Chris Lee & Partners Ltd

Despite current market risks and uncertainty, the underlying appeal of property investment remains. At its most basic, property offers a tangible asset that provides a steady income stream, potential capital appreciation, and typically exhibits less volatility than equities. While it can outperform bonds in terms of returns, it also allows for value enhancement through growth, improvements, and rental inflation. These distinct advantages make property an attractive option for investors with the time frame and risk tolerance to weather market turbulence.

New Issue – Genesis Energy Capital Green Bonds

Genesis Energy Limited (GNE) has announced a new capital bond.

An interest rate of 6.50%p.a.has been set, with interest paid quarterly.

The interest rate will be fixed for five years, and Genesis will then run an election process, enabling investors the chance to be repaid at this time.

GNE will be paying the transactions costs for this offer. Accordingly, clients will not be charged brokerage.

We have uploaded the investment documents to our website which we encourage investors to read.

Travel

David will be in Palmerston North on July 6 and in Lower Hutt on July 7.

Johnny will be in Christchurch on July 12 and Tauranga on July 26.

Edward will also be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD). He will also be in Auckland again towards the end of August.

Fraser will be in Christchurch on August 18.

Clients and non-clients are welcome to contact us to arrange an appointment.

Seminars

The last round of seminars is next week, in Ellerslie (FULL), Milford, and Whangārei on July 3, 4, and 5.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below). Please contact our office if you need help booking.

To register yourself for our free seminar, please click on the relevant link below:

Auckland – 4 July 11am - Milford Cruising Club, 24 Craig Road

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei – 5 July 10am - Flame Hotel, Waverley Street, Onerahi

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Ellerslie on July 3 (before the seminar), and Whangarei on July 4 (afternoon).

Please contact us if you wish to make an appointment during the seminar round.

Fraser Hunter

Chris Lee & Partners Limited

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Taking Stock 22 June 2023

The speed with which new bond offers continue to arrive is an encouraging signal that, once again, retail investors will be wooed and valued when the corporates need them.  Major bond issuers can no longer obtain from banks, with comfort, the funding they need to match the life span of their assets without help from the retail market.  Banks might lend but now impose uncomfortable covenants that cramp the corporate causeways.  So it is now the turn of retail investors to be selective, to demand interest rates that reflect the corporate need, imposing a new filter - evidence of excellence - on those who seek money.  Recent subordinated issuers like the BNZ, NZX and now Genesis are offering rates near to, or higher than, 7%, a rate that would have been unimaginable when our finance minister Robertson was creating the expectation of negative rates, just two years ago. (Note, he is now preparing to borrow even more billions from overseas investors at new, higher, rates.)

Obviously, he expected that all the borrowed and printed money would not create inflation and that in his experience higher interest rates would not follow higher inflation. Perhaps it does not in countries where winter does not follow autumn. 

Just as important as a cause of this new demand for corporate funding has been the demand for banks to carry more capital. Also a factor has been a wave of fear that grips banks when they face stringent stress testing of their loan portfolios.

Always so focussed on growth and quarterly results, not to speak of vulgar bonuses, bankers become spooked when they face behavioural changes from their clients. Falling household disposable income tightens many a sphincter.  Middle managers are culled, the power holding cabal in Mahogany Row encircle the wagon;  lower level staff in banks become “headcounts” and disposable. Loan rollovers are reserved for premium clients. The new enquiry lead by the Crown will discover banks turn off risk lending when there is any whiff of fear. This scenario is rolling out most visibly in the most extreme centres of capitalism - Wall Street, an example - but even in provincial New Zealand the change is well underway. Rather than retain good people and forego bonuses the move in all sorts of banks is to cut costs in pursuit of short-term profits.  The signals in the US are the rapid emergence of lightly- regulated, uncapitalised private equity loan funds, targeting ten per cent loans from those clients the banks abandon.

At the other end of the office, depositors are demanding higher returns, quite willing to extract guaranteed bank deposits in favour of higher yielding cash funds which, of course, are lightly regulated and require no capital.

One could argue that the depositors chasing higher returns might be deluded if they think money market cash funds have the same resilience as bank deposits when sandstorms arrive.  Cash funds run by fund managers seek higher than bank rates by: 1.investing short term client money in long term, high-yielding bonds.2. investing in higher risk bonds and notes (such as those offered by Silicon Valley Bank)

This may seem like an all-care, no-responsibility model.

Such funds have come and gone regularly throughout my career. Of course, the most nauseating example was the First Step fund run by Money Managers and NZ Fund Managers’ founders, where the fund appeared to have no capital, no lending experience, no fear of risk but a healthy appetite for intermediation fees. We also had finance companies which were allowed by accounting standards (IFRS), by incompetent regulators, miserably unimpressive and frequently dishonest directors and owners, useless trustees and poor auditors to sell their wares with balance sheets and revenue statements that were fictitious.

