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Market News – 28 October 2019

This too shall pass.

Keep calm and carry on.

I think HRH would make a good investor.

INVESTMENT OPINION

Negative Interest Rates – Over the past two or three months I have read many articles discussing the volume of bonds now trading with a negative yield with the common amount quoted as being US$17 trillion.

The conclusions on the situation from people with deep knowledge about financial markets are a mix of ‘troubling’ to ‘normal market behaviour’.

I think both conclusions are fair, but one is short sighted whilst the other is trying to be far sighted.

It is normal market behaviour to continuously trade risks (buying and selling activity) and to adjust the pricing of those risks. Financial markets traders are however focused on the immediate, and thus are very short sighted.

At its simplest the marketplace is indifferent to the daily closing price (yield) for interest rate markets. If clients ask to buy, or sell, the market will arrange the transactions and where demand exceeds supply (or the opposite) the market price will change.

The journey lower in yields below 0% will have unquestionably caused traders and salespeople to debate the situation, until the next order came in asking to buy a bond with a negative yield; the order would have been executed immediately!

Those who are looking beyond their next pay cheque or bonus assessment are the ones who conclude that it is troubling to see the price of money decline below 0% to the point where we make payments to those who are willing to use other people's money.

These people quite rightly believe this is a structurally inappropriate set of financial conditions.

The hard part is developing a contemporary view for what this means next as we make forward looking financial decisions. What might it mean 12, 24 or 60 months from now?

A new theory has entered my head though, that the global savings pool is being mismanaged and asset allocation specialists aren’t adjusting their conclusions sufficiently to recognise current risk reward scenarios. After all, negative interest rates don’t offer a reward.

My theory ponders that fund managers are a significant part of the problem, by simply doing their jobs.

A fund manager appointed to invest billions of dollars into fixed interest assets will do exactly that; it is what the client has instructed them to do. This is how each fund manager earns his or her fee. However, this may be abrogating an overarching responsibility to add more value to the process.

If a fund which is managing investor money currently defines that a portion of a fixed interest fund ‘must be invested in sovereign bonds with AAA credit ratings across each of the G7 economic regions’ the fund manager will immediately invest some money in these 10-year bonds:

German: -0.34%

Swiss: -0.58%

Denmark: -0.335%

Canadian: 1.57%

USA: +1.80%

Luxembourg: -0.50%

Netherlands: -0.22%

Norway: +1.32%

Sweden: -0.03%

Singapore: +1.75%

Australia: +1.17%

You’ll quickly see that there is little hope of a positive reward from the mandated exposure in Euro denominated bonds with a AAA credit rating but this is what the prospectus ‘said on the tin’, and thus what the investors sought, so you can be very sure that’s what the auditors and regulators will want to find is happening.

I don’t begrudge a good quality fund manager their fee, but it would appear that the investment mandates need to evolve, otherwise savers' funds will continue to be tipped into fixed interest investments that are assured of losing money, reinforcing the markets that demand for bonds with negative returns still exists.

Should it though?

The same thing is almost happening here in New Zealand.

Some of you will have read the recent flurry of articles, or listened on talkback radio, about the subject of Bonus Bonds and the plummeting prize pool. It is plummeting because the fund invests solely in fixed interest assets, which it will continue to do because that is what the mandate dictates.

It’ll be fun (not) for the Bonus Bonds management team when interest rates widely reach zero.

Do they cancel the prize pool?

They must, otherwise Bonus Bonds (BB) would immediately become a ponzi scheme!

As much fun as this would be for the FMA it won’t happen.

The next logical move would be for BB to conveniently widen the mandate (rules) for the investment risk tolerance and invest elsewhere, such as directly into residential mortgages that ANZ would like to sell off its balance sheet in response to the Reserve Bank applying ever tighter equity demands over the bank.

The inevitability of adjusting risk tolerances by the BB fund is the same behaviour that must be adopted by asset allocation specialists around the world.

Professional advisers need to think long and hard about the weightings investors should apply to each asset class. Once a specialist may have described the following asset allocation mix as being balanced:

Fixed Interest: 35%

Property: 30%

Shares: 35%

Surely these numbers must change based on today’s risk reward landscape.

Negative nominal interest rates and negative real returns on most other interest rate investments around the world must imply different investment targets.

It’s quite likely that the quantitative asset allocation models used by the professional advisers don’t use negative cash-based returns in their calculations.

A similar situation is developing for Kiwisaver investors, who have now accumulated NZ$60 billion in savings.

If we continue to pour money into Kiwisaver, as we must, and we continue to instruct fund managers to buy the same things, we may run out of good NZ dollar assets at sensible prices (risk / reward scenarios). For the sake of scale, the NZX total value by capitalisation is about $150 billion.

If a fund manager receives cash with specific investment rules they are duty bound to invest according to those rules.

Referring back to last week’s Market News, Simplicity Kiwisaver fund is an early mover in trying to solve the problem of insufficient good assets with its proposal to establish a mortgage lending facility.

Disappointingly New Zealanders are also huge borrowers against residential property, but this creates an opportunity to connect them with Kiwisaver funds and reduce the country’s reliance on offshore funding via the banks.

Imagine though if mortgage interest rates fell into negative territory, as they have for some in Europe, should a credible fund manager still invest?

Within my personal ‘fund’ I surely would not accept a negative interest rate. I’d rather be paid to be a borrower and allow capital spending from the other end of my portfolio.

The global economy is raiding the wealth of the most conservative savers via these negative returns and I doubt that it is redistributing this wealth to younger generations; it’s more likely to be making its way to clever capitalists.

So, don’t sit idly by and watch your fixed interest returns migrate into negative yield territory (pre the impost of fees). Start thinking now about the impact it should have on your asset allocation if we reach that point in NZ and Australia.

Make it clear to fund managers that we don’t want to be told that the fund purchased assets that were available at a ‘market price’ if interest rates have moved to the point of delivering negative returns.

Negative Returns II – In another item on negative returns, Credit Suisse in Switzerland has taken the inevitable move of charging customers for storing cash in the bank, with a focus on large amounts at this point.

For account balances above 2 million Swiss Francs (CHF) the bank will apply an interest rate of -0.75% per annum on that excess balance. Business related accounts will receive -0.85% on balance greater than 10 million.

In the past UBS tried to apply nominal fees but given how long negative interest rates have been in place they too plan to move to market interest rates for clients, which will be negative and likely move up and down with the market. This helps avoid the ‘what fee will customers tolerate' angst.

I hope this is not coming to a town near you, but never say never.

