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8.5% Yields, Avangardco Holdings, Yankee Corporate Bond, matures Oct. 2015

Randy — Tue, 21 May 2013 20:28:35 +0000

Each week we screen thousands of corporate bond listings to find what we believe is currently the best corporate bond for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week, we look at a very short 29 month Yankee bonds (in US dollars) from AvangardCo IPL, one of the leading agro-industrial companies in the Ukraine. Although this bond is not rated by Moody’s or Standard & Poor’s, Fitch Ratings has affirmed the company’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B’ and has also affirmed the Company’s National Long-Term Rating at ‘A+.’ The following review shows why we see the 8½% yields currently indicated with these high yield notes are a savvy bet to both increase cash flow and preserve wealth. We also believe this debt instrument offers sound diversification away from the financial services sector of the global economy and that it makes a good addition to our client’s high yielding foreign and global fixed income investments.

A look at the issuer

Avangardco Investment Public Limited (AGDVY.PK) is an Ukraine-based company engaged in the agricultural industry. Avangardco IPL is the leading producer of shell eggs and egg products in its home market of Ukraine and Eurasia, and is second globally only behind Cal-Main Foods, Inc. (CALM). The global market for chicken eggs continues to demonstrate double-digit growth, which is largely driven by emerging markets, and the Company has achieved considerable progress in promoting business to foreign markets. The core strategy of AvangardCo IPL, therefore, is to continue growing both globally and domestically by capitalizing on its unrivaled scale, technology, vertical integration and cost leadership achieved in no small part by successfully leveraging Ukraine’s comparative advantage in cheap feed.

With its rich black earth and bountiful supplies of grain, Ukraine was once known as the “breadbasket of Europe”. Following the collapse of the Soviet Union, annual harvests have rebounded in recent years to more than twice the levels of 1990, harvesting a record 57m tonnes in 2011. With the right investment and modern farming technology, Ukraine could double its production of grain and oilseed over the next decade, according to the European Bank for Reconstruction and Development, which has invested nearly $1.5bn in the country’s agribusiness sector. Despite widespread corruption and bureaucratic hurdles, international food groups such as Kraft (KRFT) and Nestlé have also established themselves in everything from biscuits and chocolates to potato crisps and breakfast cereals.

While crop yields in the Ukraine have remained significantly below the European Union average due to a heavy reliance on inefficient farming techniques, agriculture technology groups such as Monsanto and DuPont Pioneer are seeking to help Ukraine boost harvests by providing higher quality seeds and other agriculture products. DuPont Pioneer has built a logistics centre to support strong sales growth in Ukraine, and has begun construction of a $40m seed production facility in the country. Ukrainian agriculture is rapidly modernising, and the regional director for DuPont Pioneer, Jeff Rowe, sees the Ukraine as “one of the fastest-growing agriculture markets in the world and an important player in the global food security issue” and is confident that the country will reach the government’s goal of 80m metric tonnes of grain by 2015.

After its intial IPO on the London Stock Exchange in May of 2010, AvangardoCo was 77.5% owned by Oleg Bakhmatyuk, who recently transferred his shareholdings to Ukrlanfarming PLC, another major (private) agri-business that he controls (100%). Unknown to most Ukrainians only a few years ago, the 38-year-old Bakhmatyuk today strikes deals as far away as China, where this year he held talks on multibillion-dollar loans and corn export deals. So, while AvangardoCo itself owns no farmland and its grain purchases are a key cost component, its majority shareholder does.

AvangardCo employs over 5000 persons and its plants are located in 14 regions of Ukraine and the Autonomous Republic of Crimea. It has a flock of 22.8 million egg laying hens and produced 6.3 billion eggs in 2012. While the majority of its production was sold as shell eggs, about 18% was processed and sold as dry egg products (14.1k tons). Another 12% of its revenues come from flock sales. The Company’s facilities are among the most technologically advanced in the Ukraine, and in the past couple of years, the company has focused on two value enhancing strategies:

Direct sales in supermarket chains and brand development domestically. Over 35% of its shell eggs are now sold through supermarkets through non-branded and the Kvochta (‘Mother Hen’) brands, Organic Eggs and Kvochta Domashnya (‘Homelaid’). The wholesale percentage of sales is projected to be only 35% of sales in 2013, as compared to 89% in 2009 prior to its IPO.
International exports. In 2012 the Company exported its products to 32 countries, primarily to the Middle East, North Africa, and the Central/Far East Asian markets. About 30% of 3013 estimated sales are projected to come from exports, up from 2% in 2009 and 19% in 2011. Ini 2012, the EU included the Ukraine on the list of third countries that have the right to export eggs, egg products, birds and poultry to the European Union.

Last year AvangardCo’s sales accounted for a 52% share of the industrial production of eggs and 88% of the egg processing market in the Ukraine. It continues to execute on its stated strategy to become the number one egg producer in the world, and aims to increase its total capacity to 30.1 million laying hens and 8.6 billion eggs by the end of 2013. Also planned is the expansion of its Imperovo production facilities from 3 million to 10 million shell eggs per day, as well as the construction of biogas plants to efficiently utilize chicken manure.

Avangard commenced its operations in 2003 following the acquisition of CJSC Avangard and the incorporation of a subsidiary company Avangard-Agro. The Company was incorporated on 23 October 2007 under the laws of Cyprus, to serve as the ultimate holding company for Avangard. Since 2010, about 22.5% of the outstanding shares of AvangardCo IPL have been listed on the London Exchange in the form of GDR’s and are widely owned. AvangardCo recently confirmed that the Company’s operations and financial results will not be affected by the recent developments in Cyprus and provided reassurance that it has no exposure to the proposed levy on deposits in Cyprus and that it has no bank deposits and other accounts in any of the Cyprus Banks.

We like companies that are profitable

The Group’s revenues and net profit have increased significantly in recent years. As of 31 December 2012, revenues amounted to US$629.3 mln, a 13.7% increase over the previous year’s US$553.3 million, and EBITDA improved 14% to US$ 279.8 million, compared to US$245.8 million in 2011.

AvangardCo IPL ($ in millions):

	2012	2011	2010	2009
Revenue	629.3	553.3	439.7	319.9
Rev Growth %	13.7%	25.8%	37.4%
EBITDA	279.8	245.8	194	152.1
EBITGrowth %	13.8%	26.7%	27.5%
Oper.Profit	264.5	231.5	180.9	139.8
OP Margin %	42.0%	41.8%	41.1%	43.7%
Finance Exp.	36.3	31.6	(4.1)
Net Profit	228.2	196.3	185	133.7
Profit Growth	16.3%	5.3%	38.4%
Total Debt	352.2	318.1
Total Cash	204.3	237.8
Net Debt	148.2	80.3

Interest Coverage Ratios

AvangardCo’s EBITDA margin stayed at about 44% of sales for both 2011 and 2012, which is notable considering the substantial growth in the scale of its operations and its ambitious investment program, which was marked by the launching of the first phase of new capacity at its new egg production complexes of Avis and Chornobaivske. With EBITDA reported at $279.8 million, earnings earnings appear to be at about 7.7 times greater than interest expenses.

We like companies with lower debt to cash ratio

AvangardCo’s total financial debt at the end of 2012 was $352.2 million, the major part of which is in US dollars, while cash and short term deposits were $204.3 million. This less than 2 to 1 debt to cash ratio is less than we typically find, but not it’s not as surprising here given the company’s strong cash flow.

We like companies that have good balance sheets

It’s current market capitalization appears to be about $589.2 million, putting its debt to enterprise value at about 48%. As a result of closely held ownership, its shares don’t appear to be traded with any significant volume. However, with a net debt of only $148.2 million and a debt to equity ratio of only about 28%, a company sporting such high margins of profitability and strong growth in cash flow should have little difficulty in accessing additional capital through the equity markets if it were deemed necessary or desirable.

We like higher yields

This five year $200 million US dollar denominated debt of AvangardCo was issued in October of 2010 at the coupon rate of 10.0%, payable semi-annually. Its principal amount appears to be non-callable except in instances of a change in control of the company (at a 1% premium) or if a specific favorable tax treaties outside the direct control of AvangardCo changes. Acquiring this bond at a modest premium to par would result in an indicated yield to maturity in 2015 of over 8%, and provide added strength to the high cash flow in our client’s foreign and world fixed income holdings.

Risks Considerations

The default risk is AvangardCo’s ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential.

A harder risk for us to identify is the geopolitical risk. Since we find it hard to understand many of the political changes even in our own country, perhaps the uncertainties of changes on a foreign soil become less formidable. With that said, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as a adding key economic value to the society it’s associated with. AvangardCo’s egg production is a basic need for any society, and is the largest producer in its homeland.

AvangardCo’s margins are sentative to the cost of feed, which is affected by trends in the international and domestic prices, as well as by the exchange rate of the Ukrainian hryvna. However, given its position in the market and that eggs are widely considered a food staple, the company should be able to retain some degree of pricing power its production cost rise significantly.

Other risks the poultry and foods industry may be exposed to involve outbreaks of bird flu and other livestock diseases, product liability claims and product recalls in connection with contamination of Avangard’s products. AvangardCo seeks to minimize these risks by utilizing advanced technologies.

We believe that these AvangardCo bonds have similar risks and maturities to other Yankees bonds such as Myria Agro bonds, Vedanta Resources (VDNRF), or Georgian Railway, which we have reviewed previously on our Bond-Yields.com blog.

Summary and Conclusion

It is our opinion that AvangardCo has positioned itself well for the future as a leading global provider of eggs and egg products from one of Europe’s richest farming districts. It has a fair cash position, excellent earnings and interest expense coverage, and an improving balance sheet. As a result, we believe these AvangardCo’s bonds offer an extremely attractive and high yield relative to its very short maturity and the financial risks that we can identify, and have therefor chosen them for addition to our Foreign and World Fixed Income holdings.

Issuer: Avangardco
Coupon: 10.0%

Ratings: B (Fitch)

Maturity: 10/29/2015

Price: 103.25

Yield to Maturity: ~8.5%

Disclosure: Durig Capital and certain clients may have positions in Avangardco 2015 bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.

To know more about this Avangardco bond call our fixed income specialist at 971-327-8847

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4% Yield, Singapore Dollars – IndianOil Corporation bonds, Baa3/BBB- rated, mat. Oct. 2022

Randy — Fri, 10 May 2013 20:38:09 +0000

We have long searched for a good fixed income investment opportunity in what is considered by some of financial industry’s pundits to be one of the world’s best currencies, the Singapore dollar. This week we target a medium term investment grade note denominated in Singapore dollars from IndianOil Corporation, which appears to be yielding over 4%. While this yield may not initially appear to be as robust as many of shorter maturity bonds that we have recently identified, if this bond’s currency continues on its longer term strengthening trend against the U.S. dollar, then the appreciation or changes in the valuation of the Singapore dollar over the next 9 1/2 years to its maturity can be viewed by US based bondholders as being added to its leaner 4.1% coupon. This IndianOil Corporation note is one of the very few fixed income vehicles that we could find in Singapore dollars that meets the strict standards of Durig Capital and offers an attractive return relative to the risks that we can identify, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Corporate Bond linked to the Singapore Dollar

This IndianOil Corporation debt, denominated in Singapore dollars, has a coupon of 4.1% and currently trades near or slightly above par. This is a noticeably lower yield than some of the bonds we have selected in the recent past, especially considering its longer 9 1/2 year maturity.

However, it does carry a high investment grade rating from a very reputable issuer with fundamentally sound financials, as explained in further detail below. Without question, the primary attractiveness of this instrument is the exposure it offers investors to the relative strength and stability of the Singapore dollar. Singapore’s monetary policy has been centered on the management of the exchange rate since the early 1980s, with the primary objective of promoting medium term price stability as a sound basis for sustainable economic growth.

Three main features of the exchange rate system in Singapore, as stated on its website, are:

The Singapore dollar is managed against a basket of currencies of our major trading partners.
MAS operates a managed float regime for the Singapore dollar with the trade-weighted exchange rate allowed to fluctuate within a policy band.
The exchange rate policy band is periodically reviewed to ensure that it remains consistent with the underlying fundamentals of the economy.

Below is a five year chart illustrating the strength of the Singapore dollar (SGD) relative to the U.S. dollar (USD). Double clicking on the chart itself will reveal its longer 10 year, and perhaps much more startling, trend.

We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and although Japan’s central bank willingness to pursue quantitative easing has recently strengthened numerous other major currencies, including both the Euro and the U.S. dollars, we view the current relative strength of the US dollar as providing a good opportunity for diversification away from the dollar and into a variety of other strong global currencies, which necessitates including an exposure to the Singapore dollar.

Singapore Economy

Singapore was founded as a British trading colony in 1819. It joined the Malaysian Federation in 1963 but separated two years later and became independent. Singapore subsequently became one of the world’s most prosperous countries with strong international trading links (its port is one of the world’s busiest in terms of tonnage handled) and with per capita GDP equal to that of the leading nations of Western Europe.

Singapore has a highly developed and successful free-market economy. It enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries. The economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector. Real GDP growth averaged 8.6% between 2004 and 2007. The economy contracted 0.8% in 2009 as a result of the global financial crisis, but rebounded 14.8% in 2010, on the strength of renewed exports, before slowing to 5.2% in 2011 and 1.3% in 2012, largely a result of soft demand for exports during the second European recession. Over the longer term, the government hopes to establish a new growth path that focuses on raising productivity, which has sunk to an average of about 1.0% in the last decade. Singapore has attracted major investments in pharmaceuticals and medical technology production and will continue efforts to establish Singapore as Southeast Asia’s financial and high-tech hub.

Growing housing and car prices and tighter foreign manpower controls have recently created an upward pressure on the inflation rate, thus preventing the monetary authority from easing its exchange rate policy. In addition, retail sales declined 2.7 percent in February from a year earlier, hurt by a 39.7 percent drop in sales of motor vehicles, as a result of restrictions put on the car sales. On the positive side, in the last three months of 2012, unemployment rate decreased even further to 1.8 percent, the lowest level since 2007. The Singapore Government’s fiscal policy is to run a surplus, and the estimated surplus for 2013 is about S$2 billion (US$1.6bln), or 5% of its total revenue.

