Sunday, November 4, 2018

November 2, 2018, Quick Update: Peanut Convertible Debentures Power Rankings

Hi, a lot has happened since our last post, so time for a new one.  This is the 36th update of the Peanut Convertible Debentures Power Rankings, which is current to November 2, 2018.  Thank you for continuing to read and support the Canadian Convertible Debentures Project.
      
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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.



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 (November 2, 2018)
  • Lots has happened since our last update. 
  • Well, NAFTA did, indeed, get resolved.  It has a new name, but let's not kid ourselves, for Canada, the new deal is substantially similar to the previous one.  Canada made some concessions in the dairy industry but they're essentially the same things that Canada would have given up under the doomed Trans-Pacific Partnership anyway, and managed to retain the dispute resolution mechanism.  The US, however, has not yet dialed back the tariffs they slapped on Canadian steel and aluminum, and we'll see if they actually do at some point. 
  • Rates are on the rise again. As expected, the Bank of Canada raised rates in October, and added some hawkish statements to boot.  The question is will they go through with it, and can the economy handle it?  Most seem to believe there will be three more rate hikes before the middle of next year.  I'm not so sure, as the Canadian economy is growing and essentially at capacity.  There has been an uptick in inflation but is the economy so heated that three more moves are required?  I expect two more.  We will see. 
  • Mid-term elections in the US are on Tuesday.  Right now, the polls say the Democrats should regain control of the House, but the Republicans should retain the Senate.  If you've been reading this blog for awhile, you already know that I think it's absolutely critical for the market and yes, democracy, that there be real checks and balances for the current US chief executive and his cronies.  
  • Regarding politics in Canada, we have seen a similar tack to the right in recent election results in Ontario, Quebec, and New Brunswick.  We will see if the trend continues with elections federally and in Alberta next year.  What I find troubling is the surfacing of similar political tactics here in Canada as those that have been used with dangerous "success" in the US.  Is party more important than country here in Canada, too?  Again, we'll see.
  • The theme of Canada not being competitive has been well played out in the press and those who seek to benefit politically and financially from such a narrative.  Yes, we need to get pipelines built here in Canada, even if you're not a fan of oil and gas extraction industries.  The switch to a carbon-free future will require great resources and investment, and getting a reasonable price for our current resources is a bridge to that future.  On the other hand, those citing the unsustainable US tax cut as a reason for Canada being not competitive are wrong in my opinion.  Again, that US tax cut that was delivered last year is clearly unsustainable (the US deficit is over a trillion dollars), unbalanced (it unevenly benefited the rich, who aren't spending it in the US economy), and will not "pay for itself" (ideology isn't fact, and trillion dollar deficit is evidence enough).  Given that the US central bank has been forced to raise rates in the face of this unnecessary fiscal stimulus, when this stimulus is forced to be lifted in, say, 2020 (either with the tax cuts running off as they are currently designed to do and/or large cuts in government spending), I think the US economy is in real risk of slipping into recession at that time.
  • October has already proven to be a highly volatile month as you market participants undoubtedly know.  Also as you know, markets look ahead.  Given what I wrote above, don't be surprised if markets look ahead in 2019 and don't like what they see. 
  • As such, given this backdrop, the thinking here is the same for convertible debentures and other market assets: emphasize high quality, reduce credit risk, and expect lower overall returns than you've been getting as of late.  Stay diversified and unlevered out there.



Picture of the Day

https://fineartamerica.com/profiles/felix-choo.html
Aboard the slow train across the Canadian prairies.  Reford, Saskatchewan, Canada. Copyright © 2015 Felix Choo / dingobear photography.  Photo published in Travel + Leisure Magazine October 28, 2018. Photo available for licensing at Alamy Images. Photo may not be reproduced without permission. 

Drop Us a Line

Thank you for reading this blog.  As always, if you have any comments or questions about convertible debentures or this blog, please leave us a comment at the bottom of the page or email us at convertibledebs@gmail.com. 

In addition, for media, sponsoring and/or financial institution inquiries, please email us at convertibledebs@gmail.com.  Thank you for your interest!

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9 comments:

  1. Can you explain the difference between Maturity Date, Soft Call Date and Hard Call Date please.

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  2. A convertible debenture is essentially a type of bond with a conversion feature. Bonds typically have maturity dates; that is, the date you get your principal back. This is also true for a convertible debenture. Soft call and hard call options are typical features for a Canadian convertible debenture. Note these options are for the benefit of the issuer. Soft call date refers to the date the issuer can redeem the issue (usually at par, but not always) as long as the underlying common shares exceed a pre-determined price for a minimum number of trading days. This pre-determined price is often 125% of the pre-determined conversion price - but again, not always. The hard call date refers to a date, which is often a year or two after the soft call date, where the issuer can redeem the convertible debenture issue, no matter what the price of the underlying shares are trading at. Usually, hard calls are redeemed at par but again, not always. I trust this answers your question.

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  3. Ok thanks....I have traded a few debentures and bonds in the Canadian market, and quite a few baby bonds in the US market. The baby bonds always have a call date (optional) and a maturity date.
    I had a debenture a few years ago that converted to stock, which I had no say in, how does one determine if this is going to happen....the prospectus?
    I own Dii.db.u, how is a 34.4% hard call date calculated? With this debenture maturing in a year for a for a 7.71% yield (IMO very safe),why is it not higher on your list.
    Lastly, can you recommend any reference material for understanding debentures?
    Thanks again.

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  4. I would say that most Canadian convertible issues give the issuer the option of paying back principal via shares. Not all exercise this option however. This can be a bit treacherous for an investor since if the convertible issue is large relative to the market cap of the issuer, material dilution can occur.

    On Dorel, the date of earliest hard call is the end of this month; the odd 34% yield reflects an automatic calculation that annualizes, and I can see how it might be confusing. Dorel has struggled a bit in light of the Toys R Us bankruptcy and is a long ways off from conversion. The model doesn’t like it much since it doesn’t assign much probability for the shares to exceed conversion before maturity. That said, I agree the company isn’t necessarily a huge credit risk. It’s current ranking is probably a bit harsh.

    As for other reference material, there isn’t much out there but let me get back to you on this when I have a bit more time to compile a few links. Stay tuned.

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  5. Thanks for your excellent reply, looking forward to any links you can find.

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    1. This comment has been removed by the author.

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    2. Apologies for the delay. This blog post from Paul Borisoff of Canaccord Genuity has a lot of good information in it: http://www.borisoffwealth.ca/blog/31304-The-Canadian-Convertible-Debenture-Market--Exploiting-Opportunities-in-an-Overlooked-Asset-Class

      This webpage has some basic information about the asset class in general: https://www.incomeresearch.ca/referenceConvertableDebentures.php

      And here's a primer on convertible debentures produced by RBC: https://ca.rbcwealthmanagement.com/delegate/services/file/162724/content

      Please note I do not have any relationship of any sort with any of the above sources, and I don't have any responsibility for the info contained therein.

      Hope this is helpful!

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    3. Thanks for those I'll look at them this evening....much appreciated.

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  6. Thanks again for those links, I did learn a couple things on conversions. Any thoughts on IVQ.DB.U and IVQ.DB.V, I've taken a small position. I noticed it doesn't make the power rankings.

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