Tuesday, November 24, 2009 2:20 PM
Convertible debentures for Main St.
Andrew WIllis
Retail investor interest in convertible debentures isn’t lost on the structured product crowd, as money manager Middlefield Group launches a $75-million fund dedicated to this sector.
Middlefield, a manufacturer of structured products with strong ties to stockbrokers, sold what it called the Pathfinder Convertible Debenture Fund, moving units at $12 each. For this price, buyers get a Pathfinder unit and a warrant to purchase another unit at $12 over the next year.
Pathfinder is attempting to fill the same sweet spot in portfolios that the higher quality income trusts occupied: Dependable cash distributions along with capital gains.
In launching a convertible bond fund, Middlefield is targeting an asset class that’s been a favourite of the hedge fund crowd, and developed a retail following in recent months, as investors look for both income and exposure to equity markets. Convertible debentures pay interest, but can be flipped into equity at a price set at a premium to where a stock is trading when the debenture is sold.
Corporate Canada ramped up convertible issues because this form of financing typically features a lower interest rate than bank debt or conventional bonds, and less potential dilution than a stock sale. Many companies will retire convertible bonds, at par, prior to the point this debt flips into stock.
The Pathfinder fund is targeting a 9.3 per cent monthly cash distribution, and wants to deliver a rising unit price. CIBC World Markets and RBC Dominion Securities led the transaction.
Middlefield’s portfolio managers on this fund are Dean Orrico, the company’s chief investment officer, and Robert Lauzon, head of trading and a senior portfolio manager.
