Bernard Hickey says Forsyth Barr should be dumped from the panel selling the Mighty River Power float and investors should go through the prospectus with a fine tooth comb and a very sceptical eye. Your view?

By Bernard Hickey

This week felt a lot like any week in March 2006 or March 1999 or March 1986.

The extraordinary frenzy of pre-registration for the Mighty River Power float spoke volumes about the mood of stock market investors.

So too did the NZX50 index, which hit a record high despite unemployment being only just below a 13 year high.

The mood of investors is bubbly and there's a whiff of greed in the air.

The theory - which is yet to be tested by the substance of a prospectus - is that Mighty River Power is the surest of sure things.

How could anyone possibly lose money when you have a dominant position in a network monopoly providing an essential service for a captive market?

Who wouldn't want to take advantage of a government handing over a high yielding cash generator to private investors?

The unspoken view is this is a once-in-a-lifetime carve up of a piece of the commons that private individuals can get their hands on.

Why wouldn't you leap before you look when 'free money' is being given away and the herd is thundering in the same direction?

The best dose of smelling salts for those in a bubbly trance came on Thursday from the Commerce Commission. It offered up a sort of time capsule from 2006 for investors to peruse. The Commission's report into the way brokerage Forsyth Barr and French investment bank CALYON foisted NZ$91.5 million of toxic bonds onto regular investors is a neatly encapsulated warning from the past.

The Commission said both Forsyth Barr and CALYON were "misleading and deceptive" in the way they accentuated the positive of these bonds and tried very hard to eliminate the negative.

There wasn't much messing with 'Mr Inbetween' in the way these supposedly 'capital guaranteed' bonds were marketed. Forsyth Barr brokers told their customers these Credit SaILS notes were 'safer than investing in a Westpac term deposit' and would generate an average return of 10% and regular interest payments of 8.5%.

Instead, the notes were based on derivatives of bonds issued by a range of supposedly blue-chip firms, including three Icelandic banks called Kaupthing (careful not to insert the 'r'), Glitnir and Landsbanki, as well as US banks Lehman Bros and Washington Mutual.

When they collapsed in late 2008 so did the capital in the 'capital guaranteed' Credit SaILS notes.

Forsyth Barr has consistently denied any responsibility for the notes or any wrongdoing in the marketing of the notes.

The Commission's report, however, details a range of evidence showing how Forsyth Barr was consistently "misleading and deceptive" during the marketing process.

The best example is an email showing Forsyth Barr's reaction when CALYON tried to tone down some of the language in the prospectus. "One of the deletions we feel is harmful to the marketing of this offer. Remember we catch more flies with honey than vinegar!," the email read.

The salesmanship was barely concealed in another email detailing Forsyth Barr's frustration at a Companies Office request to tone down the 8.5% return figure. “Why can't we put the 8.5% in there with a tiny (1) next to it and then at the bottom in tiny text next to the (1) we put all their dumb language? This would be workable. We're not selling bloody cigarettes!”.

Forsyth Barr has not denied the emails exist, but has disputed the Commission's report, saying it contained factual errors and statements were taken out of context.

The government certainly doesn't feel it is selling cigarettes either with its sale of Mighty River Power shares. Yet it has included Forsyth Barr on the panel of brokers to sell the shares to regular investors.

The Mixed Ownership Model share floats are designed to win back the confidence of an older generation of stock market investors and create a new generation of investors.

Including Forsyth Barr on the panel risks undermining that aim.

The government should remove Forsyth Barr from the panel and its Managing Director Neil Paviour-Smith should resign as an NZX director.

Investors should also go through the Mighty River Power prospectus when it comes with a fine tooth comb and a very sceptical eye.

We all love to party, but partying like it is 2006 or 1986 or 1999 will just give us another hangover.


This article was first published in the Herald on Sunday. It is used here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Bernard - not exactly hard to understand. We as investors have having to survive in a world full of negative real interest rates and money printing (the latter being something that you've shamefully advocated that NZ should copy). As such savers are being forced to take on increasingly larger risks to get a half acceptable return to survive, and in the case of Mighty River, probably a lesser one than others.
Money printing proponents such as yourself have little right to criticise investors for taking on undue risks that could well blow them up at some point in the future - you, and like minded others, are the problem

The difference between buying Mighty River shares and receiving looted property is? ....... Very little

I agree without reservation.

