Canexus convertible debenture - early redemption

Discuss your favourite picks, broker, and trading or investment style.
Post Reply
westcoastfella
Contributor
Contributor
Posts: 565
Joined: 10 Jun 2009 15:47

Canexus convertible debenture - early redemption

Post by westcoastfella »

With the acquisition of CUS by CHE completed, I've been waiting to see what they are going to do with the CUS convertibles, and I got my anticipated offer of early redemption for my CUS.DB.C today. I'm not terribly impressed with it.

The C series notes are due on December 31, 2020, and CHE is offering par value. From what I can tell here, the soft call for that series was Jan 1, 2017, and the hard call is December 31, 2018; I understand this to mean that CHE doesn't need to offer a premium to me to redeem the notes past Jan 1 2017, but they also cannot forcibly redeem them until Dec 2018. Which leaves me with a (limited**) choice.

I'm currently leaning towards rejecting the offer:
- they may increase the offer to some premium, in order to get them off the books. If the increase were tantalizing enough, I might take it.
- if they don't increase the offer, and I do not accept it, the offer indicates that the debentures "will remain outstanding and will continue to accrue interest on their existing terms until the applicable maturity date, or until earlier redeemed, exchanged, substituted, annulled, cancelled, or repaid in accordance with their terms", which means at least 4 more interest payments for me. Looking through the convertible debenture options to replace, there doesn't seem to be anything else maturing ~2020 that will match 6% yield, above or below par. I'm reasonably confident that CHE will not default on the notes, so I don't mind waiting and collecting what seems to be an exceptional rate of interest.

This is my second early redemption of a convertible debenture, but the first where I have a choice. I'm wondering if anyone can help with a couple of questions:

1. Do I have a correct understanding of soft call and hard call above? I could not find this information in the prospectus for the issue, this was all I could find.

2. All CUS convertibles will be delisted from the TSX on May 8. I'm assuming that this would not impact my interest payments, can someone confirm.

Are there any other CUS debenture holders out there? What are your thoughts on the offer?

** there is a 90% redemption rule in effect for this series, if 90% of the debenture holders choose to redeem at the offer than CHE can redeem 100% of the issue, regardless of how I vote.
westcoastfella
Contributor
Contributor
Posts: 565
Joined: 10 Jun 2009 15:47

Re: Canexus convertible debenture - early redemption

Post by westcoastfella »

Just a quick follow up on this. In the end I rejected the offer from Chemtrade, and it looks like the 90% rule did not kick in (meaning more than 10% of the holders rejected the offer). This is also true for another debenture, a 6.5% due in 2021. I had wondered if there might be a counter offer at a higher price, but there has not been one yet. I'm fine either way, Chemtrade will continue to pay the interest (6%) until they can redeem the full amount, and I expect they will do so at their earliest convenience in 18 months.
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: Canexus convertible debenture - early redemption

Post by kcowan »

I am glad it worked out for you. I am currently dealing with a couple of winners. It has been a while since I have had one. Of course, just avoiding a default is a win with the yields they offer! I am currently shopping for some new ones for early July to fill in my rungs. The offerings are not nearly as attractive as they were.
For the fun of it...Keith
westcoastfella
Contributor
Contributor
Posts: 565
Joined: 10 Jun 2009 15:47

Re: Canexus convertible debenture - early redemption

Post by westcoastfella »

they are not - which was a big reason that I elected to hold onto this one. Nothing else yielding close to 6% right now...

I'd like to consider this a win, but certainly nothing approaching your NFI homerun, congrats on that. I generally look at convertibles as bonds, so I'm not too focused on the convertible nature... but when they do pan out, they can really pan out! I managed to buy this one about 9 months ago around 90, and I'll get paid out par $100 + the interest payments, so I can't complain.
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: Canexus convertible debenture - early redemption

Post by kcowan »

I have been doing them for 12 years, ever since I took over MILs FI Portfolio.

Had 6 big winners, the rest just returning 6+% interest and one a big loser.

Now they offer 4 to 5.5% but do not smell like winners!
For the fun of it...Keith
westcoastfella
Contributor
Contributor
Posts: 565
Joined: 10 Jun 2009 15:47

Re: Canexus convertible debenture - early redemption

Post by westcoastfella »

It looks like my strategy of holding out for another offer was a good one, and the new offer from Chemtrade announced yesterday is better.

I get 50 bps lower coupon rate, but an extended hard call date that would allow me to collect 2 additional interest payments before the new hard call, which would give me ~$50 extra per $1000 over the new lifetime of the debenture, and of course they are trade-able on the open market (unlike my CUS debs). Conversion price of $28 seems un-achievable for CHE.UN by then so I'd be looking at strictly the bond side.

A quick look at other debenture offers with maturity dates in 2020 shows that 5.5% is a pretty decent coupon for the duration, and CHE is probably more stable than some other options out there. I'll probably take it.
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: Canexus convertible debenture - early redemption

Post by kcowan »

Yes I would tend to go for it. You are trying to suboptimize at this point.
For the fun of it...Keith
Post Reply