Chris Lee & Partners Ltd

TAKING STOCK 25 May 2017

 

IN COMMERCE, most companies assess their success on varied criteria, perhaps including market share, client satisfaction, nett profit, share price (in the case of listed companies) and, hopefully, on their achievement of social objectives.

In the narrow area of financial markets many different organisations have sought to offer ‘’awards’’ of ‘’excellence’’ by allowing companies to apply to a panel of judges.

Sadly these judges are often of doubtful acumen, often being the sort of people who seek this role as the pinnacle of their career, or to paper over their career failures.

The one type of award that does mean something is that assessed by clients, rather than some appointed panel, or worse, some foreign magazine, requiring an entry fee and advertising support.

Indeed our business is regularly approached by Asian magazines and organisations wanting to award our firm ‘’Financial Analyst of the Year’’, or ‘’Broking Firm’’ or in one absurd case ‘’law firm’’ of the year.

But an award voted on by clients means something.

For that reason the annual INFINZ awards are treated with respect, by those who work in capital markets.

To win the Fund Manager of the Year is a genuine compliment.  I do wonder about awards such as the ‘’debt issue of the year’’ but I do respect the categories that are meaningful.

The sharebroker of the year is awarded after institutional clients assess 20 categories of service, selecting the best in each sector, second best and third best.

The overall winner is decided mathematically, presumably awarding 3 for the best in each section, 2 for second and 1 for third.

Over the last 15 years, the stand-out performer has been First NZ Capital, which has won the award in 10 of these years, including this year, and in most years it has won the key category of best in research and analysis, its head of research Arie Dekker clearly heading an excellent team of, I think, 13 committed, skilled performers.

To win 10 times in 15 years cannot be a random result.  It must mean something.

This year the points awarded, on the 3, 2, 1 basis, left FNZC more than 50% ahead of any opposition.

I am unsure why, but neither JBWere nor Goldman Sachs were awarded first, second or third in any category.

FNZC’s long-term chairman Bill Trotter and his fellow directors deserve an accolade for having won such respect for so long.

I suspect their dominance comes down to a client first mentality, advice based on research, a constant pursuit of excellence, and a willingness to spend money developing global markets.

FNZC executes nearly 50 percent of all NZX trades, it is easily the prime marketer of our capital market in the large global cities, and it has no tolerance for the sort of big swinging hicks that overcharge and under-deliver.

Vigour, rigour and candour, as well as intellectual grunt make up the formula that all market leaders should exhibit.

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DESPITE FNZC’s dominance it is not represented on the NZX Board, where the sharebroker representation is from the retail firms Forsyth Barr and Craigs, whose CEO, Frank Aldridge, has recently joined the NZX board.

I suspect the market regulators and the bureaucrats get their input from FNZC from private meetings rather than NZX representation.

It is not a coincidence that FNZC is focussed on research and their relationships in places like Beijing, Hong Kong, Singapore, London, Frankfurt and New York.

The information flow between NZ and these important capital markets is essential if NZ is to win its share of their savings, enabling NZ to develop its infrastructure and fuel its business and social development.

Nor is it a coincidence that many of our leading fund managers gained their career impetus from FNZC, the likes of Matt Whineray (NZ Super Fund), Brian Gaynor (Milford), Murray Brown (Fisher), David Copley (Trafalgar) and Matt Goodson (Salt), all having had senior roles with FNZC.

Perhaps the NZX has a clear line of communication with the market regulator through its new CEO, Mark Peterson, who is another with FNZC exposure, at an earlier time in his career..

Of course the best known FNZC ex-manager is Chris Liddell, who has had a series of very senior jobs in global organisations like Microsoft and General Motors and is now doing his best to run what some see as the baby-sitting service for one Donald Trump.

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THE SALE of the Perpetual Guardian Trust Company to an Australian trust company may not mean much to New Zealand investors, given the fading relevance of trust companies.

But it does bring to an end an adventure whose origins were with the troubled PGC group and its eccentric owner George Kerr, and with a British visitor Andrew Barnes, who arrived here after an unsuccessful foray into wealth management with the Australian company AWM.  I am unsure why Barnes moved from Australia to New Zealand.

Kerr sold the PGC subsidiary Perpetual Trust to Barnes, with a plan not detailed to PGC investors, but arranged with Barnes, a fellow with whom I once locked horns.

The plan was based on growing Perpetual by borrowing money, some of it mezzanine finance, to acquire other trust companies and then list the larger entity, with Kerr/PGC to share the intended premium achieved by selling off the new entity, after achieving some synergies from mergers.

The first part of the plan proceeded.

Barnes, through his company Complectus, bought Perpetual, then the troubled trust company NZ Guardian Trust and later bought at least two minnows including Covenant Trust and renamed the group Perpetual Guardian Trust.,

With borrowings from banks, some with expensive short-term conditions, Complectus sought to list PGT in Australia and New Zealand and at one stage thought Goldman Sachs would achieve a listing. Not all, including the writer, saw value in this listing.  The plan has taken much longer to hatch perhaps because many share my view that the future of PGT is not certain.

New Zealand’s other large investment bank, First NZ Capital, perhaps did not see the same value in PGT.  The chance of selling the group to the public, always a prospect I opposed, fell away.

Barnes said that the broking world was keen on a float but those I know in that world did not share this enthusiasm, so a trade sale became the most probable outcome.

It was clear to me that this transaction had always been an arbitrage play, rather than a plan to build and own a trust company with long-term ownership stability.

I did share the view that the best possible outcome for Barnes was to find a trade buyer enabling all debt to be resolved and if a tail wind prevailed, left the Englishman with a shilling for his ambition and the risk he took in borrowing to build the group and for his time in merging the companies and cutting costs.

While he was working towards his exit, Barnes was rattled by a public claim from PGC that Barnes/Complectus ‘’owed’’ PGC $22m as its share of the gain that might (or might not) occur when the original plan (buy Perpetual, grow it, list it) was achieved.

Barnes denied there was any obligation to pay PGC $22m and at one stage counter-sued PGC/Kerr.

That argument was resolved, perhaps with a promissory note payable when an exit occurred.

If there were such a note, it must soon be settled, presumably after Complectus has repaid the banks, and the mezzanine debt.

Such an outcome might imply the group has sold for enough to repay debt, any capitalised interest, and PGC, implying an obligation of at least $100 million.

If the Australian buyer has paid out this amount, its view of its ability to succeed in NZ wealth management is massively more optimistic than mine.

I believe trust companies should exit wealth management, conceding that they have no competitive advantage and are unable to attract the sort of staffing skill levels that usually home in on niche managers like Salt, Devon, Harbour, Mint, Aspiring and Milford.

Trust companies, as I see it, should sell wills and should administer trusts and estates, when there is no other option, for example for an orphan or immigrant bachelor with no family or friends.  They should exit wealth management.  They are not needed.

If Barnes has sold for more than $100 million he has succeeded spectacularly, in my opinion.  Some guess he has made a huge profit!