As a means of comparison, over the last year Singapore’s Government Bond Yield for 10 Year Notes have declining 0.21 percent to 1.40%, while the benchmark interest rate in Singapore was last recorded at 0.03 percent. Standard & Poor’s credit rating for Singapore stands at AAA. Moody’s rating for Singapore sovereign debt is Aaa. Fitch’s credit rating for Singapore is AAA.

About IndianOil

IndianOil Corporation Ltd. is India’s flagship national oil company, with business interests that straddle the entire hydrocarbon value chain – from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas as well as marketing of natural gas and petrochemicals. It is the highest ranked Indian corporate in the prestigious Fortune ‘Global 500′ listing, ranked at the 83rd position in the year 2012, and is 78.9% owned by the government of India. Indian Oil is India’s largest company by sales, with revenues of Rs.4,09,957 crore ($85.55 billion) and profits of Rs.3,955 crore ($825 million) for the year 2011-12.

IndianOil and its subsidiaries own and operate 10 of India’s refineries and its cross-country network of crude oil, product and gas pipelines is the largest in the country. Its Gross Refinery Margins have gone through a tumultuous phase last year, being at reasonable levels in the first six months and then falling into a tightening trajectory before recovering in the last quarter of the year. Despite the tight margins for the year, it was able to achieve healthy profit levels. However, profits were lowered after the imposition and payment of an Entry Tax by the State Government of UP on crude oil received at its Mathura Refinery (retrospectively from 2007 onwards). Subsequent to this, it has taken various steps to prospectively pass on a sizeable component of this tax through sale of major petroleum products in the State, and expectations are that the impact of the entry tax for the past period to be mitigated. Barring such one-time burdens, IndianOil continues to grow at a healthy pace and retains market leadership in India’s Downstream Sector.

As a country, India has achieved 8-9% growth rates continuously over the last six years. However, the year 2011-12 saw the growth rate plummet to 6.5%, which although lower than previous years, is still much higher than many other countries. The widening fiscal deficit and trade gap, combined with high inflation and reduced growth has pushed the country at the moment into the danger zone of stagflation, having the worst of both the worlds – anemic growth and high inflation. However, POL (Petroloeum, Oil, and Lubricant) demand growth remains robust at 4.9%, and in terms of value, crude oil imports stood at 7.5% of the GDP – easily amongst the highest in the world. Due to uncertainties in domestic gas production, India has turned into the third largest importer of natural gas among Asian countries, after Japan and South Korea. If the country is to continue to grow on a high trajectory, access to energy has to be ensured, and India’s polymer market is set to grow to over 12 MMTPA in the next five years (supported by demographics, changing lifestyles and growing income levels.)

The total debt of IndianOil appears to be about $14.8 billion, or about 10.4% of its current enterprise value, and its operating cash flow is about $5,240 million compared to interest expenses of about $229 million. This IndianOil bond is currently rated Baa3 by Moody’s.

Risks

The default risk is IndianOil’s ability to perform. Considering that the company is essentially state owned (78.9%), the primary operator within the Indian economy’s vital oil industry, has excellent revenues and cash flow, very low debt to equity, and has a high investment grade rating by Moody’s, and it is our opinion that the default risk for this issue is relatively low compared to the currency risk of the Singapore dollar.

Globally, the Oil & Gas industry continues to be impacted by geopolitical tensions that rock the oil markets and bring heightened volatility in oil prices. The refining sector especially is expected to pass through a tough time, primarily because of the slowdown in growth all around, including in scaling down of growth rates in emerging economies from Asia essentially due to the increased inter-connectivity of the global business.

The Indian petrochemicals industry will face competition from larger, very well financed oil industry giants with hubs in China, Singapore and West Asia for global markets. However, the growing market of India places IndianOil in a unique and advantageous position to tap these opportunities.

The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Singapore’s economy.

Accessibility and Liquidity

IndianOil has relatively little debt for a company of its size and nature, and we have specifically targeted this debt denominated in Singapore dollars for the express purpose of diversification away from the US dollar. We believe having a portion of fixed income revenues outside of the dollar actually helps lower the overall portfolio risk to the greenback’s potential devaluation against other global currencies. We also believe that acquiring and owning individual maturity definite bonds offer significant advantages over owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail. Achieving an institutional sized yield typically requires an institutional sized bond purchase, and even though broker/dealers may require an institutional sized bond purchase, it is possible with an advisor or an investment manger’s assistance for a number of retail clients to be combined together in order to make a larger institutional sized purchase. This is how we have been able to facilitate purchases as low as US $5,000 for many retail buyers.

Conclusion

While acknowledging that every investment vehicle involves varying elements of risk, we believe that recent pricing of the Singapore dollar relative to the U.S. dollar represents an good opportunity for initiating a longer term exposure to it with a relatively high yield from such a sound issuer as IndianOil. The economic policies and fiscal responsibility of Singapore appear have resulted in its currency having appreciating against many other global currencies over the last ten years, and should this continue on the same path for the next ten years, we expect that comparative yields when measured against a U.S. dollar based investment have a high possibility of being outstanding relative to the risks that we can identify. Therefore, we view the currency risk of this remarkable city-state nation as one that we have highly recommended our clients take in their continued effort to diversify away from overweighted US dollar based assets, and it is why we are adding these long 9 1/2 year IndianOil bonds in Singapore dollars to our Foreign and World Fixed Income holdings.

Coupon: 4.10

Ratings: Baa3

Maturity: 10/15/2022

Price: ~100.5

Yield to Maturity: ~4.05%

Disclosure: Durig Capital clients may currently have positions in these IndianOil 2022 bonds.

Contact our fixed Income specialist, Hugh, with any questions you may have at 971-327-8847.

On a scale of A+ to F

Reason for Durig A+ Rating

Contact our fixed Income specialist with any questions you may have at 971-327-8847.

Durig.com | Bond-Yields.com

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7.65% Yields with Trade & Development Bank of Mongolia short bonds, B1 rated, Sept. 2015

Randy — Tue, 07 May 2013 22:58:21 +0000

This week we again turn to the far eastern country of Mongolia to find what we believe are better yielding U.S. dollar corporate bonds relative to the amount of risk that investors typically find in more common or more popular domestic U.S. corporate bonds. Increasingly known for its vast mineral resources, Mongolia is the fastest growing country in the world with an amazing 17%-a-year growth rate. As the Mongolian economy transitions away from a long history of oppression and into free markets, the sheer abundance of its very low cost resources has unlocked great market opportunities for their county. The financial sector is considered as one of the most geared to Mongolia’s rapid economic growth, which is being fueled by development of its world class mineral resources, and the following review shows why we believe adding these very short 29 month, 8.5% coupon, Yankee bonds from the Trade & Development Bank of Mongolia to our Foreign and World Fixed Income holdings offers great cash flow and helps to lower overall portfolio risk through a broad and diverse investment strategy..

The Mongolian Economy

With a population of less than three million and a territory as large as Western Europe, Mongolia’s extensive mineral deposits and attendant growth in mining-sector activities have transformed Mongolia’s economy, which traditionally has been dependent on herding and agriculture. The country opened a fledgling stock exchange in 1991, and joined the World Trade Organization in 1997. Growth averaged nearly 9% per year in 2004-08 largely because of high copper prices globally and new gold production. By late 2008, Mongolia was hit hard by the global financial crisis. As a result, Mongolia’s real economy contracted 1.3% in 2009. In October 2009, Mongolia passed long-awaited legislation on an investment agreement to develop the Oyu Tolgoi mine, considered to be among the world’s largest untapped copper deposits and expected to account for one-third of Mongolia’s GDP by 2020. In March 2011, six big mining companies prepared to bid for the Tavan Tolgoi area, the world’s largest untapped coal deposit.

Mongolia purchases 95% of its petroleum products and a substantial amount of electric power from Russia, leaving it vulnerable to price increases. Due to severe winter weather in 2009-10, Mongolia lost 22% of its total livestock, and meat prices doubled. Inflation remained higher than 10% for much of 2010-12, due in part to higher food and fuel prices. Mongolia’s economy grew by 6.4% in 2010 and 17.5% in 2011 on the strength of commodity exports to nearby countries, high government spending domestically, and very notably, the development of Oyu Tolgoi. Foreign direct investment into Mongolia is heavily skewed towards mining, and following calls by nationalist politicians to renegotiate the investment agreement with Rio Tinto and the passing of the controversial Strategic Sectors Foreign Investment Law (SSFIL) in May of last year, the attractiveness of Mongolia as a destination for foreign direct investment lost its luster. As a result foreign direct investments fell 17% y-o-y to US$3.9bn in 2012 and are down 58% in the two first months of this year, while GDP growth slowed to 12.3% last year from 17.5% a year earlier.

However, on April 19, 2013, the Mongolian Parliament passed amendments to SSFIL aimed at easing restrictions and creating more favorable conditions for foreign investors. While the investments of state owned or state participated companies will still need parliamentary approval in cases where the investment exceeds a 49% stake, parliamentary approvals for foreign non-state owned companies and threshold of MNT100bn (US$70mn) have been removed. While the Mongolian government is still in dispute with Rio Tinto regarding the cost-overruns and some compliance matters at the Oyu Tolgoi mine, Prime Minister Altankhuyag Norov charged the Mining Minister Gankhuyag to speed-up the land, foreign labor force, customs documentation permits and take actions on solving water, environmental, power plant, third-party laboratory, and infrastructure issues. These appear to be positive steps towards boosting the severely hit investor confidence, and we think that the new rules will prompt renewed foreign investments in this underexplored market with huge economic potential.

Standard & Poor’s credit rating for Mongolia stands at BB-. Moody’s rating for Mongolia sovereign debt is B1. Fitch’s credit rating for Mongolia is B+.

A Look at the Issuer

The Trade and Development Bank of Mongolia LLC (TDB), the oldest bank of Mongolia, was founded in 1990 and is based in Ulaanbaatar. It is one of the largest Mongolia banks, and together with its subsidiary, TDB Capital LLC, it has about 1219 staff providing various banking and financial services including large corporate, SME and retail lending, deposit-taking, trade finance, remittance, cash management, treasury, foreign exchange and investment banking through a network of 47 branches. TDB acts as a primary lender to most of Mongolian leading corporations as well as foreign corporations and foreign representative offices across all major industrial and commercial sectors. Leveraging this pre-eminent position and its long-standing customer relationships, the Bank has consolidated its market-leading position in the handling international trade finance and remittance, with access to credit lines from major international lenders and correspondent banking relationships with over 150 international financial institutions.

TDB is 73.1% owned, directly and indirectly, by US Global Investment LLC, an intermediate parent company, which is in turn owned equally by an individual, Erdenebileg Doljin, and Central Asia Mining LLC. The latter is the ultimate parent company, and is owned by two individuals. Goldman Sachs acquired a 4.8% stake in TDB in February 2012. Apart from the treasury stock of 3.4%, the bank’s remaining stake of 18.3% is owned by a number of individuals, who are minority shareholders. At the 2012 “Global Banking & Finance Review” awards, Trade and Development Bank of Mongolia was awarded for the “Best Corporate Bank Mongolia 2012” from among best commercial banks in the world.

As a result of the high loan growth of 142% in 2011, TDB’s Tier 1 and total capital adequacy ratios (CAR) declined to 8.2% and 12.7% at end-2011 from 10.2% and 16.3% at end-2010, respectively. Despite significant loan growth during 1H 2012, its Tier 1 and total CAR improved to 9.1% and 14.5%, respectively, as of June 2012 helped by a capital injection from Goldman Sachs in February 2012. At the end of December 2012, TDB’s total assets reached MNT 2623.0 billion ($1,851 million) and capital funds reached MNT 295.2 billion ($208 million), representing 22.9% and 30.0% market shares respectively. The Bank has had a strong earnings track record with MNT 15.0 billion ($10.58 million) in 2009, MNT 20.7 billion ($14.6 million) in 2010, MNT 48.5 billion ($34.2 million) in 2011 and MNT 64.8 billion ($45.7 million) at the end of December 2012.

At the recent Mongolia 2013 Investment Summit in London, the President of the Trade and Development Bank, R.Koppa, stated that a total of USD 68 billion is needed to develop Mongolia in the near future. He said that 20 billion USD of it will be spent in the mining sector, 12 billion in infrastructure, 8 billion in urban development, 2 billion in agriculture, 20 billion in trade and industry, 2 billion in environmental protection, 2 billion in social development and 2 billion in finance. He also pointed out that 14 billion USD will be raised from Foreign Direct Investment, 18 billion from internal sources, 6 billion from government bonds, 16 billion from international capital markets, 12 billion from international financial organizations and the rest, 2 billion USD, from donor countries.

Moody’s states that the probability of systemic support for TDB is high, given the bank’s large market presence in Mongolia. The systemic support indicator for Mongolia (i.e. the government bond rating) is B1, which leaves the bank’s local currency bank deposit rating at its standalone rating of ba3. TDB’s foreign currency deposit rating is B2, and is constrained by the country ceiling. Moody’s rating of B1 (stable) is underpinned by TDB’s good franchise value as one of the largest banks with expertise in corporate banking in Mongolia where it held 29.5 corporate lending market shared at end December 2012. TDB serves approximately 400 major Mongolian corporations in almost all major business sectors. An upgrade of the sovereign rating could be positive for the banks ratings, especially if it can maintain its currently healthy asset quality, capital, and profitability metrics throughout the economic cycle.

As the leading banking and financial services provider in Mongolia, it appears that TDB is well positioned for continued growth and profitability as an integral and vital component within the rapidly expanding Mongolian economy. Considering last week’s parliamentary approval of recent amendments to Mongolia’s Foreign Investment Mining Laws, it is our opinion that that the Trade and Development Bank of Mongolia will benefit from the renewed interest of investment monies ready to enter the country.

