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scottwalshnz
24-08-2015, 10:28 AM
Contract have announced a new 100m of bond issues: https://www.nzx.com/companies/CEN/announcements/268909

Thoughts on the margin?

Newman
25-08-2015, 12:24 PM
Why bother to pay brokerage to buy bonds with an interest rate of 4.5%?

Harvey Specter
25-08-2015, 12:53 PM
How much is brokerage? 1%? Apart from the ability to trade it, these are probably a better option: http://www.heartland.co.nz/content/investors/heartland-investment-rates.aspx

Snoopy
25-08-2015, 03:35 PM
Contract have announced a new 100m of bond issues: https://www.nzx.com/companies/CEN/announcements/268909

Thoughts on the margin?

Contact shares are currently trading on the market at $5.28. Normal dividends to be paid for the just completed financial year add to 11cps + 15cps = 26cps. That last 15c will not be imputed, but only becasue CEN cleared out their imputation credit account with a special 50c dividend that definitely won't be repeated.

So the normalised gross dividend yield is currently:

11cps /0.72 + 15cps = 30.3cps

=> 30.3cps / $5.28 = 5.7% gross yield

There is a prospect of much better gross yield next year when full imputation on the normal dividend makes a return.

The NZ official cash rate currently sits at 3%. The indicative issue margin of 1.15% to 1.2% implies a bond interest rate of 4.15% to 4.2%.

To me buying the CEN head shares looks a far better bet than buying the bonds. I don't consider there is any real difference in investment loss risk between the two. And the prospect of a capital gain on the shares looks better than the prospect of a capital gain on the bonds.

SNOOPY

PSE
25-08-2015, 04:33 PM
Contact shares are currently trading on the market at $5.28. Normal dividends to be paid for the just completed financial year add to 11cps + 15cps = 26cps. That last 15c will not be imputed, but only becasue CEN cleared out their imputation credit account with a special 50c dividend that definitely won't be repeated.

So the normalised gross dividend yield is currently:

11cps /0.72 + 15cps = 30.3cps

=> 30.3cps / $5.28 = 5.7% gross yield

There is a prospect of much better gross yield next year when full imputation on the normal dividend makes a return.

The NZ official cash rate currently sits at 3%. The indicative issue margin of 1.15% to 1.2% implies a bond interest rate of 4.15% to 4.2%.

To me buying the CEN head shares looks a far better bet than buying the bonds. I don't consider there is any real difference in investment loss risk between the two. And the prospect of a capital gain on the shares looks better than the prospect of a capital gain on the bonds.

SNOOPY
I think this is a useful comparison from Snoopy.
Previous CEN bonds have been issued on unfavourable terms to the buyer, callable and leaving CEN the option of cancelling interest payments.
You may want to investigate the situation here.
I don't understand why people buy bonds with a margin above the cash rate, the benefit of bonds is their capital appreciation when shares are falling. Without that, this offer is directly comparable to the equity and doesn't look great in this light.

Harvey Specter
25-08-2015, 08:35 PM
Snoop - if the cash rate reduces to 2% after the bonds are issued, assuming the market is comfortable with the same margin, the price of the bond will increase. That gain is taxable as it is a financial arrangement.

What happens to the shares? Assuming they are priced on yeild, and the dps doesn't change, the share price also increases? And that gain is non taxable capital gain?

PSE
26-08-2015, 07:25 AM
Snoop - if the cash rate reduces to 2% after the bonds are issued, assuming the market is comfortable with the same margin, the price of the bond will increase. That gain is taxable as it is a financial arrangement.

What happens to the shares? Assuming they are priced on yeild, and the dps doesn't change, the share price also increases? And that gain is non taxable capital gain?
I am ignorant, I assumed that the interest rate on this bond drops with the cash rate?
Seems like the offer is fixed rate thanks for clearing that up Harvey, comparing it to the equity is not appropriate in this case.
The interest rates are relatively low right now but definitely could make sense to have a few bonds in the portfolio against the risk of a sharemarket crash.

Snoopy
26-08-2015, 12:44 PM
I am ignorant, I assumed that the interest rate on this bond drops with the cash rate?


I think it does but not instantly. 'Bond Rates' based on 'Cash rates' are normally set for a period (one year? two years? three years?) before they are reset. I haven't checked the reset period for these Contact bonds.

