Recent convertible debenture offerings continue to corroborate double-digit inter-company interest rates

Junk bond yields have declined.  For example, the Merrill Lynch U.S. High Yield Master II Index (which has no published Canadian equivalent) declined from a high of 23.26% in December 2008 to a low (so far) of 6.27% on October 18, 2012.

There nonetheless is evidence in the Canadian convertible debenture market to support inter-company (or cross-border) interest rates in excess of 10% where the borrower is not blue-chip on a stand-alone basis.  Although CRA treats convertible debentures as indivisible instruments (see IT-96R6), economically they consist of a warrant, and a debenture with an implied yield which is higher than the stated coupon.  For example, in the ENTREC offering of 7% $1,000 convertible debentures, if the embedded call option were valued at $250 so that the included "pure" debenture in effect was being purchased for $750 then, depending on what assumptions were made as to when the convertible debentures will likely be converted or mature, the yield on that pure debenture might be over 15%.  Moving more downstairs, the NAT offering of 10% convertible debentures had an even higher implied yield.

Neal Armstrong.  Summaries of ENTREC and NAT short form prospectuses under Offerings - Convertible Debentures.