Consider Corporate Bonds over Alberta Capital Bonds

The Alberta government announced the rate on Capital bonds on Friday with a rate of 3.3%. The rate is equivalent to what is available on 5 year GIC’s. Considering limited liquidity, you may want to consider buying corporate bonds or 5 year Fixed Rate Reset Preferred shares.

The rates on corporate bonds can be as high as 7% depending on quality and maturity and a select number of preferreds are yielding above 5% with preferrential tax treatment.

Call your Rothenberg Investment Advisor today discuss the various options available in the market place. Your comments and thoughts are always appreciated.

Alberta Capital Bonds On Their Way

Albertans are sure to be inundated with marketing on Alberta Capital Bonds in the coming weeks as the Alberta government looks to individuals to raise capital to fund their current deficits. Details of the offering were provided to financial institutions such as ourselves this week. The bonds will go on sale February 16th until March 1.

Unlike Canada Savings Bonds, Alberta Capital Bonds are not redeemable and must be held until maturity except for some very limited circumstances. The bonds will be dated March 15, 2010 and have a 5 year term. Interest can be paid annually or compound annually.

The minimum purchase amount will be $1,000 with a $25,000 maximum regardless of how the bonds are registered. You would not be able to buy $25,000 for yourself, $25,000 for your RRSP account and $25,000 jointly with your spouse. The government will not provide certificates which is also a different format compared to Canada Savings Bonds.

While the bonds are not CDIC insured, they do have the full backing of the Alberta government. They will be eligible for RRSP’s within a Self Directed Plan. The only thing that we don’t know about the bonds is probably the most important number.

What are they going to pay? The highest 5 year GIC is currently 3.30%. Expect the announcement to come in around that level.

If you are interested in higher rates, please don’t hesitate to contact us. We have access to some Alberta Capital Finance Authority which is a government agency accrual notes yielding over 5%.

Your thoughts and comments are always appreciated.

Bonds Are Not Stocks

Bonds are not stocks.

The title of this post seems quite obvious in nature yet the amount of calls we received after Manulife cut the dividend on its common shares and how it affected the pricing and interest payments on their corporate debt was quite astounding.

Earnings per share for the company increased to $1.09 in the second quarter compared to $0.66 for the same quarter last year which is a positive.

The dividend cut will save the company $800 million per year. The savings is a positive for bondholders as there is more money available to make interest payments on their debt and pay principal back at maturity.

Unlike common shares or stock where a company can cut the dividend as it sees fit, the company cannot decide to stop making interest payments as part of a change to its strategic plan.

This is why bonds of a corporation are safer than common shares of the same corporation. There is limited upside but you have layers of downside protection. So what happened to the bonds on the day of the announcement? Not much. Manulife’s 10 year bonds dropped about 1% compared to 15% on their stock.

Corporate bonds move up and down in value based on several factors including interest rates, creditworthiness, and the spread between government bonds moving up or down. To learn more about bonds and how they differ from stocks, you can click on the following link HERE on our website that has an educational piece on bonds.

Your comments are always appreciated.

Look for Value in Convertible Debt

In some of my previous posts, I discussed the value available in the Canadian preferred share and investment grade corporate bond markets. Over the last couple of months, typical preferreds have risen 20% – 25% while investment grade corporates and Tier 1 Capital Trusts have increased 10% or more.

An area to consider for some decent value right now is the convertible debenture market.  A convertible debenture of a publically traded company usually trades on the TSX so pricing is very transparent. The debentures are usually unsecured so they are based solely on the creditworthiness of the underlying company.

The debentures pay a fixed rate of interest with coupon payments being made semi-annually in most cases. Unlike trust units or commmon stock, the interest payment is fixed on the debentures which gives a level of comfort to investors as companies will do whatever it takes not to go into default.

The debentures are convertible into common shares at the investors option at a pre-determined price when issued. This provides the investor not only the interest but an opportunity for capital gains as well should the underlying share price of the company rise over the term of the debenture.

At maturity, the corporation usually does one of two things. It can pay the investors back in cash or shares. If the payment is made in shares, the price used is usually 95% of the average trading price over the 20 days prior to maturity.

Typically speaking, you dont want to be faced with this scenario as the share price will drop continuously over those 20 days. I will get into this in more detail on another post.