Tiwai Smelter – Rio Tinto, at times pretending to be a major Australian corporate entity, has returned to the NZ political table in the build-up to our 2020 general election to test the mettle of Jacinda Ardern and Winston Peters.

Rio has dusted off the same playbook – ‘We may or may shut down Tiwai Point Aluminium Smelter if we aren’t offered subsidies from your taxpayers’.

I don’t have the energy (intentional pun) to write my opinion about this situation again, you might find it in our archives, but the conclusion is that I hope the government rejects Rio Tinto’s advances and they leave town if they must.

If they need subsidies to be in business, then they are not in business.

I wrote about this at some length in 2015 when they last lobbied for subsidies and again in 2018 when Rio displayed their true financial colours by increasing their use of the smelter in Southland (after crying poor at all other times).

There would be short-term employment losses for Southland if the smelter closes, and these would need to be dealt with, but there are excellent long-term energy gains across all of New Zealand if Rio Tinto leaves.

Economies are constantly evolving, with old businesses fading from view and new ones emerging. Employees must follow that evolution.

In the interim, Southland employees might evolve from aluminium production to site clean up gangs, based on Rio Tinto’s obligations to the site.

The Australian government has made decisions to demonstrate that they are ‘Australia first’ even if it disrupts its neighbours' feathers. To a large extent this is unsurprising. New Zealand’s response should be that we have better uses for our renewable electricity than to supply subsidies to an Australian business. (You’re beginning to sound like Trump – Ed)

If our Prime Minister has any nous she will appoint Mark Binns, past Meridian CEO (and you? – Ed) to negotiate on behalf of the Crown.

Post Script: Good news, it seems, Energy Minister Megan Woods has immediately formed the same view as me (clever lady – Ed) and delivered her response between sips of her afternoon tea:

The government won’t be providing additional financial support to the Tiwai Point Smelter.

The issue is a commercial matter between Meridian and smelter operator New Zealand Aluminium Smelters.

The New Zealand Government has had a clear position since 2013 under the Key/English Government that there will be no more financial assistance from taxpayers for Rio Tinto, which is already supported by Meridian for the power it uses.

This hasn’t changed.

It was an unexpected, and pleasant, surprise to hear this from the Minister. Maybe the government is developing more spine in its decisions.

I could add another quote for her:

‘There is no need to make the phone call to me, which you proposed in your public statement..

Cheque Retirement – Here’s another reason that it is appropriate to retire cheques from the payment system; Kiwibank alone has clients with $3.5 million of unpresented cheques.

Kiwibank has displayed good leadership with its decision to stop issuing cheque books, followed by not issuing bank cheques.

Good leadership is supported by observers, which is what is happening here; cheque use by its customers has declined 36% over the past five months since the bank’s announcement. If customers objected widely they would have tried to increase cheque use to make a statement to the bank.

You’ll recall that ACC and IRD will no longer accept cheques as a form of payment. Others will, and should, follow.

If the government is serious about trying to insist on faster settlement of outstanding invoices across the economy, then they too (via the central bank) should be placing a sunset date on cheque use in the NZ economy and then defining tolerable settlement periods for outstanding obligations.

The government and the Reserve Bank should then insist on another development from our banks; demand that a bank account number and the payee target name be cross-checked for accuracy before payment can be completed.

With the current regulatory pressure around Anti Money Laundering monitoring it is an anomaly that ‘you’ can pay money into my bank account but address the payment to ‘Batman’, or any other superhero of your choosing (or less glamorous label – Ed).

It is astonishing to me that our banking framework doesn’t cross-check the ‘who’ (name) to go with the ‘where’ (account number).

The ANZ recently refused to deposit a cheque for a client because after the name fields were filled with trustee names there was no room left to record the trust’s name (Computershare naively issued the cheque this way). Because the payee details weren’t a perfect match the bank refused to process it.

This is clearly an example of double standards for the same action.

I know of another unpresented cheque, which highlights the abuse of this old payment method:

A client recently reported to us that an insurance company had mailed them a cheque to settle an obligation. The client quite rightly mailed it back and said it was an absurd method to use for delaying payment and to act properly by making the payment directly to their bank account.

The client’s view was that if the insurance company’s financial survival was depending on earning 5-10 days interest on this client money then bigger problems existed for that insurer’s business.

One of those problems may well be the ‘we have always done it that way’ approach.

Another possible problem might be an incomplete effort with respect to the Anti Money Laundering legislation by the insurer not being sure where to make payment to, and if they ask they’d be forced into more AML obligations!

If our banks wish to prove themselves as a better service offering for payments, locally and globally, they will need to up their game otherwise the many crypto currencies that are trying to gain a beachhead will begin to claim meaningful territory with consumers.

Government and central banks need to contribute to the improvement across payment systems to enforce the outcome they prefer.

EVER THE OPTIMIST

The Cawthron Insitute (CI) in Nelson has proved that science trumps bluster and confirmed that varying food (with Asparagopsis armata native red seaweed in this case) can reduce the methane expelled (≤80%) by farm animals.

The government has done well to quickly offer CI $100,000 funding to contribute to work costs on this specific project.

Next, Shane Jones needs to ride into a few of his ‘regional villages’ and offer to fund those who might credibly develop mass production (aquaculture) facilities for growing the seaweed because there is clearly a ready market waiting to buy it. It’s not hard to imagine him convincing various iwi around the country to get involved in this kai moana concept.

After refreshing myself on methane measurements, carbon dioxide equivalents, cow methane per annum and possible carbon pricing I came up with the following thoughts on the value of ‘red seaweed’ to dairy farmers:

The price that could be paid for the seaweed might be something like the price of normal dry matter food (a) plus the effectiveness of carbon reduction (b = maybe 70%) multiplied by the volume of CO2 equivalent released per cow per annum (c = 4 ton according to a Danish study), multiplied by the number of cows, say 500 (d), then multiplied by the price our government sets for carbon, once discussed at $25 per ton (e).

This may sound complicated, but it’s not, it looks like straight forward algebra to me:

a + (b x c x d x e)

Example: Dry matter food + (.70 x 4 ton x 500 x $25) = Dry matter +$35,000 per annum.

Is it possible for an aquaculture business to produce sufficient red seaweed to feed 500 cows per annum from income of $35,000?

Does the carbon price need to increase?

Does the price of milk need to increase? (I remember an oft used challenge when we were kids – ‘what’s that got to do with the price of milk?’ This reference may come back into fashion).

Whilst I am on the price of milk, it is rising again back into the highs experienced during 2014. (An ETO II really, within ETO I).

