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  1. #1
    Advanced Member BIRMANBOY's Avatar
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    Default ANZ Capital Notes Issue March 2015

    Anyone getting any of these? I have reserved some since my bonds portfolio has been sold down over the last year. Has been some cautionary articles about them but still reasonable return for not too much risk in my opinion.
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    Quote Originally Posted by BIRMANBOY View Post
    Anyone getting any of these? I have reserved some since my bonds portfolio has been sold down over the last year. Has been some cautionary articles about them but still reasonable return for not too much risk in my opinion.
    I've put my name down for a few, as have some other bonds maturing very soon. Wasn't sure reading the broker blurb if they were over-blowing the risk and just having to explicitly state everything these days. S&P's rating was the lowest you can get without getting into junk.

  3. #3
    Advanced Member BIRMANBOY's Avatar
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    As you say...disclaimers, a*** covering and sundry buts and howevers. BBB- is still reasonable though and a high class of "junk" one might think. Highly unlikely that ANZ will be joining the Prominvestbank of Ukraine in having to offer 24% for term Deposits. 7.2 % sounds downright conservative in comparison
    Quote Originally Posted by Sideshow Bob View Post
    I've put my name down for a few, as have some other bonds maturing very soon. Wasn't sure reading the broker blurb if they were over-blowing the risk and just having to explicitly state everything these days. S&P's rating was the lowest you can get without getting into junk.
    Last edited by BIRMANBOY; 09-03-2015 at 04:19 PM.
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    Just had a quick look on the CIP website at the offer. To say I wouldn't touch these things with a barge pole would be a massive understatement.

    ''Interest Payments are scheduled to be paid quarterly but are subject to ANZ’s discretion. Interest payments are non-cumulative. This means that if ANZ does not pay interest on an Interest Payment Date, ANZ will not pay you that interest on a later date. ''

    ''
    Depending on the circumstances, the ANZ Capital Notes may be repaid, converted into ordinary shares issued by Australia and New Zealand Banking Group Limited (ANZBGL), or written off. The Capital Notes would only be written off if conversion was unable to take place.''

    The fact that the felt the need to put either of these clauses in the offer is a massive red flag to me

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    Do you really think that ANZ would ever exercise discretion not to make an interest payment that was due? That would be tantamount to declaring that they were going out of business, not just in NZ which is probably about one eighth of their operations, but totally. OK, nothing is without risk but these are as low risk as just about anything in this part of the world. If I weren't overweight Aussie banks I'd be looking to having a few. But DYOR of course.

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    Okebw
    The language you refer to is pretty much standard for companies offering a new issue of bonds. If you do some research on the offer docs of any large insto. you will find this to be so. It really is just about "covering all the bases" in case of some unforseen circumstance.

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    Hunting for more dog food Beagle's Avatar
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    According to Chris Lee's blurb on these they require the above clauses, (which I also find objectionable) to comply with the new Basil 3 capital requirements. Effectively these represent an equity risk but you only get a fixed interest return. He went on to say that these are also loss absorbing instruments or words to that effect...
    Equity risk for a fixed interest return is never a good deal in my book.
    Disc -Own HNZ shares and would buy more of them or shares in ANZ bank itself, (presently none owned), over these.

  8. #8
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    Worldwide, banks are under pressure from regulators to increase their capital/equity.

    The end result of these ANZ Capital Notes is to increase their capital/equity. This makes regulators happy.

    I believe that "traditional" bonds do not count toward equity. This does not make regulators happy.

    So I expect to see more Capital Note issues for the general public (highly subordinated, well back in the queue for payment if things go all squidgy and pear-shaped).

    And I expect to see more "covered" bonds not available to the general public (not subordinated, well to the front of the queue for payment if things go all squidgy and pear-shaped).

    In this case, I think that the selling point is 7.2% for a "blue chip" security available to the general public. Who possibly don't realize where they stand in the queue, should things go all squidgy and pear-shaped.

