Saturday, February 10, 2018

February 9, 2018, Update: Peanut Convertible Debentures Power Rankings

Hi there, convertible debenture investors.  This is the 26th update of the Peanut Convertible Debentures Power Rankings, which is current to February 9, 2018.  Thank you for continuing to read and support the Canadian Convertible Debentures Project!
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 a little 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.

Public Service Message: the Financial Post Convertible Debentures List
We've received quite a few emails asking about the Financial Post's convertible debentures list, which has apparently vanished from the newspaper's website.  Unfortunately, we don't know of another complete list of Canadian convertible debentures that is available free to the public that has the same depth of information that was contained in the Financial Post list.  The stats and figures we use for the Peanut Power Rankings we collect from various public sources and calculate ourselves (it's a lot of work!); we don't have a complete list of convertible debentures either.

For those of you out there that are clients of a full-service brokerage firm with a research team that covers convertible debentures, you may be able to obtain a complete list if you ask your broker.  Also, as we announced on December 20, thanks to one our valued readers, we were informed that the TSX publishes a basic list on its website approximately monthly.  It's not the same as the old Financial Post list, but hopefully it can still be of use to some of you out there. 

Market Commentary - Quick Points (February 9, 2018)
  • Well, hello there volatility.  It's been awhile, old stranger.
  • To the surprise of many, the market seemed to sleepwalk higher throughout 2017 no matter the circumstances.  So I guess we all knew a week like the last week was going to happen sooner or later.
  • The catalyst for the very recent market tumult looks to be signs of inflation from a US economy that's largely operating at full capacity.  As you know by now, the threat of higher inflation compels central banks to raise rates to fight said inflation, which in turn tightens money supply and reduces the available amount of money chasing risk assets. 
  • We've said this before, but we'll say it again: the recent Republican tax cut south of the border was actually quite unnecessary and ill-timed.   It'll likely be nothing but inflationary and add to a massive US deficit (sidebar: funny how Republicans care about deficits when the Democrats are in charge, but are the biggest spenders around when they're in control) at a time when the US economy is already firing on all cylinders and corporations are cash-rich.  Further, while the corporate tax cuts and the increase of the threshold for the estate tax are designed to be permanent, tax cuts for individuals expire in 2025 and the individual mandate for having health insurance has been eliminated, effectively crippling Obamacare.  Forget the "positive" headline of this so-called "tax reform": in a real democracy, stealing from the poor and middle class today to permanently pay the rich more is bad long-term economic policy if the goal is to actually have a decent society. Let's not let this happen here, Canada.
  • But I digress.  Enough about maddening politics; let's get back to markets.   
  • The truth is, the risk assets that have been most positively bubbly (e.g., cryptocurrencies, marijuana stocks) have been correcting hard since about Christmas and now the general stock market has joined in the stampede.
  • It'll be interesting to see where things go from here.  This isn't the same as 2008, when the fallout from the subprime mortgage crisis threatened to end capitalism as we had all known it. 
  • In my opinion, this feels a bit more like 2011, when the so-called "taper tantrum" roiled markets after it became apparent that post-financial crisis quantitative easing was going to be slowly withdrawn by the Fed.  Liquidity (or, cheap easy money, if you prefer that term) is being withdrawn from markets as we speak, and the world is going to have to re-learn how to adjust to a higher interest rate environment never mind all of the other geopolitical factors out there. 
  • As hybrid fixed income instruments with equity option features, Canadian convertible debentures are of course affected by what happens in interest rate and equity markets.
  • That said, you'll note that relative to the stock markets, your Canadian convertible debenture holdings generally probably held in pretty well this week as its fixed income characteristics came to the forefront during the volatile week.  This is one of the reasons why we like convertible debentures so much: in times like these, it gives you some measure of downside protection that's commonly associated with bonds.  
  • In recent weeks, three smaller REITs (Morguard North American Residential REIT, Slate Office REIT, and Plaza Retail REIT) have introduced new issues of convertible debentures. We haven't rated any of the three for our Peanut Power Rankings as of now, but that can change if there are any of you out there who have particular interest in these issues.  Please let us know if you do. 
  • A general reminder: stay diversified and protect your capital out there.  Volatile times provide an opportunity to both fine-tune your portfolio by picking up those quality names that you may have previously missed and pare those positions that are no longer a good fit for your circumstances. Don't panic and stick to your long-term strategy.
  • Ok, let's get to the Top-5 for this update.  

Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (February 9, 2018)
    1. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Last week's ranking: #7).  Holy, bong! Based on information coming from the company, we had always kind of suspected that Liquor Stores was interested in getting into the business of marijuana retailing, but we didn't quite expect this.  On Monday, Liquor Stores and Aurora Cannabis announced their intention to develop a Western Canadian retail cannabis business - and it's a doozy.

    In itself, Liquor Stores entering the pot business would've been newsy enough, but what was remarkable about the deal is Aurora's equity announcement in Liquor Stores.  Specifically, Aurora has taken an initial 19.9% equity interest in LIQ, and the deal is structured such that Aurora may, in the future, provide additional equity investment to bring its stake in Liquor Stores up to 40%.  Significantly, you'll note that Aurora is paying $15 for each LIQ share it's buying, which is above both the current market price of LIQ (the common shares closed Friday at $11.97) and the conversion price (which is $14.60) associated with the LIQ.DB.B convertible debentures.

    Given all that's happened in markets this week, it's possible that these enticing details have been overlooked.  Nevertheless, on paper, this deal makes a lot of sense for both parties.  For Alberta-based Aurora, buying a stake in LIQ basically amounts to a big step forward in vertically integrating its business.  Liquor Stores is already the largest private retailer of liquor (another regulated substance, of course) in Alberta and it also has a large presence in British Columbia, and this experience and credibility should give Aurora a leg-up in obtaining retailing licenses for marijuana once they become available.  Importantly, Liquor Stores also provides instant access to retail bricks-and-mortar infrastructure (i.e., stores) in many key geographic locations.  For Liquor Stores, getting into an entirely new business provides the company with the jolt that it has so desperately needed to reach new highs (haha).  Whereas marijuana could've been once seen as a competitive threat to the booze-selling business, now Liquor Stores has both bases covered.

    Jokes and benefits aside, however, there are of course many risks here too.  Provincial frameworks for cannabis regulations still haven't been finalized, and we won't know the cannabis retailing playing field for sure until this is accomplished.  Further, the success of Liquor Stores in its traditional liquor retailing business has traditionally been linked to the vibrancy of the Alberta economy which, though recovering, isn't quite the same as it had been previously.  

    On pure numbers, our quantitative model has always liked the LIQ.DB.B convertible debenture, in part because the underlying shares of LIQ are volatile.  I suspect adding the aura of the green stuff will increase volatility which, in theory, is a positive for the embedded conversion option in the convertible debenture. 

    The bottom line: If you were looking for a relatively safer way to play the brand new business of cannabis retailing, there are worse ways to do it than through Liquor Stores.  An investment in LIQ.DB.B isn't without risks, but it's encouraging that Aurora saw fit to pay well above market and conversion prices for LIQ shares.  So here's the deal: if you believe in the Alberta recovery, want a cannabis play to boot, and generally like the outputs of our quantitative model, then LIQ.DB.B is worth consideration here.  At Friday's close of $104.25, LIQ.DB.B has yield-to-hard call date of 3.19% and the underlying common shares need to rise 22.0% to hit the conversion price.  We no longer have a position in LIQ.DB.B, but are thinking of re-entering. For more information on Liquor Stores, please have a look at the company's most recent investor presentation ... but note this presentation dates back to November, prior to the announcement of the Aurora deal.

    2. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #1). DHX's fiscal 2018 second quarter results are due to be released before market open on Tuesday, February 13.  This is an important earnings release for a company that's been under fire in the last year, and the results could cause DHX's common shares (and by extension, DHX's convertible debentures) to move significantly in either direction.

    If you've been reading this blog for awhile, you're fully aware of the DHX story: the initial excitement of the company's coup of an acquisition of Peanuts (i.e., Charlie Brown and Snoopy) last spring was followed up by a terrible miss on earnings for its fiscal 2017 fourth quarter (June 2017 quarter).  DHX stock got crushed in the aftermath, the company announced a strategic review (this is code for trying to find a buyer for the company), and then recovered somewhat after posting better financial results in its fiscal 2018 first quarter (September 2017).  So where do we go from here?

    Although the company has been radio silent about its strategic review (maybe we will hear more about this on Tuesday - some analyst on the conference call will inevitably ask), newsflow out of the company as of late has been mostly positive.  DHX seems to be busy in trying to execute deals to distribute their library of media content, and in December, the much-hyped Disney acquisition of the film, television, cable assets of Twenty-First Century Fox indirectly highlighted the value and importance of the kind of quality content that DHX produces and distributes in today's digital world.  Bay Street and the market wants to see results.  Will Tuesday be a sign of results?  We will see, soon enough.