And we had several “mortgage trusts” which lied and subsequently failed to meet obligations. (“We would never lend on property developments”).  Happily, NZ investors have largely remembered these atrocities so since 2008 there have been very few finance companies appearing in portfolios, almost none still braying for retail money today.  Investors will be wondering how lasting will be the new fashion of accepting low levels of regulation and low levels of capital, in quest of marginally higher returns. They will be wondering what makes a Kiwisaver fund believe it has a data base and the culture and experience to compete for banking business.  Typically, the new fashion lasts for years, often finishing in a torrent of investor tears.  But banks will shrink so opportunities will appear. Banks will find capital expensive. They will seek to cut costs. Services will be reduced. Expect more branch closures.  Those investors who move to buying bonds must focus on excellent companies, preferably where their product or service is essential, where their governance is stable and credible, not chosen for social reasons, and where there is a history of stability, evidence of a desire to survive difficult business cycles.Where one sees evidence of short term preoccupation with turnstile governance, prioritising of social acclamation, a focus on quarterly results and bonuses, fanciful stock valuations, or improbable bad debt provisioning, then the signal will be to run like hell.  There will be ample good issues for the patient investor.  Experienced financial advisors will add value by analysing the information to enhance sensible choices.  _ _ _ _ _ _ _ _ _ _ _ _ The recent political and media chatter about productivity and recession would be worth reading if it began with an understanding of what these things actually mean.

We are told we are in a minor technical recession, as measured by two successive quarterly falls in the highly debatable figure we quote as our Gross Domestic Product (GDP).

I wonder how many commentators have a clue as to how GDP is measured.  It is supposed to be the sum of the value of all goods and services produced.  It measures more than just tangible goods and services and thus is a notional figure that may be fictitious.  It attaches notional value to the output of our bloated, politically-stacked, arguably mediocre public sector.

Those that add up our real production of tangible goods and services will find the sum of all these goods and services is around $200 billion.  Yet GDP is quoted as being more than $350 billion.  How come?  The public sector includes crucial, valuable services like health and education, where some sort of figure must be calculated to include in GDP.

The public sector comprises some 130 departments, agencies and entities, many of which are necessary, some of which, like the Retirement Commission, are just cost centres whose output may be dismissed by some as having negative value. There are many such departments whose fabric resembles the emperor’s fine silk. Because so many public services produce stuff that has no, or an incalculable, value, the compiler of our GDP figures makes the absurd blanket assumption that every dollar spent on the public sector is matched by an equivalent amount of value, to be added.  Therefore input costs equal output value. The assumption must be that one dog’s manure is valuable as fertiliser for someone else’s lawn.  So we spend something like $140 billion, more than our total amount of exports, on a public sector, then create a notional value of $140 billion to add to GDP, bringing our mythical GDP to the sum of $360 billion. Whoopee!By this logic all we need to accomplish to have a growing economy is to fatten up the public sector,  spend even more on it, and GDP will rise!

NZ is not unique in adopting this notional value. Many countries use the same illogic. Heaven knows what China does, to achieve its constant GDP growth.  The “input equals output” theory leads to the ridiculous anomalies displayed when the government comes to assess productivity and, from that, productivity per head per region.  Current published figures base productivity on GDP divided by the number of hours worked, or GDP regionally divided by per head of population. The current list claims Wellington is our most productive region, a conclusion only made possible by the fiction that public service input equals output. The chart shows Wellington is a third more productive than Canterbury, Otago, Marlborough, Manawatu, Hawke’s Bay or Waikato.

Wellington says it produces $77000 per capita.

The surprise is that the chart does not claim Wellington has less wind than those areas.  It is not a huge stretch to see how this emboldens Wellington public servants and politicians to demand the regions buck up, lift their game, adopt artificial intelligence, use technology more wisely, work smarter, put their boots on quicker. How townies love telling cockies how to improve.  One might suggest to the compilers of this fiction that they stay well away from those who don their boots at dawn, return at dusk to work with their computers, honing in on data that can help them save water, fertiliser, nurture their animals and their land and streams, and prepare for weather changes, Stay well away, townies.Those townies will sound like the 1966 British Lions rugby captain a lock named Campbell-Lamberton who would stand back from the mauls with the All Blacks, watching his team be beaten up by Meads, Gray and others, shouting to his troops “ more fire in the mauls, chaps”.   Talk to the farmers. You might discover the farm produces revenue of $4 million with four staff. Productivity, real productivity, $1 million per head.   I suppose an alternative is to pay all public servants six times as much, which might mean, under the theory input equals output, that the public sector is truly as “productive” as the farmer.

Perhaps it is time for the world to exclude the public sector from GDP and to revert to measuring goods and services that the public will buy.

In New Zealand’s case we could choose to measure exports per capita, by region, and then develop a little more respect for those who push the wheelbarrow.

The notion that a report on retirement living, or a proposed cycleway over a harbour, can be “valued’’ by its cost is not one that should fool anyone.  _ _ _ _ _ _ _ _ _ _ _ _

The most common question asked during our ongoing seminar rounds is what sort of a KiwiSaver fund best suits a retired, 65-year-old owner of KiwiSaver capital.

With very rare exceptions the answer is none!  Once the employer subsidy and tax credit ends, KiwiSaver falls from the very best saving option, to the very worst deposit option.  A bank deposit with no fees has a better return for risk profile, not just because of the usually high KiwiSaver fees but even more so, the better fit for a retired person’s portfolio.  KiwiSaver funds are rightly managed for the average client, who will be around 38 years old. For that man a balanced fund can plant saplings, knowing in 27 years’ time the trees will be harvestable or saleable.

