Market News 30 November 2009

The global financial market is a living thing. It has a heart rate. Not one that you can monitor for consistency on an ECG but one that changes to reflect the mood or the strengths and weaknesses of the time. 

 

It displays emotions. It thinks and makes decisions. It is seldom forgiving and can, on occasion, be pointedly nasty and dangerous. Its surname is Darwin.

 

The financial market pays no respect to the 'buy and hold' strategy.

 

It is of course a confluence of millions of personal inputs which you have no hope of understanding in isolation. So, you must monitor the collective signals. The financial market.

 

To keep yourself safe (with help from your adviser) you must research, analyse and look forward. Try to forecast changes or spot the weakest amongst the herd of options, then stay well clear.

 

I haven't written this to frighten investors only to encourage them to always keep one eye on the financial market(s). We are all watching when it becomes most active but you should keep one eye on it while it sleeps too.

 

Code willing, we'll be here to help.

Investment Opinion

Hanover & Allied Farmers - If this proposal is approved Hanover's investors will receive shares in Allied Farmers (NZX listed as 'ALF'). By way of example only, if ALF shares trade at $0.25 at the time and a Hanover debenture investor was offered $0.70 value they would receive 2.8 shares for every $1 originally invested in Hanover. Under this scenario an investor owed $10,000 by Hanover, now valued at $7,000, would receive 28,000 shares in ALF.

 

It is very likely that after ALF shares are issued to Hanover investors the share price will fall. This is because some Hanover investors will see a sale as an opportunity to convert a frozen asset back into cash, albeit less cash than they originally invested and probably less than Allied will recover from Hanover's assets. Many very elderly Hanover investors would prefer anything now, to a greater sum later.

 

If the ALF share falls from $0.25 to $0.15 the implication is that the seller at $0.15 is accepting an exit from the $10,000 original Hanover investment at $4,200 (plus cash already received). They would be choosing to do so regardless of asset valuations, currently at $7,000 for the $10,000 invested.

 

New investors will be expecting this behaviour and will not buy ALF shares until they believe the share price has fallen (been pushed) to levels that offer an excessive discount to the likely recovery from Hanover's assets. These new investors will provide market liquidity but they will not do so at 'fair' or 'premium' prices. 

 

The majority of Hanover investors agreed to a moratorium and its very slow repayment profile. If the ALF offer goes ahead, and you have sufficient cash on hand, the wise thing to do would be to retain the patience provided under the Hanover moratorium and watch Allied as they work on asset recoveries.  Note that ALF may also generate profits from their other businesses. Whatever cash it recovers will be real cash to strengthen ALF and ultimately will underwrite the share price.

 

If you vote for the Allied proposal it should be because you believe they will extract better value for you from the Hanover assets. In believing that, and by retaining your prior patience (albeit enforced) you should be willing to hold your ALF shares and monitor their progress.

 

I accept that each investor has different needs for cash and different views about what can be extracted from Hanover's assets but trying to hold ALF shares as long as possible seems likely to deliver the best outcome in my view.

 

I am certain of one thing. The market will not pay you what you want or expect for your shares in the immediate future.

Investment News

Financial Advisers Act - ***important notice*** We encourage all public investors to get involved in the development of the Code of Conduct for Financial Advisers.

 

The latest paper covers 'Minimum standards of ethical behaviour and client care' and can be downloaded from the left side of their website. 

 

Again, we encourage all public investors to read it and make submissions about what they expect from their financial adviser. I happen to know that the Code Committee are very keen to receive submissions from the public. They want to understand how some of the proposals will affect you in practical terms. This code is going to have a significant influence on the service delivery to you in future so it is very important that you contribute to its definition.

 

There are some good rules proposed but there are also aspects that we are not comfortable with and do not believe are beneficial to our clients. We will make submissions and once complete we will load them to our website with our other submissions.

 

If you prefer not to make submissions but would like some of your points heard you are welcome to email us. With your permission we will attach such emails as appendices to our submissions (not displayed on our website).

 

Specifically we would be interested in hearing your thoughts on the following concepts:

 

If all advisers were forced to charge clients via time based invoices or annual portfolio fees (under a scenario where commission, brokerage etc is banned);

If a client must sign a waiver when they do not disclose the full and accurate details of their portfolio before receiving advice; If all advice must be given in writing; Signing a consent if you do not wish to go through a 'suitability analysis';

Being asked to sign a waiver (about consulting with another adviser) if the first adviser was deemed not to be independent by the Act;

How to define whether an adviser is independent or not?

 

If commission/brokerage is banned it seems unlikely that we, or any sharebroker, could provide you with the advice and transactional service the way we have in the past. How would this impact the way you access investment advice in future?

 

Would the introduction of rules like these improve the quality of the investment advice you receive?

 

The Code Committee are very keen to hear feedback on the practicality of their proposals. We'll make submissions about how changes will impact our business and thus you, but it is very important that they hear from the public too.

 

Reminder notice -  that the committee is holding public meetings as follows:

 

Christchurch, was today (we are keen to hear any feedback if you attended)

Wellington, tomorrow, 1 December, 8.30am - 11.30am, ***Venue Change to*** Te Aro 3, Level 4, St. Johns House, 114 The Terrace

Auckland, 2 December, 1.00pm - 4.00pm, at the Quality Inn Westend (465 Great North Rd, Grey Lynn)

 

The Wellington venue change was due to a smaller than expected audience which is disappointing news.

 

If you can spare the time you are encouraged to attend. You should email and RSVP to  consultation@financialadvisercode.govt.nz.

 

I will attend in Wellington.

 

Bank Hybrids - Both S&P and Moody's have commented that they expect to reduce the credit ratings that apply to hybrid securities issued by banks. 'Hybrid' securities are usually issued to meet the test for use as Tier 1 capital (equity) on a bank balance sheet and include the various perpetual securities on issue in NZ.

Weaker credit ratings would result in higher credit margins and therefore higher nominal interest rate costs in future on these securities. This suggests that the perpetual bank securities in NZ should not trade far above a capital price (excludes accrued interest) of $100, and some should trade below that. Be patient if you are a buyer.

S&P is re-assessing bank capital on the basis of hybrid securities being less effective as capital, in their opinion. Their findings have lead them to conclude that most banks need more equity capital to further strengthen their businesses. 

Higher costs from hybrid securities and less influence with credit rating agencies should mean more rights issues or equity placements from banks when they need to boost Tier 1 capital in future.

We are very comfortable with the bank perpetual securities being used by clients. For diversity reasons we encourage clients not to let holdings of perpetual securities become too large as a proportion of a portfolio.

ANZ - I see they have sold their custodial business. Capital re-allocation at work.

Dubai World - The same old story that exposes one to an increased risk of trouble - too much debt. So now a 'whole country' is calling for a moratorium for its major business interest. It will be interesting to see how the bank lenders react to such a request. Delayed repayment, provision, doubtful debts and write offs will have the affect of reducing the equity position of banks that are involved. 

In NZ many finance firms found themselves in trouble because when they had too much cash they went hunting for borrowers and agreed to weaker security positions. Are the banks guilty of the same thing, believing that all Middle Eastern nations were over-flowing with oil money? Only to find that Dubai wasn't.

This story sees me running up the flag of concern a little higher. It reminds me that last year we believed it might be at least three years before real savings begin to reduce the inflated debt positions of many around the world. We must watch this story very closely to see if it stabilises or kicks off a damaging round of financial dominoes. 

A reminder of our current opinions for investing: Every new investment should strive to make a portfolio stronger than it was before. 

Chocolate rush - the passion factor in chocolate is getting addictive. The great race to buy Cadbury has expanded to include Hersheys, KRAFT and Nestle. Consolidation led by the most powerful seems to be re-appearing in financial markets.  What do you own that someone else may want to buy? This is a speculative comment, but if F&P Healthcare are best of breed and others are finding it hard to compete maybe the answer is to buy them? Please do not buy FPH based on this comment. I offer it solely to highlight that if a large, financially strong, company wishes to increase its scale or resolve a weakness in its own business they may prefer to buy a competitor rather than build from the ground up.

DNZ Property - We have asked about the DNZ property offer. We have not been involved but one person kindly dropped in the documents for us to read. Note that there has been a share consolidation prior to this offer. The IPO treats current shareholders very poorly in our opinion. DNZ's need to raise funds reflects their high debt levels (48%) and likely pressure form their banks to reduce these debts. 

