Canadian exchange traded debt

[SafetyinNumbers]

Is there a community here interested in discussing Canadian exchange traded debt? 
 

I’m mostly interested in the special situations but it’s seem like an inefficient market over time. I have had some success historically.

[Haryana]

Please provide some examples or tickers if you like. 

 

[SafetyinNumbers]

https://divestor.com Has been kind enough to provide the below Google sheet that has most of the listed debt included.

 

https://docs.google.com/spreadsheets/d/1ZWLueyQ13lw8oy0Pi5z4OYcRIHNSwM0XlTsAfBBz5c4/edit

 

 

Edited January 5 by SafetyinNumbers

[SafetyinNumbers]

I guess there isn’t much interest.

 

Two special sits I find interesting are ECN.DB.B and DRT.DB.A.

 

Both haven’t rallied despite big equity injections relative to the EV.
 

With ECN, it seems like they want to sell the business given the strategic process last year. The conference call was pretty clear they will sell or spin the RV/Marine business in short order. That should allow them to sell the remaining Triad business which should trigger a change of control which has very favourable terms for ECN.DB.B holders. 

 

$DRT.DB.A just closed a rights issue today. One of the parties backstopping the rights issue also owns a lot of debentures so it seems like this transaction improves the odds of repayment significantly. I like the less risky 38.5% YTM post the rights issue.

[Haryana]

 

I suppose these could be interesting due to the expected series of federal interest rate cuts this year. 

 

However each one will require quite a bit of research to figure out the credit quality of the debt issuer. 

 

I am likely clueless but the HISA (high interest savings accounts) based ETFs like CASH.to are popular. 

 

[bizaro86]

I'm super interested in this topic, and some of my best (and worst!) returns in the past have been in this space. 

 

I've got quite a lot of floating rate prefs right now at double digit current yields, but no exchange traded debt other than CSU.DB right now.

[SafetyinNumbers]

This is definitely not a cash replacement strategy. The decline in interest rates is helpful in that it makes it easier to do a refinancing or sell businesses. It's much more akin to an event-driven expected value. Generally super illiquid and decently high risk of bankruptcy which usually doesn't mean a zero but very well could. I made 5x on bankruptcy of Twin Butte bankruptcy and took a zero recently on AH bonds so the range of outcomes is wide. 

 

A good strategy for probabilistic investors, terrible for deterministic investors. It's a pond that almost no one is swimming which can mean easily mispriced securities. Too high and too low so I tend to keep positions small but occasionally there is a fat pitch. 

 

Value traps can be frustrating but at least with these there is a maturity date. Unfortunately, corporates often try to screw over the debenture holders and because they are small issues without many institutions involved, they often get away with it. That's why it's nice to find aligned incentives and maybe get big enough one day to fight back.

Edited January 7 by SafetyinNumbers

[bizaro86]

I agree it's very probabilistic/event driven. Most of the issuers aren't exactly top-tier corporates - if they were they'd issue regular bonds instead. So I think a diversified portfolio/par-buyer type strategy would underperformed in the space.

 

I think bankruptcy/restructuring type events tend to have the fattest returns here. I had a very large position in the Just Energy debs when they restructured, that I was able to fully hedge with puts for like a 20% spread in a month. Was a very big position but seemed like a layup and did close. The hardest part was getting RBC-DI to correctly exercise the puts after the reverse split.

 

If you're interested in debt benefiting from equity issuance, you might consider AMC debt. Various issues, but even the first lien has a high ytm and they are issuing $50-$100MM/week of equity through ATM (or more recently equity-for-debt swaps)

[SafetyinNumbers]

8 hours ago, bizaro86 said:

I agree it's very probabilistic/event driven. Most of the issuers aren't exactly top-tier corporates - if they were they'd issue regular bonds instead. So I think a diversified portfolio/par-buyer type strategy would underperformed in the space.

 

I think bankruptcy/restructuring type events tend to have the fattest returns here. I had a very large position in the Just Energy debs when they restructured, that I was able to fully hedge with puts for like a 20% spread in a month. Was a very big position but seemed like a layup and did close. The hardest part was getting RBC-DI to correctly exercise the puts after the reverse split.

 

If you're interested in debt benefiting from equity issuance, you might consider AMC debt. Various issues, but even the first lien has a high ytm and they are issuing $50-$100MM/week of equity through ATM (or more recently equity-for-debt swaps)

Where are you trading AMC debt? I haven’t delved into US paper. Was seriously considering some GNW floaters a few years ago but just owned the common instead. 
 

