Sunday, April 15, 2018

April 13, 2018, Update: Peanut Convertible Debentures Power Rankings

Hello. Welcome back as we resume our regularly scheduled programming.  This is the 29th update of the Peanut Convertible Debentures Power Rankings, which is current to April 13, 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.



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 (April 13, 2018)
  • 2017 was a remarkably calm year in US equity markets.  2018? Not so much.  Volatility continues to reign, and we're up several hundred points in the Dow one day, and down the next.  Rinse and repeat.  It's as if markets have finally woken up to the all of the nightmare geopolitical worries out there, not the least of which is the toxic environment in Washington.
  • Meanwhile, here in Canada, is it just me or is the consensus bearishness on the TSX getting a little out of hand? There's been plenty of whinging about Canada's competitiveness, which I gather is due in part to the relatively different tax, fiscal, and corporate welfare (let's call it was it is) philosophies between here and south of the 49th.  Everything being equal, tax-and-spend is a recipe for deficits, this is true.  But cutting tax-and-spend means monsterously large deficits, which is what our neighbours to the south are staring at in the near- to medium-term.  And no, trickle-down economics don't work.
  • So where am I going with this? With its moribund start to the year, the TSX is better value now than the S&P 500.  Our view remains that interest rates will rise somewhat less than consensus expectations (like it or not, a lower dollar will be the balancing mechanism to keep exports competitive).  If so, this will help interest sensitives like utilities, telecoms, and pipes.  The banks would benefit from a steeper yield curve, but forecasts aren't signaling this.  That said, valuations are getting cheaper, and over the medium- to long-term, when have we ever known a Canadian bank to not be good at making money?  Our take: buy, hold, and DRIP away.  Finally, oil prices are now on the rise, which may provide a bid under the Canadian energy companies which have all but been for market once again. 
  • Speaking of oil, we've mentioned on this blog as far back as January that we thought oil prices might be higher over the next year purely on the fact that the Saudi royal family has incentive to manage prices higher as we head into the upcoming IPO of the massive Saudi state oil company, Aramco.  This article in Bloomberg, which ran this past week, more or less confirmed what we suspected.  The target to look out for: $80 oil.  
  • As we've been saying pretty much since we've started this blog: it's risky out there.  As such, like a broken record, we still think it's probably best to emphasize broad diversification across portfolios and focus on quality names.  As always, protect your hard-earned capital. 
  • Let's get to the Top-5 convertible debentures.  If you have any comments, you can drop us a line as per usual.     


Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (April 13, 2018
    1. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Previous ranking: #1).  For the second straight update, the Hydro One instalment receipts sit atop our list.

    Of course, Hydro One, as a utilities stock, is interest rate sensitive, not to mention being exposed to the strange dynamic of being a former Crown corporation in which the Government of Ontario still owns a sizable minority stake.  As Ontario slips into election mode, Hydro One risks being dragged into all sorts of political mudslinging, and it made news this past week when the new Progressive Conservative leader (facepalm) suggested he would fire Hydro One's CEO is elected.  These types of things aren't going to help shareholders and instalment receipt holders.

    Ok, so you may be wondering, why do we have it at #1 then? Well, mostly, our quantitative model says it's undervalued.  Based on Friday's close of $30.80, the model says H.IR is now about 15.0% undervalued.

    By now, you probably already know that these Hydro One instalment receipts have a complex structure.  We won't go into details again in this post but for more information, check out our write-up from a previous update.  

    The bottom line: The interest rate environment has hit the price of the Hydro One instalment receipts quite 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 utilities play at this point in the interest rate cycle.  Further, the upcoming Ontario election may throw Hydro One investors some additional curveballs.  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.  It is currently trading slightly out-of-the-money; if the share price of H does not improve, you run the possibility of getting stuck in a zero-coupon convertible debenture after the Avista deal closes.  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.

    2. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #2).  Oil is up (WTI is at US$67.39 as of Friday).  Gas prices are up (I fueled up this morning, trust me).  Surge Energy is up.  Is there light at the end of the tunnel for Canadian E&P companies?

    Same comments as last time: Surge continues to quietly execute within the context of a tough environment for oil juniors - year-end results released March 14 were decent enough.  If you believe management's estimates based on its proven and probable reserves, the company has a net asset value per share of over $6, which is three times higher than its current share price.  The question is, however, with so many investors badly burned in the last oil downturn, are there any investors left who care?

    The bottom line: If you have a positive outlook on energy prices or even just a neutral one, SGY.DB might be worth a look here.  Please note, however, investing in an junior Canadian resource company requires a relatively higher risk appetite.  At Friday's close of $101.00, the yield-to-hard-call of SGY.DB is 5.45%, and the common shares need to rise about 31.0% to hit the conversion price.  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.

    3. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #4).  Tricon has been busy refinancing some debt and completing securitizations, which should save the company in interest expense going forward.  In addition, the company entered an agreement to sell its manufactured homes division, but financial terms were not disclosed.  These bits of news helped stabilize Tricon's stock price, which had sold off in recent weeks in sympathy with the rest of the real estate sector. 

    As we've been saying for awhile now, Tricon is executing very well and fundamentals are intact, so we haven't been too worried about the price volatility in the share price and convertible debentures.  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.

    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$105.00, the yield-to-hard-call date is 3.95% and there is about 3 years left until the earliest potential hard call date. The common shares need to rise about 25.8% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00 and will continue to hold it unless there's a change in fundamentals.  For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

    4. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #6).  As we mentioned last time, this hotel REIT reported its year-end financial results on March 7 and the results missed, and the HOT.UN was punished.  The HOT.DB.U convertible debenture is holding up relatively better, but Bay Street seems to want the company to execute better in 2018.  

