Contact Energy - Unsecured Subordinated Capital Bonds

Media Statement
10 November 2011
Contact Energy Capital Bond offer
Contact Energy Limited has today announced an offer of up to $150 million of Capital Bonds to the New Zealand public, with the ability to accept oversubscriptions of up to a further $100 million. The issue of Capital Bonds is primarily being undertaken to further optimise its capital structure through increasing financial flexibility and extending its term funding profile. The proceeds of the Offer will be applied to general corporate purposes.
The Capital Bonds will be unsecured, subordinated, redeemable, cumulative, interest bearing debt securities. They have a maturity date of 15 February 2042 but can be redeemed on any interest payment date from 15 February 2017, and earlier in certain circumstances.
The Capital Bonds will pay interest quarterly at a rate to be set after the close of the offer. However the Minimum Interest Rate on the Capital Bonds for the first five years until 15 February 2017, which will not be less than 8.00% per annum, will be set on 22 November 2011 and announced on or before the opening date for the Offer.
The Offer is expected to open on 23 November 2011 and close on 15 December 2011 at midday. Interested investors should contact their usual financial adviser or contact one of the joint lead managers or the co-manager to the Offer listed below to request a copy of the Simplified Disclosure Prospectus:
Joint Lead Managers Craigs Investment Partners - 0800 226 263 ANZ - 0800 ANZ IPO (0800 269 476) ASB Institutional - 0800 ASB OFFER (0800 272 633) Forsyth Barr - 0800 367 227
Co-Manager Westpac Institutional Bank - 0800 489 222
The Simplified Disclosure Prospectus is also available on Contact Energy’s website, www.contactenergy.co.nz/bonds.
ENDS

whew, Unsecured, Subordinated and can go til 2042...
will Origin still be majority owner by then? or by then will it be Zed, or the Warehouse

I'm interested in people's thopughts about the relative merits of this offer and the Infratil six year offer which is also 8%.
My thoughts are that people have to buy electricity so on the face of it Contacts offer is clean and in a company that's easy to understand and alomost bullet-proof, Infratil's balance sheet has some considerable gearing and yes I know their biggest asset is a majority stake in Trustpower, (ironic I know), but its such a dog's breakfast of assets and they've made such a mess of their European airport investments I'm not so sure about them... Thoughts anyone ?
Don't like the insurance industry so the IAG opportunity will get no support from me despite its higher credit rating, (personally i trust used car dealers more than credit rating agencies who have hardly covered themselves in glory in recent years, lets be honest).

Roger you just about have the same risk as shares & none of the advantages. Bonds to be worth while need to be high up the security ladder not one rung up from the bottom

Roger - I dont follow bonds but am starting to look into them for various reasons.

The Contact bonds are extremely long dated so they will get the benefit of the interest rate set or if that is above market at the time, can redeem them. ie. they get the best of both worlds.

I would say Infratil bonds are just as secure as Contacts. whetehr sahres are the better option depends on how the markets go.

Possum - Bonds will normally be one rung of the bottem wont they as they get tehir cheap debt from banks who take first security leaving bonds ranking behind them.

CJ the previous Contact Energy Bonds are far higher ranked than these ones. You have to do your homework very carefully

There will no doubt be a few more bond offerings over the next few months. I am personally not that wild about Contact, IAG or Infratils offerings. All for completely different reasons.

The upcoming Transpower 4 year floater may be a better option. Or like I said, wait and see what else comes up.

i too would be interested to hear some more opinions on this offer.

From my brief analysis:

Return side:
- Initial rate looks ok at 8% vs 5-5.5% on offer with the banks over a 5 year term
- margin at 4.5% to bbsw with step ups of .25% each reset is good - makes it pretty likely the bonds will be redeemed 2017 imho

Risk side:
- Clearly Contact is pretty stable and low risk although could this change with privatisation of electricity sector
- Would prefer a more senior bond but hey - they know the can get it away so why not

Overall a pretty fair return - probably worth a small allocation for most retired investors. Maybe 20k on a mill portfolio.

Thanks Guys. Given the "European slow motion train wreck", I have little interest in a very long dated unsecured subordinated capital bond. Secured shorter bonds offer better secuity and avoid the possibility of wild swings in capital value if interest rates go beserk over say a full blown European failure, for example. I'd rather be a "possum in the headlights" and watch the train wreck upfold from the comfort of a solid cash position. On the chance there's a satisfactory resolution that provides an outcome that doesn't involve a world-wide recession or even depression, there's any number of solid equities that'll provide better upsaide that the above mentioned capital bond. Cash is KING !!!

Contact's issue was for $150m with the ability to accept over-subscriptions for another $100m which I think they would have been most happy to receive in the current financial climate so for a company with a big name like Contact in a stable industry like that, actually issuing only $129m is a pretty average result, (Issue closed on 15th December). I guess there could still be a few more in the mail so the final tally may yet to be announced.

If all they got was $129 million then the issue could be considerd a complete failure. explains why my broker kept calling me on the issue. Probably very long in firm allocation.

If this is the case i would expect some secondary market weakness as brokers dipose on the residual Stock.

as has been discussed this is a sub issue with all the risk that implies andis dated (long) to meet rating agency requirements for an equity credit.

If NZG privatise the gentailors it will be interesting to see if more rather than less regulatory pressue is applied.