The transaction will benefit the banks (reduced risk), and those that currently own the lucrative management contract (Duffy, Hassell). DNZ managers and owners appear to have built a business that benefited them significantly more than the public shareholders. Current shareholders will be diluted and lose significant value as a result of this transaction. DNZ is not offering rights evenly to all shareholders. You know our view on rights issues versus placements when price dilution is the result. 

The net affect of this transaction seems to destroy a significant amount of value for current shareholders in DNZ.

We will not be participating. Nor will we be recommending DNZ in future given its poor treatment of existing shareholders.

We encourage DNZ investors to read pages 69-85 of the offer document for the summary provided by PricewaterhouseCoopers. 

SCF - SCFHA perpetual notes have recently traded from $30 to $60 (per $100). Who knows something? SCF has publicly stated their intentions for adding capital to its business with support from both Allan Hubbard and external investors but this was known when the shares traded at $30. No doubt the 100% price increase will prompt a 'please explain' notice form the NZX? Maybe clients urged to sell by their advisers will also issue a 'please explain' notice.

Brick of Healing - In our pursuit of useful information (economic in this case) I donned a floppy towling hat and sat in a plastic chair at Wellington Airport (WIAL) car park counting cars (please be serious - Ed) OK, it wasn't a towling hat. That bit was just to embarrass my kids and the data was actually provided to me by the company for which I am very grateful (as are the kids - Ed). 

It may seem like a strange topic but stay with me for a minute. The request started with noticing that my recent flights had typically been quite full. I wondered if I could turn this anecdotal evidence into real evidence of economic improvement in NZ. I figured that Wellington was a major hub in NZ so if more people were on the move again it would be a good sign regardless of whether it was business or tourism based.

Well, it turns out that car park movements at WIAL do display a gradual rising trend in activity from the lows of December 2008 (57,000) until today (77,000). People are being more careful with spending because premium parking use is down as a proportion, but also rising again. We hope the rising trend continues and confirms ongoing growth for the economy.

Investment Opportunities (No shortage!)

Trustpower -  offer of senior bonds for 5 year at 7.60% and 7 years at 8.00% is open now and closes on 18 December (a short time frame so please act promptly if you wish to participate). The bonds will repay in cash at maturity. We have an allocation and view the offer as being reasonably attractive, especially the 7 year term at 8.00%. Please review your portfolio for holdings of Trustpower and Infratil when considering this offer.

When calling for an allocation please define the term you wish to invest in.

The investment statement has been loaded on our website. We expect hard copies shortly. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Goodman Property Trust - offer of senior secured (against GPT properties) 5 year bonds. GPT bonds have a BBB+ credit rating from S&P. The interest rate will be set on 14 December at the swap benchmark rate +2.00% credit margin, but cannot be lower than 7.75%.  The bonds will repay in cash at maturity. The issue is open now and closes on 10 December. Investors require an allocation to participate in this issue.

The investment statement has been loaded on the Current Investments page and we have hard copies available. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Public Infrastructure Partnership Fund - Morrison & Co intends to offer the public access to invest in the PIP Fund early in 2010. Initial descriptions of the intended property assets, tenants and returns make us very interested on behalf of our clients.

Of significant interest are the expected returns and, more importantly, the inflation adjusted rental agreements that are proposed. The initial limited information available leads us to believe this investment is likely to suit both fixed interest investors and those concerned about inflation. Inflation adjusted pricing of the income stream should provide a much lower risk inflation protection for investors than a portfolio of assorted shares or properties.

We have started a mail list because we anticipate our participation in the PIP Fund. If you wish to join the mail list please call, email or use the online form.

Synlait - for the moment this offer has been cancelled. The demand we saw was high and not consistent with the press release from the company. We shall continue to maintain our mail list. It is clear that Synlait will return to the market, possibly in the first quarter of 2010.

University of Canterbury - closed today. Thank you to all those who participated. We'd also like to thank the university for agreeing to come to market and offer bonds to the public from a completely different sector.

Auckland Airport - closed on Friday.

Meridian Energy - We continue to build our mail list in the faint hope that Meridian offers a sensible interest rate on their longer term product next year. We have hard copies of the current investment statement and the soft copy is loaded on the Current Investments page of our website.

Transpower - expects to issue bonds early in 2010. The bonds will be long term (5 years +). Transpower has a "AA" credit rating from S&P. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

I am in Auckland on 8 December. Chris is in Christchurch and Timaru between 15-16 December. Please call or email if you would like an appointment.

Michael Warrington

Senior Consultant Projects Resources Limited

Special Note: The meeting for Hanover and United investors to vote on the Allied Farmers proposal will be at the Ellerslie Race Course Convention Centre in Auckland on December 16th.

Please note that Edward will attend this meeting and can act as proxy for any investors who do not wish to attend. Edward will either vote as instructed, or will vote where he is given discretion. Auckland clients are welcome to introduce themselves to Edward. He is an important part of our team.

This meeting overlaps with Chris' trip to Christchurch and Timaru seeing clients and then SCF directors and executives.

Chris Lee

---

Market News 23 November 2009

Marie thinks there is a problem with me dispensing investment advice. (The list is longer than that buddy - Ed)

I stay up too late.

She's been walking around the house tutoring me: ‘Early to bed, early to rise, makes... ‘

I wonder if this counts as ongoing education for the new Code of Conduct for Financial Advisers?

Investment Opinion

More compliments for ASIC - I must stop complimenting Australians or I may put my NZ passport at risk. However, another piece of excellent work has emerged from the Australian Securities and Investments Commission (ASIC), or an evolution of excellent work. Last week I read Consultation Paper 123 (CP123) on the ASIC website that discusses tightening the demands they place on debenture issuers in Australia. We were introduced to it by an alert member of NZ financial markets (Gordon Rail) for which we thank him. 

We strongly encourage our Securities Commission (SC), NZ investment advisers and NZ investors to read this paper. We also encourage the management of our Non Bank Deposit Takers to read it too.

CP123 highlights the sort of information that we seek for our clients, especially from NBDT, and will continue to do so. Namely - Equity, Liquidity, Investment rollovers, credit ratings, loan portfolio, related party transactions, valuations, loan to value ratios. In addition to these we like to understand as much as possible about governance and management of an NBDT.

For the moment, I doubt the the SC will pick up this approach from ASIC and apply it here in NZ. (I hope I am wrong) Perhaps if a large enough group of investment advisers request this information, as a condition of assessing which NBDT they will present to investors, then this framework might develop in NZ because consumers demanded it (rather than waiting for the regulator). 

You may recall we have referred to the fact that having NBDT reporting under a RBNZ framework will progressively reduce the risk of this sector to investors, relative to history. Well, if the investment advice sector regularly sought, received and understood the items from the ASIC report there would be a further reduction in risk for investors. This reduction would be both via improved skill at an advice level and reduced risk from the NBDT who would be more sensitive to investor reactions when observing the data.

The same logic applies to understanding the risks that exist within bank business, albeit that they deliver strong results on several of the measures (liquidity, rollovers, credit ratings and loan portfolio) Some of you may think they should also win on related party transactions but then again the IRD may disagree with you, as may the courts.

We have been known to 'recommend' things before, sometimes 'urge' but I don't recall 'strongly encouraging' before.

We suggest you find time to read it.

Managing investment documents - Direct investors receive regular paperwork regarding their investments. We believe investors are wise to maintain several files for these papers. We would suggest separate folders to file the following, in date order: 

- Records of your investment assets, such as holder statements (Computershare, Link Market Services), certificates, confirmation of deposits, properties etc.

- Records of the income received. We would suggest dividing these up into separate tax years.

- Records of transactions such as buy or sell contract notes or perhaps notes about new issue investments that you have participated in.

- Bank statements.

Investors are encouraged to always have a summary list of their investment portfolio as a good way to maintain an awareness of what is held. This is necessary to support each future investment decision. We have an example portfolio in excel if anyone would like assistance with a simple format to follow. If you would like a copy please email us.

Investment News

Financial Advisers Act - The Code Committee has released its next document for consultation. This paper covers 'Minimum standards of ethical behaviour and client care' and can be downloaded from the left side of their website. 

 

Again, we encourage all public investors to read it and make submissions about what they expect from their financial adviser. This code is going to have a significant influence on the service delivery to you in future.