    The bottom line: HOT.DB.U has traded below par in the months since it hit the market. 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.  Arguably, the trust units of the REIT are trading cheaply, but the company does need to start hitting earnings estimates.  With a yield-to-hard-call-date of 6.72% and over 3 years left to the hard call date, we continue to think the convertible debenture is very good value.  It closed Friday at US$95.10 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.

    5. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #3).  Disappointingly, DHX continues to plumb levels near its 52-week lows.  Two priorities for this embattled little company going forward: (1) de-lever the balance sheet by paying off debt and (2) completing the ongoing board strategic review, which the company has indicated will occur before June 30.

    On the latter, it remains to be seen if the company will be sold.  DHX has desirable sought-after assets, but retains a heavy debt-load.  This said, the DHX.DB convertible debentures are trading at sizable discount to par, and in the event of a change of control, they may be redeemed at par. However, I wouldn't be surprised to see the company sell off just some of its assets (for example, perhaps, its TV channels), and use the proceeds to pay off debt, but this would not constitute a change in control.

    The bottom line: DHX has attractive media content assets, but clearly there are risks. DHX's Peanuts intellectual property has cash cow characteristics, and the company is currently undergoing a strategic review, which are both positives.  However, although the company is making progress in paying off debt, it remains highly levered, which is potentially risky in a rising interest rate environment.  Further, the exit of the CEO and CFO does not help the company's relationship with Bay Street.   Results have been disappointing but we still think the unique nature of DHX's assets are potentially worth the risk if you can handle the volatility.  However, at this point, any new investment in the shares or convertible debenture has to be considered borderline speculative.

    The convertible debenture (DHX.DB) closed Friday at $91.25.  At this price, DHX.DB has a yield-to-maturity of 7.61% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 113.9% 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 well in the end.  Management needs to execute, though, and as we've seen in the last few weeks, there is limited room for error.  We are long DHX.DB at an average price of $99.22 and continue to hold.  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.



    6. Morneau Shepell, 5.00% 30-June-2021, Series 'A' Convertible Debentures. (Ticker: MSI.DB.A), (Previous ranking: #10).  Morneau Shepell, the human resources, retirement benefits, and technology company, just keeps going up, doesn't it?  Defying gravity, Morneau Shepell has done remarkably well in the market volatility of the last couple of months.  Year-end results were released on March 7, and the company increased earnings 33% year-over-year. 

    The bottom line: This is quietly a pretty solid company that executes very nicely in its niche, and the convertible debenture is now trading in the money thanks to the continued strength of the MSI common shares.  At Friday's close price of $112.05, the yield-to-hard call is a -0.64%, but there are still over 2 years until the earliest possible date of hard call.  MSI stock isn't cheap, but should it continue its positive price momentum, the MSI.DB.A convertible debentures will come along for the ride.  We have no position in MSI.DB.A.

    7. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Previous ranking: #5).  Cargojet is a dynamo in its space, but it's now trading well in-the-money. Those lucky enough to be in the CJT.DB.C convertible debenture must feel like they are flying in first class.

    The bottom line: Cargojet is a terrific little company and remains a very good story operating in an area of long-term, secular growth - online retail is only going to grow.  No, the stock isn't cheap and the yield-to-hard call on the convertible debentures now sit at -3.68% based on Friday's close.  At this point, an investment in CJT.DB.C is an alternative to buying CJT outright.  We no longer have a position in CJT.DB.C.  Apparently we sold too soon!

    8. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #7).  2017 year-end financial results were released on March 29.  The company's royalty interest could be summed up very quickly like this: Mr. Lube was strong, Sutton Realty was steady, and AIR MILES® was mildly disappointing.  Based on the fourth quarter, the payout ratio of DIV is slightly above 100%, but taking into account the company's DRIP which has sizable participation, the payout ratio is closer to 94%.

    This suggests to me that the dividend is more or less sustainable, but it would be nice if the company could close another accretive royalty deal here in the near future.  We patiently await and clip coupons in the meantime.  
      
    The bottom line: DIV is an interesting royalty company that focuses on well-known trademarks, 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.  DIV.DB is holding steady in the current volatile market environment.  At Friday's close of $101.00, we have a yield-to-hard-call-date of 4.95%, and the common shares need to rise 39.6% 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.

    9. Premium Brands, 4.65% 30-April-2025, Series 'G' Convertible Debentures. (Presumed Ticker: PBH.DB.G), (Previous ranking: #9).  A noted consolidator in the pre-packaged sandwich and lunch meats industry, the stock price of Premium Brands has done very well in recent years.   The stock continued to do even better this week when the company announced on Thursday that it would use its new convertible debenture proceeds and purchase the 100-year old beef jerky and sausage company, Oberto.

    The bottom line: We don't closely follow this company, but there's no question that the company's stock and convertible debentures have done very well for investors in recent years.  Last time, we said that we didn't think the terms of the financing were exactly super generous for investors as the 4.65% coupon seemed a little skimpy in a rising rate environment and the conversion price was set some 60% away from the price where the common shares were trading.  Well, with the announcement of the Oberto deal, the common shares are now only 51.0% away from the conversion price, and the yield-to-hard call is 4.44% with some 5+ years until the earliest possible date of hard call.  So, if you believe that can continue to be effective in executing continued consolidation and operating in its business niche of pre-packaged foods, then you could do worse than consider PBH.DB.G.  We did not subscribe to the PBH.DB.G offering.  For more information on Premium Brands, please have a look at the company's most recent investor presentation

    Picture of the Day

    https://fineartamerica.com/profiles/felix-choo.html
    Sleeping wolves.  Saskatoon, Saskatchewan. Copyright © 2018 Felix Choo / dingobear photography.  Picture is 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!