Risks Considerations

The default risk is Trade and Development Bank’s ability to perform. As most rating agencies still rating Mongolian sovereign debt at single B, the country’s low rating pretty much ensures a glass ceiling equivalent to the only nation it operates within. However, considering their historical and recent performance, their sound tier one capital position, a reasonably easy access to the additional capital the may be needed for its continued rapid growth, and its good (stable) credit rating from Moody’s, it is our opinion that the default risk for this very short term bond is minimal relative to its more favorable return potential. Furthermore, it is our opinion that if or when the credit ratings of Mongolian sovereign debt rise, it increases the possibilities of a more favorable rating for TDB.

The hardest risk for us to identify is the geopolitical risk. Perhaps the most prominent issues are Mongolia’s apparent lack of stability in the legal environment that supports investment, successful project financing and the guarantee of the sanctity of contracts. However, considering how difficult it has become to understand many of the political changes and potential changes for bondholders (ala General Motors) in our own country, we again suggest that the uncertainties of changes on a foreign soil are much less formidable than in times past. With that said, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as adding key economic value to the society it’s associated with. As a primary lender to many of Mongolian leading corporations, TDB is a key player in the development of its world class mineral resources, and is highly regarded as one of the best operators in its homeland.

TDB is relatively small compared to other financial institutions, and many factors such as presidential elections, trending populism and patriotism, China’s weakening demand for coal, cheaper coal prices, positive changes from strategic investments, the draft mining law, sales of Chinggis bond and the international attention on Mongolia will all have their own impacts on Mongolia’s economy. However, it often appears that companies outside of the United States might also have an internal cash flow advantage. Consequently, we see these TDB bonds as having similar risks and maturities to other Yankees bonds such as Bio PAPPEL (CDURQ), Vedanta Resources (VDNRF), or Mongolian Mining (MOGLF), which we have reviewed previously on our Bond-Yields.com blog.

Summary and Conclusion

All things considered, it is our opinion that TDB has positioned itself as a leader within the Mongolian financial sector. As Mongolia continues to develop its world class resources, we think these short term Trade and Development Bank U.S. dollar bonds represent both sound diversification and a high yield relative to the fiscal risks that we can identify, and believe that their lower “B” ratings are largely attributable to the sole country that they currently operate within. Therefore, we are these high yielding Yankee bonds from TDB to our list of Foreign and World Fixed Income holdings.

Coupon: 8.5

Ratings: B1

Maturity: 10/15/2015

Price: ~101.8

Yield to Maturity: ~7.65%

Disclosure: Durig Capital and certain clients may have positions in TDB 2015 bonds.

On a scale of A+ to F

Reason for Durig A+ Rating

Contact our fixed Income specialist with any questions you may have at 971-327-8847.

Durig.com | Bond-Yields.com

Mongolia Bank News:

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7.7% Yields with Mongolian Mining Corp bonds, B+/B1 rated, mat. March 2017

Randy — Wed, 17 Apr 2013 17:54:06 +0000

This week we reexamine the far eastern country of Mongolia to find what we believe are better yielding U.S. dollar corporate bonds relative to the amount of risk that investors typically find in more common or more popular domestic U.S. corporate bonds. Increasingly known for its vast mineral resources, Mongolia is the fastest growing country in the world with an amazing 17%-a-year growth rate. As the Mongolian economy transitions away from a long history of oppression and into free markets, the sheer abundance of its very low cost resources has unlocked great market opportunities for their county. One of the companies leading this charge is Mongolian Mining Corporation, a high quality hard coking coal producer and exporter. Although the currently indicated 7.7% yield to maturity of this bond is lower than some of the double digit yields that we have presented recently, the following review shows why we believe adding these short 4 year, 8.875% high coupon Yankee bonds from Mongolian Mining to our Foreign and World Fixed Income holdings offers great cash flow and helps to lower overall portfolio risk through a broad and diverse investment strategy.

An Updated Look at the Issuer

Cayman Islands based Mongolian Mining Corporation (MMC) is the largest producer and exporter of high-quality coking (metallurgical) coal in Mongolia. Metallurgical coal is a fuel with few impurities and high carbon content, and 60- 70% of the steel produced today uses metallurgical coal. Its two large open pit mines enable MMC to be one of the lowest costs, high quality metallurgical coal producers in the world at around USD 23.9 per ton.

In an effort to improve coal quality, Mongolian Mining Corp has invested in building a coal handling and preparation plant (CHPP) that will allow it to process and wash coal. The CHPP Module II came to full operation in 2H 2012, increasing its total processing capability to 10Mtpa. CHPP product tonnage for 2012 increased 175% over 2011. The CHPP Module III has been completed, and its commissioning is expected in 1H 2013. This will increase the total processing capacity to 15Mtpa starting in 2H 2013.

Through steadily increasing volume over the years, China has become the number 1 global producer of steel, and has become a net coking coal importer. China imported 53.5 million metric tonnes of coking in 2012, compared to 44.7 Mt in 2011. Mongolia preserved its position as the largest supplier of coking coal to China with approximately 35.6% share by volume in total Chinese coking coal imported in 2012. Mongolian companies enjoy the lowest production cost due to thick coal bed and open pit mining, and supplies coal at a discounted price to China. Thus, Mongolian coal will be least affected by decline in global coal prices and is able to provide high quality coal at about ½ the price of its Canadian and Australian based competitors. The graph below helps to demonstrate how its low production costs allow MMC to provide high quality coal at about ½ the price of its Canadian and Australian based competitors. MMC is the dominate Mongolian coking coal provider.

The Group’s gross profit for the year ended 31 December 2012 was approximately USD54.1 million, representing a decrease of USD152.1 million, or 73.8 %, from gross profit of USD206.2 million recorded for the year ended 31 December 2011. In 2012, gross profit margin was 11.4%, compared with 38.0% in 2011. The decrease in gross profit and gross profit margin was mainly driven by (i) a decrease in the average selling price (ASP) of coking coal products supplied by the Group due to challenging market conditions in China as demand from steel mills and coke plants was affected by global economic conditions and (ii) costs related to coal transportation and stockpile loss totaling USD19.5 million, which was one-off recording at the end of the year. The global economy in 2012 went through a challenging period amid a slower than expected recovery in the USA and the uncertainty linked to the European sovereign debt crisis. Affected by declines in the export sector, and also by the Chinese government’s continuation to tighten policies designed to curb inflation in the property sector, the Chinese domestic economic growth rate slowed down to 7.4% in the third quarter of last year and stood at 7.9% as at the end of 2012 compared to 8.9% reported in the fourth quarter of 2011.

Average Selling Price per tonne (USD, washed hard coking coal)	2012	2011
Mongolia Mining	108.0	155.0

Hit by a steep decline in coal’s ASP in 2012, MMC ended the year with revenues of $475.5 million (a 13% decline from 2011) and a net loss of $2.5 million compared to a profit of $119.1 million a year earlier. While the low ASP remains a concern, we are impressed with the relatively low cost of production and (EBITDA) generation, and see that the biggest risks to earnings and cash flow is not likely to be big fluctuations in the demand for their products, but rather, in transportation issues and production costs. MMC is headquartered in Ulaanbaatar, Mongolia, and employs over 2,400 people. By providing a profitable low cost service with limited direct competition, it appears that Mongolia Mining is well positioned as a vital component to the Mongolian economy and we anticipate that it will its large economies of scale will continue to show improvement in costs savings and solid earnings and cash flow going forward. Therefore, it is our opinion that the poor earnings of 2012 last year is likely to turn around in 2013 and is now presenting us with a good opportunity to acquire these bonds at at an even more favorable yield than we first targeted purchasing them at (and missed) previously.

Interest Coverage Ratios

The major contributing factors of the Group’s net loss position are (i) a decrease in the ASP of coking coal products, (ii) costs related to coal transportation and stockpile losses totaling USD19.5 million, which was one-off recording at the end of the year, and (iii) an increase in the Group’s finance costs due to the issue of guaranteed senior notes and other facilities, bringing total net finance cost to USD11.4 million. Gross profit for the year was $54.1 million, while profits from operations was $12.4 million. While this is certain farther removed from the normal criteria we strive to achieve and indicative a higher risk, MMC also stated that coal inventories in China have returned to normal levels from the fourth quarter of 2012 and “re-stocking activities are expected to positively influence coking coal prices in the short-term.”

We like companies with lower debt to cash ratio

The consolidated debt of Mongolia mining at the end of 2012 was $1,009 million, primarily attributed to the 2017 Notes. Cash and cash equivalent at the end of 2012 was about US$284.3 million, giving them a debt to cash ratio of about 3.5 to 1. Considering its reasonably strong cash flow and sound cash position, we remain of the opinion that it is a lower fiscal risk.

We like companies that have good balance sheets

Mongolia Mining’s total debt appears to be trading at about 64% of its currently indicated enterprise value of about $1.568 billion. While this may appear higher than we typically like to see, its cash position of $284 million represents over 18% of the valuation given to it by the capital markets and adds reasonably sound resiliency to its balance sheet.

We like higher yields

In March 2012, the Group successfully issued $600 million Guaranteed Senior Notes at 8.875%, maturing in 2017. Although the credit ratings of B+/B1 assigned to this debt are widely different than that of our government’s sovereign debt, when set in comparison to the paltry 0.74% yields of longer five year U.S. Treasuries we believe this nearly 7% difference in yield represents a savvy opportunity for higher rewards given the level of risks that we can identify.

Risks Considerations

The default risk is Mongolian Mining’s ability to perform. As most rating agency still rating Mongolian sovereign debt at single B, the country’s low rating pretty much ensures that MMC’s rating has a glass ceiling equivalent to the only nation it operates within. Considering their historical and recent performance, their sound cash position, balance sheet and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential. Furthermore, it is our opinion that if or when the credit ratings of Mongolian sovereign debt rise, it increases the possibilities of a more favorable rating for MMC.

The hardest risk for us to identify is the geopolitical risk. Considering how difficult it has become to understand many of the political changes and potential changes for bondholders (ala General Motors) in our own country, we again suggest that the uncertainties of changes on a foreign soil are much less formidable than in times past. With that said, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as adding key economic value to the society it’s associated with. Mongolian Mining is a low cost supplier for the steel industry, and it is highly regarded as one of the best operators in its homeland.

Expressing confidence in the potential and future economic growth in Mongolia is Rio Tinto (RIO), one of the world’s largest mining companies, which recently spent over 6 billion dollars to buy out Turquoise Hill Resources (TRQ) stake in the project and build the new Oyu Tolgoi copper and gold mine. The impact of this spending was significant in this country of only 3 million people, expanding Mongolia’s GDP by 17.5 percent according to the International Monetary Fund. In passing the Strategic Foreign Investment Law last May, the Mongolian Parliament positioned itself to intervene in approving foreign takeovers of assets in strategic sectors like mining and banking. Subsequently, new foreign direct investment stalled and the law’s lack of clarity remains a concern. However, it was recently announced that this may soon be amended to restrict only foreign state owned or directed entities. Furthermore, although Mongolian Mining Corporation is listed on the stock exchange of Hong Kong Limited (since 2010), it remains largely in the control of natives Odjargal Jambaljamts (43.45%) and Dr. Oyungerel Janchiv (11.42%).

Water extraction and power generation are costs that are subject to large variances for Mongolian Mining Corp, but a greater risk resided in the transportation of it product to market. MMC plans to have railway access to the Chinese border by 2015, but for political reasons it will not match the gage of the Chinese rail lines and will end at the border. Until this rail line is done they are forced to continue using an existing network of roads which it has helped to build and maintain for years. Other Analysts that we follow have indicated that they believe the transportation concern is the largest single risk, and have stated that this should be mitigated when the railroad becomes operational. The President of Mongolia has stated that a top priority of his country is to build a rail line to both China and to the Pacific Ocean.

Mongolian mining corporation is relatively small compared to other coal companies and their subsidiaries, such as BHP Billiton Ltd, Rio Tinto (RIO), Arch Coal (ARCH), and Peabody (BTU), and may face increasing competition from substantially larger and better financed companies as Mongolia mining. However, it often appears that companies outside of the United States might have an internal cash flow advantage. Consequently, we see these MMC bonds as having similar risks and maturities to other Yankees bonds such as Bio PAPPEL (CDURQ), Myria Agro (MAYA:GR), Vedanta Resources (VDNRF), or Georgian Railway, which we have reviewed previously on our Bond-Yields.com blog.

Summary and Conclusion

All things considered, it is our opinion that MMC has established itself as a low cost leader in the supply of coking coal to the World and to the Chinese steel market. It has a good cash position, a reasonably sound balance sheet, and is evidently very well connected both politically and socially for continued growth within one of the key and vital economic industries of Mongolia. Consequently, we think these MMC bonds represent both sound diversification and a high yield relative to the fiscal risks that we can identify, and believe that their lower “B” ratings are largely attributable to the sole country that they currently operate within. Therefore, we are adding these high yield, short maturity, Mongolian Mining Corporation USD (Yankee) bonds to our list of Foreign and World Fixed Income holdings.

Coupon: 8.875

Ratings: B+/B1

Maturity: 03/29/2017

Price: ~104

Yield to Maturity: ~7.7%

Disclosure: Durig Capital and certain clients may have positions in MMC 2017 bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

On a scale of A+ to F

Reason for Durig A+ Rating

Contact our fixed Income specialist with any questions you may have at 971-327-8847.

Durig.com | Bond-Yields.com

Mongolia Mining News:

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Carriage Services Capital Trust, 7% TIDES Convertible Preferred Securities

Randy — Tue, 16 Apr 2013 18:31:27 +0000

This week we look at a lesser known Term income Deferrable Equity Securities (TIDES) investment vehicle, subordinated convertible preferred securities from Carriage Services Inc. (CSV), which mature in June of 2029 and is currently indicating yield of about 7%. If this relatively midsized funeral operator continues its rapid growth and significantly increases in value, this bond’s convertibility feature allows for the possibility of adding long term capital gains into its total return potential. After further review, we see this as a rare and unusual opportunity to achieve higher US dollar yields in the very profitable funeral industry, which is starting to benefit directly from the baby boomer cycle. Therefore, we have selected these Carriage Services convertible notes for addition to our Foreign and World Fixed Income holdings.

NEW NEWS See Bond-Yields.com YouTube update for Carriage Services Capital Trust, 7% TIDES Convertible Preferred Securities below.

