Tom Konrad CFA
A couple readers have asked me if they should accept the New Flyer (NFI-UN.TO/NFYIF.PK) Rights offering to exchange their C$5.53 principal 14% subordinated notes for nine shares of New Flyer common stock. The answer is most emphatically YES.
When I last wrote about New Flyer, I knew that they were planning to convert from their unusual stapled security structure to a more conventional share structure, but I was not certain how they could entice IDS holders to go along with the swap.
Now, it’s clear. The New Flyer IDS is the combination of the C$5.53 note and one common share of New Flyer, and currently trades for C$7.66. The subordinated note is worth more than the face value because of the high interest rate, but is callable for C$5.80 next year, and hence is worth no more than about C$6.40 (call price plus interest) if not exchanged. That means New Flyer common shares are currently worth at least C$7.66-C$6.40 = C$1.26.
The Tender offer gives you the right to exchange the IDS for 10 common shares (one that you already own, 9 in exchange for the subordinated note). This is worth at least C$12.26, 60% more than the current IDS price.
When New Flyer issues all these new common shares in exchange for subordinated notes, note holders who make the exchange will have an instant gain, but the value of all shares will be diluted. Since only the company structure is being changed, not its net value, if everyone exchanges their notes for common shares, the whole exchange will be a wash in terms of the value to IDS holders. But any IDS holder who chooses not to make the exchange will not participate in the gain, yet they will still be diluted by all the new shares issued, and hence will suffer a net loss. If some IDS holders choose not to exercise the Rights, those who do make the exchange will benefit at the expense of any IDS holders who do not exercise their Rights.
In other words, although this exchange is voluntary, any IDS holder who chooses not to participate will suffer immediate dilution and a net loss in the value of their share large enough to more than offset any benefit from holding on to the high-interest subordinated note until it is called.
If you’re a New Flyer IDS holder, you’ve been made an offer you can’t refuse. Don’t.
DISCLOSURE: Long NFYIF.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
So will you be adding to your substantial position Tom? I am already overweight in NFI and am tempted to add… but I am worried North American municipal governments and transit authorities are tapped out…
If the stock falls near $7 I plan to buy more, and I intend to hold my current position until the stock rises substantially.
I follow a trading discipline where I have a maximum cost basis for any one stock, as well as a maximum value. Much of my current position was bought in late 2008 at a cost basis of around $6. I cannot currently buy more without exceeding my maximum value limit, but if the stock price falls further, I’ll add to my position.
I’m confused about NFYIF. Its still trading at the old pricing (10 times the new Candadian NFI) If I buy more am I buying the IDS? I’d rather buy the new security given that the IDS will presumably be de-listed. But the price of NFYIF continues to drop making me want to buy more at the new level. As it is I’ve missed the chance to buy the new security at 59 cents 🙁
Yes, if you buy NFYIF now you’re buying the IDS (NFI-UN.TO.)
The post-exchange stock is now trading on the TSX as NFI.TO, but it does not yet have a US pink sheet ticker, so you have to buy or sell through a broker’s international desk.
To value NFI-UN.TO, use whatever value you think the C$5.53 face value debenture is worth, and add in the current price of NFI.TO, currently trading at C$0.65
Correction: it looks like New Flyer will start trading as NFYEF on the Pink Sheets Monday.
Thats information I can use, thanks!