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In this 'lower for longer' interest rate environment, are 10-year bond offers the future for retail bond issues from corporates?

In this 'lower for longer' interest rate environment, are 10-year bond offers the future for retail bond issues from corporates?

By Gareth Vaughan

The lower for longer interest rate environment is putting the kibosh on non-bank retail corporate bond issues with none hitting the domestic market since Contact Energy raised NZ$200 million just before Christmas.

Money borrowed through domestic bond issuance so far in 2012 totals NZ$3.8 billion. Of this NZ$1.85 billion has been raised by banks, NZ$1.05 billion by supra-nationals - the so-called kauri issues from overseas entities, NZ$873 million by councils led by the Local Government Funding Agency, and NZ$50 million from corporate issues through just one issue, - a 10-year issue to institutional investors from state owned enterprise Meridian Energy.

Compare this with 2011 when a total of NZ$10.2 billion was borrowed through domestic bond issues - the highest annual figure since 2008 - including NZ$2.4 billion through corporate bond issues with sales from the likes of Z Energy, Air New Zealand and Insurance Australia Group (IAG) marketed at retail punters.

Swap rates have been steadily dropping in recent weeks against a backdrop of a gloomy global economic picture highlighted by uncertainty over the heavily indebted Eurozone and weaker than expected jobs growth in the United States. On top of this worse than expected unemployment figures domestically and a slow rebuild of Christchurch have added to the mix. Financial markets are now pricing in 35 basis points worth of cuts in the Official Cash Rate (OCR) over the next year, this index shows, after the Reserve Bank hinted at a cut to the OCR, from its current level of 2.5%, in last month's review.

Since the start of the year the three year swap rate, for example, is down 25 basis points to 2.69%, the five-year is down 20 basis points to 3.17% and the seven-year rate is also down 20 basis points, to 3.58%. Over a longer timeframe swap rates have fallen even further. The one-year swap rate was at 2.41% yesterday and the 10-year at 3.96%, compared with 8.22% and 7.45%, respectively, in May 2007 when interest.co.nz started tracking swap rates.

The magic number

What all this means for retail bond issues is don't expect many, if any, anytime soon.

"I can't see anything happening in the retail space for quite a while," one senior debt market figure told interest.co.nz.

Or as a second senior debt market source puts it: "The (new issues) pipeline's quiet anyway, yields rallying doesn't help in a retail sense."

Debt market sources say an interest rate of 6% is still probably perceived as a "magic number" for retail bond issues. With swap rates so low, that means a chunky margin would have to be coughed up by a bond issuer  to reach 6%. For a seven-year issue, for example, the margin would have to be 242 basis points over the swap rate at yesterday's rates to reach a flat 6%. And for a five-year issue it'd need to be 283 basis points.

"For broad based retail buyers, a NZ$200 million plus deal, they're not interested in going below 6%," this source says, noting also that strong credit ratings are more desired by investors than ever.

Although bank bond issues this year, notably from Rabobank and ANZ, have been retailable, the last pure play retail bond issue was from Contact Energy, with the energy retailer and generator saying just before Christmas it would pay 8% annual interest on a NZ$200 million capital bond issue, NZ$50 million short of the company's target. Contact's issue closely followed one from IAG, which raised NZ$325 million through an issue of unsecured subordinated bonds paying 7.5%.

In March this year both ANZ and Rabobank each raised NZ$250 million in seven-year retailable bond issues paying 6.25% and 6.1%, respectively.  The bonds issued as "registered transferable deposits" are what is known as "retailable" as they can be bought in parcels as small as NZ$5,000. Registered banks have an exemption from the requirement to issue an investment statement or prospectus for this sort of issue. Normally buying bonds on the secondary market must be done in parcels of at least NZ$10,000.

Where the ma & pa's are putting their money

So with this dearth of retail bond issues, where are the yield chasing, retail bond loving, ma and pa retail investors sticking their savings now? They appear to be favouring the perceived safety of bank deposits. Based on Reserve Bank figures, New Zealand dollar denominated term deposits rose NZ$4.4 billion during the first quarter of 2012 to NZ$104.571 billion.  That total figure, as of March 31, is up a massive NZ$25.9 billion over five years, since March 31, 2007, when NZ$78.616 billion was held in New Zealand dollar denominated term deposits in a much higher interest rate environment prior to the onset of the global financial crisis.

Christian Hawkesby, head of fixed income at fund manager Harbour Asset Management, said it might be that with time retail investors are becoming more realistic about the rates they can expect their money to earn.

