Investment Q&A

Q: Hi, We are applying to buy some Constellation Series 1 Debentures through rights, with a payment of $133.217, for family members. Where would it make most sense to hold these debentures - RRSP/RRIF, TFSA or a Non Regd Taxable account. ( Most of us being in higher Tax bracket of 40-54% Marginal tax rate ). considering the following:

1. These debentures will likely yield anywhere between 5-10% ( on a cost base of $133 ), by way of Interest income, for 17 years ( assuming we will be able to swap with warrants, if called before redemption)

2. We will incur a Capital Loss of $33 as at March 31, 2040. ( $100 Principal to be received at maturity)

3. If held in Tax sheltered accounts, would it make sense to move them to a Non-Regd Taxable account, let's say 5 years before maturity date, when the M/V of these debentures will likely start declining. So, we could use the Capital Loss in Taxable accounts.

Thank You

Q: "We don't quite match the market in good years but will lessen your losses in bad years" say many portfolio managers to clients in exchange for a 1/2 to 1% management fee.

But, over the years, since the market has had significantly more positive years than negative years, I feel this is a good argument to just purchase some very low-fee ETFs, once you've determined your asset and currency mix. Less fees, therefore more money invested and therefore little value add from the advisor! Your comments please.

Also, I am a 65 year old retiree with a high 7 figure investment portfolio who will not run out of money. I favor a balanced portfolio of 80% equity (with a slight tilt to growth) and 20% fixed income. I also favor a 50/50 split between US and CAN dollars.

While I realize you cannot provide individual advice, which low cost ETFs should I consider?

Q: Sorry but another question on CSU.db
It appears that only CSU shareholders will receive the warrants for a potential swap. I have a friend that holds the original debentures and they did not receive any warrants for exchange? Why would the shareholders receive warrants ( they don't need them) and the original debenture holders not receive warrants ( they will need them)?
Secondly on the rights , 3.03 rights are required to buy $100 face value, is it fair to say its actually 4 rights then? Fractional rights won't be allowed?
thanks

Q: Sorry for another questions about the CSU rights, warrants and debentures. I was thinking of taking a small position in the debentures and have the rights to do that. However, I believe that I would be getting the Series 1 debentures which likely means that I will someday have to buy warrants to remove the redemption feature. The cost is now starting to increase because I am not sure there will be enough warrants to cover the Series 1 debentures so the warrants could be expensive. It seems to me that if CSU wanted to remove the redemption feature they could just do it without the warrants. Will there be enough warrants to go around? And if the warrants sell for $1 that is another 1% lost. Any further comments?

Q: The four referenced cash accounts pay roughly the same rate of return. Which of these are best in terms of risk and liquidity. What would you recommend for cash portions of the portfolio and which etf if any would you avoid. Thanks

Q: I hold the Series 1 Debentures and am quite content to continue to do so, also the rights to purchase Series 2 which I intended to let expire. Should I or is it advantageous to sell Series 1 to switch?

Q: I received a copy of the debenture prospectus in the mail today and have been reading it with some interest. I think they are going to need an army of accountants to figure out how they should account for it. Although it would make an excellent CPA or CFA exam question, the arrangement seems unnecessarily (ridiculously?) complicated.

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

Q: My question is about HBND, the new bond covered call ETF, which is yet to appear in your menu. It seems like a very nice alternative to a plain vanilla bond ETF, due to the high distributions, and general safety of covered call writing, but your opinion would be much valued. I realize it is new, therefore no history to track, and no doubt still quite small, but i wonder about the safety and erosion of the share price.
Thanks

Q: We have 30% allocated in our registered accounts for fixed. (currently 10% each for CBO, ZAG and XBB) Are these the best options for today and the next year(s)? Also see XLB recommended recently and wondering if we should be adding or replacing any of the above?
Appreciate your opinion
Thanks Doug

Q: I am looking at individual bonds from an investment perspective. Bank bonds for example have excellent credit ratings but still have great yields.
So: as an individual investor I don’t mind preparing to carry these to maturity given the yields. But I am also interested to know: if their value goes up in the future, how difficult is it to sell individual bonds at their market value and does it simply replicate the process of stock selling?

