IFTHA Infratil Perpetuals

[causecelebre]

And.....IFTHA recently went XI, so pricing adjusts accordingly.

Thanks, and sorry but what is XI?

[Grimy]

Ex interest. Was paid today.

[causecelebre]

Ex interest. Was paid today.

Great, thanks for that.

[Nor]

Based on my wealth of inexperience I believe that those that reset soon will do so at atleast what they would at present, so quite good. But more important I think is the margin, which if it is large ie bigger than 1.5%, will ensure the return is still good even when rates are lower.

[Lego_Man]

Can I ask, as i'm simply learning about perp bonds, is the fall in the price IFTHA a result of the market perceiving rate drops next time it resets?

They're a bugger to analyse. Interest rate expectations are undoubtedly a factor, but IMO the more significant factor is the view of the credit compensation. Since the coupon is fixed at 1.5% over short dated swap and the securities never need be repaid, you have to think of the discount more akin to the perpetuity value of whatever extra spread is demanded by the investor.

Let's assume really simple maths and say an investor has a time horizon of 30 years. If they will only accept the risk of the instrument if they get an extra 1% per annum return to the headline rate, they will only be prepared to pay 70c on the dollar for that instrument (1% x 30). It is akin to a long dated bond, except it's lower down the credit stack and therefore much riskier. 1.5% is a very low credit margin for a subordinated instrument like IFTHA.

The irony is you can see the dynamic in action by comparing IFTHA with how IFTHC behaves. IFTHC is annual reset and the annual coupon is 2.5% over swap, not 1.5%. However IFTHC trades pretty much at par. That 1% credit margin difference using the maths above, nicely explains the 30% discount from IFTHA to IFTHC.

IMO IFTHA is "busted", it's been a joke for many years and the company should adopt a standing buyback programme, whereby they step into the market and buy the perpetuals back should the implied spread breach a certain level. This would give some certainty to retail investors.

[Newman]

[QUOTE/] IMO IFTHA is "busted", it's been a joke for many years and the company should adopt a standing buyback programme, whereby they step into the market and buy the perpetuals back should the implied spread breach a certain level. This would give some certainty to retail investors.[/QUOTE]

No company would last forever. When Infratil is in big trouble, it has to redeem IFTHA at face value. 30 years would be long enough for this to happen.

[Lego_Man]

No company would last forever. When Infratil is in big trouble, it has to redeem IFTHA at face value. 30 years would be long enough for this to happen.

At that point you may as well just be long the ordinary shares then as you will be facing similar risks...

I would also note that Infratil's senior bonds are yielding over 7% right now.

[GTM 3442]

I love IFTHA. With an initial entry price of $0.56, I've done well. But equally, those who bought in at $1.00 at the initial listing have not done well.

Swings and roundabouts, and how many of the initial holders still hold anyway? They've also been great for slow, long-term, trading. But does anyone think that IFT are going to buy these back at $1/pop? Seriously?

[Lego_Man]

I love IFTHA. With an initial entry price of $0.56, I've done well. But equally, those who bought in at $1.00 at the initial listing have not done well.

Swings and roundabouts, and how many of the initial holders still hold anyway? They've also been great for slow, long-term, trading. But does anyone think that IFT are going to buy these back at $1/pop? Seriously?

Don't get me wrong, they're great trading vehicles for people that know what they're doing. But for the retail market they're nonsensical.

[GTM 3442]

I first bought IFTHA waaaaaay back, as the annual rate reset gives a built-in (trailing) inflation hedge. I have bought and sold over the years as the price has fluctuated, but the main reason I have them is still that combination of price and rate reset.

If I recall, Infratil have occasionally bought some back on-market when the price was right.

A true "Swiss Army Knife"!