If you look at ECN.DB.B or DRT.DB.A, please let me know what you think. 

[bizaro86]

14 hours ago, SafetyinNumbers said:

Where are you trading AMC debt? I haven’t delved into US paper. Was seriously considering some GNW floaters a few years ago but just owned the common instead. 
 

If you look at ECN.DB.B or DRT.DB.A, please let me know what you think. 

 

I've been buying the AMC debt through Interactive Brokers. The 7.5% of 2029 is first lien paper. If they filed today I don't think it would be covered, but at the pace they're adding equity to the balance sheet I think there's a good chance they get there. And if they make their maturity wall in 2026 it probably trades at a much smaller spread thereafter.

 

I'll try and take a look at ECN and DRT this week.

[bizaro86]

So it took me much longer than a week to get to looking at these, and I missed a pretty solid move in the ECN debentures, so congratulations! 

 

ECN did lower the balance on their senior credit facility using the proceeds of the equity raise you mentioned, and now they have enough space on that line that they could refinance the debentures into it, which is a pretty good backup plan. I'm a bit skeptical on how much of that capacity is going to be there in the long term and the credit facility expires before any of the outstanding debs come due so they'll need to renew first. Capacity might be lower because they've been selling down their finance assets, that is deleveraging but also is getting used to cover losses. They do have positive equity~=market cap here, but much of that is goodwill/intangibles, and I'm a bit skeptical that those are worth much in a finance/leasing business. I also dislike that they've been reducing exposure to floorplan loans (Which I think are pretty solid) and ramping up exposure to areas I think are riskier. Basically I think at the mid-teens YTM these are at right now they're probably priced about right. But getting in here when the last Q came out and they showed the deleveraging from the equity raise was a great trade and you're up 20 points since then!

 

DRT is definitely higher risk/reward. YTM is obviously extremely high, and I like that their credit facility is essentially undrawn so they don't really have debt senior to these debs. But their business is probably impaired by work-from-home. They've been shutting down plants (and without the charge for that last quarter they'd have made money) which hopefully gets them on more solid footing. The major owners being willing to fund the rights offering is a great sign, imo, because as you noted they're putting in money that is effectively junior to the debs. Having a major owner committed to the equity is a good thing, because a share-for-debt restructuring would be a completely fine option here, but a CCA filing would probably not result in a good outcome, imo. 

 

The other one I've always thought probably has a greater ability to pay off their debs than the market expects is Wildbrain, from the underlying value of their intellectual property assets. But those are trading pretty close to par right now. 

[SafetyinNumbers]

42 minutes ago, bizaro86 said:

So it took me much longer than a week to get to looking at these, and I missed a pretty solid move in the ECN debentures, so congratulations! 

 

ECN did lower the balance on their senior credit facility using the proceeds of the equity raise you mentioned, and now they have enough space on that line that they could refinance the debentures into it, which is a pretty good backup plan. I'm a bit skeptical on how much of that capacity is going to be there in the long term and the credit facility expires before any of the outstanding debs come due so they'll need to renew first. Capacity might be lower because they've been selling down their finance assets, that is deleveraging but also is getting used to cover losses. They do have positive equity~=market cap here, but much of that is goodwill/intangibles, and I'm a bit skeptical that those are worth much in a finance/leasing business. I also dislike that they've been reducing exposure to floorplan loans (Which I think are pretty solid) and ramping up exposure to areas I think are riskier. Basically I think at the mid-teens YTM these are at right now they're probably priced about right. But getting in here when the last Q came out and they showed the deleveraging from the equity raise was a great trade and you're up 20 points since then!

 

DRT is definitely higher risk/reward. YTM is obviously extremely high, and I like that their credit facility is essentially undrawn so they don't really have debt senior to these debs. But their business is probably impaired by work-from-home. They've been shutting down plants (and without the charge for that last quarter they'd have made money) which hopefully gets them on more solid footing. The major owners being willing to fund the rights offering is a great sign, imo, because as you noted they're putting in money that is effectively junior to the debs. Having a major owner committed to the equity is a good thing, because a share-for-debt restructuring would be a completely fine option here, but a CCA filing would probably not result in a good outcome, imo. 

 

The other one I've always thought probably has a greater ability to pay off their debs than the market expects is Wildbrain, from the underlying value of their intellectual property assets. But those are trading pretty close to par right now. 