    The bottom line: DHX has attractive media content assets. Its Peanuts intellectual property has cash cow characteristics, and the company is currently undergoing a strategic review and in theory could be sold at a premium (see our previous update on our theory as to why it could sell for $9.32 a share).  Nevertheless, there are considerable risks here.  The company is highly levered (there is outstanding net debt of about $1 billion), which is not where a company wants to be in a rising interest rate environment.  Further, the company seems to have lost the confidence of Bay Street.  All this said, we think the unique nature of DHX's assets are potentially worth the risk if you can stomach the volatility, and the underlying common shares and the convertible debenture seem to have stabilized.  In fact, they have actually fared relatively better than the overall market in the excitement of last week.

    The convertible debenture (DHX.DB) closed Friday at $96.00.  At this price, DHX.DB has a yield-to-maturity of 6.63% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 73.9% away from DHX.DB's conversion price of $8.00.  Recovery may well be a long road, but if we get there, investors in the convertible debenture could do very well in the end.  Management needs to execute, though, and there is limited room for error.  We are long DHX.DB at an average price of $99.22 and curious what Tuesday's earnings release will bring.  We also have a position in DHX's Series B common shares (DHX.B). For more information on DHX, please have a look at the company's most recent investor presentation.

    3. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Last week's ranking: #8).  As a group, utilities have really taken it on the chin since interest rates started rising, and Hydro One hasn't been immune to the onslaught.  The company's instalment receipts (H.IR) are now trading out-of-the-money for the first time since they hit the market last summer, and the bottom has kind of fallen out on their price in the last two weeks.   

    Up until quite recently, our quantitative model has consistently rated H.IR as overvalued.  On pure numbers, that's now changed.  Based on Friday's close of $30.50, our model says H.IR is almost 16% undervalued.  But is now really the time to be getting into utilities?

    That's a good question.  Obviously, all interest rate-sensitive stocks will be facing headwinds in a rising rate environment.  As such, one only really wants to be in those names that have the ability to grow in such an environment.  I don't follow Hydro One particularly closely but should its proposed acquisition of Avista close as expected later this summer, it'll presumably give the company an important beachhead in the US for future growth.  Actually, buying American assets seems to be the preferred way towards growth for Canadian utilities these days (witness other similar moves by names such as Algonquin, AltaGas, Fortis, and Innergex) and the Avista deal is projected to be accretive for the company.

    We did a special update post on the instalment receipts when they were first announced last summer.  Here's a quick review summary of the details. First, the large $1.4 billion instalment receipts offering is an essential part of the financing behind Hydro One's foray into the US through its proposed acquisition of Spokane-based Avista.  Avista shareholders approved the deal back in November, but we are still awaiting various regulatory approvals before the deal is finalized.   Second, as mentioned above, the Avista acquisition will be accretive for Hydro One shareholders.  Third, the offering has a complex structure, and is essentially a deferred equity raise by Hydro One which has been disguised as a convertible debenture that will be represented by instalment receipts until deal finalizes this summer - got all that? Fourth, owning the instalment receipts is essentially like owning a (now, slightly out-of-the-money) call option, but instead of having to pay a premium for the privilege, Hydro One pays the investor a 4% coupon on the full value of the (eventual) convertible debenture in the time period before deal close.  This 4% annual coupon is distributed quarterly, and one payment has already gone out to investors at the end of December, so there are now only three payments remaining.  Fifth, that coupon drops to zero after deal close, which means investors would, if they're rational, convert the debentures into common shares well before the debenture's 10-year maturity term as long as the instalment receipts are in-the-money ... or even if they're slightly out-of-the money, in order to participate in dividends associated with holding the common shares (as opposed to holding a convertible debenture that pays no coupon). Sixth, even though this instalment receipt offering is quite unconventional, it effectively constitutes a rare convertible debenture issue from a large, investment grade issuer.

