Ewing Morris Select Credit Fund LP

Chemtrade Logistics Income Fund

In March 2020, many bonds traded at inconceivable prices. But in April 2020, while most of the market was shooting higher, Chemtrade convertible debentures continued to trade at absurd levels thanks to a little-known Canadian ETF.

Chemtrade is a North American industrial chemical manufacturer and distributor. We were familiar with Chemtrade as it was the buyer of Canexus - a credit we cheerfully owned into that acquisition. We were comfortable with the backdrop in the covid context, as refineries still needed to operate at reasonable utilization rates, underpinning the company's regen acid business.  Water treatment customers were also not changing their demand. Chemtrade also had non-core assets it could sell as well as a fulsome dividend it could cut.

In mid-April, we identified an obscure, Canadian convertible-focused ETF that was set to offload Chemtrade's 2023 and 2024 debentures as they were trading below the underlying index's 80 cent inclusion threshold. The deletion auction was at April month-end. We paid an average of 72.09 and 66.43, respectively, for Chemtrade's 5% 2023 and 4.25% 2024 debentures, with a weight exceeding 20% between these two securities. After the company cut its dividend in half and exited a non-core asset, we exited the investment around par, realizing a 49% and 60% holding period return (respectively) and an IRR exceeding 30% on both investments.

Parkland Corporation

With energy markets in disarray in the spring of 2020, Parkland's bonds got painted with an energy discount, even though it produced no oil and gas. It merely distributed refined product - mainly gasoline. As a result of the energy stigma, the bonds traded wide relative to peer bonds of similar risk.

In addition to being a long-time bondholder of the company, our equity team was also invested in Parkland, which brought the skills of our entire organization to bear on the file. As reduced driving dented gasoline demand, we had confidence in Parkland's management team to handle the turbulence and saw no need for the company to have to turn to the capital markets to bridge themselves through the pandemic.

We paid 99.625 for our principal position, the 5.625% bonds due in 2025. When combined with our purchase of the 2028 bonds, our weight exceeded 20%. After management accelerated its deleveraging goals to work toward an investment grade credit rating and the operations showed the resilience our team expected, we exited the bonds less than a year later to fund more attractive opportunities. We realized an IRR of 10.5% and 15.5% on the 2025 and 2028 bonds, respectively. A fine result for a conservatively managed, high quality BB issuer.

J2 Global

In the summer of 2020, Hindenburg Research published a short sale report on J2 Global. Over the subsequent month, the stock fell 22%, below its March 2020-low. We were very familiar with the company as we had owned J2 bonds in the past and we owned a large weight in the stock in our equity funds since 2015. As our entire team had a focus on the file, the dislocation caused by Hindenburg was a perfect opportunity to consider its convertible bonds which fell in sympathy.

From a fundamental perspective, although the short seller's criticisms regarding corporate governance were reasonable, the fundamentals of the business were strong. Its programmatic acquisition strategy had been well-executed over time, it continued to generate abundant free cash flow and the company was sitting on substantial cash and investments that essentially de-risked the balance sheet.

We purchased an 18.5% position in J2 Global's 1.75% senior convertible notes due in 2026 at $86.8 on largely a constructive credit view. We purchased a 3.0% weight in the company's 3.25% senior convertible notes due 2029 at 102.75, with a view that the security bore no actual downside since it was putable in one year, yet had upside through a 15% FCF yield (2019) in the equity and a strike price only 20% from the market price at the time of purchase. We exited the 1.75% notes with a 17.8% holding period return. As our view on the business and equity played out, evaporating the short seller cloud, we exited the 3.25% bonds with a 90.9% holding period return.

Shaw Communications

Some opportunities last for days. Some last for hours. Some last as long as a phone call. On March 15, 2021, a landmark deal was inked where Rogers was buying Shaw Communications in an all-cash transaction. That morning, we received a phone call. The call where you know why you're the one who's getting the call; you understand why the seller is selling; and, you've done the work to be in a position to transact.

In March of 2021, despite the recovery in risk markets, interest rates were virtually zero and Shaw's reset preferred shares were deeply underwater, trading at $16 per share. To our surprise and excitement, the announcement took the Shaw B preferreds up far less than we were expecting. As we bought a size position in a similar situation in the past (Rona preferreds when Lowe's was buying Rona), we received a call the morning the deal was announced.  That call offered a block for sale, from entities (likely retail or regulated institutions) that were simply not accustomed to pricing event-driven situations and were happy to take the liquidity.

