Cannabis Convertibles

[SafetyinNumbers]

Is anyone looking at some of these weed converts trading with giant YTMs?

 

Some like ALEF.DB was issued at par this summer and is offered at 60, which is around a 33% YTM to maturity in June 2022. They are also convertible at $1.47 but I am not attributing a lot of value to that option. That being said, there are some publicly traded warrants (ALEF.WT) with a slightly higher strike price ($1.55) that were issued with the converts and they have over a 60 vol so the conversion option is technically worth about 6 points.

 

Unlike a lot of Canadian converts, these bonds in particular don’t give the company the option of issuing stock at a discount to the share price (usually 95% of the VWAP) at maturity. I’m finding most weed issues don’t.

 

This one in particular is interesting because there is a private convertible whose obligation they acquired in an acquisition that is the only other debt on the balance sheet. The Emblem convertible is for $25m and let’s them convert to shares at 95% so I expect them to do that at maturity in February 2021.

 

That of course leaves more security for ALEF.DB holders. In fact the initial issue of the ALEF.DB was for $40.25m and $2.9m of it was exchanged for stock in Q3 so the net issue is only $37.35m now.

 

You might wonder why anyone would exchange their debentures for stock in the first 3 months of issue. Well it’s because people wanted to sell the converts so bad, they dropped below the equivalent of the share price a few times presenting a pure arb if the borrow was available.

 

In terms of the balance sheet there is about $160m in net assets (excluding goodwill and intangibles) including $51m in cash backing the $37m of bonds. I’m guessing they will continue to burn cash for a while but will recovery exceed the bond value? Will they issue more debt in front of the ALEF.DB holders? I have no idea.

 

Anyway, it’s interesting to think about during tax loss selling season. I own some ALEF.DB.

[SharperDingaan]

They are getting interesting, but today's $58 bond will be < $50 once the Q4 earnings/AR come out.

The tide on cannabis is going out, and PM's have minimum quality restrictions.

 

SD

 

 

[SafetyinNumbers]

They are getting interesting, but today's $58 bond will be < $50 once the Q4 earnings/AR come out.

The tide on cannabis is going out, and PM's have minimum quality restrictions.

 

SD

 

 

 

Why do you think Q4 results will bring more selling?

 

 

[SharperDingaan]

All that 'goodwill' on their SCFP gets means tested, to determine the amortization charge. Surprise.

Most institutional IPS disallow bonds <55. Unwinds the conv/common arbitrage, & the bond buyer has to be retail. Hard to find.

Retail that subsequently does the same arbitrage? - even harder to find  ;)

 

Starting point should be 40-45, and the more adverse the head-line industry news the better.

Payback period of 12-18 months.

 

SD

 

[SafetyinNumbers]

That's not unreasonable.

[SafetyinNumbers]

SharperDingaan was right that these converts should be avoided back in December but we are now closer to maturity and at much lower prices.

 

They are probably better from an earnings forecast than they were back then too with the shelter in place guidance resulting in much more legal weed being purchased.

 

FIRE.DB trades at 25, matures in Oct 2021.

PLUS.DB trades at 30, matures Feb 2020.

ALEF.DB trades at 45, matures June 2022.

[SafetyinNumbers]

SharperDingaan was right that these converts should be avoided back in December but we are now closer to maturity and at much lower prices.

 

They are probably better from an earnings forecast than they were back then too with the shelter in place guidance resulting in much more legal weed being purchased.

 

FIRE.DB trades at 25, matures in Oct 2021.

PLUS.DB trades at 30, matures Feb 2020.

ALEF.DB trades at 45, matures June 2022.

 

FWIW Updated quotes

 

FIRE.DB trades at 27, matures in Oct 2021.

PLUS.DB trades at 58, matures Feb 2020.

ALEF.DB trades at 75, matures June 2022.

 

What's amazing to me is how much higher the market caps of all of these companies are in the past few months. ALEF did a small equity raise and I would expect the others to as well. FIRE has an ATM and we will see how much they tapped it in May by the end of next week.

 

 

[SharperDingaan]

Canadian debs have done very well too  :)

 

SD

[SafetyinNumbers]

SharperDingaan was right that these converts should be avoided back in December but we are now closer to maturity and at much lower prices.

 

They are probably better from an earnings forecast than they were back then too with the shelter in place guidance resulting in much more legal weed being purchased.

 

FIRE.DB trades at 25, matures in Oct 2021.

PLUS.DB trades at 30, matures Feb 2020.

ALEF.DB trades at 45, matures June 2022.

 

Closed out the FIRE.DB. The current quote of 143 is not apples to apples because there was a restructuring (expected) but the value of the package is worth about 100 compared to the 25. I did not achieve the whole package value  as I unfortunately sold the equity as soon as I got it but I’m not complaining.

 

PLUS.DB trades at 86 currently has a restructuring proposal which looks compelling based on current prices. Still long.

 

ALEF.DB is now AH.DB and it trades around 82. They have a good balance sheet so as of now, I think these bonds are money good but that could change. Still long.

 

I just wanted to put a pin on this thread in case anyone was following.