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WEQ.DB.C - Western One Convertible Debentures


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I have been buying the Western One debentures over the last 6 months in a price range from $40 to $55 (both series WEQ.DB and WEQ.DB.C). I would not touch the WEQ shares (39MM outstanding at $0.12 for $4.8mm mkt cap) at the current time as the WEQ.DB.C debenture is being converted into WEQ shares (like DGI & Anderson did).

 

Currently WEQ.DB.C is trading at $54. These $71 million face debentures should end up owning > 500mm WEQ shares when they convert on August 7th (20 day weighted avg price 5 days prior to conversion). Based on a weighted avg conversion price of about $0.15 buying the debs is like buying the shares currently at $0.075 at the $54 price.

 

I, like Raymond James below, believe WEQ should do at least $25mm in EBITDA in 2017. Here is the valuation of the equity in 2017 based on their numbers:

 

2017 EBITDA $25.5 million

Multiple 6 times

Total Value of WEQ $153 million

Net debt $64 million after WEQ.DB.C conversion

 

Value of equity $88.5 million

 

Number of shares

after C conversion 538 million

 

Equity value $0.16

 

The WEQ.DB.C are a very strong buy at the current price of $54. Equity value of $0.16 would mean debenture holders will recover greater than $100 (face value) on their debentures (about $115 compared to $54 now).

 

Here is RJ’s most recent note.

 

WesternOne Inc. July 4, 2016

 

WEQ-TSX Company Comment

 

Frederic Bastien CFA | 604.659.8232 | frederic.bastien@raymondjames.ca

Samir Ghafir (Associate) | 604.659.8470 | samir.ghafir@raymondjames.ca

Infrastructure & Construction | Related Products & Services

 

Lack of Financing Options Triggers Mother of All Dilutive Events

 

Recommendation

 

We remain on the sidelines on WesternOne after the company announced last week it

will issue stock to redeem its outstanding 8% convertible debentures. There may be a

time to turn more constructive on the story, but not before the dust settles on this

massively dilutive exercise. In the meantime our target price on the common shares

moves to $0.15 from $0.45.

 

Analysis

 

 We suspect WEQ’s senior lender forced management’s hand. After spending the

better of the last 12-15 months pursuing alternatives for its debt structure,

WesternOne settled on redeeming all of the Series 2 convertible debentures that

were set to mature on Jun-30-18. Pursuant to Section 4.6 of the trust indenture, the

company is exercising its right to issue common shares to satisfy its obligation to pay

the $71 mln redemption price. The exact number of shares will be calculated by

dividing the $71 mln redemption price by 95% of the 20-day VWAP leading up to

Aug-05-16 (defined as the redemption date).

 

 Existing shareholders to own only about 7% of company after all is said and done.

Assuming a VWAP of $0.15, we estimate WesternOne will need to issue 498 mln

freely tradable shares to redeem the converts, taking WEQ’s total share count to

538 mln. This would give current holders of the Series 2 debentures control over

93% of the company’s stock and much say about its strategic direction. We

speculate it may even trigger the sale of some or all of the Britco operations to its

competitors. We believe in particular that Black Diamond Group and Civeo could

have interest in Britco’s portfolio of 1,700 rental units in BC, while Horizon North

Logistics and ATCO Group could benefit from consolidating its modular fabrication

capacity.

 

 Term facility gets rewritten too. Pursuant to an amended facility letter WesternOne

entered into with its senior lender: (i) the facility’s maturity was extended from Oct-

01-17 to Oct-01-18; (ii) the revolving operating line and the revolving capex facility

were reduced to $20 mln and $45 mln, respectively, from $30 mln and $50 mln

previously; (iii) the facility carries interest at either prime plus 2.40% or banker’s

acceptance rate plus 3.65% until Oct-31-16, after which the margin will be

determined based on the senior debt-to-EBITDA ratio, and (iv) the total net debt-toEBITDA

covenant was adjusted to not exceed 5.0x from Oct-01-16 to Mar-31-17,

4.5x over the following six months and 4.0x thereafter.

 

Valuation

 

Our new target continues to reflect a target EV/EBITDA multiple of 6.0x our estimates for

2017, which is within WEQ’s historical trading range (see Exhibit 1 for detail).

 

Most recent presentation….