Might Shane Jones' fund need to become a little like Working For Families and agree to subsidise red seaweed production to the equivalent of the taxes collected on PAYE from those employed in the industry?

I support the farmers in rejecting the concept of farming less. The world’s population, proponents and protestors, need food, NZ is good at producing food and our economy needs the income.

I am far more interested in solving problems than retreating from them.

As a workmate once reminded me, it’s expensive saving the planet.

If it takes a decade of financial support to reach a point that subsidies are no longer required that is better than rejecting real progress.

We shouldn’t be concerned about long timelines either because during my reading I discovered that next year it will be 100 years since scientist Arthur Pigou suggested that ‘CO2 emissions be charged at a price equal to the monetary value of the damage caused by the emissions, or the societal cost of carbon.’ (Wikipedia)

Today’s children are telling us they are disappointed in their great grandparents for not listening to Arthur more intently and taking action earlier by assigning costs to environmental damage.

Three cheers to the Cawthron Institute and to anyone who helps to make mass production of Asparagopsis armata a reality.

ETO II – The rising volumes of trading for the dairy derivatives on the NZX has encouraged the world’s leading provider of indices, S&P Dow Jones Indices, to establish a Skim Milk Powder index.

This is good news for the ongoing development of the dairy industry and the pricing of its product internationally, but even better news for the NZX because the new index matches the ‘NZX Skim Milk Powder futures contract’ and thus draws more attention to its expanding derivatives market.

INVESTMENT OPPORTUNITIES

Z Energy– has stated that it will not be offering a new bond to holders of the bond maturing in November (ZEL030). These bonds will be repaid.

Infratil Bond – has continued with its offer of the 10-year bond (IFTHC) and now introduces a new fixed rate bond paying 3.35% and maturing on 15 March 2026.

Both tranches are open to new investors.

Both tranches can be used for reinvestment by holders of the IFT200 bond maturing on 15 November 2019. This Exchange offer closes on 8 November so please act now if using this facility.

The offer documents are available on the Current Investments page of our website.

Please contact us if you wish to secure an allocation.

TRAVEL

Kevin will be in Ashburton on Wednesday 6 November.

Mike will be in Auckland (city) on 7 November.

Edward will be in Nelson on 12 November and in Auckland City on Thursday 21 November and Albany on Friday 22 November.

Edward and Johnny will be in Christchurch on Wednesday 27 November.

Mike Warrington

Market News – 21 October 2019

The Queen is so impressive.

She has more skill and good grace in her little finger than all in the UK parliament combined.

In delivering her latest Queen’s Speech she endorsed the will of the people by respecting both the content of the speech, drafted by elected MP’s, and by acknowledging that Brexit was the democratic choice of the people.

Her Majesty no doubt has private opinions about the performance of ‘her’ government but she keeps them to herself. She has seen off 13 Prime Ministers so far, starting with Winston Churchill, so I expect she is thinking ‘this too shall pass’ (Keep calm and carry on? - Ed).

We all still wonder what will actually come to pass for the UK.

INVESTMENT OPINION

Inflation – A core component of interest settings increased over the last quarter.

The headline was a threatening - DOMESTIC INFLATION RISES AT FASTEST ANNUAL PACE IN EIGHT YEARS

The facts were – The Consumer Price Index rose 0.7% in the September quarter, bringing annual inflation to +1.5% for the past year, down from +1.7% for the year to June and 0.5% below the central bank target of +2.0%.

At least the story contained another useful fact – inflation has only exceeded the central bank target once during the past eight years. This made the headline factual, but misleading (is this possible? – Ed).

It would have been more useful if the headline focused attention on the non-tradable (i.e. local) inflation data which is rising too fast (+3.2% year to date) and would allow the ‘guns of criticism’ to be appropriately pointed at councils (rates increases at +5.0% YTD), building costs and insurance costs.

Our interest rates did increase on the day of the announcement, but this was in response to a similar lift in the US and not in response to our local inflation data. None of the interest rate increases will result in investor excitement.

EV– Then, what followed was a far more accurate, witty and possibly ominous headline:

‘Dyson pulls the plug on electric vehicle.’

People had plenty of fun with James Dyson’s decision to build EV’s; ‘will they suck?’ and ‘is Dyson just blowing hot air?’, but the company’s final decision to withdraw from this market is revealing.

One of the UK’s greatest design and engineering firms has declared that they cannot establish a point of difference at a price that consumers would be willing to pay.

Does this mean affordable EV’s will be unappealing or that EV’s will generally be unaffordable for a long time yet?

Hopefully it means that so many major vehicle manufacturers have locked up such a huge pool of patents that it’s clear they are about to increase supply massively and undercut smaller producers on price and not that the future for demand is poor.

I hope lower prices will lead to higher demand because a much larger EV fleet in NZ will be good for our balance of payments (we generate our own electrical energy but import fuel).

Tesla remains as the canary in this mine, especially for luxury EV’s.

I looked at a few other car manufacturer share price charts to see how they were performing based on their beliefs with EV options. Interestingly Toyota was a standout for ongoing increases in value and they prefer hybrid engineering to pure EV!

I’d think long and hard, and then do so again, if you’re ever encouraged to invest in EV manufacturers.

Greenery – Several years ago there was a move by businesses to claim ‘greenness’ but it didn’t really catch on in financial and business activities, but it is happening again now and this time it stands a better chance of contributing to better decision making with respect to the environment.

It won’t happen as quickly as the most naïve idealist politicians would like but neither do we want it to otherwise it is less likely to cement in the better behaviours that most of us seek.

We need to avoid cheap attempts to ‘green-wash’ things with valueless veneers just to satisfy demands for immediate change.

As a senior BP spokesman said when visiting NZ last week, politicians can claim headlines by demanding that fossil fuel use stop immediately but this is truly impossible given the scale of energy use by the world’s population. He explained that the rapid increase in renewable energy generation is impressive, but thus far it is barely enough to simply cover the increased demand for energy globally.

He did not favour efforts to reduce energy use because of the strong relationship between reducing poverty via access to energy for these populations.

Putting a price on carbon to penalise the worst quality energy suppliers and to reward the best seems to be the next step required.

Logically businesses are seeking to make desirable changes that also assist them financially (carrot). Reducing energy use is a common thread, such as Sky City Casino’s moves to swap in LED bulbs, and this is good, but we will need some regulatory ‘stick’ too to ensure that all are captured by the need for change and cannot get away with trivial attempts to green-wash their activities.

