Newsletter June 2009

June 1, 2009


Last month’s section on bonds appears to have raised as many questions as it answered – and for my mother it didn’t answer anything at all! My mother is very intelligent, so if she didn’t understand what I was talking about, then chances are others didn’t either. Exaggeration is often the best method to explain a concept so here goes. First of all a quick look at the terms that are important when looking at a bond in the secondary market.

  • Coupon – the interest rate received for the term of the bond (does not change)
  • Price – how much you pay for the bond when it is issued
  • Yield – the return the new buyer will receive, from the time they buy the bond in the secondary market, until maturity

A one year bond is issued today with a coupon of 10%. I invest $100,000 and at maturity I will receive $110,000. The coupon is 10% and my yield will be 10%. The price I have paid for the bond is $100,000. A week after I bought the bond I desperately need my money back, so I decide to sell it to someone else. Unfortunately in the preceding week the company who issued the bond has been sued by a supplier and there is a chance they may go bankrupt. Who is going to give me $100,000 for my bond now? I find someone who likes risk and is prepared to buy my bond so long as they achieve a return (yield) of 50%. The only way they can yield 50% on a bond that is going to pay them back $110,000 in one year is to pay me $73,333 for it.  I’ve lost about $27,000 in one week and the new owner of the bond stands to make a 50% return on their money (or lose the lot if the company defaults). The important thing to remember is that different yields only arise if the bond is resold after it is issued. If you are not forced to sell, and you hold your bond until maturity, you will yield whatever the initial coupon rate was.

Swap Rates

Last month’s explanation of how the perpetual reset securities were faring in the secondary market raised a few queries about swap rates. I will look at swaps in next month’s newsletter.


Some of you will have Infratil or Barramundi warrants, so it might be timely to explain how they work.  A warrant is a security that entitles the holder to buy a share in a company at a predetermined price. Barramundi investors received one warrant for every two shares issued under the Initial Public offering in October 2006. Infratil issued warrants to shareholders in July, 2004 at no cost, and issued a second series in June, 2007. The important terms of warrants are the exercise price, the underlying share price, and the expiry date.

Infratil (IFTWB)

These warrants have an expiry date of July 10, 2009, with an exercise price of $1.62. The underlying Infratil (IFT) share price is currently at $1.66. These warrants give the holder the right to buy Infratil shares for $1.62 any time up until July 10th. If the underlying share price is above $1.62 the warrants are said to be “in the money.” If the underlying share price falls below $1.62 the warrants are worthless, and are said to be “out of the money.” Holders have two options. They can exercise their warrants and take up new Infratil shares for $1.62 or they can sell their warrants to someone else. With the Infratil share price hovering just above the exercise price recently, the warrants have some value (0.05 cents at present). Whether you sell your warrants or take them up will depend on your individual circumstances, however you should be doing one or the other. Ring the office if you would like to discuss this further.

Barramundi (BRMWA)

These warrants have an expiry date of October 25, 2009, and an exercise price of $1.00. The underlying Barramundi (BRM) share price is currently at $0.57. It is hard to see the Barramundi share price reaching $1.00 before October, so it is likely these warrants will remain out of the money. Any holders of these warrants should keep an eye on the price leading up to the expiry date. I will comment again in the September newsletter.

The KiwiSaver anniversary (July 01) is almost upon us again. Any members who have been in the scheme since last July should ensure they have deposited at least $1,043 with their provider before July. This is the most the Government will provide as a matching contribution to your KiwiSaver account. Depositing more than $1,043 per annum is OK, however you won’t receive any more from the Government. For those of you who are under 65, and not in KiwiSaver, call the office to discuss the opportunities. The Government will give you $1,000 to join and then match your contributions to $1,043 per annum, so you may as well take advantage of that.

Are we seeing the start of the recovery in the sharemarket, or is it a suckers’ rally? There are commentators with far more experience than me making varying claims, however the fact is nobody knows with any certainty where the bottom of the market is. There seems to be less bad news flowing through, however some of the unemployment data out of the US and UK is staggering. I do like to see most portfolios having an exposure to shares, in order to provide some insulation against the effects of inflation. My views on inflation have been well documented in the monthly newsletter and I think this will be a big issue over the next decade. My advice to clients seeking exposure to the sharemarket remains the same – buy in stages through 2009 and 2010 to achieve a low average price.

So what do we buy? Below are some shares that are currently favoured by the brokers that conduct our research. Any allocation made to shares needs to be weighed up with the other assets you own, the goals you are trying to achieve, and the risk you are able to take.

Income Shares
AMP Office Trust, Goodman Property Trust, Kiwi Income Property Trust
The property trusts have all suffered significant depreciation in share price, and at current levels provide very attractive yields.
Cavalier Carpets, Fletcher Building, Methven, Sky City, Telecom, Steel & Tube
These are all traditional yield stocks, however the recession is bound to affect future payments.

Growth Shares
Opus International Consultants, BHP, Leighton Holdings
Resource and infrastructure companies should benefit from world Governments spending their way out of recession.
Fisher & Paykel Healthcare, CSL, Ansell, Sonic Healthcare
Healthcare is seen as a defensive investment (it shouldn’t be affected by a recession). Often healthcare companies are selling to Government-funded organisations so a recession has less effect than if those sales were made to consumers.
Ryman Healthcare
Ryman should benefit from the huge number of people due to retire over the next thirty years.
Caledonia Investments, Foreign & Colonial Investments
The UK investment trusts are a good way to gain exposure to overseas markets. Both these trusts are listed on the New Zealand stock exchange.

The budget was released this afternoon, and by all accounts paints a fairly bleak picture. To me the Government’s books are a reflection of the average New Zealand household – too much debt. The alarm bells should be ringing for anyone retiring from 2020 onwards, as it is unlikely we can continue to afford current levels of superannuation. (In 2000, there were approximately nine taxpaying workers for each retired pensioner. In 2050, there will be only three tax-paying workers for each retired pensioner). KiwiSaver, and the Government Superannuation Fund were set up to address this problem, however it is clear to me that we are going to have to take more responsibility for our own retirement needs. The age of eligibility will increase; the entitlement will decrease, and at some stage they will bring back asset testing.

Fixed Interest
BNZ Income Securities has issued a prospectus seeking to raise $250 million. The offer is for perpetual shares, and has a similar structure to the recent Rabobank issue. The rate is reset every five years at 4.09% above the five-year swap rate.

  •     Initial dividend rate of 9.10%                        First rate reset date – 28 June 2014
  •     Dividends paid quarterly                               Minimum investment of $5,000
  •     Standard & Poors credit rating of A+          Closing date 23 June, 2009

Works Finance has issued a prospectus seeking to raise $100 million (with $50 million of oversubscriptions). They are offering a three-year unsubordinated bond based on the three-year swap rate, plus a margin to be determined on June 02. The minimum rate has been set at 8.75%.

  •     Minimum interest rate of 8.75%                  Maturity date – 15 September 2012
  •     Interest paid quarterly                                   Minimum investment of $3,000
  •     Standard & Poors credit rating of BBB-     Closing date 24 June, 2009

The finance companies all offer special rates at various times. Most are based around the Government Guarantee and most offer better returns than those available at the banks. UDC is currently offering 4.70% for 14 months.


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