I have seen precious little reason to believe that PGT will become an increasingly significant wealth manager. Indeed I foresee the reverse.

There is very little margin in selling wills, designing trusts and being the wealth manager of last resort.  Administration in these days is a low-value product.

There has been no disclosure of the sale price so what others guess is simply speculation.  Presumably the IRD will eventually know the outcome of this transaction.

PGC shareholders, no doubt, would be curious if this plan had achieved its lofty goals and might have wondered why their asset, Perpetual Trust, would have been the catalyst for a planned asset arbitrage.

Surely they would have wondered why the Englishman should have been involved, given he was by his own strong words, no friend of Kerr’s, and had no relevant history in New Zealand.

But the matter is now concluded.

I would hope the new Australian owner paid such a carefully calculated sum that any returns in the future will be satisfactory.

I guess the alternative – that the Australians paid anything like $200 million – might mean, by my guesswork, that the Aussies have a much higher level of optimism about trust companies as wealth managers than I imagine.

Either way, all will be applauding Barnes for his exit.

If he has had a windfall, it is probably best that the PGC shareholders never have to confront this news.

Arbitrage is not really a subject that brings joy to retail investors.

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IF IT transpires that the Australian buyer of PGT has paid far too much, our sympathy will be minimal.

PGT is spinning its greater value as being related to the use of the cloud to store wills and documents.

In this age this is hardly a unique long-term advantage, and very far from being a money-spinner.

PGT earns very little from drafting or administering estates and trusts, nor should it, as there is minimal value-add.

If it makes an extravagant profit it would be by persuading the public to allow PGT to manage the investments of wills and estates.  Managing money does provide large margins.

One of New Zealand’s best-ever trust company’s CEO last year told me that it was impossible for a trust company to attract top tier fund managers.

The best result for trust company clients is that PGT appoints the best external managers to look after PGT’s client money, and does not charge for identifying the best of these managers.

More likely, there would be double intermediation costs leaving hanging the question of what value, if any, is there in paying anything other than a token sum to a double intermediator.

My view is that if there is any value it is calculable in a flat amount, say $100- $200, not as a percentage of the assets of any trust or estate.

If the Aussies believe that PGT will grow its revenue from double intermediation, New Zealanders should address this by voting with their feet.  We have banks and some good fund managers with skills in managing wealth.

Perhaps it would be revenge on the Aussies, if it transpires that PGT has been mis-valued.

Who will forget the behaviour of Australian companies of past eras, when they arrived here and simply rorted New Zealanders?

For example the Australian property rogues Girvan Corporation bought the almost debt-free NZ property company St Martins Properties in the mid 1980s, used its cash and borrowing ability to sell to it various poor quality assets, stripped it of value and left the renamed ‘’Girvan Corp’’ as a corpse on the NZX.

Thanks for coming.

If PGT has been sold for a premium price that does not deliver on the optimistic hopes of its buyers, tears will not be shed in my office!

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POWERHOUSE has sold its tiny holding in the Ruth Richardson led Syft Company, realising around a million dollars.

I applaud this exit.

Powerhouse, an incubator for companies hoping to commercialise modern technology, is underpowered, lacking the capital it should be providing to the excessive number of companies it wants to support.

The million dollars from the sale of Syft will help.

What is not so encouraging is to note that Powerhouse, which employs valuers to guess what each of its holdings are worth, has sold Syft for around two thirds of what its valuers had guessed that Syft was worth.

In other words the Powerhouse model was not validated by the Syft sale.

One hopes Powerhouse advises its shareholders on the reasons for this negative margin between valuation and sale price.

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THOSE who have become agitated by the warnings of Goldman Sachs about a housing market collapse should relax.  Perhaps take an afternoon nap.

The suggestion that a 5 percent fall in prices is worthy of anyone’s attention is risible.  Prices of any asset, be it a house, a car, a share of a company, or a lump of gold, vary and almost never move only upwards.  Five percent movements can occur in any month. Ten percent swings are not too rare.

Goldman Sachs is the world’s highest profile investment bank.

It is akin to a money machine, an icon for those wealthy Americans, whose mantra seems to be that the acquisition of money is the reason we were put on Planet Earth.  Its social contributions are not obvious.

To be fair, Goldman Sachs spends much on research, it does facilitate deals, it is undoubtedly smart at finding solutions that can be defended in Court, and it manipulates American politics with breathtaking impunity, and astonishing regularity.

It seems half of the unelected people who advise Presidents are Goldman Sachs disciples.

Sorry to spoil the myth, but Goldman Sachs is not even smart at forecasting the future, let alone omniscient, unless the future can be manipulated.

Recall that just six years ago Goldman Sachs forecast peak oil production had been reached and that a barrel of oil would not be cheaper than US$200 per barrel, ever again.

It is US$50 and has been pretty well ever since.

Thanks to often highly risky technology, production and discoveries are increasing, while usage is falling.

Goldman Sachs three years ago forecast a slump in gold prices, putting the future price at US$1100.

It has been above that price by a significant margin ever since.

To those who seek to compare NZ housing prices with overseas markets, I suggest they have a kip, wake up refreshed, and consider these facts.

1.  We are unable to build even a half of the new houses that our growing population require.  Demand is obvious.  Supply is a problem.

2.  We are reluctant to rezone productive land for housing usage.

3.  We encourage wealthy people to come to live in New Zealand.

4.  Technology provides high-paying jobs in our big cities, resulting in a concentration of population in urban areas.

5.  Our public transport is poor, adding to the concentration problem, which itself is burdened by inadequate roading solutions.

6.  Younger people, new to the housing market, aspire to much better and bigger houses than the dwellings that were good enough for their parents 30 years ago.

7.  Officialdom imposes minimum standards that add to cost.

8.  Never before has the world so clearly signalled a long future of very low inflation and very low interest rates (An official global strategy).  Low rates enable the servicing of ever bigger mortgages.

9.  Many young women prefer careers to marriage and family-rearing, in effect adding to housing demand as individual ownership increases.

The likes of Goldman Sachs focus on the price of a house, relative to the buyer’s income, and note that the house is now 10 or even 15 times the average salary, whereas in the 1970s that ratio may have been four times.

One wonders why not much public discussion focusses on the income, rather than the asset.

New Zealand’s productivity remains moribund.

We are a nation that does not regard productivity as the definition of a good person, quite unlike, say, Czechoslovakia under Russian rule from 1948-1989, where ‘’unproductive’’ people like sportsmen, musicians, artists and poets were beaten with baseball bats, by thugs whose attacks were sanctioned by the Communist leaders right up till late 1989.

If we ever want to make our large city houses affordable maybe we need to increase our average incomes, through greater productivity.

(I often observe, covered in scrub or gorse, perfectly good land, easily capable of producing crops.)

Should we be recognising that we live in a highly desirable country, blessed with rain, topsoil and a liveable climate, now in reach of wealthy people who observe our tiny population and want to immigrate here?