I saw a statement from the Financial Markets Authority too making it clear they will try to stop false green claims being made.

Central government can address a price for carbon and obligations to measure and report emission (penalty) or capture (reward).

New Zealand’s Zero Carbon bill is debating just how we might achieve this but from what I read the bill is highly contentious at this point. By the way, I wish the government hadn’t politicised the name of the draft law (emphasis mine) - ‘Climate Change Response (Zero Carbon) Amendment Bill’.

Personally, I don’t think we should be able to purchase carbon offsets from outside NZ because corruption elsewhere will undermine our attempts for genuine progress from NZ businesses; let’s see if we can create internal success without trying to kill off businesses here before we consider foreign participation.

The majority of the world’s leaders have made it clear they don’t like sharing control or economics so there is little chance of a global accord on carbon pricing and trading.

Central bankers can, and are, beginning to set expectations relating to environmental risks and outcomes. With a carbon price and consistent reporting standards on emission and capture the central bank would be able to apply regulations to influence funding costs – higher equity requirements from high carbon emitters, with the opposite also applying.

Plenty would argue that lowering Loan to Value Ratios (LVR) and Debt to Income ratios (DTI) to impact housing outcomes was an interesting experiment learning to apply Carbon Emission Ratios (CER) will be far more important long term.

Failures under LVR or DTI can result in financial support from family, or bankruptcy in the worst case, but failure under CER doesn’t have such a convenient reset button.

Proactive businesses see the change in regulatory tone and understand the ‘carrot’ so are already taking steps in the right direction with respect to environmental concerns.

Last week I attended the roadshow to promote Argosy’s new ‘Green Bond’ and I was impressed that the financial advice community are now probing on behalf of clients who care as to whether this was a coat of green paint or a meaningful improvement to the business.

I didn’t see an FMA representative in the room, so presumably they’ll read the offer documents and don’t wish to ask questions of the senior executives.

For ARG meaningful improvement is what they’re after and whilst it is the right strategy to pursue in the current political climate it is also now financially intelligent to do so.

Property tenants are beginning to demand measurable improvements against global standards, standards that are being adopted in NZ for ‘green’ buildings. Argosy describes the certification standards in its offer documents and on its website.

Energy efficiency (savings) is a major thread in these measurements but the comfort of tenants is a factor also.

The government is one of this country’s largest, and most desirable, tenants. They now demand a minimum certification standard of four star from new leases so this will apply additional pressure to landlords to improve the quality of their buildings and reduce the environmental impact.

Buildings of a lower standard (both government and council expectations) will progressively attract weaker tenancy demand and lower relative rental income.

By contrast longer leases and higher rentals are being agreed for the ‘greenest’ buildings with the highest standards.

Argosy has committed to only issue a value of ‘Green’ bonds that can be applied to their best performing buildings and this is reviewed by Ernst & Young. After this issue they will have $200 million ‘Green’ bonds on issue sitting alongside $214m of properties and another $140 million due for completion soon (includes Stewart Dawson’s corner for interested Wellington investors).

It’s not a breach of covenant if these numbers fall out of line, but you can see the intention is good.

Lenders to Argosy should be pleased with the environmental behaviour, and the improved quality of the tenancies to ensure that financial obligations are met but beyond that it is the shareholders who win financially.

Longer tenancies and premium rentals imply increased scale and duration of future revenues, which when placed alongside declining debt costs for long durations results in wider margins over longer periods.

This helps to partially explain the current share price premium relative to property values across the sector; the area inside the rectangle is getting larger.

Property owners may have it easier than many other sectors in achieving greater ‘greenness’ but what we have seen so far is genuine and will not wash off.

If this leads Julianne Genter and/or James Shaw to join the ARG share register that will just be icing on the cake.

FED shopping again – After months of fighting against Donald Trump’s lobbying for more interest rate cuts in the US the Federal Reserve has returned to the market to buy assets onto its balance sheet (US$60 billion per month), thus adding liquidity to the market again.

Currently this is being done on the premise of ensuring constant access to short term liquidity for the banks, which follows a period when difficulty accessing same day cash resulted in overnight interest rates reaching 10%.

From one perspective this is a responsibility of the central bank, financial stability and the smooth functioning of the financial system, however, it isn’t a stretch to believe this purchases of short term Treasury Bills (30-180 days) will gradually extend in duration until the Fed is again buying 10 year Treasuries from the market.

Would it be more effective to assist the economy if the US government spent more time trying to increase the ‘liquidity’ in the wallets of the large group of the lowest paid people?

Regardless of how this new strategy plays out it reinforces long settled opinions about interest rates remaining very low for a very long time.

EVER THE OPTIMIST

NZ remains an important market for dairy product and from the NZX’s perspective for trading of derivatives on dairy products (used by farmers for price hedging, and buyers locking in future prices for known delivery requirements).

Two weeks ago the NZX Dairy Derivatives market reported simultaneous records for day (+22%), month (+11%) and year (+40%) counts with trading NZ Milk Price Futures contracts.

ETO II

Even though various delays have occurred for the business Rocket Lab is already up to nine successful launches, with the latest being last week.

I attended a presentation of another exciting NZ start up business last week, one which hopes to show that we can build another better, faster, cheaper business to many of the world’s largest manufacturers.

Stay tuned; if it becomes public I’ll be sure to guide your attention to it.

INVESTMENT OPPORTUNITIES

Argosy – ARG’s new bond issue (ARG020) was completed last week and the interest rate was set at 2.90%.

Investors will have noticed that one of the best features of this new bond (ARG020) was the company’s choice to pay interest in the months of January, April, July and October, which very few bonds offers.

Thank you to all who invested in this bond offer through Chris Lee & Partners.

Z Energy– explained recently they will not replace their maturing bond on 15 November 2019 (ZEL030). These funds will be paid out to investors on that date.

Infratil Bond – The offer of the 10-year bond (IFTHC) remains open, with its annual reset interest rate, and will close this offer on 13 November. This bond pays an interest rate of 3.50% until December 2020 (then reset annually).

The free option that the interest rate cannot fall below 2.50% is beginning to look more attractive.

The extension to this tranche’s closing date is to provide a rollover opportunity to people holding the Infratil bond maturing 15 November 2019 (IFT200). Rollover applications would need to be submitted to us prior to 8 November.

The public can still invest new cash into this bond (IFTHC).

TRAVEL

Kevin will be in Ashburton on Wednesday 6 November.

Mike will be in Auckland (city) on 7 November.

