CANEXUS CORP 6.5 PCT DEBS T.CUS.DB.D

Net Debt Calculation

[6milli]

For the purposes of valuation, convertible debt should either be considered as follows and yes it is a slightly circular calculation but one which in this case will not be relevant (in my opinion):

1) the estimated equity value is above the convertible debt equity conversion price, and therefore one should assume the debt is in fact converted to equity and the shares outstanding should increase by the appropriate amount the the principal value of the debt will not factor into the net debt calculation

2) the estimated equity value is below the convertible debt equity conversion price, and therefore the face value of the debt should be considered as other debt would be considered, and thus will factor in to the net debt calculation


The Series III conv debt is convertible at $8.30 per share. The Series IV and Series V are both convertible at $11.35 per share. The Series VI is convertible at $6.50 per share.

Therefore, for the purposes of valuation, the convertible debt should be accounted for within the net debt calculation and not the equity value calculation; if you think the equity value will be greater than $6.50 then you should start valuing some of the convertible debt as equity shares instead of debt.

While the convertible debt was carried on the balance sheet as at Sept. 30/14 for $287.1 million; however, the principal amount of all convertible debt outstanding was $312.9 million and so for valuation purposes this will be the amount used in the net debt calculation.

(If anybody has insight on why the convertible debt is stated on the balance sheet at $287.1 million instead of the principal amount outstanding of $312.9 million I'd be happy to hear the answer.)

Next, as at Sept. 30/14 $257.2 million was drawn on the credit facility - US$225 million and C$5 million. (I assume the stated value takes into account exchange rate differences).

In addition, at Sept. 30/14 short-term borrowings were $8.1 million including $7.8 million in swing line loans and $0.3 million in other bank debt.

In addition, according to the 3Q14 MD&A, "The Corporation had commitments of $45.8 million at September 30, 2014 and $26.5 million at November 6, 2014, primarily related to the expansion of NATO unit train operations and a caustic modernization project at our North Vancouver chlor-alkali plant." This means that they were contracted to spend at least $46 million in the future on expansion projects as at Sept. 30/14 and that they had in fact spent about $20 million of this by Nov. 6/14. There can be some argument made for how to account for this; however I am going to be conservative and therefore will add it all in. Furthermore, by including all expansion capex into the current net debt figures, future cash flow (cash profits less maintenance capital expenditures) can be taken at face value and do not need to be adjusted downwards by the value of future expansion capex. Therefore, for valuation purposes, the extra $46 million should all be added to the net debt calculation.

Net debt = $313m (conv debt) + $257m (credit facility) + $8m (short-term borrowings) + $46m (contracted expansion capex) = $624 million

Therefore, to me a fair net debt value to use for Canexus currently is $625 million.

There are several important factors to consider with the $625 million in mind:

1) $46 million is "future" capex, of which $20 million was spent by early November and therefore arguably definitely should be included in net debt now, but the addtional $26 million will be funded out of future cash flows

2) Any increase in the value of the US dollar will increase the net debt given the high US dollar denominated debt amount.

3) Any future shortfalls in cash flow generation vs dividend payouts will further increase net debt.  Dividends declared per quarter are about $18.5 million (185m shares * $0.10), but because of the DRIP the cash drain seems to be $14-15 million. This does not mean the net debt would increase by $14-15 million per quarter due to dividend shortfalls, the net debt will only increase due to this reason if cash flows before dividends (cash flow before dividends = cash profit - capital expenditures) is less than the cash dividend payout. The good news here is that future capex should be well below the levels over recent history due to the finishing of the NATO expansion project. In addition, we have already accounted for future capex expansion amounts in our current net debt. Since we are talking about it here, maintenance capex should be $25 million annually in the future and there will be significant excess cash from operations over maintenance capex.: "Management anticipates ongoing annual maintenance capital expenditures of approximately $25 million which will be financed primarily out of net cash generated from operating activities."



I'm looking forward to any opinions, thoughts and/or critical analysis of my net debt calculation of approximately $625 million for Canexus.

[materialsgirl]

6milli; Your post was the most thoughtful, thorough and clear blog that I have ever read on stockhouse.com with respect to a complex question. Thank you mat

[Stockvesting]

Thanks 6milli.  Great explanation!

[BlueCollar51]

I don’t profess to be an “expert” but I think you may be confusing “Debt” with “Obligations”. Not all Convertible Debentures are the same and not technically Debt they are often considered “Obligations”. It’s important to read the prospectus carefully. They often contain clauses that allow the Issuer to convert them to shares instead of redeeming them for cash.   The following is from the

[Calgaryrider]

Obligation, debt....same thing.   The explanation on debt should be handled in terms of a balance sheet is bang on.  How it's handled in terms of covenants is that the primary lender doesn't count it for a very good reason.....they don't care about share price, meaning after a debt for equity swap.....which would milder this stock. i also want to point out that Ocean's

[6milli]

Blue: Thanks for posting. 1) Debt vs. Obligations: I am not confusing "debt" with "obligations". Convertible debt is simply debt that can be converted to equity at a certain conversion price. There are several series' of convertible debt for Canexus and the minimum equity conversion price is $6.50. Should the share price exceed $6.50 then the convertible debt should no

[BlueCollar51]

2) Accounting mumbo jumbo: Your explanation about it being accounting mumbo jumbo does not make sense to me. While accounting rules may sometimes seem convoluted, they are explicit and they always make sense when you do the math. I do not see the math in how the balance sheet amount of convertible debt is calculated. If anybody can help me understand that point it would be much appreciated Read

[6milli]

BlueCollar51 wrote:2) Accounting mumbo jumbo: Your explanation about it being accounting mumbo jumbo does not make sense to me. While accounting rules may sometimes seem convoluted, they are explicit and they always make sense when you do the math. I do not see the math in how the balance sheet amount of convertible debt is calculated. If anybody can help me understand that point it would be much

[Kherson]

[pierrelebel]

Why is the debt carried in the books different from the face value of the obligations?  The answer can be found in the auditors note #9 (Sept 30 2014 repost): https://canexus.ca/documents/Canexus-2014-Third-Quarter-Report.pdf It is highly technical and you can look it up if really important to you. From my perspective, the debt analysis presented earlier says it all.

[6milli]

Pierre: I read Note 9 in the 3Q14 report  several times before my initial post. Again, as I put to Blue just now, it says "The Series IV, V and VI Convertible Debentures are considered to be Level 2 financial instruments not carried at fair value. Their fair values as noted in the table above were determined using their closing price on the TSX at September 30, 2014, less the fair

[Kherson]