    *** 

    Saturday, April 7, 2018

    **CORRECTION NOTICE** Beyond Convertible Debentures: Guardian Capital Group (GCG.A), April 6, 2018, Update

    *** CORRECTION NOTICE.  April 9, 2018. *** Thanks to a comment made by one of our astute readers, it was noted that we were possibly "double-counting" the value of Guardian Capital's BMO shares and corporate investment portfolio since I was including the dividend income that was generated from these two sources in the multiple calculations I had previously done on the company's operating income.   The reader quite correctly indicated that this dividend income should be carved out, and we've done that now - all figures below have been updated.  The corollary of this correction is that the overall thesis I have on Guardian Capital is still the same, but the amount of perceived undervaluation is not as much as I had previously indicated when this blog post was first published over the past weekend.  Please see below for details - corrections in the text of the article are in blue text.  As I always say on this blog, everything you read here is provided as information and opinions only, and not intended to be a provision of investment advice or a recommendation of any investment action in any form.

    https://fineartamerica.com/featured/first-bluebird-of-spring-felix-choo.html
    A brilliant azure blue male Mountain bluebird (Sialia currucoides) on barbed wire near Beaverhill Lake, Alberta.  Copyright © 2013 Felix Choo / dingobear photography.  Picture is available for sale as prints and wall art at Fine Art America.  Picture is available for licensing at Alamy Images. Photo may not be reproduced without permission. 

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    Beyond Convertible Debentures is a semi-regular column on this blog where we explore different and somewhat less widely covered investment ideas that exist outside of our favourite asset class of convertible debentures.  We hope at least some of you out there find it interesting. As always, thank you for logging into The Canadian Convertible Debentures Project.

    Important disclaimer: Like everything else on this website, content here is provided as information and opinions only and 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.



    Beyond Convertible Debentures: Guardian Capital Group, April 7, 2018, Update

    Since our last Beyond Convertible Debentures update on Guardian Capital in late February, the company has officially filed its 2017 annual financial statements and annual information form on SEDAR, which allows us to update a few of numbers before the company files its 2018 Q1 financials.  We won't repeat the background on the company we went into in our last update on Guardian; for a recap, click here

    Instead, let's just get to the updated numbers. 

    When attempting to value Guardian Capital, I like to use a sum-of-the-parts type of approach.  The way I see it, there are three main parts to company's valuation: (1) Guardian's asset management business, (2) Guardian's large position in BMO shares, and (3) the rest of Guardian's proprietary investment portfolio, which mainly comprised of a diversified global equities portfolio.  The investment premise here has always been that the BMO shares and the investment portfolio constitute a large portion of Guardian's share price, allowing investors to essentially buy the company's main asset business for either very cheap or, at times, free.  Let's see what the numbers tell us: 


    Guardian Capital's class 'A' non-voting shares (GCG.A) closed Friday (April 6) at $24.10 per share and its common voting shares (GCG) closed at $24.00 per share.  If we take a weighted average of the two classes of shares based on their market capitalization, we get a "combined" per share value of $24.09 per share.

    Based on the numbers we've calculated from publicly available sources, $12.07 of this $24.09 total per share value is comprised of Guardian's holdings of 3.70 million BMO shares and $9.54 of the $24.09 is made up of the rest of Guardian's proprietary investment portfolio.  This leaves $2.48 of per share value in what's left of the $24.09, which we would, by process of elimination, then attribute to Guardian's core asset management business.  Stated differently, as at the close of trading on Friday, the market is pricing Guardian's asset management business at only $2.48 per share ... because the rest of the share price value is comprised of Guardian's own holdings in a big chunk of BMO shares and a proprietary diversified investment portfolio that is mostly made up of global equities.  

    So, is the market mispricing Guardian Capital?  We think so. 

    The crux of our investment thesis is that the $2.48 per value attributed to Guardian's asset management business is, quite frankly, too low for what the company brings to the table.  As at December 31, 2017, Guardian generated $48.2 million of operating earnings in the last 12 months.   Note that "operating earnings" here includes the regular income from Guardian's fee-generating investment management activities, as well as dividends and interest from its BMO shares and the rest of its proprietary investment portfolio, while excluding any net capital gains (or losses) generated from trading of its BMO shares and/or proprietary investment portfolio.

    If we take $48.2 million of operating earnings and carve out the dividends generated from the BMO shares and the rest of the company's corporate investment portfolio (these dividends add to $21.4 million), we get a total adjusted operating earnings for Guardian of $26.8 million.  This is a reflection of the true earnings power of the core asset management business since it excludes any income generated from the company's BMO shares and corporate investment portfolio.

    If we take the market-implied market capitalization attributable to Guardian's asset management business (i.e., $2.48 value per share x 29.5 million shares outstanding = $73.1 million market implied market cap) and divide it by the $26.8 million of adjusted operating earnings generated, we arrive at a price-to-adjusted operating earnings ratio of 2.73x for this business.  This compares to a ratio of 3.28x when we first started writing about Guardian Capital in this column back in December and, at the time, we thought 3.28x was undervalued.  This means the market is possibly underestimating Guardian's asset management business even more now than it was before Christmas.

    That said, even though we think it's very undervalued, it's open for debate as to what kind of price-to-adjusted operating earnings ratio multiple that this business should be trading at. 