Is our distance from North Korea, or even Trump, now a benefit rather than a handicap?

If you were selling out of London, or Chicago, or China or Johannesburg might you not consider as good value for money, a nice house in Auckland or Tauranga, or Napier or Wellington, or Nelson or pretty well anywhere in New Zealand?

Is not our housing market simply a reflection of too many people able to buy a house, and too few houses to sell?

Are we not just another option, behind Vancouver and Sydney perhaps, but way ahead of most English-speaking nations?

Why do we not focus on productivity, and set about lifting our incomes, so that the house/income ratio improves.  Perhaps that is a discussion for another day?

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TRAVEL

I will be in Whangarei on June 12 and Auckland on June 13 and Christchurch on June 20 and 21.

Kevin will be in Christchurch on 22 June.

Edward will be in Auckland on 26 May.

Edward will be in Hamilton on 7 June.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

Chris Lee

Managing Director

Chris Lee & Partners Limited

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TAKING STOCK 18 May 2017

 

A TINY report on some preliminary discussions in the Christchurch High Court last week has opened up issues that simply must be considered by every seasoned investor.

When one reverts to discussing the catastrophes of the past, to alert the watchdogs of the present, there are risks.

One risk is that the public (and Taking Stock readers) will be bored or turn away, by being reminded of appalling events of the past.

Rarely, but on several occasions, I have been asked by readers to move on and forget the past.  To do so might provide a free passage for those who would repeat the rotten strategies of the past.

Another risk is that one could oneself be bogged down by ugliness and fail to focus on the improvements in today’s environment.

In my view these risks are manageable and an acceptable cost of a greater need – the need to ensure that unresolved disasters are understood and that any signs of a recurrence are recognised and would prompt urgent action.

In my 43-year career in capital markets I have seen at least three catastrophic developments that have changed New Zealand.

The first was a change in mindset, led by politicians, the media and a few sociopathic business heads.  As I recall, this began in the early 1980s.

The change led to pursuit of extreme wealth, enabling absurd and conspicuous over-consumption (corporate jets, rich lists etc).  Wealth, of itself, became a lauded pursuit, despite lack of value-add.  Transferring money from one party to another brought knighthoods!  We were to be the Zurich gnomes of the South Pacific.

It often seemed to me that the politicians and the media were intoxicated by the free rides in leased jets, or by the presence of free wine and Cuban cigars.

In that era tax evasion was ‘’smart’’, attacking the defenceless was jolly good sport and not cowardly, rorting the Crown, as Russian moguls would argue, was ‘’fair game’’.

Was it surprising that in this world the likes of Fay Richwhite prospered, Ron Brierley became the chairman of the BNZ, various Crown entities played the Cook Island tax tricks, and in Christchurch was born a movement of ‘’Zappers’’?

The Christchurch group, describing Zenith Applied Principles, figured it was right to be exploitative.

Some ‘’Zappers’’ believed that not paying one’s creditors was helping those creditors, teaching them a lesson for ever offering credit!

The second disastrous step was the decision to allow a repair of outdated regulations to morph first into deregulation and then, for two decades, virtually no regulations.

Roger Douglas, completely bereft of business wisdom but doggedly pursuing a revision of our political interventions, succeeded in pursuing the illogical argument that a broken system (command economics controlled by Robert Muldoon) could be fixed by an unfettered, unregulated free market.

The lack of sensible checks and balances directly led to our NZ Stock Exchange having some 400 listed companies in 1987, diminished to barely 150 by 1991, in doing so stripping some tens of billions from the pockets of ordinary New Zealanders.

Does anyone remember Investment Finance Corporation or Como or Prime West, or Renouf Properties or Cory Wright and Salmon?  And hundreds more of that genre?

It was in this era that dozens of finance companies were closed down, yet virtually every depositor was repaid in full.  Their balance sheets meant something!

Until deregulation, the likes of the trustees, the auditors, the credit raters, the directors and senior management understood that the public depended on the checks and balances provided by good practices.

Sadly the deregulation led to an awful era by all of the above of deteriorating effort to serve clients but a rapidly increasing effort to serve shareholders.

The valuable inter-dependence between directors, trustees, auditors and executives drifted into abrasive and disingenuous relationships, the public left without protection.

We know where this led.

Ultimately the consequence was disastrous, as we saw in 2008, when the next iteration of finance companies fell over, only to reveal that their assets at ‘’audited’’ value, with trustees nodding, were worth in fact often nothing at all.

Whereas in 1987-90 investors were repaid in full, in 2008 the deregulated environment allowed mountain oysters to be described as gourmet food and, sadly, many were left to swallow the scraps.

The third disaster stemmed from the mindsets created by the first two and perhaps is best identified as the modern acceptance of self interest in money lending and banking.

In effect moneylenders with no personal standards, and bereft of a culture of caring about other people’s money, were allowed to connive with often dishonest or inappropriate borrowers, to borrow others’ money for high-risk ventures.

Banking lost its service ethos, extreme bonuses became the motive, and in the second tier of banking, where contributory mortgage companies and finance companies live, a pursuit of instant wealth for the shareholders became the target.

Bridgecorp’s rotten CEO, Rod Petricevic, paid himself a salary of $2 million, more than the ANZ CEO at the time.

Wide boys colluded with dishonest borrowers to use the money of investors who were trusting the auditors, trustees, directors, financial advisers, credit raters, valuers and regulators to ensure that they were buying into gourmet food, not mountain oysters.

Undoubtedly some of those who failed in their task were deceived by the work of others.

Trustees relied on directors’ certificated affirmations, auditors only ‘’spot checked’’, regulators relied on auditors and directors, financial advisers relied on audited accounts and trustee affirmations and credit raters . . . as you will see the arguments are circular, but all depend on the integrity of the acclaimed information.

The system had failed because there was this culture of ‘’wealth is best’’, ‘’the market knows best’’, and there was none or little of the accountability that good regulations would prescribe.

How well I recall sitting in the lounge of a couple who owned a finance company, in the months before it collapsed.  The husband and wife loudly proclaimed they would rather lose their family home than to let down any investor.

Yet when their investors were losing most of their money the couple were busily hiding assets in family trusts and even parking assets in the names of friends, to be retrieved later, when the investors’ money had turned to dust.

The absence of honour, with very few exceptions, characterised the 2008 finance company sector collapse.  All the checks and balances were found to have been policed by other greedy or inept people.

What has brought all these dispiriting events to mind was last week’s report of a Court hearing involving a highly-motivated, honourable and fearless liquidator, Robert Walker.

Indeed I regard Walker as so rare he might almost be blue.

He is driven by his view of justice, a liquidator exhibiting moral outrage rather than just pursuing commercial objectives.

Whether his views are right or not will be for a High Court to decide.

The preliminary hearing involved a filed law suit still some time from being heard in the High Court.  It seeks hundreds of millions of damages from various parties linked to the failed Christchurch property company, Property Ventures Group, owned by multi-bankrupted developer David Henderson.

