Blast from the past with Convertible Debentures

OK, I wanted to bring up a blast from the past. Does anyone remember the Organigram convertible debentures that hit the conversion and kept plowing higher? I do! My intentions today are to share with you a perspective on debentures that I once shared with you guys a couple of years ago. I am going to leave the content unchanged. So dates and even the exchange that OGI was on are different now. Keep that in mind as you read through – again, consider this more of a blast from the past if you will. I intend to revisit these types of investments in the future again but in today’s current market conditions.

Roll the clock back a couple of o years and here we go … 

Organigram Holdings Inc DB (TSXV: OGI.DB)

Organigram is a company that many of us are likely familiar with by now. Organigram is listed on both the TSX Venture under OGI and also the OTC under ORGMF. In this issue, We would like to focus on their recently listed convertible debentures. 

The link for the details of the debenture can be found here:

https://www.organigram.ca/latest/organigram-announces-closing-of-115-million-convertible-debenture-bought-deal-financing/

Before we dive into this a little further let’s share the definition of a convertible debenture with you according to Investopedia so that we are all on the same page:

“A convertible debenture is a type of loan issued by a company that can be converted into stock. Convertible debentures are different from convertible bonds because debentures are unsecured; in the event of bankruptcy, the debentures are paid after other fixed-income holders. The convertible feature is factored into the calculation of the diluted per-share metrics, which increases the share count and reduces metrics such as earnings per share (EPS).”

The reason we are bringing up Organigram debentures is to help offer an alternative investment for those of you that prefer something with less downside and still leave the potential for plenty of upsides on the table. At a high level, what this means is something more conservative in nature that doesn’t leave you as vulnerable to the crazy volatility we have been seeing in the market recently.

OK well here is the high level of the details:

  • Convertible Debentures were sold at a price of $1,000 per Convertible Debenture
    • Note: the display of the debentures to purchase via your broker will likely show differently. For example, the price of $1000 may show as $100 as it does on stockwatch for example, and the quantity may show as 1000 units for 1 debenture. We cannot comment on how your broker will display this, I recommend calling them if it is unclear.
  • Maturity date is January 31, 2020
  • Interest rate of 6.00% per annum, payable semi-annually on June 30 and December 31
  • Conversion price of $5.42 per Common Share
  • Potential force conversion if Common Shares are greater than $7.05 for any 10 consecutive trading days

Let’s get to this and plot this on a chart. Note for simplicity we cannot know what you will pay for these so the chart will be assuming you added these at $1000 per debenture. For simplicity we will keep the payments nice and rounded – you are welcome. For the example below I will assume you bought $10,000 worth of debentures. You can adjust this as needed depending on your situation – this is for demonstration purposes.

So as you can see in the above time series of the graph, we have the potential (assuming not converted to share) of your initial $10,000 investment accumulating interest in excess of $1000 by the debentures maturity. This amount could actually be more if you are able to obtain the debentures less than the initial offering. With that being said, there is even reason why one would want to obtain these debentures higher than they were initially offered as well.

What if the price of Organigram share prices continue to trade sideways or even go down? Good question. If this does occur the upside of conversion may be lost, however, you still have a decent return of the 6% interest you collected along the way plus the initial principle you invested would be returned by maturity. Visually it would look something like this:<IMG 3 OGI sideways>

So now let’s take a look at what could happen to our debentures of the share price does take off and go above the conversion price. In this scenario, we would collect out interest payments just as we did above until the price goes above the conversion price and we convert our debentures into shares. You would end up with some of the interest payments (possibly all) and then the ability to acquire shares for a cheaper price than you bought the equivalent amount of debentures. Essentially you would have shares that are worth more than the initial debenture investment you made. So for example, if the shares were worth $7.05 that would be an extra $1.63 on top of the conversion price which equated to about 30%. If we stick with our initial $10,000 investment as per about then that is a gain of about $3,000 plus the accrued interest you would have received on top of that. This is what that scenario could look like:

Advantages:

  • Advantages are displayed and explained as per above. In a nutshell, the Organigram debentures are what I would consider a more conservative means of investing in the space with little to no downside (see risks below for details) while leaving the upside open. This could be a route to go for those of you that have sleepless nights watching some of the marijuana shares price volatility.

Risks: 

Like any investment, there will be some form of risk involved and these debentures are no different. Here are the potential risks you may face:

  • The company goes belly up. That is to say that Organigram declares bankruptcy of finds itself in a situation where it unable to meet its financial obligations.
  • Currency – The debentures are only available on the TSXV, so all interest payments will be issued in Canadian dollars. I am not going to speculate on what the exchange rate will be going forward. In fact, this could potentially boost your yield. However, I just wanted to ensure you are aware that the debentures are paid in Canadian dollars and not US dollars or Yuan or bitcoin…etc…
  • Opportunity cost – Like any other investment there is always a potential that your money could be put to better use in another investment. For example. If you were super bullish on Organigram currently then you would purchase the shares which are currently trading below the debentures conversion price instead. You would receive more upside this way. Note that the advantage as we discussed of the debentures is to act as a safeguard in the event the share prices trade sideways or go down.

Note: That because the debentures are tradable you will see the prices fluctuate. The price fluctuation is not likely to be near as drastic as you will see within the common shares. At the end of the term you will receive the debenture initial investment back, plus the interest along the way (assuming they do not get converted or default) so at the end of the day the price fluctuations can really just be labeled noise.

What happens if you buy the convertible debentures lower than the offering:

Well if you can manage to get them cheaper than they were issued then you will supercharge your gain potential. Let’s say you can get the debentures at 95% of their initial invest…. So in the example above you could get $10,000 worth of convertible debentures for $9,500. You would end up getting the $10,000 back at the end of the term too. On top of this, your 6% interest rate would really be 6.3%

What happens if you buy the convertible debentures higher than the offering:

There could be reasons why you would purchase the convertible debentures at a higher price than they were issued and still be profitable. For example, let’s say you pay 105%. In our initial scenario that would mean we pay $10,500 for the $10,000 worth. So right off the bat we know we will lose $500 when the principal is returned, however, the interest accumulated along the way will make up for this. Depending on when you decide to buy these at this price you would recoup enough interest to offset this amount. So if you purchase these shortly after reading this article you will end up collecting well over $1,000 in interest payment and thus netting a gain. Reason to purchase above the initial offering a quite simple. You are optimistic about the company, but looking to limit the potential downside or reduce the volatility in your account to help you sleep easier at night.

Hopefully, this fresh look on convertible debentures will help you achieve your gains to go on convertible adventures.

Thanks for taking the time to check out my blog guys. Much appreciated! So, as I initially suggested, I am curious about revisiting the convertible debenture landscape, particularly as it pertains to the convertible debenture world in today’s new reality. Before I do, I would love to hear your feedback or thoughts before I begin this revamped journey. Thanks!

Disclaimer: I am not a certified comedian – please consult a comedian before having a laugh – same applies to any financial advice you might take away from my posts. If you can donate that would mean a lot to me and help to fuel me to keep going. Also, feel free to give me any feedback. Good, bad, or ugly. Thanks.

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