A retired investor buys forests that will be available to harvest or sell in nearby years.  Unaccountable newspaper columnists, or self-interested KiwiSaver managers and salesmen, are of little help in the decision-making process.  KiwiSaver funds are NOT the equivalent of a high yielding bank account.  _ _ _ _ _ _ _ _ _ _ _ _ 

Seminars

Next week our seminars are in Tauranga Monday, 1.30pm and Hamilton on Wednesday, 1.30pm.

The last round is in Ellerslie (FULL), Milford, and Whangārei on July 3, 4, and 5.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below), but some (not all) of our venues are roomy and can accommodate walk-ins if you are having trouble registering. Please contact our office if you need help booking.

To register yourself for our free seminar, please click on the relevant link below:

Tauranga – 26 June 1.30pm - Tauranga Yacht & Power Boat Club, 90 Keith Allen Drivehttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamilton – 28 June 1.30pm - Ventura Inn, 23 Clarence Street https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland – 4 July 11am - Milford Cruising Club, 24 Craig Roadhttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei – 5 July 10am - Flame Hotel, Waverley Street, Onerahihttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4 (afternoon).

Please contact us if you wish to make an appointment during the seminar round.

Travel

Edward will be in Wellington on June 29.

Edward will also be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD). He will also be in Auckland again towards the end of August.

David will be in Palmerston North on July 6 and in Lower Hutt on July 7.

Johnny will be in Christchurch on July 12 and Tauranga on July 26.

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris LeeChris Lee & Partners Limited

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Taking Stock 15 June 2023

THE world's most devoted analysts tell us that the great reset is imminent; they do not know when it occurs; they are certain it is needed, and will occur.

In the USA, they refer to it as the ‘’fourth turning’’, a reference to previous major shifts in paradigm in the last two centuries. Issues like consumerism, inequality and debt will drive the change.

They now hold conferences, trying to identify the signals of the turning.

I wonder if the outing of PricewaterhouseCoopers (PwC) in Australia as a massive cheat, might be a catalyst, providing the spark to acknowledge the bad practices that are accepted by those who carelessly pay bills with Other People’s Money.

When PwC's corrupt practices in Australia were revealed in recent days, Australia’s fury ignited a global inquisition into the undeserved halo that the world's major accounting firms have worn throughout recent decades.

They have been lavishly paid to provide supposedly excellent arithmetic and supposedly honourable advice to governments and local governments worldwide.

Just in NZ, the major accounting firms anchor their extreme salaries and bonuses with the$100 million (plus) that they collect from a government that presumably has hollowed out the expertise of the public sector so carelessly that the government must feel it has no alternative but to fill the sty with caviar, scallops and blue cod, to attract “independent” approval for its policies.

Silk purses can be used to fill pigs’ troughs.

The big four comprises Ernst Young, KPMG, Deloittes and PwC, but lesser firms, like Grant Thornton and McGrathNicol also enjoy the swill in New Zealand.

In Australia PwC was outed after being fed with tax payer money to advise the Australian government on how to tax effectively foreign companies operating in Australia.

Think Microsoft, Amazon, Google, Apple and many others.

Apparently, the Australian government saw in its millions of public servants no talent capable of researching and advising on this matter.

Perhaps any talent had been sucked out of the public service by the big four and the law firms that have free access to the sty.

Having done the work and advised the Aussie government on how to create the tax law, PwC then scuttled off to its foreign clients and, for another feed from the trough, advised the foreign clients on how to structure their tax affairs to defeat the new system on which PWC was providing advice to the government.

PwC in Australia has nine thousand staff and billings of several billion, a dominating chunk of the billings being from the government.

It now faces national and international judgement for its treachery.

The Australian Super Fund, a massive organisation, has responded by expelling PwC from its list of approved consultants.

Other major firms have followed.

Its biggest competitor KPMG has gently condemned PWC’s practice.  One might guess that glass breaks when stones are thrown.

Far too late to be a credible confession of embarrassment, PwC itself has booted out several partners, an act that seems far more a public relations exercise than an act of contrition, let alone a promise never to cheat again.

Globally, governments have been snapped out of slumber by this breach, which surely will bring attention to the relationship between governments and their use of public money.

Perhaps the governments themselves have long been lazy and irresponsible in their quest to obtain ‘’independent’’ or ‘’private sector’’ affirmation of their often ideological, or illogical, maybe even corrupt, law-making processes. (Cycle lanes on harbour bridges might be a hint of mis-use of consultants).

Have we in the developed world deliberately anointed accounting people with very narrow skill sets to be the anonymous designers of tax systems that the designers can then circumnavigate?

Do we bestow respect on major accounting firms and perhaps law firms where billings far exceed the real value they add?

Would a change in the somewhat unearned deference to these organisations be a signal of the fourth turning, when the Western world resets, with a new determination to demand value for money in all expenditure of Other People's Money? Surely this incident in Australia will bring new attention to the quality of government spending.

What we do know for sure is that PwC in Australia is disgraced and may have to be sidelined or barred from access to the public purses for a long time.

Perhaps it will need to rebrand, to escape the damage to its reputation.

I recall that Arthur Young’s reign in New Zealand ended when its certification of Registered Security Ltd’s trust deed was seen to be disgraceful, 30 years ago. Its partners paid millions to investors and then closed down the AY brand.

