Sunday, August 13, 2017

August 13, 2017, Update: Peanut Convertible Debentures Power Rankings

This is the 12th update of the Peanut Convertible Debentures Power Rankings.  This update is current to August 11, 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 (August 12, 2017)

Volatility in the equity markets has been very muted all summer, that is until US President Donald Trump ad-libbed his "fire and fury" comments towards North Korea and then all of sudden everybody was worried about, oh, thermonuclear war.  Super.  (Sidebar: for a short, interesting perspective of why North Korea is the way North Korea is, see this piece by George Friedman published in Business Insider on Wednesday).
In response to the public sabre-rattling, the VIX, a much-quoted measure of expected near-term (30-day) market volatility conveyed by S&P 500 stock index option prices, did this in the past week:

VIX closed up 54.6% for the week. You can probably guess from this chart exactly when President Trump spewed his rather shocking "fire and fury" threats. Chart source: Google Finance.

I swear, everything in the world has been off-kilter since the Cubs won the World Series last November.  And I say this as a Cubs fan.

To be honest, I'm surprised there hasn't been more of this kind of market volatility given the current resident at 1600 Pennsylvania Avenue.  I expect more.  (As I write this, the governor of Virginia just declared a state of emergency in Charlottesville due to the racial violence which has broken out in the city).  I don't want to get into too much politics here, so all I'll say is protect your capital accordingly.

Bond markets did well this week, as is often the case when conditions get squirrely in the stock markets.  If you're keeping score at home, for the week, the S&P 500, NASDAQ, and S&P/TSX Composite were down -1.43%, -1.50%, and -0.65%, respectively.  Canadian bond yields fell. Here's a graph of the yield of a Canada 5-year bond, which slid back below 1.50%:

One-year graph of a Government of Canada 5-Year Bond (August 10, 2016 to August 10, 2017).
Source: Bank of Canada.

With all of the non-stop action in equity and fixed income markets, a spate of earnings reports, and the aforementioned geopolitical events, the Canadian convertible debentures market has been active since our last update.  Consequently, this has caused more movement than usual in our Peanut Convertible Debentures Power Rankings.

Last update's #1 ranked issue, the Hydro One 4% 30-September-2027, Instalment Receipts (ticker: H.IR, this update's ranking: #6) had a spectacular debut on huge traded volume.  Those lucky enough to get a fill at the $33.30 offering price are already up 12% in only three days on their investment.  Nifty.  The issue isn't in our Top-5 for this update; although we still really like it, let's just say it's not the same screaming buy at $37.29 versus $33.30.

This means we have a new #1 in our rankings this week.  Let's get to the Top-5 to see what it is.

Peanut Power Rankings Top-5 Convertible Debentures (August 11, 2017)
  1.  Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #3).  The original #1 in our rankings, TCN.DB.U is back on top.  Tricon delivered an all-around solid Q2 earnings report on Wednesday, beating the expectations of most.  Assets from the Silver Bay Trust acquisition seem to be performing even better than expected.  Tricon itself had sold off along with the rest of the real estate plays on the TSX after the Bank of Canada began signalling its tightening intentions - that is, until its earnings report.  Due to the strength of the Canadian dollar for the last month, the USD-denominated TCN.DB.U has become quite affordable for the CAD-based investor.  Dare we say its a bit of a bargain here, considering the prospects.  At Friday's close of  US$108.00, the yield-to-hard-call-date is 3.39% and the common shares of TCN are trading at about 21% below in-the-money territory.  Bottom line: organic growth in TCN, good management, a decent US-dollar denominated coupon, and reasonable valuation suggest to us that it's an opportunity to get into TCN.DB.U, if you aren't already in it.  We've been long TCN.DB.U since it debuted at US$100.00.  

  2. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Presumed ticker: DHX.DB), (Previous ranking: #2). First things first: this issue is not yet trading.  Still.  Even still.  If you've been reading this blog and previous updates, you know that this issue was a part of DHX's acquisition of 80% of Peanuts (i.e. Charlie Brown, Snoopy, and friends), and 100% of Strawberry Shortcake.  Based on my interpretation of the legalese in SEDAR filings, this convertible debenture issue should be available for trading as soon as DHX files a prospectus or prospectus supplement to allow for wider distribution of the debentures.  Even though the acquisition has now been closed for over a month, as at the time of writing, no prospectus or prospectus supplement has been filed and, as such, we're still waiting to see if we can actually get our hands on this issue by buying it on the exchange.  As this issue was technically completed via private placement, liquidity of the debentures may be very limited even if a prospectus is eventually filed.  So this is a big caveat.  If liquidity weren't an open question, this issue would be an easy #1, especially at a par value of $100.00.  However, given the strong price action of DHX.B in the last month (+11.1%, even after including the nuclear war-induced sell-off this week), if and when DHX.DB hits the market, it should be trading considerably higher than $100.00.   As we've repeated many times before, the terms (5.875% coupon, $8.00 conversion price, favourable call provisions) are simply boffo for investors.  The bottom line: DHX is a unique media content company and probably makes a nice acquisition target for someone else, Peanuts is a once-in-generation type of asset with valuable IP, and the terms of the convertible debenture are excellent.  We have no position in DHX.DB, but would be interested in acquiring one once (if?) it becomes available for trading on the TSX.  We do, however, have a position in DHX's Series B common shares (ticker: DHX.B).  Snoopy dance! 

