Works Finance (NZ) Limited (WKS) Bonds

[Silverlight]

For discussion the WKS010 vs WKS020


Just reveiwing the Yields for:

WKS010: 15% & WKS020: 7.9%

Could anyone shed some light on why the WKS010's trade at such a large discount to the 020's.

Coupons are 9.8% to 9.65%.

[Dubdee]

WKS010 are subordinated and close to equity, can suspend interest etc and are perpetual. WKS020 are senior dated debt.

[Silverlight]

To answer my own Question, just found out the answer.

WKS010 are preference shares, guaranteed on an unsecured subordinated basis.

WKS020 are fixed dated bonds, guaranteed on an unsecured unsubordinated basis.


Edit: Thanks dubdee, was typing as you posted :)

[Silverlight]

Additionally,


If the holder requests a higher rate than the rate set in the remarketing process, then the holder will be entitled to require Downer to repurchase or resell their holding. If Downer repurchases the securities, it will have the option to redeem in cash or equivalent value of shares in Downer

In effect as the WKS010 mature 3 months before WKS020, you could request a higher rate, and have your holding bought back, or converted in DOW shares. Would like to see how the prosepctus words this, anyone have a copy or a link?

[midas]

Additionally,
Originally Posted by Direct Broking Website;

If the holder requests a higher rate than the rate set in the remarketing process, then the holder will be entitled to require Downer to repurchase or resell their holding. If Downer repurchases the securities, it will have the option to redeem in cash or equivalent value of shares in Downer
Silverlight
In effect as the WKS010 mature 3 months before WKS020, you could request a higher rate, and have your holding bought back, or converted in DOW shares. Would like to see how the prosepctus words this, anyone have a copy or a link?


These have seemed like a good oppourtunity to me for a while. The terms of rollover are contained in the notes to the financial statements for Downer. Go to www.works.co.nz , shareholders info and click on latest annual report. Page 77 conatins the info. As I read it if you want to get out of them in 2012 you can by choosing to take shares at a 2.5% discount. The company has gone through a bit of a downer lately but is still well rated. Cant see it not meeting a payment by 2012.
All I need before buying some is confirmation that I am reading the situation correctly.

[Newman]

[QUOTE=midas;318838]Additionally,
Originally Posted by Direct Broking Website;

If the holder requests a higher rate than the rate set in the remarketing process, then the holder will be entitled to require Downer to repurchase or resell their holding. If Downer repurchases the securities, it will have the option to redeem in cash or equivalent value of shares in Downer
Silverlight
In effect as the WKS010 mature 3 months before WKS020, you could request a higher rate, and have your holding bought back, or converted in DOW shares. Would like to see how the prosepctus words this, anyone have a copy or a link?


You can download a copy from
www.companies.govt.nz
by searching the company and viewing a file "WORKS infrastructure finance (NZ) Limited Memorandum of amendments dated 15 March 2007". It is a large file 4.5 MB thus cannot be loaded on the forum.

The recent decrease in price may be linked to the collapsed South Canterbury Finance (preference shares) and the earthquales in Christchurch (need money now).

[Lizard]

WKS010 in trading halt pending material announcement but not the 020's?

Are they likely to be suspending the next div then?

[Lizard]

Actually, I guess it's just that they're prefs rather than debt securities as the DOW shares are in halt too over delays on the Waratah train project. All looks pretty messy:

http://www.smh.com.au/business/train-project-faces-new-delays-20110124-1a2z4.html

[macduffy]

Comment from Adele Ferguson of the SMH.

http://www.smh.com.au/business/credibility-dives-on-downer-downgrades-20110125-1a4es.html

[winner69]

Apparently Works senior bonds (WKS020) have a condition that the interest rate increases by 1.25% if they fall below BBB- credit rating.

Maybe a additional payday for your jokers coming up?

[RazorX]

Hmm I was looking at getting some of these bonds (WKS020) in February. Maybe not a good idea? I don't know a lot about bonds, but I thought they were safer than shares?

[macduffy]

Hmm I was looking at getting some of these bonds (WKS020) in February. Maybe not a good idea? I don't know a lot about bonds, but I thought they were safer than shares?

Safer in that they rank above equity in the event of liquidation. Not saying that this is the case here but they can be a bit of a trap if reliance is placed on their "bond" status without proper attention being given to the soundness of the company in the first place. As with the "secured" nature of the borrowings of so many of our failed finance companies!

[Jessie]

I think you have to be a bit careful with the WKS010 bonds.