Thanks. A big part of the ECN trade is its event driven nature. If they sell the business which is pretty much what they are telling us they are going to do,  then ECN.DB.B gets 104.875 + interest until the end of 2024. The sooner a deal is done the better and of course they actually have to do it. I disagree that the goodwill/intangibles aren’t worth anything. Most value/debt investors don’t want to pay for them but origination is valuable because with the right structure it can create significant ROE. I assume that’s why SKY was willing to invest new equity above TBV. On a related note, it will be interesting how much CHW and ACD trade for when they are sold. If you haven’t looked at ACD, it trades at close to half TBV and I think they have every reason to go private given the current conditions. 
 

Agreed on the DRT. I like that one of major equity backstops for the rights issue also owns a lot of bonds. I think the rights issue was a clever way of getting a larger stake in the company while ensuring the debentures get paid off but they have to execute too. Equity holders have a lot more faith than the debt holders!

 

Thanks for taking a look. 

[bizaro86]

9 hours ago, SafetyinNumbers said:

Thanks. A big part of the ECN trade is its event driven nature. If they sell the business which is pretty much what they are telling us they are going to do,  then ECN.DB.B gets 104.875 + interest until the end of 2024. The sooner a deal is done the better and of course they actually have to do it. I disagree that the goodwill/intangibles aren’t worth anything. Most value/debt investors don’t want to pay for them but origination is valuable because with the right structure it can create significant ROE. I assume that’s why SKY was willing to invest new equity above TBV. On a related note, it will be interesting how much CHW and ACD trade for when they are sold. If you haven’t looked at ACD, it trades at close to half TBV and I think they have every reason to go private given the current conditions. 
 

Agreed on the DRT. I like that one of major equity backstops for the rights issue also owns a lot of bonds. I think the rights issue was a clever way of getting a larger stake in the company while ensuring the debentures get paid off but they have to execute too. Equity holders have a lot more faith than the debt holders!

 

Thanks for taking a look. 

 

I hadn't considered them selling ECN, and agree that would be a home run. I'm somewhat skeptical of that, in the same way I don't like accounting for intangibles on finance companies In all seriousness, I agree completely a financial can deserve a premium to TBV (eg  Geico) but I'm uncertain that their origination platform delivers high enough ROEs for it to have much intangible value. Probably the best case would be they find an alt-manager looking to expand or someone looking to build private credit capability who pays up. Anyway, ECN seems like a mix of too hard and not rich enough for me right now.

 

I'll probably nibble on the DRT debs, as it seems like management wants to get them repaid, which is a surprisingly important factor in credit investing imo. And the spread is very high.

 

I took a brief look at ACD and sort of like their debs as well, and might add there. Obviously only 11% ytm but I did a deep dive on them years ago and think they do a good job. Recent large write-down not withstanding I think factoring is a reasonably low risk operation. The equity might be the better bet there as it's cheap and a go-private probably pays close to TBV

 

[SafetyinNumbers]

6 hours ago, bizaro86 said:

 

I hadn't considered them selling ECN, and agree that would be a home run. I'm somewhat skeptical of that, in the same way I don't like accounting for intangibles on finance companies In all seriousness, I agree completely a financial can deserve a premium to TBV (eg  Geico) but I'm uncertain that their origination platform delivers high enough ROEs for it to have much intangible value. Probably the best case would be they find an alt-manager looking to expand or someone looking to build private credit capability who pays up. Anyway, ECN seems like a mix of too hard and not rich enough for me right now.

 

I'll probably nibble on the DRT debs, as it seems like management wants to get them repaid, which is a surprisingly important factor in credit investing imo. And the spread is very high.

 

I took a brief look at ACD and sort of like their debs as well, and might add there. Obviously only 11% ytm but I did a deep dive on them years ago and think they do a good job. Recent large write-down not withstanding I think factoring is a reasonably low risk operation. The equity might be the better bet there as it's cheap and a go-private probably pays close to TBV

 

The strategic review that ECN announced is what peaked my interest. SKY ended up doing the private placement and apparently wants to buy Triad but wants nothing to do with RV/Marine. Everything ECN has done since is to try and clean itself up for SKY. Ultimately, they still have to execute though.

 

The ACD bonds don’t seem very interesting to me. Like you pointed out, the reward is much higher in the equity. 

 

 

[SafetyinNumbers]

Pretty good update from DRT.TO, I thought but converts DRT.DB.A are still offered at 58.

 

 

[SafetyinNumbers]

This morning DRT announces small SIBs for the DRT.DB and DRT.DB.A. Not much of a premium and I’m not sure I should tender any,