A Look at the Issuer

Headquartered in Houston Texas, Carriage Services (CVS) was incorporated on 1991 and is currently the fourth largest publicly traded deathcare company. Not only is it a leading provider of professional funeral and cemetery services and products in the US, it is the leading consolidator of family owned deathcare businesses. Its vision for the next ten years is to affiliate with many of the best remaining independent funeral firms around the country. Carriage operates 167 funeral homes in 26 states, and it operates 33 cemeteries in 12 states.

We like companies that are profitable

Carriage Services recently announced record results for the quarter and full year ending December 31, 2012, achieved strong Q4 revenue growth of 13.1% to a record $53.3 million, and Adjusted Earnings Per Share growth of 140% to $0.24 per share. Full year results were also outstanding, achieving year over year revenue growth of 8.8% to a record $204.1 million and Adjusted Earnings Per Share growth of 30.8% to a record $0.85 per share. It also substantially raised its Rolling Four Quarter Outlook of Adjusted EPS to $1.11 to $1.14 from its previous guidance of $1.03 to $1.05.

Strong Historical Growth in profits

	Total Field EBITDA	EBITDA Margin	Adjusted Earnings Per Share
2012	$80.9 million	39.6%	EPS of $0.85
1999	$61.6 million	23.3%	EPS of $0.40

Interest Coverage Ratios

Interest expenses for the year ending Q4 2012 appear to be $17.0 million, while operating income (EBITDA) was about $80.6 million, indicating a healthy interest coverage ratio that’s over 4.7 times. In the fourth quarter they completed a refinance of $130 million of 7.875% senior notes due in 2015 with a $235 million syndicated bank financing comprised of a $130 million five year term loan and a $105 million five year revolving credit facility, with interest savings of over 400 basis points on the refinanced term loan.

We like companies with lower debt to cash ratio

The long term debt of Carriage Services at the end of 4Q 2012 was $268 million. Cash and cash equivalent at the end of Q4 was about $1.7 million, giving them the appearance of a rather poor cash ratio. However, as revealed previously in our StoneMor Partners (STON) high yield bond review, our research into the funeral industry business shows that it is not uncommon for these operators to have and maintain control over large trust funds of presold business. Carriage Services is no exception, as it controls a $177 million trust fund, equivalent to about 68% of its total debt. Consequently, we do not have the same concerns that might otherwise arise from such a very low cash level indication.

Valuation Ratios

Carriage Services has demonstrated aggressive profit and production growth over the last 20 years and is forecasting more of the same kind of growth in the future. Yet, with future earnings projected at about $1.11/share and it stock trading currently around $19.33, the approximately 17:1 price to earnings (PE) ratio is less than what is might be expected for a company evidencing such consistently robust growth. Hence, we think this company’s stock has plenty of potential for appreciation, even if it only achieves about half its historical trend. The United States on average has about 2.5 million funeral cases each year, and we have seen forecasts that by 2040 this number will nearly double, making this industry the final beneficiaries of the great and long lasting Baby Boomers cycle.

We like companies that have good balance sheets

Carriage Services debt of $268 million appears to represent about 45% of the near $592 million enterprise valuation currently given it by the equity markets. This is a better managed and less leveraged balance sheet that most of the company we have investigated in the funeral care industry. Considering that its 7.875% bonds were just refinanced at about 4%, there are strong possibilities that this 7% convertible note might also soon be called and replaced with a less costly option. The underlying stock is trading at about a mere 5% discount to its convertible position, after which the bond price should reflect a one to one valuation to any stock price increase. Should the stock trade lower, bondholders continue to reap the 7% coupon yield, which in our opinion makes this 7% income play an extraordinary value if bonds are obtained at or below its call value.

We like higher yields

It appears that there are no credit ratings currently assigned to this debt, making it very different than the ever popular and highly rated sovereign debt of our spend happy government. Yet, when set in comparison to the paltry 2% yields of ten year U.S. Treasuries, we think the 5% difference in yield AND the added capital gains that its convertible feature allows for (the conversion price being $20.4375 per common share) represents a remarkable opportunity for higher rewards given the level of risks that we can identify.

Risks Considerations

The default risk is Carriage Services ability to perform. Credit rating agencies do not rate this convertible debt, but considering its historical trends, recent performance and its forecasted levels of earnings, its excellent position within a very solid industry, and the excellent cash flow that easily services their interest bearing debt, it is our opinion that the financial default risk for this convertible debt is minimal relative to its more favorable return potential.

The hardest risk for us to identify is the future valuation of the stock. With that said, the management team of Carriage Services has a well developed business growth plan that has proven itself to be very successful and profitable, and we have no reason to think that the company will deviate from this same kind of growth in the future. Furthermore, it appears that Carriage Service will continue to find numerous opportunities for growth, as aging practitioners of many small family funeral businesses find it easier to exit by selling the business to Carriage rather than broker it to an heir less caring of its worth.

With the increase of low cost cremations during the last ten years, the funeral industry has experienced significant pressures on its margins. We are aware that on the west coast, funeral operators have seen the cremation rate exceeding 75%. While this remains a risk, it does make the EBITDA growth for Carriage Services over the last few years even more impressive. Lately, these high west coast cremation levels seem to currently be receding, a trend that is expected to slowly spread across the rest of the nation.

Carriage services may face increasing competition from any number of substantially larger and better financed companies, such as Service Corporation of America International (SCI), Stewart Enterprises, Inc. (STEI), or StoneMor Partners. All of these companies have significant resources, but the largest industry competition continues to be the thousands of small operators.

This convertible preferred security has similar risks to other convertible bonds that we have reviewed, such as the Tricon Capital convertible bonds, which have appreciated about 15% in the 3 months since our first review, and TransGlobal Energy convertibles (which after its recently reported quarter may be on a similar path).

Summary and Conclusion

Over the last twenty years, Carriage Services growth is impressive. All things considered, it is our opinion that this company has established itself as a strong player within in the funeral supply and services industry, and has done so possibly right in front of an even greater growth impetuous, the Baby Boomer cycle. We think this fixed income investment vehicle offers sound diversification, as well as a very high yield in relative to the risks that we can identify. In addition to its already high coupon yield, these notes hold the possibility for significant capital gains due to its convertibility feature. For these reasons, we have selected Carriage Services Capital Trust 7% Convertible Preferred Securities, maturing in 2029, for adding to our portfolio of Foreign and World Fixed Income holdings.

Ticker: CSV

NYSE: $19.33 3/13/2013

Convertible Preferred (Bond):

Coupon: 7.00%

Maturity: 6/1/2029

Callable: anytime after 6/5/2001 (with not less than 30 days notice)

Conversion Price: $20.4375 (at bondholder’s option)

Call Redemption Price: 50

Rating: none
Pays: Quarterly

Price: 50

Yield to Maturity: ~7%

Disclosure: Some Durig Capital clients may currently own these Carriage Services Convertible Preferreds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

Durig.com | Investment-Income.net

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5.50% Yield, Russian Ruble – Caterpillar bonds, A2/A rated, mat. Dec. 2015

Randy — Mon, 15 Apr 2013 19:06:27 +0000

This week are targeting a very short, 32 month, very high quality A2/A rated bonds from Caterpillar, denominated in Russian rubles, and are targeting a better than 5.50% yield to maturity for our clients.

Corporate Bond linked to the Russian Ruble

Caterpillar (CAT) has bonds, denominated in Russian Rubles, which have a coupon of 7.5% and currently trade at a yield to maturity (32 months) of about 5.5%. While this is a noticeably lower yield than some of the bonds we have selected in the recent past, when considered with its short maturity, high investment grade rating, and very distinguished brand name issuer, it presents itself as an excellent vehicle for currency diversification away from an overweighted U.S. dollar fixed income portfolio and compares very favorably with the incredibly low yields that many high quality investment grade corporate bonds currently offer.

We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and although Japan’s central bank willingness to pursue quantitative easing has recently strengthened numerous other major currencies, including both the Euro and the U.S. dollars, we view the recent European debt concerns to have unduly weakened the Russian Ruble. Therefore, we see this as an opportune time to increase our exposure to the ruble and the Russian economy, which continues to show remarkably good growth potential in spite of the Europe’s ongoing financial turmoil.

Russian Economy

Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industries, with notable exceptions in the energy and defense-related sectors. Russia is the largest country in the world and the fifth largest economy. The Russian economy is commodity-driven. Russia is the world’s largest producer of oil (12 percent of world output), natural gas (18 percent) and nickel (20 percent). The energy sector is the most important; it contributes 20-25 percent of GDP, 65 percent of total exports and 30 percent of government budget revenue. The Russian export industry consists primarily of natural gas to the Euro zone, is the world’s second largest exporter of oil, and is the third largest exporter of steel and primary aluminum. This reliance on commodity exports makes Russia vulnerable to boom and bust cycles following the highly volatile swings in global commodity prices, and provides reason for the higher correlation of its currency to oil prices.

The economy had averaged 7% growth since the 1998 Russian financial crisis, resulting in a doubling of real disposable incomes and the emergence of a middle class. The Russian economy, however, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. The economic decline bottomed out in mid-2009 and the economy began to grow in the first quarter of 2010. The GDP in Russia expanded 1.8% in the fourth quarter of 2012 over the previous quarter, and has averaged about 3.7% annually over the last two years.

Russia’s competitive flat income tax rate and low corporate tax rates support innovation, although private enterprises also must cope with “informal taxes” such as bureaucratic hassling and corruption. Other taxes include a value-added tax (VAT) and a regional property tax. In the most recent year, Russia recorded a budget deficit equal 0.02 percent of the country’s GDP, and the its debt to GDP was last reported by the International Money Fund at 9.6%. The state maintains a strong presence in such key sectors as energy and mining, and the unemployment rate in Russia decreased to 5.80% in February 2013, while inflation was recorded at 7.3%.

As a means of comparison, over the last 12 months the yields on ten year Russian government bonds have declined 1.18 percent and currently stand at about 6.8%.

About Caterpillar

As the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, Caterpillar needs little, if any introduction to most investors. The Cat equipment product line, consisting of more than 300 machines, sets the standard for the heavy equipment industry. A global leader in size, scope, reach and character, Caterpillar Inc. is a genuine enabler of sustainable world progress and opportunity, defined by the brand attributes of global leadership, innovation and sustainability.

Owing to reduced global demand for mining equipment and to bring production in line with demand, Caterpillar recently announced plans to lay off more than 400 employees, or about 11% of its workforce at its Decatur, IL factory. Amid the growing concerns of the sluggish pace of global economic recovery, Caterpillar temporarily retrenched employees last October and shut down parts of its Decatur facility for a week in November and entire month of December due to the fall in demand. However, this time the layoffs appear to be permanent. Caterpillar had previously added production capacity for many of its products. However, with the growing concerns and uncertainty about the pace of economic growth, short-term economic risks in the U.S, the Eurozone debt crisis, and the slowdown in China’s growth, Caterpillar has now opted to be cautious toward acquisitions and expansion investments. Mining companies such as Vale S.A. (VALE) and BHP Billiton Limited (BHP) also have been revisiting and trimming their capital expenditures plans following the slowdown in economic expansion in China, the world’s largest user of coal and metals. Prices for coal and iron ore have dropped due to slowing growth in China and European debt problems.

Caterpillar’s results have borne the brunt of continued economic turmoil in Europe and its domino effect on the rest of the world. Furthermore, reduced sales, lower production and a decline in inventory primarily resulted in lower fourth quarter 2012 earnings for Caterpillar. While Caterpillar remains challenged with slowing demand and inventory corrections, for fiscal 2013, sales are expected to be in the range of $60 to $68 billion and earnings between $7.00 and $9.00. And although the equity markets may appear to have been less than kind to its shareholders over the last year, its Board of Directors voted this week to maintain the quarterly cash dividend of fifty-two cents ($0.52) per share of common stock in response to what they declared to be “a record year in 2012.” Caterpillar’s balance sheet is strong, and dividend payments are perceived as a good way to reward long-term investors in the company.

The total debt of CAT is 40.15 billion, or about 43.4% of its current enterprise value, and its operating cash flow is about 5.24 billion compared to interest expenses of 467 million. This Caterpillar bond is currently rated A2 by Moody’s and A by Standard & Poor’s.

Risks

The default risk is Caterpillar’s ability to perform. Considering this bond’s short term maturity and CAT’s prestigious (and near monopolistic) position of strength within the industry, we don’t see where the default risk of any bond could get much lower, and it is our opinion that the default risk is negligible relative to the currency risk of the Russian ruble.

The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Russia’s economy.

Russia’s long-term challenges include a shrinking workforce, a high level of corruption, difficulty in accessing capital for smaller, non-energy companies, and poor infrastructure in need of large investments. The Russian economic decline bottomed out in mid-2009 and overall has fared relatively well to other major world economies. Higher oil prices, which has buoyed much or Russian recent growth, could help Russia reduce the budget deficit inherited from the lean years of 2008-09.

Allotments

How can investors participate in Russian ruble denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.

Conclusion

While acknowledging that every investment vehicle involves varying elements of risk, we believe that the recent strengthening of the US dollar relative to the Russian ruble represents an extremely attractive opportunity for initiating a moderately longer term exposure to the Russian economy with a very high grade issuer, at a reasonably attractive short term yield. A continued demand for Russia’s abundant supply of oil and natural gas will likely result in a continued strengthening and expansion of their economy, which in turn is likely to result in the strengthening of the ruble currency, which we believe is one of the currencies more highly correlated to the price of oil. Therefore, we view the ruble currency risk of this prominent emerging market as an unusual and significant opportunity that we have highly recommended our clients take in their continued effort to diversify away from overweighted US dollar based assets, and it is why we are adding these CAT Russian ruble bonds to our Foreign and World Fixed Income holdings.

Coupon: 7.50

Ratings: A2/A

Maturity: 12/20/2015

Price: ~104.5

Yield to Maturity: ~5.66%

Disclosure: Durig Capital clients may currently have positions in these CAT 2015 bonds.

Contact our fixed Income specialist with any questions you may have at 971-327-8847.

