Is this a good Fixed Interest Offer?

Several times a year, new fixed interest investments are offered to the retail public. There is invariably a good appetite amongst retail investors for offers that appear attractive relative to bank deposits. The question for potential investors should be, how good is the offer? 

Currently, Air New Zealand has a bond bffer on the market. There has been plenty of advertising and various share broking firms have firm allocations. There is also a limited pool for Air New Zealand shareholders. A book build process was used to set the coupon rate (interest rate) at 6.9%. Essentially the share brokers believed that they would be able to sell the offer at this rate. 

This offer is unrated, and is from a company that the Government has the major shareholding in. This is one of the companies which the National Party has said it would reduce its shareholding in, if it is re-elected as the government. The bond holder’s interests will rank ahead of the shareholders. 

The coupon rate (interest rate) is low by comparison to the recent Z Energy offer. The maturity date (duration) of the two offers is close enough to be considered comparable. Z Energy has the Government Super Fund as a major shareholder. Again this offer was unrated. The coupon rate for Z energy was 7.35%. It is currently trading at a yield of around 6.8% which is very close to the rate set for the Air New Zealand bond. 

Since the Z Energy offer, interest rates have fallen. Currently the original Z Energy bond holders could sell at a profit. Unless there are further significant falls in interest rates there is unlikely to be much potential for investors to make a capital gain on the Air New Zealand issue. 

Air New Zealand is a company that has just reported a significant loss, which is not surprising given the economic conditions of the past year and the impact of the Japanese and Canterbury earthquakes. The reason they are making this offer is because it offers a significantly lower cost of credit, rather than using the more typical bank consortium financing. 

Let’s now look at an alternative, admittedly effectively a locked in investment. We also need to remember that most retail investors will buy bond issues and hold them to maturity, rather than trading them for any capital gains. Five year bank deposit rates are currently around 6%. These tend to be AA rated, and there is almost an implicit crown guarantee. It costs money normally to break a bank term deposit. It also costs money in the form of brokerage to sell a listed bond if the need should arise. Investors need to ask themselves if the margin between the bank rate and the bond offer is sufficiently high to reward them for the additional risk that they take. 

There is little doubt that this bond offer will sell out very quickly to retail investors. This is because there is little on offer in the debt market, and what there is seems very expensive. Professional investors will be looking for higher rating, higher quality investments as we are heading to a rising interest rate environment. From an investment perspective this is not a direct investment that we would include in a client’s managed portfolio. 

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.