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.
PLEASE CALL OUR OFFICE AS SOON AS POSSIBLE IF YOU ARE
INTERESTED IN ANY OF THESE SECURITIES
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.
Dorchester
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
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%
CCC
CC 25.00% – 30.00%
C
Ratings provide a good comparison between companies, but like any research, are based on historic information.
Equities
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.
Fixed Interest October 2008
October 15, 2008
Fixed Interest Opportunities
The turmoil in the global financial markets has seen governments around the world taking action to ensure the stability of the banking system. Most central banks have been slashing interest rates in an attempt to stimulate the economy, and we are now seeing governments’ guaranteeing bank deposits.
Yields are falling, and look set to fall further by the end of next week. Some are predicting a one percent lowering of the Official Cash Rate to 6.5 percent on October 23. Most economists are predicting the Official Cash Rate will be below 5 percent in 2009. Those of us with money at call or on short-term deposit at the bank are going to be receiving significantly less for our money from now on.
The Government guarantee on deposits includes finance companies and building societies. They had to be included to avoid people withdrawing their money en masse and shifting it to the banks. So we now have a bizarre situation where you can invest with Marac or South Canterbury Finance at 10 percent, and enjoy the same security as a Government Bond paying 5.75 percent. I can’t see the finance companies holding these rates for long, so my advice is to take advantage while you can. Marac, South Canterbury, UDC and Allied Nationwide have all applied to the Government to be covered under the scheme, and we are in touch with them on a daily basis as this develops.
CAUTION
- The fundamentals should not be thrown out the window
- Bank deposits should still form some part of a fixed-interest portfolio
- Choose companies that were sound before the Government guarantee
- Retain funds at call for emergencies and to take advantage of future opportunities
- Don’t invest too much money with any one company
For those of you averse to the finance company sector (even with a Government guarantee) there are still some good secondary market opportunities available. The ANZ perpetual bond paying 9.66% until April 2013 is currently selling at $102.50 per 100.
Please call the office and discuss further if you want to take advantage of these opportunities.
Newsletter October 2008
October 1, 2008
The Global Credit Crisis
Currently as each month passes we hope for a catalyst in the financial markets that will provide some sort of return to normality. Unfortunately as each month passes we get more bad news from overseas. Investor confidence is probably at its lowest levels since 1987. The U.S Government has bailed out Freddie Mac, Fannie Mae, and AIG, Lehman Brothers has filed for bankruptcy, Lloyds is set to buy the Halifax Bank of Scotland, and Merrill Lynch has bought the Bank of America. Now the U.S Treasury is contemplating a $700 billion bailout of the financial markets. The proposed plan would have the Treasury buy up bad mortgage-related debts from financial institutions, and is designed to restore confidence in the markets. I wonder how the recently-ejected U.S homeowners feel about their tax dollars being used to help rescue the very institutions that have just kicked them out of their house.
Any return to normality needs to start with the lending practices of the banks. Over the last few years we have seen the US banks prepared to lend 100% (sometimes more) to fund the purchase of property. This is fine if you can guarantee the value of the asset being funded will keep going up, but not so good when values are falling. Anyone who has owned property over a long period knows values can and do fall. Sure, the long-term trend is one of rising prices; however property is just as cyclical as most other assets and we are currently experiencing a correction. The increase in property values over the last six or seven years has led to a certain amount of complacency amongst bankers and consumers. Homeowners have been funding new cars, overseas holidays and increased personal expenditure on the back of the value of their home. What happened to the days when you saved up to buy something?
I don’t believe this complacency is limited to homeowners. In my opinion, the prices being paid for farmland are far removed from their capacity to generate income. Borrowing millions of dollars to generate a one to two percent (income) return seems very risky to me, and there seems to be an inbuilt presumption of continued capital gain amongst some farmers and farm lenders.
KiwiSaver
The Government’s KiwiSaver scheme has been in place for over a year now, and in its current form, should be taken advantage of. The incentives offered by the Government are too good to ignore and anyone under sixty-five should sign up if they haven’t already done so. Here are some of the key points of the scheme:
- Participation is voluntary
- The Government will give you $1,000 when you join
- The Government will pay $40 per annum towards your scheme’s fees
- The Government will match your contribution up to a maximum of $1,043 per annum, provided you are over 18 years of age
- Employees must contribute either 4% or 8% of their gross pay
- Employers are required to contribute to an employee’s account, starting at 1% in 2008, building to 4% in 2011
- All contributions are locked in until you are eligible for government superannuation (currently 65), or for five years, whichever is the later
- Withdrawals may be allowed – financial hardship, serious illness, emigration
- After three years you are allowed to make withdrawals to contribute towards your first home
- Housing New Zealand will offer a first home deposit subsidy of $1,000 for each year in the scheme, up to a maximum of $5,000
- You can take unlimited contributions holiday after you have been a member for one year
I advocate using KiwiSaver solely for the Government benefits on offer. I suggest people contribute the minimum amount required ($1,043 per annum) to get the maximum benefit from the scheme.
Those of you who are employees need to weigh the advantage of the Government and employer subsidies against the requirement to contribute 4% of your wages to the scheme each year. Once your gross earnings are over $26,000 the incremental benefit of contributing to the scheme is limited to the contribution you are receiving from your employer, because the Government will only match your contributions up to $1,043 per annum.
If you are unsure of the implications for you, please call the office and I can go through it with you. We have KiwiSaver investment statements for ING, Gareth Morgan, and Fisher Funds.
Fixed Interest
Yields continue to fall with the expectation of further rate cuts by the Reserve Bank. Most commentators are predicting the Official Cash Rate to be at 6.50% by the New Year. Unfortunately there have been no new high quality fixed interest offers in the last couple of months, so the secondary market or the finance company debenture market has been the only means of sourcing longer-term fixed interest at better than bank rates. My advice to those who are holding larger than normal amounts of cash in bank call or term deposits is to look at seeking some long-term fixed interest before the end of the year. Fisher & Paykel and Ports of Auckland may be seeking to raise some money, so I will let you know if and when that happens. Other opportunities include:
Security Maturity Rating Yield Price/$100
Kiwi Bonds 6 months AAA 6.00%
1 year AAA 6.00%
2 years AAA 5.75%
UDC Telephone Call A/C At Call AA 7.85%
UDC Term Maximiser (PIE) 1 year AA 7.80%
South Canterbury Finance 3 years BBB- 10.00%
BNZ Income Securities (PIE) Perpetual A+ $105.40
ANZ Perpetual Bonds Perpetual A+ $105.00
Rabobank Perpetual AA $99.20
Origin Energy Perpetual BBB- $94.00
Shares
The volatility in the US and European markets is reflected in our market on a daily basis. For those of you brave enough to enter the markets my advice is to buy in stages – don’t try and time the absolute bottom of the market.
Man Investments (OM-IP) and Liontamer offer capital guaranteed investment opportunities, and have both gained a very good reputation based on past performance. We will look at these opportunities in more detail next month and explain how they manage to offer a capital guarantee. For anyone interested in these investments in the mean time please phone the office.