Q: So NWH.UN announced a successful debenture issue today which will have the effect of reducing interest expense. On the surface this seems like good news, but I am wondering why someone would buy it. The interest rate is lower than the dividend yield and the convertible price is still about $2 higher than currently trading. I can see buying this if you were convinced there was going to be a dividend cut, but I doubt that will be the case at least in the near term given managements stated recent focus. What am I missing? Why would someone buy this debenture? I am an income investor and have a 2% weighting and am thinking of increasing it to 5%…..if I can figure out an answer to my question. Would you be ok with a 5% weighting in this stock under these circumstances?
Thanks in advance. Love the service.
Thanks in advance. Love the service.
5i Research Answer:
There are some buyers that may have restrictions on buying common securities. Bond funds, for example, could buy this issue but not units. There are of course investors who do believe the distribution is at risk, and the debentures offer more security of income, as well as a higher corporate ranking overall. We can't give personal weightings, but for us just the ~10% yield would make us think less rather than more. We do take cues from the market and there is just not a lot of growth here. 7.75% is also fairly steep for a debenture that is convertible at not a huge premium. Keep in mind on such issues that interest expenses are still tax deductible for the company, so this may be driven by capital allocation at the corporate level.