BULLETIN by nyut545e2


                                                                            PUBLISHED MONTHLY BY DISNAT ONLINE BROKERAGE              SEPTEMBER 2004

                                                                                                                                      MEMBER CIPF
TRENDS AND STRATEGIES                                                          NEW ISSUES: CONVERTIBLE DEBENTURES

This column is produced by André Gosselin,                                      In the last few months, principal protected notes have been a highlight
vice-president of Orientation Finance                                           of new issues. However, convertible debentures have recently been
(orientationfinance.com) and financial colum-                                   making a comeback on the financial scene. What exactly are
nist for Affaires Plus magazine and Finance
                                                                                convertible debentures?
et Investissement newspaper. He holds
a doctorate in political science and is
the author of seven books on investments                                        Like bonds, convertible debentures are debt securities issued by a
published by Transcontinental Publishing.                                       commercial enterprise, but they have certain characteristics setting
                                                                                them apart from traditional bonds. These distinctive features include
                                                                                a conversion privilege allowing holders to exchange their debentures
                                                                                for common shares of the issuing company at a conversion rate fixed
In praise of simplicity                                                         in advance in the prospectus. As a general rule, a restriction period
Why make life complicated when it can                                           of three to five years is imposed on debenture holders, limiting the
be so simple? Take exchange traded                                              time when conversions can be performed.
funds as an example. Are there other
investment strategies this simple and                                           Convertible debentures are generally subordinated. This means that
diversified that can enable investors to                                        if the company is declared bankrupt or insolvent, bondholders will have
do better than three-quarters of fund                                           their claims settled ahead of convertible debenture holders. Like
managers? Dogs of the Dow Jones                                                 holders of company bonds, however, holders of convertible debentures
fans say yes.They will tell you investors                                       are reimbursed ahead of preferred or common shareholders.
need only put their money in the 10 Dow
Jones stocks (of the 30 in the index)                                           In acquiring convertible debentures, investors benefit from a regular
offering the highest dividend yield (in other words, the highest annual         income based on a fixed or variable interest rate. An increase in the
dividend divided by share price).Twelve months later, you merely repeat         share price of the issuing company usually leads to a higher price for
the process, investing again in the 10 stocks providing the best yields         the debenture, giving a more accurate value to the debenture’s
in dividend terms.                                                              privilege of conversion to a predetermined number of common shares
                                                                                in the issuing company. When such an increase occurs, convertible
As an investor, you should not be overly worried by the fact that this          debenture holders can pocket derived gains either by exercising the
may involve shares whose price has gone down in the last year. Stocks           debenture’s conversion privilege or simply by selling the debenture
that are unpopular with investors at least offer the advantage of being         on the market without converting it.
available at bargain prices. In this regard, a dividend yield above 3%
can act as a brake on sharper declines in share prices.                         If, on the other hand, the share price of the issuing company falls, the
                                                                                debenture price will also come down to the level at which its yield
A study published in 2003 in the Financial Analysts Journal confirms that       becomes comparable to the yield on a non-convertible bond of similar
the “Dogs” strategy has given excellent results over the last few years         quality. The interest yield provided by convertible debentures limits
when applied to the Canadian market. According to the two authors               somewhat their propensity to fluctuate in price (their volatility).
who performed the research, the 10 stocks from the old TSE 35 index
(we now have the TSX 60 instead) that offered the best dividend yields
year after year also obtained overall yields higher than those of the           Conversion and yield
reference indices, in this instance the TSE 35 and TSE 300.                     Investors pay for the conversion privilege provided by convertible
                                                                                debentures: they accept a yield at maturity slightly below what non-
Although this investment strategy may have involved a greater number            convertible debentures of similar quality provide, because the risk of
of trades than a strategy consisting of investment in an exchange traded        default is different. Debenture holders make a greater sacrifice if,
fund, yields still came out higher than those provided by the latter            contrary to expectations, the common share price fails to rise. Under
approach. Better still, although it may be more costly in tax terms than        these conditions, it is not profitable to exercise the conversion
a strategy that consists simply of investing in an index, the Dogs of the       privilege allowed by the debenture. A higher price for common shares
TSE 35 method provides higher net yields.                                       in the issuing company is thus essential to making it worthwhile for
                                                                                investors to accept the lower yield.
Since dividend income is more highly taxed than capital gains, the
researchers wondered if the Dogs of the TSE 35 strategy could provide           When a prospectus for a convertible debenture contains a buyback
an after-tax advantage. Even supposing a 40% tax rate for the Dogs of           clause, the issuing company can require that it be converted, meaning
the TSE 35 and a 20% rate for an investment in a TSE 35 index fund, the         that, if the share price rises substantially, the issuing company will
Dogs option does better than index funds. With similar risk, the 10 Dogs        buy back the debentures. This decision will result in the forced
of theTSE 35 was also more profitable than investing in all 35 companies        conversion of the debentures into common shares.
in the TSE 35.