Henderson is best known for his battles with the Inland Revenue Department, for his three-decade problems in pursuing his property vision, for his relationship with former politician Rodney Hide and, most recently, for the collapse of his company owing debts that creditors believe amount to hundreds of millions.

Liquidator Walker has spent years assembling a case attempting to prove that PVG was insolvent and trading recklessly years before it failed.

Eventually LPF, a litigation funder chaired by a former Supreme Court Judge, has agreed to fund a case against multiple parties allegedly involved in PVG’s collapse.

These include the accounting behemoth PricewaterhouseCoopers (PwC), the auditor of PVG for its last few years, having taken over from Grant Thornton, which had retired, expressing doubts about PVG’s solvency.

The hearing last week was sparked by a claim from the defendants that they were being forced to spend millions defending the claims, and that they wanted certainty that if they defended the claim successfully then LPF would have sufficient substance to cough up any award of costs a court might make to successful defendants.

Clearly the defendants did not believe that such an award would be met by third party insurers and did not believe that LPF has a few millions of substance.

I assume the defendants were genuinely uninformed and wanted information, not simply posturing.

Introducing the facts that he hopes to prove, the liquidator provided details of the sort of behaviour that characterised many of the participants in the property development, property financing sectors in that rotten period.

Walker provided details of a land deal in Paraparaumu, a PVG entity buying a few acres of swampland and sand dunes in an area flanked by housing and the planned (just completed) Kapiti Expressway.

Gorse covered, and occupied still by goats, the land belonged to a Maori Incorporation.

PVG bought the land, allegedly for $8 million, with perhaps $6 million left in as vendor finance by the Incorporation.

Shortly afterwards a Christchurch valuer produced a valuation that claimed the land was worth nearer to $32 million.

Perhaps he believed that the NZ Land Transport authorities could be pushed into a costly settlement; perhaps he thought the land could be remedied and made suitable for a massive housing subdivision; perhaps he thought gold or oil lay beneath the swamp; perhaps he had a bad hair day.

Based on this extraordinary valuation PVG succeeded in getting the likes of ASB, Dominion Finance and Hanover Finance to use the supposed value as security for huge loans, ASB alone lending $14 million to PVG.

This sort of decision-making at banking headquarters emanated from the changes referred to earlier, in my opinion.  That is, they were made in an environment where pursuit of apparent wealth was a prime objective, where banking standards were overshadowed by an obsession with quarterly results, and where rulebooks were discarded in some old rubbish bin.

(ASB was not the worst of the banking offenders.  That inglorious epithet belongs to Westpac.)

Anyway, PVG borrowed on a hydraulicked valuation, with the inevitable outcome.

PVG did the same with its Queenstown land at Five Mile, obtaining a valuation of nearly four times its then recent cost price.

All of these details were outlined by Walker in court last week.

Walker alleges that PricewaterhouseCoopers did not liaise with the retiring auditor Grant Thornton, it did not question these game-changing valuations, and may even have been active in assisting PVG to appear to be solvent, a state that might have had much to do with these valuations.

The Liquidator vs PVG (and others) case is still a long way off and the facts will need to be debated before we get an outcome that reflects the view of the law.

But the morsels offered in Court last week suggest that this case might be the proxy for a full discussion on the sort of behaviour that led to the 2008 financial crisis in New Zealand.

Such a discussion must take in the role of the NZX, despite its lack of involvement with PVG.

The NZX supervised listed securities (shares or bonds) from some of the worst offenders like Lombard, NZF, Dominion, St Laurence, Strategic, MFS (Octavia), South Canterbury Finance and even Marac, the latter saved from ignominy by a recapitalisation and a new skilled, competent executive and board.  (It now is thriving, as a fully-fledged bank, Heartland Bank.)

If the NZX had been just incompetent, or unmotivated, there might be no need to re-litigate its failures.

But it was much worse than this.

It knew there were continual breaches of its rules yet it failed to act.

It assured the market and investors that it had suitable regulatory authority, and modern enforceable rules, but it allowed serious transgressions to occur.

I guess an optimist might hope that the Liquidator vs PVG case will be followed up by other actions, if the law finds that a wider investigation is necessary, even after all these years.

Whatever the mechanism used, the final outcome must be an agreement of all parties never to repeat the illegal and unethical behaviour that poisoned the years of ‘’no regulations’’, probably more accurately described as ‘’inadequate’’ regulations.

Today the NZX is a much better organisation largely thanks to Tim Bennett and more recently Mark Peterson, both of whom have displayed good judgement and standards.

The FMA is a much better regulator largely thanks to Sean Hughes, who took up the challenge from day one.

But can we be sure about auditors, trustees, credit raters, valuers and directors?

Does greed still prevail?  Are our politicians clear about the need for their leadership?

Does the media play a useful Fourth Estate role?

The only institution I unreservedly applaud is the High Court.

Do we need more clarity about the law, perhaps provided by bringing cases to it, rather than allowing settlements to be conducted silently?

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ONE development that investors will watch with interest is the trend for debt issuers to seek public subscriptions without paying brokerage to the distributors.

There have been any number of corporate debt issues in the last year targeting retail investors as well as institutions, yet requiring the retail investors to pay a transaction cost.

Michael Warrington years ago correctly forecast that the institutions would not pay a rate that took into account the savings that apply when a company raises debt without a prospectus and without paying the distribution cost.

This form of distribution has encouraged distributors like Forsyth Barr, Craigs and many others to collect their revenue by charging clients an annual fee, rather than from the fees paid for specific distribution.

The clever way to sell this to investors is to imply that a no distribution fee model prevents commission-based selling.

This may be clever but it is not even remotely near the full story.

The annual fee far exceeds distribution costs.

For example Broker A charges annual fees to clients of around $150 million while Broker B’s fees would be closer to $60 million, its client base much smaller.

To collect $150m in brokerage fees paid at 0.75%, Broker A would need to distribute $2 billion worth of new bonds per year, whereas in reality the bonds distributed are more likely to be a quarter of that sum.

Given it has 25,000 clients whose money it manages, with an average wealth of about $500,000 per client, the arithmetic would then be that every client would need to buy $80,000 of new bonds each year.

There are no years in recent times when these sort of numbers have been credible.

The annual fee and zero distribution payment has been wonderful for brokers who charge percentage fees on portfolios, and dreadful for investors, who have to pay extreme fees.

Investors would need the companies issuing debt to pay a premium to investors of perhaps an extra 1% per annum to make the model work.

So, the recent announcement of issues of securities by Genesis, Vector, and today, Infratil are likely to be welcomed warmly by retail investors, as the companies pay the distribution cost.

Perhaps we are moving to an era when the no-fees-paid model will be used only by institutions, in the comfortable position of using other people’s money.

The Vector issue, at 5.7% for five years, is tiny and has already been allocated.  It pays distributors 0.50%.

