Bonds

Taxpayers' still on the hook for about NZ$8.12 bln worth of bank wholesale borrowings through Crown guarantee

Gareth Vaughan — Tue, 21 Feb 2012 03:55:49 +0000

By Gareth Vaughan

Taxpayers' are still guaranteeing about NZ$8.12 billion worth of bank bonds through the Crown Wholesale Funding Guarantee Scheme even though the scheme closed nearly two years ago.

Launched by then-Finance Minister Michael Cullen at the height of the global financial crisis on November 1, 2008, the scheme closed on April 30, 2010.

However, debt principal issued by ANZ, BNZ, Westpac and Kiwibank with a combined value of about NZ$8.12 billion continues to carry the guarantee until it matures, with the last of this - US$71 million from ANZ - not maturing until November 19, 2014. Treasury says no provision is made for losses under the scheme as the probability of loss is considered remote.

Although the Australian parents of the New Zealand banks moved to buy back some of their debt guaranteed under Australia's equivalent scheme, the New Zealand banks won't be doing the same. That's because the Australian banks have had to pay monthly fees on all their outstanding guaranteed debt. In contrast the New Zealand banks had to pay Treasury fees upfront when each guarantee was granted (there were 25 in total), and Treasury says they're non-refundable.

Of the wholesale debt still guaranteed, principal worth just over NZ$2 billion stems from BNZ, NZ$2.1 billion from ANZ, NZ$3.7 billion from Westpac and NZ$320 million from Kiwibank. ASB didn't raise any wholesale funding under the scheme. Should any of the banks with wholesale government guaranteed debt on issue get into trouble before the debt matures, the taxpayer would have to foot the bill.

Of the outstanding maturities, a significant sum doesn't mature until 2014. Westpac has NZ$1.875 billion of maturities in July 2014, Kiwibank's A$250 million bond issue matures in October 2014, BNZ has NZ$791 million of maturities in 2014 and ANZ US$171 million.

The combined total guaranteed by taxpayers is down from NZ$10.4 billion at June 30, 2010. In the year to June 2010, the Crown received NZ$76 million worth of fees for the scheme. When the scheme was closed, Finance Minister Bill English said the government would receive almost NZ$290 million in fees in total. The Government received a fee from each participating institution based on the institution’s credit rating and the term and amount of guaranteed debt issued.

The scheme was initiated as an opt-in wholesale funding guarantee facility. At the time Treasury and Cullen said the objective was to facilitate access to international financial markets by New Zealand financial institutions, in a global environment where international investors were highly risk averse and where many other governments had offered guarantees on their banks’ wholesale debt.

Banks using the guarantee must maintain an additional 2% capital buffer, on top of the existing required 4% Tier 1 capital, to help protect the taxpayer's position as guarantor.

See more on the scheme here.

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BusinessDesk: Fletcher Building misses first-half guidance, cuts FY forecast on Laminex charges, housing slump

BusinessDesk — Tue, 21 Feb 2012 21:04:18 +0000

Fletcher Building, New Zealand’s biggest listed company, posted a 13 percent decline in first-half profit, missing its guidance, and cut its forecast for the full year on weak demand for home building and charges to restructure its Laminex unit.

Net profit fell to $144 million in the six months ended Dec. 31, from $166 million a year earlier. Sales rose 30 percent to $4.5 billion, helped by the contribution of the Crane business in Australia. Excluding Crane, sales fell 5 percent. See Fletcher's full announcement here.

Fletcher is poised to be a major beneficiary of rebuilding work in Canterbury following the earthquakes that devastated Christchurch but ongoing aftershocks, including the quake on Dec. 23, has delayed the work. At the same time, residential construction is weak in Australia and New Zealand and Fletcher’s insulation business has been hurt by the Australian government’s “disastrous” and unexpected decision to dump a subsidy scheme.

The construction and building products firm said full-year profit before one-time items would be $310 million to $340 million, below the $359 million level predicted in October, when Fletcher warned of a 10 percent decline in first-half earnings. The company raised its interim dividend to 17 cents from 16 cents, as expected.