 

There are aspects that we are not comfortable with and do not believe are beneficial to our clients. We will make submissions and once complete will load them to our website with our other submissions.

 

I am very pleased to see that the committee is holding another round of public meetings as follows:

 

- Christchurch, 30 November, 8.30am - 11.30am, at The Christchurch Club (154 Worcester St)

- Wellington, 1 December, 8.30am - 11.30am, at the Spectrum Theatre, BP House (Cnr Customhouse Quay & Johnston St)

- Auckland, 2 December, 1.00pm - 4.00pm, at the Quality Inn Westend (465 Great North Rd, Grey Lynn)

 

If you can spare the time you are encouraged to attend. I will attend in Wellington.

 

Withholding Tax - Market News strikes again. (Dreamer - Ed) The IRD seems to be backing away a little from its proposals regarding application of the new WHT levels after 1 April 2011 (the date when 38% would have applied for any investors that had not re-confirmed they wish to have 21% withheld). We'll keep you posted.

Hanover & Allied Farmers - If you are an investor in Hanover (or United) your primary concern, and thus driver of decisions, remains ‘who will return the greatest proportion of my money?’ 

Your decision should not include the emotional content from many regarding Messrs Hotchin and Watson, such as appears in the entertainment pages of the Sunday Herald where Paul Holmes says he cannot understand such investments but then believes he can condemn the offer. 

To date Hanover has met the terms of its moratorium and the trustee has concluded that receivership is not currently necessary. The market value of the assets has declined but this fact remains true regardless of which party is in control, and it does not imply that the moratorium has produced less than a receiver.

One commentary called for statutory management. I doubt this will happen because I believe the government would prefer businesses to resolve their own problems, within the laws available.  They are likely to conclude that investors voted on the moratorium, with the benefit of advice from many sources. Now those same investors are faced with another decision and they should seek as much advice as possible about the options before deciding.

Chris has commented on the situation (Taking Stock) based on the early information. As more detail comes to hand we will develop our opinion. We look forward to the Grant Samuel report on the offer. Prior to any vote we will write to our clients that held Hanover investments with our opinion regarding the vote(s).

One thrust of opposition is likely to come form those who claim investors should not agree to convert from being a lender (fixed interest investor) to a shareholder (owner) of the asset because a lender ranks ahead of an owner. I would respectfully suggest that lenders to Hanover already 'own' the problem and repayment of capital is dependent on the business assets and their performance. 

So, the proposed shift across to Allied as a shareholder is not as significant a step as it may seem. Chris will be publishing some analysis demonstrating the effect of loan recoveries on Allied's share value (but not price).

It is absolutely true that if Hanover investors agree to become shareholders within Allied this is a significant benefit to the strength of Allied's business. However, I ask readers to revert to the question in the opening line.

Next week I'll write a paragraph about what it may mean to hold shares in Allied Farmers instead of fixed interest investments with Hanover.

BBI Networks - The recapitalisation vote and name change proposals were passed last Monday. The company will revert to being known as Prime Infrastructure, will remove itself from the management contract held by Babcock & Brown and shall move forward with a stronger balance sheet. This is excellent news for NZ lenders (SPARCS and senior bond holders. There has been a significant increase in equity and a reduction in debt within the business. Debt has reduced from approximately 98% of the balance sheet to 68% and future interest cover under the new structure rises to 2.2x. This financials are not 'strong' but are significantly better than the previous position.

Holders of SPARCS (BBN010) will receive a 10% interest rate for the year to November 2010. Holders of the senior bonds (BBN020) have had their interest rate increased to 9.00% and should now see their bond value rise significantly towards $100 per $100. Unless you need cash for some other purpose, I would suggest that on a value basis (relative to other opportunities), holders should 'not sell' until the bond value is much closer to $100. If you have held the investment through the very difficult previous 12 months it seems logical to now hold for longer to see some of your value restored.

Disclosure - I own a few of the senior bonds (BBN020) and I shall be holding them until the value at least approaches par ($100). Then I shall keep them until a different investment motivates a change ('if').

A little fun - I was invited to attend a conference recently and a cheerful fellow who I am sure would prefer to remain nameless made me smile when he declared - 'we are very happy with the idea of banning commissions, as long as we start with the Securities Commission, then the Commerce Commission....'

Government Guarantee - The government is changing the (future) terms of the Retail Deposit Guarantee Scheme ('GG'). Details of the replacement Deeds can be read on the Treasury website as can the full status list for organisations covered by the GG. 

Investments made by those eligible for the GG up until 31 December 2009 will be covered by the GG until 12 October 2010. However new deposits from 1 January 2010 will only be covered if the deposit taker agrees to sign the new Deed. Clearly those seeking to apply for the extended GG must sign the new Deed.

The new Deed allows a deposit taker to offer guaranteed and non-guaranteed deposits. This is a very good development and will allow deposit takers to better understand who is investing based solely on the strengths of the borrower. It will also allow those investors to receive the appropriate reward e.g. UDC or Marac would likely attract more investors if they offered higher rates for non-GG deposits. 

The GG fee shall become 1.50% between 12 October 2010 and 31 December 2011 so depending on the term investors choose, they should be offered part or all of this margin. A deposit maturing in December 2011 may receive most of the 1.50% extra return, whereas a shorter term should receive a smaller portion of the extra 1.50%.

For the sake of clarity, investors currently covered by the GG will not lose that status as a result of the changes to the Deed.

Credit Ratings - There have been split reactions to ASIC's actions of increasing the responsibility that a credit rating agency must accept. Standard & Poor has said they will no longer provide credit ratings that can be used on products offered to the public (retail investors). They are concerned about global inconsistency. If we lived in a world that behaved consistently with finance that would be fine, but we do not. Moody's has said they will agree to operate under the new rules. 

We wondered if the reaction would be to lower credit ratings, based on no apparent increase in the risk of a borrower, and thus aim to reduce the incidence of failure within each credit rating bracket, and thus the risk of liability. 

A little of this has occurred with the intention to reduce the credit ratings on subordinated investments issued by the banks. This rating change does not affect the current credit strength of a bank but it does describe an increased risk assessment of the subordinated products and this will result in higher credit margins on them. 

The willingness of ratings agencies to lower ratings, without underlying changes to the business, highlights why they are only part of a decision when selecting an investment. (Think Credit Sails)

Higher credit margins will reduce the market trading value of current securities but this will increase the future returns of these investments.

Infratil (IFT) - has taken the opportunity to explain in reasonable detail the value they see with investing in the assets put up for sale by SHELL in New Zealand. IFT has always been a very good communicator. After the presentation last year you may recall us saying we felt IFT would be better served if they exited their European interests and focussed on Australasia. They appear to be doing this. I see a point of value in the SHELL transaction that I believe is quite significant for them. I'll refrain from expanding on my thoughts until the deal is done and the opportunity is a reality. I wish them well closing the deal.

Sensible Quote - Amongst the many things we read I came across a simple reminder for investors about how difficult the current situation is and the need to choose very carefully as we look forwards making new investment decisions. 'Be sure of one thing if of nothing else; the future will be different to what everybody now expects.  The truth is that the huge ills caused by banks’ grossly incompetent and imprudent lending and the consequent collapse of bubble-priced assets, was never going to be resolved easily and not without much more pain.' 

 

Brick of Healing - I view Allied Farmers offer to Hanover and United investors as a brick of healing. The circumstances may not have become easier but the ALF directors and management clearly see a way forward. If nothing else their actions provide impetus for a change from a negative tone to a positive one. Their offer makes a mockery of the many who made emotional claims about how little value would be recovered and how dishonest many participants had been. The offer will also re-ignite the debate about the merits of moratorium (which offered time and value) relative to receivership.

 

Investment Opportunities (No shortage!)

Public Infrastructure Partnership Fund - Morrison & Co intends to offer the public access to invest in the PIP Fund early in 2010. The NZ Super Fund will also be an investor. Initial descriptions of the intended property assets, tenants and returns make us very interested on behalf of our clients.

Of significant interest are the expected returns and, more importantly, the inflation adjusted rental agreements that are proposed. The initial limited information available leads us to believe this investment is likely to suit both fixed interest investors and those concerned about inflation. Inflation adjusted pricing of the income stream should provide a much lower risk inflation protection for investors than a portfolio of assorted shares or properties.