As I read it, at the step-up date (June 2012), Downer can choose to effectively convert them into perpetuals paying 3% above the 1-year swap rate. They can also go through a remarketing process invitation in which case the bond holders can ask for redemption or exchange into shares. However they are not obliged to do this, and I would imagine in the current circumstances, they won't.

If they convert to 3% above 1-year swap, they will currently pay a dividend of about 6.5 cents. This should increase eventually when interest rates rise. There will be no way of cashing them in except by selling them on the secondary market. Downer can chose to redeem them when it suits them, but they don't have to. At the current price of 87 cents, they seem a bit dearer than other perpetuals even when taking account of the 3% margin. (Eg, IFTHA has a 1.5% margin over the 1-yr swap rate but is selling at only 62 cents).

[kiwitrev]

Announcement today 200m preference shares held by Works in Downer redeemed 21 April by Works Finance and then Works Finance made loan to Works of $200m. Does anyone know holders of WKS010 and 020 are impacted by these events?

[Gary]

I have somee Works WKS010 which I have had for about 3 years, when I bought them, the yeild was 9.2%.
I notice today they have reached nearly 27% yeild.
Could someone enlighten me why they have dropped so much in the last 3 months?
Do you recommend selling them at such a low price?

[Lizard]

Hi Gary,

Firstly, that 27% yield is a yield to maturity. Given the maturity is defined by the calculation to be Jun 2012, the formula presumes that you will not only get interest payments, but an additional capital return of 13cps on the current 87cps price of these pref shares, along with the 9.8cps in gross dividends. The reality is that the 13cps on maturity is not particularly likely as Jun 2012 is actually a "step-up" date. The details of what happens then are rather complicated.

I just checked out the old prospectus (http://www.business.govt.nz/companies/app/ui/pages/companies/1909583/191839/entityFilingRequirement?backurl=%2Fcompanies%2Fapp %2Fui%2Fpages%2Fcompanies%2F1909583%2Fdocuments%3F q%3D%26start%3D40%26limit%3D20%26sf%3D%26sd%3D%26b ackurl%3D), which you can get from the companies office web-site. Either Works Finance can agree a new interest rate with holders and repurchase or exchange for shares to holders who don't like the rates offered, or they can basically walk away and leave these as preference shares with an annual reset of 3% above one year swap rate or they can repurchase. Repurchasing is unlikely as Downers needs the funds. Currently, the most likely option would be the 3% margin above swap, as that would only require around 6%pa in gross interest payment based on current one year swap rates - you can follow them here. (http://www.interest.co.nz/charts/interest-rates/swap-rates)

Therefore, buyers at 87cps can assume that they will get 9.8cps this year and the equivalent of 6cps thereafter until sale. Take the 3.8cps higher return this year off the 87cps buy price and then divide the 6cps by the 82.2cps entry price and you will get an effective yield of 7.2%. By comparison, the Infratil Perpetuals which might be of a similar character, offer 1.5% above 1 year swap. Based on the current swap rates and price, they're sitting at about 7.1%, so as you can see, the WKS010 look as though they are being priced in the same region.

I can't answer as to whether you should sell them. You would still get 87% of the face value back and perhaps a bit less on what you paid, since it looks like at 9.2% you would have paid more than $1 per unit. It doesn't appear that they are pricing in the possibility of DOW being a financial basket-case or dividend payments being suspended (although this is possible). On the other hand, if inflation appears in the next year or two, the one year swap rate and ongoing re-set rate could rise which would improve the value, provided DOW remained a credible borrower.

Note also that although these are preference shares, the underlying preference shares in Downer appear to have been replaced with a straight out loan at an initial 10% interest. I'm not clear if that improves the security on these - would seem to be better for holders, but don't think they've been given an explanation.

[Newman]

Hi Gary,

I just checked out the old prospectus, which you can get from the companies office web-site. Either Works Finance can agree a new interest rate with holders and repurchase or exchange for shares to holders who don't like the rates offered, or they can basically walk away and leave these as preference shares with an annual reset of 3% above one year swap rate or they can repurchase.

The Direct Broking website shows "The Step-up Rate applicable on 15 June 2012 will be the 1 year swap rate plus a margin 4.05% p.a." I think this number is correct because on the step-up date the new rate would be 1 yr swap + step-up addition (2%)+ initial margin. The intial margin was close to 2% as the current interest rate (9.80%) was 5yr SWAP + initial margin when the rate was set in 2007. Thus the new rate from June 2012 would be around 7%, not too bad if WKS010 is bought at 79 cents now. Further, WKS010 could be converted to shares in June 2012.