    Like in our previous columns on Guardian, we've tinkered with the numbers to see what the shares of Guardian Capital would trade at if the market assigned, say, an 8.00x price-to adjusted operating earnings ratio on its shares.  In our view, an 8.00x multiple is quite a reasonable ratio.  Click below to view the numbers larger:


    As you can see, with an 8.00x multiple, we would get to a value of $28.87 per share, which is 19.8% higher than GCG.A's close price on Friday of $24.10.  So, based on this quick-and-dirty analysis, there's quite a bit of potential upside here.  As such, perhaps this suggests an opportunity?

    To summarize, here are what we see as positives associated with investing in Guardian Capital shares:
    • Not widely followed by Bay Street, we believe that the market continues to undervalue Guardian Capital - and it's even cheaper now than it had been the last two times we mentioned the company on this blog. When we dive into the numbers and carve out the significant value of its holding of BMO shares plus the rest of the company's proprietary investment portfolio, the "stub" asset management business is currently trading only at a 2.73x price-to-adjusted operating earnings ratio. (I repeat: only 2.73 times!)
    • The company's asset management business has a long history of being consistently profitable.  In 2017, the company booked $93.7 million in after-tax net earnings.  Based on Friday's close prices, the company has a market capitalization of $711.2 million.  This implies a total business trailing price-to-earnings ratio of 7.47x.  This is also cheap, and considerably cheaper than the TSX as a whole.
    • Guardian Capital has grown its dividend in each of the last eight years, and based on the go-forward quarterly dividend of $0.125 per share, the current dividend yield of the stock is approximately 2.07%. 
    • Given that there are few publicly traded independent investment asset managers left trading on the TSX, there is definitely some scarcity value in Guardian.  It would almost certainly be a good acquisition target for any of the big Canadian banks (given their history of dealing with one another, BMO would seem like a possibility), but this is, of course, just pure speculation on our part. 
    There are also, of course, risks to investing in Guardian Capital.  Here are some of the more prominent risks, in our view:
    • The value of Guardian Capital's shares are highly correlated to equity markets, and in the event of a broad market correction, they would almost certainly struggle.  In the depths of the 2008 financial crisis, GCG.A traded as low as $3.00 per share.   Since the beginning of 2018, volatility in markets have picked up and we are now firmly entrenched in a rate tightening cycle, not to mention all of the disruptive geopolitical risks out there. 
    • Since the company's position in BMO shares is such a large part of its overall valuation, Guardian's fortunes are therefore also tied to that of BMO's.  I tend to think that BMO is a pretty solid bank, but to the extent that BMO runs into any issues, then shares of Guardian would be negatively affected as well.
    • The shares of Guardian Capital are illiquid.  Even the more liquid class 'A' shares only trade on average less than 10,000 shares a day, so bid-ask spreads can be quite wide at any given time.  Our view: know your price and set limit orders and not market orders when buying or selling.
    • A large part of Guardian's business is focused on managing assets for institutional investors such as pension funds.  In recent years, large institutional investors have tended to reduce their allocations to liquid assets such as stocks and bonds, and instead increased  allocations to such asset classes as real estate, private equity, and infrastructure.  If this trend continues, traditional asset managers such as Guardian could be negatively affected.
    • With the huge, widespread of acceptance of ETFs and other lower-fee investment options, pricing power for traditional investment asset managers is arguably eroding.  This may negatively affect Guardian's ability to generate the same level of fee income per dollar of assets under management going forward.
    The bottom-line: in today's (expensive!) market, we're always on the lookout for potentially undervalued investments such as Guardian Capital.  In our view, the market continues to undervalue this investment asset management firm.  As such, we continue to build a position in GCG.A; our average cost base is approximately $25.57 per share.   

    ***
    Any thoughts, questions, or comments?  As per usual, please feel free to drop us a line through the comments form below or by sending us an email.  


    Sunday, March 25, 2018

    March 23, 2018, Update: Peanut Convertible Debentures Power Rankings

    Hi, again.  This is the 28th update of the Peanut Convertible Debentures Power Rankings, which is current to March 23, 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.  Note: we've done some additional tinkering on the quantitative model since last update, so you may notice some variation in the model prices if you're comparing to last time.  As always, everything about this blog is a work in progress, and we're trying to continuously improve outputs as best we can.  Hopefully you find our efforts useful.



    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 (March 23, 2018)
    • Not much time to write this week so we'll avoid all of the politics talk and keep this really brief.
    • Equity markets remain volatile lurching back and forth in search of direction.  The TSX in particular has had a rough go of it in 2018, and sits at a level below that of a year ago.  
    • The most recent data from both Canada and the US suggest that price levels are edging higher.  This means interest rate increases.  We're still of the opinion that the US will raise rates three more times this year, and Canada once or maybe twice.
    • So, to quickly sum, we have high equity valuations, a return of market volatility, rising interest rates, an aging bull market, growing trade protectionism, and the worst US administration, well, ever.  Clearly, there are risks out there.
    • As such, we'll keep pounding the drum for broad diversification across portfolios to help manage the risk.  In addition, a focus on quality names that can weather the storm of higher rates and an uncertain world would be preferable. As always, protect your hard-earned capital.
    • Let's get to the Top-5 convertible debentures.  This week, we struggled with coming up with names atop our list since, to be honest, there are warts with all of the names listed there.  All part of the fun being in the market, I guess.  If you have any comments, you can drop us a line as per usual.     


    Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (March 23, 2018
      1. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Previous ranking: #2).  Almost by default, we're moving Hydro One back atop our (vaunted!) list.