The revised full-year forecast “assumes very modest increases in new housing construction in New Zealand, no improvement in Australian residential building activity and reflects the magnitude 6.3 earthquake which occurred in Canterbury on 23 December 2011 which has further set back construction activity,” chief executive Jonathan Ling said.

He described the first-half results as “a creditable outcome” given “the tough trading conditions and low volumes in most markets.”

Fletcher took charges of $21 million to restructure Laminex, its bathroom and kitchen panels unit, and flagged additional one-time costs of $40 million to $50 million in the second half.

The company has also embarked on a strategic review of its insulation business in Australia and New Zealand, with the potential for further costs.

“The sudden decision by the Australian government two years ago to terminate the insulation subsidy scheme has been disastrous for the domestic insulation manufacturing industry,” Ling said. “The dislocation of the industry could not have happened at a worse time, with the strong Australian dollar undermining the competitiveness of domestically manufactured product.”

Earnings from Fletcher’s building products division fell 23 percent to $43 million in the first half, with a 16 percent decline for plasterboard and a 26 percent drop in insulation. Earnings from roof tiles fell 25 percent.

Operating earnings from concrete rose to $60 million from $57 million, led by growth in Australian pipelines, while demand for cement, aggregates and masonry products was weaker in New Zealand.

Construction earnings tumbled 24 percent to $25 million as the company completed a number of projects in Auckland and didn’t find as much new work, while margins shrank.

Crane, the Australian pipelines business, posted a 6 percent gain in first-half earnings to $53 million, helped by demand from two mining and gas contracts.

Distribution - PlaceMakers - earnings dropped 40 percent to $15 million and Fletcher noted increased rivalry in the DIY and retail market, where competitors including Bunnings have opened new large format stores.

Earnings from laminates and panels tumbled 48 percent to $42 million, including the $21 million of one-time charges for Laminex. Excluding the charges, earnings fell 21 percent. Laminex earnings fell 35 percent to $37 million while Formica earnings rose 13 percent to $26 million.

Steel division earnings dropped 44 percent to $24 million.

See Fletcher's bond issuer page here.

BusinessDesk: Air NZ long-haul passenger numbers fall in January

BusinessDesk — Wed, 22 Feb 2012 01:02:54 +0000

Air New Zealand, whose chief executive Rob Fyfe will leave at the end of the year, reported a 4.3 percent decline in long-haul passenger numbers last month.

Long-haul total passengers carried fell to 149,000 in January from 156,000 in the same month a year earlier, with a 5.5 percent decline passengers on the North America/UK route to 88,000 and a 2.7 percent fall in numbers on the Asia/Japan/UK route to 62,000.

The airline blamed the impact from the Canterbury and Japan earthquakes for declining numbers of Japanese routes.

The shares fell 3.4 percent to a month-low 86.5 cents in trading today.

Domestic passenger numbers were flat at 583,000, while Tasman/Pacific numbers fell 1.4 percent to 248,000. The group’s passenger numbers fell 1 percent to 980,000 in the month, and were down 0.7 percent to 7.73 million in the financial year-to-date.

Auckland-based Air New Zealand told analysts and investors in November it’s aiming for a $110 million profit improvement by 2015 from long-haul flights, which are now an under-performing part of the company.

Total revenue passenger kilometres fell 1.3 percent to 2,334 million, while capacity, or available seat kilometres was flag at 2.71 million.

See Air NZ's bond issuer page here.

David McEwen reveals seven important things you should look at before you invest in a corporate bond

Guest — Tue, 21 Feb 2012 19:52:35 +0000

By David McEwen*

The quality of a bond is only as good as the borrower’s capacity to repay its debts.

Therefore, it pays to check out some key figures about a bond issuer before taking up its offerings. The following are particularly useful when checking out bond issues by companies.

Gearing

Debt can accentuate a company’s profits if is invested at a return greater than the cost of interest, hence the reference to its ability to ‘gear up’ returns (the term ‘leverage’ is also used for the same reason).

