Deans Knight Income Corporation (the "Company") (TSX:DNC) is
pleased to provide an operational update of the Company for the
nine months ended September 30, 2012.
Highlights:
-- At September 30, 2012, the net asset value ("NAV") of the Company was
$13.32 per Share.
-- Net investment income(1) for the nine months ended September 30, 2012
was $6.47million, or $0.6144 per Share.
-- The Company paid dividends of $0.5247 per share on all of its
outstanding voting and non-voting common shares (collectively, the
"Shares") for the nine months ended September 30, 2012, which equated to
85% of net investment income.
Corporate:
During the nine months ended September 30, 2012, the Company
generated net investment income of $6.47 million. In addition to
net investment income, the Company also generated $3.21 million of
realized capital gains in the nine month period from the sale of
certain holdings and settlement of foreign currency contracts. The
Company paid out $5.53 million in dividends, equalling $0.0583 per
Share each month, or $0.5247 per Share, for the nine months ended
September 30, 2012. This represented approximately 85% of net
investment income.
Based on the Company's investments at September 30, 2012, the
Company anticipates that it will be able to generate enough income
from its investments to pay the monthly dividends of $0.0583 per
Share throughout the fourth quarter of 2012.
Investments:
The high yield corporate bond market has been volatile over the
last five years. Depending on which way that volatility is moving,
the media jumps on the story and bombards investors with news
exacerbating the trend. Twelve months ago, the tone was decidedly
bearish with growing concerns that the U.S. economic recovery was
slowing...that China's growth was slowing...and that Greek debt
woes would wreak havoc with the Euro and European banks. Last
year's worries caused investors to redeem high yield bond mutual
funds in the third quarter of 2011, creating forced selling while
bidding up government and investment grade bonds in a "Flight to
Quality", which is the exact opposite of what investors should have
been doing.
(1) The Company calculates net investment income as interest
income less the on-going operating costs of the Company, and
excluding any realized capital gains and losses and any income or
loss not derived from debt securities.
The reality is, the concerns mentioned above are the same
concerns the average investor has today. Twelve months ago, Deans
Knight, the investment manager who actively manages the Company's
Portfolio, didn't know what was going to happen to high yield bond
prices or what the catalyst to reverse the downward trend was going
to be. What they did know, through experience, is as fast as prices
fall, they can rise. The catalysts that reversed the trend were
investors need for yield and the fact that businesses, despite the
negative news, were actually improving.
So what does this mean going forward? Although one can't predict
with certainty, bond portfolio returns are far more predictable
than stock returns. Over the long run, the rate of return from
investing in bonds should be its current yield to maturity. With
government bond yields under 2%, deficits continuing to grow and
too little tax revenue/income to support the debt, we believe our
income strategy of investing in high yield corporate debt is a
better alternative. Companies, in general, are actually doing
relatively well. Good management teams are using improving cash
flows to de-lever their balance sheets putting them in a better
position than they were five years ago.
As Deans Knight has stated numerous times, for a debtholder in a
corporation the most important consideration is the borrower's
ability to meet its coupon payments and pay back the principal at
maturity. Investors cannot predict short term prices. The only
thing investors can control is the companies they choose to invest
in and whether or not they are compensated for the risk that the
borrower fails to meet its obligations. The Company's Portfolio, as
of September 30th, is yielding 8%, which is attractive versus U.S.
and Canadian government bonds providing yields of only 1 - 2%.
Over the long term, the Company will look to provide additional
value by identifying mispriced high yield bonds and participating
in private debt financings with equity kickers.
The Company's investment in Paramount Resources is an example of
mispriced debt. Paramount is an oil and gas producer, predominantly
natural gas, with assets in Alberta, Northwest Territories, and
North Dakota. In addition to its producing assets, Paramount has a
number of investments in other oil and gas companies (all of these
companies were previously assets within Paramount that were spun
out to form new companies). The ratings agencies have consistently
rated Paramount's debt lower than Deans Knight believes is
appropriate, as the agencies focus on production numbers and do not
properly value Paramount's extensive land position or their
investments in other oil and gas companies. Looking beyond the
"metrics", there was substantial asset coverage versus the level of
debt outstanding. Thanks to the low rating, Paramount refinanced
debt in 2010 at 8.25%, an attractive coupon given the assets, cash
flows and management team backing our investment.