SNOOPY

Snoopy
26-08-2015, 12:47 PM
Snoop - if the cash rate reduces to 2% after the bonds are issued, assuming the market is comfortable with the same margin, the price of the bond will increase. That gain is taxable as it is a financial arrangement.

What happens to the shares? Assuming they are priced on yield, and the dps doesn't change, the share price also increases? And that gain is non taxable capital gain?

That's how I understand it Harvey. Of course to be fair we should point out that if the cash rate rises and the bonds lose value, then that loss is tax deductable. Interest rate rises might be expected to lower ther price of utility type assets too. So the share price could fall in this instance. And that share value loss would not be tax deductable (for non-traders).

SNOOPY

PSE
26-08-2015, 02:31 PM
Hmm, back to square one if they reset then they are limited in capital appreciation so may as well own the shares.
In terms of portfolio allocation though a buoyant economy causes a rising stock market would cause a rising interest rate environment and falling bond prices (rising yields).
On the other hand a recession and falling stock market would cause lowering of interest rates and rising bond prices.
Right now these rules are out the window we have low interest rates and a sharemarket bubble and most bonds are like this one not long dated or with recall options anyway. I would have loved it if there were some good bonds around I would have been 75% bonds by now as the bubble is obvious.
I know what you are saying, lowering interest rates makes shares more attractive but the reason central banks lower interest rates is to counteract the recession which is causing shares to fall.
Hope y'all can follow my somewhat convoluted logic, the guts of it is that shares and bonds are normally (perhaps not right now) negatively correlated so having a bit of both should increase returns where investors are doing the opposite of what the market is doing.
That is selling their shares into bonds during a sharemarket bubble and selling their bonds into shares in a sharemarket crash.
As I say I haven't bought bonds and this is a big gap in what I am doing, so appreciate your thoughts.

PSE
26-08-2015, 02:39 PM
There are worse things than paying tax on profits, I am buy and hold on shares but if I had to pay tax on bond capital appreciation it would be no big deal.
Good to know but a first world problem :) making too much money darn have to pay tax :p

GTM 3442
27-08-2015, 03:14 AM
First World problems are, at the end of the day, still problems.

But usually nicer to have than Other World problems.

So enjoy 'em while you have 'em ! !

BIRMANBOY
27-08-2015, 09:51 AM
I have roughly equal amounts in shares and bonds...the average return, (for my portfolio), from shares (dividends not cap gain) is several % points greater than bonds. Bonds in last several years have as you say been dropping and are not as attractive currently as dividend yields available. Most of my bonds were purchased in 2012-2013 when good yields were more easily available. Personally I think it comes down to how conservative you are. A bond will still be better than a TD in all probability but does have the advantage over shares of not being as vulnerable to share market volatility. Its all relative...in a climate of capital loss and 3% divs..a bond at 4.5% looks good. A share market crash/correction gives good opportunities (IN SHARES NOT BONDS) for a long term thinker.
Hmm, back to square one if they reset then they are limited in capital appreciation so may as well own the shares.
In terms of portfolio allocation though a buoyant economy causes a rising stock market would cause a rising interest rate environment and falling bond prices (rising yields).
On the other hand a recession and falling stock market would cause lowering of interest rates and rising bond prices.
Right now these rules are out the window we have low interest rates and a sharemarket bubble and most bonds are like this one not long dated or with recall options anyway. I would have loved it if there were some good bonds around I would have been 75% bonds by now as the bubble is obvious.
I know what you are saying, lowering interest rates makes shares more attractive but the reason central banks lower interest rates is to counteract the recession which is causing shares to fall.
Hope y'all can follow my somewhat convoluted logic, the guts of it is that shares and bonds are normally (perhaps not right now) negatively correlated so having a bit of both should increase returns where investors are doing the opposite of what the market is doing.
That is selling their shares into bonds during a sharemarket bubble and selling their bonds into shares in a sharemarket crash.
As I say I haven't bought bonds and this is a big gap in what I am doing, so appreciate your thoughts.

Harvey Specter
27-08-2015, 10:55 AM
There are worse things than paying tax on profits, I am buy and hold on shares but if I had to pay tax on bond capital appreciation it would be no big deal.
Good to know but a first world problem :) making too much money darn have to pay tax :pPaying tax is good as it (normally) means you are making a profit. Just pointing out that it has to be factored in when comparing.