Edward will be in Nelson on 12 November and in Auckland City on Thursday 21 November and Albany on Friday 22 November.

Edward and Johnny will be in Christchurch on Wednesday 27 November.

Mike Warrington

Market News – 14 October 2019

I have just read the first optimistic thing relating to Fonterra in a long time; Fraser Whineray has accepted an offer to join Fonterra’s senior executive ranks, departing his role as CEO at Mercury Energy to do so.

Fraser’s move is not about the money. He has some history in the sector (Dairy Board and Puhoi Cheese) and will surely hold some strong views about adding value for NZ to one of our largest export businesses.

Good on him.

If you happen to be a Fonterra investor, don't count your chickens (cows – Ed) too soon.

Fraser doesn’t start until 2020 and 'good things take time' in the dairy sector.

INVESTMENT OPINION

Budget Surplus – Decision making is always a forward-looking exercise, but on occasion one must allow themselves time to reflect on the success or failure of past decisions.

Without wanting to get too far into which period of government influenced what results, New Zealand should be very pleased with its recent budget surplus (the cash part, not the revaluing of the rail business). The reality is that collective fiscal governance in NZ has been well led by both 'colours'.

Higher tax revenues may imply a conclusion of being over-taxed, but I suspect it also means IRD is getting better at collecting taxes that were once avoided.

Displaying that we can collect a surplus of tax is a far stronger position to be in than the many nations with ballooning future liabilities and no political fortitude for increasing government revenue to begin solving their problem.

Actually, Japan deserves compliments for its political fortitude on tax reform having introduced and progressively increased its sales tax, one of the most effective taxation methods, as they try to tackle Japan’s enormous government debt burden.

I see they passed this tax increase into law just prior to the Rugby World Cup and next year they have the Olympics to add even more consumers into the mix.

Japan’s only mistake was that unlike New Zealand’s simple and effective GST application they have agreed to certain exemptions for their sales tax.

But I digress…

Governments are notorious for wasteful spending, so I don’t want ours to simply search for ways to spend more and certainly not for short term excitement (sugar rushes). Longer term infrastructure requirements (ably assisted by private investors in Public Private Partnerships) and perhaps increased savings toward ACC and Superannuation obligations appeal to me.

If there’s room, then sure, personal income tax cuts to reposition some money back into the hands of those who are most active within the economy would be useful.

It would be nice if we could afford to increase the net income for those on the lowest incomes to counter the uncontrolled price increases the public endures from barely controlled council spending and now huge increases from the insurance sector too.

As the global trade wars expand NZ is going to be very grateful for the fiscal prudence of our government.

Business Confidence - I am looking at an ANZ supplied chart that overlays economic growth (GDP measure) and business confidence (Quarterly Survey of Business Opinion).

The correlation is not quite 100% but it’s well over 90%.

The recent decline in business confidence is steep, with a gradient only mirrored by troubled periods such as 2008, 2000 and the mid 1990’s.

I understand why some commentary concludes that we talk ourselves into some of our own economic problems, but in fairness the businesses are looking forwards when they make today’s investment decisions, so their lead indicator should be heeded.

Based on weaker economic opportunities businesses are investing less money.

The businesses don’t necessarily expect to earn less money but they cannot see clear opportunities to increase their revenue and want to steer a conservative course with financial resources just in case revenue declines.

It would be logical for investors to respond to this signal by managing their investment risk taking in much the same way; don’t expect an increase in revenue or profits from the businesses that you own. It may happen, but the business group is telling you of its improbability.

Business Confidence II – Here are a couple of news items that deserve to add confidence;

Christopher Luxon will now offer his skills to the NZ parliament; and

The current CEO of Walmart in the US, New Zealander Greg Foran, has accepted the role as CEO of Air NZ. This is an outstanding hire by the company and should inspire other NZ businesses to think big when trying to secure new executives.

Trade War – Donald Trump began the trade disruptions based on the sound principle of wanting better financial balance between trading nations.

In truth he wants the US to sell more than it purchases, but from a starting position of the opposite happening just striving to reach a balanced outcome was a good initial focus.

However, political tension has escalated rapidly as various nations fight back, not wanting to cede ground to the detriment of their own economy, no matter how fair balanced books sound.

The situation has now become worse as political ideology has reached the forefront, making financial outcomes a secondary consideration; witness the fiery debate about freedom of expression regarding Hong Kong and sports (NBA) being drawn into the fire.

Those who held out hope that the ‘trade war’ would be settled prior to the 2020 US elections are going to be disappointed.

Economic activity seems likely to slow as nations try to do less business with each other, but this will likely be compounded by reduced spending (increased saving) by consumers as they worry about their future employment and personal incomes.

Watch the once bustling Hong Kong economy slow to a crawl.

The interest rate markets, tracking lower again, have been expressing stronger expectations that the forecast weaker economic results are coming to pass.

Canary - I hope this story from last week isn’t a canary in a coal mine.

A modest sized hedge fund (US$4 billion) in Korea has frozen investments in the fund and suspended withdrawals.

The fund invested in higher risk bonds, using leverage (this is what hedge funds do) so to be experiencing a run of withdrawals and then to suspend these it confirms that the fund was beginning to lose money on its higher risk bonds, exacerbated by the leveraged position.

You would have thought it was hard to lose money in a bond market with falling yields. To do so implies that the higher risk bonds were too high risk and the borrowers failure to meet obligations, even off very low interest rates, discloses that we may have reached a tipping point for this sector.

It is a long while ago (2007) when Bear Sterns failed under the weight of failed lending to higher risks, a year prior to the Global Financial Crisis, but we said at that point ‘there is never just one cockroach’. 12 months later the infestation became more obvious than any dared believed was possible.

This quote sounds familiar - 'We made this decision through consultations with regulators in order to minimize the losses of investors'. (how generous - Ed)

The fund’s name is Lime Asset Management. This might leave a sour taste I thought.

Then I looked up their website where they present an acronym for LIME - Legendary Investment Management Entity. A bit too cute.

At this point I am beginning to think their legend won’t be what they imagined when they boasted so openly in public.

I hope they turn out to just be a sour fruit and not a canary.

Mortgages – The huge decline in nominal interest rates is now delivering negative real returns (below inflation) and with bond yields now well below bank term deposit rates professional investors are considering other options for lending money.

Simplicity Kiwisaver fund is the first to declare that it will start acting as a mortgage lender, with the potential to currently offer a low rate of 2.95% under certain conditions.

This strategy will come with additional administration costs but with returns of 1.00% or more above the strong bonds they currently invest in it’s definitely an avenue worth pursuing and adds value beyond the fees charged by the fund.