 

http://www.weq.ca/investor-information/documents/WEQInvestorPresentationJune162016.pdf

 

Conversion news release…

 

http://www.weq.ca/news-releases/documents/WEQ-NewsReleasereDebentureRedemptionFINAL.pdf

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I own a full position and agree completely. They moved up very strongly the day after the conversion announcement was made only to head now below where they were originally. In the meantime, the WEQ.DB have moved up and stayed up.

 

I continue to think that many income only funds are or have liquidated the "C"'s to buy the WEQ.DB or other.

 

Cardboard

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this trade looks pretty good to be true.  Any idea what would make this a mistake? 

 

(To me, I would guess that some kind of crack-up after the conversion would hurt, plus all the sellers liquidating after the convert could drive down the price, but the margin of safety is ~46%. )

 

And if you guys don't mind, how in the he// did you find this one?

 

Thanks!! 8)

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Just out & now their largest position….

 

http://www.broadviewcapital.ca/wp-content/uploads/June-2016-WesternOne-the-Sequel-WesternTwo.pdf

 

Despite our less than enthusiastic view of the market, we are still finding select opportunities to deploy capital. We have been adding to our position in the Western One Inc. debentures (WEQ.DB and WEQ.DB.C) and have now made the position our largest, with an approximate 7% weighting in a combination of the two tranches.

 

After the close on June 30th, it was announced that WesternOne would be equitizing the near-dated debentures due in 2018. Equitization is the act of paying back debt with newly-issued equity. Companies do this as a last resort, as it is extremely dilutive to existing shareholders. This is not, or at least should not be, a step that is taken lightly given that the move effectively hands control of thecompany over to debtholders. Conversely, for other creditors such a move is typically good news as it removes a liability and an interest burden thereby improving the overall creditworthiness of the entity……

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How can US investors trade this type of bonds? Interactive brokers doesn't have this bond available, at least for US based investors. Thanks!

 

Second this - can't find on Interactive Brokers. How would a US investor trade these?

 

These debentures are exchanged traded on the TSX like any of the Canadian stocks. If you can buy and sell Canadian shares with IB then you should be able to purchase these debentures.  Perhaps TD Waterhouse would be better.

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These debentures are exchanged traded on the TSX like any of the Canadian stocks. If you can buy and sell Canadian shares with IB then you should be able to purchase these debentures.  Perhaps TD Waterhouse would be better.

 

Nope,

I have an IB canadian account, and I cannot buy canadian debentures with them. They simply don't offer these instruments.

I buy them with my bank brokerage account.

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This trade is not a sure thing.

 

By the time you will receive your shares, chances are that stock price will probably be around what you paid for.

 

And don't think there is available shares to borrow to short it.

 

Don't care. Not a "trade". Expected holding period up to 3 years for the thesis to prove out.

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These debentures are exchanged traded on the TSX like any of the Canadian stocks. If you can buy and sell Canadian shares with IB then you should be able to purchase these debentures.  Perhaps TD Waterhouse would be better.

 

I can confirm these are available on TD Waterhouse.

 

I enjoyed this paragraph from Broadview:

 

Down the road, a newly reborn WesternOne could conceptually re-initiate a dividend, start making

acquisitions and work its way back towards sausage status. We’re not sure if there is a precedent for

re-sausagefication so perhaps this could be the first.

 

"Re-sausagefication"  ;D

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Hi

 

I'm new to the world of Debentures, so I'm looking for a little bit of help...

 

I have a few questions:

1. What's the difference between WEQ.DB and WEQ.DB.C? Just that one is convertible?

2. Do the WEQ.DB.C's 'auto-convert' on 7th August, or do I have to do anything with them or is there any other option?

3. I presume this is pretty safe as in a liquidation scenario, we would get our money back before any holders of common stock?

4. If the share price of WEQ is now 0.11 CAD, and the price of WEQ.DB.C is now 52-54 CAD, is it still a good opportunity?

5. If I buy the WEQ.DB.C am I in effect buying the opportunity of getting WEQ shares for 0.07 CAD which I can then sell for 0.11 CAD, but there's a possibility that they might be worth slightly more if I hold onto them?

6. What if they convert but the share price has dropped to 0.07 CAD, can I just sell them and only lose out on the transaction costs but still regain my capital?

