Author Topic: Cannabis Convertibles  (Read 1989 times)

SafetyinNumbers

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Cannabis Convertibles
« on: December 17, 2019, 12:47:54 PM »
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 donít give the company the option of issuing stock at a discount to the share price (usually 95% of the VWAP) at maturity. Iím finding most weed issues donít.

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 letís 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 itís 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. Iím 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, itís interesting to think about during tax loss selling season. I own some ALEF.DB.


SharperDingaan

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Re: Cannabis Convertibles
« Reply #1 on: December 17, 2019, 02:13:14 PM »
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

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Re: Cannabis Convertibles
« Reply #2 on: December 17, 2019, 02:29:08 PM »
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

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Re: Cannabis Convertibles
« Reply #3 on: December 17, 2019, 03:12:45 PM »
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
« Last Edit: December 17, 2019, 03:15:07 PM by SharperDingaan »

SafetyinNumbers

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Re: Cannabis Convertibles
« Reply #4 on: December 17, 2019, 05:24:04 PM »
That's not unreasonable.

SafetyinNumbers

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Re: Cannabis Convertibles
« Reply #5 on: April 07, 2020, 04:28:46 PM »
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

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Re: Cannabis Convertibles
« Reply #6 on: May 28, 2020, 11:15:03 AM »
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

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Re: Cannabis Convertibles
« Reply #7 on: May 28, 2020, 11:22:09 AM »
Canadian debs have done very well too   :)

SD