I also observe that Simplicity intends to have restrictions for both Loan to Value Ratio (LVR) and Debt to Income (DTI) which should make it clear to the Reserve Bank that they are dragging the chain by not adding DTI to their regulatory demands from our banks.

I had thought that this move would quickly be copied by other Kiwisaver providers, but given that the largest funds are owned by banks it is far more likely that Simplicity has alerted them to the opportunity to sell some of their own loans from the bank’s balance sheet into the Kiwisaver fund, if they haven’t already thought of this themselves (seems likely - Ed).

New Zealanders had hoped that Kiwibank and the other small banks may have led the charge for reducing the influence of Australian owned banks in the NZ economy but given the rate of growth of savings in Kiwisaver, it may well be these vehicles that increasingly localise our lending market.

ACC – ACC’s disclosure that its levies may need to rise in response to lower interest rates is the reality of the situation for many businesses, especially insurance businesses.

ACC defines its liabilities based on estimated incidents of expense to the 'insurer'.

ACC then tries to match its assets, and forecast income from the asset, against those liabilities.

Falling interest rates (and earnings on shares) are a double-edged sword because they reduce the real income available to the fund and increase the present value of probable future liabilities.

In response ACC needs a greater asset level very soon to ensure that they have sufficient assets for the new valuation of known liabilities and to try and generate additional income as part of the payment obligations now budgeted over the year ahead.

This very same situation is impacting all other insurers.

It feels perverse to be told that lower interest rates is another reason the insurance sector is increasing the levies that they expect me to pay. My investment income has gone down, and my insurance costs have simultaneously gone up.

Low, or zero, interest rates are more than just a problem for income of passive investors. It is a problem for consumers too.

Further, any managed funds with defined payout agreements, such as Government Super Fund (GSF) in NZ and National Super (but not the NZ Super Fund) ensure that the government suffers at least twice under the weight of lower investment returns. Remember that the government in this instance actually means our taxes, so we take another hit, or our children do.

I once commented about the merit of teaching the Time Value of Money to secondary school students to ensure that they understand the leveraged implications of the movement in interest rates. It’s not just a subject isolated to one or two hundred professionals in banking and financial markets, it reaches us all.

The past decade, and quite likely the one ahead of us, provide excellent material for real life examples that students can learn from.

In the meantime, I suspect that you intuitively knew that if your expenses were not coming down, but interest rates (returns) were, you were worse off in today’s financial terms and thus you either needed a greater level of savings or to contemplate capital spending in retirement.

Spot Survey - Given the decline in returns, both interest rates and dividends, are you willing to spend capital to retain your preferred spending levels?

Supplementary question: if the answer is yes to spending capital, do you prefer to manage the decline yourselves or have this coordinated for you by others?

Standing Proxies – A large proportion of you have made use of this new service and issued Standing Proxy instructions to Computershare and Link Market Services to have the NZ Shareholders Association represent you at meetings.

Well done. Your action has added significant influence to the NZSA’s formal voice with NZX listed entities.

If you haven’t yet appointed the NZSA as your Standing Proxy we strongly encourage you to do so, especially if you are not one to bother presenting your own voting at such meetings.

We have the forms and guidance notes here if you’d like to receive them. (Just drop us an email to ask).

Those who have appointed the NZSA as Standing Proxy holder have been a little surprised that they continue to receive voting information from the registries, inviting them to vote.

The registries are obliged to issue this to you for each event.

You still have the right to exercise your vote (step in front of the NZSA) if you wish to, however, having appointed the NZSA to act on your behalf it seems unlikely that you’d want to do so.

So, with your Standing Proxy instructions in place you can simply ignore the invitations to vote that you’ll continue receiving, comfortable in the knowledge that the NZSA is going to exercise a voice on your behalf.

If you’d like to know who the NZSA is voting, and why, then I would encourage you to subscribe and become a member. http://www.nzshareholders.co.nz/

EVER THE OPTIMIST

After recently attending a 2019 venture capital evening I was energised by the younger generation’s potential to create new business opportunities.

Convincing investors will be harder than they think, but the enthusiasm can be infectious and based on my assessment a quarter of them did indeed have compelling propositions and were very likely to attract investor demand.

INVESTMENT OPPORTUNITIES

The free option that the interest rate cannot fall below 2.50% is beginning to look more attractive.

The public can still invest new cash into this bond (IFTHC).

Argosy – has announced that it is issuing another senior, secured ‘green’ bond for a seven year term. We have uploaded the term sheet and presentation to our website under ‘current investments’.

Argosy have set a minimum interest rate of 2.85% which will be fixed for the seven years.

Argosy are paying the brokerage costs on the bond. Accordingly clients will not have to pay brokerage.

If you wish to have a firm allocation for this bond please urgently contact us no later than 5pm on Thursday the 17th of October. Payment will be due no later than the 28th of October.

Z Energy– is next in line with a maturing bond (15 November 2019) and we look forward to learning about their decision on whether or not to offer these investors a new bond to roll their maturing funds into.

TRAVEL

Chris will be in Christchurch (tomorrow) Tuesday 15 and 16 October.

Edward will be in Auckland (Remuera) on 16 October & Nelson on 12 November.

Kevin will be in Ashburton on Wednesday 6 November.

Mike will be in Auckland on 7 November.

Mike Warrington

Chris Lee & Partners

Market News – 7 October 2019

It didn’t take long for our well-informed readers to help me understand the ‘Thomas Cook underwrite’.

In response to previous failures in the travel booking sector, in the 1970’s the UK established something called the Air Travel Organisers Licence which sees the Civil Aviation Authority become a travel insurer (£2.50 per booking is collected) to cope with moments like these (Minties not enough? – Ed).

Contrary to my fear, UK taxpayers should be pleased with their government because Thomas Cook had been lobbying them to inject £200 million to avoid the collapse; you know the response.

Interestingly, Thomas Cook had recently convinced a large Chinese shareholder to inject £900 million new equity, so they’ll be less than impressed with the situation, especially if this shareholder felt certain the UK government would assist.

It does make you wonder whether this Thomas Cook situation (‘let it fail’) is a contemporary view based on the China, Hong Kong and Brexit disruptions and the new political minefield being uncovered.

INVESTMENT OPINION

Goodman AML – The new placement offer of additional units to retail investors in Goodman Property Trust (GMT) will fail in my opinion based on a couple of measures; the proportion of money raised and the administrative efficiency.