Genesis pays a similar interest rate, is a much bigger issue, and is in high demand.  It also pays a distribution fee of 0.75%.

Today we hear from Infratil, paying a slightly higher rate, and a similar distribution fee.

I expect the public to be discerning and to be well advised on these matters.

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FOR many years the British newspaper commentator Rod Oram has written a column based on political and business views for one of our Sunday papers.

Recently he applauded the Commerce Commission’s decision to bar the merger of our Sunday papers and their other offerings.

The Sunday paper’s ‘’business’’ editor last week announced Oram’s retirement, noting that his work for many years had been ‘’challenging’’.

I do not suppose there is any link between his views on the future of the newspapers and his retirement.

The Sunday papers will need to find another left-wing and often left field commentator to address the audience Oram has created.

What does Russell Norman do these days, outside his lobbying role at Greenpeace?

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TRAVEL

 

I will be in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.

Kevin will be in Christchurch on 22 June.

Edward will be in Auckland (Queen’s Street) on 26 May.

Edward will be in Hamilton on 7 June.

He is also in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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TAKING STOCK 11 May 2017

THE future of the high margin departmental stores in big city centres must be in doubt, despite the current rush of international stores to target Wellington and Auckland.

The likes of David Jones, Top Shop, H & M and other brands, internationally respected by those who shop, have arrived in New Zealand and are currently creating excitement.  Their nett margins may not be so exciting.

David Jones, owned in South Africa, reached Wellington nearly a year ago and may well be wondering why, perhaps learning that the small but well-known building it uses, once the Kirkcaldie & Stains outlet, is far from suitable for what DJ actually should be stocking.

I am a non-shopper, one of those male dinosaurs that never browse around shops and never buy via the internet.

For me, shopping is a chore, an unreasonable user of time, an activity to which I succumb only at times like birthdays and Christmas, and then with approximately the same pleasure one might get from engaging with a traffic officer on the side of the Takapau Plains.

Yet even to a novice like me David Jones displays problems; understaffed, too crowded, excessive display of over-priced and undersized goods that do not seem to be differentiated significantly to justify the extreme margins.

I suspect its leadership team needs sharpening, and staffing levels look thin.  The high prices imply a superior culture that I cannot detect.

But it is not because of sluggish sales that the city centre shops are exhibiting signs of problems.

Perhaps the greater pain will be afflicting the landlords.

What one can observe in Sydney’s main streets must inevitably be occurring here, at least in Wellington and Auckland.

The problems are related to the developments of the internet-buying phenomenon.

By way of explanation let me acknowledge that CBD landlords expect much greater returns from retail shops, eating houses and accommodation than they ever would get from office space let on a square metre basis.

They need more revenue.  The risks – tenant failure and tenant costs – are far greater and harder to forecast than failures by corporate office tenants.

To achieve this the retail shop landlords for decades have linked rent to turnover, rather than to square metre calculations.

The tenant might pay, say, 5% of turnover (some pay more, some less).  If inflation drives prices higher or the shops attract more sales, the landlord wins, as does the retailer.

Landlord risks are greater.  So might be the returns.  The nett margins are not the landlord’s problem.  They target gross revenue.

What the likes of Westfield in Australia are now finding is that the nature of centre city shopping sales is changing.

Unlike me, many shoppers now buy their towels or their televisions or their dockweed syrup via the internet, yet arrange to pick up and pay in the Westfield centre shop in the CBD, near to where the buyer may work.

Landlords regard the sale as inner-city revenue and want their 5%.  The shop owners push back and record the sale at the depot out of town, and exclude the revenue from their turnover reports to inner city landlords.

These deductions from turnover lead to lower rental receipts and that leads to lower property values, resulting in lower amounts of bank debt availability.

Unless people stop buying via the internet but picking up their purchases in the CBD, landlord/shop tenant warfare is brewing.

Of course CBD landlords are already under attack, certainly in Wellington, where the biggest user of space is the Crown, which now has an edict that the public service may not employ people of more size than a halfback, so that each public servant can work from a space roughly the size of an ice-cream cone.  (Waffle has to come from somewhere).

Lease renewals were returning space as this policy was implemented, but the November monster earthquake changed the scene.

The consequences of Wellington’s earthquake last November have rescued the landlords, for the meantime.

The equivalent of around a dozen buildings are now out of bounds, perhaps permanently to some percentage, so any surplus office space is attracting new, expensive leases, supply being less than demand.  The Statistics Department is paying the Chow brothers $800 per square metre!

The earthquake brought an unexpected bonus, for just weeks before the quake one saw these building owners scurrying around in earnest endeavour to entice tenants with discounts and freebies.

All sorts of extras were being offered, Musak, or gyms, or balconies for pipe smokers.

The earthquake has changed the scene but perhaps only for some time.

In the long haul, CBD property faces challenges, not just for those buildings let to retailers who will be resisting paying rent on sales not generated in-store.

One unsolved problem in Wellington is the inevitable drift to Auckland for companies that achieve scale – large staff numbers.

Another is the heightened earthquake fear fuelled by a series of attention-seeking media articles barely able to contain their excitement over the possible occurrence of a world record earthquake tomorrow morning in our capital city.

Just as one can truthfully say that it is possible to forecast Lotto numbers each week, so can one claim to forecast major earthquakes, events which strike at random and seem to have been accommodated, so far adequately, by strict building codes.

In pursuit of sales the media may be spooking insurers and landlords.  Spooked insurers, landlords and tenants ultimately might not be a great outcome for the Wellington media.

A third issue for landlords is debt.

Wellington’s leading property owner, Mark Dunajtschik, is revered by the sector, hailed as wise and long-term in his goal-setting.  He operates on sensibly low leverage levels and is highly regarded as a landlord with real wealth.

While his debt levels are said to be less than 30%, others more flamboyantly gear up to 70%.

If a building yields rentals of 7%, and you buy it with 70% of borrowing at 5%, then on your capital (30%), the acclaimed return is impressively high, just south of 12%.

The potential problem I signal is the effect on bank willingness to roll over debt facilities in the event that debt costs rise, perhaps fuelled by falling bank confidence (and thus need for more margin) for the big borrowers.

If debt cost rises to 7%, return on equity falls immediately to the stated property yield (7%), which looks much less impressive to those who earlier might rush to lend.

If shop turnovers fall because of internet purchases, if demand for space slips because of the drift north, or earthquake fears, or Crown edicts on reduction in space per employee, or if banks cease to fawn over flamboyant property owners, then property values may come under rapid review.

Perhaps Kiwi Income Properties is signalling fear of some of these outcomes with its apparently urgent wish to sell its Majestic Centre and even its suburban shopping centre in Porirua.

Augusta’s bold young CEO Mark Francis might not have revealed much of his plan yet but he did ask why anyone would want those Wellington assets.  His negativity about Wellington is not unusual for an Auckland entrepreneur.

