sharetrader
Page 1 of 5 12345 LastLast
Results 1 to 15 of 61
  1. #1
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default Turners (TNR) bonds

    Hi All. Long time sharemarket investor but very shy bond market investor here. In fact TNRHA, the soon to mature (30th September 2016) bonds have been my only bond investment for some years. I was skeptical two years ago when Dorchester issued these bonds, but the 9% coupon rate was enough to overcome by skepticisim! Now in effect the bonds are being reincarnated as TNRHB, but with a much lower 6.5% interest rate. Are they still the compelling investment that I believed the TNRHA bonds were two years ago? Let's see.

    SNOOPY
    Last edited by Snoopy; 19-09-2016 at 09:41 AM.
    To be free or not to be free. That is the cash-flow question....

  2. #2
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default Gross Income: TNRHA vs TNRHB vs TNR Shares

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 19-09-2016 at 09:46 AM.
    To be free or not to be free. That is the cash-flow question....

  3. #3
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default Banking Covenants on TNR

    Quote Originally Posted by Snoopy View Post
    Are they still the compelling investment that I believed the TNRHA bonds were two years ago? Let's see.
    Below is a comparison of the different financial covenants that Turners agreed to with their banks at the time of issue of both respective bonds. These numbers are taken from each respective bond prospectus.

    TNRHA (issue) TNRHA (forecast at maturity) TNRHB (issue)
    Interest Cover (EBITDA to Total Interest) 3.0 times 3.5 times 3.0 times
    Interest Cover (Dorchester Finance Limited, Oxford Finance Limited) N/A N/A 1.25 times
    Maximum Leverage Ratio (Gross Debt to EBITDA) 3.75 2.0 2.5
    Minimum Debt Cover Service Ratio (cashflow for debt servicing)/(total debt service costs) 1.1 1.1 N/A
    Equity Ratio (Dorchester Finance Limited, Oxford Finance Limited) N/A N/A 20%
    Maximum CAPEX as a percentage of base case 110% 110% 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.

    1/ The allowed leverage ratio at the time TNRHA bonds were introduced was set temporarily high, because the business at that time was in a consolidation phase.
    2/ It looks to me that with TNRHB, the 'tool for keeping parent bank capital risk in check' has changed. Changed from looking at 'debt servicing costs' to having a 'minimum equity ratio' on the loan book.
    3/ The issue of the TNRHB bonds looks to affirm a rather more risky capital regime in terms of 'interest cover' and 'maximum leverage ratio'.
    4/ Notwithstanding (3), the 20% equity ratio required on the finance company loan books is reassuringly conservative

    SNOOPY
    Last edited by Snoopy; 19-09-2016 at 09:49 AM.
    To be free or not to be free. That is the cash-flow question....

  4. #4
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default Campbell MacPherson Appraisal

    Quote Originally Posted by Snoopy View Post
    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:

    --------------

    "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

    ---------------

    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

    ---------------

    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%).

    ------------


    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
    Last edited by Snoopy; 19-09-2016 at 09:51 AM.
    To be free or not to be free. That is the cash-flow question....

  5. #5
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default The TNR bonds 'hidden benefit'

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 19-09-2016 at 09:52 AM.
    To be free or not to be free. That is the cash-flow question....

  6. #6
    Member
    Join Date
    May 2007
    Location
    Auckland, , New Zealand.
    Posts
    338

    Default

    Thanks for your analysis Snoopy. I probably won't be investing in these bonds. But more because I'm building cash at the moment (will be greatly helped by AIR tomorrow) for future investments, rather than anything against the Turners bonds.

  7. #7
    Guru
    Join Date
    Apr 2007
    Location
    Hamilton New Zealand.
    Posts
    4,069

    Default

    Thanks Snoopy

  8. #8
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default

    Quote Originally Posted by Grimy View Post
    Thanks for your analysis Snoopy. I probably won't be investing in these bonds. But more because I'm building cash at the moment (will be greatly helped by AIR tomorrow) for future investments, rather than anything against the Turners bonds.
    I should put the comments on my assessment of Turners bonds in context. I am a long term investor. So if the share price of TNR was lower in two years time than now, this would not worry me. If you wanted to definitely spend your invested capital in two years, then the TNRHB bond issue has more merit.

    As a long term investor I hope for long term capital gain, as the dividend flow increases. But I accept the risk of capital loss is there, albeit reducing the longer your investment time horizon. My big issue with particularly New Zealand market bonds, is that the interest offered is sometimes less than the dividend yield from shares in the same company. In theory should a company get into trouble, the shareholders lose their capital before the bondholders. In practice, I cannot remember a company on the NZX that got into trouble where the shareholders lost their money, but the bondholders got all their capital back. So as a bondholder if you

    1/ Get the same after tax income as a shareholder. AND
    2/ Give up your right to capital appreciation AND
    3/ Retain your right to lose your capital shoudl the company get into trouble.

    THEN why would you do it? For this reason my preference is always to invest in utility type shares instead of bonds, for the New Zealand market (where high dividend yields are common) at least.