      Of course, Hydro One, as a utilities stock, is highly interest rate sensitive, not to mention the strange dynamic of being a former Crown corporation in which the Government of Ontario still owns a sizable minority stake.  But if this doesn't really bother you, based on Friday's close of $32.25, our model now says H.IR. is about 10.7% undervalued, and that's a big reason why this issue has re-surfaced atop our rankings. 

      By now, you probably already know that these Hydro One instalment receipts have a complex structure.  We won't go into details again in this post but for more information, check out our write-up from a previous update.  

      The bottom line: The interest rate environment has hit the price of the Hydro One instalment receipts quite 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 utilities play at this point in the interest rate cycle.  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.  It is currently trading slightly out-of-the-money; if the share price of H does not improve, you run the possibility of getting stuck in a zero-coupon convertible debenture after the Avista deal closes.  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.

      2. Surge Energy, 5.75% 31-December-2022, Convertible Debentures. (Ticker: SGY.DB), (Previous ranking: #8).  Obvious observation of the day: Canadian resource stocks sure are volatile! And so are oil prices.  If you've filled up your gas tank in the last week, you already know that WTI is back up, and with it, so is Surge Energy.   

      Surge continues to quietly execute within the context of a tough environment for oil juniors - year-end results released March 14 were decent enough.  If you believe management's estimates based on its proven and probable reserves, the company has a net asset value per share of over $6, which is three times higher than its current share price.  The question is, however, with so many investors badly burned in the last oil downturn, are there any investors left who care?

      The bottom line: These days, one needs to be something of a contrarian and have a stomach for risk to willingly invest in the Canadian junior oil market. That said, if you have a positive outlook on energy prices or even just a neutral one, SGY.DB might be worth a look here.  At Friday's close of $100.25, the yield-to-hard-call of SGY.DB is 5.67%, and the common shares need to rise about 37.5% to hit the conversion price.  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.

      3. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #6).  This embattled little company held its annual general meeting on March 23, and according to the presentation slides from the meeting, the board's strategic review of the company is expected to be complete by the end of fiscal Q4 which, for DHX, is June 30.

      Will the company be sold?  Hard to say.  The company has sought-after assets, but retains a heavy debt-load.  This said, the DHX.DB convertible debentures are trading at sizable discount to par, and in the event of a change of control, they may be redeemed at par.

      The bottom line: DHX has attractive media content assets, but clearly there are risks. DHX's Peanuts intellectual property has cash cow characteristics, and the company is currently undergoing a strategic review, which are both positives.  However, although the company is making progress in paying off debt, it remains highly levered, which is potentially risky in a rising interest rate environment.  Further, the exit of the CEO and CFO does not help the company's relationship with Bay Street.   Results have been disappointing but we still think the unique nature of DHX's assets are potentially worth the risk if you can handle the volatility.  However, at this point, any new investment in the shares or convertible debenture has to be considered borderline speculative.

      The convertible debenture (DHX.DB) closed Friday at $93.04.  At this price, DHX.DB has a yield-to-maturity of 7.23% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 97.5% 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 well in the end.  Management needs to execute, though, and as we've seen in the last few weeks, there is limited room for error.  We are long DHX.DB at an average price of $99.22 and continue to hold.  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.

      4. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #4).  Not much new to report here.  Tricon is executing beautifully, but the market doesn't care, and the company has sold off along with the rest of its interest-sensitive brethren. 

      We aren't too worried as fundamentals are 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.

      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$103.00, the yield-to-hard-call date is 4.67% and there are 3+ years left until the earliest potential hard call date. The common shares need to rise about 35.4% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00 and will continue to hold it barring a change in fundamentals.  Quite frankly, with the debenture trading at these levels, it's possibly a good buying opportunity. For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

      5. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Previous ranking: #3).  Economy and Amazon be damned, Cargojet just keeps going higher, doesn't it?  Impressive.  Very impressive.

      Since our last update, Cargojet announced strong year-end earnings and also increased its quarterly dividend.  Those lucky enough to be in the CJT.DB.C convertible debenture must feel like they are flying in first class.

      The bottom line: Cargojet is a terrific little company and remains a very good story operating in an area of long-term, secular growth.  No, the stock and convertible debenture aren't cheap, but they going higher because the company keeps executing on its opportunities.  Note that Amazon is worth keeping an eye on, however, as they are a fierce competitor in whatever market segment they choose to operate.  We no longer have a position in CJT.DB.C.  Apparently we sold too soon!


      6. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #5).  Sigh.  This hotel REIT reported its year-end financial results on March 7 and the results missed, and the HOT.UN has subsequently been punished.  The HOT.DB.U convertible debenture is holding up relatively better, but Bay Street seems to want the company to execute better in 2018.  

      The bottom line: HOT.DB.U has traded below par in the months since it hit the market. 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 6.73% and over 3 years left to the hard call date, we continue to think it's very good value but Bay Street seems to be getting impatient with the story.  The company just needs to keep executing.  It closed Friday at US$95.00 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: #7).  Still crickets over here.  I suppose, however, in times of market volatility, boring is good, right?

      No word yet on any new royalty acquisition(s) on the horizon.  Year-end financial results are expected March 29. 
        
      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.  DIV.DB is holding steady in the current volatile market environment.  At Friday's close of $100.00, we have a yield-to-hard-call-date of 5.25%, and the common shares need to rise 40.9% 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. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Previous ranking: #1). Well, to be blunt, that sucked: Liquor Stores' year-end financial results, released March 15, were quite disappointing.  Revenues, same-store-sales, and earnings growth were all negative, which suggests that the company's traditional liquor retailing business is struggling to find its feed right now.  LIQ traded like it was hungover in the aftermath.  Blah!