(Digression coming - Ed) I recall a time in the mid 90's when the prototype Porsche Boxster was so attractive 4,000 people placed deposits before the company had even agreed to build the car! The production version lost some of its glitter. I hope my initial enthusiasm for this product is met by an excellent new investment opportunity.

Regardless of the final design or paint job, we have started a mail list because we anticipate our participation in the PIP Fund. If you wish to join the mail list please call, email or use the online form. There is room for up to 4,000 people.

Trustpower - has confirmed they will offer 5 and 7 year bonds prior to christmas. We anticipate yields between 7.75% - 8.00%.   We have started a mail list. Please advise us if you would like to receive a copy when the offer is made.

Goodman Property Trust - offer of senior secured (against GPT properties) 5 year bonds. GPT bonds have a BBB+ credit rating from S&P. The interest rate will be set on 14 December at the swap benchmark rate +2.00% credit margin, but cannot be lower than 7.75%.  The bonds will repay in cash at maturity. The issue is open now and closes on 10 December. Investors require an allocation to participate in this issue.

The investment statement has been loaded on the Current Investments page and we have hard copies available. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Kiwi Income Property - offer of Mandatory Convertible Notes (convert to shares) is open. The return has been set at 8.95% for the first 5 years before converting to KIP shares. We have a small allocation.

The investment statement has been loaded on the Current Investments page and we have hard copies available. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Synlait - has announced it intends to offer ordinary shares to the public prior to christmas. We expect to have a small allocation. Synlait is a milk production and exporting company, competing with Fonterra. You can read more about them on their website. This may present a good opportunity for NZ investors to gain access to our major export industry. Fonterra's farmers have made it clear they don't want any external shareholders.

We have a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

University of Canterbury - 10 year bond issue remains open until 30 November.  Full details are available in the investment statement loaded on the Current Investments page of our website. Please contact us if you would like a hard copy of the investment statement.

Auckland Airport - 5 year bond offer at 7.00% closes this week. All applications should be now be in, or on their way to us.

Meridian Energy - We continue to build our mail list in the faint hope that Meridian offers a sensible interest rate on their longer term product next year. We have hard copies of the current investment statement and the soft copy is loaded on the Current Investments page of our website.

Transpower - expects to issue bonds early in 2010. The bonds will be long term (5 years +). Transpower has a ‘AA’ credit rating from S&P. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

 

I will be in Auckland on Tuesday December 8.

Chris will be in Christchurch Tuesday and Wednesday December 15/16.

Interested investors/clients should contact us to arrange times.

Michael Warrington

---

Market News 16 November 2009

Last week I was blessed with replies from not only a budding astronomer but also a mystery shopper for Consumer NZ!

The astronomer debated the merits of my recession watching methods and implicitly suggested an appointment with my optometrist. He saw plenty of winter satellite movements. He also kindly pointed me to a very cool website, with a cool name, www.heavens-above.com to monitor the movement of satellites above my house.

I learnt that the most obvious sightings are described as 'Iridium Flares' when the angle of the sun's reflection is best, based on your location. Iridium is a reference to the name of a system of low orbit satellites supporting cell phone communications. Apparently named after the number of electrons in an Iridium atom (77 for the curious).

I'll pin the next week’s schedule to the kitchen wall for my family's benefit. I doubt anyone will rush to spot the International Space Station though... between 4-5am each day. (Try not to frighten the cat as you dash to the door - Ed)

I learn something new every day.

The mystery shopper concurred with the findings of the Consumer NZ panel and was disappointed by most of what he experienced. Having products pushed at him and a lack of disclosure around adviser income were stand out concerns. Interestingly he didn't comment on the influence of educational qualifications with the advisers he spoke to (A current focus of the Financial Advisers Code Committee). I was pleased he made contact and found our conversations instructive.

 

Investment Opinion

Financial Advisers Act - The commissioner for financial advisers has fired (my words) two members of the Code Committee because their organisations failed to perform well in the recent Consumer NZ survey. The commissioner cites her reasons as not wanting to lose the public's confidence in the work being completed by the Code Committee on the new Code of Conduct.

The departure of these two committee members does not rest easily with me.

This is the same committee that, as far as I could tell, did not invite the public along to presentations regarding the Code of Conduct development nor did it seek their submissions on the subject. Yet now two committee members have been asked to leave to ensure public confidence is maintained. 

One of the departing committee members was till recently the head of Westpac's Wealth division (financial advice). Banks are one of the largest providers of investment advice in NZ. We need a senior member from this sector on the Code Committee to contribute their knowledge to developing the new regulations. They are not developing a financial plan. We should also have a consumer on that committee.

The Commissioner has extended the time for making submissions on the competence (education?) part of the Code until 27 November. We continue to encourage the public to get involved by reading the material being released and making submissions to have their views heard. Perhaps a few Westpac investment clients could make submissions so the Commissioner hears their views.

To the Commissioner we politely say, 'This process needs leadership not reactions. Take your time and get it right. This subject should not fall into the arena of politics. The Code must represent quality content not desirable perceptions. It must improve adviser behaviour and serve consumers well, not provide the illusion that it will.'

Imposing a deadline on this process may be impractical. One bank tells us that they have to train 1800 staff members to meet the new standards.

We have loaded Chris and Michael's submissions on our website.

Our view is that getting this right is more important than meeting some politically desirable timetable. Strong enforcement of tough penalties is all that is needed now.

Withholding tax changes - A new bill, soon to become law, will dictate what rates of Resident Withholding Tax ("RWT") shall be deducted. It is the Taxation (Consequential Rate) Bill introduced by Hon Peter Dunne. 

Tax is usually discussed in whispered tones for fear of others listening in or in an angry tone as one reflects on the amount of money that flows away from us. So why are we discussing it in such a wide public forum? 

Well, we are not tax advisers but this RWT change will affect our clients and will require action from them, unless the IRD changes the way it plans to roll out its changes.

The current RWT rates are 19.5%, 33%, 38% and 39%. 

From 1 April 2010 the RWT rates will be 12.5%, 21%, 30% (Corporates), 33% and 38%.

The current plan from IRD is to automatically shift those on 19.5% RWT to the new 21% level with their various providers (banks, Non Bank Deposit Takers, registries for investments etc). Inexplicably, the IRD requires those financial institutions to ask investors to write and confirm their chosen RWT rate or they will be lifted to the 38% rate from 1 April 2011(?! – great date)

The net tax rate up to $48,000 has fallen from 19.5% to 18.5%. If the RWT level increases to 21% the incidence of under-payment of tax should surely decline, not increase, so it makes no sense to me that IRD will force RWT up to 38% if the public do not re-state the obvious and declare 21% to be their preferred (and appropriate) RWT rate.

It will involve a massive waste of resources to achieve the updated RWT instructions when the changes could all happen automatically. Perhaps the outward mail effort by the financial organisations, re-gathering of the RWT instructions and hours of data entry is a recession busting extra employment scheme? It'll generate a little extra tax income for government from those wages. (and a boosted dividend from NZ Post - Ed)

Sometimes if you have a gripe you should offer a solution. So, here it is. The IRD has the best idea of all taxpayers’ income and thus the preferred RWT rate that should apply to each. The IRD should simply dictate to all financial organisations the RWT that must be applied to an IRD number (respond to lists supplied by the financial institutions). This process could be handled quickly, electronically and by a small number of participants. Certainly a smaller group than 4.25 million New Zealanders.

Alternatively all investors on 19.5% should be moved to 21% unless the tax-payers states otherwise.

India buys GOLD from IMF - I continue to be interested in investments that are being pursued by those countries with the most money. It is a generalisation and ignores the oil exporters but China, India and other Asian exporting nations are showing that they have the most 'cash' at present so it is worth monitoring where they are investing.

It would be hard to describe most developed nations as having plenty of spare cash. The financial strength they do have is typically being directed towards financial incentives to fight off recessions.

I found it very interesting to read last week that India had purchased a very large volume of GOLD from the IMF (International Monetary Fund). They with the cash are buying from those who need it.

Chinese interests are regularly seen investing in products and services that they believe are necessary to support their rapidly growing nation. Those investments include food providers and that is something we, as a nation, are good at. My optimism is growing for NZ Inc.