The Company did not invest in any new private debt financings
during the third quarter. However, one was repaid. In August 2011,
the Company participated in an $18 million CAD Secured Subordinate
Revenue Note with RapidEye Canada Ltd. ($7.3 million initial
investment for the Company's Portfolio). The proceeds from the
financing were used to acquire assets from the bankruptcy of
RapidEye AG, a global provider of high-resolution imagery and
geospatial solutions.
At time of purchase, Deans Knight believed RapidEye Canada could
generate EBITDA margins of 25% on annual revenues of EUR13 million
and could improve revenues and margins over time as new management
re-focused the business plan. Management exceeded expectations, as
they are on pace to reach revenues of at least EUR20 million this
year and have improved EBITDA margins to 40 - 50%. As a result of
this quick turnaround, Rapid Eye was able to repay our notes with
cash and a new debt facility.
The note had a 3-year maturity with a coupon of 5% and was
secured by the assets of RapidEye. In addition to the coupon,
noteholders were compensated by a royalty on net revenue, which
declined as debt was reduced. To September 30, 2012, the Company
earned interest and royalties of approximately $1.25 million CAD,
providing a 17% income return on our initial investment. In
addition, although the note has been repaid, noteholders will
continue to receive a royalty of 2.75% on RapidEye's net revenue
for the next 9 years.
Details of Net Asset Value:
The net asset value of the Company at September 30, 2012 was
$140,354,366, or $13.32 per Share, which consisted of the following
components:
$ Per Share (1) %
Investments (2) 123,443,730 11.71 88.0%
Gain on forward contracts (3) 472,806 0.04 0.3%
Cash and cash equivalents 10,585,595 1.00 7.5%
Accrued Income 2,682,151 0.25 1.9%
Future Income Tax Asset (4) 3,760,000 0.36 2.7%
Accrued Liabilities net of prepaids (589,917) -0.04 -0.4%
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143,801,922 13.32 100.0%
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Notes
(1) Based on 10,537,262 Shares, being the total number of voting
and non-voting common shares outstanding during the period.
(2) Details of the investments held at September 30, 2012 are
included in the Summary of Investment Portfolio below.
(3) Represents the mark-to-market gain (loss) on forward foreign
currency contracts at September 30, 2012. The Company has hedged
substantially all foreign denominated investments back to the
Canadian Dollar.
(4) The Company has approximately $31,600,000 of deductions
available to be applied against future years' income tax returns.
The Company's policy is to recognize a future tax asset to the
extent that it believes that it is more likely than not that the
future tax asset will be realized. The Company will continue to
review these estimates on a periodic basis and will amend the asset
value accordingly, if deemed appropriate.
About Deans Knight Income Corporation
Deans Knight Income Corporation is an investment company focused
on investing in corporate debt securities, predominantly rated
below investment grade. The Company's objective is to maximize the
total return for shareholders, consisting of bond price
appreciation and income received from bond investments. The Company
will pay a monthly dividend to shareholders, based on earned income
each month. The capital of the Company is actively managed by Deans
Knight Capital Management, a respected investment firm based in
Vancouver B.C. that has been investing in corporate bonds since its
inception in 1992. For more information: www.dkincomecorp.com.
As an investment company, Deans Knight Income Corporation falls
under the continuous disclosure requirements for investment funds.
In compliance with such continuous disclosure requirements, the
Company will provide shareholders with financial statements on a
semi-annual basis. In an effort to keep shareholders informed, the
Company intends to provide shareholders with an operational update
each quarter, detailing relevant investment activity and
holdings.
