Hi Gary,

Firstly, that 27% yield is a yield to maturity. Given the maturity is defined by the calculation to be Jun 2012, the formula presumes that you will not only get interest payments, but an additional capital return of 13cps on the current 87cps price of these pref shares, along with the 9.8cps in gross dividends. The reality is that the 13cps on maturity is not particularly likely as Jun 2012 is actually a "step-up" date. The details of what happens then are rather complicated.

I just checked out the old prospectus, which you can get from the companies office web-site. Either Works Finance can agree a new interest rate with holders and repurchase or exchange for shares to holders who don't like the rates offered, or they can basically walk away and leave these as preference shares with an annual reset of 3% above one year swap rate or they can repurchase. Repurchasing is unlikely as Downers needs the funds. Currently, the most likely option would be the 3% margin above swap, as that would only require around 6%pa in gross interest payment based on current one year swap rates - you can follow them here.

Therefore, buyers at 87cps can assume that they will get 9.8cps this year and the equivalent of 6cps thereafter until sale. Take the 3.8cps higher return this year off the 87cps buy price and then divide the 6cps by the 82.2cps entry price and you will get an effective yield of 7.2%. By comparison, the Infratil Perpetuals which might be of a similar character, offer 1.5% above 1 year swap. Based on the current swap rates and price, they're sitting at about 7.1%, so as you can see, the WKS010 look as though they are being priced in the same region.

I can't answer as to whether you should sell them. You would still get 87% of the face value back and perhaps a bit less on what you paid, since it looks like at 9.2% you would have paid more than $1 per unit. It doesn't appear that they are pricing in the possibility of DOW being a financial basket-case or dividend payments being suspended (although this is possible). On the other hand, if inflation appears in the next year or two, the one year swap rate and ongoing re-set rate could rise which would improve the value, provided DOW remained a credible borrower.

Note also that although these are preference shares, the underlying preference shares in Downer appear to have been replaced with a straight out loan at an initial 10% interest. I'm not clear if that improves the security on these - would seem to be better for holders, but don't think they've been given an explanation.