We do not know whether there has been similar behaviour in New Zealand in recent years, in terms of abuse of what in the investment world would be called ‘’inside information’’, such a breach leading to massive fines and probably jail, in the case of capital market treachery.

However, we do know that all the accounting firms have regularly been paid far, far more for poor quality work than any polite person would discuss at a corporate cocktail party, prior to this latest infraction.

For example, we have long pretended not to notice the gap between what an audit means to accountants, and what an audit is wrongly expected to mean to investors.

Accounting firms use a senior audit partner to oversee junior staff who plod through audits, checking on the accuracy of creditor records, debtor details, revenue statements, and bad debt provisioning.

Yet the outside world believes auditors are validating the business model, the business sustainability, and the truthfulness of what are coded as sales, and profits.  The outside world kids itself.

Does anyone recall Wynyard, the audited software company that booked sales that in truth were conditional and never happened, leading to the unexpected collapse of the company?

Do we remember the finance companies and mortgage trusts that booked interest as received, when it was accrued, not received, and clearly needed a miracle ever to be received?

Do we recall how Ernst Young audited South Canterbury Finance a few months before it collapsed, allowing SCF to claim bad debts were a mere fraction of the ultimate total, revealed months later, and clearly known by the SCF directors and its leader.

The same audit company allowed SCF to pretend that its capital had been increased by the injection of assets that in effect the company already owned, a form of double counting amounting to chicanery.

Does the word accountability ever resonate with these people?

And let us not forget the absolutely dreadful performance of major accounting firms when they act as receivers and liquidators.

Our government, under Key’s leadership, allowed McGrathNicol to run a clean-up of SCF that cost taxpayers $53 million for two years of work, often performed by people earning $30-$60 an hour, but charged out at virtually triple this rate, Treasury condoning such gluttony.

Worse, Treasury had paid PwC to advise it on how to supervise McGrathNicol, receiving the sane advice that the sale of SCF assets should be deferred for several years to avoid destruction of value in what was a dysfunctional market.

Treasury and its Minister, Bill English, paid for and accepted the advice but Key overruled Treasury so McGrathNicol proceeded with fire sales that cost the country a billion dollars, as we all now know, and as PWC correctly forewarned.

If the accounting firms are in the spotlight for their government tax advice, they most certainly should be in a dungeon for their goofy work in audit and in receivership and liquidations, over many decades.

Value-add never seems to be considered when governments use other peoples’ money to pay hyper-inflated bills.

One wonders whether the PwC behaviour in Australia might be the catalyst for a new era of austerity, beginning with a review of the charges made by such consultants.

Of course, the ‘’fourth turning’’ is predicted on many more issues than careless government spending or corporate greed and ineptitude.

Global analysts regard the fourth turning as a great societal reset, based on what they see as the only credible response to extreme debt; that is, much more careful spending of Other People’s Money.

They forecast a horrid depression or hyperinflation, or both, predicting that many countries will see half or more of their voters fall beneath a dignified living standard, hastening the demand for change.

They wonder if this gloomy outcome will change what democracy delivers, as the power falls into the hands of those who are most disenfranchised, perhaps some of the voters schoolchildren who do not attend school.

They point to early changes in society occurring in Europe, where, for example, France now seeks to legislate travellers away from aircraft to trains, a response to France’s pledge to become carbon neutral.

Perhaps the new cost of airfares will speed up this transition, as inflation reduces affordability.

The fourth turning is a scary prospect in many respects but if it leads to a reversal of our childlike misunderstanding of the value of arithmetic, tax advice, audit, and receivership costs, it might be welcomed by those who resent poor quality spending.

Next up might be an examination of our acceptance of massive bills for legal advice.

Footnote: Receivers and liquidators are licensed and regulated. By themselves! Whoever thought this was a good idea?

_ _ _ _ _ _ _ _ _ _ _ _

The decision to link the top tax rate (39%) to the trust tax rate was inevitable and common sense.

There never was a case for using a tax incentive to increase or sustain our growing use of family trusts, so many of which were immorally based, formed in the 1990s in the false belief that wealthier people could access welfare subsidies (rest homes, an example), legally and morally.

The means testing of pensions drove vast numbers of people to form a trust, encouraged by the likes of Money Managers and lawyers in the 1990s.

When trusts and the highly paid are less able to avoid the 39% top tax rate, attention surely must focus on the Portfolio Investment Entity rate of 28%, which favours those on higher tax rates.

Effectively, investors in a PIE structure have been able to enjoy a maximum tax rate of 28%.

This concession was made to the KiwiSaver and funds management industry, quite wrongly in my opinion. The logic was that anyone who invests through a fund manager will be paying tax on any capital gains whereas a private investor, who does not trade his shares, will not.

The 28% tax rate was granted at a time when the top personal tax rate was 33%, giving fund managers an advantageous rate to attract investors.

The size of the concession becomes excessive when the discounts hit 11% instead of the intended 5%.

If the PIE rate is not reset at 33%, the tax avoidance option will encourage issuers to find a formula that attracts the PIE concession.

It would be hard for a government to find logic in that outcome.

Seminars

The programme moves to Palmerston North and Napier on Monday, June 19 and Tuesday, June 20, then to Tauranga on June 26 and Hamilton on June 28.

The last round is in Ellerslie, Milford, and Whangārei on July 3,4, and 5.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering.  Please contact our office if you need help booking.

