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Where's the research?

Friday, February 13th 2009, 6:44AM 6 Comments

by Philip Macalister

The flood of retail money into corporate bonds at the moment has a whiff of the type of investor behaviour we saw over finance companies. With interest rates at very low levels and bank term deposits barely providing a positive return after tax and inflation, it is no wonder that investors will be attracted to anything starting with a seven and if it starts with an eight it’s like a bright light. Likewise, banks aren’t showing a lot of appetite for lending so corporates are being forced to the bond market, with much of the money raised being used to pay down debt. I’m not sure how much of the money being invested in these bonds is going through financial advisers, but I suspect a fair bit is going through broking firms. Indeed one made a comment that if it wasn’t for Fonterra they would be making a loss this quarter. The corporate bond rush has highlighted a point which has been bugging me for some time about the savings industry, that is the lack of research available to investors. I’m not sure how much is floating around on these offers and it seems very little makes its way into the public domain for the retail investors. Therefore these offers are being bought on rate, just like finance companies were, and brand name. There seems to be little regard to things like balance sheets, credit ratings, economic risks and the like, therefore little consideration of whether the return being offered was commensurate with the risk. I’d have to make it clear here that I’m not saying these companies are dodgy, or high risk, like some of the finance companies, indeed the companies known to be in the bond market are reputable organisations. But there is a wide divergence in their qualities, which doesn’t seem to show through in the rates on offer. I guess one thing the bond offers are doing is taking potential interest away from shares and property. A view expressed here, was that with interest rates down people would start looking to growth assets. Judging by comments from the real estate sector and a look at volume figures on the exchange, that hasn’t happened – yet.
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Comments from our readers

On 14 February 2009 at 9:27 am Mark Brown said:
Research doesn't exist in the NZ credit market. Banks and brokers provide no meaningful or forward-looking assessment of corporate debt. Investors must do their own work and I am of the view that hardly any firm has the resources to do this well. Last year returns reported by fixed income managers ranged from nearly 20% to below 10% and many retail investors would have negative returns due to defaults etc. Thats a huge dispersion for fixed income and credit selection drove the divergence. While investor demand has shifted from finance companies to investment grade debt, investors still miss out on research and have poor diversification. The secondary market for debt has deteriorated, partly because the abundant new deals (with brokerage attached) is keeping retail away from existing deals. That makes it harder and more expensive to liquidate positions you might want to sell for liquidity or research-driven purposes.
On 15 February 2009 at 8:01 pm Interest(ed) said:
Mark - Are you saying:

• The secondary fixed interest market for credit assets is relatively illiquid because there are no willing buyers for existing corporate securities.

• The new issues are no more attractively priced than the existing illiquid securities.

• Despite this - the new issues go out the door like hot cakes.

If this is the case then it is really interesting. I guess because of the hype around these new issues coming to market, it is easy to miss the fact that there is plenty of existing fixed interest securities out there already that our clients could be buying.

Is there any reason as to why new issues seem to be preferable to existing securities?
On 16 February 2009 at 9:43 am alan said:
The article by Brian Gaynor in the NZ Herald of 14th February should be compulsory reading for advisors and investors.
On 16 February 2009 at 8:17 pm Sleepless said:
I had this strange dream last night.

I went to the bank to get a $300k loan, but the bank manager said that his bank had no money to give me.

Next thing you know the same bank manager was chasing me down the road saying "Here, have $800k".

I stopped and said I didn't want such a big mortgage (after all I only needed $300k). The bank manager kept saying "sssshhhhhh.... don't worry, it's not a mortgage to the bank. It's a fixed interest security. The retail investors want you to have the money."

I asked the bank manager what interest I should pay, and he said: "Don't make it too much, it might scare them."

I ran off, but the the bank manager kept yelling "Come back, come back. Have you got any friends who need some money?"