As an investor I am very attentive to what these nations are investing in. I am keen to spot the businesses they are likely to invest in and I would like to be on-board the same investments. With respect to food I shall be very interested in the financial details of Synlait and any discounted access to shares in PGG Wrightson.

The Wall St Journal, the Financial Times and TheStreet.com are very useful news outlets for financial and economic information but maybe in future New Zealanders' should read the Straits Times (Singapore) and the Wall Street Journal - Asia (Hong Kong).

Investment News

RBNZ Financial Stability Report - has just been released and is worthwhile reading for investors. It can be read on the RBNZ website. It provides a good summary of the situation with respect to recent history but avoids much forecasting. The media picked up on comments about 'further rationalisation and some closures in the non-bank sector' and gave it a push but this should not be a surprise to anyone, certainly not users of this website.

Non Bank Deposit Takers that do not demonstrate, soon how they will increase capital to, or above, regulated levels should plan an orderly wind down of their business. Otherwise the Treasury should force them to do so. Those that do raise the necessary capital must move quickly to increase liquidity, manage failed loans and restore profits to rebuild depositor confidence.

 

Allied Nationwide Finance - The ANF story is evolving. One of their major shareholders has invested more equity and is becoming more involved in the management of the business. The company is reviewing opportunities for buying loan obligations off other finance firms that may be finding it difficult to retain those loans. This behaviour suggests an increased commitment may be available from the company's shareholders which would be a promising development for investors with ANF.

Further, ANF no longer offers deposit terms for less than 1year. They must have plenty of cash to take this step. They are wisely testing their deposit base to understand who will continue to invest with them for terms beyond the current government guarantee period. All finance companies need to understand this information. Those who gain the extended GG are expected to test this by offering guaranteed, and non-guaranteed, deposits.

ANF is expected to have a credit rating confirmed by the end of 2009.

BBI Networks - The vote on recapitalisation occurs today. We may hear the results tonight. Once we do the future will be a clearer. If the plan is approved holders of NZ SPARCS or senior bonds will be in a significantly improved position and the value of these securities should rise noticeably. If not, it seems likely that BBI will go into administration (receivership) increasing the risk of loss on SPARCS and delayed repayment plus possible losses for senior bond-holders.  Chris will update this situation on Thursday.

Marac - The Chief Investment Officer visited us last week and confirmed just how much hard work is going on at Marac and PGC following the capital raising and executive changes. He highlighted that credit rating upgrades and a banking licence remain key objectives for Marac. 

PGG Wrightson's capital raising is imminent which PGC will surely support given their current strong capital position. (our opinion)

The CEO was to have joined us but was called away at the last minute. Far from being disappointed by his absence we interpreted it as evidence of significant business activity requiring his attention. PGC and Marac are quite clearly on the 'front of the wave' right now which is a good position to hold in an industry that needs consolidation. We look forward to a string of success driven initiatives over the next 6 months.

The Australian Securities & Investment Commission (ASIC) - Maybe we should turn to Australia for a little extra regulatory spine? 

We have noted before that while the investment advice community has had its weaknesses there is also a need for more accountability for regulators, ratings agencies, auditors, directors, valuers, trustees and finally consumers. (everyone it seems - Ed) True, because they all play a role in financial markets.

In this case we applaud ASIC regulatory actions for tightening the expectations and requirements, in Australia, for ratings agencies. 

From 2010 ASIC will remove the exemption from liability that protected the ratings agencies when their credit ratings were published in offer documents (prospectus, take over documents) or disclosure statements. 

Issuers (borrowers) must now get consent from a rating agency before they publish a credit rating to give the ratings agencies control over the publication of their work.

The ratings agencies must also now hold an Australian Financial Service licence which forces them to manage conflicts of interest in the same way as other operators within the industry.

(Standard and Poor’s profits rose by a billion and more, when it rated as AAA all of those accursed CDO funds.)

The Securities Commission in NZ would do well to observe and learn from ASIC's pro-active stance.

Tutorial (Credit Margins) - Several weeks ago I offered a brief summary of how swaps worked so clients may better understand the 'swaps benchmark' that we often refer to. The other common reference we make is 'credit margins'. Typically a fixed interest investor will receive a return (interest rate) that reflects a benchmark interest rate plus a credit margin. 

The credit margin is an incremental return that reflects the extra risk of failure by the chosen fixed interest investment and the terms (rules) of that investment. The greater the risk of failure by the borrower, and the lower the protections for the investor, the larger the credit margin should be. 

If the borrower is a very strong business (e.g. Rabobank) the credit margin will be very small. Conversely if the borrower is in a weak financial position (e.g. BBI Networks) the credit margin will be a lot larger.

If the investor protections are significant the credit margin will be lower. If the investor protection is weak the credit margin should be larger.

Credit margins change based on market conditions. When liquidity levels were very high in 2006 credit margins were very low as demand to lend money exceeded the supply of businesses willing to borrow that money. Now, in more distressed financial times the tables have turned and credit margins are much wider. By way of example Sky TV issued its bonds in 2006 with a credit margin of 0.65%. If they borrowed the same money today investors would demand a credit margin of approximately 3.50%.

It is now clear that the credit margins (extra return) available in 2006 was insufficient to cater for probabilities of loss in a portfolio. Credit margins offered today are much more rewarding and should better reflect any incidence of corporate failure. 

During late 2008 and early 2009 the credit margins offered were arguably too high but they reflected the market concerns of the time. The investments offered by AMP, Rabobank, BNZ and Contact Energy were particularly well timed for investors, as was Downer’s issue.

Hanover - Adam Bennett of the NZ Herald has done a good job by getting information from the Chairman (Henry) and the independent director (Hammond) to report to investors. This is much more useful than the drama shows witnessed elsewhere. They confirm that Messrs Watson and Hotchin have made the contributions that they committed to under the Plan. Hammond urges investors to read this years annual report to understand progress and the current situation. It won't improve the circumstances but it will be factual, not fanciful or hysterical.

 

Investment Opportunities

Plenty to choose from before the Christmas break:

Goodman Property Trust - senior, secured 5-year bonds. A minimum interest rate has been set at 7.75%. The final interest rate will be set on 14 December. Investors will receive the higher of 7.75% or the swap rate +2.00%. The GPT bond has a BBB+ credit rating from S&P. These bonds will repay in cash at maturity.

The GPT investment Statement has been loaded on the Current Investments page. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Kiwi Income Property - Mandatory Convertible Notes (convert to shares). The yield has been set at 8.95% for 5 years. At maturity the investment will convert into shares at the lower of $1.20 or a 2% discount to a trading average at that time. We have a small allocation. Please contact us if you are interested in this issue.

The KIP investment statement has been loaded on the Current Investments page. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

University of Canterbury - 10-year bond issue remains open until 30 November. This offer appeals to us for long-term allocations within fixed interest portfolios.  Full details are available in the UoC investment statement loaded on the Current Investments page of our website. The bonds are 10 years long, the first 5 years at 7.25% then reset for a further 5 years at a benchmark rate plus 1.75%. The minimum investment is $5,000. 

If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

Auckland Airport - 5-year senior bond offer is open paying 7.00%. We like the borrower and would describe the return as 'satisfactory'. This issue closes on 27 November. If you wish to receive an investment statement or firm allocation please contact us or use the request form on the Current Investments page of the website.  

Synlait - has announced it intends to offer ordinary shares to the public prior to Christmas. Synlait is a milk production and exporting company, competing with Fonterra. You can read more about them on their website.This may present good opportunity for NZ investors to gain access to our major export industry. Fonterra's farmers have made it clear they don't want any external shareholders. We have a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Meridian Energy - the MEL investment statement is loaded on our website. We will mail hard copies out to everyone on our mail list. 

The short term interest rates offered are uncompetitive (4.25% - 5.00%) so we suggest investors wait until the new year to see if they offer more competitive interest rates when they offer longer term bonds.

Trustpower - is considering offering a senior bond to the public shortly. We have started a mail list. Please advise us if you would like to receive a copy when the offer is made.

Transpower - is considering offering a long-term bond (5 years +) to the public in 2010. We have started a mail list. Transpower is a very strong credit with a "AA" credit rating from S&P. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

Auckland – Michael will visit Auckland prior to Christmas, probably in the second week of December. If you would like an appointment please make contact with us.

Michael Warrington Senior Consultant Projects Resources Limited

---

Market News 9 November 2009

The satellites are back out of their garages. The recession must be over.