All of these changes add weight to the theory that accommodation for students and those who prefer to be city dwellers might be the most positive plan for Wellington’s centre.

Rental income might be lower, but tenancy risks might be more forecastable.  Will Wellington eventually resemble Hong Kong’s suburbs?

 _ _ _ _ _ _ _ _ _ _ _ _

ONE OF the reasons that the National Property Trust did not like the deal that Augusta put to it was that it dumped onto NPT some 6% yielding Auckland property.

NPT believed it lacked the financial clout to borrow cheaply enough to fund 6% yielding Auckland buildings so it has targeted 7.5% yields in provincial cities like Hamilton, Palmerston North, Napier and Ashburton.

To me this was logical.  NPT did not need to be a lookalike to city property investment trusts, like Argosy.

A provincial portfolio yielding 7.5% might offer nice diversification for listed trust investors.

The logic is the same – the attraction of diversification – for those who invested in the Quantum unlisted property syndicates, which focus on Wellington City accommodation.

If Quantum extends its syndicated properties to another few buildings it might later list, and offer the public another version of a listed property trust.

If I had to choose between accommodation and CBD retail space, I know which one I would regard as more suitable for my age group.

 _ _ _ _ _ _ _ _ _ _ _ _

SOMETIMES it is not a bad idea to join the dots.

Dot 1:  Fletcher Building has problems in obtaining skilled staff, in part because it so fiercely measures itself on quarterly performance, under its CEO Mark Adamson, a former hedge fund merchant.

Dot 2:  The whole construction sector including Fletchers struggles to find and keep skilled staff.

Dot 3:  Auckland City is battling to offer decent accommodation to the large number of immigrants arriving here to acquire skills.

Dot 4:  Young New Zealanders find the tertiary education fees are intimidating, especially in the area of trade skills.

Dot 5:  Many teenagers do not aspire to wear ties to work.

Now join the dots.

What would be the outcome if Fletcher Construction re-established Fletcher Scholarships to be awarded to 100 young people each year, to attend technical universities to study construction, electrical work, plumbing, roofing, concreting, or, at a collar and tie level, quantity surveying, engineering or design?

What would 100 scholarships at $20,000 per annum cost?  Perhaps $2 million, barely a drop in an excavator’s bucket.

Scholarship graduates might be bonded to Fletchers, and offered a supervised career path that was effectively an adult apprenticeship, with a line to a long-term role at Fletchers.

If one part of the scholarship programme targeted capable but disadvantaged youth there might be some risk but the Crown might help here, with funding.

After 10 years Fletchers would have a home-grown team, grateful for the absence of student loans. 

If Fletchers were to address the hopeless corporate culture that has prevailed, at least since Hugh Fletcher’s days, one of our biggest companies might enjoy a resurgence.

If it wants help in addressing its culture, I can direct it to a modern, exciting HR company in Wellington, managed by a very capable woman, who is surrounded by excellent people, mostly women, who really do understand that excellence and corporate culture do finally boost the ‘’bottom line’’.

If Fletchers want an introduction, they are welcome to ring me!

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THE listing of Oceania Healthcare shares last week, at a tiny premium, should provide a useful option for those who see growth in the sector of providing housing, security and healthcare for our ‘’seniors’’.

Investors currently can choose from Rymans, where growth is likely to occur in Australian villages, Summerset, which is busily building new villages in the main cities, Metlifecare, which is Auckland focussed, and Arvida, listed two years ago, primarily a care provider in small villages, largely in the South Island.

Oceania is based on villages built decades ago by charitable groups, such as the Salvation Army.

Twelve years ago these villages were aggregated and managed centrally.

From its equity-raising in April, Oceania collected some $170 million with which to refurbish existing sites (brownfield developments, to use the sector term) and to begin a new and more profitable model, selling licences to occupy, rather than renting out their units.

Thanks to the rule changes which now allow care providers to charge what the market will pay for ‘’premium’’ rooms, Oceania now provides rented accommodation profitably, but its real turbo-charged profits will come from its building and then selling modern units, built perhaps on spare land or air space in its best locations around Auckland.

Oceania will begin its publicly-listed life without the major problem afflicting Arvida, which has a similar spread of small villages, mostly in the South Island.

In Arvida’s case, it bought recently around 20 small care operations and then imposed on the owners a new corporate structure.

Most had been used to managing their own villages and devising policy, for example, on what made up the menus and which suppliers they would use.

Having a corporate structure imposed on them naturally led to a dislike of ‘’Head Office’’, if the feedback I hear is correct.

However Arvida too has had a lifeline thrown to it, by the new ‘’premium’’ room ruling.

No care provider can assess all rooms as ‘’premium’’, as there has to be room for government-subsidised residents.

But you can imagine that if the likes of Arvida can follow Ryman’s example by charging an extra $19,000 per year for a room with a nice view, then it needs only to find 100 such rooms to increase its revenue by $1.9m, without additional expense.

One imagines that Oceania and Arvida will find far more than 100 rooms can be classified as ‘’premium’’.

What next must happen is that these villages attract residents who are able to pay this premium.

The maths seem credible.

Many people who choose to enter such villages do so after selling the family home so arrive armed with healthy bank balances.

The average stay in a full care unit is less than two years, as full care implies failing health.

By contrast the average stay of an independent resident in a villa is nearer eight years, indeed longer in the retirement village whose board I chair.

The commercial providers react to increasing longevity by raising the minimum entry ages, now in some cases nominating the mid-70s as the minimum entry age.

The village I know best has a minimum age of 65, though this can apply to the older person, in the case of a couple.

Do not be surprised if the excess of demand over supply leads to the more commercial operators lifting minimum ages to 80.

Those with commercial motives make their giant cash profits when a resident dies, at which point they resell the units, paying to the estate just 70-80% of the original unit cost, and pocketing the often massive difference between payout price and the new resale price.

It is not uncommon for a unit that originally cost $400,000 to involve an estate payment of, say, $280,000 yet a resale at $800,000.

It is this deferred charge that has led to the likes of the big three (Rymans, Summerset and Metlifecare) making hundreds of millions in profits.

These profits will stop occurring, I suppose, if people stop dying or the units are not resalable, as might happen either if the population stops getting older or if a better model emerges, say the Government deciding to build geriatric hospitals.

Some will say that the Government will start building the day after rainclouds disburse $100 notes.

So Oceania is in a sea which looks to have clear water, few fishermen, and millions of plump fish.

Its new strategy may take two years before its catch is noticeably improved.

One imagines it does not want a change in the financial or regulatory climate to pour muck upon its resource.

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THE soon-to-retire PwC head of receiverships, John Fisk, has written to Strategic Finance debenture and exchange share investors, advising that the total payout to debenture holders will settle at 20 cents in the dollar.

A tiny final payment of less than one cent is likely sometime.

Fisk reports that the soft (my word) settlement with directors produced some millions, of which around $1 million seems to have been paid by the directors.

Presumably the remainder comes from insurers.