To register yourself for our free seminar, please click on the relevant link below:

Palmerston Northhttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/feilding-and-district

Napierhttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

Taurangahttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamiltonhttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland - Ellersliehttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

Auckland - Milfordhttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangareihttps://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round.

Travel

Edward will be in Napier on both 22 June & 23 June (Mission Estate).

Edward will be in Wellington on 29 June.

Edward will also be in Auckland on 19 July (Ellerslie), 20 July (Wairau Park) and 21 July (Auckland CBD). He will also be in Auckland again towards the end of August.

David Colman will be in Palmerston North on 6 July, and in Lower Hutt on 7 July.

Johnny will be in Christchurch on 12 July and Tauranga on 26 July.

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris LeeChris Lee & Partners Limited

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Taking Stock 8 June 2023

Fraser Hunter writes:

Thoughts on the Infratil Acquisition 

Infratil announced it will pay $1.8 billion to take full ownership of One NZ (formerly Vodafone NZ), increasing its stake from 49.95% to 99.9%. The remaining shares are held by individuals, including the CEO of One NZ. 

Infratil acquired the remaining stake from Canadian investment company Brookfield Asset Management. Brookfield has made more than $1 billion from its four-year investment in One NZ, having purchased half the company for $1.7 billion in 2019. Both Brookfield and Infratil received approximately $1.7 billion between them for the sale of the cell tower assets. 

The purchase will be funded through an $850 million equity raising, cash reserves, and debt. This includes a $100m retail offer, which will allow existing New Zealand shareholders to apply for up to $80,000 of new shares. The institutional placement will be completed at $9.20 per share, an 8.9% discount to the last closing price of the day prior to the announcement. Details of the Share Purchase Plan will be sent to existing shareholders directly from the registry on the 13th of June. Applications will close on the 27th of June 2023.

Infratil is confident in its ability to uncover even more growth opportunities by taking full ownership of One NZ, despite the already impressive performance. During the presentation, Infratil outlined a clear and achievable plan to reach a 30% EBITDA margin through cost optimisation, which would be a similar margin to rival Spark's. Under Infratil and Brookfield’s ownership, One NZ’s EBITDA margins have increased from 23% to an impressive 28%.

Infratil is targeting equity returns of +10–12% from the increased investment in One NZ over the medium to long-term. Given Infratil’s track record, it is fair to give them the benefit of the doubt. Using Infratil’s holding in Z Energy as a blueprint, it may not be all that farfetched to see a future IPO of One NZ, which I think would be highly appealing to local and offshore investors. 

Such an IPO would be large and need to include an incentive for investors to take the risk of equity ownership. Infratil would have needed to see some strong short-term performance from One NZ to justify the price paid, given its targeted returns.

Full price paid

The multiple for the acquisition was 9.5x EV / EBITDA, which is slightly ahead of where Spark and the global telco industry is trading. It also represents a 50% premium to the fair value valuation of One NZ in Infratil’s year end result. A typical rule of thumb for the control premium of a business is 15-25%, suggesting either the 31 March valuation was low, or the price paid is high. 

How the asset is valued from here will also be of great interest. In the last financial year, One NZ was one of IFT’s best performing assets and its valuation uplift was a key generator of profits and performance fees for its manager. It is also one of the Infratil’s larger exposures, representing nearly 30% of the portfolio following the transaction. Should the valuers adopt the acquisition value, Infratil’s existing stake has just seen a 50% (+$600m) overnight increase in valuation, which would likely generate a hefty performance fee.

Interest rates

At Chris's recent seminars, there have been many questions about the where interest rates may go from here and what the pipeline looks like for upcoming bond issues. 

Firstly on interest rates. Over the last few weeks, we have seen the RBNZ indicate it may have finished its hiking cycle, which caught a lot of the market off guard. Particularly as it came just weeks after the budget release, which was initially viewed as having an inflationary impact. 

The RBNZ justified its move with signs inflation is cooling, plus had likely already factored an increase in spending in its ‘surprise’ 50bps increase prior to the budget release. Given the aggressive hiking of the RBNZ over the past 12-18 months, a pause in the rate hikes may not be a bad thing. 

Historically, the effects of rate hikes usually manifest over one to two years, and so far, their impact has been less drastic than anticipated. We are witnessing robust employment rates and wage growth, while asset prices, albeit weaker, demonstrate resilience. The much talked about recession continues to be pushed out.  

My base case view, which seems the most common one, is that inflation has likely peaked and will be reined in back towards the 2-3% target range eventually. I don’t think inflation and interest rates is going to fall off a cliff, but perhaps the simplest reason to support this is that both the RBNZ and the Federal Reserve continue to reiterate their commitment to curbing inflation, and seem prepared to hold the threat of further rate increases over the market, should they deem it necessary.

Underpinning this view is also the belief that most of the factors that drove the long-term trend of falling interest rates remain present. These include ageing societies, slowing global growth and an overwhelming demand for defensive, lower risk assets. A Bank of England paper took this further, suggesting declining real interest rates have been occurring since the Middle Ages and is a persistent phenomenon seen across all regions. 

While oil price shocks and geopolitical conflicts have had significant impacts, these incidents have not resulted in enduring changes to interest rates. If the post-covid era was to follow the pattern of wartime shocks, this would suggest an impact lasting between five and eight years, before interest rates resume a downward trend. 

