I have never analyzed any convertible debentures and I don’t recall ever owning one. In updating the Aecon report I also took a look at its convertible debenture.
Aecon has $184 million worth of convertible debentures that were issued by prospectus in September 2018. They pay 5.0% annually (paid semi-annually). They mature on December 31, 2023. They are convertible into common shares at a conversion price of $24.00 per share. With Aecon’s shares trading at $14.22 and given that they have only very briefly ever traded above $20 it seems unlikely that the conversion privilege is worth much. Since the shares could go above $24 in the next 3 years the conversion privilege is worth something but probably very little. Investors that specialize in these options would have software or access to information about how much the conversion privilege is worth. It can be calculated using option pricing theories.
These convertible debentures trade on the Toronto Stock Exchange under the symbol ARE.DB.C. They closed Friday at $100.01. Looking at money.tmx.com, I am not entirely sure of the trading volume. 157,000 is indicated as the volume but I am fairly sure that means $157,000 of face value which is a relatively light volume. It is best to assume that the trading liquidity in this here .
I like that these are trading at or about par value. That means we would expect our yield to be the issue yield of 5.0%. That might be attractive especially in an RRSP or TFSA or RESP where it is not taxable.
Be aware however, that if the company were to run into severe financial difficulty they could default on these debentures. They also have the right to redeem them in shares (at a 5% discount to the recent share price). If they did redeem in shares it would be because they are in some distress and it is possible that the value of the shares would be plunging.
Despite some risks, a 5.0 % interest yield and a high likelihood (not a certainty though) that they will mature on December 31, 2023 at face value may be attractive.
In contrast to bonds, these trade on the exchange which means you can sell easily and with probably not a large bid/ask spread.
A debenture is a fixed income investment. It’s like a bond but with some very key differences. Debentures are unsecured. Bonds issued by a corporation are sometimes secured with some sort of collateral. A debenture is issued against the general credit of the company (the issuer) and not against any specific assets or cashflows of the issuing company. Convertible dentures usually trade on the exchange whereas bonds do not trade on the exchange but rather are bought and sold through brokers often with high bid/ask spreads.