Allied Farmers Limited Capital Notes (ALF010)

[Alan3285]

Hi Guys,

Happy New Year to you all.

Has anyone looked at the ALF010 bonds?

My (very simplistic) analysis of these is as follows:

• They are currently yielding 16% (based on 'offer' on the board as of right now);
  
  
• They rank ahead of all the equity shares.

Therefore, I am thinking that whatever risk attached to the bonds before the Hanover deal, there is now greater asset backing than before (whatever final value is actually extracted from the Hanover loan book), and all of the equity that 'financed' the acquisition of those assets ranks behind the bonds.

Therefore, whatever the risk in the bonds prior to Hanover, the risk must be relatively lower today (without getting into absolutes!)

That makes them look quite attractive to me, but am I missing something from the above analysis?

Thanks,

Alan.

[macduffy]

When do they mature?

Not perpetuals, are they?

[Alan3285]

When do they mature?

Not perpetuals, are they?

No - not perpetuals. They mature on 15 Nov 2011.

Yield (quoted above) is YTM.


Alan.

[Contrarian]

Gidday Alan
I've been trading the NZDX for a year or two & it's interesting.

I've got a few ALF010 which I got before the notes were gold plated as you have pointed out. I look at it like this "One can earn say $1,600 interest with a fraction of the capital required to earn $1,600 at a banks deposit rates" Working back like that gives you the rest of your capital for other things.

[Alan3285]

Hi Contrarian,

I've got a few ALF010 which I got before the notes were gold plated as you have pointed out.

So I take it you also believe that the massive increase in capital from the Hanover deal has made the ALF010 bonds pretty much rock solid?

Am I correct in my analysis above that the assets from Hanover all add to the buffer on the bonds?

If so, what is your opinion as to why are they still trading at such a high yield?

Thanks,

Alan.

[GTM 3442]

My understanding is that the ALF010 issue are Capital Notes, which will convert into Allied Farmers shares on maturity.

So perhaps the question should be why is the yield so low.

[macduffy]

Is the conversion on a one for one basis?

Or does a (say) $1 note convert to $1 worth of shares at conversion date valuation?

Have/do these securities actually trade at quoted levels, ie how liquid are they? There doesn't seem to be any transactions whenever I take a look.

[Alan3285]

Hi GTM,

My understanding is that the ALF010 issue are Capital Notes, which will convert into Allied Farmers shares on maturity.

For the purposes of discussion, I'll go with a working assumption that the shares are currently fair valued (and leave it to those who know better to vote on that on the market itself).


The conversion formula is here:

(Page 46 of the document, Page 50 of the PDF, Clause 6.14.3 and Refer to 11.1 - Definitions)

Number of Ords =

= Issue Price of Notes / ( (100% - Conversion Discount) x VWAP during Reference Period) )

If I substitute using the current figures:

= $1 / (95% x $0.105)

= 10 Ords for each capital note (rounded)


In other words, the formula delivers approximately $105 of market value shares for each $100 of nominal value capital notes.


However, the capital notes are currently trading at approximately $90 per $100 of nominal, so a conversion would mean:

$90 of market value capital notes = $105 of ordinary shares


Hence, upon conversion, a theoretical gain on conversion (today) of about 16%.

So perhaps the question should be why is the yield so low.

Is my maths correct?

If so, then what calculations are you doing that are deriving a market value for the capital notes that is substantially lower than $90 with a current yield to maturity of about 18%?




Thanks,

Alan.

[GTM 3442]

Just a creepy, sneaky feeling that the whole thing revolves round finding value in the Hanover loan book - where Hanover couldn't - and where nobody else was game to try.

The record of some of the other finance companies who are failing to make scheduled payments in their recovery plans doesn't induce confidence.

For real thrills and excitement, I don't think you can go past RPC010 -

Buy 110%
Sell 90%
Last 100%

[Alan3285]

Hi GTM,

Just a creepy, sneaky feeling that the whole thing revolves round finding value in the Hanover loan book - where Hanover couldn't - and where nobody else was game to try.

The record of some of the other finance companies who are failing to make scheduled payments in their recovery plans doesn't induce confidence.

Okay - but my point above in the OP was that whatever value is extracted from the Hanover loan book all of it is now a further additional buffer for the ALF010 holders compared to the pre Hanover position.

That makes those capital notes very secure from what I can see.

The new shares issued were something like 1.5 billion at a theoretical value of 20c each (or something like that) making about NZ$300m of theoretical value in the Hanover book (my numbers might be out a bit - I was going from memory so please adjust if appropriate).

That figure was based on a valuation by PwC or Grant Samuel (or both?)


If they get just 20% of the theoretical value out, that is still $60m sitting behind, and securing the capital notes.

Doesn't that make them more secure than pre-Hanover?

If so, what realistic assumptions can we use that would get the valuation on the capital notes materially below the current $90 / $100?


Alan.