      To make matters worse, both Alberta-based NHL hockey teams have now been officially eliminated from the playoffs picture, which could make comps for this quarter and next challenging.  At this point, the saving grace may, indeed, be the company's foray into the cannabis retailing business going forward, but of course, that's an endeavour that comes with considerable risks. 

      The bottom line: If you were looking for a relatively safer way to play the brand new business of cannabis retailing, Liquor Stores is an alternative to speculating on the usual suspects of cannabis stocks pinballing up and down on the TSX.  An investment in LIQ.DB.B isn't without risks, however, both in the cannabis industry and its legacy liquor retailing business - as its most recent financial results suggest.  Nevertheless, it's encouraging that Aurora saw fit to pay well above market for LIQ shares, and with new leadership at the helm at LIQ, the company does appear to have more assertive direction.  So here's the deal: if you believe in the Alberta recovery and want a cannabis play to boot, then LIQ.DB.B is worth consideration here.  At Friday's close of $103.75, LIQ.DB.B has yield-to-hard call date of 3.31% and the underlying common shares need to rise 47.3% to hit the conversion price.  We no longer have a position in LIQ.DB.B, but have a position LIQ common shares. 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.

      9. Premium Brands, 4.65% 30-April-2025, Series 'G' Convertible Debentures. (Presumed Ticker: PBH.DB.G), (Previous ranking: unranked).  A noted consolidator in the pre-packaged sandwich and lunch meats industry, the stock price of Premium Brands has done very well in recent years.  The company has used new convertible debenture issues in the past as a financing vehicle to fund new acquisitions, and on March 15, another new issue was announced.  This issue is expected to hit the market on April 10.   

      The bottom line: We don't closely follow this company, but there's no question that the company's stock and convertible debentures have done very well for investors in recent years.  In our view, for a 7-year convertible debenture issue, the terms of the financing weren't exactly super generous for investors as the 4.65% coupon seems a little skimpy in a rising rate environment and the conversion price was set some 60% away from the price where the common shares are trading today.  That said, however, this company has been very effective in consolidating and operating in its business niche of pre-packaged foods, so if you believe they can continue to execute on their strategy, PBH.DB.G may be worth consideration.  We did not subscribe to the PBH.DB.G offering.  For more information on Premium Brands, please have a look at the company's most recent investor presentation

      10. Morneau Shepell, 5.00% 30-June-2021, Series 'A' Convertible Debentures. (Ticker: MSI.DB.A), (Previous ranking: #15).  Morneau Shepell, the human resources, retirement benefits, and technology company founded by our oft-embattled federal Minister of Finance, has done remarkably well in the market volatility of the last couple of months.  Year-end results were released on March 7, and the company increased earnings 33% year-over-year. 

      The bottom line: This is quietly a pretty solid company that executes very nicely in its niche.  MSI common shares have moved steadily higher in the last year, and closed Friday just 1.0% off the conversion price for the MSI.DB.A convertible debentures.  MSI stock is by no means cheap, but with hard call for MSI.DB.A still more than two years away, the convertible debenture could deliver nice returns should MSI continue its positive price momentum. 

      Picture of the Day

      https://fineartamerica.com/featured/shipwrecked-in-the-tropics-felix-choo.html
      Shipwrecked in the tropics.  An Hai Beach, Con Son Island, Con Dao Archipelago, Vietnam.  Edmonton, Alberta. Copyright © 2011 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. 

      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!

      *** 

      Sunday, March 4, 2018

      March 2, 2018, Update: Peanut Convertible Debentures Power Rankings

      Hi, convertible debenturers.  This is the 27th update of the Peanut Convertible Debentures Power Rankings, which is current to March 2, 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 (March 2, 2018)
      • Wow, just so, so much has happened since our last update, but yet there's so little time to write about it all.  We'll try to blow through these points really quickly.  
      • Good news first: how about Canada at the Olympics? 29 medals, arguably the country's best performance ever at a non-boycotted games.  Made for some great TV viewing.
      • More unsettling: the market volatility that arrived a month ago has decided to stick around, jolting many portfolios.  As always, stay diversified out there, folks. 
      • To geopolitics: this week, there have been rumblings that the Chinese constitution would soon be changed to eliminate presidential term limits, which could entrench the most powerful Chinese president in a generation, Xi Jinping, as China's leader for life.  To this, Trump responded: "I think it's great. Maybe we'll give it a try someday." 
      • Of course he did. 
      • I'm no political scientist, but the US system of government is theoretically designed to prevent too much power from vesting in any given one office - there are supposed to be checks and balances.  Well, here we are in 2018, and things don't quite seem right, do they?
      • Here are a few random words to describe one of the two main political parties in DC: complicit, hypocritical, ignorant, self-serving, destructive. I'll leave it up to you to decide which one of the two these words apply to, and why things don't quite seem right in 2018.   
      • In other news: another school shooting.  Yet another one.  The stock answer from one of the two main political parties in the US, and their paid sponsors: how about even more guns!  Let's arm teachers!  What could possibly go wrong? [**Insert expletives here**]
      • In trade news: Trump tweeted yesterday: "Trade wars are good, and easy to win", following the US imposition of stiff steel and aluminum trade tariffs.  Even though the move is aimed mostly at China, Canada will likely also suffer some collateral damage.  Fun fact from history: big tariffs were a feature of the (Republican) Herbert Hoover administration of 1928-32, which oversaw the ushering in of the Great Depression.
      • Fed-watch: new Fed Chairman Jerome Powell spoke to the House Financial Services Committee on February 27 and it sounded to me like we're in store for four rate hikes in the US this year.  Recall our previous theory that unnecessary tax cuts (and hence fiscal stimulus) in the US during a time when the economy is running at full capacity will be inflationary and hence force the Fed to raise rates at a faster-than-expected pace.
      • Back home in Canada: as the Bank of Canada won't likely be raising rates at the same speed this year (again, our theory), we figured we'd see some air come out of the loonie and it looks like it's already happening - just like that, the Canadian dollar is down to 77.57 US cents.  
      • Over in equity markets, the TSX is off to a ragged start in 2018, down more than -5%. 
      • Yes, the markets generally coasted to new highs in 2017 with surprisingly little volatility, despite the minefield of powder-kegs in Washington.  Maybe 2018 is the year where the market re-discovers that there is only one world out there, and that we're all inevitably interlinked and affected by it all.  If so ...     
      • Let's get to the Top-5.  Before we do though, we have the same general reminder as last week: stay diversified and protect your capital out there.    