  3. Rogers Sugar, 5.00% 31-December-2024, Sixth Series (Series 'E') Extendible Convertible Debentures. (Ticker: RSI.DB.E), (Previous ranking: #5). Well, it sure looks like maple is sweetening the money pot for Rogers Sugar shareholders, and the convertible debentures are also along for the ride too.  And what timing, buying L.B. Maple Treat Corporation in Canada's 150th year since Confederation! The market clearly likes the new maple syrup growth platform, and now it's up to RSI management to execute.  The question is, how is the legacy sugar business performing?  I don't know, but RSI's fiscal third quarter earnings are due August 14, so we'll find out pretty quickly.  RSI.DB.E has been hot out of the gate, closing Friday at $104.00, which gives the issue a yield-to-hard-call-date of 4.16%.  RSI common shares closed at $6.82, so they are about 21% away from RSI.DB.E trading in-the-money.  The bottom line: the new maple angle provides a dose of excitement to a long-time sleepy company, though trade, consumer sentiment, and growth risks remain in Rogers' traditional sugar business.  Our quantitative model suggest RSI.DB.E is already trading at around fair value, so maybe this one to look for on a pullback.  We have no current position in RSI.DB.E but would consider acquiring one at the right price.

  4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #4).  Cargojet's Q2 earnings were announced on Tuesday, and true to form for the company for just about every recent quarter I can recall, they were strong earnings.  Compared to its Q2 a year ago, revenues were up 11.1% and EBITDA 9.3%.  As we've mentioned in the last couple of updates, the recent increase in the Canadian dollar may help spur increased online sales from US retailers, and in turn be a positive for Cargojet, which is Canada's dominant air cargo carrier.  CJT.DB.C closed Friday at $108.50, which means the issue is trading at a yield-to-hard-call-date of 2.04%.  CJT common shares closed Friday at $48.56, so they are about 21% away from CJT.DB.C trading in-the-money.  The bottom line: Cargojet continues to have a superb market position in an area of long-term, secular growth, and even at current prices, it's not a bad entry point for CJT.DB.C. 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 update's ranking: #11). This issue cracked our Top-5 right after it was first announced in conjunction with HOT.UN's acquisition of 18 Marriott and Hilton-branded hotels in late May, but quickly fell off the leaderboard as various factors (e.g., higher Canadian dollar, interest rates) conspired to work against the company.  But after announcing rather poor Q2 earnings on Wednesday, HOT.DB.U is getting to levels where its valuation has become a bit more compelling.  On Q2, operationally, it was a disappointing quarter.  Even though as a result of acquisitions, top-line revenue was up 56%, revenue per available room (a.k.a. RevPAR), a key measure of hotel performance, was down in a couple of key geographies (Pittsburgh, Amarillo) for the hotel REIT.  In many ways, the hotel industry is one of the riskier subsectors in the real estate industry.  It is notoriously economically sensitive and new threats such as Airbnb are emerging.  However, that said, the well-regarded management team of HOT.UN has done a good job of attempting to diversify its operating footprint. HOT.DB.U closed Friday at US$97.50, which means the issue is trading at a yield-to-hard-call-date of 5.72%.  HOT.UN trust units closed Friday at $9.22 (US$7.27), so they are about 27% away from HOT.DB.U trading-in-the money. The bottom line: this one isn't without risk, but given its now-cheaper valuation and strong management team, it may be worth a shot here.  We have no current position in HOT.DB.U, but we may consider acquiring one at the right price.     
Picture of the Day
Cameraman's view of Giants vs. Cubs from Wrigley Field.  Chicago, Illinois. Copyright © 2014 Felix Choo / dingobear photography.  Photo is available for licensing from Alamy Images.  All rights reserved. Photo may not be reproduced without permission. 

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