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.

Steps Being Taken to Prevent Another Meltdown

One of the most difficult things for investors both professional and amateur to do is analyze some of the structured products that are now being called Toxic Assets. Pricing them has become difficult because in alot of cases, the assets backing them are hard to identify and disclosure documents can contain hundreds of pages of data that can take days and even weeks to analyze.

In order to analyze the data, a more efficient reporting framework is being developed to extract the releveant numbers so one pool of mortgages or asset backed securities can be analyzed and compared to another.

This will allow investors and analysts to compare investments and make informed decision in a very timely matter. The reporting system being worked on now is called XBRL that stands for eXtensible Business Reporting Language. For more information on it, I have added a link to the CFA Institute website.

When the government can stop worrying about which company will fail next and concentrate on prevention, you will hear alot more aboout XBRL. Your thoughts and comments are greatly appreciated.

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?

Trust Distributions Under Immense Pressure

Don’t be surprised to see your income trust distribution cut to zero. Forget 2011. Without a distribution, the preferrential tax treatment that a trust provides over a regular corporation doesn’t mean that much.

In an effort to keep balance sheets in order, REIT’s, Oil and Gas Trusts, and to a lesser extent business trusts are cutting distributions to conserve cash. The reason for this is two fold.

One is the economic uncertainty but the other is the uncertainty of being able to renew upcoming mortgages and convertible debt on the balance sheets.

By keeping earnings in the company, they will be able to be in a better position to pay off debt as it matures or be able to renew financing at less onerous terms.

In most cases, don’t buy an income trust based on its current yield as that yield is not particularly safe. Look at their convertible debt before buying their units as the yields are pretty frothy and provide an extra layer of ssecurity over the units.

Better yet, look at corporate bonds that are yielding 7% or more as you could see some capital appreciation along the way.

If you are looking at trusts that most probably have safe distributions, National Bank analysts point to Inter Pipeline with a current yield of 11.42%, Keyera Facilities yielding 11.14%. On the REIT front, Boardwalk REIT at 6.81% or CAP REIT yielding 8.05% are safer bets. On the business front, A & W reported very strong same store sales growth of 7.5% for the last quarter and is now paying 10.70% based on todays closing price of $12.83.

Are you buying trusts right now based on current yields? Your comments are always welcome.

Bond Bubble Revisited

On December 11, 2008, I wrote a post on How to Profit if The Bond Bubble Bursts which you can revisit by clicking here. Since then, long term US Treasury Bonds have increased by more than 1% and indications are that rates will go higher as the government needs to raise several trillions of dollars over the next year and the market is having trouble digesting the vast quantity required.

I had indicated that one way to profit from this would be to buy the Horizon Betapro 30 year US Treasury Bear ETF that trades on the TSV under the symbol HTD. 

This ETF provides 2 times the daily movement up or down of the underlying investment.  Since the last commentary was written on this subject, the ETF has performed well closing today at $15.15, well above its December 11th close of $13.47, a 12.5% return over the last two months.

The 52 week high was over $20 and I wouldn’t be surprised to see it climb back to those levels by the end of the year. What are your thoughts? Do you think long term bond rates in the US will climb or drop close to all time lows?