 

Many thanks for helping out a newbie. :-)

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This will definitely help Western's heat and rental business for the next few winters...

 

Home-building boom expected for Fort McMurray, Alta., after fires, CMHC says

The Canadian Press

Published July 21, 2016 - 4:56pm

Last Updated July 21, 2016 - 5:05pm

CALGARY — A home-building boom in wildfire-ravaged Fort McMurray, Alta., is expected to start later this year and expand in 2017, the likes of which haven't been seen in 20 years, Canada Mortgage and Housing Corp. said Thursday.

 

The federal housing agency released a report that looked into the community's housing market following the fire that erupted in May and destroyed 2,000 structures.

 

Tim Gensey, a market analyst for CMHC, said the report was based in part on what happened after a fire took out more than 500 homes and buildings in Slave Lake, Alta., in 2011.

 

The report said if all the single- and multi-family homes destroyed by the fire in May were rebuilt in one year, along with the usual number of new homes, it would result in about 2,500 housing starts — greater than the previous record of 2,200 starts in 2007.

 

But Gensey said it's unlikely housing starts for destroyed homes in Fort McMurray can begin this year because of the extensive cleanup that must take place first.

 

"We did note that most of the reconstruction permits were received within 14 months of re-entry into Slave Lake and construction obviously took place after that, so we will probably expect a timeline that's similar to that (in Fort McMurray)," he said.

 

"A large amount of the housing stock has unfortunately been lost to the fire but there are still some fundamentals that we think will guide the market in the medium term."

 

Jim Rivait, CEO of the Alberta branch of the Canadian Home Builders' Association, said it typically takes six to nine months to build a house and it will likely take two to three years to finishing rebuilding Fort McMurray's homes.

 

He pointed out that many decisions have yet to be made by the municipality, including when and whether it will allow reconstruction of homes in certain areas that may have environmental problems. Insurance settlement processes will also likely delay housing starts.

 

"There will be some built (this year). Certainly not 2,500," Rivait said.

 

"A healthy market up there was building 1,000 homes a year. I think they may have some local capacity for 500 or 600 right now so there's going to have to be help from outside."

 

He said some neighbourhoods are so extensively damaged that the process of rebuilding them will be akin to setting up new subdivisions. Rebuilding will have to be staged so that builders aren't "tripping over each other," he said.

 

Although most of the damage in Fort McMurray affected residential areas, some businesses are included in the Regional Municipality of Wood Buffalo's count of 1,928 structures destroyed. About 80,000 people in the region were forced from their homes in early May and most were not allowed to return until a month later.

 

The anticipated building boom would follow a housing bust linked to low oil prices. Home construction in Fort McMurray had fallen to a near 20-year low before the fire, and only 74 combined single- and multi-family units started construction in 2015, the lowest level since 1997, CMHC said. The pace this year was equally weak at only 13 starts.

 

Additionally, CMHC noted that only 155 sales of existing homes took place in the first quarter of this year, continuing a downward trend that began in 2014. The average home price fell to $504,000, compared with an average of about $609,000 two years earlier.

 

In its report, the agency forecasts housing prices will halt their declines but didn't make a price prediction. It said it's unclear how many listed homes for resale will return to the market after repairs are made, noting many listings expired because the homes had been evacuated.

 

But prices will be supported, CMHC said, as some displaced residents opt to purchase existing homes, driving up demand.

 

Rental vacancy rates that hit 29 per cent in October are expected to decline rapidly, helping stabilize rents that been falling, CMHC said.

 

 

 

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Hi

 

I'm new to the world of Debentures, so I'm looking for a little bit of help...

 

I have a few questions:

1. What's the difference between WEQ.DB and WEQ.DB.C? Just that one is convertible?

2. Do the WEQ.DB.C's 'auto-convert' on 7th August, or do I have to do anything with them or is there any other option?

3. I presume this is pretty safe as in a liquidation scenario, we would get our money back before any holders of common stock?

4. If the share price of WEQ is now 0.11 CAD, and the price of WEQ.DB.C is now 52-54 CAD, is it still a good opportunity?

5. If I buy the WEQ.DB.C am I in effect buying the opportunity of getting WEQ shares for 0.07 CAD which I can then sell for 0.11 CAD, but there's a possibility that they might be worth slightly more if I hold onto them?

