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A new way to buy banks

Challenger's new endowment warrants allow investors to buy the big four Australian banks on hire purchase.

Thursday, November 15th 2001, 11:41PM

Fund management group Challenger has launched a new set of endowment warrants in New Zealand which will give investors access to the Big Four listed banks in Australia.

The warrants, which are listed on the Australian Stock Exchange, are held over ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac.

Investors who use warrants are effectively buying shares on a hire purchase basis.

Challenger head of warrants Heidi Davies (pictured) says they are a good way of getting exposure to a defensive sector.

The warrants work this way. Investors make a down payment on the underlying shares by purchasing a warrant for about half the current share price. The balance is covered by a loan from the issuer.

During the life of the warrant dividends and any capital returns from the companies are used to pay off the balance.

At maturity, in February 2012, the ledger is squared up and the investor takes ownership of the shares. If cash flows from the shares have been high enough there will be nothing left to pay, alternatively a final payment may have to be made.

The interest rate used on the warrants is the 90 day bank bill swap rate plus a margin of 2.5%.

This is a better rate than that used in previous endowment warrants as Challenger is now the issuer reducing one of the parties in the process.

Davies says while the bank endowment warrants are essentially a leveraged equity investment, they are more simple than margin lending. One of the benefits is that the loan is built into the warrants and there are no margin calls.

Davies says the warrants are a cheap way to get exposure to a core sector. She says they are particularly attractive as the prices of the Big Four are already quite high.

Bank of New Zealand parent National Australia Bank closed at A$32.48 yesterday, Westpac finished at A$16.48, ASB Bank's parent CBA was A$29.85 and ANZ A$18.49.

She says people who already own the bank shares might want to consider selling the shares and moving their exposure to warrants. This would allow them to free up cash to invest elsewhere.

Davies says this series of warrants are based on the US model, as opposed to the European one. They can be exercised any time (rather than just at maturity) and the warrants are fully covered, meaning that for each warrant purchased there is one underlying share held in trust for the investor.

Challenger is looking to sell A$40 mill worth of warrants. The offer has been open for a couple of months in Australia and is already 25% full.

Davies expects the offer will be fully subscribed before its close off date which is September 16, 2002.

Check out the prices of the warrants in the Markets section of Good Returns HERE.

« What is the next investment style?Sovereign takes regulation bull by the horns »

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Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
ANZ 6.74 5.59 5.59 5.59
ANZ Special - - 5.39 -
ASB Bank 6.75 5.99 5.99 5.99
ASB Bank Special - 5.35 5.39 5.39
BankDirect 6.75 5.99 6.09 5.99
BankDirect Special - 5.35 5.39 5.39
BNZ - Mortgage One 7.15 - - -
BNZ - Rapid Repay 6.74 - - -
BNZ - Special - - - -
BNZ - Std, FlyBuys 6.74 5.35 5.39 5.49
BNZ - TotalMoney 6.74 - - -
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 6.70 - - -
Credit Union Baywide 6.45 5.95 5.99 -
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
eMortgage 6.04 6.15 6.69 7.19
Finance Direct 6.10 6.45 6.69 7.10
First Credit Union 6.45 - - -
General Finance 5.95 6.25 6.50 7.10
HBS Bank 6.65 5.69 5.39 5.69
HBS Special - 5.59 5.35 5.35
Heartland 6.70 7.00 7.25 7.85
Lender Flt 1yr 2yr 3yr
Heretaunga Building Society 6.70 5.70 5.40 -
Housing NZ Corp 6.74 5.70 5.99 6.29
HSBC Premier 6.84 5.65 5.65 5.65
HSBC Premier LVR > 80% - - - -
HSBC Special - 5.29 5.29 5.29
ICBC 6.75 5.99 6.39 -
Kiwibank 6.65 5.39 6.09 6.29
Kiwibank - Capped - - - -
Kiwibank - Offset 6.55 - - -
Kiwibank Special - - 5.39 5.39
Liberty - - - -
Lender Flt 1yr 2yr 3yr
Napier Building Society 5.80 6.00 6.70 -
Nelson Building Society 6.95 6.15 6.60 -
NZ Home Loans 6.85 6.09 6.40 6.29
Perpetual Trust 7.70 - - -
Resimac 6.59 5.88 5.86 5.90
SBS Bank 6.65 5.69 5.39 5.69
SBS Bank Special - 5.59 5.35 5.35
Silver Fern 5.95 6.10 6.55 7.05
Sovereign 6.85 ▼5.35 ▼5.39 ▼5.39
Sovereign Special - - 5.39 5.39
The Co-operative Bank 6.70 5.29 5.39 5.49
Lender Flt 1yr 2yr 3yr
TSB Bank 6.74 ▼5.55 ▼5.55 ▼5.75
TSB Special - - 5.29 5.40
Wairarapa Building Society 6.20 5.75 5.95 -
Westpac 6.59 ▼5.59 ▼5.59 ▼5.59
Westpac - Capped rates - 6.74 6.99 -
Westpac - Offset 6.59 - - -
Westpac Special - 5.25 5.39 -
Median 6.70 5.70 5.59 5.67

Last updated: 29 May 2015 5:26pm

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