    The "non-cumulative" aspect is the turn-off for me.
    Last edited by GTM 3442; 10-03-2015 at 05:46 PM. Reason: punctuation

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    Cutting through all the clauses, sub-clauses and what ifs..you are left with the basic question...How likely is the ANZ to default...is it more likely or highly unlikely. The answer has to be highly unlikely, surely that is self evident. Catastrophic events could happen of course but if the ANZ and or any of the major banks go belly up you can guarantee that a major **** storm has struck and the rest of the financial world including the stock exchanges are also in similar positions. My understanding is that the Oz banks are in good financial health and are in a different space than previous US banking collapses. As always..pays to be diversified and spread the risks but on the face of it I cannot see any more risk here than all the other countless places to put your money. Some people scoff and say there is no such thing as "too big to fail", but the ANZ is in good health and I see no reason to believe otherwise.
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  10. #10
    Hunting for more dog food Beagle's Avatar
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    I think the above two posts sum the situation up very nicely. My perspective as outlined above is that with a stock like HNZ with projected fully imputed dividends of 7.5 cents / 0.72 = 10.41 cps gross you're getting a 7.8% dividend yield this year and its highly likely that EPS and dividend growth will continue for the next 5 years at a fairly reasonable pace so seeing as you're effectively taking an equity risk with these ANZ instruments you might as well get the superior equity return with HNZ who's divvies could grow at circa 10% per annum and SP could easily double in the next five years.
    Therein lies the fallacy of this investment...equity risk for a modest fixed interest return. As GTM 3442 suggested I think there's an awful lot of people investing in this that don't fully understand that they're effectively taking an equity risk. I know one of them personally that's putting in $100K and talking to them and telling them the risk was like pouring water on a duck's back. All they see is ANZ and 7.2% and think its easy money.

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    Fair comment, Roger.

    It only makes sense once a decision is made in favour of investing in ANZ over, say, HNZ. A Kiwi investor is unlikely to get much benefit from imputation/franking from ANZ; the ANZ shareprice is pretty much at an all-time high; current dividend yield is around 4.5% and likely capital requirement constraints will limit future dividend increases for a few years at least.

    I hope your contact is investing in the context of his/her $2m-$3m diversified portfolio!
    Last edited by macduffy; 13-03-2015 at 12:17 PM.

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    I looked into these while taking an interest in perpetual hybrids recently...

    I was reading up on these notes and the outlier risks to purchaser were horrible. I've read that these are referred to as loss absorbing instruments i.e. the investors absorb the loss for the issuer if things go wrong. This is one of the reasons it can be counted as Tier 1 capital these days, because ANZ don't have to pay the money back in almost any situation (non-cumulative, optional payment, share conversion whenever they want etc etc).

    But the good thing I found is on page 18 and 19 of the investment statement. It has a table which compares the notes to the ANZ Perpetual Notes which is what I was originally interested in. The Perpetual notes rank properly, and their list of features is excellent. The table makes it quite obvious how much better they are. This made me more convinced that the perpetuals are the way to go.

    I still think there is a place for these notes, and I doubt ANZ will go south any day soon, but not a giant allocation in the portfolio.

    GS

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    I've applied for a few. I understand the risks of Tier 1 & 2 capital-part of the fall-out of the GFC. If ANZ gets into enough trouble that I won't be repaid then I doubt if many of my other investments will be looking too healthy anyway....
    I have bonds/shares/property, so just a bit of diversification.

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    Advanced Member BIRMANBOY's Avatar
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    I have placed an order too..feeling optimistic about ANZ and after 30 years of dealings they have never let me down yet. However just a few implements out of the family silver drawer as too much in one place just makes issuers complacent.
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    Ive got some as well, Its getting harder to find good rates of interest.

    Been told BNZ have a tier 2 offering soon.

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    Quote Originally Posted by mcdongle View Post
    Been told BNZ have a tier 2 offering soon.
    Yes, I'll be looking at that when it comes out too.

  17. #17
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    I've have been thinking about this one. Talked to ANZ and they offered me a 5 year fixed mortgage at 4.99% so am thinking of taking a couple of hundie to invest in this. Small risk and easy money in my view !

    Quote Originally Posted by BIRMANBOY View Post
    I have placed an order too..feeling optimistic about ANZ and after 30 years of dealings they have never let me down yet. However just a few implements out of the family silver drawer as too much in one place just makes issuers complacent.