We bought a 13% position in the Series B preferred shares in one trade mid-morning and followed with another 8% in the Series A preferred shares the next day. The timing of the deal was very fortunate, as Shaw preferreds had a reset/redemption date of June 30 - only a few months away. Clues regarding a possible redemption were aplenty to those paying close attention. The press release, merger agreement, media reports and Rogers' own capital structure all hinted at a harmonized pro-forma capital structure (ie: one without preferreds) . The preferreds were redeemed by the company at $25 June 30th, 2021. In less than four months, we captured a holding period return on the series B and A preferreds of 35% and 21%, respectively (IRR: 184% and 95%). And this outcome was achieved all independent of the closing risk of the broader corporate transaction.

Consensus Cloud Solutions

As a spin-out of J2 Global's e-fax communications business, and led by J2's former CFO Scott Turicchi, we were inclined to invest in the company's bonds. Scott's conservative management of J2's capital structure gave us confidence in his plans at Consensus; leverage 4x at the time of the spin, with plans to delever to 3x via earnings growth and strong free cash flow. The stock debuted at a 9x EBITDA multiple. Beyond the solid credit picture, we thought that as Consensus was a first-time issuer, we could capture a discounted new issue price in what was otherwise an expensive high yield market. Our suspicions were proved correct and the bonds traded up 2-3 points soon after their issue. Our position between the 6% and 6.5% notes due 2026 and 2028 totaled ~25%. Due to our long-time relationship with company leadership, we received 100% of our new issue order.

But then interest rates went up. A lot. Consensus failed to deliver on the growth objectives it outlined to the street. And, its core business softened somewhat more than expected. Over the period we held our bonds, the stock fell 40%. Despite all these headwinds in rates, the business and the stock, Scott kept paying down debt, as promised. This, combined with an excellent purchase price, time and opportunistic exits in the market and directly with the company, our holding period return was more than 15% on both issues and well in excess of the market's (iShares US High Yield ETF), holding period return of 4.2%.

Ziff Davis

Ziff Davis was the remainco of the J2 Global spinout transaction. After the spin, Ziff Davis continued executing its acquisition strategy. Its lifetime EBITDA multiple paid on acquisitions is a remarkable 5x. In mid 2022, Ziff was trading at 6x EBITDA and had a 10% free cash flow yield to the enterprise.

Ziff was an ideal platform for a take-private and the company's capital allocation skill could also generate value through open market stock buybacks if acquisitions were difficult to find at the right price. With growth in long-term earnings power, historical acquisition deployment and a lift in multiple toward that of 'high performance conglomerates' we saw a double in the equity very acheivable. We bought a 21.5% weight in the common equity.

But then large language models (ie: ChatGPT) were released. About half of Ziff Davis' business is driven by advertising on their digital properties. This mattered because instead of a user finding a product comparison review on a Ziff Davis website, users could now ask ChatGPT itself to review or compare any products they wanted, on-demand. Perceived or real, it was a threat to the business and the equity valuation. There existed reasonable, nuanced counter-arguments at the time: traffic appeared unimpacted thus far, LLM owners will partner with Ziff to access content to train their models and half of Ziff's revenue is subscription-based and relatively insulated from this risk. We believed none of these arguments were strong enough to matter.

After many years of top-five exposure to Ziff Davis in one form or another across our entire firm, we exited our position in the strategy in early 2023 at an average of $82.01, a 3% loss.

As of October 2024, the stock is below $44.

Bandwidth

Bandwidth is in the business of telecommunications and software. It has a software-powered network that its customers use to send things like appointment reminders by text and the ability for people to dial into a teams or zoom meeting, for example. Following a debt-financed acquisition at 6x revenue in 2020, the rapid increase in interest rates and a slowdown in growth, we found Bandwidth's trading in the low 60's. At the time, the equity market capitalization was worth nearly half of the business value, clearly pointing to a mispricing in the debt.

We saw the business as having reasonable fundamentals. Expert network opinions cited Bandwidth having the best infrastructure in the industry and the company was consistently profitable prior to its IPO at a much smaller scale. The company clearly had untapped earnings power - this is why the equity carried the value it did. The bond market on the other hand was uncomfortable with its founder and CEO, David Morken. Our differentiated view was that the market was missing immense, unpriced takeout optionality in the bonds - that a sale could lead to a par exit price versus a low 60's current market price. There was evidence of contemplation of a sale in several places, including David's very own employment contract. Absent an event, the bonds also underappreciated two other factors: 1) the potential for Bandwidth's cash flow to rapidly improve in 2023 and 2) David was already making great strides in de-risking the balance sheet, with a 160 million-dollar buyback of its 2026 convertibles.

Over the ensuing year, we built a 36% position in the 2028 senior convertible notes at an average cost of $62.34. Since our original purchase, the company has performed well; it has rapidly paid down debt; and now the 2028 bonds are the principal remaining piece of debt outstanding. As of December 31, 2024, the 2028's trade above $80, representing a holding period return of 29% and IRR of ~20.2%.