Longtime U.S. investors in Canadian stocks fondly recall riding the Canadian dollar higher as the global resource boom fueled its rise above parity with the U.S. dollar.

But the loonie has fallen sharply over the past two years, first as the result of a divergence in interest-rate policies between each country’s central bank, then later as the decline in commodities turned into an outright crash.

Those of us with existing holdings in Canadian stocks have suffered the painful experience of watching the very currency that once enhanced investment performance now erode it, even as the S&P/TSX Composite Index remains within shouting distance of last September’s all-time high.

However, thanks to the lower exchange rate, U.S. investors who are new to the Canadian investment story, or at least have new money to invest, now have the opportunity to buy high-yielding stocks at a substantial discount. And when the commodity cycle eventually turns, the Canadian dollar should start rising again.

In the interim, Canadian Edge’s approach to security selection has hardly remained static. We’ve been paring our exposure to the energy sector in favor of those companies best positioned to survive crude’s collapse.

And we’ve also been increasing our exposure to Canadian companies that derive substantial earnings from the U.S. market.

After all, though Canada’s economy expanded at a slightly faster pace last year than that of its neighbor to the south, the resurgent U.S. economy is forecast to outpace Canada’s economy for the next three years.

That along with the performance-enhancing boost of a surging U.S. dollar should give Canadian companies with U.S. operations a significant earnings tailwind.

Meanwhile, we maintain the benefit of geographic diversification for when Canada’s economy eventually strengthens.

One Canadian company that we’ve recently highlighted for its U.S. operations is the technology-based financial services firm DH Corp (TSX: DH, OTC: DHIFF). The company originally specialized in printing checks for the banking industry, but has since evolved into a North American financial technology leader, providing software and IT solutions to more than 7,000 banks and credit unions in the U.S. and Canada.

In 2013, DH acquired U.S.-based Harland Financial Solutions in a USD1.2 billion deal that dramatically transformed the firm from being an outsider in the core-banking market to a significant player.

Prior to that deal, DH generated just 7.5% of revenue from its U.S. segment. Since then, revenue from its U.S. operations has grown to account for 42.8% of total revenue. And owing to the higher margins from its U.S. operations, the U.S. segment accounted for 50% of full-year 2014 EBITDA (earnings before interest, taxation, depreciation and amortization).

Let’s Make Another Deal

Now DH is pursuing yet another transformative deal that builds upon its strength in the U.S. by expanding its client base to include the country’s largest banks and financial institutions, while extending its reach to the global market.

Late last week, the USD2.7 billion company announced it has entered into an agreement to acquire New York, NY-based Fundtech, a leading provider of mission-critical payments solutions to banks around the world, from the Chicago-based private-equity (PE) firm GTCR in a cash deal totaling USD1.25 billion–DH’s ninth acquisition and its largest to date.

Fundtech, which was founded in 1993, was acquired by GTCR in late 2011, in a USD390 million deal. Shortly thereafter, the PE firm merged Fundtech with BankServ, another provider of electronic payments technology. GTCR had acquired BankServ earlier that year in a deal whose value was undisclosed.

With 19 offices across the globe, Fundtech serves approximately 1,200 clients, including global money center banks, mid-sized banks and credit unions, non-bank financial institutions, central banks and corporates.

In an interview with Bloomberg, DH CEO Gerrard Schmid observed, “Checks are in long-term decline; consumers are writing fewer of them. With the Fundtech acquisition, it puts us squarely into payments technology which is massively relevant for banks these days.”

During the conference call accompanying the announcement, Mr. Schmid noted that payments technology is a top investment priority for many banks as it confers competitive advantages while helping maintain compliance with complex regulations.

With the acquisitions of Harland and now Fundtech, Mr. Schmid says DH will serve two of the major pillars in banking: lending and payments.  

In 2014, Fundtech booked USD263 million in adjusted revenue and USD68 million in adjusted EBITDA. Those results are equivalent to 25.1% and 21.3% of DH’s full-year 2014 adjusted revenue and adjusted EBITDA, respectively.

DH management expects the acquisition to be accretive to adjusted net income per share within the first 12 months following the deal’s close.

Like the Harland acquisition, the deal to acquire Fundtech will be financed by a mix of debt and equity. First, there’s a secondary equity offering via the issuance of 16.5 million subscription receipts, each of which entitles the holder to receive one common share upon the deal’s close, for gross proceeds to DH of CAD626.2 million. The issuance is equivalent to 19.1% of DH’s current shares outstanding.

The company will also be issuing CAD200 million in convertible debentures, with a conversion price of CAD52.75, or 33.2% above the current share price.

The balance will be funded with borrowings from DH’s bank credit facilities. The deal is expected to close during the second quarter.

Management says the strong cash flows Fundtech generates will allow DH to quickly deleverage following the acquisition (debt to EBITDA is expected to swell to 3.75 times at closing and then decline to less than 2.5 times by the end of 2016), while continuing to support the dividend and invest for future growth.

Since it was added to the Conservative Portfolio in November 2009, DH has delivered a total return of 270.3% in local currency terms and 216.3% in U.S. dollar terms. The stock currently trades near an all-time high.

With a current yield of 3.2%, DH Corp is a buy below USD32.

Canada Strengthens Trading Ties to China

A special supplement by Khoa Nguyen

After almost two years of lobbying, Canada’s financial services industry can now rejoice as Toronto joins cities such as London, Frankfurt, Singapore and Hong Kong in establishing a trading hub for China’s currency, the renminbi (RMB). Toronto becomes the first city in the Americas to win the designation, which will give Canada a leg-up in expanding its trade with the world’s second-largest economy.

Canada’s major trading partner has long been the U.S., thanks to both proximity and the demand resulting from the sheer size of the U.S. market. Canada’s neighbor to the south typically absorbs about three-quarters of the country’s exports.

However, Canadian policymakers are keen to diversify the country’s export markets–especially to fast-growing emerging Asia–in order to reduce its dependence on the U.S. Although China is the nation’s third-largest export market after the U.S. and European Union, exports to China accounted for just 5.2% of Canada’s total exports in 2013.

One of the limiting factors has been the difficulty companies experience and the costs they incur when exchanging from once currency to another, which usually requires conversion into U.S. dollars as an intermediary step.

By allowing businesses to convert RMB directly into Canadian dollars, the hub will reduce Canadian companies’ cost of doing business with Chinese partners. Leaving out the middleman will save Canadian companies an estimated CAD6.2 billion over 10 years. Facilitating these transactions through easier and cheaper methods is expected to lead to increased trade between the two countries.

The Canadian Chamber of Commerce estimates that Canada’s exports to China could increase by CAD32 billion over the next decade. The smoother currency conversion process would also reduce Canadian importer costs by up to CAD2.75 billion over the same period.

Another benefit would be the discounts Chinese businesses say they would offer global trading partners making deals in RMB. In a poll by HSBC, 55% of these businesses said they would offer up to a 5% discount.

Peter Hall, the chief economist of Export Development Canada, said, “By adopting the RMB as a payments currency, Canadian traders will have access to a wider universe of Chinese clients, and at the same time, improve their bottom lines. This is because the vast majority of China’s traders are SMEs (small & mid-sized enterprises), most of which do not have USD liquidity.”

While Canadian businesses will benefit from the increased trade and discounts, Canada’s major banks will enjoy additional business due to the transactions they will facilitate in RMB.

RMB-denominated transactions have dramatically increased since China removed barriers limiting the currency’s use outside its borders in 2009. The country has pushed to globalize its currency, and by the end of 2014 it had become the fifth most-used currency in the world, representing about 10% of all global payments.