Air NZ Bond AIR030

[Grimy]

Air New Zealand has announced that it plans to issue a 5.5-year senior bond. Maturing 27th April 2028
The interest rate has not yet been fixed, but will be a minimum of 6.00%, with interest paid April and October.
Any takers?

[mcdongle]

Im going to give it a miss

[Grimy]

Me too. I briefly considered it, but I think there will be better pickings on the NZX before too long. The term of the bond and the government being an owner may suit some people at present. If the return had been a little higher I would have been keener.

[peat]

its tricky because one senses an opportunity due to the safety net of the govt as the largest shareholder but I personally forego opportunities like this where the investment doesnt stand on its own merits but has some guarantee express or implied. I'll use the example of South Canterbury Finance if you recall the situation where there debt was quite safe AND paying a higher risky rate .

Anyway I think this bond will act more like equity i.e be risky and go down in value when times get tough. There is less need to accept risk in a bond portfolio now adays

[SBQ]

its tricky because one senses an opportunity due to the safety net of the govt as the largest shareholder but I personally forego opportunities like this where the investment doesnt stand on its own merits but has some guarantee express or implied. I'll use the example of South Canterbury Finance if you recall the situation where there debt was quite safe AND paying a higher risky rate .

Anyway I think this bond will act more like equity i.e be risky and go down in value when times get tough. There is less need to accept risk in a bond portfolio now adays

Agree. When inflation is like 8 or 10% annually, why would you waste time looking at fix term investments like bonds?

In Finance news, the classic 60/40 allocation for stocks / bonds is recording it's worse year ever. All those Kiwi Savers licking their wounds.

[winner69]

Calling Sierra Bravo Quebec

I agree with your comments

[percy]

Take care with bonds.The following is from Chris Lee's newsletter.
WITH an inflationary environment so suddenly following a deflationary one, a question commonly posed asks whether the low-yielding bonds of yesteryear should be sold in favour of more recent, higher yielding issues.

While every situation is different, some truisms are worth recalling.

There is no free lunch. When bonds are sold, they are sold at a price mutually agreed by both parties. A buyer of low-yielding bonds may demand a steep discount, whereas a seller of high-yielding bonds may demand a premium.

In 2020, the Auckland Council issued bonds maturing in 2050, offering an interest rate of 2.95% per annum. After initially seeking $300 million, the Council eventually accepted bids totalling $500 million. At a time when investors were fearful of interest rates turning negative, the issue closed oversubscribed. Some of the more unscrupulous ''advisers'' elected to profit further from this demand, buying the bond for themselves and on-selling it to clients at an even lower yield, arguing that such actions were ''market forces''.

The economic cycle changed, and negative rates never eventuated. 2.95%, even from our largest council, is now well below the market average. A seller of these bonds today would reap barely 60 cents in the dollar. The seller could then elect to invest into a more recent bond, earning an interest rate of, say, 6%.

[winner69]

The end of the story above -

At the risk of oversimplifying the equation, a $10,000 investment earning 2.95% has become a $6,000 investment earning 6.00%. The $4,000 difference has, effectively, been transferred to the buyer of the lower yielding bonds. Although other factors will form part of an investment decision, that loss of principal is permanent.
Add brokerage - both ways - into the deal, and suddenly, the lunch is looking quite expensive indeed.

[percy]

The end of the story above -

At the risk of oversimplifying the equation, a $10,000 investment earning 2.95% has become a $6,000 investment earning 6.00%. The $4,000 difference has, effectively, been transferred to the buyer of the lower yielding bonds. Although other factors will form part of an investment decision, that loss of principal is permanent.
Add brokerage - both ways - into the deal, and suddenly, the lunch is looking quite expensive indeed.

Thanks W69.

[Nor]

If someone bought these at current ~$58 per hundred the capital gain if held to maturity would be caught by tax when form IR3K is filled, 'Sale and Disposal of Financial Arrangements'.
Interestingly it seems to me that it is implied that capital losses are tax deductible, which is unusual, as it says the resulting figure must be entered in return without distinguishing between gain and loss. IMIO.

[peat]

In 2020, the Auckland Council issued bonds maturing in 2050, offering an interest rate of 2.95% per annum.

Duration amplifies risk massively.
Coz you're losing yield for so so soo sooo long (if it goes against you)

well done Auckland Council!