Its a shame
The NZX is not the best address to list, so,off the ASX for access to OZ for self managed super funds (Oz super scheme). Note some internationa funds will not invest in any ASX stock.
The company. We do not think these assets should list of a stock exchange.
Because to generate the returns the brokers want to to keep selling and re selling shares, the prices MR needs be ever upward, regardless of the customer base it serves.
These are long term 50 yr and more assets, they should be dealing in the bond market, giving bond type %yield not equity style returns, couple of point over OCR (who is going to buy a share like that - but a bond.....)... This suits the pension funds.
NZ regulation is not strong enough to hold prices we think.
Here is another question. What is Fonterra going to do now for people that buy/value the shares at $7.20 so that they get a 7% return (thats a 49c return) when the dividend is expected at 30c. Or is the 7,20 set to go up more.
We saw one broker with a target value of $6.50..

"The impact on utilities will be profound, and will be made worse by the emergence of cheap battery storage, which would allow households – and businesses – to consumer more of their own energy, and effectively remove the morning and evening peak in pricing, as well as the midday peaks, as we revealed in a dramatic graph in our article last May of Why generators are terrified of solar. Without any peaks, the profit margin of generators is removed. UBS calculates the EBITDA profit pool of the conventional generators will shrink by around 50 per cent."
" means that solar PV is not just licking the cream off the profits of the fossil fuel generators – as happens in Australia with a more modest rollout of PV – it is in fact eating their entire cake."
"the biggest utility in Italy, which had the most solar PV installed in 2011, highlighted its exposure to reduced peaking prices when it said that a €5/MWh fall in average wholesale prices would translate into a one-third slump in earnings from the generation division."
Maybe the wiser move is to install solar panels with your $s rather than buy shares,

Interesting piece of crystal ball gazing "these are sunset industries"  I dont agree in that they wont go away as they will be needed. 
Battery storage is frankly not as cheap or maintainance free as you may think and I doubt it ever will be...but time will tell.
The problem I have with selling off these utilities is they have a monopoly, hence they can charge freely and given the "free markets" known ability to abuse that position, I dont agree with you.  Now Air New zealand, yes sure....that is a doo doo no ifs no buts, sadly selling it is too late I suspect.
Take a look at a very interesting house that really is self-sufficient.

They want to trun your power account into something like a mobile phone bill, where the price to you has nothing to do with the cost to them.
Then they game the regulator to say our equity need give same return as stock market. etc. etc....
Then for power bills all rise, not to pay for assets, or provide cash for sinking fund etc tec, but rather to fund dividends...
The bond comment before was how they fund project assets, if they didn't have the cash via sinking fund aside...
Problem is the generation assets do not have any reserves to fund new long term assets, as any free/spare cash has been extracted as dividends, Hence current equity holder has no equity to put in, (as dividends should never have been taken) and new assets asset repair need be funded out of todays abnd tomorrows power accounts....... nightmare......
The power companies should be the sources of investment (like pension funds) for the power companies need save a little each year in order to build new assets every 30 or 50 years.....
And by saving (putting aside in sinking fund) a little each year the power accounts need not jerk around by the bodes gaming the regulator.
Its like on the farm, we are trying to put cash aside so that over 15 to 20 years we will have cash to fund revamp of shed and irrigation. Otherwise bag, an extra $1m of debt and no sign of repayment....... (its a struggle to set cash aside) as the amount we count as depreciation, going forward, in theory was where the conversion loans repayments was meant to come from (and we mean plural).
Otherwise its 3 years to sell some for half of what it was all thought 5years ago a la Hart....

"the price to you has nothing to do with the cost to them." and are there any industries/retail that dont do exactly the same thing? or wouldnt if they could?
Even the finance industry with its buying of futures etc in effect pillages our wallets as they can corner the market and push up prices...
The problem then becomes are the price rises we see real price rises due to lack of (or partially because of) supply or purely greed.
and ppl say the "free market" is the best way....I suppose its a bit better then many options like say Soviet style...but that isnt saying much by the look of it.

Agree, Ive delt with enough of them....same applies to telcos, etc etc....

