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  1. #1
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    Default IFTHA Infratil Perpetuals

    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)

  2. #2
    Kanga ru Xerof's Avatar
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    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
    Last edited by Xerof; 14-10-2010 at 03:04 PM.

  3. #3
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    Quote Originally Posted by Traderx View Post
    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.
    For clarity, nothing I say is advice....

  4. #4
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    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.

  5. #5
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    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”


  6. #6
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    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? )

  7. #7
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    Yes to both questions.

  8. #8
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    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!

  9. #9
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    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.
    Last edited by macduffy; 20-12-2011 at 01:16 PM.

  10. #10
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    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.

  11. #11
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    I was surprised to read Chris Lee speculating that IFT should consider re-structuring the terms of the interest re-set on these securities to show leadership amongst the issuers of indexed securities (banks, Origin). Issuers of these securities have incidentally benefited from an unforeseen change in dynamic between interest rates on wholesale and retail funding rates due to Basel requirements. As I read it, he suggested that retaining adherence to the current formula was inappropriate, unethical and exploitative, given that it now results in subordinated debt being rolled over at interest rates below those of current higher-ranking issues.

    It will be interesting to find out if that comment was based solely on wishful thinking.

  12. #12
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    Probably a combination of wishful thinking and talking his own - or rather, his clients' - book!

    A bit much to expect an issuer to change the terms of an issue because conditions/circumstances move in its favour. We wouldn't expect investors to agree to changes if the situation was reversed.

    Does Chris Lee have much credibility these days?

  13. #13
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    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!!
    Last edited by modandm; 11-01-2012 at 07:54 AM.

  14. #14
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    I just came across this on the IFT web-site which gives their response on the issue of IFTHA interest rates:
    http://www.infratil.com/content/view/2868/155/

    Their main argument seems to be that fixing the terms in any straight-up way involves a transfer of value from shareholders to bond holders, given that the current market price for IFTHA is around 55cps. This seems a somewhat one-side argument, given shareholders have benefited from an unforeseen transfer of value to them via both lower interest paid and via the company buying back on market at a substantial discount. And I am guessing only a small proportion of bonds will have changed hands from the original holders.

    A return to "expected" interest rates (i.e. investors could have expected these subordinated bonds to give them at least a 1.5% premium to a bank term deposit) would cost IFT less than $4m per year - a value which they've already saved for the past few years.

    In 2009, the IFT notes to the accounts assigned a value of $420m to the contractual cashflows on the bonds (before that, I doubt that the accounts gave a figure, but, if IFRS had been in use, the amount would likely have been considerably higher). Just two years later, in 2011, the value of contractual cashflows has fallen to $334m - and given they are perpetual, this can't be attributed to cashflows paid.

    I am not arguing that they should necessarily change the structure of the IFTHA's to suit conditions, I am simply suggesting that their "transfer of value" argument for not undertaking a restructuring in favour of bondholders is fallacious given that it would simply be reversing an unforeseen transfer of value that has already occurred.

    While it can be argued that these things can go either way - and bondholders just got unlucky this time - it should be borne in mind that IFT retained the option to redeem for cash on notice (at the higher of face value or market value) and would no doubt have chosen to hurriedly do so if unforeseen circumstances had sent luck the other way.

  15. #15
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    Default Ift

    Quote Originally Posted by modandm View Post
    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

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