The normal preference for investors to discuss investment value with their financial advisers has, in this case, been side-tracked by the deeply unnecessary Anti Money Laundering demands being presented to GMT investors.

We have a good understanding of the AML law given its introduction to our business in 2012 and our clients have kindly come on this journey with us, helping us to meet our legal obligations.

AML obligations have now been rolled out more widely across our economy, but to have ‘captured’ GMT, and some other similar business, when they approach their current owners asking for additional capital is a failure to apply the purpose of the law effectively in NZ.

The law wants us to spot the money launderers and those who are financing terrorism. We must know our clients well (a good thing) and be alert to transactions that don’t make sense (Suspicious Transaction Reporting). We arrange transactions for clients, so we have something to monitor under the AML law.

GMT does not arrange transactions for you, so they have nothing to monitor with respect to AML law.

GMT doesn’t really care who is on their register, so they won’t spend any time wanting to know you. GMT’s manager receives its fee for managing the properties regardless of the investors on the register.

It is because GMT uses a Trust structure (issues units, not shares) to hold the properties on your behalf ( with a third party manager) that they are ‘captured’ by the AML law obligations. This is by virtue of another unpopular law; The Unintended Consequences Act 1840.

By contrast Argosy is a company structure with ordinary shares and has no such obligations under AML.

ARG shareholders shouldn’t sit too smugly though because I was told that the FMA is looking into whether companies and shareholders should be captured too under the same AML obligations as GMT!

What nonsensical thinking is driving this regulatory behaviour?

GMT issued $150 million units to wholesale investors two weeks ago, a placement that was underwritten so GMT knew its funding increase would be successful. The retail offer appears to only be seeking an additional $15 million so GMT will be indifferent to my prediction of its impending failure.

They will be indifferent to the opinions of the FMA about the retail offer success and the huge workload that will reach their registrar, Computershare, will result in fees that will cause the GMT directors to seriously question whether they can pursue retail placements ever again.

The GMT Chairman (who, by the way, has been there too long) must have had a sense of humour when he wrote in the covering letter with the following words in support of the offer:

The offer ‘allows every investor to participate (unless restricted by legal constraints) and is a cost-effective alternative to a Rights issue.’

I beg to differ.

The NZ Shareholders Association will argue with GMT about the effectiveness and fairness of Rights issues relative to placements, but it is the AML legal constraints that will kill off the majority of retail demand.

GMT is going to find that they have wasted a large amount of money on lawyers, printers and fees to the registrar with this retail placement.

Maybe they are trying to make a point to the Financial Markets Authority about the stupidity of this AML obligation being added to their operation (at our expense as GMT unit holders) but I’d rather they didn’t waste ‘our’ money lobbying nor arranging offers that appear doomed to fail.

Computershare may well be collecting a fee, but it’s not going to be sufficiently large for the grief they have just introduced to their staff.

Regular readers will recall me having cited AML as adding a subtle element of anti-competitiveness to our economy. I hear from people constantly that they do not wish to open new accounts across various industry players as a result of the AML obligations that we all face.

Recall also my recent compliments to the Capital Markets Task Force for highlighting this problem in their recent report.

Now, the imposition of the AML obligations onto NZX listed, closed pool, investment businesses adds another drag to capital markets and it is likely to reduce investment opportunity for retail investors.

Subtle resistance points like this accumulate to deliver a meaningful problem for our economy.

We are, for predominantly good reasons, slowing the economy down a little with new environmental expectations but let’s not slow it further with unnecessary red tape.

Martin Stearne, the Chair of the Capital Markets Task Force must be rolling his eyes in frustration.

But wait, there’s more….

Since 2013, a new investor should not have been able to join the GMT register without passing the AML monitoring efforts of a Financial Service Provider such as ourselves.

No investor can arrange business without being AML compliant, so in theory GMT is entitled to believe that the money laundering risks of the investors on its register are being monitored by Financial Service Providers (FSP) such as Chris Lee & Partners and the banks that process the dividends.

It would have taken a very patient money launderer to join GMT’s register prior to 2012 to gain access to a 2019 capital raise, to then place more money, without being noticed by the AML police. They cannot, of course, sell their GMT units without interacting with an AML compliant FSP.

To launder money it must be washed and dried (bought and sold) and GMT doesn’t offer a sales facility to its register.

Side bar: I note that the registrar, Computershare, does offer a facility to sell securities for people, which I find curious because they are exempted from most aspects of the AML law!

Businesses that raise new capital should be considered AML compliant if they always appoint Financial Service Providers to complete the transactions and instruct them that wider distribution can only occur through other Financial Service Providers (in return for some brokerage). All of the FSP’s are Reporting Entities under the AML law and thus they can confirm that all participants to the transaction are AML compliant.

I love our democracry, but just sometimes we need Executive Orders (let me guess… - Ed).

I’d be keen for the FMA to reflect on how easy it is becoming to do business with wholesale investors at the exclusion of retail investors.

The FMA presents themselves as trying to improve the integrity of financial markets so investors, including retail investors, can participate confidently but the FMA themselves will be able to reduce their efforts on improving behavioural integrity confronted by retail investors if there are fewer of them to protect.

Wholesale investors won’t be screaming about this GMT situation. They face modest AML imposition and they will benefit by gaining new customers if retail investors stop managing money themselves. They have already invested their $150 million in a 48 hour period the previous week.

The NZ Shareholders Association added value for its members by contacting GMT to discuss why, and whether the ‘burdensome AML obligations’ could be avoided.

The answer was no, the AML could not be avoided. They pondered whether a Broker (Financial Service Provider) could confirm AML compliance but in my view this would have resulted in someone else unwisely accepting GMT’s legal obligation.

Given that GMT is not providing any revenue to the Financial Service Providers its hard to understand why the FSP’s would accept legal liabilities from them.

Dairy Results – Fonterra and its farmers, and unit holders, will not have enjoyed reading about Tatua Dairy’s results, delivered days after Fonterra’s.

Tatua announced an increased profit, based on slightly lower milk volumes, with increased payout to famers at $8.50 per kgMS and they increased their retained earnings (double the previous year) to invest in infrastructure upgrades.

Nice work, proving again (alongside Synlait) that it can be done.

Green Bonds – The Bank for International Settlements has launched a ‘Green Bond Fund’ that its members (60 different central banks) can invest cash into and have it recognised as ‘Reserves’ of that central bank.

The fund will operate under Swiss law and in US dollars.

With these actions they have reinforced the US dollar as the dominant global currency and opened the door widely to the advantage of presenting oneself as ‘green’.

