July 2, 2017, Update: Peanut Convertible Debentures Power Rankings

Happy Canada Day long weekend and Happy Canada 150!

This is the ninth update of the Peanut Convertible Debentures Power Rankings.  This update is current to June 30, 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.

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 30, 2017)

"Rates are, of course, extraordinarily low," said Stephen Poloz, Governor of the Bank of Canada, in Portugal on June 28.    

"It does look as though those cuts have done their job," he added, in reference to 2015, when the central bank surprised the market and cut rates twice, 25 basis points each time, in response to plummeting oil prices.

Well, Poloz's comments pretty much confirmed the smoke signals put up by his chief deputy (and this blog's favourite central banker), Carolyn Wilkins, two weeks earlier.  Seems as if the Bank of Canada has fully transformed its feathers from dove to hawk. 

Bond markets agreed.  For example, look at the right side of this graph of a Canada 2-year bond:

Not surprisingly, the previously listless loonie has also taken flight due as a result.  Over the last two weeks, the Canadian dollar has moved up from 75.57 US cents to 77.06 US cents.

As we wrote last time, 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.

The major North American stock markets were flat-to-down in the month of June.  Losses on the broad-based S&P 500 were modest (-0.27%), while the tech-laden NASDAQ gave back materially more (-1.70%).  The latter's decline in the last couple of weeks seemed to coincide with the European Union slapping Alphabet (a.k.a. Google) with a record-setting US$2.7 billion anti-trust fine.  Ouch.

Here in Canada, the S&P/TSX Composite continued with its uninspiring performance thus far in 2017, falling a further 1.69% during the month.  Oil inventories remain high, which is keeping a lid on prices (WTI oil is currently at about US$46), and savaging Canadian energy stocks.  At least financials seem to have stabilized a bit for the time being.  They've no doubt been helped by the hefty investment by Warren Buffet's Berkshire Hathaway in Home Capital, which has effectively stopped the bank run in the alternative lender.

In the Canadian convertible debentures market, there are a couple of developments of note since our last update.

First, Cargojet's 5.50% 30-June-2019, Series 'B' Convertible Debentures (ticker: CJT.DB.B, this week's ranking: #17) have been soft-called for July 4, so this will be the last update in which the issue will appear in our Peanut Power Rankings.  The issue last closed at a lofty $168.00; if you were lucky enough to be a holder, by now you've either sold the debentures on the open market or have exercised your conversion option.

Second, for the first time since we started these rankings, we have a new #1! Also, we have one brand new entrant in our Top-5.  For more details, see the corresponding section below.   

Peanut Power Rankings Top-5 Convertible Debentures (June 30, 2017)

1. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Presumed ticker: DHX.DB), (Last week's ranking: #3). Well, here it is, the new #1.  I suppose this is something of a controversial pick considering that the issue has yet to trade, but since the terms of this debenture are so enticing provided you can get it at or near par value, we can't really ignore it any longer.  After the market shut down for the weekend, DHX Media announced the closing of its game-changing US$345 million acquisition of 80% of Peanuts (i.e., Charlie Brown, Snoopy, and the rest of the crew), and 100% of Strawberry Shortcake.  With that out of the way, based on my reading of the SEDAR filings, this convertible debentures issue should be available for trading as soon as DHX Media files for a prospectus to allow for wider distribution of the debentures.  As the issue was technically first completed via private placement, the liquidity of the debentures remains an open question and might be very limited.  (If so, this would certainly have an impact on the issue's current #1 placement in our rankings).  For now, we consider it to be #1 because the terms of the issue are generous for investors - presumably, they were designed this way to ensure that the financing would get done in order for the company to close on the important Peanuts deal.  Let's go over the main features.  The 5.875% coupon is sizable, and the $8.00 conversion price is a reasonable 39.4% over the Friday close price of $5.74 for the Series B shares.  In addition, the convertible debenture 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 coupon and terms in the convertible debentures = our new #1, notwithstanding any liquidity problems that may arise when the issue finally becomes available for trading.  We have no position in DHX.DB, but would be interested in acquiring one once it becomes available for trading on the TSX.  We do, however, have a position in DHX's Series B common shares (ticker: DHX.B).    


2. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1).   This issue was our #1 ranked convertible debenture in our first eight updates, and slips to #2 in this iteration.  Fundamentally, not a whole lot has changed except for the fact that the price of the convertible debenture has started to move up towards fair value (as we suspected it would), and it isn't quite the relative bargain it had been in the last few months.  That said, the nice story here is still very much intact and as long as Tricon keeps executing going forward, TCN.DB.U should respond accordingly.  As we now have said many times, the Silver Bay Realty Trust 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 attractive, higher-growth Sun Belt markets.  At this point, the yield-to-hard-call is still 3.02%, and the potential upside from the conversion option remains.  Bottom line: good potential for the equity + decent US-dollar denominated coupon + yield-to-hard-call still above 3% = still an excellent choice if you have idle cash sitting around waiting to be deployed into the convertible debentures market.  We're long TCN.DB.U since it debuted at $100.00.  


3. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #4). The recent uptick in the Canadian dollar may help spur increased online sales from US retailers, and in turn be a positive for Cargojet, Canada's dominant air cargo carrier.  This is a strong company in the right space; growth of online retail and shopping is only going to continue to increase.  CJT.DB.C closed Friday at $109.00; the yield-to-hard-call is at 1.98%. Bottom line: Cargojet has a super market position in an area of long-term, secular growth; get on board and fly the friendly skies.  We've been long CJT.DB.C since it debuted at $100.00.   


4. Algoma Central, 5.25% 30-June-2024, Series 'A' Convertible Debentures. (Ticker: ALC.DB.A), (Last week's ranking: unranked).  Oops, we missed this one in the last version of our rankings.  This brand new $82.5 million (including over-allotment option) offering closed on June 21, and represents an interesting opportunity to invest in the convertible debentures of a historic, if overlooked, Canadian company that is today majority-owned by the Jackman family.  For those unfamiliar with Algoma Central, it is a leading Canadian shipping company, which owns and operates the largest Canadian flag fleet of dry-bulk carriers and product tankers operating on the Great Lakes - St. Lawrence Waterway. Algoma Central's history as a company dates back to 1900, and it's been listed on the TSX since 1958. Fun fact: the company has the same number of shares outstanding today as it did in 1958.  As such, perhaps it's no coincidence that not a single Bay Street analyst follows the company, as there hasn't been much investment banking business to be had over the years.  In fact, probably the only way new shares in Algoma Central will be issued is if this convertible debenture manages to work its way into in-the-money territory sometime over its seven year term-to-maturity.  This brings us to maybe the only real bad news with this issue: with a conversion price of $21.15 and a Friday closing price of the common shares at $12.96, a 63.2% increase in the common shares is required for ALC.DB.A to trade in-the-money.  That's pretty steep.  Fortunately, there's lots of good news here too.  First, Algoma Central has a very good balance sheet, and is considered to be superb credit despite operating in a somewhat cyclical industry.  Second, Algoma Central stock is a true value sleeper, trading at a price-to-book value of only about 0.8x and a price-to-earnings ratio of about 15.0x.  Third, over the last couple of years, the company has been selling some of its non-core real estate assets in the St. Catharines and Sault Ste. Marie areas, and is expected to monetize up to $125 million in these sales - compare this figure to Algoma Central's current market capitalization of approximately $504 million.  Fourth, the company is widely regarded to be excellent operators in their line of business, and its current fleet renewal program is expected to garner 11 Equinox-class carriers by 2018, which is expected to contribute materially to Algoma Central's operating efficiencies going forward.  (For some bonus reading on Algoma Central: in August 2016, travel writer Porter Fox published a captivating story in the New York Times about his journey through the Great Lakes on the Algoma Equinox ship - I think the piece provides a rare glimpse into the business and the fascinating geographies it traverses, so give it a look).  Bottom line: a good credit + unique company with a historic pedigree + underrated underlying equity = a strong new entrant in our Top-5.  We have no current position in ALC.DB.A, but we do have a position in ALC, the common shares of Algoma Central. 


5. 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 a renewable energy stalwart (and especially so on the hydro side).  That said, as a utility, the equity of Innergex is sensitive to the overall interest rate environment, and the Bank of Canada's new hawkish stance works against the company from this perspective.  That said, we still consider renewable energy to be a highly important secular theme and this company is a good operator in this space.  INE.DB.A itself continues to be an attractive investment because it remains close to trading in-the-money; the common shares closed only 5.2% below conversion price on Friday.  However, the yield-to-hard-call date for INE.DB.A is now effectively down to 0.00% based on Friday's debenture close price of $109.20.  Bottom line: we want renewable energy in our portfolio and INE.DB.A, at current prices, allows for participation in any potential 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.

Picture of the Day


Happy Canada 150.  Churchill Square, 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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