Works Finance (NZ) Limited (WKS) Bonds

[Lizard]

The prospectus is one of the most difficult ones to read that I have ever struggled through, so I'm really not too certain about the right of exchange/redemption and how it operates beyond the step-up date. However, any exchange appears to be at a 2.5% discount to the 20 day VWAP (translated into NZD on the daily rate for each day).

At current price of DOW shares ($A 3.23), they would be issuing close on 15% more equity to replace. This is significant enough to potentially result in a conversion "death spiral" and possibly they would require approval from shareholders (not sure if the issue of ROADS themselves was ratified and whether that somehow covers a significant issue of equity beyond normal limits - as we saw in NZ when the ALF010's converted).

More practically, bondholders don't welcome being made into shareholders unless things are so dire that there is no other option for obtaining their money back. In this case, the securities are perpetual, so converting bond holders to equity holders would only occur if DOW wanted/needed to stop paying the div - which they can stop doing anyway. They would have to be fairly callous to foul their reputation in the debt market for the small advantage that issuing equity over ROADS might give them in some scenarios.

[kiwitrev]

From Interest website.







Works Finance (NZ)
9.80% 15 Jun 2012/Perpetual






Indicative market yield (% pa)

N/A



Indicative market price (%)

74.00





Issuer

Works Finance (NZ)



Amount on issue (NZ$m)

200.0



Issuer type

Corporate



Description

Convertible Preference Share



Security ranking

Subordinated



Assumed maturity date

15 Jun 2012



Legal maturity date

Perpetual



Credit rating

N/R



Current coupon

9.80



Coupon type

Reset Quarterly



Next coupon reset date

15 Jun 2012



Coupon reset at

1 yr swap plus 4.05



Election/Conversion date

15 Jun 2012



First & future call dates

15 Jun 2012 & on dividend payment dates if stepped up



Margin reset date

15 Jun 2012



Margin reset

1 yr swap plus 4.05 if not resold



NZX Code

WKSHA



Holdings - minimum/increments ($)

3,000/1,000



Issue documentation

Click here


Notes

The preference shares are a perpetual instrument and as such have no fixed redemption date and the holder has no rights to require redemption.

Dividends may consist of a combination of cash payments and imputation credits. Dividends may not be paid under certain circumstances and are non cumulative.

On the First Step-up Date (margin reset date), holders will be given the option to either request the Step-up Rate, or a lower rate, or accept the rate determined after a remarketing process.

If the holder requests a higher rate than the rate set in the remarketing process, then the holder will be entitled to require Downer EDI Limited to repurchase or resell their holding. If Downer EDI Limited repurchases the preference shares, it will have the option to redeem in cash or equivalent value of shares in Downer. If the remarketing process is unsuccessful the dividend rate will be set at the Step-up Rate.

[Lizard]

Yes, there is plenty of room for confusion about the step-up date, but now that the step-up date has passed and they did not elect to attempt a re-marketing process, the securities become perpetual with annual re-set. There are no more "step-up" dates, so the last two paragraphs referring to the re-marketing process can be deleted, as no longer apply.

[sharer]

Thanks to Lizard & others for helping to clarify the situation.
I found it all quite confusing. Although i now hold them at a modest capital gain (according to DB Portfolio list), i'm feeling rather insecure ...

[BIRMANBOY]

I'm surprised more interest hasnt been shown in these. At 6.6% interest rate and selling at 7300 for 10,000 worth of bonds for this means a gross return of 9.04% which seems rather succulent to me. If interest rates drop next year as they may well do should still be at at a good yield when compared to other options. Might be time to add a few more.

[sharer]

I'm surprised more interest hasnt been shown in these. At 6.6% interest rate and selling at 7300 for 10,000 worth of bonds for this means a gross return of 9.04% which seems rather succulent to me. If interest rates drop next year as they may well do should still be at at a good yield when compared to other options. Might be time to add a few more.

Or ... having regard to where & with whom they do business, whether their bills get paid, & all the scary press speculation about world money stuff recently,
maybe for this risk we should not offer more than 4500 for 10000 bonds, & hope they continue to be able to pay the 6.6% coupon rate ...

[BIRMANBOY]

Big gap between your 4500 and 7350..Mr. Market is valuing these at 7210 to 7350 in last couple of weeks....what do you know that is making you nervous? They havent missed any dividends for me and they seem to be getting work ...the vans are new...big companies like these are unlikely to go to the wall because there just aren't that many players in the business they do. Risk is everywhere...what makes these stand out in your opinion?

Or ... having regard to where & with whom they do business, whether their bills get paid, & all the scary press speculation about world money stuff recently,
maybe for this risk we should not offer more than 4500 for 10000 bonds, & hope they continue to be able to pay the 6.6% coupon rate ...

[Lizard]

Was thinking of putting the money from the NPX020's in here when it comes back next month.

[BIRMANBOY]

I see these are now trading at 8000...where they seem to have been somewhat settled. This is producing a gross return of 8.2% which is quite a handy yield. One interesting thing is since they are not heavily traded every now and then when the stars and moons colide you can put in a cheeky offer as someone did recently at 7610. These reset every year now so yield will no doubt drop down from 6.6% but when you consider Kiwi Bank is offering 5.88% on its recent bond offer..there is still good value in these Works (IMHO)

[kiwitrev]

B.Boy
You will be feeling pretty good, trading today almost to 90% on better than expected DOW 6mth result-up 7% on ASX but was up 14% in early trade. Interesting to note that vol. on DX at $180k the greatest for some time tells me punters banking on redemption into the future. Any similar views out there?