    The bottom line: The interest rate environment has hit the price of the Hydro One instalment receipts hard.  If you didn't get in on the offering and have been a keeping an eye on this story, a second chance has presented itself as long as you're comfortable getting into a utility play in this rate environment.   However, before making any investment decisions, as always, consult a highly qualified investment professional - H.IR is a more complex issue than most and you want to know exactly what you're getting into.  Based on Friday's close price of $30.50, our quantitative model says H.IR is currently undervalued by 15.7%.  We have no position in H.IR.  For more information on Hydro One, please have a look at the company's most recent investor presentation

    4. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last update's ranking: #2).  Well, here's something that no company wants to hear: Amazon wants to enter your industry.

    Clearly big fish like FedEX and UPS would be in Amazon's crosshairs in such a move.  The effects on Cargojet, which currently dominates the Canadian overnight air cargo market with a 90% market share, are less clear, but I suspect the implications are going to be more negative than positive.  First, if Amazon wants to ship more of its own goods using its own delivery infrastructure, then there will presumably be less of it for companies such as Cargojet to pick up.  Second, if Amazon decides to offer its shipping services to other companies as well, they will effectively become a competitor.  And, of course, it's no fun to be an Amazon competitor: just ask Barnes & Noble or Costco or Safeway or Kroger's or HBC or Macy's or ... well, you get the idea. When Amazon enters your industry, they mean business.

    The bottom line: Before this tidbit of Amazon news, it was nothing but friendly skies for Cargojet.  CJT common shares had pushed well into the $60's and pulled CJT.DB.C into in-the-money territory. As can be expected, shares of CJT sold off somewhat on Friday, and so did CJT.DB.C, ending the day at $116.25.  Yes, Cargojet is a terrific little company, and remains a good story in an area that's poised to grow going forward.  The Amazon news, however, undoubtedly adds a wrinkle. How comfortable are you with this wrinkle? We've been long CJT.DB.C since it debuted at $100.00, and we're holding on for now at least.

    5. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #6).  Both Tricon's common shares (TCN) and this associated convertible debenture (TCN.DB.U) have gotten crunched in the market volatility of the last week.  That's never fun, but if you're a longer-term investor, the fundamentals underlying this story are still intact. 

    TCN.DB.U was this blog's inaugural #1 atop the Peanut Power Rankings.  Tricon made a transformative acquisition in 2017 and continues to be well-positioned for the future.  As a real estate operating company, it, too is interest rate-sensitive and the company tends to trade up and down with the Canadian REIT group. Unfortunately for investors (like us) in this name, the direction has been down as of late.

    The bottom line: TCN.DB.U is a very good quality convertible debenture issue, and has a nice combination of potential upside, yield, and USD-denominated exposure (for those who believe the Canadian dollar will depreciate somewhat, as we do).  At Friday's close of US$103.16, the yield-to-hard-call date is 4.65% and there are 3+ years left until the hard call date. The common shares need to rise about 27.7% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00 and aren't really worried at all about the volatility in this issue over the past couple of weeks.  If anything, it's a buying opportunity. For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

    6. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Last update's ranking: #3).  The trust units of HOT.UN also traded off somewhat in the market rush to the exits this past week, but the HOT.DB.U convertible debenture held firm.  Fundamentally, there hasn't really been much change in the company as of late.  As a matter of fact, the strong US economy is clearly a positive for this hotels owner, as one can expect more travel during strong economic times, not less.

    The bottom line: HOT.DB.U has traded below par in the months since it hit the market, but it's almost back to US$100.00 now.  This is a play for those who have confidence in the REIT's highly regarded management, believe in the strength of the US economy, and have a negative forward view on the Canadian dollar.  With a yield-to-hard-call-date of 5.32% and about 3.5 years to the hard call date, we actually think it's super value.  The company just needs to keep executing.  It closed Friday at US$99.00 and we're long HOT.DB.U at US$98.00. For more information on American Hotel Income Properties REIT, please have a look at the trust's most recent investor presentation.

    7. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #4).  DIV common shares, which had been doing really well since about last September, was also caught up in the downdraft of the last week.  The convertible debenture (DIV.DB), however, has held steady.