6. What if they convert but the share price has dropped to 0.07 CAD, can I just sell them and only lose out on the transaction costs but still regain my capital?

 

Many thanks for helping out a newbie. :-)

 

Although asking questions is great and admitting you don't know something, are you really sure you want to get into this?  To me there are two circles of competence at work here, one is distress investing and two are the businesses of the underling company.

 

Of the former, the new shares, i.e. post conversion could easily trade down to what would amount to a breakeven or loss for the current deb. holders, so no there is no guarantee of your capital here, so ideally you want a back stop of 'value' where you think that owning the company with the new capital structure is a good to great investment.  To be more explicit, you should factor in the probability that a number of deb holders will not want to hold the equity, adding downward pressure.

 

So whatever you sell the post-converted shares for is what you sell them for.  They could trade at 11 cents or 7 or 3.   

 

If comfortable owning the name, from a portfolio perspective, I would estimate my ideal position X, and only do 1/2 X, given that it may well trade down to my breakeven or worse, again only IF I were comfortable owning the name anyway; that at least is my 2 (or 11) cents. And if it is within spitting distance of a 10 to 20% 2 month return, sell. (it is at a low in an out of favor industry, FWIW.)

 

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Voodoo,

 

We concur with netnet, but would add that the smartest thing here would be to do no more than a token investment, & treat the whole thing as a learning experience. Learning how to invest in distressed debt is a valuable skill - but everyone pays a tuition bill. You should also notice that the folks with admitted positions in this, are all very experienced investors. 

 

Our own view (with no position) is that if we bought a deb, we would be hoping that after the dust settles - there was still be enough of it outstanding to avoid being called-in, or converted. Copies of both prospectus would be high on our pile, & we would be very familiar with the terms of each.

 

It can be a very rewarding experience; but it is not a short-term trading thing, thick skin is useful, & you need to be able to maintain a detached view - under what can be very trying circumstances at times.

 

SD

 

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WesternOne Inc. Announces Current Market Price to Be Used for Issuance of Common Shares on Redemption of 8% Extendible Convertible Unsecured Subordinated Debentures

 

VANCOUVER, BC--(Marketwired - July 29, 2016) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES NEWS WIRE SERVICES

 

WesternOne Inc. ("WesternOne") (TSX: WEQ) (TSX: WEQ.DB) (TSX: WEQ.DB.C) announced today that upon redemption of all its issued and outstanding 8% Extendible Convertible Unsecured Subordinated Debentures due June 30, 2018 (the "Debentures") on August 5, 2016 (the "Redemption Date"), common shares of WesternOne ("Common Shares") will be issued to satisfy WesternOne's obligation to pay holders of the Debentures the full principal amount thereof (the "Redemption Price") based on a price of $0.1278 per Common Share. As a result, holders of the Debentures who have not elected to convert their Debentures on or before August 4, 2016, will receive approximately 7,827 Common Shares for each $1,000 principal amount of the Debentures plus a cash payment equal to the accrued and unpaid interest thereon to, but excluding, the Redemption Date (less any applicable tax required to be deducted, if any). The accrued and unpaid interest on the Debentures as of the Redemption Date will be $7.67 for each $1,000 principal amount of the Debentures.

Pursuant to the terms of trust indenture (the "Indenture") dated as of February 26, 2010 between WesternOne and Computershare Trust Company of Canada, as trustee, as amended and supplemented pursuant to the supplemental indentures dated June 1, 2011 (the "First Supplemental Indenture"), December 31, 2012 and March 28, 2013, the number of Common Shares to be issued to holders of the Debentures upon redemption thereof has been determined by dividing the Redemption Price by 95% of the Current Market Price of the Common Shares on the Redemption Date. For this purpose, the Current Market Price is $0.1345, which was calculated based on the volume weighted average price per Common Share on the Toronto Stock Exchange (the "TSX") during the 20 consecutive trading days ending on the fifth trading day preceding the Redemption Date, which was July 28, 2016.