Post-pandemic we have seen supply chains being rebuilt and restructured to make them more resilient, causing the unwind of some of the benefits of globalisation that will come with a cost. Technology and productivity advances will play a key part in filling this gap. Moving manufacturing back to developed markets becomes more achievable as technology and automation takes a bigger role in the process. Cost of labour becomes less of a factor and factors like shipping and storage costs, and time to deliver, become more influential. 

During the last week, we saw some very credible counter arguments to the view that rates would return to their historic trend. Bank of Japan Governor Kazuo Ueda made the case that the global economy may be moving away from a period of very low interest rates, into an era of sustained higher inflation, where the cost of goods and services rise more rapidly.

Ueda credited the surge in inflation to a combination of different factors, notably labour shortages, supply chain disruptions and an increasing the cost of goods. He also took the view that the high and growing level of debt and increasing geopolitical risks could prolong the period of higher inflation.

So, what does this mean for investors?

The New Zealand corporate yield curve remains inverted in the current financial environment, meaning that long-term bonds are returning less than short-term maturities. This is an unusual scenario and is a signal that frequently predicts an impending economic downturn, though its predictive accuracy is not perfect. It can imply a variety of things, but importantly it signals the market's expectation of declining interest rates in the medium term.

While the annual returns on longer bond yields are lower than the short end, they still present an appealing option for investors by allowing them to bolster their portfolios by adding yield and addressing any maturity gaps.

Laddering, or staggering bond maturities over time, remains an important strategy for investors in this scenario. Laddering is the investment practice of purchasing a variety of bonds with varying maturity dates. This strategy can provide investors with a consistent and diverse income stream while also assisting them in effectively managing interest rate risks.

Another advantage of laddering is that it reduces risks. If interest rates do rise in the near term, which remains a real possibility, by staggering investments a portfolio benefits from the ability to invest at the higher rates. 

The stock exchange currently has investment-grade bonds with yields around 5.5% percent across a wide range of maturities. This not only allows investors to fill any potential maturity gaps in their portfolio, but ensures liquidity, as the bonds mature and funds are returned to bondholders.

In terms of new issues, we anticipate a steady flow of new issues, supported by the maturation of existing debt issues, which will need to be renewed at much more investor-friendly levels. We believe investors should be ready to take advantage of these new issues which fit with their existing portfolios and continue to build out a resilient income generating portfolio and continue to extend duration as these offers come to market. 

New Investment Opportunity

The NZX has announced that it is offering a subordinated bond with a minimum interest rate of 6.50% per annum (fixed for 5 years). This issue is open now and closes on Monday 12 June. 

The NZX is crucial to our economy, enabling investors, kiwisavers, managed funds and institutions the ability to buy and sell investments. It also has a large funds management business (smartshares). 

This investment will have a legal maturity date of 10-years, however investors will have the option to exit after 5-years, as the NZX plans on running an election process (reinvestment option) at this time.

Whilst scaling may occur, we do not anticipate much scaling with this issue.

The NZX will be paying the transaction costs for this bond, accordingly clients will not be charged brokerage.

Please contact us if you wish to receive a FIRM allocation. The investment document and investment statement is now on our website (under current investments).

Seminars

Our seminar programme continues.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering. Alternatively, you can contact our office for assistance.

The venues which have some flexibility are:

12 June Dunedin – Edgar Centre – 1.30pm

13 June Invercargill – Ascot Park Hotel – 1pm

19 June Palmerston North – Distinction Coachman – 11am

28 June Hamilton – Ventura Inn 1.30pm

5 July – Whangarei – Flame Hotel 10am

To register yourself for our free seminar, please click on the relevant link below:

Dunedin

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/dunedin

Invercargill 

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/invercargill

Palmerston North

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/feilding-and-district

Napier

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

Tauranga

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamilton

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland - Ellerslie

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

Auckland - Milford

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round. 

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Travel

David Colman will be in New Plymouth on 9 June, Palmerston North on 6 July, and in Lower Hutt on 7 July.

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Edward will be in Wellington on 29 June.

Edward will also be in Auckland on 19 July (Ellerslie), 20 July (Wairau Park) and 21 July (Auckland CBD). He will also be in Auckland again towards the end of August. 

Johnny plans to visit Christchurch, Hamilton and Tauranga in July and August.

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris Lee & Partners Limited

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Taking Stock 1 June 2023

THE late Lloyd Morrison, the founder of Infratil, left an army of admirers when he died in his 50s of leukaemia, a decade ago.

Many people would also have been in a group made wealthier by his vision.

I was in the army of admirers and in the group who benefited from his vision and his ability to attract excellent people to execute Infratil's strategies.

I had met Lloyd in the 1980s when he was a sharebroker, watched with sympathy when his first foray into arranging a listed public company (Omnicorp) failed, a victim of banking panic and share market frenzy in 1987.

He founded Infratil in 1994, imagining a listed vehicle that would make strategic investment in infrastructure companies like Wellington Airport, Trustpower, for a short while Port of Tauranga, and eventually in international assets, some ideas wonderful, some (European secondary airports) disastrous.

Morrison formed Morrison & Co to manage Infratil and other infrastructure funds, perhaps watching how Macquarie in Australia became the millionaire's factory, buying infrastructural assets.