      Peanut Power Rankings Top-5 Convertible Debentures and Additional Bonus Coverage (March 2, 2018)
        1. Liquor Stores, 4.70% 31-January-2022, Series 'B' Convertible Debentures.  (Ticker: LIQ.DB.B), (Previous ranking: #1).  Last update, we talked at length about Aurora Cannabis paying $15 a share to acquire a 19.9% stake in Liquor Stores, which is a price above both what shares in LIQ have been trading at on the TSX and the conversion price of the LIQ.DB.B convertible debentures.  We won't repeat ourselves too much this update, but the deal did quietly close on February 14.    Liquor Stores' full-year financial results are scheduled to be released after market close on March 14.  LIQ has had issues in its traditional liquor-retailing business; it'll be interesting to see if the company has made progress on its issues on March 14. 

        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.  If anything, entering the marijuana retailing business only adds to that volatility, which is, theoretically at least, good for supporting the convertible debenture's prices. 

        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, both in entering a brand new industry plus the lingering issues in its legacy liquor retailing business.  Nevertheless, it's encouraging that Aurora saw fit to pay well above market for LIQ shares, and with new leadership at the helm at LIQ, it does appear to have more assertive direction.  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 $105.00, LIQ.DB.B has yield-to-hard call date of 2.90% and the underlying common shares need to rise 21.3% to hit the conversion price.  We no longer have a position in LIQ.DB.B, but have initiated a position in LIQ common shares.. 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. Hydro One, 4.00%/0.00% 30-September-2027, Instalment Receipts. (Ticker: H.IR), (Previous ranking: #3).  By now, you should know the deal with this one: as a large utilities company, Hydro One will be sensitive to rising interest rates.  Up until quite recently, our quantitative model has consistently rated H.IR as overvalued.  As prices of H and H.IR have fallen fairly sharply since the beginning of the year, the valuation of both by our model has now changed.  Based on Friday's close of $31.55, the model now ways H.IR. is about 13% undervalued.

        These Hydro One instalment receipts have a complex structure.  We won't go into details again in this post but for more information, check out our write-up from last update.  

        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 utilities play at this point in the interest rate cycle.  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.  It is currently trading out-of-the-money; if the share price of H does not improve, you run the possibility of getting stuck into a zero-coupon convertible debenture after the Avista deal closes.  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.

        3. Cargojet, 4.65% 31-December-2021, Series 'C' Convertible Debentures. (Ticker: CJT.DB.C), (Previous ranking: #4).  Last update, we mentioned the news that Amazon was going to be entering the time-sensitive delivery business.  This could effectively make the behemoth a competitor to Cargojet, which would be concerning.  So how did Cargojet stock respond? It sold off for a few days, but then bounced back from the canvas like a champ.  Impressive.  The company is expected to release its fiscal fourth quarter results before market open on March 12.  Given Q4 encompasses the Christmas season, this is typically Cargojet's strongest quarter. 

        The bottom line: After a brief dip on the Amazon news, Cargojet simply went on about its business and CJT shares are back above $60 again.  As we mentioned last week, Cargojet is a terrific little company and remains a very good story operating in an area of long-term, secular growth.   Amazon is worth keeping an eye on, however, as they are a fierce competitor in whatever market segment they choose to operate.  We had participated in the offering and had been long CJT.DB.C at $100.00.  However, we decided to take profits on the issue since our last update, selling our position at $116.23 to fund other opportunities.

        4. Tricon Capital, 5.75% 31-March-2022, Series 'U' Extendible US Dollar Convertible Debentures. (Ticker: TCN.DB.U), (Previous ranking: #5).  Tricon released it's year-end financial results on February 28, and from what we can see, the numbers were really quite strong.  The market didn't seem to care, however, as the real estate sector on the TSX has been out of favour given interest rate worries.

        No matter, the fundamentals still seem to be in place so we aren't too worried. 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.

        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$104.50, the yield-to-hard-call date is 4.18% and there are 3+ years left until the hard call date. The common shares need to rise about 32.2% to hit the conversion price.  We've been long TCN.DB.U since it debuted at US$100.00 and will continue to hold it barring a change in fundamentals.  Quite frankly, with the debenture trading at these levels, it might even be a buying opportunity. For more information on Tricon Capital, please have a look at the company's most recent investor presentation.

        5. American Hotel Income Properties REIT LP, 5.00% 30-June-2022, Series 'U' US Dollar Convertible Debentures. (Ticker: HOT.DB.U), (Previous ranking: #6).  Much like Tricon, as a real estate play, HOT.UN has struggled in recent weeks.   However, HOT.DB.U, the convertible debenture, has actually held in quite nicely.   Fundamentally, the story is still intact here.  Fourth quarter earnings are expected after market close on March 7.

