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  1. #16
    Kanga ru Xerof's Avatar
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    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
    Last edited by Xerof; 11-01-2012 at 03:11 PM.

  2. #17
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    As a shareholder (of Ords - for Xerof purposes), I would be annoyed if they did change the terms. The terms were well published at the time they were issued.

    Many holders of debt did much worse out of the GFC than IFTHA holders who have just been screwed as the spread has widened. At least the debt is still worth something!
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  3. #18
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    You could argue that there is a "moral hazard" in allowing Infratil to buy back the perpetuals at the discounted price.

    Market "convention" is that perpetuals are rarely "perpetual". They are usually redeemed, in full, at some point. Infratil controls this "intervention" - given they are profiting from collapse in bank bill swap rate given to the real market risk price - there is moral hazard in their at market purchases.
    Do not consider my postings as investment advice. I am here to share research and to speculate on what might be. The boundary between fact and conjecture might not always be clear - best to treat all comments as speculation.

  4. #19
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    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.

  5. #20
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    Great post, Liz!

    No, I've got no idea what the answer is to your question - something akin to the meaning of life! My hunch is that we won't know until future events play out and that IFT have just got lucky with abnormally low rates - as indeed it could be said for any borrower paying market rates these days while inflation continues merrily along. I don't think we can credit IFT's Treasury with any particular foresight in this regard, however much we may admire their management. (I do)

    It also makes a lot of sense, of course, for the company to buy back and retire these securities at current prices, assuming that they can replace the funds at a comparable rate. Can't blame them for doing this but it doesn't necessarily mean that it's also a good buy for private investors unless one is convinced that these low rates are a cyclical or transitory phenomenon.
    Last edited by macduffy; 14-01-2012 at 03:17 PM.

  6. #21
    Junior Member D B Cooper's Avatar
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    Sad to hear that Tim Brown - Head of Capital Markets at Infratil and a previous contributor to this thread was knocked over and seriously injured by a bus in downtown Wellington - Lets hope that he makes a speedy recovery.

    http://www.stuff.co.nz/national/7312...ns-the-company

  7. #22
    Junior Member D B Cooper's Avatar
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    Nice gain on IFTHA - 60c now as the 1 year swap rate rises so does IFTHA as the reset will be that much higher
    Last edited by D B Cooper; 07-02-2013 at 03:10 AM. Reason: Spelling

  8. #23
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    An interesting discussion. I bought IFTHA in 2007 when it was showing about 9% yield. A year or two back I read Chris Lee's suggestion that IFT should do something to help bondholders and had an email debate with Tim Brown. He of course used the "it will disadvantage shareholders" argument. Anyway yield is now down to 3.97% so on the principle that if you can beat them you join them I bought another batch at the discounted price. These show 6.75% which is about market average at present.

    As has been pointed out above once the swap rate rises IFTHAs will start to look good. This assumes of course that IFT dont cash them up. There is sure to be clause in the deal somewhere that allows this.

    Bonds should be an important part of any NZ portfolio because of their relative security and high yield by world standards but you have to know how they work. I also have another "perp" RCSHA (Rabo) which is yielding 8.32% currently. Their reset date is sometime in 2014 and I will need to follow the price trend and bail out if necessary.

    Re "relative security" I got burnt with Blue Star but that's abnormal. Cheers
    Last edited by bondholder007; 09-03-2013 at 05:12 PM. Reason: missing word

  9. #24
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    IFT can cash mine up at $1.00 any time they want.
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  10. #25
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    Yep. I'm happy either way having bought at low prices. Buy them back at a dollar or wait for the % rate to rise (along with the expected rise in unit price). And in the meantime not a bad % rate return.

  11. #26
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    Re RCSHA I worked out what the final annual yield would be if called in 2019 and assuming buying at todays price and assuming 5 year strike rate of todays rate. Would return annual of 6.2% on your original in price I believe. This is decent yield and one might also consider IFT150, IFT160, IFT170 and IFT 090..all of these look at 6.3 to 6.5 % based on current priceing. I will be looking at taking my BISHA returns this month and trying one of these
    Quote Originally Posted by bondholder007 View Post
    An interesting discussion. I bought IFTHA in 2007 when it was showing about 9% yield. A year or two back I read Chris Lee's suggestion that IFT should do something to help bondholders and had an email debate with Tim Brown. He of course used the "it will disadvantage shareholders" argument. Anyway yield is now down to 3.97% so on the principle that if you can beat them you join them I bought another batch at the discounted price. These show 6.75% which is about market average at present.

    As has been pointed out above once the swap rate rises IFTHAs will start to look good. This assumes of course that IFT dont cash them up. There is sure to be clause in the deal somewhere that allows this.

    Bonds should be an important part of any NZ portfolio because of their relative security and high yield by world standards but you have to know how they work. I also have another "perp" RCSHA (Rabo) which is yielding 8.32% currently. Their reset date is sometime in 2014 and I will need to follow the price trend and bail out if necessary.

    Re "relative security" I got burnt with Blue Star but that's abnormal. Cheers

  12. #27
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    A lot of great posts on this thread but nothing for the past 2.5 years. Looking for a home for a sizeable sum in bonds and have done a lot of homework inc. ANBHB IAGHA and now looking at IFTHA. The one big advantage IFTHA have over others is they are unlikely to be redeemed in the short term at current market value whereas fully priced bonds are always at risk from redemption. No doubt coupon will be lower in next reset but still will give a favourable return compared to the market in general. So as interest rates sink how low will the market value the bond now? It seems to me if one is prepared (and can do so) to hold for as long as it takes these will come good when??? interest rates eventually rise-in fact be very good.

  13. #28
    Kanga ru Xerof's Avatar
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    2.5 years - yes these aren't exactly instruments to watch and comment on, on a regular basis. For the fixed interest part of a portfolio, these are quite good if you have the patience of Job and the time horizon to hold.

    I didn't accumulate any more beyond those I held at 55 and 58 (see my last post) and they got ditched about a year ago, when it became apparent rates weren't going any higher.

    Trev, not sure the cycle has bottomed quite yet, but it's close IMO. The market is already moving to price in a 2.5%OCR, and given the coupon will be reset lower, todays price may not yet be a good entry. I'm hoping to get some in to yield around 7% so assuming next coupon is ~4.3% so price needs to be under 62 for me to want to re-enter. Others may be happy with a lower yield, given the coupon is reset annually, so I may not get them.

    you're obviously aware these behave differently to regular bonds, due to the combination of rate reset and perpetuity, so if rates rise, price should also rise, and vicky verka.

    Timbo Brown is clearly unmoved by the protestations from various interests about the 'unfairness' of it all, so holders need to be prepared to hold and/or trade on long horizons.

  14. #29
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    Thanks for your thoughts Xerof. As you have been in this one for some time what would you expect the bond to be trimmed by when next goes ex div?

  15. #30
    Kanga ru Xerof's Avatar
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    Quote Originally Posted by kiwitrev View Post
    Thanks for your thoughts Xerof. As you have been in this one for some time what would you expect the bond to be trimmed by when next goes ex div?
    1.315 cents, i.e. the gross quarterly interest per $. The NZX will adjust the closing price to X-1.315, but who knows what the market will do the next day as far as pricing is concerned - these instruments are very illiquid

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