Is buying debt to hold till maturity pretty safe?

Hi Guys,

I've had money in equities for a few years now and have done pretty well. I managed to get in right about at the bottom (all luck at that point). And have made a decent return. I currently have shares in TWR FBU NZX and MCK(bad buy but doesn't seem to be going anywhere and pays dividends of a bit more than a savings account). I also carry about a 3rd of my portfolio in a PIE call account.

However, interest rates are crap right now, and I'd really like to be making more than what I am with my call account. I am planing to start a business around 2.5 years from now and most of this portfolio will need to be liquidated in order to do that. So I'm willing to take on some risk, but I can't take on too much beacause I need to be able to take all the capital out and don't want to take a big hit when I do.

What can you guys recomend for the cash I currently have in the call account? Debt securities interest me but I haven't traded in them before. Would buying a few bonds of various risks and returns that mature within my 2.5 year time frame make sense? I would love to hear your thoughts on my portfolio as a whole, and what moves I should be making.

Thanks,

Noso

Hi Noso
Just on the bonds part of your post you might consider IFT060, maturity 15/9/13. These would fit into your time frame. I am holding these, coupon of 8.5% with quarterly interest payments. You can't trade bonds on-line, have to contact your broker. I use ASB Securities, brokerage 0.05%. In my view the only question one needs to consider (like any other trade) is the soundness of the company. You may already be familiar with Infratil, they are a large coy with diversified infrasructure assets. Most of their debt is via debt securites and have several currently on issue with a new one planned for June. IFT060 is an uncomplicated bond, no tricky stuff. As you intend to hold until maturity any movement in interest rates (upward) will not be of concern. If you wan't some info. on IFT bonds go to their website www.infratil.com Best of luck.

Have a look at the BLU020 thread for an extreme risk/reward situation.

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Originally Posted by kiwitrev

Hi Noso
. . . . . You can't trade bonds on-line, have to contact your broker. I use ASB Securities, brokerage 0.05%. . . . .

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Only some bonds can't be traded online - the likes of BNZ, Westpac, etc. Have been trading IFT/FBU etc online with Direct Broking for years now.

STL030 bonds (mature on 15/3/2011) even more reward/risk than BLU020.

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Originally Posted by Newman

STL030 bonds (mature on 15/3/2011) even more reward/risk than BLU020.

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Not really .... On the reward side of the equation: with STL030 you are paying about 65 cents for a dollar. BLU020, you pay about 35 cents for a dollar bond plus about 30 cents accrued interest.

On the risk side: well ... this is where you have to do your own homework.

The new issue for Genesis could be worth looking at over your timeframe. Details are a bit sketchy at present but should be more transparent by next week.

Hey, Nosolution, what did you end up doing?
Interested to see how your decisions have panned out so far. Did you stick with fixed interest?

Hi No Solution,
I also have a large call account sitting getting low interst. (4%).
Been thinking about bonds.

Have no plans as such for the money except the interest return to live on, so can hold to maturity.

Happy to use a broker...but would prefer to do own thing.

How do you go about buying a bond say issed by a bank eg ANZ do you contact the bank ?

Can you give me an update of what you ended up doing ? How has it worked out.

Thanks.

I would also be interested to know how you got along, havent really got into the bond market, but it has some healthy returns it seems and am just starting to research them now!

Kiwi2 read the bluestar thread.

You can buy fixed interest securities, bonds etc on the open market see below link https://www.directbroking.co.nz/Dire...ratesheet.aspx

Best to do some research yourself...if you use DB you can call them and they are quite helpful with explaining. The major thing is be aware that stated rate of interest is going to be constant (unless its a perpetual) but ACTUAL yield is determined by how much of a premium (or discount) that you have to pay to buy on open market. Alternatively IFT is getting ready to place a new bond

Issuer Details
Issuer Name:	Infratil Limited
Key Dates
Opening Date:	23/04/2013
Closing Date:	27/06/2013
Issue
Coupon Rate:	6.85% p.a.
Minimum Investment:	$5,000 and in multiples of $1,000 thereafter
Amount Sought:	$25m with up to $75m of oversubscriptions.
Details
Infratil Limited ("Infratil") has registered a Simplified Disclosure Prospectus for an offer of Infrastructure Bonds. The new Infrastructure Bonds have a maturity date of 15 June 2022 and will pay a fixed rate of interest at 6.85%p.a. Interest will be paid quarterly. Infratil Infrastructure Bonds are unsecured, unsubordinated debt securities of Infratil. Unlike each series of Infrastructure Bonds issued prior to November 2011, the Infrastructure Bonds offered under this prospectus are not convertible into shares in Infratil in any circumstances. Infratil is a holding company with investments in the infrastructure companies that are described in the Simplified Disclosure Prospectus. Prospective investors should refer to the Simplified Disclosure Prospectus to fully understand the status of the Infrastructure Bonds and the terms and conditions of the offer. For more information or to request a copy of the Simplified Disclosure Prospectus, when made available, please contact the Direct Broking Fixed Interest Team on FREEPHONE 0800 800 372 or you can request a copy of the Simplified Disclosure Prospectus by providing your details below. Disclosures and Statements ANZ New Zealand Securities Limited will be paid commission of up to 1.25% of the application amount on all applications that are accepted by the registry bearing the Direct Broking "stamp". No fees are payable by the applicant on successful applications. ANZ Bank New Zealand Limited is a joint manager of the issue.

