Newsletter April 2011

April 1, 2011

Genesis Energy

The Genesis Energy bond offer has finally made it to the market, with an announcement the minimum interest rate will be set at 8.50%. Genesis is seeking to raise $225 million, with the ability to accept oversubscriptions of up to $50 million. The issue is similar to the New Zealand Post issue of 2009 in that it has a very long term (30 years) and has its rate reset every five years. The very long term allows Genesis to consider the funds as equity in their books, rather than debt. Standard & Poors have indicated it will assign high equity content (100%) to the bonds until 2021. It is possible (but not certain) that the bonds would be repaid then. With its long term I think you should view this opportunity as having similarities to a share investment as much as a bond investment. In order to cash in your investment prior to maturity you would have to sell it on the secondary market, which would incur brokerage of one percent.

  • Maturity Date – June 15th 2041
  • Interest paid quarterly
  • Minimum investment – $5,000
  • Credit rating – BB-
  • Minimum interest rate – 8.50%
  • Rate Set Date – April 14th
  • Closing date – May 18th
  • First Rate Reset Date – July 15th 2016

 Call the office as soon as possible if you would like to discuss this opportunity.

 Origin Energy

Origin Energy has issued rights to existing shareholders to fund various asset purchases, and to strengthen their balance sheet in the anticipation of pursuing other growth opportunities. They are seeking to raise approximately $2.3 billion. Origin is offering shareholders the right to purchase one new share for every five shares they currently hold. The offer price is $13 per new share. At present Origin shares are trading at $15.76, and the rights are trading at $2.76. The important thing for investors is to ensure they take up one of the alternatives. Either take up the new shares at the discounted price, or sell the rights to someone else. Doing nothing will mean you are losing the value of the rights assigned to you. Call the office if you need any guidance on what to do.

Fixed Interest

New issues of fixed interest have been few and far between recently, and the secondary market is struggling to draw money out of the trading banks. Most banks are offering 2-5 year rates of between 4.50% and 6.00%. Listed below are some of the more popular corporate bonds with their secondary market yields.

 

Bond                                       Interest Rate                        Maturity                               Yield

BNZ                                            7.50%                            September 2012                      3.91%

Auckland Airport                       7.19%                            November 2012                      4.25%

Telecom                                    6.92%                            March 2013                               5.08%

Infratil                                          8.50%                           September 2013                     7.85%

Wellington Airport                     7.50%                            November 2013                     6.50%

Tauranga City Council             7.05%                           December 2013                      4.59%

Auckland City Council              6.42%                           March 2014                              5.59%

Genesis Energy                         7.25%                          March 2014                               5.17%

Tower                                           8.50%                          April 2014                                 7.00%

Contact Energy                           8.00%                          May 2014                                  5.72%

Fletcher Building                       9.00%                           May 2014                                  6.80%

ANZ National Bank                    8.50%                           June 2014                                 5.01%

Vector                                           7.80%                         October 2014                            5.70%

Fonterra                                       7.75%                          March 2015                               5.18%

Goodman Property Trust          7.75%                          June 2015                                 6.39%

Infratil                                            8.50%                         November 2015                        8.50%

Trustpower                                  8.40%                         December 2015                       7.00%

Telecom                                      7.04%                          March 2016                               6.35%

Greenstone Energy                   7.35%                         October 2016                            7.24%

Auckland Airport                         8.00%                         November 2016                       5.97%

Meridian Energy                         7.55%                         March 2017                               6.00%

The main advantage listed bonds have over bank deposits is liquidity. If you need funds you can sell bonds in the secondary market, an option not available with bank deposits. Most banks will allow you to break a term deposit, however you are usually penalised heavily in terms of the interest paid to you.

Bernard Whimp

Banned company director, Bernard Whimp, is at it again with further unsolicited offers to investors to buy their shares. The recent offers have targeted shareholders of Contact Energy, GPG, Trustpower, DNZ Property, and Vector. On the face of it the offers look good, with the prices offered being well in excess of the current market price. However the fine print reveals payment will be made over a ten year period, and any dividends paid during that period will belong to Whimp. Some investors who have called me for advice have been hard to convince this is not a good offer. “How can an offer of $7.60 for my Contact Energy shares not be worth taking, if they are currently trading at $5.70?” “Even if I have to wait ten years, I’m receiving almost $2 more per share.”