Eligible bonds have a minimum rating of A– and comply with the International Capital Market Association’s Green Bond Principles and/or the Climate Bond Standard published by the Climate Bonds Initiative.

It’s the Green or Climate principles that would worry me if they are defined by ever changing groups of talking heads.

Nonetheless, it is helpful that the BIS is taking this position because it will enable them to influence the definitions that will then be tolerated and thus endorsed within each member country.

From there the likes of the Reserve Bank of NZ can start setting regulatory expectations from lenders within our economy (capital relief for genuinely green projects and thereby lower interest rates?).

Defining environmental and climate related measures is going to be quite the minefield, but it is helpful that the BIS is trying to ‘light a central pathway’ through such a fog.

Financial Crime – I’ve touched on this previously with you; please keep your sceptical antenna switched on at all times.

This paragraph won’t make you any money, but I hope it contributes to saving you some.

I don’t mean not to trust people where you have good reason to be trusting, as this can be draining, but always have a way to test things that you aren’t sure about and take your time.

Where a person rushes you it is likely the first sign of trouble. They don’t want you to cross check what is being said.

The reason for this paragraph is two-fold.

One - was after reading about yet another story of a ‘Rogue Trader’, in the oil industry this time, who took risks that he wasn’t authorised to take for his employer and then deceived and manipulated the situation to hide the truth, until finally the problem (financial loss) became too large to hide (US$320 million in this case).

Two – was after attending a presentation by a senior staff member form the Serious Fraud Office where he explained what the SFO does, the landscape for fraud in New Zealand (worse than you’d hope) and a few specific cases (resolved so he could discuss).

Fraud is, sadly, a game of whack-a-mole for the SFO and it’s a game that we don’t want to play.

There are people and processes in place to try and catch the criminals. They are getting better at their jobs and artificial intelligence machinery is making huge strides in analysing the massive volumes of evidence that predominantly resides online now. However, the criminals never stop, which is the reason for this paragraph.

If you are ever in a situation that you do not understand, or it seems (is) too good to be true, run your own sanity check, then ask another competent person to offer their opinion too.

Then, find real facts to prove what is being said, not just opinions.

If you are asked to keep ‘an opportunity’ secret, this is another bright red flag.

The high returns from the past decade must now provide a ripe environment for the next ponzi scheme operator because to declare annual returns of 8-10% for an extended period of time will not seem out of the ballpark to many investors.

8-10% per annum over the past 10 years is now a fact but promises of 8-10% annual returns for the decade ahead is a crime.

Do not rely entirely on evidence provided by the person presenting you with an opportunity. Several of the cases the SFO told us about included evidence provided to banks that had been endorsed by lawyers and accountants, who ultimately ended up ‘in jail’ themselves for being a party to the fraud.

Even with evidence of only modest financial reward reaching the lawyers and accountants the SFO could not reconcile why professionals would compromise their careers, income and freedom to become part of a fraud, but they do.

Can you reach a third party, unrelated to the proposer’s information, to verify the facts?

For example, your bank can confirm your money is yours, a share registry like Computershare and Link Market Services can verify ownership of securities (shares, bonds, units), Land Information NZ can verify property ownership etc.

Given the lengths that fraudsters will go to for deceiving people, relying on your instincts is important and elevating your scepticism in proportion to the scale of the promises is the best foundation to work from.

Remind yourself of your mother’s or grandmother’s recurring quote from yesteryear; ‘There’s no such thing as a free lunch’.

I wish I could link good outcomes from all licenced financial advice, but the reality is four of the cases the SFO had on their slide show related to crime, or alleged crime, effected by financial advisers! The Barry Kloogh story in Dunedin will be worth watching and learning from.

You can, and should, if your instincts alert you to the need, seek advice from a second independent financial adviser; not one introduced to you by the primary financial adviser that you are listening to.

Given the scale of loss experienced from events of fraud paying two financial advice fees for an item than appears to warrant such care is highly likely to be cheap insurance.

If after all your efforts to check out a situation leave you uncertain, then do nothing; home base for your money is just fine and always better than losing it.

As ever, run all financial questions past your financial adviser(s).

Europe Weak – One or two commentaries last month criticised Mario Draghi (outgoing ECB President) for easing monetary policy and trying to ‘handcuff’ incoming President Christine Lagarde to adopt his easy money mantra.

The commentators were wrong, searching for an angle for their story, and Mario was right.

European manufacturers reported a further weakening in conditions through the Purchasing Managers Index, now down to 45.6 with a reading below 50 indicating worse conditions.

Reinforcing the problem, Europe’s strongest country, Germany, reported a PMI result of 41.4, the worst result for more than a decade, which was the immediate aftermath of the Global Financial Crisis.

What is it about today that makes the situation worse than an environment when banking nearly locked up globally, asset values reduced enormously, and unemployment surged?

The medium-term perception of the Purchasing Managers has a lot to do with it, but they are responding to disappointing real data from the near term.

All opinions about the various permutations will be presented for us via the media to digest, but importantly Mario Draghi was correct and increasing the availability of money (and reducing its price) is the current reality.

EVER THE OPTIMIST

Businesses are beginning to recognise the value of our ‘retired’ generation, and their consumer potential based on their past savings ethic, and attaching themselves to the Gold Card as a client recognition card.

The Gold Card could very quickly become the most influential discounting channel in NZ, beating out the likes of Flybuys, AIrpoints and the many other cards that populate households now (too many of them – Ed).

If the discounts offered are genuine savings, then this is good news for the demographic that deserves the respect.

INVESTMENT OPPORTUNITIES

Infratil Bond – The offer of the 10-year bond (IFTHC) remains open, with its annual reset interest rate, and will close this offer on 13 November. This bond pays an interest rate of 3.50% until December 2020 (then reset).

The public can still invest new cash into this bond (IFTHC).

NZ Post – Has announced to the market that it will not reset or repay its NZP010 subordinated bonds this November.

This means holders have the luxury of doing nothing and keeping the NZP010 bonds.

In electing to keep the bonds on issue and retaining the funding NZ Post must now pay the penalty credit margin at 3.00% which implies an interest rate beyond 15 November of about 3.70% - 3.90% p.a. (at the time of writing).

The bonds continue to trade on the NZX should a bond holder ever wish to take control of the situation and sell the bonds to extract cash for a different purpose.

TRAVEL

Chris will be in Christchurch Tuesday 15 and 16 October.

Edward will be in Wellington on Thursday (10 October) & Auckland in Remuera 16 October

Mike Warrington

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