    Back on January 25, the company announced 2017 Q4 operating results at Sutton Realty, Mr. Lube, and AIR MILES®, the three major royalties in which the company has material interests.  The verdict, respectively: ok, excellent, and kind of disappointing.  Shares in DIV didn't really react too much to this news immediately, as we suspect that the market is really just waiting to see what management does next with its cash hoard.  Adding another accretive royalty to the stable would certainly help the stock but investors need to be patient.  This is a management that won't rush a deal.   
    The bottom line: DIV is an interesting royalty company, and currently owns the Sutton Realty, Mr. Lube, and AIR MILES® trademarks in Canada.  Management is highly regarded, and are aligned with shareholders through their own shareholdings.  Finally, the terms of the convertible debenture seem positive and this is a reasonable credit risk, in our view.  At Friday's close of $100.50, we have a yield-to-hard-call-date of 5.11%, and the common shares need to rise 42.6% to hit the conversion price.  We continue to think that the stock has the potential to pop at the announcement of the next royalty acquisition - but it's unclear when that will be. We're long DIV.DB at an average price of $100.08, and quietly await along with everyone else.  We also have a position in DIV common shares.

    8. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #5).  Investing in Canadian oil producers has always kind of been a boom-or-bust sort of proposition.  Unfortunately, for any investors still left in the space, it's pretty much been all bust since oil market went south back in 2014.  WTI oil had been going up in the last few months, but unfortunately, Canadian producers really haven't participated in the good news as the WTI-WCS spread started to widen at around the same time.  And, now, with general market volatility back in play, just like that WTI oil is back below US$60. 

    To boot, pipeline politics is rearing its head again.  British Columbia's new government wants to kill the Trans Mountain pipeline expansion and the federal government, which supports the project (at least nominally), nevertheless has lacked enthusiasm in pressing for the go-ahead, much to the chagrin of the Alberta and Saskatchewan governments.  I get that this is a difficult political tightrope for everyone involved, as balancing the issues of pipeline-constrained crude against valid environmental and Indigenous property rights issues is a difficult puzzle indeed.  As time drags on, however, junior E&P producers like Surge continue to languish - and Surge common shares really took a beating in the market volatility of the last week.

    The company itself is ok.  It has taken measures to improve its balance sheet and can be considered to be quite sustainable at US$60 oil ... as long as it can actually get its product into a pipeline to sell it.  Production is at around 16,000 boe/d so this is by no means a large producer, but its conventional wells in Alberta and Saskatchewan mostly produce light and medium oil, so it should be somewhat less affected by the deep discounts facing its peers who produce a heavier variety of crude.

    The bottom line: if you have a positive outlook on energy prices, SGY.DB is the top oil-related convertible debenture on our list.  Oil has traded down considerably in the last couple of weeks though, and pipeline politics don't look like they are going away anytime soon.  As such, one needs to be something of a contrarian and have a stomach for risk if one willingly invests in the Canadian junior oil market these days.  At Friday's close of $98.50, the yield-to-hard-call of SGY.DB is up to 6.19%, and the common shares need to rise about 62.7% to hit the conversion price.  Surge has an ok balance sheet and provides an an opportunity for participation in the optionality of oil prices heading higher, but at lower relative risk to holding Surge common shares directly (as this past week proved).  We have no position in SGY.DB.  For more information on Surge Energy, please have a look at the company's most recent investor presentation

    9. Rogers Sugar, 5.00% 31-December-2024, Series 'E' Extendible Convertible Debentures. (Ticker: RSI.DB.E), (Previous ranking: #21). It's been a long-time since we've talked about this particular Rogers Sugar convertible debenture (RSI.DB.E) as our quantitative model has largely rated it as relatively overvalued for the greater part of the last six months.  However, in the market volatility of the last week, RSI.DB.E has become much better value based on its end of day Friday close price of  $100.27.

    Let's review the story here.  Rogers Sugar (and its wholly owned operating subsidiary, Lantic Sugar) has a virtual monopoly of the sugar industry in Western Canada (~90% market share), and is part of a duopoly with Redpath Sugar in Eastern Canada (~50% market share for Rogers, and the company seems to have gained ground on Redpath in recent years).  On the surface, this sounds great for investors but its market dominance is due in large part to high tariff protection from lower-cost foreign producers (most notably, those in the US and Mexico).  As I understand it, the current tariff protection for Rogers Sugar is due for renegotiation in 2020, and there is no guarantee that this protection will be extended.  Given the random unpredictability of the Trump administration and its protectionist stance on trade, one really can't discount the risks here.  In addition, I think it's unclear (to me, anyway) what ongoing NAFTA negotiations will mean for Rogers Sugar.  But wait, there's more.  Given the so-called obesity epidemic in Canada, I think it's safe to say that sugar is a bit of boogeyman in the public eye, which effectively limits growth in Rogers' sugar business to changes in the population.