"I guess the other related theme is people becoming more interested in equity income as a complement to traditional fixed income investments," Hawkesby said.

Some shares listed on the NZX certainly offer attractive yields, albeit for an investment class that - in theory at least - carries a higher risk than bonds given shareholders rank behind debt holders in terms of getting their money back in a wind up situation. That said, listed companies such as Hallenstein Glassons, The Warehouse and Telecom, were all offering gross dividend yields north of 10% based on yesterday's figures.

Meanwhile, Hawkesby said in a lower for longer interest rate environment to get a bond offer away offering 6% interest meant moving further and further out, in terms of offer duration, to seven years and even beyond.

"I guess the paradox is on face value that can look attractive to a retail investor. But do they really understand the duration risk they're taking on from holding such long dated paper?" Hawkesby asks.

"Bonds with longer maturities are more price sensitive to interest rate changes. So if interest rates do head up from where they are now, it's the longer maturity bonds whose prices will be more affected by that. In managing our own portfolios we (fund managers) can take a credit view and then we can use interest rate swaps to adjust that overall duration."

Ma and pa investors don't have such tools readily available to them meaning if interest rates rise they're fully exposed to any movements.

How about 10-year retail bonds?

In terms of long-term bond offers, Hawkesby said he hadn't heard of any in the pipeline. But in the the current environment, and following Meridian's 10-year institutional deal, which raised NZ$50 million at 200 basis points over the swap rate, could one of such length aimed at ma and pa retail investors emerge?

"It's possible for the right name, the SOEs," the debt market source says. "Until you try a deal like that you don't know if it's going to work."

Separately, thousands of retail investors are facing the possibility of bank bonds, paying them interest rates north of 8% that were issued in the much higher interest rate environment of 2007, potentially being reset this year at much lower rates if the bank issuers decide not to call them on their call dates. See more on these resettable bonds from Harbour Asset Management here.

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15 Comments

How about property!....wise selection and using cash with no parasites involved...fat returns to be had...

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What about copper? How's it looking these days Wolly?

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lol

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Consider Farmland in Australia or Europe, good yeilds tangible asset and inflation proofed, managed by UK companies SIPP approved. http://j.mp/GXdBhD

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Tullow (UK) have found a monster 100 metre intersection of oil in Kenya ..... and there's much more to be found there ......they're drilling like Billy-oh ...... 44 out of 46 wells have struck black gold . That's an astonishing strike rate .......

 

....... go " long " the Kenyan Shilling ...... and you get 65 of them to just one limp soggy old Kiwi dollar , that's a bargain if ever I saw one ....

 

You can't lose with oil mate , they're not making anymore of it ....... it's " peaked " , apparently !

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Yippee! Now all we need is the Tullow wells to produce at 4 MILLION barrels per day to compensate for the fall in production this year due to depletion in pre-existing oil fields around the globe.

 

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It's kind of weird to be told by the resident Malthusians that oil has " peaked " , 100 % certain that it has peaked , brook no argument against that fact ....

 

..... when firms 'like Tullow keep finding more of it , underground oceans of the stuff ......

 

You can't lose with oil , mate !

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2 things rule the share market GBH, greed and fear......

In terms of peaked, crude oil production peaked in 2006, that is a documented and graphed fact...since then we have watched a steady ish output despite price rises....it is possible that 2012 might be a new peak but after this year its very un-likely...

and oil demand is in-elastic...so yes the price is going to see high peaks until ppl cant affor dit at all, then it will be basement priced to sell....

The deck is very steep now GBH, and the ass is out of the water a long way, that expansion joint is the weak spot and its under a lot of stress...

Enjoy the band music....

regards

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and the 2% per year demand for extra oil...then maybe the price will go down due to supply excess and not demand destruction....which is what we are seeing.

Meanwhile the ex-ceo of shell says we need 7mbpd extra per year.....to make up for what is lost so,

4million barrels per day would make that oil field the second biggest single oil field in theworld I believe.....pigs might fly....and not meet loss let alone new.

regards

 

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Crude production appeared to peak in 2006 because the price had been so subdued for the previous decade exploration efforts had all but dried up along with the oil substitution industry. We are now into the 6th year of prices that more realistically reflect cost of production. I would bet that the increase in crude and LFE production over the next 10 years surpasses the growth in demand, which will be subdued if not flat or even falling.

Steven,I realise that sitting there all day in your polyester safari suit (plus roman sandals with socks?), surfing the net all day at your employers expense makes you some sort of energy guru. But perhaps not a seer. I have great faith in the ingenuity and capability of those who have better things to do than post to message boards 24/7 to supply humanity's energy needs. Those may be somewhat less and probably more expensive than the halcyon days of the last century, but overall we'll get on just fine.