    SNOOPY
    Last edited by Snoopy; 19-09-2016 at 10:07 AM.
    To be free or not to be free. That is the cash-flow question....

  9. #9
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default

    Quote Originally Posted by Snoopy View Post
    So as a bondholder if you

    1/ Get the same after tax income as a shareholder. AND
    2/ Give up your right to capital appreciation AND
    3/ Retain your right to lose your capital shoudl the company get into trouble.

    THEN why would you do it?
    I got a follow up note in the mail yesterday from Turners, reminding me about the TNRHB bond offer which closes at noon on Friday.

    What a contrast to the original 'under the radar' TNRHA bond offer. In that, Turners claimed there were no plans to list theTNRHA bonds. Further, bondholders should therefore plan to be in until maturity. At the time Dorchester were really gunning for the old Turners Auctions shareholders to accept Dorchester shares, not what turned into TNRHA bonds as consideration for handing over their TUA shares! Subsequent to Dorchester morphing into the new Turners, the TNRHA bonds were of course listed - although liquidity was never good. Not sure how much of that was because at the time of TNRHA conception, bondholders were told they would have difficulty selling, so they never tried? Nominally TNRHA bonds were available to the general public. But the terms were so good and the scaling so skewed towards TUA shareholders, I don't think any investor not already inside the Turners tent got a look in.

    Now we have TNRHB bonds and the public are once again invited to participate. With terms no longer being so good, maybe this time the wider investing public will get a look in? If that improves liquidity in the new bonds, that will be fine by me. I see a couple of brokers have now commenced coverage of TNR shares. I am curious if any brokers out there are promoting the TNR bonds!

    SNOOPY
    Last edited by Snoopy; 20-09-2016 at 09:37 AM.
    To be free or not to be free. That is the cash-flow question....

  10. #10
    Guru peat's Avatar
    Join Date
    Aug 2004
    Location
    Whanganui, New Zealand.
    Posts
    4,508

    Default

    Thanks for your thoughts Snoopy
    I'm now working for a brokerage type firm and this is my first issue to work on. We consider Turners are looking good at the moment and the duration risk of the bonds is low but yes liquidity risk will exist for divestment
    A very useful yield however and I concur that one of the advantages of this issue is the convertability and the discount achieved from that either 5% or could be more if share price exceeds 3.75 so there is a bit of upside as well.
    Hit me up if anyone wants some (hope this doesn't breach any rules - probably does oops)
    For clarity, nothing I say is advice....

  11. #11
    ShareTrader Legend Beagle's Avatar
    Join Date
    Jul 2010
    Location
    Auckland
    Posts
    12,927

    Default

    Quote Originally Posted by peat View Post
    Thanks for your thoughts Snoopy
    I'm now working for a brokerage type firm and this is my first issue to work on. We consider Turners are looking good at the moment and the duration risk of the bonds is low but yes liquidity risk will exist for divestment
    A very useful yield however and I concur that one of the advantages of this issue is the convertability and the discount achieved from that either 5% or could be more if share price exceeds 3.75 so there is a bit of upside as well.
    Hit me up if anyone wants some (hope this doesn't breach any rules - probably does oops)
    Too late to get some at par ? Sorry, couldn't resist
    No butts, hold no mutts, (unless they're the furry variety).

  12. #12
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default

    Quote Originally Posted by Snoopy View Post
    Now in effect the bonds are being reincarnated as TNRHB, but with a much lower 6.5% interest rate.
    I got a miserable single sheet introducing me to the TNRHB bonds when I signed up. But now I find the full bond prospectus is on line.

    http://www.turnerslimited.co.nz/site...%202016%20.pdf

    I don't remember being pointed to this at the time. So I think it is only fair that all TNRHB bond investors should know about it.

    SNOOPY
    Last edited by Snoopy; 28-05-2017 at 02:58 PM.
    To be free or not to be free. That is the cash-flow question....

  13. #13
    percy
    Join Date
    Oct 2009
    Location
    christchurch
    Posts
    13,156

    Default

    The code for Turners bonds is now TRAHB.

  14. #14
    ShareTrader Legend Beagle's Avatar
    Join Date
    Jul 2010
    Location
    Auckland
    Posts
    12,927

    Default

    Quote Originally Posted by Snoopy View Post
    I got a miserable single sheet introducing me to the TNRHB bonds when I signed up. But now I find the full bond prospectus is on line.

    http://www.turnerslimited.co.nz/site...%202016%20.pdf

    I don't remember being pointed to this at the time. So I think it is only fair that all TNRHB bond investors should know about it.

    SNOOPY
    Thanks Snoopy.
    No butts, hold no mutts, (unless they're the furry variety).

  15. #15
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,292

    Default TRAHB Bond Covenants: Introduction

    Quote Originally Posted by Snoopy View Post

    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
    Last edited by Snoopy; 08-09-2017 at 10:34 AM.
    To be free or not to be free. That is the cash-flow question....

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •