Newsletter December 2008

November 28, 2008

I am sending this newsletter a few days early due to the number of fixed interest opportunities available at present. If any of the bonds mentioned in the newsletter are of interest to you please let me know as soon as possible so I can put our bid in for them.

As we predicted, fixed-interest yields have tumbled throughout November. High quality bank bonds are now trading between 6.00% and 7.00%, and there are very few opportunities to achieve the 9.00% yields that were available only a few months ago. The sharp decline in yields is due to the expectation of further rate cuts by the Reserve Bank on December 4th. Some commentators are predicting a 1.50% cut in line with other central banks around the world as Governments attempt to shield economies from recession.

More institutions have been granted the Government Guarantee through November, and investors in Marac, South Canterbury Finance, Allied Nationwide Finance, UDC, and the Wairarapa Building Society can sleep easy knowing their investments carry no risk through to October 12, 2010. My concern is how the Government manages the withdrawal of the guarantee in two years time, and what effect that will have on investor behaviour. My advice to clients who are investing in financial institutions they would otherwise not have invested in is to ensure their deposits mature before October 2010.

The following table gives an indication of how far interest rates have dropped:

Security                                                   Maturity               Rating             Yield      Price/$100

UDC Finance                                       18 months                 AA                 6.20%

South Canterbury Finance                 18 months               BBB-             7.00%

Marac Finance                                     18 months                BBB-             6.50%

Kiwi Bonds                                           All terms                    AAA              5.25%

BNZ Income Securities (PIE)            Perpetual                    A+                                    $109.30

ANZ Perpetual Bonds                         Perpetual                    A+                                    $109.50


PGG Wrightson Finance

Our allocation of PGG Wrightson bonds is full – there is a public pool so we can still accept applications, but cannot guarantee they will be accepted.

Fletcher Building Finance

Fletcher Building Finance is making a public offer of $100 million of capital notes with the ability to accept $100 million oversubscriptions. The capital notes will be issued in two series – May 2014, and May 2016. The interest rate initially being offered is 9.00%. Fletcher Building Finance may, at any time prior to the closing date, without prior notice, change the interest rates it offers, other than for those capital notes for which applications have been accepted at the date of the interest rate change.  

The capital notes are unsecured, subordinated debt obligations of Fletcher Building Finance. The capital notes are guaranteed on an unsecured, subordinated basis by Fletcher Building Limited. Fletcher Building Finance and Fletcher Building Limited have covenanted that they will not pay dividends in respect of their respective ordinary shares while interest on the capital notes remains outstanding. The offer may remain open until 31 March, 2009 or such earlier date that Fletcher Building may determine.

Capital notes differ to bonds in that the company can elect to pay investors back at maturity in shares rather than cash. This provides some comfort to banks that have lent the company money. Capital notes also usually rank below other company debt, so you would be further down the queue in the event of a company failure. When investing in a security such as this you are relying on the underlying company (Fletcher Building) to perform well throughout the term of your investment.

These capital notes will be of interest to those of you who have GPG Finance, Trustpower, or Burns Philp Finance maturing in December. They are a similar type of security, carrying similar risk.

Genesis Energy

Genesis Energy Limited has registered a prospectus for an issue of unsecured, unsubordinated fixed rate bonds. The offer is for $150million (plus up to $75million of oversubscriptions). Two maturities are available (15 March, 2014 and 15 March, 2016) and the indicative rates are between 7.00% and 7.75%.

The rates will be set on December 1st, and the offer will be closing on December 19th.

South Canterbury Finance

South Canterbury Finance is considering making an offer of up to $75 million of first ranking, fixed rate, secured bonds with up to a further $25 million available by way of oversubscriptions. South Canterbury Finance has a guarantee under the New Zealand retail deposit guarantee scheme.

The bonds mature on 8 October 2010 and will pay interest of 8.00%. South Canterbury Finance has the right, at its discretion, to extend the term of the Secured Bonds by up to 12 months to 8 October 2011 in the event the Deposit Guarantee Scheme is extended by the Crown for at least a corresponding period.

Previous South Canterbury Finance bonds have sold out in days, and with the backing of the Government Guarantee this is likely to be the case again.



Finance Companies

St Laurence

St Laurence’s recapitilisation plan is finally with investors, and voting papers need to be in by December 3rd. St Laurence are aiming to repay 70% of debenture-holders’ principal and interest by December 2013, with the remainder paid back as and when they are in a position to do so. It seems a very long repayment scheme to me, however I do believe St Laurence (with significant capital injections from its shareholders) is better placed to recover investors’ funds than a receiver.


The Dorchester deferred payment plan is due out this week. They hope to repay investors’ principle over a three-year period, and will possibly pay 20% of that principle prior to Christmas.


Strategic are (again) working with their trustee on a plan to restructure the company, and hope to have something to put to investors before Christmas. Like St Laurence, I believe the Strategic management are better placed than a receiver to recover money for their investors.

Credit Ratings

The ratings you see assigned to the debt securities in this newsletter have nothing to do with my personal view of the company – they are ratings assigned by a credit ratings agency. The ratings represent the probability of a company defaulting on its obligations. Below is the Standard & Poors’ rating scale.

Rating                         Estimated Probability of Default Over an Average One-Year Period

AAA                                                                0.00% – 0.01%

AA                                                                  0.01% – 0.02%

A                                                                     0.05% – 0.10%

BBB                                                               0.20% – 0.40%

BB                                                                  0.60% – 1.60%

B                                                                    3.00% – 11.00%


CC                                                                25.00% – 30.00%


Ratings provide a good comparison between companies, but like any research, are based on historic information.


The sharemarket continues to take its lead from the United States and Europe, and we are seeing unprecedented volatility. Sometimes this volatility is on very low volumes, which distorts prices. My advice to buyers of shares hasn’t changed over the last six months – that is to buy in stages rather than try and time the bottom of the market. The NZSX50 has dropped 38% since October 2007. I am confident that buyers of quality shares at current prices (provided they have a long-term view) will not regret their decision.


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