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

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Nuance: Solutions and technologies that help people work more intelligently- Monopolistic Review

Randy — Tue, 02 Apr 2013 21:44:54 +0000

Monopolist Review – Nuance Communications

NASDAQ: NUAN - 19.05

What makes this a good business?

Designing and delivering intuitive technologies that help people live and work more intelligently, Nuance Communications is the leading provider of speech and imaging solutions around the world. Headquartered in Burlington, MA, Nuance holds more than 4,000 patents and patent applications, and maintains one of the world’s largest libraries of speech data. The cost, performance, and ease of use for the new paradigm of speech interactions in the mobile solutions is radically improving, and experts are predicting substantial future growth opportunities within the mobile voice recognition market even when many other facets of growth in the modern world have stalled. After closely reviewing its business model and recent financial statements, we believe this is an excellent business that has delivered robust revenue growth in a time period when growth is hard to achieve.

Nuance’s leadership advantage in sales, industry partnerships, and innovation are a significant deterrent for new competitors attempting to gain a foothold. However, the growth prospects for this niche industry are so appealing that the aura of green emanating from the horizon of profitability has many industry heavyweights diligently looking into this high growth market. Nuance’s many patents and innovative expertise make it very desirable as a partner for larger, more established companies looking for solutions in this area, and nearly two-thirds of Fortune 100 companies currently rely on Nuance solutions. Consequently, Nuance has the odds on advantage for providing the de facto standard for many parts if this field and we see it having great potential for monopolistic domination.

Nuance delivered strong 29% revenue growth and a 37% increase in cash flow, which stand alone as very impressive numbers. However, this was disappointing to Nuance and the analysts that follow it and this resulted in a decline in the stock price to where it now trades at about 10 times analysts expected earnings for 2013 based on forecasts. After Nuance’s stock price came down, the market’s punishment for coming in a penny shy of estimates and an over hyped relationship with Apple (AAPL) after Nuance was revealed as the engine behind Siri, what came to mind was one of Warren Buffett’s rules, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” After a little consideration of its monopolistic potential, our opinion is that Nuance more than qualifies as a “wonderful company.”

The Industry

According to TechNavio, the voice recognition industry is forecast to grow at a constant annual growth rate of 22.07% through 2016. Analysts further explain that the next major wave for the fast growth in this market is the growing demand for voice biometrics. The global voice recognition market growth also depends on the increased demand for speech recognition in mobile devices and the new paradigm of virtual agents and intelligence systems, which seamlessly combine voice recognition, natural language processing, advanced dialog capabilities, and reasoning systems to better interpret and anticipate user intent.

Nuance has pioneered the highest functioning speech software in the world, ceaselessly perfecting the ability for machines to recognize and emulate the human voice. Providing valuable insight into the industry at large, as well as what trends users and investors should be on the lookout for, Jim Greenwell (CEO of Datria, a small voice-recognition software company) declared that “Nuance clearly has the best [speech] engine out there” and noted that it worked in more than 60 languages and had underlying linguistic algorithms able to recognize small phonetic sound bites, which vary greatly between languages. Datria, which has been reselling Nuance’s engine for 14 years, has been acquired by Intelligrated (a North American based automated material handling solutions provider) and is now known as Knighted.

While Nuance’s speech technology is able to identify about 60 languages and synthesize 39 languages by “Speech to Text,” its imaging technology supports over 100 languages. By designing and delivering technologies that intuitively link man, machine and the global storehouse of knowledge to help companies and consumers work seamlessly and intelligently with the world, Nuance has won awards for its solutions in every major product family.

The launch of the Ecosystem

Nuance seems to be developing a robust ecosystem with more than 10,000 developers that have joined the NDEV Mobile developer program since it first launched in 2011. This many voice based storefronts provide tremendous leverage for Nuance’s prominent expansion into this powerful new arena. Some of the featured websites utilizing Nuance’s technologies are:

The Mobile Market

In the mobility market, we are starting to see the second major wave of growth that will have a mushrooming of applications. The 8 largest handset and 10 largest automakers use Nuance solutions, and Nuance solutions have shipped in more than 5 billion mobile phones and 70 million cars. Millions more mobile consumers have downloaded Nuance’s Dragon Mobile Apps. With the world excited about Apple’s launch, we are excited about the many thousands of developers working with large websites developers for many applications, in many languages, of the recognition technologies that will strengthen and enhance Nuance’s vital position and value within this explosive ecosystem.

Voice Biometrics

It appears voice biometrics breakthroughs are making this a far easier, more efficient and eventually lower cost way to establish higher levels of personal security. Furthermore, these biometric programs will easily “plug and play” in the major speech recognition call centers, giving major companies another way to enhance and lower their fixed cost structure. There are more than 22 million registered users of Nuance desktop solutions, and Nuance has been recognized by Opus Research as the world’s leading provider of voice biometrics solutions. A strong validation of Nuance’s voice biometrics solution portfolio is its over 23 million enrolled voiceprints, which is more than the rest of the industry combined. Having 23 million voice prints out of a total 28 million voice prints worldwide gives them an over 80% market share. Dan Miller, senior analyst of Opus Research, recently stated,

“The breadth of Nuance’s product line enables them to provide a secure user interface that includes voice biometric authentication, speech recognition, synthesized speech, natural language understanding, artificial intelligence, and mobile user interfaces.”

The Cloud

Cloud use, the next generation of voice recognition, enables usage on any device at any time. This will be a critical element of Nuance establishment as the de facto standard. As leaders for voice biometrics and text recognition in the medical industry, desktop solutions, and mobile apps, Nuance appears to have the advantage in achieving an integrated solution and in becoming the interface of choice for next generation products. If or when this can be realized, Nuance stock could become a manifold gain from its current valuation.

Our previous studies have recognized that companies achieving monopoly positions have more of a “gutter approach” versus the individual roof shingle, which only sees the rain that falls on it. While the gutters often remain unseen, they typically receive the same amount of rain (or in business terms, profit) as all of the singles combined. Nuance is endeavoring to be the stand alone leader and the de facto standard for the entire new voice recognition industry. There are outstanding barriers to competition, and Nuance has been able to achieve excellent margins and economics of scale as a result of its strong products, in essentially every voice recognition category, and its very strong strategic partnerships.

Further evidence of Nuance’s success

More than 3,000 hospitals in the U.S. use Nuance healthcare solutions, and more than 150,000 doctors and caregivers use Dragon Medical. Ford SYNC voice activated technology attempts to integrate the car’s GPS navigation, entertainment options (including iPod and satellite radio), climate controls, and hands-free voice calling into a single, unified in-dash interface. Buy PC magazine’s top editor’s choice says,

“If you’ve never used dictation and voice command software before, Dragon Naturally Speaking seems almost futuristic. It translates accurately. The speed is incredible. Intelligent features allow the software to become smarter the more you use it, by looking for words in context…I’ve found my workflow completely changed, in particular when writing scripts.”

Some of Nuances partners are:

Apple
Audi
BMW
Hyundai
Ford
Chrysler
ZTE Corporation
Cerner
Granger mobile app
Mac
Intel
Linux
Samsung
Siemens
Sharp
T-mobile

The Risks

Google is very competitive in the mobile environment, and it’s this risk of competition that is the largest that we could identify. Considering Forbes’ widely publicized advances that Google has made in voice recognition, it is almost surprising that Apple has trumped Google with Siri. Apple has taken more of an almost Microsoft operating system kind of approach, using Nuance as the underlying engine and adding it’s own application layer on top. Google has used more of an Apple operating system kind of approach, providing more of a cradle to grave complete solution. Siri’s approach allows Apple (and others) to implement a dynamic solution while committing far less resources to it. Google has not noticeably altered the market share in Nuance’s largest market, voice recognition for the medical industry.

Microsoft appears to be more focused on the personal computer (PC), and has been quietly attempting to take things a few steps further by building a system around technologies that not only recognize human speech, but also translate it into text (including that of foreign languages) and then play back the words in a language using a synthesized voice intended to sound like the speaker. Apple, Microsoft and Google all have far more resources and much greater capital than Nuance, but these behemoths all seem to be focused on recognition technologies designed to enhance and supplement future generations of what they consider their core products or services. Nuance, whether in partnership or in competition with anyone, is focused on its recognition technologies as the prime driver for organic growth.

In general, there is a gradual transition of the recognition business away from the traditional Windows package software to a business which involves working directly with the OEMs integrating the next generation of a virtual agent on their hybrid devices, including tablets and laptops. This is where we expect to find real opportunity and the future growth in this business. However, this transition appears to happening much more quickly than we first thought. The challenge in this is that as this transition is substitutional, with its revenues occurring more in the future, we will likely see some weakness in today’s packaged software business. The good news in this is that the level of engagements we are seeing with OEMs on systems intending to deploy this technology is quite attractive, and we think it will provide long-term value for Nuance shareholders.

In Summary and Conclusion

The potential market for recognition technology is enormous. Nuance already has the early advantage, and has experienced significant growth. It has already established certain scale and technical advantages that appear to have it in the pole position in a race to monetize this massive industry’s latent potential. Considering how few players may even remain in contention for second place, we think Nuance Communications, its products and its intellectual properties, has monopolistic potential and represents an extremely attractive longer term investment opportunity. Therefore, we are adding it to our collection of equities tending towards a Monopolistic advantage.

Disclosure: Durig Capital and certain of its clients may currently hold positions in
Nuance.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

Disclosure: Durig Capital and certain of its clients may currently hold positions in Telit.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

A+ Rating
with the BBB!

- Always Serving Your Interest First -

971-327-8847 TEL 877-720-3010 TOLL FREE

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9% Yield from Petroleos de Venezuela’s 4½ year Yankee bonds, maturing Feb. 2017.

Randy — Tue, 02 Apr 2013 20:25:09 +0000

After the news of the passing of Hugo Chavez, we thought it appropriate to reconsider Petroleos de Venezuela S.A. (PDVSA) bonds, in US dollars, that are currently indicating a 9% yield to maturity. Although this Yankee note may lack some appeal with many U.S. investors because of the unpopularity and geopolitical risk associated with the of Venezuela’s current socialistic government, it does represent the senior unsecured debt of the most highly prized and crucial state owned company within the country’s most valuable industry. Here at Durig Capital we have developed our own strict criteria for evaluating lessor rated high yield junk bonds, and as a result of our research as presented in more detail below, we believe that the slightly discounted price of this 8.5% coupon bond represents one of the best short term “risk to reward” opportunities denominated in US dollars. Although it appears that acting president Nicolás Maduro, the front runner in Venezuela’s upcoming elections, will likely bring little change to the country’s existing socialistic and economic policies, we think the current air of uncertainty may present us with an opportunity to acquire these bonds at a slight discount to par. Therefore, we have marked these 56 month high yielding PDVSA Yankee bonds for addition to our Foreign and World Fixed Income holdings.

Wealth Preservation Concerns

Wealth preservation remains one of the biggest concerns among our clients, and we continue to look for the most “intelligent risks” that are more likely to achieve reasonable returns that can effectively outpace moderately rising inflation. With US Five Year treasury yields stuck well below 1% and the official CPI still over 2%, a certain degree of wealth destruction is virtually assured within these otherwise commonly considered “safe” US government notes.

Part of our effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars is to lower overall portfolio risk by diversifying into a variety of higher yielding instruments denominated in US and foreign currencies both within and away from the US economy.

Venezuela’s Economy

Venezuela remains highly dependent on oil revenues, which account for roughly 95% of export earnings, about 40% of federal budget revenues, and around 18% of GDP. Venezuela is the fifth largest member of OPEC, and is reported to have the world’s largest proven oil reserves, surpassing both Canada and Saudi Arabia. However, a lack of technology and limited drilling sees its output at only 31 percent of Saudi Arabia’s and its exports at only 22 percent that of Saudi. GDP growth rose to 5.12% in 2012, while government spending, minimum wage hikes, and improved access to domestic credit continues to cause high inflation – roughly 22% in 2012. The government tightly controls Venezuela’s currency, the bolivar. It was devalued by 32 percent in February and now officially trades at 6.3 bolivars to the dollar, pushing up prices for most products. Since oil is priced in dollars, a weaker bolivar increases the local value of oil revenues, giving the government more cash.

While Venezuela continues to wrestle with a housing crisis, higher inflation, an electricity crisis, and rolling food and goods shortages – all of which were fallout from the government’s unorthodox economic policies – a healthy Venezuela would quickly become one of the most attractive destinations for investment in South America. Its size, geographic position, resources and educated workforce would find it relatively easy to attract international investment as it did in the past. Closer relations with powerhouses, such as Brazil and Colombia, that have prospered without alienating the US, are a chance for Venezuela to reintegrate the international fold.

A handful of oil companies have stuck it out in Venezuela, especially Chevron (CVX), which takes the long view that by sticking with the country through difficult times it might end up in a favorable position when a more reasonable regime comes to power. Whether or not Venezuela contemplates a liberalization of its oil economy that would allow or encourage greater investment from giants like Chevron, currently involved in five important onshore and offshore projects in Venezuela through a partnership with Petróleos de Venezuela S.A., we prefer the similarly yielding debt of the state owned oil company PDVSA over any of Venezuela’s sovereign debt issues.

Petroleos de Venezuela S.A. (PDVSA)

Petróleos de Venezuela S.A., the state-owned corporation of the Bolivarian Republic of Venezuela, is responsible for the efficient, profitable, and dependable exploration, production, refining, transport and commerce of hydrocarbons. Its main objectives are to foster the harmonic development of the country, to guarantee sovereignty of national resources, to increase endogenous development and to serve and benefit the Venezuelan people, who correspond to their share of the country’s national wealth. PDVSA is constitutionally the owner of the country’s oil reserves. The State of Venezuela is PDVSA’s sole stockholder under the provisions of the Constitution of the Bolivarian Republic of Venezuela and represents the economic and political sovereignty exerted by the Venezuelan people over oil, their major energy resource.

