Newsletter February 2010

February 1, 2010

Strategic Finance

Some Strategic Finance debenture holders may have received an offer from Marchmont Securities to buy their debenture stock for 0.10 cents for each $1.00. They cite the fact that Strategic have missed their first repayment under the moratorium, have increased their bad debt provisions by a further $106 million, and that receivership may be looming.  Whilst all this is true, the offer is clearly aiming to take advantage of vulnerable investors who fear they may not receive any money back from Strategic. Jane Diplock from the Securities Commission has warned against accepting such offers, and others have labelled it a scam. There is nothing illegal in what these people are doing, but rest assured, they are not being charitable – their aim is to make as much money for themselves as they can. They are willing to buy your debenture for 0.10 cents in the hope they will receive 0.80 cents from Strategic over the next five or so years. It is worth noting that the latest bad debt provisioning has reduced Strategic’s loan book value to below 75% of the money owed to debenture and note holders. It seems to me that Strategic has a long way to go before their value falls to 10% of money owed, and investors would be better off to let the moratorium (or receivership) run its course, rather than accept such a low offer.

The Allied Farmers purchase of the Hanover loan book has been mooted as a possibility for Strategic Finance. Hanover debenture holders selling their Allied Farmers shares today would be exiting their original investment with Hanover at approximately 0.45 cents in the dollar. Those willing to wait for a recovery in the Allied share price might achieve a better result in time. It has at least given Hanover investors some options.     

Auckland Airport

Auckland Airport is seeking to raise $126 million in order to buy into the Cairns and McKay airports. Shareholders will be offered one new share for every sixteen currently held at a cost of $1.65 per share. The offer is non-renounceable which means you cannot sell your rights to someone else. It’s a relatively small capital-raising in relation to the overall size of the company, so mathematically it will have little impact on the share price. The main driver of the share price will be opinion on whether or not buying Australian airports is a worthwhile strategy. At $1.65 I would recommend investors take up their entitlement.

Bonus Bonds

I am often asked whether or not Bonus Bonds are a good investment. Bonus Bonds started in 1970 and is a fund where investors’ money is grouped together and invested in low-risk debt securities such as Government and Local Authority bonds. The income earned from investing all bondholders’ funds is placed in a prize pool, and paid out as tax-paid prizes in each monthly prize draw. The Herald ran an article recently explaining the odds of winning money with Bonus Bonds.  If you own $6 worth of Bonus Bonds, your chance of winning the $1 million prize is eleven times worse than your chance of winning first division Lotto using a $6 ticket. Your odds of winning any prize are never greater than 1 in 9,600, so I would prefer to see people investing their money at least in low-risk securities that are going to pay a regular return. However if they bring a certain level of enjoyment I see no harm in investing small sums.

Fonterra

Fonterra is looking to raise $250 million in senior, unsecured bonds over February and March. My understanding is that this bond offer, unlike their 2009 offer, will be distributed through institutional buyers. We will have access to the stock; however buyers would have to pay brokerage of 1% if they wanted to purchase it. Please let me know if you are interested. We should know what rate they are offering in early February, and we will be able to draw a comparison with their 2015 bond which is currently selling at a yield of 6.75% (6.50% after brokerage).

Auckland City Council

Auckland City Council is considering making an offer of up to $150 million of retail bonds. The offer is expected to open in late February, and should prove attractive to those investors who are averse to risk, but are looking for slightly better returns than those being offered by the banks. The Auckland City Council has an “AA” credit rating from Standard and Poors, and the security is by way of the council’s ability to levy its ratepayers. Their 2009 bond maturing in March 2014 is paying 6.42%, and I would expect the rate on the new bond to be slightly higher than that. Other city council bonds have been very popular so please contact the office as soon as possible if you would like to reserve part of our allocation.

Meridian Energy

Meridian Energy has registered an offer document for an issue of $150 million in “Renewable Energy” bonds to the public. The bonds are offered in two tranches – a five year bond and a seven year bond. There is provision for oversubscriptions of up to $50 million to be accepted.

The main features of the offer:

  • Two maturity dates (March 16, 2015 and March 16, 2017)
  • Indicative interest rates are between 7.15% and 7.65%
  •  Interest will be paid semi-annually
  • Minimum Investment of $5,000 – thereafter in multiples of $1,000
  • Standard & Poors credit rating – BBB+
  • Closing date – February 23rd

 Meridian Energy is the largest state-owned electricity generator in New Zealand, operating hydro stations in the South Island, and wind farms in Palmerston North, Southland and Makara.

 Finance Companies

At this stage no companies have applied for the extension to the Government Guarantee. The current guarantee is in place until October 12th, 2010, and the extension runs until December 31st, 2011. We would expect to see most of the main players with the extension in place over the next two to three months. Some companies are quick to advertise the fact they are covered under the Government Guarantee, and then offer attractive reinvestment rates with maturities outside the guarantee. If you are renewing a finance company debenture, and are not sure about the guarantee, don’t hesitate to ring the office and check. Guaranteed rates currently available:

 

Company                                                       Maturity                                             Rate

South Canterbury Finance                      October 12, 2010                                8.00%

South Canterbury Finance                         5 months                                           7.00%

Equitable Mortgages                                   6 months                                           5.50%             

Marac Finance                                             6  months                                           5.00%

UDC Finance                                               7 months                                            4.80%

 

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