Turners (TNR) bonds

[peat]

certainly their price has decreased to reflect some change in their value

[Snoopy]

certainly their price has decreased to reflect some change in their value.

As a TNRHB bondholder myself I am not worried. The chance of a serious downturn in the second hand vehicle market between now and the end of September 2018, when the TNRHB bonds mature, I believe, is low. But if these Turners TNRHB bonds are replaced by TNRHC bonds, something which I believe is likely, then I think the 'capital risk' for those new bondholders is a non trivial risk that definitely should be considered.

If the current interest rate of 6.5% is carried over, this is not out of line with Turners declared 'interest margin' of near 9%. After all, Turners have to gather the loans scrutinise the people they loan to source the cars that the loans are written for - all stuff that bondholders don't have to deal with. But if you look at the Turners finance division on its own (not the whole company) then the interest margin rises to some 16%. So I would have to think hard whether any such bond return offered is a fair slice of the pie, given the capital risk on the block.

If:

1/ Turners achieve their goal of $250m in syndicated loans AND
2/ the bond pool remains at $25m THEN
3/ $20m of those bonds become subject to securitized loan default risk.

It appears that Turners bond holders will be first in line for being hit by any market risk fall out. This means an 8% fall in the overall loan securitized portfolio value will result in a ($20m/$25m =) an 80% loss of capital by bond holders and the end of interest payments. That would be a worst case scenario. But even a 2% decline in the value of the securitized loan portfolio combined with an associated default in loan repayments would result in a 20% loss of capital for bondholders. That is a 'non-trivial' loss.

We don't yet know what the TNRHC bond rate offered will be. But I would have to think carefully whether receiving about 40% of the interest income from any loan deal, while shouldering most of the capital risk of a market downturn, is a deal worth taking up.

SNOOPY

[Snoopy]

We don't yet know what the TNRHC bond rate offered will be. But I would have to think carefully whether receiving about 40% of the interest income from any loan deal, while shouldering most of the capital risk of a market downturn, is a deal worth taking up.

With all bond investments, I think it is worthwhile stacking them up against the alternative of putting the same money into the head share. The historical dividend yield for TNR shares over the payouts relating FY2018 will soon be:

(3.0c + 3.0c + 4.5c +5.0c) / 302 = 5.13% (net), or 5.13%/0.72 = 7.1% (gross)

If the TNRHC bonds are rolled over at 6.5% and retain their 'share conversion option' value after two years then in my expectation:

1/ Bondholders will have a lower expected gross return than shareholders.
2/ Bondholders will be taking a higher capital risk than shareholders.
3/ Bondholders will likely have a greater liquidity risk than shareholders BUT
4/ If the TNR share price goes down over the two year bond period then bondholders will have an opportunity to buy TNR shares in the future at a discount to today's price.

Given 1/ 2/ and 3/, I would have to conclude that a 6.5% interest rate would be insufficient to interest me in taking up potential TNRHC bonds. However I do note that with the full year result announcement:

"The company is also in the process of re-negotiating pool parameters with BNZ on the Securitisation Warehouse."

If:
1/ the securitisation terms for bondholders become more favourable OR
2/ the bond interest rate offered increases OR
3/ the share price increases, so reducing this alternative investment's gross yield

THEN my assessment could change.

SNOOPY

[winner69]

Snoops ...are you sure thatbthe current listed Turners bonds have anything to do with the securisatation thing.

It seems that the other ‘bonds’ we are talking about (the 8%) are notes issued by the Trust to ‘buy’ the debt from Turners

Then I might be completely wrong

[h2so4]

It seems that investing in TNRHC bonds is not straightforward.

[Snoopy]

It seems that investing in TNRHC bonds is not straightforward.

I would say investing in any bond is far from straightforward. Yet some who invest with great investment rigour with shares are often content to toss money into a bond with the belief that management will almost certainly look after them, and with little thought to what might happen to the company to allow it to pay:

1/ A return on your money AND
2/ The return of your capital intact.

I admit to being guilty of this in the past myself. But I am now very wary of a coming bond market correction. I reckon it is actually harder work to truly get an appropriate return on a bond investment than it is to get an appropriate return on your shares, and neither is easy money!

SNOOPY

[Beagle]

Currently the current issue of bonds present as something of an opportunity if you can nab some, (hounded some up at $1.01 this week, not enough really).
Currently trade cum this June quarters interest payment of 1.625 cps and these mature on 30 September 2018 and are convertible for shares at a 5% discount to the 90 day VWAP leading up to conversion date or you can ask for the cash back or get preferential rights to a replacement bond issue, if any. Those looking to add to their shareholding but unsure on timing and whether they'll get timing right can buy at a 5% discount to the 90 day VWAP and effectively de-risk the timing of the entry.

If anyone would like to sell me some more at $1.01 please PM me. I'd love to hear from you and am all ears like a Basset hound

[percy]

Don't muck around.
Ring TRA's CFO Aaron Saunders [09] 308 4950 and get the correct answers.

[Enjay]

Percy might be onto something there - hard to read into these types of debt / capital structures from the balance sheet sometimes.

Those bigger auto finance companies often use bankruptcy remote trust structures to raise capital and shuffle legal title / risk / assets to make those finances look better.

Be curious to know how TRA approaches it.

[Snoopy]

Percy might be onto something there - hard to read into these types of debt / capital structures from the balance sheet sometimes.

Those bigger auto finance companies often use bankruptcy remote trust structures to raise capital and shuffle legal title / risk / assets to make those finances look better.

Be curious to know how TRA approaches it.

Welcome to the forum Enjay. The TNRHB bond issue has only 2.5 months to run. If it is replaced by a TNRHC bond issue (and that is an if) then that bond issue will have its own prospectus outlining underlying risks, and that should answer some of these questions. TRA are on record as saying they are re-examining the financial arrangements underlying the securitization of loans. Personally I am prepared to wait for them to do this, and ask any questions at that point.

Percy is a great investment enthusiast and has a penchant for going straight to the top. Personally I have found a carefully worded e-mail to investor relations gets me the answers I want. Not saying one approach is necessarily better than the other.

SNOOPY