Pursuant to Section 2.1(f) of the First Supplemental Indenture, holders of the Debentures will have the right to convert the whole or any part of the Debentures into Common Shares at a price of $7.50 per Common Share at any time prior to the close of business on August 4, 2016. A holder of the Debentures electing to convert the principal amount of their Debentures will receive approximately 133.33 Common Shares for each $1,000 principal amount of the Debentures converted plus a cash payment equal to the accrued and unpaid interest thereon to, but excluding, the conversion date (less any applicable tax required to be deducted, if any). For more information see the Indenture and the First Supplemental Indenture, which are both available on SEDAR (www.sedar.com).

The Debentures will be delisted from the TSX at the close of trading on the Redemption Date.

Forward-looking Information

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  • 3 weeks later...
  • 6 months later...

WEQ sells Britco Leasing for $41mm

 

This will allow the Company to pay off all bank debt if they so desire. Remaining business I assume is Britco modular and the profitable WIS business. Remaining WEQ debentures (WEQ.DB) should rise to near $100 in price as they are now well covered.

 

 

Black Diamond Group Completes Strategic Acquisition

 

Acquires Britco Rental Business From WesternOne Inc, Enters Into $29 Million Bought Deal Equity Financing and Amends Credit Facilities

CALGARY, ALBERTA--(Marketwired - March 6, 2017) -

 

 

Black Diamond Group Limited ("Black Diamond" or the "Company") (TSX:BDI), a leading provider of modular work space solutions and workforce accommodations in Canada, United States and Australia, is pleased to announce it has completed the acquisition of the modular workspace rental fleet and related assets, including the Britco brand, from Britco LP, a wholly-owned subsidiary of WesternOne Inc. (the "Transaction"). Black Diamond has not acquired the modular manufacturing business of WesternOne Inc. The Transaction is expected to give Black Diamond a leading position in the British Columbia work space solutions market, and provide additional size and scale to the Company's existing BOXX Modular operations. Black Diamond will now operate over 2,000 rental units from five key locations throughout the province of British Columbia.

 

"This acquisition of Britco's modular workspace rental fleet and related assets serves to further diversify our business, expands our customer base and footprint in British Columbia and positions us for future infrastructure projects in the province," said Trevor Haynes, Chairman and CEO of Black Diamond Group. "We will leverage the strong brand that Britco represents in this marketplace and are excited to play a meaningful role in British Columbia and its communities, including First Nations."

The Business

Founded in 1977, Britco has the largest fleet of modular buildings in British Columbia- including site offices, mobile offices, office complexes, classrooms, sales centres, first aid buildings, mobile washroom facilities and container solutions for storage. Britco has a diverse customer base and stable revenue stream, with utilization rates averaging 75% over the last three years.

Summary of Transaction

This is a strategic transaction for Black Diamond to acquire all of the assets pertaining to and currently used in Britco rentals, for cash consideration of approximately $41 million, subject to customary adjustments. The Transaction includes all of Britco's 1,896 rental fleet assets, working capital in the amount of approximately $1,175,000, nearly 1,000 existing customer contracts, nine strategic First Nations partnerships, and the transfer of all key personnel to ensure the seamless transition of Britco operations to Black Diamond. The Company will not be assuming long term liabilities or debt obligations other than real estate leases for the five operating locations. The Transaction has an effective date of March 1, 2017. The Company intends to continue operating as Britco in this marketplace.

Peters & Co. Limited acted as financial advisor to Black Diamond in connection with the Transaction.

Strategic Rationale

The Transaction is expected to:

Provide immediate accretion on a cash flow per share basis;

Further diversify Black Diamond by continuing to scale its non-resource business lines and expand its customer base;

Increase Black Diamond's future cash flow stability;

Position Black Diamond as the largest modular workspace and modular rental provider in British Columbia;

Strengthen Black Diamond's position in future British Columbia infrastructure projects; and

Allow Black Diamond to access new customers through the expanded British Columbia footprint, which includes operating locations in Vancouver, Nanaimo, Prince Rupert, Fort St. John and Kelowna.

Pro-Forma Summary of the Transaction

Black Diamond's BOXX Modular business unit is expected to have the following characteristics after giving effect to the Transaction:

With the trailing $6.5 million of Adjusted EBITDA from the Transaction, normalized for approximately $500,000 of synergies, BOXX Modular will represent over 40% of the Black Diamond EDITDA on a trailing basis; and

Largest work space solutions and modular rental provider operating in British Columbia with the most diverse fleet of over 2,000 assets to meet a wide variety of customer needs;

One of the largest modular work space solutions and modular unit operators in Canada; and

Five key operating locations in British Columbia, bringing the total number of BOXX Modular locations to 17 throughout Canada and the United States.