    Ok, that's a lot of negative stuff right there, but let's look on the flipside of things.  First, Rogers Sugar has been in business for years (127 years!), and been faithfully producing free cash flow, paying out dividends to shareholders, and making interest payments to creditors for a really long time.  In addition, in the last year, the company has made two really shrewd acquisitions to position itself as a major player in the maple syrup industry.  Unlike sugar, maple syrup is a growth industry, and the export trade environment is definitely friendlier than that of sugar.

    Rogers announced its fiscal 2018 first quarter results on February 1.   Results were reasonably better than a year ago, and the maple business definitely helped.  It'll be interesting to watch to see how Rogers grows this side of the business going forward. 

    The bottom line: Clearly, there are trade and growth risks in the traditional sugar business, but maple syrup provides a sugary shot in the arm for this century-old company.  RSI.DB.E is at its most affordable since the convertible debenture issue hit the market last summer.  At Friday's close price of $100.27, the yield-to-hard-call is 4.94% and the common shares need to rise 34.3% for the issue to trade in-the-money.  We have no position in RSI.DB.E.  For more information on Rogers Sugar, please have a look at the company's most recent investor presentation (note: the presentation is really not that recent - it dates back to last July and is related to the company's acquisition of L.B. Maple Treat Corporation).

    10. Algoma Central, 5.25% 30-June-2024, Series 'A' Convertible Debentures. (Ticker: ALC.DB.A), (Previous ranking: #9).  Since our last update, there have been two bits of news out of Algoma Central.  First, on January 24, the company announced a normal course issuer bid (a.k.a. a stock buyback), in which up to 5% of the company's outstanding shares may be purchased over the next year.  These are pretty standard terms as far as Canadian normal course issuer bids go.  Of course, this particular buyback is hot on the heels of the somewhat novel modified Dutch auction stock buyback the company conducted right before Christmas, in which only 0.9% of the total number of shares outstanding were offered by shareholders to the company for purchase and cancellation at the maximum offered price of $14.75 - really quite a bullish result.  Second, on February 5, the company announced that it had taken delivery of its seventh Equinox Class vessel, furthering its fleet renewal program.  Good stuff.

    Some fun facts: Today, Algoma Central is the largest owner and operator of dry and liquid bulk carriers on the Great Lakes - St. Lawrence Waterway, and the company has been a Great Lakes shipper since all the way back to 1900.  (For a good read, check out this New York Times travel section article about cruising the Great Lakes on an Algoma Central Equinox Class vessel).  This company doesn't get much coverage on Bay Street as insiders own 78% of the company and, as such, it doesn't offer much in the way of investment banking business.  Actually, somewhat famously, Algoma Central has never done an offering of shares after its initial public offering back in the 1960s.  Nope, no dilution here, friends. 

    Shipping is an economically sensitive and cyclical industry, and in the last couple of years, management has been busy with a number of initiatives to position the company for the next upswing in the cycle.  First, the company has divested over $100 million in real estate.  Second, the company has been reinvesting heavily to modernize its fleet to make it more efficient and profitable.  Third, the company has been building out its global short sea shipping (i.e., think of this as international shipping along coastlines without having to cross an ocean) capabilities, which has the potential to be a promising growth opportunity over the medium- to long-term.  Shares of Algoma Central have generally responded positively, and even with the market volatility of the last couple of weeks, its common shares are still up over 14% over the last year.

    The bottom line: although Algoma Central only apparently issues new equity about once every 50 years, its ALC.DB.A convertible debenture just hit the market last year, and demand for it has remained quite high in the secondary market.  ALC.DB.A is a good credit and offers exposure to a company with unique shipping infrastructure assets, a market-leading position, and a management that thinks sustainably for the long-term.  ALC.DB.A closed Friday at $104.41, which gives it a yield-to-hard-call of 4.14%.  The common shares need to rise about 44.2% to hit conversion price.  We have no position in ALC.DB.A, but have a long position in ALC common shares. For more information on Algoma Central, please have a look at the company's most recent investor presentation.

    Picture of the Day
    Pacific sunset. A fisheye view of the spectacular summer Chicago skyline as seen from the Navy Pier Ferris wheel.  Chicago, Illinois.  Copyright © 2013 Felix Choo / dingobear photography.  Picture is available for sale as prints or wall art at Fine Art America.  Picture is also available for licensing at Alamy Images.  Photo may not be reproduced without permission. 

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