Nicholas,

My guess on interpreting that description:

They stay forever, unless KiwiBank wants to redeem them.

They get 'preference' for payment of 'dividends' (interest if you consider this to be debt rather than equity) ahead of the govt, but behind everyone else, and if things are really bad, your 'interest' does not accumulate.

Is it a good investment? All depends on the rates, and how they are determined (fixed forever or annual reset for example).

Alan.

Perhaps I'm missing something, but I don't get it. "The proceeds from the issue of the shares are to be ultimately used to provide tier 1 capital to Kiwibank Limited. The shares are not shares in Kiwibank, but are shares in Kiwi Capital Securities." So, the money from investors is ultimately going to prop up Kiwibank's Basel II requirements (is there something we should be concerned about?), but the investors are buying shares in 'Kiwi Capital Securities'. What does KCS do, other than channel money to Kiwibank? How will KCS pay the dividends? (ie. What business do they undertake, that they could then use the profits thereof to pay the dividends on these shares?) Why doesn't Kiwibank just issue bonds?

Interesting to do this before Basel3 is finally nailed down, clearly no problem for a government department but there is going to be a crackdown on synthetic tier 1 capital and rightly so. I wonder if Goldman Sachs are organising this one.

Clearly the deal is to complicated to be understood by mums and dads investors.....

The Government does not want to put in any more capital so it seems a logical way to substitute T1 here. It is certainly less complicated than the deals done in UK by RBS and Lloyds. Non-cum is just a safety valve but should never be called on if they maintain the regulatory ratios.
What they need to do is make the interest rate attractive and I am not too sure they will achieve that other than by offering a more fixed coupon.

Kiwibank was recently, at least, gobbling up market share from the other banks. The RBNZ has managed to persuade the banks they need to have more local retail deposits, rather than relying excessively on short term offshore funding. So Kiwibank, which perhaps people were preferring to save with, came under pressure to compete with these other banks. So getting more capital makes sense if they want to continue to build on what they have already begun. I have some savings with Kiwibank. It all sounds fine to me.

Iain

It seems that people with money are elligible to buy these shares. I agree that it appears a dishonest attempt to get around previous committments to the NZ public about Kiwibank.

Too many conspiracy theories, they are doing what all the others have done using pretty much the same vehicles, I think I have BNZ, ANZ and Westpac securities of the same nature, they need to be perpetual to fall under tier 1.
If they don't pay a didvidend it doesn't accumulate, means they will be in the cr@pper as who would leave there deposits with a bank that fails to pay its interest bills.
The skys not falling in Kiwibank is playing follow the leader and good on them.

Re Nicolas

From memory BNZ are not cumulative, I am not sure about others.

l@ Anon : "..look at their profits they have not been generating sufficient retianed earnings...so need a capital injection". Wasn't that so with a number of deceased finance companies as well? The interest rate setting on this issue will be the litmus test in my opinion. The higher is, the more Capital & Merchant like it will appear to me.

@Anon - The issue I have is that the issue of preference shares in an SPV (KCS) whilst within reserve bank rules regarding tier 1 capital, skates pretty close to the wind with regard to the political commitment of "no privatisation of SOE's". KB needs to decide whether it is actually issuing equity (shares) or debt (bonds). At the moment it seems to want it both ways - it's equity if its RBNZ asking, but it's debt if its the electorate.

When Kiwibank started, I could understand the business model. There was a lot going for it. A lot of the customer facing infrastructure was already there, plus they had the benefit of buying 'off the shelf' back end systems where other banks have long standing legacy systems which are costly to update (i.e. online banking was already maturing in the wider market, they got to tag on at the end of it). I just never believed that beyond a few pay packet to mouth type customers they'd get that far. But their growth I think blew even their own predictions out of the water.

I'll go along with Anon on this point. I suspect as they've continued to move up through different customer types, they have been caught out a bit with their own success.

Its only about context and words when you want to cloud the situation, i.e. "its not debt if it is the electorate".
Sorry Chris B but you are trying mix politics and finance to push a privitisation argument that is not there.
Re Govt give the money at a cheaper rate, wouldn't this be a subsidy? Wouldn't it be easier for the government to guarantee kiwibank and exempt them from the Basel requirements.

If Kiwibank gets $200m in deposits per month, this money will not generate any profits, yet for very dollar Kiwibank will require appoximately $8 ($16m) in equity. Ignoring risk weightings. $100m will allow them to raise $1.25b in deposits ignoring risk weighting and using 8% min equity reqmnt.

John - Kiwibank is a government-owned bank - the politics and finance were well and truly mixed long before i started paying attention...

What is the point of issuing the preference shares in an SPV (Kiwi capital securities), rather than in kiwibank itself if not to avoid accusations of "backdoor privatisation" as Bernard mentioned? the only other obvious reason is as a firewall in case of default - but thats not really very likely for reasons noted above.... is it?

I agree that Kiwibank needs Tier 1 just like everybody else, and just like everybody else it has gone to the market. Difference is, because of a blanket election statement made without consultation with its management it has had to structure a strange looking offer to mitigate poltiical risk. And from an investor's point of view, anytime politics intrudes on the running of a purely financial business you have to be worried (think Fannie Mae and Freddie Mac for a nice recent example of the insidious effect of slow-burn political intervention).

"We all have too much time on our hands!" - tell me about it, I'm stuck at home baby minding at the moment.

"..you and others have implied that this could be some backdoor privatisation."
No, our resident conspiracy theorists might have said such (HT Iain P), but what I said was that the structure of this deal has been put together to specifically preclude this being portrayed as a backdoor privatisation. That implies Kiwibank met political headwinds when putting this deal together and might suggest that their desire to get more tier 1 capital is greater than the desire not to to upset their shareholding minister. That is a good thing in a CEO (as long as the underlying motivation is growth and not financing existing debt) - but in this case the politics has had a material influence on the business of the company.

Consider the extreme situation that kiwibank defaults on this at some time in the future. Preference shareholders in KCS (a wholly-government owned subsidiary) will hold quite different legal rights in regard to claims on kiwibank compared to hypothetical shareholders in kiwibank - particulalrly should NZPost/government decide that KCS should restructure or forgive outstanding debt from kiwibank to KCS.

This is an unlikely scenario, but my point is that the restructirng entered into here is not inconsequential - which is a bad thing if, as appears, it is politically motivated.

A fractional reserve bank does not need capital, but simply unlimited credit from which to make loans.

John - have BNZ, ANZ etc. issued preference shares through Special purpose subsidiary holding companies? My understanding was that they had issued direct preference shares in the parent company - precisely because there is no reason not ot - and its much easier to sell something if the name on the paper matches the entity you are asking people to invest in!

But you're right - until the prospectus comes out this is a lot of hot air. Still its a major break in usual practise for kiwibank which makes it distinctly interesting.

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