The nominal interest rate of CPI plus 6.8% until 2040 looked very interesting at first. However, the amortization of the $33 premium to the year 5 company par value redemption option would appear to almost fully negate the 6.8% (unless a warrant is held and exercised). If the warrant is exercised, effectively allowing the debenture plus its replacement debenture to go to term, the initial $33 premium amortized over 17 years still knocks off 2 to 3% per year. Nonetheless, unless I am missing something, CPI plus (say) 4% until 2040 still looks pretty good.
Having come to the CSU party late I only own 16 shares. That means I can buy $500 of debentures and so exercising or even disposing the rights seems hardly worth the effort. However, I was thinking that as the debentures will trade on the TSX, I could buy more rights or debentures but the amount I would be willing to pay would depend whether I could also acquire more warrants and at what price. It appears that the warrants will not trade on the TSX except when the company issues a redemption notice. That makes buying the debentures look more than a bit risky.
Does my analysis look right to you?
Does the 3.03 ratio of rights to $100 principal value of the debentures also apply to the warrants or is it 1 warrant for each $100 debenture? The prospectus says that CSU will try to ensure that warrants are available to all debenture holders. Do you have any idea how they will do that and will it that mean the warrants value will be suppressed somehow?
Finally, is it likely that the trading price of the debentures will assume the company will never redeem the debentures given the warrants effectively eliminate any incentive it may have to redeem the series 1 debentures early?
Thanks as always
The warrants were issued to all shareholders 1:1. Yes, one warrant will allow the swap of $100 Series I debentures for Series II debentures, which are exactly the same as Series I except for the redemption clause. With the warrants, one can assume that there is no redemption, so the amortization of the premium can be calculated over a longer time frame. Current coupon is 13.3%, and we think this, plus the built-in inflation protection, makes the debentures attractive even at current prices. Of course, there is a risk if inflation declines. Yes, the warrants will not be listed until and when CSU announces a redemption. We do expect this to happen, as why would CSU go through all this trouble if not? On the 'availability' clause we can only assume CSU means available through a market listing.