prospectus is filed, then according to securities regulation, a four-month hold period is in effect from the initial closing of the securities (which in my interpretation would be May 31, the closing of the subscription receipts), which would make the convertible debentures available for trading in the secondary market on September 30.  If this is the case, then liquidity could be very limited.  (An example of a private placement convertible debenture that was not offered to the public via prospectus, but eventually made its way onto the TSX after the four-month hold period is the current Blackberry debenture BB.DB.V, which was a part of a large debt refinancing involving institutional investors such as Fairfax Financial).  In any event, this is all pretty complicated stuff ... which is why you might be wondering why we're even bothering.  Well, it's because the terms, for investors, of this DHX Media convertible debenture are outstanding. The 5.875% coupon is sizable, and an $8 conversion price is a reasonable 36% over the Friday close price of $5.88 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 is the liquidity concerns, so this is a developing story to stay tuned on.  We have no position, but are interested in acquiring one if and when DHX.DB becomes available.

  4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #2). Not much new to report here: Cargojet is still 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 will move with its reported financial results, and Cargojet did report a good first quarter.  CJT.DB.C closed Friday at $108.00; the yield-to-hard-call is now down to 2.31%. Bottom line: Cargojet has a super market position in an area of long-term, secular growth; CJT.DB.C is cleared for take-off.  We've been long CJT.DB.C since it debuted at $100.00.  

  5. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' Convertible Debentures. (Presumed ticker: HOT.DB.U), (Last week's ranking: unranked). Note: this issue is not yet trading.  On May 31, AHIP REIT announced that it was buying a portfolio of 18 Marriott and Hilton-branded hotels containing 2,187 guestrooms located in Maryland, New Jersey, New York, Connecticut, and Pennsylvania for approximately US$407.4 million.  A US-dollar denominated, US$42.5 million convertible debenture offering is part of the financing package to pay for the rather large transaction for AHIP REIT.   For those unaware, AHIP REIT is essentially a pure play on midscale lodging and long-term contracted rail crew lodging in secondary American cities.  The REIT initially IPO'ed in 2013 and, since its inception, has seen rather sleepy price action on its limited partnership units.  Investors have been rewarded with positive returns, however, largely due to AHIP REIT's rather hefty monthly USD distributions (dividend yield of 8.6% as at Friday's close, with an AFFO payout ratio in the low 80%'s).  The terms of the convertible debenture issue seem fairly positive, with an ok 5.00% USD-denominated yield, plus a relatively generous conversion price of US$9.25, which is about 22% above Friday's close price of HOT.UN.  As a lodging play, it should be noted that AHIP REIT will be economically sensitive as generally, lodging is among the most economically sensitive subsectors within the investable real estate space.  That said, management has appeared to have done a good job of geographically diversifying its growing portfolio.  In fact, I would say an investment in HOT.DB.U is essentially an investment in a management team with a stellar track record. CEO Rob O'Neill has been in the hotel business for 45 years and was a co-founder of Canadian Hotel Income Properties (CHIP) REIT, which was sold to the British Columbia Investment Management Corporation (bcIMC) in for $1.2 billion in 2007.  Prior to that, Mr. O'Neill was a founder of the Coast Hotels chain, which was eventually sold to Japanese interests.  Bottom line: the underlying REIT LP units might be a bit sleepy, but by investing in HOT.DB.U, you're entrusting your investment with an experienced, successful lodging industry management team.  As such, this convertible debenture makes for an interesting play; the offering is set to close soon, on June 9.  We have not subscribed to the offering, but may consider initiating a long position when the debentures begin trading. 
Picture of the Day
The misty temperate coastal rainforest on the cliffs of the Capilano River in North Vancouver, British Columbia, Canada. Copyright © 2012 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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