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Originally Posted by kiwi2

Hi No Solution,
I also have a large call account sitting getting low interst. (4%).
Been thinking about bonds.

Have no plans as such for the money except the interest return to live on, so can hold to maturity.

Happy to use a broker...but would prefer to do own thing.

How do you go about buying a bond say issed by a bank eg ANZ do you contact the bank ?

Can you give me an update of what you ended up doing ? How has it worked out.

Thanks.

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Not particularly helpful..hes asked what he could do not what he shouldnt. The road is littered with failed finance companies, dreary mining ventures gone wrong, companies that implode etc. etc. Bonds , debt securities also have had some bad apples. All financial ventures are DYOR and hopefully a recognition that "if it sounds too good to be true...it probably is"

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Originally Posted by POSSUM THE CAT

Kiwi2 read the bluestar thread.

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See above posts.

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Originally Posted by Dej

I would also be interested to know how you got along, havent really got into the bond market, but it has some healthy returns it seems and am just starting to research them now!

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Originally Posted by BIRMANBOY

See above posts.

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Thank you for your insight BIRDMANBOY, very helpfull :)

No problem...ps Birman are cats BIRDs and cats dont get along according to Gareth.:) Another thing to keep in mind is for example with the IFT new bond coming out.... When you buy at outset, ie not on open market but when its issued, there is no brokerage charges because the fees are paid by issuing entity (here IFT) to the facilitator either DB or ASB or whomever. SO if you buy a 10,000 bond it costs you 10,000 and will pay the quoted interst rate (6.85%) fro the duration of the term..(I think 2022)? Problem of course is this...at the moment 6.85% is great but what happens in 3,4,5 or 8 years. Lets say the interest rates go up to 10% hypothetically. Now you are receiving 6.85% when you could be getting 10% as a TD....whoops. So this is where the open market comes in. You can sell your bonds at any time but key is at what price. If you tried to sell your 6.85% bonds when better options are avail elsewhere then no-one wants your bonds at face so would be offering to buy at a discount. So you might be forced to sell 10000 bonds for 7000 or whatever ..you get the idea. I have 11 or so assorted bonds and all are "in the money" ie they are paying me well above current interest rates and also if I sold them I could sell for more than I paid for the. Good timing. Trick is to keep an eye on interest rates and also maturity terms etc. Longer the term..higher the yield but also greater chance of interest rates turning? Do some study before you go for it.

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Originally Posted by Dej

Thank you for your insight BIRDMANBOY, very helpfull :)

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I invested in a range of bonds a couple of years ago and have been receiving a steady, above bank interest, income stream from them since. Like any investment you need to do the research on the issuing company/bank, read the prospectus, etc.
Things to consider are whether they are a fixed term or perpetual and if perpetual how and when the interest rate is changed and when or if they might be called(cashed up).
Often you can buy bonds at a discount to the issue price based on the market perception of the bond and or the dividend being paid. You can also pay a premium based on the same reasons. So you need to look at the yield to see what you actually get.
Eg:
Credit Agricole (CASHA) perpetual bonds callable from 19/12/2017 are paying 5.04% fixed till 19/12/2017
Currently you can buy 10 000 bonds for $6262.
The gross yield is 10 000 x 5.04% = $504 / $6262 = .08 x 100= 8%
Things to consider are that someone originally paid $10 000 for the 10 000 bonds and why they are selling at a discount as well as the likelihood of the bonds being cashed up (taxable capital gain to you of $3738) or if not cashed up what the interest rate might be reset at.
Only using this as an example - not actually suggesting they are a good buy - although they might be.


I bought my bonds thru Chris Lee and partners and found them very friendly and helpful.
www.chrislee.co.nz
Check out their "current investments" page for a list of bonds available and PDF's of the investment prospectuses
Also I find their Market News and Taking Stock newsletters make good reading.

Thank you very much Birmanboy for your help.

So am I correct in reading that Infratil Limited is opening a bond today and I can invest up to the 27th June 2013 via the ANZ ?

Does this mean as I am paying no premium for the bond I am going to be getting 6.85% on any money I invest ?

Sound good....but hopefully not too good as not to be true as the old saying goes.

