Been thinking about this one further, to determine my view on whether IFT should show some greater degree of concern for bondholders.

Firstly, as I see it, the main problem for investors is not in itself the low interest rate, but the unexpectedly high fall in the face value that results from the comparison between the interest now available on IFTHA and other available issues of similar ranking. With a fixed rate bond, holders expect the face-value to change, maybe by 5-10% over the life of the bond as interest rates change. It may change more dramatically if the financial status of the issuer changes. However, with a perpetual with annual reset, holders are looking to have more stability in their capital but accepting the variation in their income, although aware that a change in the financial status of the issuer would have some impact.

However, the fall in face value has not been caused by IFT becoming less financially sound. Nor has it been caused by the fall in the interest rate per se - which has tracked the OCR cuts as it would be expected to. What is unexpected it that retail deposits and other more secure forms of debt did not absorb all the cuts in OCR. This resulted in the historical difference of the benchmark rate at around 50bp above deposits crossing over to become a 150bp spread in the other direction. Chart below from the RBNZ:

Attachment 3751

The result is that the IFTHA's now attract about 200bp less interest than they would have had the historical relationship stayed the same. If this had been applied today, IFTHA's would be attracting about 6.22% interest - which is probably closer to what holders would be expecting at this point in the cycle.

Now I don't understand completely why this happened. The question is, whether it is cyclical, a structural change or a transitory change?

If it is a cyclical change, then how long is the typical cycle and could issuers have guessed they were at a peak? It doesn't look particularly cyclical from that chart though, as the gap was fairly consistent over more than one business cycle. If a longer term series could show that it is cyclical, then issuers may have outsmarted investors - which is not the way a company like IFT which regularly goes back to the market might like to be perceived and may want to give some consideration to restoring their tarnished image. (It would be interesting to know how well their current bond issue is being taken up.)

If it is a structural change, then either it was foreseen by issuers (in which case they really do deserve to be distrusted from now on) or it was unforeseen, in which case you would think that there would not be any resistance from IFT at all in coming forward, stating that it was unintended consequence of structural change and proceeding to offer a solution that restores interest to around the expected 6.22% mark.

If it is a transitory change, then IFT are correct to assert that eventually the balance is likely to be restored, deposit rates will fall below wholesale rates, the premium in the IFTHA's will return and their face value will be (somewhat) restored. In that case, I can agree with IFT that the wisest course of action is to do nothing, as any attempt to alter the formula risks making things worse.

I would be interested if anyone can shed more light on whether the change in relative rates is likely to be cyclical, structural or transitory.