However, if gearing is too high, then servicing or repayment of debt becomes an issue when life doesn’t go according to plan (and when does it ever?)

Gearing is expressed as shareholders’ funds divided by its debts, and represents the margin of safety in the event of losses or a sharp fall in the value of the borrowers assets.

From a bondholders’s perspective, a low gearing level is preferable as that reduces risk of non-repayment since, if necessary, assets can be sold to meet obligations. Look for companies where debt is no more than a third of total assets.

Liabilities

As well as borrowings, companies incur financial obligations in the normal course of business, such as purchasing stock on commercial terms that require payment in 7 or 30 days.

Since this is also a risk to bond holders if such liabilities are too large or cannot easily be repaid, only invest in companies where debt plus other liabilities is no higher than 50% of total assets.

Business risk

This refers to the possibility that an outside party will not be able to meet its obligation to the company. Beware of companies that have only a small number of large clients, or where one client represents a large proportion of total revenues.

Associated party risk

The risk rises even further if that handful includes directors or other parties related to the company. Beware of companies that have a number of business dealings with directors or senior executives or lend significant amounts to them.

Quality of assets

Items that are shown on a company balance sheet as having a certain value rarely achieve full price during a distressed sale, such as if a company goes into liquidation or has to restructure to meet its debts. This is another reason to ensure a high proportion of assets relative to liabilities.

Liquidity Profile

Company balance sheets show debt as either short-term (payable within 12 months) or long-term (longer than one year).

The more debt that needs to be paid within a year, the higher the risk unless it has an equal value of assets or expected income to cover those debts. If not, the company will have to refinance its debt and any difficulty in doing this would affect bondholder payments.

A useful rule of thumb is to look for a company where the ratio of short-term debt to short-term assets is 1:1 and that long-term debt is no more than two times its annual net profit.

Net operating cash flows

This is the amount of money received by a company after it has paid all its bills. Any surplus can be used for retiring debt or investing in the business and is a useful buffer against business setbacks.

Never, ever invest in a company that wants to borrow from you if its operating cash flows are negative.

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David McEwen is an investment advisor and writer. A free trial of his weekly newsletter, McEwen Investment Report, is available from http://www.mcewen.co.nz/free_trial

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Rise in swap rates takes a pause - is it just temporary?

bnzeconomists — Tue, 21 Feb 2012 19:40:20 +0000

by Kymberly Martin

NZ yields eased back a little from their previous day highs. Overnight, a deal was finally struck between Greece and the Troika with respect to a further bail out package.

The rise in NZ swap yields temporarily ran out of steam yesterday.

Two-year yields closed down 2bps and 10-year down 4bps. 2-year yields sit at 3.04%, and the market continues to price just under 25bps of rate hikes from the RBNZ in the year ahead. We expect 75bps.

Swap yields have moved rapidly (40-50bps) higher since the start of the month, so some consolidation would not be surprising ahead of the next leg up.

Yesterday’s RBNZ 2-year-ahead inflation expectations showed an easing from 2.80% to 2.50%. This is a moved in the right direction, leaving the RBNZ comfortable to sit and watch offshore developments for a while longer. However, it is worth remembering these still sit at the top end of the Bank’s target bank (1-3%) for inflation.

Bond yields closed virtually unchanged yesterday. Today the DMO will announce its bond tender. The recent run up in yields back to November levels should help demand at auction. At some point next month we also expect the LGFA to return to markets with another bond auction. By our estimates, NZLGFA 15s and 17s now trade around 73bps and 107bps respectively over equivalent NZGBs. Spreads have narrowed slightly since the inaugural tender last week.

The market’s reaction to the much anticipated Greek announcement was relatively muted. However, non-core European bond yields fell with spreads to German “safe haven” bonds narrowing. Italian 10-year bond yields (5.44%), and spreads to German bonds are now at the lowest level since September. US “safe haven” 10-year yields rose from 2.0% to 2.07%, when trading resumed after Monday’s holiday. This is the top of their range since November. A break higher would be significant.

There are no key NZ data releases today. Expect some consolidation in NZ markets after their recent strong run.