Lloyd Morrison was a visionary, had a genuine social empathy, became a generous philanthropist and never became isolated from the real world. I enjoyed good steaks and red wines with Lloyd often, he befriended and supported my son James who he mentored in James' earlier years. He is one of a dozen or so business leaders I came to admire.

But no description of Lloyd would be balanced if it did not mention that he had no wish to run a cut-price service. He set up Morrison & Co to intermediate investments and devised fee structures and a bonus structure that has made the shareholders and senior people at Morrison & Co amongst the least likely to be inconvenienced by the rising price of tomatoes.

To be less polite, Morrison & Co's fees and bonus structure are nearly as revoltingly excessive as those of Goldman Sachs and Macquarie's, in their home towns.

In managing other people's money invested through Infratil, Morrison & Co has benefitted from clever purchases of important assets, like the property company Canberra Data Centre, which manages data for key Australian organisations, including the defence force and the government.

Morrison & Co has not just benefitted - it has been revoltingly over-rewarded, its feed of fees being the equivalent of the lavish overindulging in lots of things, as the Romans observed from its leaders prior to the end of the Roman Empire.

Morrison & Co collect bonuses not by buying an asset, adding value, and selling the asset at a much higher price. It collects bonuses by simply getting a valuer to declare that the asset will (might) sell for a much higher price.

Morrison & Co then collect a cash bonus, paid for by having Infratil borrow money to pay the bonus.

It is fair to note that the cash payment may be made in the (near) future but it is correct to say that it is collected on the valuer's valuation, not on a realised sale price.

Morrison & Co would argue that if it had to sell the asset to realise a gain that in turn led to a bonus, then its interests would not be aligned with its Infratil investors unless by chance the sale decision was made because there was not much opportunity to add further value.

The theory is that the Morrison formula ensures good assets are allowed to percolate. I cannot see why ''playing the long game'' breaks the alignment of interests for Morrison & Co and for investors.

Infratil does have a connection with someone who has been smart at timing a sale.

The previous chief executive Mark Bogoievski deserved the thanks of Telecom investors when he first foresaw the demise of Telecom's Yellow Pages, and found a Canadian pension fund that had the opposite (incorrect) view.

Telecom, thanks to Bogoievski's investment banking skills, sold the Yellow Pages to a syndicate for more than $2 billion many years ago, after the various search engines made the Yellow Pages virtually obsolete.

One might ask any readers of Taking Stock when they last used the Yellow Pages.

I suspect the Yellow Pages might today be worth something but perhaps only a fraction of what Telecom was paid during Theresa Gattung's glum period of leadership, perhaps salvaged by Bogoievski's talent.

Well, last week Morrison & Co announced that in response to fund manager and Infratil shareholder discomfort, its bonus formula is to be modified.

The effect was to reduce its nine-figure bonus (hundreds of millions) by $6 million.

One could compare that to Air New Zealand responding to criticism of its massively hiked internal air fares by generously doubling the allocation of boiled lollies to its Koru Club members.

Infratil is one of my favourite companies, the late Lloyd Morrison a man I greatly admired, but never let it be said that Morrison & Co misses any opportunity to garner wealth from those whose cash Morrison & Co manages.

The new bonus formula needs further revision.

_ _ _ _ _ _ _ _ _ _ _ _

IF the government insists on providing a deposit guarantee for our trading banks, perhaps implementing the guarantee next year, it must surely first bring together some people with a memory of the guarantees it so badly bungled in October 2008.

Most who read Taking Stock are long in the tooth, to use a farmer's analogy.

They will recall the outcome of the moral hazard that accompanies a Crown guarantee for private sector deposit-takers.

In 2008 the late Michael Cullen introduced a comprehensive guarantee scheme that was endorsed by John Key. It embraced amateurishly governed credit unions and building societies, moronically governed and managed finance companies, some cooperative-owned banks, the Crown-owned Kiwibank, and the huge Australian-guaranteed Australian trading banks.

The banks paid fees of several hundred million to obtain the Crown guarantee.

Every other beneficiary of the guarantee contributed the equivalent of a paper cup and a box of used matches.

The banks were bolstered by the confidence provided by the guarantee. No bank depositor ever required a payout by the guarantor, the Crown. Many small finance companies, which paid barely a nickel for the guarantee, cheated, seeking to merge with the finance companies that were ineligible for the guarantee.

Many scoundrels thought they had duped the authorities.

Some spent time in seclusion, enjoying porridge and white bread, as the cost of their delusion.

Others, like South Canterbury Finance, simply gamed the guarantee system, borrowing hundreds of millions at high rates, effectively offering high rates to their investors for what, with the guarantee, became the equivalent of government stock.

Treasury, amongst whose people resided dopes who thought SCF stood for the Save the Children Fund, failed to administer any sane controls over the likes of SCF and preferred to continue its childish war with the Reserve Bank, rather than pool all knowledge and control the finance company behaviour.

Treasury's management of the guarantee was of kindergarten standard.

SCF was allowed to borrow as much as it chose, and to lend it to half-witted people at massive rates, creating a lending margin the equivalent of Mongrel Mob lending.

Of course this all ended in misery, the public sector clearly unable to govern the private sector, and clearly inept at managing private sector assets. That should have provided a lesson no government should ever forget.