All through winter I don't recall spotting any satellites in the sky. I refer to the Lower earth Orbit variety  and not the Geostationary ones (ref Arthur C Clark). That's strange, I thought. It can't be the cold because with altitudes ranging from 160 - 2,000 km above the earth they'd be aclimatised to winter!

Last night we spotted eight in a very short time frame. 

Perhaps a client with a scientific skill could confirm why this is? Perhaps the tilt of the earth's axis in spring plays a role with light reflected from the sun for Wellington?

I like to think it indicates the recession is over.

Investment Opinion

Property Sector investing - I prefer to use listed property trusts when I add property risk to a portfolio. I am not a fan of residential property for various reasons but the two that concern me at present are rising real costs of debt and a government that looks very likely to reduce the tax efficiency of this investment (about time some will say).

Within the listed property trust sector I believe that debate is about to rage in the media, and amongst advisers, about the best way to invest and the relative fairness of yield.

From next week investors will be confronted with a decision which ultimately will be helpful in understanding where they sit on the risk spectrum. 

Currently you have the following choices for investing in major companies in the listed property trust sector:

Buying shares (units) in a listed property trust, accepting the price movements and currently receiving pre tax returns between 10 - 13% (depending on your tax situation and which investment is chosen)  

Invest in a Mandatory Convertible Note (Kiwi Income Properties is issuing). These have a limited exposure to share price movements (only upside) during the first five years but will convert to shares at maturity. The likely pre tax return on this product will be between 8.50% - 9.00%. (our opinion)  

Invest in a senior ranking bond, secured against properties owned (Goodman Property Trust is issuing). There will be a covenant that states debt cannot exceed 50% of the property values. The bonds will be repaid in cash at maturity. The expected return on these bonds is between 7.75% - 7.85% (our opinion)

There is of course no 'one size fits all' answer.

Where do you think you sit? 

If you have money to invest, like cash flow and are comfortable with a property exposure managed by NZ's largest and most skilfull operators then you should be able to make a selection form the current menu.

Financial Advisers - Consumer NZ is clearly dissatisfied with the financial advice sector. I applaud their intentions but I am not sure how comfortable to be with their survey, nor their claim that the current reforms are too little too late. Having not seen the 'Mystery Shopper' model used I should probably reserve judgement. However, I usually don't so why start now?

Stuart + Carlyon, Trustees Executors and First NZ Capital (pleased I worked there!) deserve compliments for meeting the objectives of the mystery shoppers. (or spotting them! - Ed)

The public 'rejections' or 'disappointments' leveled at the various business brands may not be a safe way to report the findings. Investment advice (our focus) has never been a one size/style fits all. I don't expect the various firms to comment publicly but I'm sure many will feel the Consumer NZ statements don't fairly reflect the effort they put into client servicing.

I have worked at ANZ National bank and Westpac and know their private banking investment advice to be very good and overseen by highly skilled staff. I know the operators at the other banks and believe them to offer similar qualities. Perhaps the investment scale of the mystery shopper didn't lead them into the arms of the private bank? Increasingly all areas of investment advice within a bank are now reporting to the same head and are responsible to the same investment committees. (Recent failures have highlighted the need to avoid different investment areas within the same bank.)

Similarly I know many of the NZX firms and their advisers. The advisers are not robots homogenously quoting a corporate line. Surely this is a good thing. So, within most NZX firms you will find many excellent advisers, including at Craigs Investment Partners (mis-named in the report).

I agree with the Commissioner for Financial Advisers. The introduction of the new Financial Advisers Act will improve service delivery in this sector.

In my opinion, perhaps the most important point that comes out of the Consumer NZ report is that all individual advisers should be required to meet the AFA status (Approved Financial Adviser under the new Act) regardless of whether they work from a QFE (Qualifying Financial Entity) or operate independently. The Act no longer demands this.

High Kiwi Dollar - Have you noticed that importers have been relatively quiet recently, enjoying the high kiwi dollar? 

Amongst that group you'll find the electricity generators of NZ. A rising kiwi dollar reduces the cost of imported parts for generation, such as towers and turbines for wind farms. Don't be surprised if you witness a rush of capital expenditure and borrowing (bond issues?) from the electricity sector over the next 6-12 months. If I am right it will also mean a few lumpy current account deficits being reported.

Reduced long term capital costs for generation are likely to deliver larger long term profits because I can't imagine the generators reducing the price they sell power to us. 

Given the amount of money being spent of generation and distribution I wouldn't expect increased dividends as a result but it does suggest rights issues to raise more capital (supporting larger debt levels) are less likely.

Auto rollover - We do not like firms that apply automatic rollover to deposits if they do not hear from the investor at maturity. We accept that retaining the funds is a necessary outcome for banks and possibly Non Bank Deposit Takers, when no instruction is received, however we think it is not an acceptable practice for any other borrower.

It is not difficult to ask for the investor's instructions at the start of an investment on the application form.

This issue has emerged because of Meridians plans to automatically rollover investors for the same term if no instruction is received. In their original investment statement they twice state that investments will be repaid at maturity. On a third occasion they introduce the clause about automatic rollover. With Meridian's ridiculously low interest rates and efforts to exclude introducing advisers they have an incentive not to write to maturing investors and then hope a repayment instruction is not received!

An inability by an investor to issue a timely instruction or simply forgetting to is not an acceptable reason for a borrower to retain the money.

Automatic rollover may be entirely inappropriate for the investors circumstances at maturity. 

Take it as a warning. Introducing advisers should contact all of their clients invested in Meridian Energy. Investors should write and offer a maturity instruction, even if it is many months away. Our opinion is that funds should be repaid because the current interest rates offered are very low and better alternatives exist.

Investment News

BBI Networks - Last week we referred to the senior bonds (BBN020) stepping up to a 9.00% interest rate. This was drawn from the recapitalisation prospectus leading to a vote on 16 November (page 138 if you are curious). Friends in the industry called to debate this. ANZ (lead manager) kindly sought clarification from the issuer. BBI Networks has confirmed to the NZX that the interest rate will be 9.00% from 31 August 2009.

Transpower - confirmed at a recent presentation (kindly organised by Westpac) that they have a lot of money to borrow over the next three years as their upgrade programme increases in scale. They expect to offer bonds to the NZ public, possibly early in 2010. Transpower recently received a credit upgrade to ‘AA’. 

The potential bond issue may be good for investors but this news is a doubled edged sword. The increased expenditure will result in increased transmission costs arriving on your power bill. A never ending assault on the wallet from the energy sector it seems. 

Fidelity Bonds - Our compliments for Tyndall and Fergus McDonald are becoming evergreen as they continue to deliver consistent growth in the value of the Fidelity Bond fund again. At the end of October the fund value increased from $81.5m (September) to $83.5m and if they reach $86.8m over the next two months bond holders can be paid all outstanding interest in January. Such a performance would be an excellent effort on Tyndall's part and restore some lost faith to bondholders. 

Performance over recent months has been adding $2.5m - $3.5m each month. If long term interest rates continue to rise it reduces the cost of the capital protection thus increasing the flexibility for Tyndall's to manage the fund. It is entirely reasonable to believe that the fund can exceed the $86.8m threshold by January and repay all outstanding interest. Nothing is certain, but I am becoming optimistic. 

A little back of the envelope maths suggests that if all interest owing is paid out in January the bonds are worth an implied $110 per $100 (after tax). Accordingly we re-iterate our DO NOT SELL notice for clients. To achieve such value by selling in the market you would need to offer the bonds at an unusually low yield on the NZX (e.g. 6.00%).

MFS (Octaviar) - ASIC is taking five former directors and senior executives to court over falsifying and backdating documents. I doubt a successful case would lead to any money for NZ MFS investors but they may have already benefited. The $150m in question was borrowed from Royal Bank of Scotland, some of which was used to repay some NZ investors prior to failure of the business! We applaud ASIC's focus and energy in pursuing alleged breaches.

 

Remain Alert - to the major economic indicators. US unemployment rising above 10% is not a good sign with respect to their ability to consume or save. G20 leaders state that the current recovery is too weak to remove stimulus measures. It reminds me to highlight our preference that clients use every opportunity to improve the quality and strength of their portfolio (reduce risk). Rising share values allow a few sales to take some money of the table (keep the ratios right in a portfolio). A maturing fixed interest investment allows the opportunity to reinvest with stronger borrowers.