With the completion of the Transaction, Black Diamond's 2017 Adjusted EBITDA guidance increases to a range of $35 million to $45 million.

 

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A nice opportunity remains in the convertible (WEQ.DB) if you can buy them with a bid in the low $80's.

 

If you want to see a comparison, look at ZAR and ZAR.DB. The balance sheet post this transaction looks almost identical to ZAR. They will be left with $10 - $15 million of net cash (assuming all other debts paid off) and only a $51.75 million convertible.

 

Of course, ZAR.DB has offered very nice terms to get its holders to agree to a term extension to 2019 and it is still a buy IMO in the low $90's. One big advantage for WEQ is that they won't have to do that with the convertible due in June 2020, will continue paying a low 6.25% and the conversion has zero value (no dilution potential). This will give them more flexibility to pursue financial engineering such as buying them back at a discount over time.

 

So you should have a nice floor on the debs while being paid 7.5% interest (if bought at $83 for example) on a security that should trend to par over time.

 

The stock is still cheap too with only 17 million shares outstanding. Even at $2, it is less than half of book value (although size of write off on sale in unknown) but, if their business which is cyclical turns at all (and it should based on renewed Western activity), a double from here is far from being a crazy assumption.

 

Cardboard

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A nice opportunity remains in the convertible (WEQ.DB) if you can buy them with a bid in the low $80's.

 

If you want to see a comparison, look at ZAR and ZAR.DB. The balance sheet post this transaction looks almost identical to ZAR. They will be left with $10 - $15 million of net cash (assuming all other debts paid off) and only a $51.75 million convertible.

 

Of course, ZAR.DB has offered very nice terms to get its holders to agree to a term extension to 2019 and it is still a buy IMO in the low $90's. One big advantage for WEQ is that they won't have to do that with the convertible due in June 2020, will continue paying a low 6.25% and the conversion has zero value (no dilution potential). This will give them more flexibility to pursue financial engineering such as buying them back at a discount over time.

 

So you should have a nice floor on the debs while being paid 7.5% interest (if bought at $83 for example) on a security that should trend to par over time.

 

The stock is still cheap too with only 17 million shares outstanding. Even at $2, it is less than half of book value (although size of write off on sale in unknown) but, if their business which is cyclical turns at all (and it should based on renewed Western activity), a double from here is far from being a crazy assumption.

 

Cardboard

 

Don't you think ZAR equity has a better potential than debentures here? At a closing price of $0.82 , there is a 53% potential appreciation for the equity at a capped price of $1.25. For the debt holders, assuming they are paid off on Jan 2020 and the price remains at $1.25 , you get 24% (interest) + 10%(par appreciation) = 34%.

 

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Sure but, it is a downside protection thing. If the oil price doesn't do well, ZAR (equity) could be diluted by a lot in late 2019 if they have no cash or can't replace/extend the convert. ZAR.DB holders would have received 8%+ a year from current price and be calling the shots.

 

So that depends on your risk tolerance, need for income, your assessment of the future of the business and how you finance your securities (margin). Same thing for WEQ. I think that both convertible (ZAR.DB and WEQ.DB) offer currently attractive returns with low risk. For fixed income investors, they should definitely show up on their radar screens.

 

Cardboard

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Sure but, it is a downside protection thing. If the oil price doesn't do well, ZAR (equity) could be diluted by a lot in late 2019 if they have no cash or can't replace/extend the convert. ZAR.DB holders would have received 8%+ a year from current price and be calling the shots.

 

So that depends on your risk tolerance, need for income, your assessment of the future of the business and how you finance your securities (margin). Same thing for WEQ. I think that both convertible (ZAR.DB and WEQ.DB) offer currently attractive returns with low risk. For fixed income investors, they should definitely show up on their radar screens.

 

Cardboard

 

I see. I think the play here is to sell the whole company in 3 years. If they can't sell this relatively unlevered company in 3 years than both debenture and equity holders are screwed, the equity holder more so.  I'm just betting with the management who holds more equity than debentures. I thought they got a great deal getting debenture holders to wait 3 years at 8%.

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