IFTHA Infratil Perpetuals

[westerly]

by the way tim - you should be ashamed of the article you wrote for the herald.

If anyone missed it - tim argues against mandatory ratings for debt issues to retail punters arguing:

1. The rating agencies messed up with the GFC so why trust them
2. Ratings just give advisors a cop-out
3. Ratings are expensive to get

My view on things is this:

Does having mandatory ratings increase the protection of retail investors?
Does it do so at a reasonable cost?

THE ANSWER IS YES!

A cynic might wonder what IFT's currently listed bonds would be rated as. It seems to me not too highly. Perhaps IFT prefers to pull the wool over mum and dads eyes. SHAME!!

I have found Infratil one of the better communicators of information about their Company and cannot see any real reason to criticize the article.
Rating agencies have definitely failed in their assessments at various times and one can wonder just how independent they really are.
As the saying goes do your own research. As for the IFT perps I think there is no real reason why they should change the conditions. Chris Lee is being a wee bit optimistic.

Westerly

[Xerof]

Must say I agree with those sentiments Westerly, with the exception of Lee being a wee bit optimistic - his suggestion is ludicrous...

The 'problem' with the Perps pricing is partly to do with absolute levels of interest rates, but IMO, far more to do with credit risk pricing movements since these were issued. The 'credit risk' margin that the market was offered and accepted at Issue was 150 pips above the benchmark one year swap rate. That is no longer appropriate in todays market - it's more like 500 basis pips (as is being paid on their fixed term bonds issued at ~8.0% (~3.0% market base rate plus ~5.0% implied IFT credit margin) So, to achieve that yield, the price must be ~54 cents for the $1

For those who buy now, they hold some comfort that the Perps are pricing the Infratil credit risk a whole lot better, and unless credit markets get worse (possible) then the downside is limited. Holders will pick up the narrowing of credit spreads going forward, plus any benefit from the 'normalisation' of base rates, where the returns will be magnified by the deep discount currently available.

By that I mean:

If today you buy IFTHA's at 54 cents for FV of $1.00, your coupon is 4.22%, but your yield is 7.81% (ignore the dirty pricing issue)

If rates rise to 10%, the coupon rises to 11.5%, but your yield balloons out to a very tidy 21.3%


I do have one issue with Tim's comments regarding 'fairness' to shareholders with regard to the buy-backs - these securities are hybrid, and I would like to be considered as more of a shareholder, not a bondholder. To say therefore that shareholders are benefiting from the buy-backs when ONLY ordinary shareholders take the benefit, sticks in my craw


Discl: hold at 55 and 58, and will accumulate more in due course