 

Brick of Healing - The continued rise in milk pricing has resulted in a significant increase in the pay to farmers (now $6.05 per KgMS). This is excellent news for the farmers and NZ as a whole. Our Trade minister, Tim Groser, is also very optimistic about the opportunity for our agricultural sector to profit from rising world demand.  

 

Investment Opportunities

A broader menu of opportunities is revealing itself as we enter the back straight before christmas:

Goodman Property Trust - has announced an offer of senior secured 5 year bonds. Bondholders' money will be secured against some of GPT's properties and this debt level will not be allowed to exceed 50%. GPT has a BBB+ credit rating from S&P. The interest rate is likely to be set between 7.50 - 7.85%. If it is towards the top end of this range we would consider the return to be 'reasonable'. The issue opens next week and closes on 10 December. These bonds will repay in cash at maturity.

Our covering letter has been loaded on the Current Investments page and we will load the investment statement their once received.

We bid for an allocation this Friday so any guidance about investment volumes this week would be very useful.

We have a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Kiwi Income Property - is considering an issue of Mandatory Convertible Notes (convert to shares). This may appeal to high yield fixed income investors. It is from the same sector as GPT above but this issue converts to shares at maturity. It will therefore offer higher returns than a bond issue. We would expect between 8.50 - 9.00% with the top end of this range being sensible in our view.

We have a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Synlait - has announced it intends to offer ordinary shares to the public prior to christmas. Synlait is a milk production and exporting company, competing with Fonterra. You can read more about them on their website.This may present good opportunity for NZ investors to gain access to our major export industry. Fonterra's farmers have made it clear they don't want any external shareholders.

We have a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

University of Canterbury - 10 year bond issue remains open until 30 November. This offer provides a diversity of risk that we have not experienced in NZ before.  Full details are available in the investment statement loaded on the Current Investments page of our website. The bonds are 10 years long, the first 5 years at 7.25% then reset for a further 5 years at a benchmark rate plus 1.75%. The university does not have a credit rating but their funding is 48% from government and 30% from the students. The bonds are a senior, unsecured debt of the university. The issue size is only $100m so is likely to sell quickly. The minimum investment is $5,000. The deal is now open and closes on 30 November or before if filled. Graduates of UoC may wish to read the philanthropic options closely. 

If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. 

Auckland Airport - 5 year bond offer is open paying 7.00%. We like the borrower and would describe the return as 'satisfactory'. This issue closes on 27 November.

If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.  

Meridian Energy - has released its investment statement. We have loaded the soft copy to our website and expect printed copies shortly. We will mail hard copies out to everyone on our mail list. 

Possibly in reaction to our opinion that the interest rates offered were too low, Meridian has REDUCED the interest rates to between 4.25% - 5.00%. We need not express a new opinion for readers. We suggest clients hold the investment statements and wait for either increased interest rates or the long term offer expected in the new year.

Meridian are approaching clients who invested earlier in the year, without involving the clients broker, and offering them the new terms. We strongly urge such investors to contact their adviser to discuss the rollover opportunity. We will be encouraging our clients to exit. It is very important to issue an instruction to Meridian for if you do not they automatically roll your investment for the same term! (see above opinion)

Trustpower - has stated they are considering offering a senior bond to the public shortly. We have started a mail list. Please advise us if you would like to receive a copy when the offer is made.

Transpower - we have started a mail list for an expected bond offer in early 2010. The bonds will be long term (5 years +). Transpower has a ‘AA’ credit rating from S&P. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website.

Michael Warrington Senior Consultant Projects Resources Limite

---

Market News 2 November 2009

I have bad news for my wife, as recipient of the generous offer from Readers Digest ('RD') last week. (I think she is already attuned to bad news - Ed)

Two clients have told me she will not win the $500,000 from RD for they are certain it is coming their way (not).

One gentleman has worked very hard to reach a human to seek removal from their contact list. He did reach a human, in NZ. I guess RD are yet to learn the benefits of an offshore call centre.

Marie need not be concerned about poverty yet though because Mr William Douglas has just contacted me from Russia and there's a US$2.2m fee available from him instead.

Have a laugh, but never send off cash or bank account details.

Investment Opinion

Will travel numbers rise? - I was impressed, as a consumer, with the latest round of price cuts and flexibility offered by Air NZ. I expect patronage to rise. All my recent flights have been very well populated. I believe pricing is likely to remain low for some time yet as competition appears to be increasing. Witness Emirates and Pacific Blue (Virgin) introducing more international flights into Christchurch, Dunedin and Queenstown. I am not rushing out to buy AIR shares, instead I find myself optimistic about the fortunes, or few extra shillings, that are likely to arrive in the hands of the airport operators. Share and bond holders should feel comforted. Tourism NZ may also be pleasantly surprised by statistics out of Australia.

More than a few Rupees - While in Surfers Paradise I read a familiar story about difficulties for a property investment syndicate in the area. I wore a knowing smile as I stayed at a 'Breakfree Resort' realising a cut of my accommodation costs would make it to MFS (receivers) but sadly nary a cent would make it back across the Tasman. 

The failing property investment wasn't a surprise, however, the probable outcome for the scheme was further anecdotal evidence of investment wealth available in India (and other such Asian nations). 

No doubt the two local lads, smiling for the camera as if they weren't under pressure, will have been forced to sell a controlling interest at a significant discount but the presence of the new Indian investors is a promising sign and the source of those investors should be understood by others wishing to sell assets or raise capital.

Financial Advisers Act - The 'Code Committee' is beginning to release elements of the new code of conduct. The first section is about minimum standards and feedback is sought by 13 November 2009. The committee are consulting quite widely and ultimately we expect a good code to be developed. However, we may not be getting off to a good start.

While there have been calls for many to be involved, and public presentations have already occurred, I could not find where any invitations had been made to the public? The entire basis of this legislation is to improve the circumstances for the public so surely we need their input into the future code of conduct.

I was disappointed to miss the presentations myself after learning about them upon my return from leave.

They were happening as I read the notice on my desk. I would have been very keen to attend. 

I have made contact with the Chair, Ross Butler, to discuss options to view the presentation notes and to discuss the need for public involvement.

We urge readers of this website with an interest in the subject to go to the Code Committee Website and review the material. We would then strongly encourage them to make submissions about the developing code so it delivers what they need as an investing member of the public. There is a risk developing that your current adviser, who may well be very skilful and of great value to you, may NOT be approved as a financial adviser if they not hold certain specific tertiary qualifications. Without the 'approved' status they will not be able to give a client advice, but may increase cost.

During my time at the bank(s) servicing the investment advice community I met some very talented advisers who were committed to adding value for their clients financial activities. The current draft code may prevent them from offering a service unless they achieve the specific tertiary qualifications. I believe adding the new qualification would add little or no extra value to the clients of the advisers I am thinking of. 

Of course, I can also think of many advisers that do not add any value to their clients, in fact they probably do the opposite, but if they hold the relevant qualifications it is likely they WILL be available to you. Is this not a lose:lose situation?

The skills necessary to provide good financial advice do not come out of a nominated tertiary qualification. It helps, but experience, integrity and a motivation to serve clients are much more influential, and the really key common factor in good advice is researched (and understood) product knowledge.

So, we ask our clients to please get involved in the process. Tell the Code Committee how you expect the new code under the Financial Advisers Act to help you. Importantly, we also encourage readers who are not our clients (welcome users of this website) to speak up for their advisers (if they support them) and express to the Code Committee the elements of advice that they consider to be the highest priorities to them.

*** Now is the time to act. ***

Investment News

Interest rates are rising - Hooray. Whilst it will have some impact on the valuations of some investments, importantly it will deliver increasing incomes to fixed interest investors. It may also slow the exuberance of share markets in recent months.

The RBNZ Governor is not yet ready to lift the Official Cash Rate ('OCR') but financial markets sense the need for it to happen and are increasing the interest rates for longer terms. This vindicates our calls for clients not to accept below 7% for longer term investments (unless very strong e.g. government or council bonds). From mid 2010 onwards it seems likely that the RBNZ will endorse the markets forecasts and begin to lift the OCR. This means that fixed interest investors are sailing into an environment of higher real interest rates (more return for the same risk) that should deliver rising incomes. Long term bank deposit rates will be worth watching.

