Arctic Glacier Income Fund (AGUNF) – Liquidation – 6% Upside

Current price: $0.0173 (mid)

Distribution: $0.0184

Upside: 6%

Estimated distribution date: 17th of June, 2020

Monitor's report

This idea was shared by iFindValue.

 

This is an extremely illiquid stock (avg. trading volume for the last 10 days just over $1100) with very wide bid/ask spread (16%) as well. Arctic Glacier Income Fund has two listings - one on the pink sheets (AGUNF) and one in Canadian Securities Exchange (AG-UN.CN). Both have very low liquidity yet due to FX factor higher upside comes from AGUNF (6% vs 3.6%).

So this is mostly a bid/ask play. Spread from the the estimated cash in mid-June to current trading mid price stands at 6%, however even if one manages to acquire a position at this price, the eventual upside could turn out to be lower due to the cash burn (although conservative assumptions were taken below).

Canadian fund Arctic Glacier is liquidating and in December distributed a major part of its cash (C$15m or C$0.043/unit). Before remaining cash balance (estimated at C$9m at June'20) can be distributed, AGUNF must receive clearance certificates (basically signing off that they paid the enough taxes) from the Canada Revenue Agency ("CRA") and Revenue Quebec ("RQ"). Fund's monitor Alvarez & Marsal estimates that the whole process (approval+final distribution) should be completed until the 17th of June'20.

With conservative cash burn estimates between now and the distribution deadline, it is estimated that cash in June 17, 2020 could be around C$9.03m. This would leave ~C$0.0258/share or ~US$0.0184/share to be distributed to shareholders. The last mid-price of AGUFN as of 5/21/20, was US$0.0173/share, which provides 6% upside to the estimated cash balance. Given that there is essentially no asset risk (all cash) and no liabilities, the risk/reward in this investment opportunity seems to be compelling. Certificate distribution in June should be the catalyst here.

The only major risk here is that the tax regulators don't provide clearance certificates by 6/17/20 and deadline/final distribution is postponed. Nonetheless, in November'19 the monitor seemed optimistic about eventually receiving the approvals:

Upon receipt of the CRA and Revenue Quebec clearance certificates, the Monitor will promptly facilitate a Final Distribution and seek the termination of these CCAA Proceedings. Accordingly, there is a reasonable possibility that the Monitor will be making the Final Distribution and seeking termination of the CCAA Proceedings in advance of June 17, 2020.

Moreover, even if the process does get postponed, assuming that one manages to acquire a position at $0.0173/share, there should be about 11 months of additional time before the cash account gets depleted.

 

Calculations for distribution

  • At the beginning of Dec'19 cash balance stood at C$9.4m.
  • The company still receives 0.12% monthly interest on the remaining cash.
  • Monthly cash burn until Nov'19 amounts to C$63k/month (monitor fees, legal counsel, CPS, tax consultants, administrative expenses etc.). After the majority of cash was distributed further cash burn should've been lower. Nonetheless, for conservative measures the same C$63k were used in the calculations.  Liquidation/transactional costs were excluded (as this is a liquidating fund they might be minor).
  • Exchange rate: 1.40102

Estimated cash amount at the 17th of June'20:

agunf

There is also a currency exchange rate risk, but it can be hedged through FX futures.

4 COMMENTS

  1. Zulu Investor

    Hi Ilja, thanks for the idea. I like it. May I ask why this is just a quick idea? My understanding is that “quick ideas” are usually investments that don’t have as strong of a case as the official ones in the “idea” page. How do you guys separate the two?

    1. dt

      Quick Ideas are most often cases with light research only where we do not have any specific insights on the likelihood of transaction closing. For example most large cap arbitrage situations would probably fall into this category, as market is usually correctly weighing risk/reward and case is well covered by public media.
      In this particular case we kept Arctic under quick ideas, because of low liquidity – it’s only few hundred dollars of daily volume – which makes it unactionable for most members.

  2. jwestern

    I managed to buy a few thousand CAD worth at 2.1 cents per share by just putting in a long-term order and waiting.

  3. Ilja

    So the 32nd monitor’s report was released on the 16th of June:
    – The process is extended (partially due to COVID-19) until the Dec’20, however it is also stated that “there is a reasonable possibility that the Monitor will be making the Final Distribution, applying for delisting of AGIF, and seeking termination of the CCAA Proceedings in advance of December 18, 2020. ”
    – In early July’20 AGUNF will make a third interim distribution for about C$5m, which is US$0.01/share (84% of the current market cap).
    – Cash/share on the 30th of May stands at C$8.8m, which is worse than expected (C$9.1m according to calculations that were made in the write-up). That is due to higher than expected professional fees and other expenses.
    – Given the recent cash burn of the last 6 months, the estimated distribution size in mid-Dec’20 stands at US$0.0172/share. Therefore at the current trading price of US$0.017/share (mid-price), there is virtually no upside left, unless you expect the Final Distribution to happen much faster.

    So given the points above as well as the uncertain timing, the idea is closed with -2% loss in 1 month.

    https://www.alvarezandmarsal.com/sites/default/files/canada/ag-thirty-second_report.pdf

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