Wednesday, November 6, 2013

IBI Group: Cheap Debt That's Covered By Net Current Assets

Shares of IBI Group (IBG) have fallen off a cliff, and therefore may be substantially undervalued. Unfortunately, the company carries a decent amount of debt, which means even though the stock's potential upside is large, so is its potential downside!

IBI's debt, however, also trades at a large discount. As a result, investors in the debt are offered substantial upside without the same level of risk as that borne by equity holders. In particular, the company's 7% debentures, due at the end of 2014, currently offer investors a yield to maturity of 30% in a company that is profitable if you ignore intangible asset write-downs. Interestingly, this debt is also currently covered by the company's net current assets, as discussed further below.Read more...

12 comments:

PSDFinancier said...

Question for you...what broker do you use for buying Canadian bonds? IB doesn't provide Canadian bonds, and Fidelity has said they don't have any IBI Group bonds in their inventory.

Best,
PSDFinancier

Saj Karsan said...

Hi PSD, I can't really help you there as I use Canadian brokers and they all have them. A US-based investor may be able to help.

Anonymous said...

Hi Saj,

Has your view of IBI debentures changed after yesterday's earnings report?

Is someone desperate to get out today or is the sell-off justified.

Regards,

FV

Saj Karsan said...

Hi FV,

The write-downs took me by surprise. I don't know if the sell-off is justified. I hope they can increase cash flow!

John said...

The current asset can still cover the debentures due in 2014, right?

Anonymous said...

These bonds can be redeemed with equity - at the company's option. Likely scenario given cash position.

mf said...

If the bonds are redeemed with equity, will they be redeemed at market value of the share? Or the initial value? Thanks.

Saj Karsan said...

Hi mf,

At 95% of the market value of the shares on the redemption date.

Toronto Gal said...

Hi: I'm a small, inexperienced investor. My Advisor sold me this in my RSP (big mistake). My book value is $8000. My market value is $2560. I am down $5440, or 68%. What to do? Just sell it and move on with life? Since it's in my RSP, I can't even claim a capital loss. I am very upset. HELP!!!

Saj Karsan said...

Hi Toronto,

I'm sorry that happened to you. Not knowing your whole situation though, I'd be hard pressed to give you helpful advice. Myself, I do own some of this company's debt though.

CreditRisk said...

"At 95% of the market value of the shares on the redemption date."

.... this is wrong....

Read the prospectus. Is 1/95%....so IBI delivers the trustee more than the face value

Saj Karsan said...

Hi CreditRisk,

I suspect we mean the same thing. The 95% I refer to is the *price* at which the shares delivered would be calculated, the 1/.95 you refer to is the *number* of shares per bond par value.

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