Jason Wong is now the head of investment strategy at AMP Capital Investors. I have worked with Jason and have a lot of respect for his work. He was recently quoted as saying the RBNZ is likely to be forced to increase OCR sooner than they expect. The debate is now about timing, not direction.

Under this scenario annual reset securities should enjoy rising interest rate resets. The markets share this view and in recent weeks have been buying these securities and prices are rising. If credit margins (reward for risk) can hold steady then the value of these securities may yet rise a little further. Achieving returns greater than 7% on strong investments for longer terms should become easier. Indeed the prospect of strong investments yielding 8% may again become a reality for clients. After all, the banks are enjoying 8.50% returns on low risk 5 year mortgages today. 

I note some helpful comments from the ANZ chief economist and the BNZ strategist both highlighting that borrowers should expect rising interest rates and should take care to make good decisions about the structure of their debt and perhaps not to become too exuberant about investing in real estate. These comments are supported by the banks making significant increases to their longer term deposit rates, which will undoubtedly place upward pressure on the interest rates that others must offer.

We do however encourage clients to continue investing. Nothing is certain in this world.  It would be a shame to watch yields rise, not take advantage of this, and then witness global economies returning to weak conditions, resulting in falling interest rates again.

University of Canterbury ('UoC') - further to our comments last week, about the lack of a credit rating for this bond issue, we have received more information to support our view that we are not concerned by its absence in this case. The co-lead manager, First NZ Capital, directed us to 'Key Strategic Area 7:Financial Viability' between pages 48-51 of the University's annual report. Page 51 displays the financial viability measures monitored by the government's Tertiary Advisory Monitoring Unit at the Ministry of Education (remember we like the government involvement) and another set of data monitored by the University.

They are outperforming all of the targets. I make specific mention of the interest cover ratio (income relative to debt servicing costs) of 60x in a capital markets world that usually smiles proudly when they display 5x or 6x.

 

We are grateful to First NZ Capital for the information source.

 

St Laurence Ltd ('SLL') - has issued a letter updating investors and highlighting that Perpetual Trust ('PT') has agreed to them continuing to manage the company under the repayment plan. I applaud PT's willingness to allow SLL staff to manage the process. Further, I note and applaud the new performance measures agreed to by PT which are directly linked to repayment outcomes for SLL investors. The opportunity to perform remains with SLL and the incentive to get it right is very clear. We wish them well. Failure to perform will most likely result in a receiver being appointed to take over management of SLL assets.

 

SCF - continue to tick off necessary milestones. Last week they announced a new 75m funding facility and the arrival of three new independent directors, Bill Baylis, Stuart McLauchlan and Denham Shale. Next we look forward to hearing an update from the credit rating agency, their application for the extended government guarantee and steps towards increasing their capital.

 

A&R Whitcoulls - bond holders should be pleased to learn that the business, now known as REDGroup, has successfully consolidated its purchase of Borders and earnings have lifted from AUD$14m last year to AUD$42m this year. 

 

Changing source of consumers - I recently read a snippet of information which continues to remind us of the changing world of consumption. Many of the world's major car makers chose not to attend the once significant Tokyo car. They are going to Shanghai instead! Anecdotal, sure, but significant. I am pleased with our government's current focus on trade agreements in the Asian time zone.

 

PIMCO - is one of the world's largest investment managers. One of its managing directors, Bill Gross, is one of the industry's most experienced participants. I read their material often and enjoyed his most recent 'Investment Outlook' and thought a few of you may consider it worth a read too. (click on the link to open)

 

Oil - over $75 and threatening to rise may be good for those investing in this sector but it threatens to slow economies with the effect of rising costs (tax to OPEC etc).

 

US Housing - You may recall us saying that stable (would be nice) or rising US house prices would be a significant indicator that the world could breath a sigh of relief with respect to the 'financial crisis'. Well, with the exception of Las Vegas (perhaps they bet the house on red? - Ed) almost all other regions have experienced four months of stable and rising values. These price updates suggests stability of one of the world's largest assets held as collateral by largest lenders (banks). Property transaction numbers are also increasing. We appreciate that very low interest rates and tax credits for first home buyers are assisting but we are pleased by the current data.

 

BBI Networks - senior bond holders (BBN020) should note that the coupon stepped up to 9.00% from 31 August 2009. The NZX still appears to be pricing it as a 8.50% coupon. Be careful when/if selling. Note that 16 November is an important date for BBI investors as this is when the recapitalisation vote occurs. If approved it will increase the capital ranking behind the bonds (and SPARCS) by $1.5 Billion and interest cover will increase to 2.2x 

 

Powerco - Within the BBI Networks recapitalisation proposal are comments that highlight repayment of the subordinated bonds maturing on 15 April 2010. The funds will be provided (equity) by the shareholders, QIC and BBI. If BBI is not in a position to invest QIC will provide the total amount, thus diluting BBI shareholding in Powerco. This is a good development for Powerco bond holders (increase equity, reduce debt).

 

Nuplex ('NPX') - reports continued strong growth of sales in Asia. NPX should have learnt a lot about the risks of high debt levels and bank covenants last year. Armed with this knowledge, new capital and rising sales the Board should be able to put on a good display for shareholders and lenders over the next few years. They'll need to perform well to make up for the errors made leading into 2008.

 

Brick of healing - a story that at face value appears to be a wonderful win:win is that of the ice cream being developed by LactoPharma. They intention is that the ice cream will reduce the side affects of chemotherapy. In fact I see three wins here. A victory for health, for science and for value added to a NZ business product (milk, Fonterra). 

  

Investment Opportunities

Reset Securities - We have touched on this previously. Clients who expect rising short term interest rates next year may wish to consider the  various annual reset securities trading at discounts on secondary markets.  

If credit margins stabilise, or fall and interest rates begin to rise the value of these securities will rise also. There are many on issue with different terms and conditions so get advice before make selections. Issuers include - Infratil, CBA, ASB, Sky TV, Rabobank, SCF, Origin Contact Finance.

University of Canterbury - 10 year bond issue. This offer provides a diversity of risk that we have not experienced in NZ before.  Full details are available in the investment statement loaded on the 'Current Investments' page of our website. The bonds are 10 years long, the first 5 years at 7.25% then reset for a further 5 years at a benchmark rate plus 1.75%. The university does not have a credit rating but their funding is 48% from government and 30% from the students. The bonds are a senior, unsecured debt of the university. The issue size is only $100m so is likely to sell quickly. The minimum investment is $5,000. The deal is now open and closes on 30 November or before if filled. Graduates of UoC may wish to read the philanthropic options closely.    

We have started a mail list. If you wish to receive an investment statement please call us, email us or use the request form on the Current Investments page of the website. It would be very helpful if you advise us of your possible investment amount to support our efforts with allocations. We bid for an allocation on 15 October.

Meridian Energy - has released its investment statement. We have loaded the soft copy to our website and expect printed copies shortly. We will mail hard copies out to everyone on our mail list. 

Meridian are starting with short term offers of 6-9 months at 4.75% and 12-18 months at 5.25%. We expect to read that Meridian reserves the right to amend the interest rates during the months ahead. They'll need to because the current offers are simply inappropriate. Clients can achieve the same, or better, returns for the same terms with bank deposits and much better returns with NBDT under the government guarantee. Meridian has got the pricing of their current offer wrong in our view.

We suggest clients hold the investment statements and wait for either increased interest rates or the long term offer expected in the new year.

Meridian are approaching clients who invested earlier in the year, without involving the clients broker, and offering them the new terms. We strongly urge such investors to contact their adviser to discuss the rollover opportunity. We will be encouraging our clients to exit.

Auckland Airport - 5 year bond offer is now open paying 7.00%. We have loaded the soft copy of the investment statement to our website and expect printed copies shortly. We have a small allocation for client use. This issue closes on 27 November.

Trustpower - has stated they are considering offering a senior bond to the public shortly. We have started a mail list. Please advise us if you would like to receive a copy when the offer is made.

Kiwi Income Property - states it is considering an issue of Mandatory Convertible Notes (convert to shares). This may appeal to high yield fixed income investors.

Chris will be in Auckland briefly next Monday (9 November). If you would like an appointment please contact him by email or phone.

Michael Warrington Senior Consultant

Projects Resources Limited

---