July 07, 2021
Subs -
WE ARE LIVE.
Qualified Canadian Readers Only.
Hoping everyone enjoyed a nice long weekend. Activity continues to slow on the equity front as capital providers check out for the summer. Surprisingly, several issuers tapped the new issue market this week, despite coming off the Canada Day and Fourth of July holidays. Debt markets remain robust as high-yield spreads sit at their tightest level since 2007. Many Canadian public and private issuers continue to explore alternative forms of financing - namely, convertible debentures.
More small-to-mid cap public and private issuers are finding convertible debentures to be an attractive financing solution, so let’s have a brief look at why that is:
Low cash cost of capital in the mid-to-high single digits (versus what would likely be mid-teens for a straight bond);
Typically subordinated or senior unsecured, leaving the cap table open to new lenders and leaving assets unencumbered;
Extremely issuer-friendly and flexible covenant patterns, typically only papered for minimal incurrence tests;
As equity names level off and even begin to fade, issuers have had the benefit of seeing their equity values enter “frothy” territory - this places the convert in a prime position as the option value is expected to move deeper out-of-the money as the equity fades.
On the investor side, we typically see arb folks that play public converts and hedge out the option - and private investors with an appetite for risk, while wanting more palatable downside protection. Gary would fall into the latter - put a pin in the capital stack, grab some security, clip attractive coupons (vs. the boring HY index) and participate in the upside.
Year-to-date there have been 7 convertible debenture issues totalling $556M:
DIRTT Environmental Solutions ($35M @ 6% due 2026)
Dye & Durham ($300M @ 3.75% due 2026)
Chorus Aviation ($50M @ 6% due 2026)
North American Construction ($65M @ 5.5% due 2028)
BBTV Holdings ($15M @ 7% due 2026)
Wildpack Beverage ($17.4M @ 8% due 2025)
Columbia Care ($74.5M @ 6% due 2025)
There are approximately 85 listed convertible debentures trading in Canada. Unfortunately I do not have the stats or means to track the private convert market, but I can assure you it is far more active in Canada.
P.s. if the above is referenced in client pitch material, I hope to see a footnote sourcing GG.
AIP Yield Fund is out raising up to $20M in sub receipts. The company intends to list on the TSXV via its shell, Value Capital Trust. AIP seeks to invest in “overlooked” industrial real estate south of the border - a hot sub-sector of the real estate market.
Staying within the real estate corner of the market, Marwest Apartment REIT hit the market with a $9M marketed prospectus offering of units. The company focuses on multi-residential assets with a focus on stable markets throughout Western Canada. Stable market and Western Canada aren’t usually seen in the same sentence. Marwest has a portfolio of assets in and around the 5% cap rate mark, and an acquisition pipeline of 9 assets - far more compelling than our beloved GTA. The deal is being led by one of the strangest syndicates I have seen this year, with Canaccord Genuity leading, followed by CIBC, National Bank, Desjardins, iA, Raymond James, Richardson Wealth, and Wellington-Altus. A truly retail-focused syndicate of dealers and banks - I am sure many bankers in that syndicate took a gut shot to their ego.
Lastly, July 14th Flow Water will commence trading - a truly exciting time for all shareholders who have been locked-up for quite some time and long-awaiting this liquidity event. All I can suggest is hit the bid as fast as possible - if Gary were a betting man, Flow opens down 15%+.
ECM World
Top 3 Notable Transactions
Canada Nickel Company
$10M bought of FT Shares
Cantor w/ EWP, Haywood, Mackie
AIP Yield Fund LP
US$20M marketed of Units
Laurentian w/ CG, Cormark, iA
InMed Pharmaceuticals
$11M marketed of Units (1 sh + 1 wt)
HC Wainwright
Cheers,
GG