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  1. #1
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    Default NZX Subordinated Notes

    I am a novice when it comes to investing but out of interest I asked about the NZX Subordinated Notes. One of the most important details is the interest rate paid. Below is what the prospectus has;

    Interest Rate The Subordinated Notes will pay a fixed rate of interest for the first 5 years until the first election date.
    This initial Interest Rate will be determined by NZX in conjunction with the Joint Lead Managers
    following a bookbuild. A bookbuild is a process whereby an interest rate is determined by
    reference to bids from market participants for an allocation of Subordinated Notes.
    The initial Interest Rate will be set at the sum of the Swap Rate plus the Issue Margin, subject to
    a minimum interest rate.
    The minimum interest rate and indicative Issue Margin will be determined by NZX in
    conjunction with the Joint Lead Managers and announced to the market on or about 17 May
    2018. The final Issue Margin may be above or below the indicative Issue Margin.
    The Interest Rate will be announced to the market on or about the Rate Set Date.
    If NZX runs an Election Process, a new Interest Rate may be set via that process as described
    in section 3 of this PDS (Terms of the Offer) and section 5 (Key features of the Subordinated
    Notes).



    Any idea what this might mean in regard to interest rates? Obviously a large investor will be happy with a lower yield, particularly if it is someone else's money. Does this mean I would buy the bond without knowing the yield. I guess bond dealers would have a ball park figure but it sounds more like an interest rate auction controlled and decided on by the issuer (NZX) and their Joint Lead Managers. Sounds crazy to a small investor like me. Admittedly I haven't read through the whole document which probably explains things in more detail. Just wondered if anyone would have a ballpark figure for an interest rate on something like this.
    Also if I stick to my belief that the financial markets have a big crash coming buying 15year bonds in a rising interest rate environment with the possibility of inflation pushing up rates faster than expected this would probably be a bad idea. Admittedly if we are following Japan we might have another couple of decades of low interest rates. Who knows, I wait and watch but become more and more impatient waiting.
    Last edited by Aaron; 21-05-2018 at 09:05 AM.

  2. #2
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    Per ANZ securities 5year swap rate is 2.75% so the issue margin is what NZX adds to get the bonds sold so they go from the bids they receive. I don't suppose I could bid 20% to try and raise the issue margin.

  3. #3
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    They will be trying to get away with a rate under 4%.

    Personally, I don't think you can go past the annual reset of Infratil's IFTHA - if bought at the right price.

  4. #4
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    Here are my thoughts on the instrument
    They are 15 year instruments. with their life divided into three five year phases


    • Term 15 years maturing on the Maturity Date (20 June 2033) if not Redeemed before that date. They may be redeemed (you could be repaid your principle ) at 5 year intervals
    • Minimum interest rate 5.4% (for the first five years only)
    • It may be higher than 5.4 if the 5 year swap rate moves up and that plus the minimum indicative rate (between 2.6 and 3.0) is greater. You wont know this till after you apply but can be assured of the minimum rate
    • After the first five years you will be offered either compulsory redemption , or , new terms. If you dont like the new terms you can redeem (at par)
    • Same again after the next 5 year period
    • They will be listed so you can sell them (if there is sufficient liquidity)


    If you have any further questions please ask, but note I am not distributing these - just helping out on the forum.
    Last edited by peat; 21-05-2018 at 05:17 PM.
    For clarity, nothing I say is advice....

  5. #5
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    Thanks Peat and GMT. I guess the minimum indicative range was further in the prospectus. 5.4% tied up for 15 years(or possibly 5 years). Not for me.

    Another question for the bond market gurus.

    Rabobank Perpetual Bonds (RCSHA) Rabo bank must have issued these at 8.43% why don't they issue new bonds at a much lower rate and redeem the perpetual bonds. I haven't made any effort to investigate this so don't put in too much effort on my behalf. It just seems odd that they are paying such a high rate. Maybe it is to do with their creditworthiness.

    It is just that I use rabodirect and have a number of term deposits constantly roling over waiting for the big crash (GFC2) it would be a damn shame if Rabodirect were the first to close their doors in a crash before I could invest my savings.
    Last edited by Aaron; 22-05-2018 at 08:50 AM.

  6. #6
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    Quote Originally Posted by Aaron View Post
    Thanks Peat and GMT. I guess the minimum indicative range was further in the prospectus. 5.4% tied up for 15 years(or possibly 5 years). Not for me.

    Another question for the bond market gurus.

    Rabobank Perpetual Bonds (RCSHA) Rabo bank must have issued these at 8.43% why don't they issue new bonds at a much lower rate and redeem the perpetual bonds. I haven't made any effort to investigate this so don't put in too much effort on my behalf. It just seems odd that they are paying such a high rate. Maybe it is to do with their creditworthiness.

