I received the following offer:
Option 1: Exercise – 3.03 Rights will be required to subscribe for $100 CAD principal amount of unsecured
subordinated floating rate debentures, Series 1, due March 31, 2040 of Constellation Software Incorporated
(CSU.DB (TSX)) (21037XAA8) at a Subscription price of $133.217 CAD per $100 CAD principal amount
of Series 1 Debentures. Please specify the number of Rights you wish to exercise.
The Series 1 Debentures will be issuable only in denominations of $100 CAD and integral multiples thereof.
By reading this, it seems it’s not a valuable buy, spend $133.217 to buy $100 denominated debenture due March 31, 2040. I am not sure if I understand it right. Could you please help me to understand it? Thanks.
It is true that $133.21 needs to be spent for $100 in debentures. But, the debentures are linked to inflation, and reset once a year. With inflation spiking last year, the current interest rate of the debentures is 13.3%. Thus, the premium price reflects that this is much higher than current market rates. If CSU redeems the debentures, there is a potential $33.21 loss, but CSU has to give five years' notice on such an action, so the loss is amortized over that time. Also, with its new warrants, if CSU announces a redemption investors can swap debentures, which extends maturity to 2040 and eliminates the possibility of redemption. Thus, that loss can be considered to be amortized over 17 years now. Still a loss, but even with the capital loss the debentures are still attractive because of the yield. The main question, of course, is what will be the rate next year?