Are you taking up the offer ?

Thanks again.

Kiwi2 have a look at what debts rank above it. IE what debts have to be paid first before you get your money back if the company has problems

Sure..first thing is express interest with them by requesting a prospectus. If you use DB you can sign in and tick box to do that. If you dont use DB use your normal people..if you dont have any connection with anyone? , I find DB (direct Broking) is good. DB is associated (owned ) by ANZ but I dont know if you can walk into your local ANZ bank and do it if that is what you are asking. So you will pay your whatever amount andd will receive your 6.85 in quarterly payments. UNLESS something goes wrong with underlying issuer IFT. So there is an element of risk...how much risk is acceptable to you is the 1000 dollar question. IFT have about 7 or 8 bonds on the go. I have had several go to maturity with no problem. Usually they will either cash you out or offer to roill you over into a new issue (if one is available). There seems to be a good aftermarket available for selling and buying on IFT so your other option is wait until they have been bought to market and are listed and then you can buy or sell on market. Remember that you will be charged brokerage fees here though. My gut feeling is these will be popular and after they list you will pay a premium to buy. Yes I will be buying because I like to spread my exposure and still get good yields. Remember what I said previously about long term though...maturing 2022 so what will interest rate look like in future. The underlying thing to keep in mind is who and what and how safe/reliable/secure is issuer. This is the most important thing to come to grips with.

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Originally Posted by kiwi2

Thank you very much Birmanboy for your help.

So am I correct in reading that Infratil Limited is opening a bond today and I can invest up to the 27th June 2013 via the ANZ ?

Does this mean as I am paying no premium for the bond I am going to be getting 6.85% on any money I invest ?

Sound good....but hopefully not too good as not to be true as the old saying goes.

Are you taking up the offer ?

Thanks again.

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A year plus later. As i derisk my portfolio Ive committed a % of my funds to fixed int over various terms up to a year and now starting to look at some bonds too. I see some reccos in previous threads anyone got any picks for the near future that they are looking at/invested in esp ones with discounted better yield that the mkt may not have picked up on that have a good rating cheers JT

With interest rates on the rise I wouldn't be looking at any with a long maturity since as interest rates rise bond rates don't look so good (in comparison to other options) and it becomes more likely you will sustain a loss if you sell before they mature. I have been selling off anything that isn't returning at least 8%. As far as new bonds coming out you could find yourself locked into a not very attractive rate if interest rates keep going. If you go for a perpetual such as Works WKSHA for example that resets each year so it has been popular and more expensive to buy...(as interest rates go up so does your return). With perpetuals depends on fine print however. BNZ for example is returning 9.1% odd but is due for reset 06/14 so could be called in and cancelled or could be reset at 5 year cash rate plus 4% plus (cant remember exact figure). So you need to be aware of all possibilities with perpetuals. If you want SAFE you could go with a NZ Govt GOV410 which matures 1923 and pays 4.26% but a term deposit will get you more than that. The Infratil debt securities are probably the more highly returning bonds and at moment range from 5.8 to 6.4 yields. Personally I think its not such a good time to be looking at these (any) bonds as investments and you can do better by going for good long term divvy producers (well I would say that wouldn't I?). There are plenty to choose from that will give you a better return and they shouldn't be any more risky than various bonds. DYOR as usual.

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Originally Posted by Joshuatree

A year plus later. As i derisk my portfolio Ive committed a % of my funds to fixed int over various terms up to a year and now starting to look at some bonds too. I see some reccos in previous threads anyone got any picks for the near future that they are looking at/invested in esp ones with discounted better yield that the mkt may not have picked up on that have a good rating cheers JT

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The only direct risk in holding bonds to maturity is the risk of non payment. As the GFC showed this sometimes can be non trivial but the risk can be mitigated by investing in a moderately issue diverse portfolio. There is a second degree risk in opportunity cost of holding to maturity. If interest rates rise further this may occur but in my opinion only in the short end of the maturity range.

One downside of bond investment for non traders is the asymmetry in the tax treatment.All gains are on revenue account but any loss which relate to the credit worthiness of the issuer may be non deductible if you are not a trader.

Bonds are preferable to term deposits of a similar profile as they are reasonably liquid. many good one are not NZX listed

Josh.
Have a look at WKSHA discussed elsewhere on this site. They are perpetuals reset ea. 30 June at 4.05 over 1 tr swap. With expected rising interest rates these should be a good hedge. It's not a finance coy but just a mechanism to channel funds to Downer which stand behind the debt.

One of my PIE term deposits has matured and I'm thinking about investing some of it in bonds. Anyone know if there are any new issues coming up that sound decent?

What I look at re possible new issues is the maturity date of existing issues on the DX market. There are quite a few coming up in the next little while which you could reasonably expect to re-issue and most of these are "solid" companies.