IFTHA Infratil Perpetuals

[Traderx]

Hi all just wondered what your thoughts are on this security.

It yields 1 year swap rate + 1.50% reset every year, int paid quarterly. So current interest is 4.97% and looks like will reset for the next year at a similar level (1 year swaps currently around 3.45%).

Trading at around 61c at the moment (was issued when swap rates were at a high point just prior GFC - surely one of the greatest debt deals done by an NZ corporate - for them).

So this equates to a current yield of about 8.1% pa.

IFT are regularly buying back IFTHAs.

Any increase in swap rates should deliver quite a strong capital gain (reverse of a normal bond) and in the meantimes earns over 8%..

IFT balance sheet is ok and assets are reliable, credit looks good so not too worried about the perpetual nature of them.

Think this provide a good hedge for anyone exposed to rising interest rates and just quite an attractive investment.

What am I missing?

Cheers

disc no holding (yet)

[Xerof]

I don't think you are missing anything. The margin is clearly now out of synch with reality, but thats reflected in the capital price, and you are correct, the capital value should (in theory) appreciate as the coupon goes up.

The Company love buying them back because the discount goes directly to Retained Earnings line (if my understanding of accounting treatment is correct)

Discl: bgt at 55 cents last year

[peat]

Any increase in swap rates should deliver quite a strong capital gain (reverse of a normal bond)
a good hedge to rising interest rates

yeh Lizard and I were discussing pref perps.
interesting that is a share, but looks like a bond, but has a direct relationship with interest rates (not inverse)

I guess the downside is if interest rates go lower.

[Lizard]

I think some of the perpetual prefs/notes are starting to look interesting. There is a hunt for income on in NZ at the present - affecting yields/prices on bonds, property trusts and other income shares. 1 yr swap rates and govt bond rates (against which most of the resets are benchmarked) are falling again, so the perpetuals are not getting much of the money. The income hunt could have another year to run in NZ, as the money gradually released from govt guaranteed debentures figures out where it is going to go.... so we may still see low benchmarks for the next reset and a further squeeze on yield. However, at this point, this is likely to also be offset by more competition for income/price rises in other options.

I'm guessing that some time in the next year (probably not yet) the fall in bond yields will falter and (particularly given the illiquidity) fixed rate bonds (and possibly income shares) could turn quite sharply. At that point, prefs could be a good hedge. Given many have close to a year to run on yields not far off those provided by similar rated fixed-rates, I'm thinking it may be time to start some slow accumulation.

The hardest part with these things is trying to put them on any kind of comparable basis. For instance, the RBOHA are quite likely to be redeemed at some point (2017 was mentioned from memory), but the IFTHA are much less likely - although the IFT buyback provides some liquidity for now. This adds a bit of risk to the IFTHA. Also difficult to keep tabs on the degree of subordination. The margins on most of these over swap rates are pretty low by current standards, so don't expect them to get back to $1 though.

[Tim Brown]

if you want more information about the PiiBs you should look at the Infratil website http://www.infratil.com/content/view/1941/119/ under the heading “Perpetual Infratil Infrastructure Bonds”

[Lizard]

Hi Tim and thanks for posting.

Hope you don't mind me asking, but are you The Infratil Tim Brown? (the one that has to put up with the Garfunkel jokes? )

[Tim Brown]

Yes to both questions.

[PJK]

OK - the IFTHA (Infratil perps) are currently priced at 52/53 cents to buy $1.00 worth of notes.
And I'm thinking WTF? This seems an inflation proofed bargain sitting on the NZX.

That effectively means that even the current low rate of 4.22% actually returns just over 8%pa to someone who buys in today - and that's an extemely good return isn't it?

Infratil look solid enough - returning regular profits and do not look likely to default on these bonds - and any increase in base interest rates will be matched by the swap resets and a 188% multiplier (due to purchasing them at just 53 cents).

So - what am I missing? Why are IFTHA's priced like this - and still sitting around?
Any advice from more experienced investors would be greatly appreciated ... before I blow my cash!

[macduffy]

PJK - see Lizard's post of 15/10/10 above.

Perpetuals subject to interest rate re-sets tend to suffer in times of low interest rates. Some holders get nervous, anticipating lower rates still; some will need to sell for whatever reason. Potential buyers have similar worries so buyer demand tends to dry up, forcing the price down and the yield up. More a reflection of the instrument and the market, rather than the issuer.

[Penfold]

There's a level of complexity to floating rate instruments that make them harder to price. The fact perpetuals have no maturity date also doesn't help. And then there's concern over subordination, issuer rating etc. It deters some investors I would suspect.

I personally like these... yielding over 8%, buy back on, counterparty generating good cashflows. I purchased 20,000 more a few weeks ago at .56 and thought I got a bargain.

Don't forget these trade on a dirty price. So to work out the yield you need to deduct the accrued interest.