Turners (TNR) bonds

[Snoopy]

Are they still the compelling investment that I believed the TNRHA bonds were two years ago? Let's see.

As part of the AGM documentation, an assessment of the bonds was made by independent firm Campbell MacPherson. On page 11 of the CM report they stated:

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"The proposed interest rate of 6.5% p.a. is significantly lower than the interest rate on the existing bonds of 9.0%. This primarily reflects:

1/ A reduction in wholesale interest rates over the past 2 years.
2/ A reduction in financail risk associated with Turners

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I accept the first point, but not the second.

It is true that Turners have been well managed over the last couple of years. But the loan business is competitive, with other good operators out there who can win over your customers. What is also true over the last two years is that in the loan industry, the climate has been exceptionally favourable for those loan businesses that survivied the great financial sector collapse. There is an old investment saying that only when the tide goes out you get to see who is swimming naked. Finance companies have been swimming at high tide for the last two years. Just how badly Turners will be affected during the next financial downturn is unknown. But IMO the 'next downturn' risk has not reduced for Turners over the last two years.

My opinion is reinforced by the relaxed 'Leverage ratio' and 'Interest cover' covenants. This would suggest a more relaxed lending policy. And this implies that company risk has increased from a few months ago.

The report carries on

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We estimate the market based interest rate on a security with similar chacteristics to the New Bonds should be in the range of 6.0% to 8.5% per annum (representing a premium of 1.0% to 3.5% over Turners FY2016 bank borrowing costs of 5.0%).

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Turners 6.5% offered is towards the bottom end of this range. I don't think that is compelling enough, when there is every chance that interest rates will be higher in two years than they are now. If the new interst rate was 7.5%, my answer would have been different. I won't be renewing by TNR bonds as a fixed interest investment. However, I will be renewing -some- of my TNR bonds!

SNOOPY

[Snoopy]

Turners 6.5% offered is towards the bottom end of this range. I don't think that is compelling enough, when there is every chance that interest rates will be higher in two years than they are now. I won't be renewing by TNR bonds as a fixed interest investment. However, I will be renewing by TNR bonds!

So what is the thinking behind my apparent tautology?

There is another way of looking at the TNR bonds, that is as an option to purchase TNR shares in two years time. The maximum you will pay for these shares is $3.75. But the real advantage could be if the share price does not advance. This will trigger option (b). The bond to share conversion price would be:

"a 5% discount to the average daily volume weighted price of Shares in the 90 days prior to the maturity date as determined by an independent advisor appointed by Turners."

IOW bondholders have a window for potentially buying some cheap and brokerage free Turners shares in two years time, or getting their capital back. It is for this reason that I will be buying some bonds. However, the risk profile as I see it has changed. So my TNR overall holding (shares and bonds) after the new bond issue will be made up of 2/3 shares and 1/3 bonds, whereas before it was 1/10 shares 9/10 bonds.

SNOOPY