Sunday, October 21, 2007 0 comments ++[ CLICK TO COMMENT ]++

To Watch: Some Canadian Opportunities... Priszm Income Fund and ABCP-embroiled Trusts

Here are some ideas running my head. As usual they are contrarian and one of them is very risky (it's only risky because I don't understand it; if I did, then it wouldn't be risky :) ).

Priszm Income Fund

Priszm Income Fund (TSX: QSR.UN) runs 400+ market-leading fast food restaurants, such as KFC, Taco Bell, and so on, in Canada. It licenses the brands from US-based Yum! Brands (YUM). It has been struggling lately due to a bunch of issues. The stock is off 50% in the last year and looks attractive. I haven't done much homework but this looks like an amazing opportunity if you believe the economy will slow in Canada (starting with a US slowdown). I have been looking for some good companies that will do ok if the economy slows and this fits that profile. Although I think this gets classified as consumer discretionary, I don't think consumers will cut back that much given that fast food is low-end and many people depend on it.

If anyone is interested in this company, be careful and note that this a trust and pays out most of its cash flow. Its growth rate is likely to be very low and you can't really compare it to a normal restaurant business. There are a lot of interesting ideas in my head so I'm not sure when I'll get around to evaluating this but it'll be high on my list.

ABCP-Embroiled Opportunities

American (and other) investors may not realize but there is a credit crisis in Canada centering on the ABCP (asset-backed commerical paper) market. Google for it if you are interested in details but basically the August credit crisis dried up the market for non-bank commercial paper. Similar to CDOs with subprime exposure in the US, investors don't want to buy ABCPs issued by non-banks. This has caused all sorts of problems, including negative impact on money market funds (if you thought money market funds were safe, this crisis shows that they are not). The companies that issued the commercial paper are unable to roll over their debt so anyone holding something tied to them have been hit badly.

I came across two trusts (not to be confused with the Priszm mentioned above or other trust structures like oil&gas royalty trusts) issued by National Bank which have fallen around 70% in the last few months.

(source: globeinvestor.com)


These trusts hold various assets, including US mortgage-backed securities, CDOs, and so on. The two securities are Global Diversified Investment Grade Income Trust (TSX: DG.UN) and Global Diversified Investment Grade Income Trust II (TSX: GII.UN). I think I am only interested in GD.UN because a press release states that GII.UN's NAV is $0.74 on Sept 30, 2007 (stock price is above that), while DG.UN's NAV is $7.61 (stock price is below that). (Go here and here and check out the NAV section.) The quoted NAV may be completely wrong since some CDOs, MBSes, etc, in the US are hard to price right now.

There are two issues affecting these trusts. One is that the ABCP market is locked up right now. The other is that the underlying assets are questionable (CDO/subprime/etc issues in the US). These are two distinct issues! In contrast, someone in the US looking at the CDOs, MBSes, etc (read my prior post on low quality credit instruments) only faces the latter problem. The commercial paper problem doesn't really exist in the US (or at least not to the degree in Canada).

The reason both issues impact DG.UN is because of the way the underlying nature of the trust (I hate these protected PDFs that you can't even copy&paste grr :( ). DG.UN holds CDS (credit default swaps) with a side entity, MMAI. Since the commerical paper crisis started in August, MMAI has been unable to re-finance.

There is a working group that is trying hard to resolve the commerical market issues. It has made some progress and hopes to solve everything by mid-December. But it won't be easy:

To get a deal by mid-December, the restructuring faces many obstacles. The biggest challenge is that some classes of ABCP are worth more than others because they either are backed by stronger assets, such as mortgage or car loans, or are supported by stronger bank loan agreements, or have fewer complicated derivatives trades. Another urgent problem is that some of the ABCP issuers have received calls for more collateral because the value of some of their underlying assets has declined.

The people said investors with healthier ABCP are balking at any plan that would call for them to share the pain with holders of more-troubled classes of ABCP. However, these sources said, the committee is seeking to convince reluctant investors to join a collective bailout.


The plan by the group is to convert the ABCP into long term debt with a haircut (small loss). One would have to figure out the impact of any agreement on DG.UN.



Before investing--if investing--the other issue is to figure out if the underlying assets held by the trust are worth more than the stock price. The graphic below shows DG.UN's holdings:

(source: PDF linked above)



The graphic is already scary-looking :) Instead of simply listing S&P ratings, it says "S&P equivalent". Hope there isn't anything shady with that. Apart from that, you can see that most of the assets are residential and commercial MBS. We just don't know what the quality of the assets are. But if one were to really invest, they are obviously doing it because they feel that the asset values are much higher than the stock price.

If I were to invest, I would have to do it quickly--before December for sure. One would want to buy the security before the ABCP deal goes through. One can't be certain that the stock price will run-up on the deal but you just never know.

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