A long time ago (well, pre-covid, lol), when I was an even worse investor than now, I bought shares of Invesque Inc. (TSX:IVQ, TSX:IVQ.U), which was paying some fat dividends back then.
Invesque is a North American health care real estate company with an investment thesis focused on the premise that an aging demographic in North America will continue to utilize health care services in growing proportion to the overall economy
Pandemic hit them hard, dividends were cut to zero, the share price was decimated, and in the end, it is an RE company but not REIT, they are not obliged to pay dividends, so they are still not paying them.
Thus, the share price is hovering around C$1, while it was C$9 before, while they are selling assets and trying to fix their debt problems.
I’ve decided to not get too upset about that, averaged down a bit, and took a closer look at their debentures to recover at least some losses (albeit on paper).
In 2020, I started buying Invesque Inc. 5.00% Convertible Unsecured Subordinated Debentures (TSX:IVQ.DB.U) and accumulated some with an average price of ~$67 just before this announcement: Invesque Inc. Announces Proposed Enhancements to the Terms of its 5.00% 2016 Convertible Debentures Due January 31, 2022
In the end, this proposition was enhanced further with the following details:
1. INCREASING the underlying interest rate from 5.00% to 7.00%, effective January 31, 2022. Previously, Invesque had proposed increasing the interest rate to 6.25%;
2. DECREASING the conversion price from US$11.00 to US$5.00 per share of Invesque. Previously, Invesque had proposed decreasing the conversion price to US$6.00 per share;
3. EXTENDING the maturity date from January 31, 2022 to January 31, 2025; and
4. REEDEMING, on a pro rata basis, US$20,000,000 (representing approximately 44.5%) of the principal amount of the Amended Debentures outstanding as at the close of business on January 31, 2022, plus accrued and unpaid interest thereon to, but excluding, the date of the redemption (the “Partial Redemption”). Previously, the Corporation had proposed a redemption of US$10,000,000 or 22.23% of the principal amount of the Amended Debentures outstanding.
Here is my math for this deal:
- Let’s assume that I bought $1000 of debentures by paying $0.67 on a dollar, so my total was $670.
- 45% of my debentures were redeemed at par, i.e., $670 – $450 = $220 was my price for the remaining 55% of debentures.
- Paying $220 for $550 of debentures is equivalent to paying $0.40 on a dollar.
- A 7% interest rate translates into ~17.5% in my case.
- In 3 years, if Invesque finally redeems all the debentures at par, I will get back 0.175*3 + 1/0.40 = ~3 times my money.
If something goes terribly wrong and Invesque bankrupt somewhere along the way, most likely I will be able to at least get my “debentures” money back.
Here comes Invesque Inc. 6.00% Convertible Unsecured Subordinated Debentures (TSX:IVQ.DB.V) and company has the following proposition:
1. INCREASING the underlying interest rate from 6.00% to 8.75%, effective September 30, 2023;
2. DECREASING the conversion price from US$10.70 to US$2.75 per share of Invesque;
3. EXTENDING the maturity date from September 30, 2023 to September 30, 2026; and
4. REDEEMING, on a pro rata basis, US$22,000,000 (representing approximately 46%) of the principal amount of the Amended Debentures outstanding, plus accrued and unpaid interest thereon to, but excluding, the date of the redemption (the “Partial Redemption”), which will occur on September 30, 2023.
These debentures are thinly traded, and at the moment it is possible to buy a decent amount only for $82+.
- Let’s assume that I will buy $1000 of debentures by paying $0.82 on a dollar, so my total is $820.
- 46% of the debentures will be redeemed at par, i.e., $820 – $460 = $360 will be my price for the remaining 54% of the debentures.
- Paying C$360 for C$540 of debentures is equivalent to paying $0.67 on a dollar.
- An 8.75% interest rate translates into ~13.13% in my case.
- In 3 years, if Invesque finally redeems all the debentures at par, I could get back 0.1313*3 + 1/0.67 = ~1.89 times my money.
Well… not too bad, but not as exciting as IVQ.DB.U was.
I would buy those debentures at $79 or less (x2.07 return), but so far, no luck, and it might never happen.