All of this implies that the founders of Strategic, who paid themselves many tens of millions, have returned to the investors via the receiver what might be the metaphorical equivalent of the parking meter coins found under the seats of their limousines.

Those contributors must be proud of their achievements.  Just as proud would be those that negotiated this ‘’settlement’’.

Our NEVER AGAIN list identifies the relevant people.

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TRAVEL

 

Chris will be in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.

Kevin will be in Ashburton on 18 May.

Edward will be in Auckland on May 26, available to clients in the CBD (Queen Street)

Edward is also in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should please contact us.

Chris Lee

Managing Director

Chris Lee & Partners Limited

 

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TAKING STOCK 4 May 2017

THE range of opinions on subjects like investment strategies and good/bad/indifferent securities covers the whole rainbow.

So it should.

The advisory industry does not comprise a multitude of identical minds with identical knowledge and experience.  Opinions are not formed solely on science.

Indeed fund management and investment advice are often more like art than science, though both should be based on extensive knowledge, research and personal involvement in capital markets.

Even the best-informed advisers can be made to look foolish but they should never lack logic.

I make this point to contrast the frivolous advice that comes from salespeople who have never worked in capital markets and do no analysis of securities.

Such advisers should be identified as salesmen for fund managers.  The fund managers would be the source of knowledge.  The ‘’advisers’’ should not pretend to have knowledge.

I reiterate that the whole subject of strategy and asset selection must embrace the whole rainbow of informed opinion.

BUT that does not excuse lies or balderdash, peddled to gain sales.

Investors are bombarded by such nonsense.

One of the whoppers is that timing the market is not relevant, the implication being that time in the market solves timing errors, i.e. every share eventually goes up in price.

Try telling that to people who bought Ford shares 17 years ago at US$21 a share.  They are now little more than half of that.  You could say the same of Lloyds Bank shares, a tenth of what they were a decade ago.

Another whopper is that diversification both reduces risk AND improves return.

It does not.  It reduces concentration risk.  Ultimately, diversification draws return to the average.

Risk must be reduced but the mindless pursuit of diversification ultimately produces mediocrity.  If mediocrity is the target, buy a little of everything.

The most recent nonsense to gain exposure, in a media which seems dedicated to pander to the lowest common denominator, is that subscribing to new issues of equities is ‘’generally bad for your health’’.

When I read this recently I wrote down a list of IPOs that have contributed enormously to my personal wealth and at much greater levels, our client wealth.

I divided IPOs in the years of my career into a few categories.

Spectacularly Good for your health over a long period - ANZ, Infratil, Mainfreight, Port of Tauranga, Ryman.

Excellent for your health over a long period – Auckland Airport, Briscoes, Metlifecare, Restaurant Brands, Summerset.

Good for your health over a long period - Comvita, Contact Energy, Property For Industry, Synlait Milk, Trade Me

Spectacular health-improving over a short period – A2 Milk, Heartland Bank, Vista, Xero, Z Energy.

Excellent over a short period - Airworks, CBL, Genesis, Meridian, Mercury, Scales

Good over a short period - Arvida, Gentrack

Worrying - Barramundi, ERoad, Metro Performance Glass, Orion Healthcare, Tegel

Nauseating – BLIS Technologies, GeoOP, Intueri Education, Pumpkin Patch, Rakon, Serko, Veritas, Wynyard.

I accept the list is not exhaustive nor will I debate my definition of what I call ‘’spectacular, excellent or good’’.

An investor who bought into all those initial issues of listed securities would now be in rude health, perhaps grumpy about the losses, but considerably enriched by the feasts from the overall menu.

My point, of course, is that it is an ignorant or untruthful statement to claim that investing in IPOs is generally bad for one’s financial health.

I cannot explain why any informed capital market participant would make such a claim.

It is easy to see how those only tangentially involved in capital markets can come up with silly thoughts.  For one thing, they generally might have no access to IPOs and no access to briefings.

I recall a few years ago a newspaper columnist with no relevant work history asserting in a silly column in a newspaper that no one should ever buy securities whose interest rate is reset annually.

I was not surprised by her ignorance but to state the obvious, annual resets are an excellent method of ratcheting income when rates are rising, an obvious example being the Works bonds, where the rate each year is reset at a 4.05% margin over one-year swap rates (though there is always the risk that the bond can be repaid).

People who purchased annual reset Origin Energy securities at a discount were richly rewarded when repaid.

Of course set-rate bonds lose appeal when rates rise so an appropriate mix of fixed rates and reset rates provides balance.

I also recall another newspaper columnist, also not from a background that involved investment, who advised his readers not to buy into the discounted shares available when the Crown sold 49% of Mighty River Power, Meridian and Genesis.

The only possible explanation for his ‘’advice’’ was that he did not understand that investors were being offered shares at a sizeable discount.

Surely even a passing mountain goat would have seen that the nett dividends made these shares an attractive contributor to any balanced portfolio belonging to an investor wanting income.

The advisory industry, unregulated and frequented by many charlatans prior to the Financial Advisers Act, was subjected to scrutiny and pressure after the Global Financial Crisis, which coincided in NZ with a collapse in finance companies, contributory mortgage funds, trust company cash funds, and other funds based on derivatives.  There were 20,000 or so ‘’financial planners’’ and ‘’advisers’’ hanging out their shingles.

As a result of the FAA, the advisory sector is now cleared of many rogues and has just 1800 remaining Authorised Financial Advisers, of whom barely 400 are independent of any obligation to sell a particular brand of funds, as far as I can discern.

Hundreds work for banks and insurance companies.

Perhaps a thousand primarily sell insurance, KiwiSaver or transfer UK pensions to New Zealand.

Nearly 550 ‘’advisers’’ have fewer than 50 clients.  Only a small percentage work in scaleable business models with more than 500 clients.  Fees should reflect scale.  High fees charged rarely reflect skill levels.  They reflect lack of scale.

Many no longer offer investment advice, to avoid the regulator’s scrutiny.

There is a dearth of women, largely, one suspects because capital markets have traditionally required the sort of over-commitment of working habits that in past eras only men would be asked to accept.

That is changing, too slowly.

Approximately a third of advisers are women but of those the vast majority have less than a decade of experience and a much smaller number again have ever worked in capital markets.  Many are more like coaches than advisers.  That also is changing, slowly.

Their typical entry point has been in insurance selling or mortgage broking.

It will be a much better environment for those who work in capital markets when, as is the case in Germany, women make up a full share of the capital market sector, enabling a proper number to graduate into the advice sector, with a background of knowledge and experience.

Generally, the best advisers have come from banking or sharebroking backgrounds where they have been involved in research, analysis or securities, and have been swamped by the culture that comes from dealing with other people’s money, with care.

The Commission for Financial Capability member, David Boyle, notes that financial advisers traditionally graduated from banks.  Bank management traditionally comprised men only.

I guess an army of these ex-bank people were created when the banks began to sack their experienced managers 25 years ago.