Forward-Looking Statements
This press release contains forward-looking statements. More
particularly, this press release contains forward-looking
statements concerning the Company's corporate objectives,
availability of tax losses and deductions, the Company's
expectations concerning market trends, redemption of certain bonds
held by the Company, the anticipated total return to the Company's
shareholders and the Company's intention to pay out earned income
in the form of monthly dividends. Although the Company believes
that the expectations reflected in these forward-looking statements
are reasonable, undue reliance should not be placed on them because
the Company can give no assurance that they will prove to be
correct since forward-looking statements address future events and
conditions and by their very nature, involve inherent risks and
uncertainties. The forward-looking statements contained in this
press release are made as of the date hereof and the Company
disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information,
future events or otherwise, unless so required by applicable
securities laws.
Summary of Investment Portfolio
The following is a summary of the Company's investment portfolio
as at September 30, 2012. This is a summary only and will change
due to ongoing portfolio transactions of the Company. Additional
information is available at www.dkincomecorp.com.
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Top 25 Investments % of Net
Asset Value
PARAMOUNT RESOURCES 8.250% 13-Dec-17 6.9
STONE ENERGY CORP 8.625% 1-Feb-17 6.6
NORTH AMERICA ENERGY 9.125% 7-Apr-17 5.4
WHITECAP RESOURCES N/A N/A 5.3
MIRABELA NICKEL LTD 8.750% 15-Apr-18 5.2
CCS INC 11.000% 15-Nov-15 5.1
CALFRAC HOLDINGS LP 7.500% 1-Dec-20 4.2
SOUTHERN PACIFIC RES 10.750% 1-Jan-16 4.1
TEMBEC INDUSTRIES 11.250% 15-Dec-18 3.7
PERPETUAL ENERGY INC 8.750% 15-Mar-18 3.3
MERCATOR MINERALS 8.000% 3-Jan-13 3.2
NORTHLAND RESOURCES 13.000% 6-Mar-17 3.1
PETROAMERICA OIL 11.500% 31-Mar-20 2.8
SHERRITT INTL CORP 8.000% 15-Nov-18 2.8
CARA OPERATIONS LTD 9.125% 1-Dec-15 2.6
GARDA WORLD SECURITY 9.750% 15-Mar-17 2.4
BEAZER HOMES USA 9.125% 15-Jun-18 2.3
CONIFEX TIMBER INC 12.000% 31-Dec-12 2.1
GATEWAY CASINOS 8.875% 15-Nov-17 2.1
BLACK PRESS GROUP 10.000% 4-Feb-14 2.0
PACIFIC RUBIALES 7.250% 12-Dec-21 1.9
SURE ENERGY 6.250% 21-Jan-14 1.8
WESTERN ENERGY SVS 7.785% 30-Jan-19 1.7
MCMORAN EXPLORATION 11.875% 15-Nov-14 1.5
NUMBER MERGER SUB 11.000% 15-Dec-19 1.5
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Portfolio Composition % of Net
Asset Value
Fixed Income
Canadian denominated in CAD 41.5
Canadian denominated in USD 20.0
United States denominated in USD 17.1
Other Foreign denominated in USD 3.1
Other Foreign denominated in EUR 0.7
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82.4
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Convertible Debentures
Other Foreign denominated in AUD -
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82.4
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Equity and Warrants 5.5
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Investment Portfolio 87.9
Cash & Short-term Deposits 7.5
Other Net Assets 4.6
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100.0
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Sector Breakdown
Energy 50.7
Materials & Metals 16.0
Consumer Discretionary 8.5
Forestry 7.0
Industrial/
Manufacturing 4.2
Technology 0.7
Services 0.8
Financial Services -
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Investment Portfolio 87.9
Cash & Short-term Deposits 7.5
Other Net Assets 4.6
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100.0
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Contacts: Deans Knight Income Corporation Craig Langdon Chief
Executive Officer and Director (604) 669-0212 Deans Knight Income
Corporation Mark Myles Chief Financial Officer (604) 669-0212
www.dkincomecorp.com