    It is just that I use rabodirect and have a number of term deposits constantly roling over waiting for the big crash (GFC2) it would be a damn shame if Rabodirect were the first to close their doors in a crash before I could invest my savings.
    No, it was announced by NZX on the 17th
    https://www.nzx.com/announcements/318109

    Personally I think many would consider 5.4% p.a. a pretty good rate of return at the moment even for a 5 years maturity.
    However one must take into account the risk of being a subordinated debtor of NZX Ltd, a company that has a monopoly but struggles to grow the business.
    Still, as a note holder one isn't so much concerned with growth merely stability and it would actually be hard to see them stuffing it up so badly that the business fails.
    Probably a reasonable risk for a small percentage of a fixed interest portfolio.

    I use RaboDirect for some reasonably large amounts and have faith in their credit worthiness.
    RCSHA has a much lower credit rating than the bank itself.
    See https://www.nzx.com/announcements/316217
    For clarity, nothing I say is advice....

  7. #7
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    Quote Originally Posted by peat View Post
    I use RaboDirect for some reasonably large amounts and have faith in their credit worthiness.
    RCSHA has a much lower credit rating than the bank itself.
    See https://www.nzx.com/announcements/316217
    5.4% is better than term deposit rates at Rabo Direct but I like the idea of not having it tied up for too long. Also after GFC2 I will need to leverage up to turbo charge returns so no point having bonds.

    But with things taking so long to crash and the possibility the long term credit cycle has changed who knows, cash and bonds might be OK but that all depends on inflation/deflation stock market crashes etc etc. Just don't know what to do at this stage.

    Rabobank used to have the best credit rating of all the banks in nz then they split of the NZ bit which doesn't have such a good rating. I guess we should follow the dairy payout and if it drops drastically pull our money out as Rabo only loans to the rural sector as far as I am aware.
    Last edited by Aaron; 22-05-2018 at 01:30 PM.

  8. #8
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    Quote Originally Posted by Aaron View Post
    5.4% is better than term deposit rates at Rabo Direct but I like the idea of not having it tied up for too long.
    liquidity is offered by the instrument being listed

    Hey, I'm not recommending it though....

    But in my opinion your strategy should incorporate a variety of investments and not rely on a GFC2 occurring.
    None of us really know whats going to happen so you build up investments to cover all scenarios.
    For clarity, nothing I say is advice....

  9. #9
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    Quote Originally Posted by peat View Post
    But in my opinion your strategy should incorporate a variety of investments and not rely on a GFC2 occurring.
    None of us really know whats going to happen so you build up investments to cover all scenarios.
    Starting to wander off topic, but I second what Peat has to say here.

    The problem with waiting for GFC2 is, exactly when do you dive in? It would make sense to 'hedge your bet' by, say,

    1/ Putting a third in when the first shock headline comes out to try and capture the 'downward' overreaction.
    2/ Putting another third in six months after that, when the market has had a chance to moderate but it is still cheap and then
    3/ Wait another 18 months to invest the last third. That will give a chance for some of the unexpected consequences to play out.

    That approach will guarantee a lower return than if you put all your money down at he 'right time'. But it avoids you having to correctly identify exactly the right time to invest, something that is usually only discernible with the benefit of hindsight.

    Conventionally, bonds have been a safe have to park funds to wait for such a crash. But the problem this time is that bonds themselves are being priced to perfection by low interest rates. IMO GFC2 while it would cause a stock market correction, might have an even bigger 'crash' effect on the bond market. If long term interest rates go up from 3% to 6%, as an example, then the bond market (Including NZX subordinated notes) will crash by 50%, which equals massive loss of capital. Having the liquidity 'to get' out after losing half your capital may be a damp squib consolation prize.

    My own solution to this dilemma is to try and profit from the sector 'mini crashes' that occur regularly, even as the overall market edges higher. The obvious recent example in the NZX has been the construction sector. This doesn't mean that I buy anything that has gone down though. You have to look for something that has a better than average chance of recovery. My most recent purchase, adding to my position in AWF Madison, fits this bill. I suspect 'construction accounts', account for for 30-50% of AWF's turnover. But the share has been hammered, while the rest of the business looks to be tracking OK. So I am picking a recovery, even while keeping aside enough cash to support a 'cash issue' if I turn out to be wrong, and a capital raising is put out there to shore up the balance sheet (hedging my bet in other words)!

    I also find it useful to not focus just on one investment theme at a time. It doesn't pay to suffer from tunnel investment vision, no matter how good the deal of the day looks. For example, in my view Contact Energy has been significantly undervalued since the Origin Energy sell down that effectively caused a mini crash in the share price. I was considering this investment simultaneously while looking at AWF. I had a CEN top up price in mind. But over the last two months, the price got away from me to the extent that I perceive Contact now trading at near 'fair value'. So I have abandonned that investment theme for now. Always be prepared to walk away if you can't buy near your original target price.

    Oh, and it case it isn't clear. I don't like the bond market in general at the moment. I do hold some TRAHB 6.5% bonds, but mainly as a hedge for the TRA shares I also own.
    Getting a 3% interest return on a BBB rated bond just doesn't float my risk/return boat.

    SNOOPY
    Last edited by Snoopy; 23-05-2018 at 09:02 AM.
    To be free or not to be free. That is the cash-flow question....

  10. #10
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    Sounds like the NZX offer has been heavily oversubscribed.

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