Therefore, PDVSA’s actions must follow the Ministry of Energy and Petroleum’s guidelines, plans and strategies, as well as the norms issued by the National Development Plans for the hydrocarbon sector. Transparency and clear control of accounts is stated as being a fundamental value for PDVSA. PDVSA has not yet reported its 2012 results, but given the strong average export price of oil in 2012, we expect that revenues for the year to be comparable to the US$ 124.75 billion of revenues reported in 2011. Total assets for PDVSA were last stated as being US$ 182.16 billion at the 31st of December 2011, however the actual amount of debt PDVSA may be responsible for isn’t as clearly communicated. US$108.27 billion was stated as being “mirrored in liabilities” in 2011, but differently labeled “thorough review” stated it as being only US$ 32.49 billion. Reuters reported it as being US$ 32.50 billion, and it was reported by El Universal elsewhere as having increased to US$ 43.3 billion.

It bears repeating (from our previous review) that PDVSA is using the lending in US dollars to bring in equipment and technology, while Asdrúbal Oliveros, an economist and director of economic research firm Ecoanalítica, commented that these bond issues are mainly made to maintain the exchange rate policy. ”PDVSA is borrowing money at expensive rates to grant the private sector access to foreign currency,” he remarked.

One of the key metrics that we examined when reviewing this issue was cash flow, profitability, and the longevity of its proven reserves (which is estimated at 387 years.) While the investment spending by the company’s growth and expansion strategy, are more concerning to from a long term perspective, the short to near term prospects for a return of capital appear to us to be favorable. Consequently, we think the higher yields associated with the slightly longer term (4½ year) PDVSA Yankee bonds represent a great opportunity to both increase and maintain good exposure to this debt instrument’s enduring high return potential.

Risks

The default risk is PDVSA’s ability to perform. Given the importance of the state-owned company’s oil export business to economy of Venezuela, we do not believe the performance risk differs significantly from slightly lower yielding sovereign debt of similar maturity. Therefore, we see higher yield of this bond is an intelligent reward opportunity relative to its performance risk.

These bonds do carry geopolitical risk associated with the policies and actions of the sovereign government of Venezuela.

We view these bonds as having other risks similar to other lower or unrated high yield short to medium term bonds that we have recently written about, such as the 11.75% Transportadora de Gas Del Sur (TGS) bonds, the 7.4% yielding bonds from Ferrexpo , or the 10.5% yields from Myria Agro.

Accessibility and Liquidity

PDVSA has numerous outstanding US dollar denominated bonds with maturities ranging out to 2037. We believe that acquiring and owning individual maturity definite bonds offer significant advantages over owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail. Even though many times broker/dealers require an institutional sized bond purchase, it is possible with a broker and advisor’s assistance for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.

Conclusion

Given the savvy high reward to risk opportunity we see these bonds represent, we are recommending these short term PDVSA Yankee bonds for our clients looking for both greater cash flow and diversification away from overweighted US economy based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Coupon: 8.5

Maturity: 11/2/2017

CUSIP: P7807HAK1

Pays: Semi-annually

Rating: B+

Price: 98

Yield to Maturity: ~9.04%

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

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5.6% Canadian, Tricon Capital Group convertibles, mat. March 2020.

Randy — Wed, 13 Mar 2013 20:23:59 +0000

Income from Residential Real Estate Development Opportunities

The Canadian dollar has been caught in the crosswinds of the recent liquidity flight to U.S. greenbacks, giving us good reasons to scour the Canadian bond market this week looking for the best high yield debt instrument to increase the loonies in our clients Foreign and World Fixed Income holdings. To overcome the difficulty in finding suitable high yield investment opportunities in bonds denominated in loonies, we turned to our neighbor to the north’s numerous convertible debentures. Tricon Capital, which we first reviewed last September, has continued to improve and is performing well. In fact, we so like Tricon’s business model and the direction the company is moving in, that we needed to consider whether it might be reasonable to acquire more of its 2017 bonds at a significantly higher price (and lower yield). Fortuitously, this occurred at about the same time that Tricon announced that it planning a new (second) convertible debenture due March 31, 2020. Similar to its earlier 2017 note, this bond is also “unrated” by the popular credit rating agencies. However, in the following updated review of Tricon Capital, we will present how it meets and exceeds the strict criteria that Durig Capital has previously developed and found highly successful for evaluating lower rated bond issues.

Denominated in Canadian Dollars, this Canadian company’s Convertible Unsecured Subordinated Bond has a coupon of 5.6% and currently trades near par. While the debentures are redeemable at the option of the company at par after March 31, 2018, the bondholder has the option to convert this debenture anytime (up until its maturity in 2020) to common equity stock at the conversion price of C$ 9.80/share. This gives this instrument the potential for much higher returns and added protection against higher inflation should the stock price of Tricon Capital appreciate significantly in value. Tricon Capital Group (TCN.TO) currently trades for about C$6.83 and has been paying a quarterly dividend that amounts to C$0.24, or about 3.51% annually.

Given the possibility of significantly increasing this already very respectable 5.6% yield through the added capital gains its conversion to stock option allows for, as explained further in this review, we find it timely and appropriate to include these 7 year Canadian dollar Tricon Capital convertible notes in our Foreign and World Fixed Income holdings.

Tricon Capital Group

Founded in 1988, Tricon Capital Group Inc is one of North America’s asset managers focused on the residential real estate development industry. It has participated in the development of residential properties in Canada and the United States by acting as the manager of a growing series of limited partnerships that provide financing for residential land development, single-family homebuilding, multi-family construction and retail developed in conjunction with residential projects. Tricon is focused on four major geographic markets in Canada (Toronto, Vancouver, Calgary and Edmonton) and five major geographic markets or regions in the United States (Southern California, Northern California, Phoenix, Atlanta and South Florida). It currently manages 7 active funds with about C$ 1.1 billion in assets under management and a growing portfolio of U.S. single-family rental homes. Over its 23 year history, Tricon has financed about 150 transactions valued at roughly C$ 10 billion and has an outstanding track record of investment performance and fund raising.

Tricon is an asset manager and principal investor focused primarily on the for-sale housing sector. As an asset manager, it manages private funds and separate investment accounts for investors participating in the development of real estate in North America by providing financing (generally in the form of participating loans which consist of a base rate of interest and/or a share of net future cash flow) to developers. As a principal investor, it co-invests in its private fund and separate account business, and most recently has established a U.S. single-family rental platform whereby it can acquire, renovate, lease and manage distressed single-family homes through a network of “best in class” local operating partners. The Company believes that U.S. single-family homes can be purchased at meaningful discounts to peak pricing and replacement cost and even to current retail pricing through foreclosure, short and bank REO (“real estate owned”) sales and that the Tricon will generate attractive risk-adjusted yields from the rental, sale and future appreciation of these properties.

Tricon completed its Initial Public Offering in May of 2010 (at C$ 6.00/share), and in April of 2012 completed a C$ 51.75 million equity offering priced at $C4.00/share. Its asset management business derives its revenue principally from Contractual Management Fees, General Partner Distributions, Performance Fees, and Investment Income. Tricon’s total Adjusted Base Revenues for the quarter ended September 30, 2012 increased by 277% from $2,690,000 to $10,146,000 when compared to the quarter ended September 30, 2011, primarily as a result of the contribution from Tricon’s new single-family home strategy, the sale of warehoused investments to new U.S distressed fund Tricon XI, increased investment income and increased contractual management fees. Adjusted Base EBITDA for Q3 2012 increased by 210% from C$1,089,000 to C$3,375,000, and Adjusted Net Income for the quarter ended September 30, 2012 was C$1,692,000, approximately C$1,100,000 or 186% higher than the C$592,000 earned for the quarter ended September 30, 2011. Interest expenses for Q3 2012 were C$566,000, indicating a coverage ratio greater than 6 times.

The Company’s U.S. single-family platform has generated Net Operating Income of $834,000 since its inception in Q2 2012, primarily from the sale of Inventoried Homes designated for sale; which amount is expected to ramp up through Q4 2012 and beyond since there is a 60 to 90 day timeframe required to renovate, lease and stabilize the recently acquired rental properties. AUM for the quarter ended September 30, 2012 was $1.1 billion – approximately $139.8 million lower than June 30, 2012 and approximately $89.2 million higher than December 31, 2011. This decrease resulted from the run-off of old funds and was partially offset by increases in AUM from the initial close of Tricon XI and higher capital deployed to the U.S. single-family rental strategy

During Q3 of 2012, the Company’s assets and liabilities increased as a result of the $51.75 million debenture offering completed in July 2012. Cash and cash equivalents at the end of Q3 were C$57.15 million, while debt was C$54.21 million. On December 4, 2012, the Company and Mandukwe Corp ( a company controlled by Geoff Matus, cofounder and a director of Tricon) completed an offering of 11,097,500 Common Shares at a price of C$5.70/share, for aggregate gross proceeds of C$63,255,750. On January 3, 2013, the Company announced the acquisition of a 550-unit portfolio of homes in Charlotte, North Carolina for approximately US$26 million. The portfolio was assembled over several decades by a private individual and has an occupancy rate of approximately 95%. Based on current rents in place and historical operating expenses, the purchase price equates to a capitalization rate of over 12.5%.

Tricon continues to successfully deploy capital into its new U.S distressed single-family for rent platform; however, no meaningful income is expected until Q4 2012 as it generally takes 60 to 90 days to renovate, lease and stabilize recently acquired rental properties and to renovate and harvest the flip properties. The Company views the single-family home rental strategy as an opportunity to invest in a deeply undervalued asset class which the Company believes offers investors strong downside protection through stable rental income and meaningful upside potential should the U.S. housing market recover. The Company believes there may still be several additional U.S. markets with economic conditions that create attractive investment opportunities for the distressed acquisition and rental of single-family home (and, if the opportunity arises, for smaller multi-family dwellings). In time, Tricon may explore expanding its platform into other markets in an effort to further its U.S. national presence, with the objective of becoming one of the larger owners of U.S. single-family rental properties in the United States. Tricon continues to pay equity holders a quarterly dividend of six cents, or C$.24 annualized, to its shareholders.

With this second convertible offering, it was announced this week that with the additional underwriter purchases Tricon has added C$86 million to their cash holdings. Tricon appears to have very little difficulty maintains strong balance sheet flexibility and good access to the equity capital markets. Along with strong insider ownership and buying support, Tricon has the approval to the Toronto Stock Exchange to buy back up to 5% of its common shares should it believe it to be an appropriate use of available cash and to be in the best interest of Tricon and its shareholders.

The convertible note

In addition to the 5.6% coupon (paid semi-annually) that they offer, a very important feature of this bond to consider is the holder’s option to convert it at anytime prior to maturity to common stock at the conversion price of C$9.80. This strike price represents a mere 5.25% annualized appreciation from the C$6.83 price TCN is currently priced at on the Toronto exchange, and it is our belief here at Durig Capital that there is very strong upside growth potential remaining within this company that may significantly exceed the 5.6% yield to maturity (at par) in 2020 that is indicated in the bond’s current price at par. While both of Tricon’s convertible debenture represent an intriguing opportunity, we see this longer maturing issue as being more conservative and having less downside risk due currently due to the high premium that the shorter issue commands. We also think that because the conversion feature allows bondholders to participate in a significant rise in the stock price, the longer maturity can be viewed as advantage. However, we would also like to point out that the shorter maturing issue will capture more of the capital gains appreciation of the stock should the stock price rise to conversion price of $9.80 prior to August of 2017.

Being a smaller issue, Tricon’s debt is not covered by the major credit rating agencies and is therefore classified as “unrated.” However, this appears to be a very astutely managed, well financed company with reasonably low debt, ready options for additional funding if necessary, and a prudent use of existing cash flows.

Risks

The default risk is Tricon Capital’s ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential. An option that further reduces the default risk of this convertible bond, should at its maturity the company decide not to pay off or roll over the debt, is a conversion of the principal (at par) to TCN common stock at a 5% discount to stock’s valuation at maturity on 3/31/2020.

As a result of being denominated in Canadian dollars, the currency exchange risk will affect the returns of these bonds and possible in a negative way as it exposes investors to the Canadian economy.

Tricon’s investments focus on the North American housing industry, with primarily attention to previous home bankruptcies. Even though this appears to be an industry that has been gaining strength since we first reviewed Tricon, the industry is fraught with unknown and uncontrolled industry related issues, such as changes in interest rates and/or building cost of new housing. Furthermore, the overall supply and demand for housing in a particular region can greatly affect the profitability within the housing market. Any and all of the above could affect the future profitability of Tricon Capital.

Any fast growth company in developing markets, such as Tricon Capital, also has execution and market risks, as companies often encounter unforeseen issues. This is a common risk associated with younger, fast growing companies.

We think that these Tricon Capital convertible debentures are very similar to the previously reviewed Neo Corp convertible bonds which was purchased by MolyCorp (MCP), Canadian based Brigus Gold convertible bonds, and TransGlobe Energy’s Convertible Bonds. Our earlier selection of Tricon Capital has resulted in it being one of the top performing issues within our client’s Foreign and Global fixed income portfolios.

Conclusion

We applaud Tricon Capital’s successful and intelligently leveraged approach to the currently distressed North American real estate market. This relatively small and less well known issue appears to be a savvy investment risk offering solid returns from a company that has good management, a good cash position, good interest coverage, and a strong and flexible balance sheet. Its convertible bond appears to be an exceptional opportunity for obtaining a very respectable 5.6% yield, with significantly lower default risk than is typically associated with an unrated (or low rated) medium term bond. The additional capital gains return potential that its conversion at any time feature allows gives us further reason to add this Canadian dollar denominated debenture to our Foreign and World Fixed Income holdings

Ticker: TCN.TO

TSX: $6.83 3/06/2013

Debenture (Bond):
Coupon: 5.60%

Maturity: 3/31/2020

Conversion Price: C$9.80

Rating: none
Pays: Semi-annually

Price: 100

Yield to Maturity: 5.6%

Disclosure: Some Durig Capital clients may currently own Tricon Capital bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

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7.84% Yields, Hapag-Lloyd, Yankee bonds, B- rated, matures October 2017

Randy — Thu, 07 Mar 2013 21:28:29 +0000

Each week we screen thousands of corporate bond listings to find what we believe is currently the best corporate bond for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week, we look at short 4 year Yankee bonds (in US dollars) from a company returning to profitably, Hapag-LLoyd, a maritime service operating out of Hamburg Germany. Although the over 7.8% yields currently indicated with this bond only carries a B rating from Standard & Poor’s, the following review shows why we see these 55 month high yield notes are a good bet to increase cash flow and preserve wealth. We think that as the European difficulties subside, this debt instrument offers sound diversification into the German economy and makes for a good addition to our high yielding foreign and global fixed income investments.