Currently most convertible debentures are yielding in excess of 10% with some yielding in the 20% range. The lower yielding convertibles have been able to raise capital in these markets to shore up their balance sheets reducing the risks of holding them. A company like Cominar REIT has a 2014 debenture yielding in excess of 10%. Primaris REIT has one yielding 12%. Debt laden Harvest Energy has debentures yielding in excess of 20%. The debt looks considerably more attractive than their trust units and the debt has increased in value by 30% in the last month.

Look for institutional investors to start picking away at them as the yields on other fixed income investments continue to drop and money markets with all time records amount of cash flow out to find higher yields.

Your comments are always appreciated.

Bank Rate Down…Line of Credit Rate Up

Most Canadians with a personal line of credit (PLC) or Home Equity Line of Credit (HELOC) are rejoicing as rates come down as our Bank Rate dropped to an all time low 0f 0.5%  that should ultimately lead to a 0.5% reduction in the Bank Prime rate that is currently 3%.

Hold off on re-doing your budget as your interest costs may be going up rather than down. Most people believe that their line of credit adjusts up or down with prime and the premium above prime stays constant.

This is not the case as I found out recently that the small print in some line of credit contracts indicate that the bank can increase the premium above prime at their discretion. I read one contract that indicated the bank could increase rates to as much as 6% above prime and intended to increase their premium by 1% on all lines of credit in April.

While the government is trying to encourage consumers and businesses to spend our way out of recession, banks are taking steps to increase margins and profitability. There is nothing wrong with wanting to increase profitability but one questions the timing based on the struggles that our economy is currently facing.

What are your thoughts on this interest rate increase? Were you aware of a banks ability to increase rates at their discretion? Your thoughts and comments are greatly appreciated.

Canadian Banks: Don’t Invest for Yield Alone

Canadian bank stocks have become extremely tempting with dividend yields at levels that I cant remember. Bank of Montreal had a yield of over 11% yesterday while other banks are yielding in the 7% – 8.5% range.

On the surface, those looking for yield will choose Bank of Montreal. The next question one should ask after looking solely at yield is how safe the dividend is in the future.

Rob Sedran, Bank Analyst at National Bank Financial, discussed the outlook of the Canadian banks on a conference call today. He believes that the dividends are safe for now on all of the banks without any guarantees.

That being said, the dividend payout ratio should be looked at closely to determine how safe a particular companies dividend may be. We can just look at income trusts and how distributions get cut when cash flow or net earnings drop.

Bank of Montreal’s dividend is the highest but their payout ratio is also the highest as 75% of their net earnings right now go to pay dividends on their common shares. This leaves 25% of earnings to grow the business which is not a great use of capital in the long-term.

The other major banks have payout ratios in the 40% – 59% range of forecasted 2009 earnings giving them a greater cushion to maintain their dividend that will allow them to increase their dividends quicker when things turnaround.

What are your thoughts on the Canadian banks? Will they cut their common share dividends or will they maintain them going forward?

Some Positives on US Housing

US Housing starts dropped to their lowest level ever at an annualized rate of 466,000 which would indicate higher levels of unemployment in the construction trade. The doom and gloom of this number has been broadcast over and over in the media although I don’t believe anyone was surprised by the figure.

So what are the positives? National Bank of Canada put out an economic report focusing on the US housing market showing some positive signals indicating a turnaround may happen sooner rather than later.

Housing deflation has persisted for 30 months and average housing prices are down more than 25%. Without getting too technical, housing affordability has come back to long-term equilibrium levels allowing Americans to consider getting back into the market.

Mortgage rates are dropping and sales have been consistent for several months at 4 million units. There are currently 10 million renters in the US earning more than $50,000 per year which is above the income required to qualify for a conventional mortgage. If just 5% of these renters decide to buy, this will have a huge impact on inventory levels.

After peaking at 11 months worth of inventory for sale, inventories have dropped to 8.7 months. Six months worth of inventory is considered equilibrium. Mortgage applications were up 45% this week compared to last. While many of these applications were refinances taking place at lower rates which is also a positive, applications for purchase were up almost 10%.

The US housing market created this mess and it will be the market that leads us out of it.

What are your thoughts? Do you think we are around the corner to a stabilized housing market or are there many months and years of declines ahead of us?