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Not much evidence for your contention regarding crude oil Vera,

In the period 2000-2003 crude traded between roughly $20-30.

http://www.infomine.com/investment/metal-prices/crude-oil/all/

By the end of 2004 it had increased substantially to trade at or above$40.

By mid/late 2005 it was above $50 ie it had doubled from the period 2000-2003.

Production of crude and condensate (what most people recognise as oil) increased until 2005. Since then its production seems to have been on a plateau, bouncing around the 72-74mbd mark. SEVEN years later thats pretty much where it is now.

But the price has almost trebled since 2004.

No apparent supply response in the production of crude in EIGHT years to an enormous price signal. Thats not the way its meant to be in economics lala land.

Of course there has been an increase in 'substitutes' to try anf fill the gap - biofuels and natural gas processing liquids primarily. But the latter are most assuredly NOT crude oil.

 

And by the way - if you look at Wikipedia Oil megaprojects you can see the recent oil discoveries that will be coming on line.

http://en.wikipedia.org/wiki/Oil_megaprojects

Look at all that lovely new oil coming on line!!!

Shame we have to bring an extra 4mbd on line each and every year just to stand still eh? Shame those numbers dont really seem to add up.

Re; Gummy - Discoveries are made every day (see above). And your point is?

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Here's a blast from the past for all the cornucopians:

 

“Saudi Arabia now has 1.2 trillion barrels of estimated reserve. This estimate is very conservative. Our analysis gives us reason to be very optimistic. We are continuing to discover new resources, and we are using new technologies to extract even more oil from existing reserves,” [Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi] said.

 

Naimi said Saudi Arabia is committed to sustaining the average price of $25 per barrel set by the Organization of the Petroleum Exporting Countries. He said prices should never increase to more than $28 or drop under $22. “This is a fair price to consumers and producers. But, really, Saudi Arabia and OPEC has limited control on world markets,” said Al-Naimi. “Prices are driven by other factors: Instability in key oil producing countries; industry struggles to produce specialized gasoline; and the resulting strains on refineries to meet local demand.”

 

... “Saudi Arabia’s vast oil reserves are certainly there,” Naimi added. “None of these reserves requires advanced recovery techniques. We have more than sufficient reserves to increase output. If required, we can increase output from 10.5 million barrels a day to 12-15 million barrels a day. And we can sustain this increased output for 50 years or more. There will be no shortage of oil for the next 50 years. Perhaps much longer.”

 

That was only 8 years ago. What ever happened to the $25 per barrel target GBH!?!?

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Chuckle - a real chestnut there Pluto. Such pronouncements were all too common a few years ago. There were some real crackers about price predictions from Daniel Yergin (spectacularly wrong, yet still the press hold him up as an expert).

 

When the facts change the wise man changes his opinion. Not so the cornucopians it seems - if you just 'believe' its all going to be fine it surely will be, eh?

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To start with oil discoveries had peaked in the 1960s, very little of the planet left to explore....

However to throw a spannerinto your arguemnt an energy company lives and breathes on its reserves it has booked so its to their advantage to find oil and book it before anyone else does, let alone the country in Q its under. So by logic alone thats un-believable.  Also oil companies are drilling in the deepest and furthest reaches possible for oil, do you really think they would be doing this if there were easy and cheap places to find oil? no, just not logical. So lets see some real evidence of you comment, Ive seem none along this line what so ever.....

"We are now into the 6th year of prices that more realistically reflect cost of production" that is very true, the marginal cost is up towards $90, trouble is the world's economy cant afford oil at that price...its built for $50USD.......

"bet", indeed you are doing so because I see no reason to conclude that its anything else but faith and belief on your part.

"safari suit" ah sniping and bitching again.....you make the same mistake over and over, shoot the messenger and maybe the message you odnt like will go away.........

Polyester would be oil based, maybe you mean hemp?

"great faith in the ingenuity and capability" the word "faith" again.....sorry but as an engineer I look at science, maths etc.....not a bible...not day dreams....not wishes....so as an engineer I say no but you odnt want to believe me, just how many no's are you set on getting?

Our economy is set to one thing, grow....to do that requires more energy....because of that as we get less and as demand is inelastic the price will go up significantly......the world would be turbulent....that will impact business...which is the point of this site....

"we'll get on fine" there you go, faith again......thats the sum of your argument.....

regards

 

 

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