        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 5.67% and over 3 years left to the hard call date, we continue to think it's super value.  The company just needs to keep executing.  It closed Friday at US$98.00 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.



        6. DHX Media, 5.875% 30-September-2024, Convertible Debentures. (Ticker: DHX.DB), (Previous ranking: #2). Oh, good grief! Last update, we were anxiously awaiting the release of DHX's fiscal second quarter, as we thought the shares (and by extension, convertible debenture) of DHX could move either way based on the results.  Well, the results were actually quite ok: Peanuts is performing as expected and the company is making progress in chipping away at its debt.  So all's good, right?

        Well, not exactly.  Shortly after earnings were released, it was announced that both DHX's CEO (Dana Landry) and CFO (Keith Abriel) were both leaving the company.  The market did not like this surprise announcement and it does raise questions about the direction of DHX going forward.

        As you're aware, DHX's board of directors is currently undergoing a strategic review of the company.  I suppose if you're an optimist, you could consider the exit of the CEO and CFO as a prelude to a sale.  However, the market definitely didn't take it that way given the ensuring sell-off.

        So where do we go from here? We don't know.  We like the company's assets but DHX needs to regain the confidence of investors.  It has done poorly on this front in the last few months. 

        The bottom line: DHX has attractive media content assets, but clearly there are risks. DHX's Peanuts intellectual property has cash cow characteristics, and the company is currently undergoing a strategic review which are positives.  However, although the company is making progress in paying off debt, it remains highly levered, which is potentially risky in a rising interest rate environment.  Further, the exit of the CEO and CFO does not help the company's relationship with Bay Street.   Results have been disappointing but we still think the unique nature of DHX's assets are potentially worth the risk if you can stomach the volatility.  However, at this point, any new investment in the shares or convertible debenture has to be considered borderline speculative.

        The convertible debenture (DHX.DB) closed Friday at a disappointing $90.00, indicating some investors have thrown in the towel.  At this price, DHX.DB has a yield-to-maturity of 7.85% (note: there is no hard call provision for DHX.B, which is good for investors), and the common shares closed the week 108.3% 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 well in the end.  Management needs to execute, though, and as we've seen in the last couple of weeks, there is limited room for error.  We are long DHX.DB at an average price of $99.22 and continue to hold.  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.

        7. Diversified Royalty Corp, 5.25% 31-December-2022, Convertible Debentures.  (Ticker: DIV.DB), (Last update's ranking: #7).  It's sort of been just crickets with this company, as there really hasn't been much in the way of newsflow for DIV in weeks and weeks.  I suppose they just continue to collect their royalties and pay out dividends.  No word yet on any new royalty acquisition on the horizon.  Year-end financial results are expected March 29. 
          
        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.  DIV.DB is holding steady in the current volatile market environment.  At Friday's close of $100.32, we have a yield-to-hard-call-date of 5.15%, and the common shares need to rise 40.0% 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: #8).  If it's crickets with Diversified Royalty Corp, it's just been tumbleweeds with Surge Energy and just about every other energy producer on the TSX.  Sentiment for Canadian energy just seems really poor right now, even though the oil price environment is better than it was from a year ago.

        For what it's worth, Surge seems to be operating quite nicely within a difficult environment.   If you believe management's estimates based on its proven and probable reserves, the company has a net asset value per share of over $6, which is more than three times higher than its current share price. 

        The bottom line: These days, one needs to be something of a contrarian and have a stomach for risk to willingly invest in the Canadian junior oil market. That said, if you have a positive outlook on energy prices or even just a neutral one, SGY.DB might be worth a look here.  At Friday's close of $100.00, the yield-to-hard-call of SGY.DB is 5.75%, and the common shares need to rise about 51.9% to hit the conversion price.  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: #9).  That flash sale on RSI.DB.E, which occurred just in time for our last update, sort of disappeared just as quickly as it arrived, so hopefully those of you waiting patiently to get this convertible debenture at a low price managed to get your orders filled.

        An alternative, of course, was subscribing to the new convertible debenture issue announced by Rogers Sugar on February 26 (presumed ticker: RSI.DB.F, this update's ranking: #11).

        Other than that, there hasn't been much news on the company in the last three weeks. 

        The bottom line: For Rogers Sugar, there are trade and growth risks in its traditional sugar business.  That said, the new maple syrup business provides a nice growth opportunity for this century-old company.   RSI.DB.E is trading higher than it had been as at the time of our last update, closing Friday at a price of $103.0  At this price, the yield-to-hard call is 4.30% and the common shares need to rise 34.5% 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: #10).  Algoma Central is the leading shipper on the Great Lakes - St. Lawrence waterway, and a large bulk shipper of iron ore.  As such, the surprise tariffs announced by President Trump on steel (and aluminum) may well be a negative for the company, should they reduce trade in this area. 

        The bottom line: Algoma Central is a good credit and an investment in ALC.DB.A offers exposure to a company with unique shipping infrastructure assets, a market-leading position, and a management that thinks sustainably for the long-term.  The Trump administration's protectionist trade policy is a wildcard for a company like this, however.  ALC.DB.A closed Friday at $103.04, which gives the issue a yield-to-hard-call of 4.47%.  The common shares need to rise about 44.9% 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

        https://fineartamerica.com/featured/bleeding-hearts-felix-choo.html
        Hearts of spring. (Where are you, spring?) Edmonton, Alberta. Copyright © 2014 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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        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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