For a summary of the rankings of our entire convertible debenture universe including the quantitative model prices of each issue we follow, please click on the table below to view it larger.
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General Commentary (March 17, 2017)
On Wednesday, the US Federal Reserve went ahead and raised its benchmark rate another 25 basis points to 1.0%, its second increase in three months and the third since the depths of the financial crisis. The Fed noted that the US economy was expanding at a "moderate pace", and the Fed left the door open on future moves in 2017. As of now, the market seems to be expecting at least two more rate hikes before the end of the year, and the fact that Janet Yellen's comments seemed to not make it a foregone conclusion that it would be three (or more) increases seemed to put the richly valued equity markets at ease. So while the music is still playing for now, but we remain vigilant - fortunes could change on a dime, especially with the bread-and-circuses spectacle (abomination?) that resides in Washington.
The Canadian bond market met the Fed interest rate hike with a relative shrug. Although rates remain elevated relative to the last 12 months, yields across the entire curve moved very little in response to the Fed move. Canadian equity markets, as measured by the S&P/TSX Composite Index, ended almost virtually flat at 15,490.49.
Here at the Canadian Convertible Debentures Project, we're keeping an eye on the Canadian yield curve and where the TSX goes from here. We didn't have any changes in the Peanut Power Rankings Top-5 this week. However, our #1 pick the last two weeks, the Tricon Capital, 5.75% coupon 31-March-2022, Series 'U' Extendible Convertible Debentures, finally hit the market on Friday, and the reception (as we suspected) was positive. More details below.
Peanut Power Rankings Top-5 Convertible Debentures (March 17, 2017)
- Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible Convertible Debentures. (Ticker: TCN.DB.U), (Last week's ranking: #1). This highly anticipated US dollar-denominated convertible debenture hit the market for its first day of trading on Friday, and it didn't disappoint. Almost $23.4 million in par value of the bonds traded, and the bonds closed at an above par price of $102.40 after trading as high as $103.40 and never trading below $102.00. As far as convertible debentures go, this is about as successful of a debut as one can expect. Based on our quantitative analysis and the qualitative factors associated with this particular issue, we still really like this issue even at these prices. As previously indicated, TCN.DB.U is part of an offering intended to help finance Tricon's proposed transaction for Silver Bay Realty Trust. The Silver Bay deal is transformative and should be accretive to the common shares, which would in turn drive the price of debentures. In a declining Canadian dollar environment, the US-denominated issue (and coupon) is nice, too. As at March 17, my quantitative model is pricing the fair value of the debentures at $113.78. Bottom line: there's still lots of room for upside here. I'm long TCN.DB.U at $100.00.
- Gibson Energy, 5.25% 31-July-2021, Convertible Debentures. (Ticker: GEI.DB), (Last week's ranking: #2). Both Gibson's common shares and its convertible debentures were down during the week, as WTI oil prices languished under US$50. Quite frankly, US shale production remains high, and there's a glut of the gooey stuff out there. Gibson is energy services, so of course its prospects will rise and fall with the oil industry. Our quantitative model indicates GEI.DB is 8.73% undervalued. The underlying shares have some volatility associated with them, which increases the value of the conversion option. Gibson has some leverage on its balance sheet, and I think you have to like the outlook for energy prices to be in this one as the current yield-to-hard-call-date is 2.69% at it's Friday closing price. Bottom line: you're here for the capital gains potential and because you like oil going forward. I have no long position in GEI.DB.
- Innergex Renewable Energy, 4.25% 15-August-2020, Series 'A' Convertible Debentures. (Ticker: INE.DB.A), (Last week's ranking: #3). This renewable energy producer is mostly focused on hydro and is known to have somewhat boring price action on its underlying shares. I don't find this as a problem as I think renewable energy is an important secular theme for the future. Also, INE.DB.A's conversion price is now only 4.0% above where the common shares closed on Friday. My quantitative model indicates the debentures, based on their closing price of $107.00, are 5.06% undervalued. Bottom line: slow and steady wins the race. With about 2.5 years until the earliest possible date of the issue being hard called, the probability of the convertible debentures trading in-the-money is very good. The yield-to-hard-call-date is still positive at 1.34%. I like this issue; you'll participate in the upside of the shares and you would still have a floor on your principal if it doesn't work out. I'm long INE.DB.A at $102.75.
- Cargojet, 4.65% 31-December-2022, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Last week's ranking: #4). Cargojet stock had a little bit of a volatile week, but ultimately ended the week about 1% higher. The Cargojet convertible bonds ended the week about 50 cents lower. The dominant air cargo carrier in Canada, an investment in CJT.DB.C is effectively a play on the continued growth of online retail and shopping. Free cash flow generation remains strong and the outlook looks bright. The conversion price of the underlying debentures is 26.1% above the closing price of the shares; yield-to-hard-call-date is 2.96% based on a debenture price of $106.00. Bottom line: Cargojet operates in a sector which has good secular tailwinds, the company is well-operated, and at these prices, CJT.DB.C looks like a terrific opportunity. I've been long CJT.DB.C since it debuted at $100.00.
- Timbercreek Financial, 5.45% 31-March-2022, Series 'B' Convertible Debentures. (Ticker: TF.DB.B), (Last week's ranking: #5). When this series first hit the market early last month, its main attraction was the relatively low conversion price relative to where the underlying stock had been trading as it was issued with a premium of less than 20%. The shares have quietly moved higher due to good operating results, and the premium is now only 6.2%. Of course, as an alternative real estate lender that's a mortgage investment corporation (MIC), the company pays out substantially all of its cash flow, so volatility of the share price is generally low, which puts a damper on the value of the conversion option. Still, with a 5.45% coupon (and a 5.17% yield-to-hard-call-date), I think one can sit and wait in the meantime. This name isn't without risk as you have to be comfortable with the state of Canadian real estate at this point in the cycle. Bottom line: nice coupon, with moderate optionality on getting into the money over the next four years. I'm long this issue at $100.95.
City bean. The outstanding sculpture entitled 'Cloud Gate' by Anish Kapoor in Millennium Park, Chicago, Illinois. Copyright © 2014 Felix Choo / dingobear photography. Photo is available for licensing at Alamy Images. All rights reserved. Photo may not be reproduced without permission.