Quarterhill Inc T.QTRH

Another picture - $50m 6% Debentures vs $50m common shares

[shareholders1]

Perhaps this has already been discussued, but may be not, based on the last few posts.

The difference in cost/ dlution is not that large after adjusting for the 6% interest paid. If you were CEO, what would you rather have on the BS?  $50 more debt or $50m more equity? 

One sobering possible reason for QTRH's  debenture choice is that raising equity any where near $2.80 (or at say a 10 to 15% discount) was simply not doable. Perhaps even if new common shares were sold at say $2.40  to 2.50, RJ was unwilling to do a deal, or at least do a bought deal.

If this guess is correct, then others' guesses that instutions want QTRH shares but simply cannot find sellers/ supply is wrong.

Debt on the other hand is a different story. 6% yield with some protections for investors bring in many types of buyers/ RJ clients.

[v_guerriero]

This is automatically converted into common equity in 2026, hence it is treated as equity capital.  It is subordinate to all debt.   I've already explained that someone could synthetically create this debenture: 1. Buy the stock at 2.68 2. collect the dividends 0.25 at the 1.8% annual yield 3. Invest the remainder into a BBB debt ETF at 4.2% (0.55) This is a profitable trade

[Capharnaum]

This isn't exactly right, because you'd have to buy puts on the stock as well for this to be synthetically like the debenture. The debenture doesn't carry downward risk unlike the stock. Obviously, you carry better upside though (from the stock appreciating now vs $3.80).

[v_guerriero]

There is no put to consider.   This is comparing owning the common equity here vs.  The call option to buy it at 3.80, plus the yield component. The only downside protection with the debenture is that you get your principal back if the stock is not above 3.80 and you can take that $1,000 and buy the stock at a lower price than your 3.80 option. But that option is only valuable vs

[shareholders1]

VG wrote : "The only downside protection with the debenture is that you get your principal back if the stock is not above 3.80 and you can take that $1,000 and buy the stock at a lower price than your 3.80 option." VG statement does not appear entirely correct, since at maturity,  QTRH could force conversion by choosing to redeem at 95% of market price.

[cabbieJBJ]

That's very interesting shareholders.  I missed that on first reading of teh ddebenture document that has been filed on Sedar. It says, "Subject to any required regulatory approval and provided no event of default has occurred and is continuing, the Company has the option (the “Share Payment Option”) to satisfy its obligation to repay the principal amount of the Debentures, in

[Capharnaum]

At time of redemption, the convertible debentures are rarely redeemed in shares for these reasons: - When the price is above 125% of the conversion price, the debentures can be redeemed with a 30 or 60 days notice. Usually, if the price is above the conversion price, it means the company is doing well and could repay in cash and issue new debt instead (convertible debentures or not). When the

[cabbieJBJ]

Capharnaum, are you saying regarding the debt/equity question, the convertible debentures do not count against the $200M shelf prospectus?  I know the $75M from HSBC does not count because I asked.

[Capharnaum]

They count against the $200M shelf prospectus. The $200M is for QTRH issued debt or equity on the market (ie: senior notes, debentures, convertible debentures, pref shares, shares). Credit margins and loans issued by banks to QTRH don't require a prospectus. What I mean is that one important criteria for banks to issue a loan (or a credit margin) is the debt/equity ratio. The amount and rate

[Justhalffull]

I don't see any mention of this in the news release. They can force redemption if the sp is 125% of the conversion price (that would be $4.75) for 20 days. Of course anyone notified of redemption would simply convert them.  There is no mention of the ability to redeem at a discount.

[Capharnaum]

Being someone that invests frequently large sums into convertible debentures, the guaranteed capital is an important factor. So, I would never do your "synthetical" debentures unless I could buy puts, otherwise it's not "without risk". If the common shares were to go down to $2.20 and stay there until the debenture is redeemed, I would still lose $.48 per share on a trade

[v_guerriero]

So that implied "put option" value in the debenture is $0.58 for a not tax constrained investor (rrsp) or $0.83 for an investor that has top marginal tax rate. That appears incredibly punitive to me.  We will find out this week what the institutional demand is for this company.  If we sell out including the optional amount, I would see the next best alternative in buying

[Capharnaum]

Pension funds don't pay taxes directly, so I guess they would be the most interested in this issue. They are the ones with the most cash to spend (since they receive regular cash inflows).

[Capharnaum]

As I've stated before, convertible debentures count as equity for most banks when they consider debt ratios.