Assessing the Yield Curve

Although we have communicated it many times previously, it bears repeating that wealth preservation by achieving returns that can outpace moderately rising inflation is one of the biggest concerns among with our clients and other fixed income investors.

A look at the issuer

Hapag-Lloyd AG was formed on September 1 1970 as a result of the merger of Hamburg-Amerikanische Packetfahrt-Actien-Gesellschaft (Hapag) and North German Lloyd (NDL). But the origins of these shipping lines go back much further, as Hapag was founded in Hamburg in 1847 by local merchants and NDL in Bremen in 1857. In 2005, Hapag-Lloyd acquired the British-Canadian container line CP Ships, thereby becoming one of the leading liner shipping companies of the world. In addition to this, Hapag-Lloyd Holding AG (the parent company of the Hapag-Lloyd Group) operates a cruise ship line, Hapag-Lloyd cruises. The Group currently employs a staff of about 6,900 at 300 locations in 114 countries. The owners of Hapag-Lloyd are the Albert Ballin consortium (77.96%, consisting of the City of Hamburg, Kühne Maritime, Signal Iduna, HSH Nordbank, M.M.Warburg Bank and HanseMerkur) and the TUI AG (22.04%).

Hapag-Lloyd is Germany’s largest container liner shipping company and is considered the 6th largest shipping company worldwide with over 146 ships owned, leased or chartered. For the second consecutive year, Hapag-Lloyd captured Alcoa’s ocean carrier of the year award for best-in-class export and import container service for North America. This is in addition to four consecutive years of the Global Carrier of the Year awards from Hellmann Worldwide Logisitcs, the 2012 Carrier of the year from Röhlig Logistics and Gebrüder Weiss Transport and Logistics, and a wide array of other prestigious Carrier, Excellence, and Environmental Achievement awards.

In order to utilise the medium-term expansion opportunities resulting from market growth and realise economies of scale in its ship operations, between July 2012 and November 2013 Hapag-Lloyd will launch a total of ten new very large container vessels into service, each with a capacity of 13,200 TEU. In December, Hapag-Lloyd opened negotiations to merge with Hamburg Süd, the 12 largest shipping company, which currently has no debt and also has the same Port headquarters of Hamburg Germany. The Port city of Hamburg holds close to 37 percent of Hapag-Lloyd. Hamburg-Süd, which was founded in 1871, had sales of 4.75 billion euros in 2011, and combined with Hapag-Lloyd the two lines together would have capacity only less than A.P. Moeller-Maersk A/S (AMKBF), CMA CGM SA, and Mediterranean Shipping Co. While Hamburg Süd focuses on North-South trade, Hapag-Lloyd mainly operates on East-West lanes such as Asia to Euro, and Westend Brokers Research analyst Klaus Kraenzle recently commented that the merger would be ”a good step, potentially giving Germany one global shipping player.”

We like companies that are profitable

In the most recent 9 Month of 2012 report, Hapag-Lloyd’s posted positive operating earnings before interest and taxes (EBIT adjusted) of €86.6 million, EBITDA of €164.1 million, and after-tax earnings of €45.6 million. Average freight rates and revenues were substantially higher than the same period last year as Hapag-Lloyd was able to increase freight rates, revenue and results in the third quarter, although the market environment remains challenging. The average freight rate rose year over year by 8%, and the earnings (EBIT adjusted) margins increased from 2.4% to 4.9%. The rate increases initiated by Hapag-Lloyd in the first quarter and implemented in the second quarter had a tangible effect, and transport volume in the third quarter amounted to revenues that were 15% higher than in the same period last year and more than made up for the operating losses incurred in the first half of the year. In short, earnings before interest and taxes more than doubled from €36.7 million in the first 9 months of 2011 to €86.6 million in the first nine months of 2012.

Interest Coverage Ratios

Global demand for container transport services was actually substantially weaker than expected in the third quarter of 2012 – which is traditionally the peak season for container shipping – due to sluggish growth in the world economy. Furthermore, bunker prices remain comparatively high, exacerbating the industry’s cost position. Yet, in spite of these negative factors, Hapag-Lloyd anticipates achieving positive operating result again for the full financial year 2012 and expects the liquidity situation to remain adequate despite the effects of higher investments in newbuilds and the ship portfolio on net debt. All of its planned ship and container investments are funded through long-term loan agreements. Interest cost for the nine months were €33.5 million, indicating nearly 5:1 coverage ratio against EBITDA and about 2.5:1 when measured against adjusted EBIT. While Hapag-Lloyd uses adjusted EBIT – earnings before interest and taxes adjusted for special items – as the key parameter for the internal management of its operating activities, EBITDA is an important indicator of the achievement of sustainable company results and gross cash flows.

We like companies with lower debt to cash ratio

Total debt for Hapag at the end of 9m 2012 stood at €2.345 billion, while cash and cash equivalents totaled €579 million, giving it a modest four to one debt to cash ratio.

We like companies that have good balance sheets

The equity ratio for the Hapag-Lloyd Group as of September 30, 2012 amounted to around 46%, while cash and cash equivalents accounted for around 8% of the balance sheets total. At the the end of 9M 2012, a total of 49 direct and indirect subsidiaries and five equity-accounted investees belonged to the group of consolidated companies of Hapag-Lloyd Holding AG. The equity-accounted investees include two strategic holdings in container terminals in Hamburg and Montreal. Hapag-Lloyd has a balanced fleet structure, owning approximately 50% of its fleet.

We like higher yields

Hapag-Lloyd has two outstanding bond issuances, a €480 million note maturing in 2015 and a $250 million note maturing in 2017. The functional currency used by the international container liner shipping industry – and therefore also the Hapag-Lloyd subgroup – is the US dollar. Payment flows in currencies other than the US dollar are hedged to the US dollar as appropriate. Although trading at a slight premium, we think the 4½ year Yankee bond, couponed at 9.75% and currently indicating a yield to maturity of about 7.84%, offers the better opportunity.

Risks Considerations

Economists from the International Monetary Fund (IMF) believed that the risks for the global economy increased further in the third quarter of 2012, and in its rating update on September 28 2012, the international rating agency Standard & Poor’s downgraded its issuer rating for Hapag-Lloyd Holding AG from BB– to B+. Moody’s followed suit a month later from B1 to B2, while the outlook (“negative”) from both remained unchanged. The downgrading of Hapag-Lloyd Holding AG’s rating and that of the bonds issued could result in less favourable conditions for raising new funds in the medium term and could adversely affect the trading price of its bonds. More recently, however, China showed its first acceleration in eight quarters and the IMF now expects global economic growth to rise from 3.2% last year to 3.5% this year.

The default risk is Hapag-Lloyd’s ability to perform. The Hapag-Lloyd Group’s prime objective is long-term profitable growth, and increasing global demand for container transport forms the basis for this planned organic growth. Based on current forecasts (IHS Global Insight, October 2012), the volume of global container transport should grow by 4.4% to 131.9 million TEU in 2013. Selling services at viable prices is still more important to Hapag-Lloyd than purely quantitative growth in volume, and the main influencing factors are transport volume, freight rate, the US dollar exchange rate against the euro, and operating costs including bunker price. Last week, A.P. Moeller-Maersk beat annual profit forecasts and predicted its container shipping business would benefit from a pickup in world trade this year, helping to overshadow a warning on falling earnings at its oil business. We see this as boding well for Hapag-Lloyd’s future profits, and considering its historical, recent and forecasted levels of performance, its fair cash position, reasonable balance sheet and the sound cash flow to service its interest bearing debt, it is our opinion that the financial default risk for this relatively short term bond is minimal relative to its more favorable return potential.

Moreover, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as a adding key economic value to the society it’s associated with. Hapag-Lloyd’s container shipping business is a basic necessity for international commerce, and it is highly regarded as one of the industry’s best operators.

The cost of shipping is directly affected by trends in the international market and prices, as well as by the exchange rate of the Euro. Fluctuations in the price of bunker fuel are also is unpredictable, but fuel and currency hedges and an expanded globally diversified fleet offering better economies of scale should help alleviate some of these uncertainties.

We believe that these Hapag-Lloyd bonds have similar risks and maturities to other European bonds we have reviewed, such as those 7.4% yields from Ferrexpo yankee bond , a very high 8% yield from a SRLEV knowing it’s based in the Swiss franc currency or 10.5% yields from Myria Agro yankee bond out of the Ukraine.

Summary and Conclusion

It is our opinion that Hapag-Lloyd has positioned itself well for the future as a global leader in shipping container services. Along with its fair cash position, earnings have rebounded and interest expense coverage ratios have risen, resulting in a significantly improving bottom line. As a result, we believe these Hapag-Lloyd bonds offer an excellent yield relative to the financial risks that we can identify, and have chosen them for addition to our Foreign and World Fixed Income holdings.

Issuer: Hapag-Lloyd AG
Coupon: 9.75%
Ratings: B-/B2
Maturity: 10/15/2017
Pays: Semi-annually
Price: 107.25
Yield to Maturity: ~7.84%

Disclosure: Durig Capital and certain clients may have positions in Hapag-Lloyd 2017 bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

Durig.com | Bond-Yields.com

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Extract 12% With Brigus Gold convertibles, maturing in March 2016.

Randy — Thu, 07 Mar 2013 00:07:17 +0000

Income from a Junior Gold Miner

Each week we screen thousands of corporate bond listings to find what we believe to currently be the best corporate bond for investors needing or seeking higher yields with as minimal risk as possible relative to its projected return. It is not often during this review process that we determine that a previously recommended issue either remains or has become such an extraordinary value that it may merit an overweight position. However, this is exactly what we find in these short 3 year Brigus Gold (BRD) 6.5% convertible debentures, which are currently selling at a discount and indicating a yield to maturity of about 12%. Therefore, we are adding them as an overweight position in our Foreign and World Fixed Income holdings.

Brigus Gold

Brigus was formed in 2002 as the result of the amalgamation between International Pursuit Corporation (founded in 1936) and Nevoro Gold Corporation (2002). The Corporation changed its name from Apollo Gold Corporation to Brigus Gold Corp. and consolidated its issued and outstanding common shares. Brigus is a growing Canadian-based mining company, headquartered in Nova Scotia, which is principally engaged in gold mining, including extraction, processing and refining as well as exploration and development of mineral deposits in Canada. Brigus Gold operates the Black Fox Mine in Timmins, Ontario, located on the Black Fox Complex. This property also has tremendous exploration upside and is a proven source for new gold discoveries. In addition to its Black Fox Complex, Brigus also owns the Goldfields Project located in northern Saskatchewan, which hosts an economic gold deposit of about one million ounces.

In addition to the 6.5% coupon (paid semi-annually) that this bond offers, it is also the holder’s option to convert it at anytime prior to maturity to common stock at the conversion price of $ 2.45. This price represents about a 50% annual rise from the $.73 price that BRD is currently trading at on the NYSE. While these kind of gains are certainly not unheard of in the volatile realm gold mining and exploration companies, we don’t think it is necessary to give any added value for it to the already remarkably high and rewarding 12% annual return that the bonds are likely to average when they mature at par value. For those that don’t mind the additional risk and prefer Brigus Gold stock for their growth equity portfolio, we currently also see it as being quite undervalued and likely to make a strong addition to a growth focused equity portfolio.

Being a smaller issue, Brigus Gold’s debt is not covered by the major credit rating agencies and is therefore classified as “unrated.” However, this appears to be well managed, sufficiently financed company with reasonably low debt, ready options for additional funding if necessary, and a prudent use of existing cash flows.

Brigus Gold Update

After our first review, Brigus Gold’s third quarter financial results reported solid increases in gold production (up 7% from Q2 2012 and 16% from Q3 2011), reduced cash costs (down 9% from Q2 2012), as well as increased operating margins (up 2%) and greater positive income from operations (up over 126%) over Q3 2011. Subsequent to the Q3, the mill optimization program was completed (resulting in increased mill processing capacity of approximately 10%) and the Company completed a $10M Flow Through financing (at $1.21/share) to fund its 2013 exploration program. Also subsequent to the quarter, it completed a bought deal debt financing for $30M in senior secured notes, the proceeds of which were used to repurchase 4% of a goldstream with Sandstorm Gold Ltd (SAND). It was also reported that the 5,326,782 warrants issued on December 10, 2008 were fully exercised on Monday, December 10, 2012 at an exercise price of $0.884 Canadian, bolstering its cash account by about $4.7 million.

On December 20th, Brigus stated that in 2013 it would fund Black Fox and Grey Fox operations with cash flows generated internally, and that cash costs are anticipated to stabilize in the range of $700 – $750 per ounce. While this is not intended as an equal comparison to the “all-in sustaining costs” of about $941 average per ounce that Barrick Gold Corp.(ABX) and Goldcorp Inc.(GG), the two biggest producers by market value, began to report in the fourth quarter of 2012, it can be compared more meaningfully to the $626 average so called “cash costs” that these two mega giants disclosed in the preceding three months. The average cash cost of 10 of the biggest gold miners was $694 an ounce in the third quarter, 49 percent higher than in the same period two years earlier, according to data compiled by Bloomberg. Barrick and its competitors are vowing to focus on margins and to get a grip on soaring production costs, rather than boosting output. In early January Brigus declared its Q4’s gold ounces at a record production level of 22,672, and its year end total at 77,734. Gold production increased every quarter of 2012, a trend that is expected to continue into 2013. The Company is expected to complete fourth quarter and year-end financial and operational results on March 28, 2013.