                                                     Continued overleaf                                                             Continued overleaf

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                                                                                                                                      SEPTEMBER       2004
 TRENDS AND STRATEGIES (CONTINUED)                                                    NEW ISSUES: CONVERTIBLE
                                                                                      DEBENTURES (CONTINUED)
  Figures from England, Australia and continental Europe (the Stoxx                   Example
  50 index) show very impressive yields for foreign Dogs. In a strange                Mr. Johnson, a typical investor, buys convertible debentures in Alexis
  paradox, it seems the Dogs strategy has worked even better in the                   Nihon Real Estate Investment Trust for a face value of $5,000. These
  last 10 years on foreign markets than in the United States, the country             debentures bear interest at an annual rate of 6.20%, payable semi-
  where this investment strategy originated.                                          annually.The first interest instalment is payable on December 31, 2004.
                                                                                      The debentures, negotiable on the secondary market, have been rated
  Canada’s Dogs of the TSX 60 is updated regularly and is available at                BB by the Standard and Poor’s credit rating agency and reach maturity
  stingyinvestor.com, in the Stocks section.The Dogs of the Dow Jones                 on June 30, 2014.
  are covered at dogsofthedow.com.
                                                                                      Mr. Johnson can convert the debentures to units in Alexis Nihon Real
  André Gosselin                                                                      Estate Investment Trust (stock exchange symbol: AN.UN) between
                                                                                      June 29, 2008, and June 30, 2014, inclusively, at a conversion price of
                                                                                      $13.65 a unit. The conversion rate is 73.2601 units for each $1,000 in
                                                                                      debenture capital. In other words, Mr. Johnson would receive 366 units
  INTERNET TRICK : the Options Center!                                                in Alexis Nihon Real Estate Investment Trust if he converted all his
                                                                                      debentures (73.2601 x 5). Alexis Nihon Real Estate Investment Trust,
  Produced in partnership with the Montréal Exchange, Disnat‘s                        the issuer of the debentures, can buy back these debentures in whole
  “Options Center” allows you to access publications and tools that                   or in part, under certain conditions, between June 30, 2008, and June
  will help you discover new strategies for improving your portfolio                  30, 2010, inclusively.
  management, maximizing your returns and reducing your risks.
                                                                                      On August 16, 2004, units in AN.UN closed at $12.19. What solution
  Open a session at www.disnat.com, click on “Equities and                            would Mr. Johnson have if units in Alexis Nihon Real Estate
  options” then select “Options Center”. There, you will find:                        Investment Trust were trading at $12 on July 2nd, 2008?

  • The “Top 10”: the most actively traded call and put options,                      With the price of a unit in Alexis Nihon Real Estate Investment Trust
    directly linked to the order input panel;                                         below the conversion price of $13.65, Mr. Johnson would probably do
  • The Montréal Exchange’s daily and weekly economic analysis;                       well to hold onto his debentures. In exercising them, he would have
  • The Montréal Exchange’s monthly Options Newsletter;                               to pay the equivalent of $13.65 for each unit in Alexis Nihon Real
  • The training center and its publications on options and                           Estate Investment Trust, trading at just $12 on the Toronto Stock
    investment strategies;                                                            Exchange.
  • An options calculator, a “derivatives map”, and the options
    trading schedule.                                                                 What solution would Mr. Johnson have if units in Alexis Nihon Real
                                                                                      Estate Investment Trust were trading at $15 on July 2nd, 2008?
  Expand your horizons, explore your options!
                                                                                      First, it is important to remember here that Mr. Johnson must treat
                                                                                      this like any other investment decision and base it on an analysis of
                                                                                      the company’s financial situation and of his own investment goals.

                                                                                      Besides the fact that Mr. Johnson can choose to hold onto his
                                                                                      debentures, he can also opt to convert them to units in Alexis Nihon
                                                                                      Real Estate InvestmentTrust, enabling him to obtain 366 units ($5,000
                                                                                      divided by $13.65, the conversion price).

N.B. This bulletin is offered for information purposes only. Investments must meet
each investor's objectives. Disnat does not issue any recommendation about a
product or give out any opinion on the nature, suitability or potential value of an
investment or of any trading strategy. Legal deposit September 2004.

 Account               Balance         CDN Prime rate (3.75%) minus applicable %                        US Prime rate (5.00%) minus applicable %
                                         Rate applied on CDN credit balance                                Rate applied on US credit balance
 Regular            $0 to $24,999                   -4.00% = 0.00%                                                   -4.00% = 1.00%
                    $25,000 to $99,999              -3.50% = 0.25%                                                   -4.00% = 1.00%
                    $100,000 and over               -3.00% = 0.75%                                                   -4.00% = 1.00%
 Self-Directed RRSP                                 -4.00% = 0.00%                                                         N/A

 Accrued monthly interest, minimum $5, non-cumulative on regular and QSSP accounts. No minimum balance on RRSP accounts.
 These rates are adjusted to reflect market conditions without notice.

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