Newsletter April 2009

April 1, 2009

We have had a wealth of fixed interest opportunities to choose from over the last nine months. I have no concerns about their quality, however I would caution all investors to think about the proportion of their funds allocated to what may be considered very similar securities. Here is a summary of the bonds we have had available recently:

 Bond                                              Interest Rate                                    Maturity

Marac Finance                                 10.50%                                           July 2013

Auckland Airport                                8.00%                                            November 2016

Tauranga City Council                     7.05%                                            December 2013

PGG Wrightson Finance                  8.25%                                           October 2010

South Canterbury Finance              8.00%                                            October 2010

Trustpower                                        8.40%                                             December 2015

Fletcher Building                              9.00%                                             May 2014

Fletcher Building                              9.00%                                             May 2016

Wellington Airport                             7.50%                                            November 2013

Fonterra                                              7.75%                                            March 2015

Tower                                                  8.50%                                            April 2014

Auckland City Council                     6.00%                                             March 2014

Contact                                               8.00%                                            May 2014

For most retired investors fixed interest is the primary source of income, outside any superannuation payments. Theory tells us we are more averse to risk as we age, and that we seek lower risk investments in retirement. I agree with this in part, however I won’t bore you again here with my views on the evils of inflation. The point I want to make here is that you should look at the maturities of your fixed interest investments when you are considering the various offers. Try to avoid having a large proportion of your fixed interest maturing at the same time as this can expose you to the risk of sudden changes in interest rates. In an ideal world you would aim to have investments maturing every four or six months to smooth out any such changes.

Babcock and Brown

The attempt by Babcock and Brown to restructure their subordinated notes failed, and the company has subsequently appointed an administrator. I don’t receive documentation directly from the administrator, however I can access it from their website so I will endeavour to stay informed about what is happening. The Babcock and Brown collapse has had an inevitable effect on the debt securities of its subsidiary BBI Networks. They have two securities listed, BBN010 (Sparcs) and BBN020, which are trading between $20 and $35 per hundred. Whether they can sell enough assets to repay these bonds is yet to be seen. The sale of 58% of Powerco for $423 million is a good start.

Bluestar Print

Very few sales of Bluestar Print bonds have occurred since the company injected more cash. Currently buyers are offering $35 per hundred for the bonds. Bluestar’s half-year results showed revenues of $304 million with after-tax profit of $25.8 million.


Nuplex shareholders would be extremely disappointed with the dilutionary effect the recent capital-raising has had on their share price. Holders of Nuplex capital notes, however, should be happy to see extra equity ranking behind their debt. The last sale of notes went through at $65 per hundred, a heavy discount, however no “Babcock and Brown.”

Difficulties such as these are always reflected instantly in the price of a company’s securities. The dilemma for investors is whether or not to sell out at such discounted prices. Hindsight is a wonderful thing, and Babcock & Brown investors would have happily sold last year at $50 per hundred now that their notes are worthless. Selling at a loss is one of the hardest investment decisions to make, however you must take the “sunk costs” (what you paid) out of the equation. Your question should be, “What is the best use of this money from today onwards?” Is it best left where it is? (hoping for a recovery in the price) or is it best cutting my losses and salvaging what I can? Unfortunately hindsight alone answers these questions fully, however not selling a security simply because its value is less than you paid for it is irrational.


I am fielding a large number of enquiries regarding ING. They have been in the news recently because of two fixed interest funds that have failed resulting in losses to investors. These funds were sold through ING and ANZ advisor networks as low risk investments, however turned out to be anything but. You should note that these funds have no connection (other than the manager) to the ING Property Trust listed on the stock exchange. 


UDC Finance is offering a special debenture rate of 5.00% for 18 months. This is valid until April 12, therefore falls within the Government Guarantee. The rate compares favourably with the trading banks who are offering 18 month rates of between 3.00% and 4.50%. UDC has a Standard & Poors credit rating of AA.


NZ Post

NZ Post Group Finance has issued a prospectus seeking to raise $150 million of unsecured, subordinated notes (with the right to accept $50 million in oversubscriptions).

  • Initial interest rate of 7.50%                                          Maturity date – November 2039
  • Interest paid semi-annually                                            Minimum investment of $5,000
  • Standard & Poors credit rating of A                             Closing date 22 April, 2009

The 7.50% return is the benchmark rate (5 year swap rate – 4.70%) plus the margin (2.80%). The very long term (30 years) is an obvious cause for concern, however NZ Post will conduct a remarketing process every five years that affords holders certain options. I will attempt to explain it simply here:

In 2014 (and five-yearly from then until maturity) NZ Post will offer new terms for the notes. Note holders will be given the opportunity to:

(a)    ask for repayment

(b)   stay invested regardless of the new terms of the notes

(c)    stay invested only if the new terms meet criteria you set

For the remarketing process to be successful, NZ Post must receive at least 25% responses under categories b and/or c, above. If the remarketing process is unsuccessful, holders are forced to continue holding their notes. If this happens the margin paid above the benchmark rate will be increased by 1.00% for the next five year period. There is clearly potential for this to become a long-term investment, however every five years you can ask for your money back, or be compensated by a further 1.00%.



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