A subscriber had a question / comment about that North American Construction Group convertibles debenture that I had mentioned yesterday. With his permission, I thought it might be useful to share the question and my response (with some edits here).
The subscriber wrote:
“I don’t fully understand the offering of bonds at such low interest rates- paying $100 for 5 or 6 percent ? Compounded after 5 years or something else? Ontario is the latest to come out with something at 2 percent and I can’t grasp the nature of it – other than these provinces are broke.”
My response is:
Indeed, several provinces have recently issued 5 year bonds at rates right around 2.2% They need to do this to fund their deficits and/or to pay off existing maturing bonds. With the possible exception of Newfoundland, all the provinces are still strong financially and there would seem to be almost no danger that they would fail to payoff the bonds at maturity. So, these are safe investments. They should however be considered illiquid since they don’t trade on the exchange and brokers charge steep hidden fees in the form of buy/sell spreads if you need to sell. If you buy these at the IPO you avoid the commission but you should plan to hold until maturity.
I agree that the 2%ish yields here are quite unattractive.
In such a low interest rate environment, the 5.5% interest on the North American Construction Group debentures caught my eye. For those wishing to hold a certain amount of fixed income, these perhaps could have a place in the portfolio. It’s far from a fantastic interest rate but it’s better than 2%.
But keep in mind that the credit risk is certainly higher than that of a province. And keep in mind that these convertibel debenture bonds trade on the market. They are not a substitute for cash given that they would fall in value at times when the market is under stress or when this specific company is under stress.
In summary, I wanted subscribers to know I had bought some of these bonds. But I have not done any analysis on the company.
I recently covered the topic of fixed income investments in the newsletter back in February (Not that the figures from February are out of date and that the Alcanna debenture mentioned there was redeemed and is no longer available).