BlackBerry Ltd Staying Alive By Trading Bonds

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) appears to be a value trap for the conservative investors as the latest positive developments for the company can be attributed to the structuring of financials and investment transactions rather than from any operational development. The key factor keeping the company in the black was the $1.25 billion convertible bond deal with Fairfax, according to Kofi Bofah from Seeking Alpha.

Fairfax investment vital

In November 2013, BlackBerry received a $1 billion investment from the Fairfax Financial-led consortium of institutional investors. In January, Fairfax took out an additional $250 million in convertible debentures.

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BlackBerry has survived so far with the help of the convertible debentures, which has been referred to as “a lifeline to preserve” the company from “going bust.” According to Bofah, in the future, there is a possibility that investors may witness “massive inventory and property write-downs” provided the Canadian company fails to effectively utilize its real assets.

In the first quarter of fiscal 2015, the company posted a net income of $23 million and revenue of $966 million. The quarter before that the company clocked in $243 million in losses and $976 million in revenue. During the first-quarter of fiscal 2014, the company posted $48 million in losses and $3.1 billion in revenue.

BlackBerry profit attributed to convertible bonds

Bofah believes that the $1.25 billion convertible bond deal was the primary reason for the return to profitability. The smartphone company took advantage of the change in the debentures fair value adjustment in the latest quarter. The fair value adjustment for the debentures in Q4 2014 was $382 million compared to -$287 million in Q1 2015, resulting in a difference of $669 million. This adjustment, according to Bofah, helped the Canadian firm to lower its operating expenses from $1.1 billion to $431 million sequentially over the same period. The lower operating expenses resulted in a profit of $23 million Q1 2015.

This means, however, that the profits were largely by improved financial and investment activities instead of any real turnaround process. Also, the quarterly operational cash flow for BlackBerry lowered from $630 million to $302 million over the past year.

In the end, Bofah advises conservative investors not to bet on BlackBerry shares as the financial risk facing the company appears similar to those “immediately predating the credit crisis and ultimate collapse of Lehman Brothers.”