This is where a basic understanding of the time value of money is essential. You need to be able to recognise that $5.70 today may be more valuable than $7.60 spread over ten years. Even if you don’t have the knowledge to do the calculations, an understanding of the concept allows you to question the merits for and against, and at least contact your adviser for guidance. As soon as you accept Whimp’s offer you forego any income from your shares. Your only return will be the annual instalments spread over ten years (if he honours his commitment). In contrast, if you hold the shares you continue to receive dividends. This alone should see the value of your investment exceed $7.60 over a ten year period. You could also expect to see a gain in the share price over a ten year period, although of course that cannot be guaranteed. Whenever you receive unsolicited offers for your shares don’t hesitate to make contact for advice. And be sure to send the reply paid envelope back to Mr Whimp, empty.

The Securities Commission has now been granted an injunction to stop Whimp from acquiring shares through his latest unsolicited offers. Although the offers are not illegal, it is an offence to mislead or deceive investors into accepting an offer. The Commission has decided the offers were misleading, and will look to uphold that stance in the High Court in May.

KiwiSaver

The KiwiSaver anniversary (July 1st) is due to roll around again. Those who have not yet joined should give it consideration. You can join the scheme provided you are not yet 65, and you must remain in the scheme for a minimum of five years, or until you reach the age of 65, whichever is the latter. The current Government subsidies make KiwiSaver an attractive proposition.

  • $1,000 kick-start
  • Matching Government contributions up to $1,043 per annum
  • Compulsory employer contributions of 2% of your salary
  • First home purchase subsidy of up to $5,000

Although I’m not a fan of the managed funds industry I see little point in not joining KiwiSaver. I firmly believe the Government will eventually make KiwiSaver compulsory, so you may as well take advantage of the subsidies while they are available. I’ve said in the past that the Government will drop the subsidies when they make KiwiSaver compulsory, however you may see those subsidies removed sooner due to the Canterbury earthquakes. The Government has said they are looking to balance the books through reduced spending, and KiwiSaver is one area they can make instant savings. There is little to be lost by joining KiwiSaver in its current form. After you have been in the scheme for 12 months you are able to take contribution holidays, so if you find it’s not for you, you simply stop contributing. Yes, the Government can (and will) change the rules over time, and if they make it compulsory your view on the merits or otherwise is removed from the equation anyway. You might as well take the subsidies while they are available. Call the office if you would like to discuss your situation.

Perpetual Reset Securities

I have written previously about the various perpetual securities on the market. I can understand the frustration of those who invested in the early perpetuals, which had reset mechanisms that would not be acceptable if they were issued now. At the time they were issued (pre global financial crisis) their terms were in line with the rates of the day. Most of the perpetuals have similar characteristics in that they don’t have a set maturity date, and they have their interest/dividend rates reset at various intervals. The rate resets are based on a benchmark rate plus a margin. Here are some examples.

Security                   Benchmark             Margin          Current Rate       Current Price/$100

Infratil                         1 Year Swap           1.50%                4.97%                        $59.80

Origin                         1 Year Swap            1.50%               4.92%                         $63.20

Rabobank                 90 Day Bill                0.76%               4.21%                         $76.00

Quayside                  3 Year Swap             1.70%               5.42%                         $86.00

ANZ                            5 Year Swap            2.00%                9.66%                        $108.45

BNZ                            5 Year Swap            2.20%                9.89%                        $103.90

Rabobank                 5 Year Swap            3.75%                8.78%                        $107.80

BNZ                            5 Year Swap            4.09%                9.10%                        $107.00 

Kiwi Bank                  5 Year Swap            2.90%                8.15%                        $102.50

Those investors holding the later perpetual securities should be mindful of their reset dates. As they get closer to resetting their interest rate, the interest rate environment at the time will have an influence on their price in the secondary market. I notice Infratil have been buying their own perpetual securities in the secondary market – generally a sign they are undervalued. For those with a bullish view on future interest rates the early perpetuals could be good buying at present. As with all investments I think the variability in these perpetual securities highlights the need to diversify your investments. If you have two or three of these in a wider portfolio of investments, chances are they won’t be causing you concern. The same may not be true, if on the other hand, you had backed only one of them.

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