Key and his cronies eventually allowed - in fact, endorsed - a massacre of asset values, which cost NZ at very least a billion dollars, a sum that in today's world might have paid for half of Robertson's petrol subsidy in this election year. Key and his Cabinet should be regarded as the cause of the billion dollar inferno. Their business competence was as poor as Treasury's.

So here we go again.

Robertson, never having worked in the private sector, a Dunedin student whose love is the art of politics, not finance, is engineering a new, permanent guarantee.

It is likely to work like this.

The banks, being well capitalised and too big to fail, will offer a depositor, say, 5.25% for a three-year guaranteed term deposit, or 5.75% for an identical deposit, except the latter would not be guaranteed. The Crown collects 0.5% for its guarantee.

The credit unions, building societies, and finance companies, having no or in my view utterly inadequate capital, and usually no credible credit rating, will pay a higher fee and may not bother offering a two-tier deposit rate, as few would take the unguaranteed option.

At what rate should their guarantee fee be set and how deeply should their lending activity be monitored, controlled, and audited?

If you asked an insurance company or a bank to be the guarantor, the fee would vary between 2% and 8%, or no guarantee at all, I suspect, in many cases.

The finance companies with good track records, if there are any, might pay 2%, the property development lenders might pay 8% fees.

Treasury would still be the enforcer, I suspect. I surmise that today it has even more people who would guess that SCF stands for the Save the Children Fund. (Treasury definitely needs an injection of excellent people in an era where diversity seems to trump excellence. Its staff turnover highlights this.)

If Robertson wants to introduce a guarantee scheme, he simply must consult with those who know how the private sector will respond to morally hazardous guarantee schemes. I will give him a hint.

The private sector will exploit guileless finance ministers and greenhorns in Treasury.

Let him ask those who shudder when they observe former bankrupts with criminal records seeking to attract ''wholesale only'' investors into what would be property-lending funds.

If the scheme is to be designed by Treasury and overseen by Treasury, and embraces second, third, and bottom tier lending organisations, then we would need the next Minister of Finance to abolish it and start again.

The outcome of all the Crown errors with SCF should be etched into manuals at Treasury and Cabinet.

They should never be repeated.

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Seminars

Our seminar programme is now well underway, discussing the Three Forbidden Words that so urgently need explanation.

Fraser Hunter has performed useful research highlighting the vast difference of investing in excellence, rather than in ambition. His research is one of the focal points of the seminars and appeared in yesterday's confidential client newsletter.

Admission to the seminars is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering.

The venues which have some flexibility are:

6 June Christchurch – Burnside Bowling Club – 1.30pm

8 June Timaru – Sopheze on the Bay – 1.30pm

12 June Dunedin – Edgar Centre – 1.30pm

13 June Invercargill – Ascot Park Hotel – 1pm

19 June Palmerston North – Distinction Coachman – 11am

28 June Hamilton – Ventura Inn 1.30pm

5 July – Whangarei – Flame Hotel 10am

To register yourself for our free seminar, please click on the relevant link below:

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/christchurch

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/timaru

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/dunedin

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/invercargill

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/feilding-and-district

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Christchurch on June 7, Timaru on June 8 before and after the seminar, in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round.

_ _ _ _ _ _ _ _ _ _ _ _

New Issues

BNZHA - BNZ Perpetual Preference Shares

The offer of Bank of New Zealand (BNZ) perpetual preference shares (PPS) is open.

Investors that would like an allocation will need to confirm the amount they wish to purchase no later than 5pm today, Thursday 1 June.

 

The PPS constitute Additional Tier 1 Capital for BNZ's regulatory capital requirements and carry a credit rating of BBB.

This investment is perpetual and may remain on issue indefinitely. However, under certain conditions, BNZ may redeem (repay) the PPS in six years' time.

 

The initial six-year interest rate has not been set but based on the indicative margin range and underlying rates, we are expecting an interest rate in the vicinity of 7.40%.

The rate will be set when the offer closes on Friday 2 June.

Investors that would like an allocation will need to confirm the amount they wish to purchase no later than Thursday 1 June.

Mercury Senior Green Bonds

Mercury NZ Limited (MCY) has announced that it plans to issue a new 5-year senior green bond.

The initial interest rate has not been announced, but based on comparable market rates, we are expecting an interest rate of approximately 5.50%.

The green bonds are expected to be assigned an investment grade credit rating of BBB+.

The proceeds of the offer are intended to be earmarked to finance and refinance Eligible Projects in accordance with Mercury's Green Financing Framework.

At this stage it is likely MCY will not be paying the transactions costs for this offer. Accordingly, it is likely that clients will be charged brokerage. This will be confirmed in due course.

The bonds are expected to be listed on the NZX. More details are expected soon.

If you would like to be sent information on these bonds, please contact us promptly with an amount and the CSN you would use.

We will be sending a follow-up email to anyone who has been pencilled on our list once the interest rate and terms have been confirmed.

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Travel

David Colman will be in New Plymouth on 9 June.

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Edward will be in Auckland on 19, 20 and 21 July- venues TBC.

Johnny plans to visit Christchurch and Tauranga in July and August.

Chris will be available at various seminar venues, as advised earlier in this newsletter.

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris Lee & Partners Limited

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