Brigus has continued to report excellent high grade gold exploration results from the 147 and Contact zones, including the discovery of a new zone named the Grey Fox South Zone. Its Grey Fox property is located on the southern portion of the Black Fox Complex and is comprised of the 147, Contact and Grey Fox South zones. Since last reporting drill intercepts on January 9th, chairman and CEO Wade Dawe as well as President and COO Daniel Racine have both made acquisitions of Brigus stock in the public market, totaling 100,000 shares for Dawe and 249,000 for Racine. We like that senior management evidently thinks the Company stock is worth investing their own money into, and we like it that the Company remains focused on increasing gold resources at Grey Fox and at the Black Fox underground mine. A full feasibility study on the Grey Fox property is scheduled to be released during the second half of 2013, and Brigus plans to to develop this property into the Company’s next mine, which is expected to be in production by early 2015. Given the impressive drill results being reported within the 147 Zone it would not surprise us to see this resource grow considerably.

Risks

The default risk is Brigus Gold’s ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential. An option that further reduces the default risk of this convertible bond, should at its maturity the company decide not to pay off or roll over the debt, is a conversion of the principal (at par) to BRD common stock at a 5% discount to stock’s valuation at maturity on 3/31/2016.

The Company’s performance is highly dependent on the price of gold as it directly affects the Company’s profitability and cash flow. The price of gold is subject to volatile price movements during short periods of time and is affected by numerous factors, such as the strength of the US dollar, global economic conditions, supply and demand, interest rates, and inflation rates, all of which are beyond the Company’s control. Slow global growth is expected to continue into 2013 and reflects the compounding effect of a number of factors, most notably increasing fiscal belt-tightening in many advanced nations, prior credit restraint in some key developing countries, and the cascading effect on international trade, credit, and financial conditions associated with the euro zone’s lingering sovereign debt crisis. In this environment, precious metals are likely to represent an attractive investment alternative.

The company also has execution and market risks as a relatively young and very fast growth junior mining company, as companies often encounter unforeseen issues. This is a common risk associated with younger, fast growing companies.

We believe that these Brigus Gold convertible debentures have similarities to other Canadian convertible notes we have previously reviewed, including those from Tricon Capital, Neo Materials/Molycorp (MCP), and TransGlobe Energy, several of which have already achieved significant capital gains since our initial recommendation.

Conclusion

We think that Brigus Gold has improved its balance sheet, and should continue to do well considering its increased production and the high prices that Gold continues to command. While it would not surprise us to see Gold prices soften further as money continues to flow from traditional precious metal safe havens into the equity markets, we believe this relatively small issue as offering excellent returns from a company that has good management, a sound cash position, good cash flow and interest coverage, and a flexible balance sheet. Its bond appears to be a rare opportunity for obtaining an outstanding 12% yield with significantly lower default risk than is typically associated with an unrated (or low rated) medium term bond, not to mention the additional capital gains return potential that its conversion at any time feature allows for. As a result, we see both the stock and its convertible debenture as more intelligent opportunities for higher returns, and it is why we have marked Brigus Gold for an overweight position in our Foreign and World Fixed Income holdings.

Brigus Gold
Ticker: BRD

NYSE: $0.73 2/28/2013

Debenture (Bond):
Coupon: 6.5%

Maturity: 3/31/2016

Conversion Price: $ 2.45

Rating: none
Pays: Semi-annually

Price: 86

Yield to Maturity: ~12%
Disclosure: Some Durig Capital clients may currently own Brigus Gold stock and/or its bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

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Tap 7% Yields in Canadian dollars with 4 year TransGlobe Energy convertible bonds

Randy — Wed, 20 Feb 2013 22:08:18 +0000

A successful International oil and gas explorer focused in Egypt and Yemen

Denominated in Canadian Dollars, TransGlobe Energy’s 6.0% Convertible Unsecured Subordinated Bond matures in March of 2017, and is currently indicating a yield to maturity of about 7%. Should this relatively new producer continue its rapid growth and significantly increase in value, the possibility exists of increasing this already high yield through the capital gains its convertibility feature allows for, as explained further in this review. Consequently, we see this as a rare and unusual opportunity for high yields in a very desirable (Canadian) currency from a well managed oil producer directly benefiting from higher oil prices and highly successful new wells in oil producing regions of Egypt and Yemen, and it is why we are adding these 49 month TransGlobe Energy convertible notes to our Foreign and World Fixed Income holdings.

A Look at the Issuer

Headquartered in Calgary, Canada, TransGlobe Energy Corporation (TGA) was incorporated on August 6, 1968 and was organized under variations of the name “Dusty Mac” as a mineral exploration and extraction venture. In 1992, it entered into the oil and gas exploration and development field in the United States and later in Yemen, Canada and Egypt, ceasing operations as a mining company. The company’s U.S. oil and gas properties were sold in 2000 to fund opportunities in Yemen and its Canadian oil and gas assets and operations were divested in early 2008 to assist with the funding of opportunities in Egypt and Yemen. Having changed its name to TransGlobe Energy Corporation on April 2, 1996, the company has been listed on the Toronto Stock exchange (as TGL) since November 7, 1997 and on the NASDAQ since January 18, 2008. Prior to listing on the NASDAQ, the Company had its U.S. listing on the AMEX since 2003.

TransGlobe Energy’s current activities, which include the exploration, development and production of crude oil, are concentrated in two main geographic areas, the Arab Republic of Egypt (“Egypt”) and the Republic of Yemen (“Yemen”). It has interests in 9 international blocks comprising 5.5 million acres, and its impressive management team and financially prudent business model have resulted in strong increases in oil reserves, oil production, and cash flow.

TransGlobe Energy’s goal is to become a significant energy producer in the Middle East/North Africa region of the globe, and its growth strategy is built on three pillars:

Achieve/maintain a high percentage of operatorship -TransGlobe operates the majority of its properties in Egypt, providing control of the drilling pace and choice of locations.
Diversified portfolio – TransGlobe’s operations contain a multi-year inventory of drilling prospects that range from low-risk development wells to higher-risk, high-reward exploration locations, and include oil as well as natural gas opportunities.
Prudent Financial management – TransGlobe maintains a very healthy balance sheet enabling the Company to fully fund its capital program with funds flow from operations.

In many countries, including Egypt and Yemen, oil companies are governed by Production Sharing Agreements (PSAs.) PSAs are a different approach from North American practices, where oil and natural gas producers obtain working interest leases over mineral rights and then pay royalties and/or taxes to applicable governments and/or the freehold mineral rights holder. All of the Company’s international projects are governed by production sharing contracts between the host government and the contractor (or joint venture partners). The government and the contractors each take their share of production based on the terms and conditions of the respective contracts. While PSAs vary in detail, they all determine the proportion of oil or natural gas produced by a company that is payable to the government. This proportion represents the government’s fiscal take and is roughly comparable with taxes and royalties as are customary in North America. The Company’s share of all taxes and royalties is paid out of the government’s share of production.

Currently, 100% of TransGlobe’s production is crude oil, which is benchmarked against Brent prices (a type of spot sales contract that has been priced with a known loading date.) The Company’s reserves are reviewed annually – as is customary in the oil and natural gas industry – following the conclusion of the fiscal year, which is also the calendar year. All of TransGlobe’s reserves have been independently evaluated by a third-party engineering firm, DeGolyer and MacNaughton, headquartered in Dallas, Texas. As at December 31, 2012, TransGlobe had a total of 48.7 million barrels of Proved plus Probable reserves and 62.4 million barrels of Proved plus Probable plus Possible reserves.

We like companies that are profitable

Revenues last year were up chiefly as a result of increased sales, which averaged 17,124 barrels a day for the third quarter and 16,942 barrels a day for the first nine months of 2012. These figures represent a 28% and 39% increase over Q3 and the nine months ended 2011 respectively. Profit margins are stated at 29.17% and operating margins are 59.33%.

Even though TransGlobe was ranked #30 in Forbes magazine in 2012 for fast growing companies, it bears noting that this outstanding growth was achieved while keeping its cash flow and balance sheet in a very strong position, making over a dollar a share in earnings.

Strong Production Growth Prospects

The company announced December 11, 2012, a 2013 Capital Budget of $129 million with $53 million (41%) allocated to Exploration. The $53 million Exploration budget includes 23 exploration wells and seismic, which is primarily focused on Egypt (96%). In the Western desert, 10 of the exploration wells are planned to test 10 of the 38 prospects summarized in the independent resource report. The total working interest Mean Prospective Resource (prior to the application of geologic success) to be evaluated by the 2013 ten well exploration program, is approximately 75 million barrels.

Based on currently identified opportunities and upside predictions, TransGlobe is targeting a production rate of 40,000 bopd within five years, which equates to a 233% increase. TransGlobe uses hedging arrangements as part of its risk management strategy to manage commodity price fluctuations and stabilize cash flows for future exploration and development programs.

Interest Coverage Ratios

Interest expenses for the nine months ending Q3 2012 appear to be $11.5 million, while operating income (EBITDA) was about $118.6 million, indicating a healthy interest coverage ratio that’s greater than ten to one.

We like companies with lower debt to cash ratio

The long term debt of TransGlobe Energy at the end of 3Q 2012 was $134.9 million, primarily attributed to the 6% convertible debentures that were issued in March of 2012. Cash and cash equivalent at the end of Q3 was about $45.7 million, giving them a modest debt to cash ratio of about 3 to 1.

Valuation Ratios

TransGlobe has had aggressive profit and production growth over the last 10 years and is forecast many more years of the same kind of growth. Yet, with its earnings at about $1.10/share and it stock trading around $8.75, the approximately 8:1 price to earnings (PE) ratio is less than what is might be expected for a company evidencing such consistently robust growth. Hence, we think this company’s stock has plenty of potential for appreciation, even if it only achieves about half of its projected growth.

We like companies that have good balance sheets

TransGlobe’s debt of $134.9 million appears to represent about 18% of the near $735.6 million enterprise valuation currently given it by the equity markets. This is one of the least leveraged balance sheets of any company that we have thus far been able to identify. Overall, it reminds us of our first review of Netflix (NFLX) bonds. Although rated as junk bonds, we saw the company as having a well managed and incredibly strong balance sheet. As the stock declined and in spite of the criticism of many others that continued to refer to it as “junk,” we revisited and recommended the bonds to our clients more than once. Since then, the bonds strengthened considerably and now command a hefty premium.

We like higher yields

It appears that there are no credit ratings currently assigned to this debt, making it vastly different than that of our government’s sovereign debt. Yet, when set in comparison to the paltry 0.88% yields of longer five year U.S. Treasuries, we think the 6% difference in yield (in what many pundits say is a very desirable currency) alone represents a savvy opportunity for higher rewards given the level of risks that we can identify.

However, one of the more unusual features to consider here is the bondholders option at any time (prior to maturity) to convert these debentures into common shares of the company at the conversion price of $15.10 per common share. While this strike price represents a stout 17½% annual appreciation from it current price of $7.86, it’s notably lower that the nearly 18½% annual increase in production that the company is projecting it might achieve. Adding in the capital gains potential significantly sweetens the opportunity here for higher returns.

Risks Considerations

The default risk is TransGlobe’s ability to perform. As we have found rating agency do not rate this convertible debt, we turn to the company’s underlying financial fundamentals. Considering its historical, recent and forecasted levels of performance, its sound cash position, excellent balance sheet and the excellent cash flow that easily services their interest bearing debt, it is our opinion that the financial default risk for this relatively short term bond is minimal relative to its more favorable return potential.

The hardest risk for us to identify is the geopolitical risk. With that said, the new government in Egypt appears to remain friendly and an ally to both US and to Israel, as well as with the Arab Spring and Iran. This is an unfamiliar path that has no precedent set for it. With Transglobe’s current oversized appetite for exploration and production growth in Egypt, the possibilities of geopolitical risks deepening there is the by far the sole greatest risk that we can identify. Perhaps what needs to be remembered, however, is that both Egypt and Yemen are achieving significant income streams from the production sharing agreements (PSA’a) that are in place. Once addicted to how little effort it takes for political parties to gather big revenues from a successful oil wildcatter finding and pulling more and more oil out of the desert sands, sudden or swift changes to the way this easy money flows are less likely. Being that TransGlobe Energy is a smaller Canadian oil exploration and production company focused on financially benefiting both Egypt and itself through its ongoing operations there, we see it as adding key economic value to the society that it’s associated with, which fits with our strategy to reduce overall risk through broad diversification.

TransGlobe may face increasing competition from any number of substantially larger and better financed companies, such as Exxon Mobil (XOM), Chevron (CHV), French based Total (TOT), or British Petroleum (BP). All of these behemoths have massive resources and a global umbrella of resources services around the world. However, we think many of these major oil producers would find it more attractive to acquire companies like Transglobe Energy and its proven reserves and PSA’a than rely solely on their own internal resources.

Even though it has a keen track recorded of being able to change direction while still achieving significant increases in production, because of the particular and singular nature of its business its revenues and earnings would be adversely affected should there be significant declines in the price of oil.

Being denominated in Canadian Dollars, this note also exposes bondholders to the Canadian economy and the exchange rate of the loonie.

This convertible bond not only carries a 6% coupon yield, paid semi-annually, but it also has similar risks to other convertible bonds that we have reviewed. These are the Tricon Capital convertible bonds, which have appreciated about 15% in the 3 months since our review, and the Neo Materials bonds, which were bought by the industry leader MolyCorp (MCP) shortly after our review early last year.

Summary and Conclusion

TransGlobe Energy clearly made changes in its core business over the last twenty years, and we find its ability to grow its cash flow from production, while also expanding its reserves and keeping a low leveraged balance sheet, to be quite refreshing. All things considered, it is our opinion that this company has established itself as a niche player in the supply of oil and gas. It has a sound cash position, good cash flow, excellent interest rate coverage, and given its strong growth potential going forward, we think these TransGlobe convertible debentures offer great diversification, a high yield in Canadian currency relative to the risks that we can identify, as well as a possibility for significant capital gains due to its convertibility feature. Therefore, we are adding these higher yielding, 2017 maturity, TransGlobe Canadian dollar notes to our portfolio of Foreign and World Fixed Income bonds.

Coupon: 6.00%
Ratings: NA
Maturity: 3/31/2017
Pays: Semi-annually
Price: 96.6
Yield to Maturity: ~6.98%

Disclosure: Durig Capital and certain clients may have positions in TransGlobe Energy bonds.

Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

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