Gross Income: TNRHA vs TNRHB vs TNR Shares
Quote:
Originally Posted by
Snoopy
Are they still the compelling investment that I believed the TNRHA bonds were two years ago? Let's see.
From an income perspective, I always like to compare the gross dividend an investor would receive if they held the shares with the equivalent bond yield.
|
TNRHA |
TNRHB |
Bond Coupon Rate at Issue |
9.0% |
6.5% |
TNR equivalent share price (one month before bond issue) |
$2.50 |
$3.02 |
TNR equivalent dividend (adjusted for 10:1 share consolidation) |
4c + 6c = 10c (actual gross) |
3c + 3c +3.5c +3.5c = 13c (forecast net) or 18c (forecast gross) |
Gross Share Yield |
4.0% |
6.0% |
Helped by imputation credits from the shares beinhg available from late FY2016 on, the gap between income form the bonds and income from the shares has closed considerably. Because not all of the profits are paid out as dividends (policy is a 50-55% payout ratio), we can expect the retained earnings to grow profits over time. As the profits trend up, then so should the share price. OTOH the bond price will not change if held until maturity two years away. IMO the balance has now tipped towards buying the shares, not the bonds, from an overall investment perspective.
SNOOPY
Campbell MacPherson Appraisal
Quote:
Originally Posted by
Snoopy
Are they still the compelling investment that I believed the TNRHA bonds were two years ago? Let's see.
As part of the AGM documentation, an assessment of the bonds was made by independent firm Campbell MacPherson. On page 11 of the CM report they stated:
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"The proposed interest rate of 6.5% p.a. is significantly lower than the interest rate on the existing bonds of 9.0%. This primarily reflects:
1/ A reduction in wholesale interest rates over the past 2 years.
2/ A reduction in financail risk associated with Turners
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I accept the first point, but not the second.
It is true that Turners have been well managed over the last couple of years. But the loan business is competitive, with other good operators out there who can win over your customers. What is also true over the last two years is that in the loan industry, the climate has been exceptionally favourable for those loan businesses that survivied the great financial sector collapse. There is an old investment saying that only when the tide goes out you get to see who is swimming naked. Finance companies have been swimming at high tide for the last two years. Just how badly Turners will be affected during the next financial downturn is unknown. But IMO the 'next downturn' risk has not reduced for Turners over the last two years.
My opinion is reinforced by the relaxed 'Leverage ratio' and 'Interest cover' covenants. This would suggest a more relaxed lending policy. And this implies that company risk has increased from a few months ago.
The report carries on
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We estimate the market based interest rate on a security with similar chacteristics to the New Bonds should be in the range of 6.0% to 8.5% per annum (representing a premium of 1.0% to 3.5% over Turners FY2016 bank borrowing costs of 5.0%).
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Turners 6.5% offered is towards the bottom end of this range. I don't think that is compelling enough, when there is every chance that interest rates will be higher in two years than they are now. If the new interst rate was 7.5%, my answer would have been different. I won't be renewing by TNR bonds as a fixed interest investment. However, I will be renewing -some- of my TNR bonds!
SNOOPY
The TNR bonds 'hidden benefit'
Quote:
Originally Posted by
Snoopy
Turners 6.5% offered is towards the bottom end of this range. I don't think that is compelling enough, when there is every chance that interest rates will be higher in two years than they are now. I won't be renewing by TNR bonds as a fixed interest investment. However, I will be renewing by TNR bonds!
So what is the thinking behind my apparent tautology?
There is another way of looking at the TNR bonds, that is as an option to purchase TNR shares in two years time. The maximum you will pay for these shares is $3.75. But the real advantage could be if the share price does not advance. This will trigger option (b). The bond to share conversion price would be:
"a 5% discount to the average daily volume weighted price of Shares in the 90 days prior to the maturity date as determined by an independent advisor appointed by Turners."
IOW bondholders have a window for potentially buying some cheap and brokerage free Turners shares in two years time, or getting their capital back. It is for this reason that I will be buying some bonds. However, the risk profile as I see it has changed. So my TNR overall holding (shares and bonds) after the new bond issue will be made up of 2/3 shares and 1/3 bonds, whereas before it was 1/10 shares 9/10 bonds.
SNOOPY
TRAHB Bond Covenants: Introduction
Quote:
Originally Posted by
Snoopy
|
TNRHB (issue) |
Interest Cover (EBITDA to Total Interest) |
3.0 times |
Interest Cover (Dorchester Finance Limited, Oxford Finance Limited) |
1.25 times |
Maximum Leverage Ratio (Gross Debt to EBITDA) |
2.5 |
Equity Ratio (Dorchester Finance Limited, Oxford Finance Limited) |
20% |
Maximum CAPEX as a percentage of base case |
110% |
I should note that these covenants can be subject to amendment after the bonds are issued, and are not 'set in stone' for the life of the bonds. But I make the following observations.
What were TNRHB bonds have now been renamed TRAHB bonds. It is just a name change to reflect the change in name of the parent company. A couple of years back, I made a 'not too persuasive' analysis on how the then 'Turners Limited' (now 'Turners Automotive Group') was doing in sticking to their bond covenants. Now I intend to make a better attempt.
I have a problem running these covenant checks. The covenants are clear. But the 'segment reporting' in the annual report may not correspond exactly to the two 'bond prospectus' groupings of:
1/ Non-finance Covenant Group &
2/ Bank Borrower Finance Companies
as listed on page 16 of the bond prospectus (the prospectus that I have previously referenced in post 12). I have assumed that all of the 'bank borrower finance companies' are listed under the 'finance' segment, while 'Automotive Retail', 'Collection Services NZ', 'Collection Services Aus' and 'Insurance' are all lumped into the 'Non-finance Covenant Group'. But I can't be sure of that. Subsidiary 'Southern Finance' was not specifically mentioned as being part of the 'finance' segment as an example.
Next, for covenant calculation purposes, I have to decide how to allocate the corporate head office costs across divisions. There is every reason to suggest the more revenue a division generates, then the more attention that division will require from management. So this is my preferred method of allocating head office costs across the other divisions. This, however, is a 'rule of thumb' that I cannot be assured accurately reflects the real allocation of head office time and resources.
The next problem is working out what the EBITDA figure is for each of the two categories. The company annual interest bill is shared amongst all the divisions of the company. But how is it split up? I have split the interest between segments in proportion to the disclosed liabilities of that segment. The proportion of segment liabilities in relation to the total liabilities determines how the liabilities and hence how the 'interest due for payment' is spread out. To me this seems logical. However, there is no obligation on the company to spread their total interest expense obligations across divisions in this way.
I am discussing this because I would like readers to see there are quite a few assumptions behind an analysis such as this. And therefore quite a few ways that the answers I am deriving can go wrong. Yet this is the fairest way I can think of to make use of the 'segment information' as presented in the annual report for the 'Turners Automotive Group'. So let's get going.
SNOOPY