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    Advanced Member BIRMANBOY's Avatar
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    Personally I would never borrow to invest but I'm an old fuddy duddy and may well be an idiot.....a lot of differing views on this idea in thread on "investment strategies...folly or fortitude. Bottom line is we are all responsible for our own decisions. I am investing in these because I had sold down some of my other bonds since I thought interest rates may have been going up. I guess as long as you are not sinking all of your trust in one product its fine but a wide spread of investments always seemed like a good idea to me.
    Quote Originally Posted by iceman View Post
    I've have been thinking about this one. Talked to ANZ and they offered me a 5 year fixed mortgage at 4.99% so am thinking of taking a couple of hundie to invest in this. Small risk and easy money in my view !
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    I am like you BB, have never borrowed to invest other than in rental properties. Probably won't do it this time either but just thought it was interesting that ANZ offered to lend me money at 4.99% to invest with them at 7.20%

    Quote Originally Posted by BIRMANBOY View Post
    Personally I would never borrow to invest but I'm an old fuddy duddy and may well be an idiot.....a lot of differing views on this idea in thread on "investment strategies...folly or fortitude. Bottom line is we are all responsible for our own decisions. I am investing in these because I had sold down some of my other bonds since I thought interest rates may have been going up. I guess as long as you are not sinking all of your trust in one product its fine but a wide spread of investments always seemed like a good idea to me.

  20. #20
    Hunting for more dog food Beagle's Avatar
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    Quote Originally Posted by iceman View Post
    I am like you BB, have never borrowed to invest other than in rental properties. Probably won't do it this time either but just thought it was interesting that ANZ offered to lend me money at 4.99% to invest with them at 7.20%
    I can see why this would be a perplexing situation for many and for others it would seem like easy money, which on the face of it, it is.
    Let's ramp it up to illustrate my points better. Suppose you're debt free and have a lovely home in Nelson worth say $700,000 and the bank offered to lend you $500,000 to invest in these Basil 3 capital compliant loss absorbing deeply subordinated unsecured financial instruments. Suppose also you're in a good paying job and / or business and all is well for the average Joe Bloggs. Joe and his Mrs think this is the easiest 2.2% return they'll ever make and will earn $11,000 before tax for nothing right ? WRONG.

    1. You are trading the security of your debt free family home for "a risk" to make that $11,000 per annum before tax, $7,370 per annum after 33% tax.
    2. You are moving from a completely risk free, (assuming you're living in a part of Nelson that doesn't flood) totally secure position in your home which provides long term security for you, your wife and your children to a psotion where you're exposing them to risk.

    So what's the risks ?

    1. Debt servicing Risk. Well ANZ in certain circumstances don't have to pay interest on these and its non cumulating and they wouldn't if there was a serious "event". You however would still be required to pay your interest at $25,000 per annum and while this probably wouldn't greatly affect you it would smash many families budget to bits.

    2. Capital Risk. They're loss absorbing so in the event of a crisis at any time over the entire life of this financial instrument, (read GFC Mk2), if in the Reserve bank of Australia's opinion it was necessary for the bank to give its shareholders "a haircut" you could see a substantial portion of your investment obliterated but of course you'd still be left holding the baby on your full $500,000 mortgage. If you got a 40% haircut, ($200k of your $500K gone, it would make the circa $7.5K per annum after tax return, look a bit silly wouldn't it !!

    Now I know you're a bright and likeable guy and have your head screwed on well and truly and have a range of other quality investments and wouldn't be so silly as to do this to a level of half a mil so the above is purely for illustrative purposes for others to understand the risks, fully.

    There's no free lunches in the investment world even when it appears there are !!

    Now on the other hand if one were to say, yes there's risk here (as in any capital investment), but lets borrow that $200K and invest in more HNZ shares which will give better dividends and in all likelyhood dividend growth each yearand capital appreciation I think there's a far better case to be made for that sort of investment being better on a risk / reward basis, e.g. your investment could easily double (as you know it does with that company), in value in 5 years and you're being pretty well compensated for the risk involved.

    Disc This poster thought he was clever and decided to partake of what appeared to be a free lunch and did what you're proposing to do on a fixed interest product prior to the GFC and got his fingers burned...once bitten twice shy !! My hair is greyer than yours mate so I just thought I'd share some of that hard learned wisdom.
    Last edited by Beagle; 21-03-2015 at 11:30 AM.

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