Many such managers were required by mindless policies to start ‘’selling’’, after a lifetime of providing knowledge and service, but never ‘’selling’’.  They neither wanted to sell, nor had the desire to scrap their career based on helping people to be wise, financially.

One has to look no further than America to see the disastrous outcome of those braindead ‘’selling strategies’’.  (Google: Elizabeth Warren, Wells Fargo.)

The explosion in credit card misuse, and the crass overuse of debt to fund unearned lifestyles, have both directly correlated with that idiotic bank pursuit of short-term profit, resulting from dishonest selling.

Somehow we expect investors to sort out the idiotic and the dishonest from the sane.

This process is not helped by the media providing a platform for those who deal in often untrue one-liners, such as claiming that bad timing is irrelevant, or that diversification improves returns, or, the other day, that new share issues are generally bad for your health.

Is it time for the media to employ in its editing team someone with enough financial nous to edit out such dangerous claptrap?  (Do media budgets cater for staff or columnists with financial market expertise?)

_ _ _ _ _ _ _ _ _ _ _

OF COURSE amongst the rainbow of informed opinions has been the view that investors should see rises in fixed interest rates this year.

That view has appeared at the beginning of each of the past seven years, often expressed as an inevitable outcome, given growing economic conditions and/or the first sight of rising inflation.

Our collegial office has held the opposite opinion, in my own case based on what I have learned is the certainty that, globally, higher interest rates would have catastrophic results, if reintroduced.

I have learned from the Europeans that low, zero or negative rates are the only sustainable solution to global excess debt, other than default and asset write-downs.

The Europeans believe the world banks would not survive significant interest rate rises because of the default rate and unemployment that would ensue.

They believe systemic banking failure is followed by disruption of trade, which is in turn followed by unemployment, middle class poverty and inevitably, war.

Their view is that war must be avoided at any cost.  (Would someone tell North Korea and Trump?)

So far the facts suggest the European view on rates has been right and our bank economists, fund managers and media commentators have been somewhat spectacularly wrong.

As a simple illustration, bank swap rates, which determine bond rates, have fallen since January, not risen.

Our Reserve Bank has clearly signalled no rises in the Overnight Cash Rate (OCR) until the end of next year.

It is true that competition may drive marginal rises in deposit rates, and of course every bank wants to lift lending margins, but affordability still drives most decisions.

So it is with delight that we observe new signs of bond issuance, at rates that might help income seekers.

Generally in New Zealand, the AA-rated senior bonds will offer 2 to 4% interest rates, senior bonds with an investment grade credit rating would be around 4.25% to 4.75%, and subordinated bonds, capital notes, very long term bonds, perpetuals or unrated bonds will yield between 5% and 6%, much more if they are viewed as junk bonds, a term not related to credit rating, but where there is an acceptance of obvious risk.  A bond without a rating is not necessarily junk.

To make my point, Infratil, Z Energy, Fletcher Building and Ryman Healthcare do not have a credit rating but are certainly not viewed as ‘’junk’’ by capital markets.

The subordinated tier two instruments often rate as BB, because of subordination, but no one would regard Kiwibank’s securities as ‘’junk’’.

The term is used lazily, or by the uninformed.

Within the space of a few weeks Vector is offering a capital note issue at around 5.70%, we expect Genesis Energy might offer a subordinated bond at a rate of perhaps 5.50% (or higher), and Infratil is very likely to offer a six to eight year senior bond at rates closer to 6%.

There is also the prospect of another senior bond, as yet not ready to be signalled, and I wonder at what point Rabobank will announce replacement securities for a recently matured senior bond, and (here I am guessing) its annually reset security (RBOHA), callable in October.

If our clients’ reaction is typical, this menu is what is needed – we have lists that lengthen every day, of clients wanting documents for the various offers.  Those who ask to be added to our All New Issues list receive information emails.

My personal guess is that for many more years New Zealand will remain a rarity in offering fixed interest investors rates of four to six per cent.

Germany, Holland, Japan, Britain, USA, Canada, Sweden. Australia, Switzerland, Singapore . . . talk to investors in any of these countries and they think we are spoilt with our fixed interest returns.

Perhaps four per cent is the equivalent today of the 2008 rate of eight per cent.

 _ _ _ _ _ _ _ _ _ _ _ _

WE should soon hear progress on the long awaited, highly significant, court case involving the directors of the dreadful Christchurch property development company, Property Ventures Group, appallingly managed by David Henderson over many years.

The creditors of this awful outfit lost more than a hundred million dollars many years ago, after it collapsed, to the surprise of virtually no one.

Henderson had been a corporate troublemaker for decades, yet his charm and social connections had enabled him to raise tens of millions from investors, and to obtain credit from a huge number of creditors who should have known better.

His accounts were audited by PricewaterhouseCoopers, who also should have known better.

Creditors would argue that their decision to engage with PVG and Henderson hinged on the audit validation of the accounts.

So any day soon, the opposing parties are back in court in a case funded by New Zealand’s leading litigation funder LPF.

The defendants include a range of people who assisted Henderson but the defendant with the deepest pockets will be PwC, which under its aggressive ‘’rainmaking’’ partner, Maurice Noone, had grown its fee-earning in the South Island, interacting with the likes of Henderson, Perpetual Trust and many others, in the years leading up to the 2008 financial market crisis.

PwC will be insured, but there will be excesses that have to be paid by each partner.

I remember that the reason the Arthur Young international accounting partnership collapsed in New Zealand was related to a call on partners after the group most unwisely accepted a fee-earning task with the rotten Registered Securities Ltd company (RSL).

Arthur Young was paid to certify that RSL followed all the correct procedures when apportioning investor money to the various nonsense ‘’mortgages’’ that RSL claimed to hold.

When the ‘’mortgages’’ were found to lack any substance, and the processes were found to be applied frivolously, Arthur Young’s accountants failed to notice yet continued to offer certification.

Eventually AY’s insurer settled for around $37 million in 1989-90, a sum in today’s dollars that might be worth nearer $300 million.

Each AY partner, even in small towns like Dannevirke, had to write a cheque for a six-figure sum, an amount in 1990 that would have been equivalent to the best home in the Viking Town.  Arthur Young hastily merged and is now part of Ernst Young.

The PwC involvement with PVG will be all the talk in every gentlemen’s club while the filed claim is debated, either behind closed doors or in the High Court.  PwC partners will be paying attention.

The claim filed will be for hundreds of millions.  Ouch.

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TRAVEL

I will be in Auckland, available in Albany on Tuesday May 9, and in Christchurch on May 23 and 24.

I will be in Whangarei on Monday, June 12 and invite any clients wanting to meet to contact me.

Michael will be in Wellington on 10 May.

Kevin will be in Ashburton on 18 May.

 

Edward will be in Auckland, at a Queen Street address, on May 26.  He is also in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Any client is welcome to meet us without charge.

 

Chris Lee

Managing Director

Chris Lee & Partners Limited

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