Q: Hi
I am sorry to have to ask another question about the recent WTS issue of CSU.
I currently own 7 * $100 Unsecured SUB FLTG RT SI with a date of Mar 31 2040 and with a cost of $765 and a MV $955. I also CSU.RT of 40 with MV @ .75 and recently received notification of WTS of 40 at no value. My question is what must I do by Sept 29 if hang onto my current debentures will they lose value ? do I have to do something with the 40 CSU.RT that I have or the 40 WTS just issued. Should I just sell the current debentures on the open market. Totally confused by this despite reading all the recent questions and answers on your website.
Thanks
Kathy

Q: For an income component, would you lean to a bond holding like PFIA at this point or more to a high interest account like HSAV?

Thanks

Q: Hi. This rights issue was described in basic form, but there seems to be a much more complex/interesting issue. These debentures, if I exercise the rights, offer a tremendous hedge against inflation, as their yield is tied to the rate of change of inflation. What seems like the deal-breaker is the 33% premium I (would) have to pay to buy the Debentures.
It seems to me odd that I am asked to pay a 33% premium to earn less than 6.5% if inflation rates go down over time. This does not seem like a very tax-efficient strategy for taxable dividends. It just seems like a very unique product and pricing. Can you comment on those particular aspects please? I am interested in earning more income soon, and there is some appeal to this as a hedge against inflation, but the price of that insurance seems too high...?

Q: Good morning 5I researchers,

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.

Q: I have purchased stocks and ETFs in the past and am considering the purchase of a coupon bond. I am not familiar with this type of investment and would appreciate some comments on this type of investment. The following information is provided for the bond;
Inventory - $150,000
Coupon - 6%
Maturity - 2/27/2030
Price - $70.375 CAD
Yield - 12.90%
DBRS rating - BB
Please explain the information provided for the bond. What are the risks associated with this type of investment.

Q: I also have a broker from a long way back where I have CSU and he is advising that with this convoluted system CSU has come out with that is intimidating to us older investors, my broker is telling me I will get approximately $400 in Principal amount of the Debentures and be debited approximately $530. Does that mean that I am getting $400 worth of debentures and pay $530 for them? I got the impression that I was getting money for this action CSU is taking. I do not know how many shares I have at the moment but those numbers will hopefully give you a rough idea. I am hoping I do not end up with another stock that operates in this manner. I will be waiting to hear from you before getting back to my broker. Thank you very much as usual.

Q: Can I please have your opinion on this etf for an income investment.
Thanks

Q: Hello. My portfolio is currently composed of all equities and approximately 10% cash. I would like to move some money 15-20% out of equities into fixed income. What would you suggest is a simple, yet effective way to achieve this? Invest directly into bonds? Buy a bond ETF? Bond mutual fund? Short or long-term bonds? Corporate or government? Can you suggest some bond ETFs or mutual funds?
Thank-you.

Q: Hi, Just to clarify further about the debentures - If Constellation decides to redeem the debentures, Only the Warrant holders will have the ability to buy the new debentures and in the ratio of 1 warrant providing a right to by 1 debenture. So, the Debenture holders ( with redemption called ), can only swap/buy the new debentures with No Redemption clause, would need to either already have or buy the warrants in the market. If not, they will be exposed to a capital loss of, say. $37, for each debenture.

In our situation, we have currently 500 CSU.DB debentures and only 250 warrants. So, in a Redemption call scenario, we should be prepared to Buy 250 additional warrants in the market, if we want to swap/buy to retain the same no. of 500 debentures ownership. Is this correct ? And, for this reason, there could be a huge demand for these warrants, when called for redemption, because, a large no. of debenture holders, may not necessarily already have those warrants.

Will the New Debentures be listed as a separate security, in addition to the existing debentures CSU.DB ?

Thank You

Q: Now that I discovered that RBC has opened its direct investing accounts to high interest saving ETFs, I am interested in moving the cash portion of my portfolio. HSAV is interesting because of the capital gains tax advantage. However I noticed that it has been fairly volatile in the last few weeks - swinging by almost 1% in a single day. That is more volatility than I would’ve expected from an investment that primarily holds bank savings accounts that reprice daily. Is there something else going on here?