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Investors getting adequately compensated: Hart

Graeme Hart doesn't believe that investors in debt offerings such as capital notes are getting under-rewarded.

Tuesday, May 6th 2003, 1:34AM

by Philip Macalister

Hart dismisses criticisms that debt offerings like the Goodman Fielder capital notes issues inadequately rewarded investors for the risk taken on.

He says people who make such comments are “ill-informed or superficial or self serving.”

While capital notes are some way down the pecking order when it comes to getting money back, Hart says investors looking at such offerings need to consider a number of factors.

From the company’s perspective it is necessary to have a range of debt in the business ranging from secured borrowings through to subordinated debt.

Hart points out that the secured borrowers get a lower return than the owners of subordinated debt, and this latter group is compensated by higher yields.

“If you are ultimately reliant on security then you’ve got a problem,” he says.

With an offer like this people have to get satisfied the fundamentals of the business, its cash flow and the people running it.

“(You) never want to be a position where you have to rely on the security to get your money back.”

Coming back to the question of whether or not people are being adequately rewarded Hart says it’s wrong for people in New Zealand to be using benchmarks in London or New York as the measures to assess whether the reward is sufficient.

“The world isn’t necessarily the benchmark,” he says. “Why go to London or New York when you live, work and invest in New Zealand?”

With an offer like this investors are getting a high yield for a relatively short-term investment.

“To get the thick end of 10 (per cent) in the US, you’ve got to sign up for 10 years not five,” he says.

New Zealanders aren’t going to do that as “they can’t even contemplate 10 year investments, then they will find out the yield they are getting isn’t much different, then they will find out that, oh shit, now I’ve got a whole new risk called foreign exchange, and by the way I don’t recognise or understand the businesses that I’m being asked to invest in.”

“People and investment managers by and large aren’t thick,” he says. “They know how to work out whether this is good or bad.”

“Do you think I’m going to find $200 million worth of thickos in New Zealand to buy up capital notes? I don’t think so.”

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