Depends on how much resiliance you want in the system. Otherwise In terms of new generation the GFC has caused a flatlining of the NZ power growth ue and if what I see around me is any indication thats going to continue as is for 3 years.
The intersting Q is when the bozos finally admit we need more generation as we swap away from fossil fuel use, what happens then to demand.
and the bit above, where does solar power fit in, if it guts peak demand and from a National perspewctive thats a good thing (we run air con plant on the sun and not with coal) it maybe 5 years before we see new plant if ppl start to deploy it and I hpe thye/we do.

Because as the old saying goes "there is no such thing as a free lunch"  NZ needs capital and all the Greens & Labour voters like BH, expect the government to fund their lifestyles and     use everybody's elses money (you know, all the rich working people)

So it cost $28m to get out of the fund, and the funds assets taken over were written down by $88m.
What was the $28m for? page 28
> A full assessment of GGE and its investments was undertaken which looked at project risks,
forecast returns and capital requirements
> The Company felt it prudent to realise Impairments of $88.9 million relating to GeoGlobal Partners I
Fund (GGE Fund) and its investments
> higher than expected costs at the Tolhuaca project in Chile following worst winter in 40 years impacting drilling
performance; one very good well and one with low productivity
> Weilheim project in Germany impacted by environmental court challenges and drilling pad relocation following
3D seismic survey
> GGE Fund had not raised third party capital by the end of 2012
> Mighty River Power decided not to commit more capital to existing structure
> Residual book value of asset $91.8 million as at 31 December 2012
and from the fund:
GGE’s goal for its Chilean platform is to develop up to 500 MW of geothermal power production over the next 5 years. GGE takes a threefold approach in reaching this goal: continue exploration and development on previously awarded geothermal concessions, participate in the government sponsored concession acquisition process, and find new untapped geothermal resources.
Mighty River Power will transfer its ownership interest in GeoGlobal Energy to the Managing Partners and pay them US$24.8 million on final close expected over the next few months. Under the terms of the agreement, both parties will now be free from geographic restriction or exclusivity in pursuing future geothermal opportunities. By terminating the existing agreements half-way through the 10-year term of the GGE Fund, Mighty River Power also avoids, among other things, future obligations for management fee payments to GGE.
Mighty River Power Chief Executive, Doug Heffernan, said that during the five-year relationship the GGE partnership had developed one of the largest global portfolios of geothermal opportunities. The structure of the new agreement reflected the respective strategic interests and capabilities of Mighty River Power and GGE and the best way to mobilise further capital to build out the opportunities in each country where the Fund’s assets are located.
where is the adult supervision we hear you say?

where is the adult supervision we hear you say?
There is no adequate supervision because at all levels including the SOE Minister, the Finance Minister, along with the CEO there is a lack of talent combined with inexperience.
I like Chalkie's view on this debacle;
These ambitions in the United States, Chile and Germany were once so important they influenced 70 per cent of chief executive Doug Heffernan's long-term incentive pay, although his current scheme, which began last July, doesn't mention them.
There is also a sense of changing direction in the announcement, which revealed the termination of a 10-year contract halfway through its term at a cost of US$25 million ($29 million).
These things happen, you might say. Sometimes you have to suck it up and move on.
However, a less forgiving view was offered to Chalkie by one professional investor, who described the announcement as "a frigging disgrace".
"You're the only investor in a fund, and to get control of your own money you've got to write out a cheque for US$25m. For these guys on the other side it's bloody Christmas.
"Things like this really highlight to me why you need a lot more visibility on the activities of these [state-owned] businesses."

Why MRP stock will go up:
1.  It's an IPO.  To shift (approx) 1.75b worth of shares you have to make them attractive; why would anyone buy at an IPO if there was no financial incentive.  They will price them with at least a 10% discount so they can shift them all. 
2.  The govn has been harping on at Kiwis for years to invest in productive industries or support Kiwi companies by buying stock (instead of Auckland houses).  This is a chance to show how good/profitable the NZX can be; it would be politically untenable for MRP stocks to go down in value after the govn has sold them to a quarter of a million Kiwi voters. 
3.  It's a good, well managed company, captive customer base, selling an essential service and it's likely to pay high, steady dividends.