Man, what a weird dream.
On 17 February 2009 at 12:39 am Peanut H said:
Oh please lets give the poor sharebrokers a break, they haven't been able to afford a decent champagne with lunch on the brokerage turnover on NZ and Ozzy shares lately. The petty cash has only extended to a Big Mac and large fries. But oh what great joy when they can beef up the brokerage commissions with a large corporate offering and commit their yet uncommitted clients to the tune of $800m for the pending Fonterra offering. Do you blame them for licking their chops at the thought of actually earning some great brokerage with the plethora of corporate issues announced and rumored to be pending.

Lets face it, it's an easy sell, "Dear Mr Punter Client, do you think Fonterra, NZ Post, Wellington Airport, Auckland City Council, Tower are going to become Babcock & Browns?". Of course not is the predictable answer.

There are all number of sharebroker websites, even some with copyright protection, titivating their clients with announced issues and rumored pending issues. My inbox has received plenty of email from them lately as well.

Speaking of easy brokerage as a earner, it is a lot easier to mass market a new issue and earn a packet instead of buying for your clients of the NZDX and receiving a reduced brokerage.

Why should the fine upstanding companies seeking loads of investors dosh bother with getting in Standard & Poors to do a rating, after all South Canterbury Finance BBB- rated only has to pay 8% to get a flood of over subscribed investors bond money in the door. I ask you, do you expect the share and advisers to insist on their clients only investing in researched and rated securities? I will be.
On 20 February 2009 at 5:03 pm Red Dog The Pirate Guy said:
My Sharebroker has clients in B & B,so is being a bit more selective in regard to Corporate Issues.
Tower has the thumbs down.
Fonterra has been a good little earner.

Speaking of brokers,I note Ken Swain of Vestar has formed a new entity with a Christchurch person and is heavily promoting insurance products.
I suppose the sales game must go on,and there are always new fish in the sea.

That reminds me of a person who had been using Money Managers and was annoyed at the Metropolis Properties Saga.
He went to visit them to voice his displeasure.
"If you don't like it,just take all your money out" he was told.
Yes I suppose at that stage there would be lots of other suckers to walk in the door.

Chris Lee notes that that terrible of terrible banks ANZ are disputing some of the Ombudsman decisions.
They have no shame.

I never liked the look of the RPI Investments offered to the public.
PPCS appear to have Mr Norgate & Co in a bit of a corner.
It appears that there was no "Subject to Finance" clause in the S & P agreement to buy the share stake.
It would be interesting if PPCS insisted on specific performance.

The lowest interest rates "for 40 or 50 years"as one banker put it to me,has sparked a renewed interest in residential and residential property.
Residential values have dropped 25% to 33%.
Mortgagee sales in commercial are sparking some interest.
There are large numbers of farms on the market,but virtually no sales,which means that the present drop in farm values of 25% to 33% is difficult to pin down,as there are only isolated sales on a willing buyer/willing seller basis which confirm this.
Commenting is closed



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ANZ 4.44 2.89 3.25 3.39
ANZ Special - 2.29 2.69 2.79
ASB Bank 4.45 2.29 2.59 2.65
Basecorp Finance 5.49 - - -
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - 2.29 2.59 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 2.89 3.19 3.39
BNZ - TotalMoney 4.55 - - -
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CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 2.50 1.99 2.35 2.45
Heretaunga Building Society 4.99 ▼3.40 ▲3.50 -
HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - ▲2.25 - -
ICBC 3.69 2.25 2.35 2.65
Kainga Ora 4.43 2.67 2.97 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.20 3.50 3.50
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.35 2.65 2.65
Liberty 5.69 - - -
Nelson Building Society 4.95 3.20 3.24 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 2.79 2.79 3.15
SBS Bank Special - 2.29 2.29 2.65
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.09 - -
The Co-operative Bank - Owner Occ 4.40 2.29 2.59 2.79
The Co-operative Bank - Standard 4.40 2.79 3.09 3.29
TSB Bank 5.34 3.09 3.29 3.45
TSB Special 4.54 2.29 2.49 2.65
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 3.09 3.29 3.39
Westpac - Offset 4.59 - - -
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Westpac Special - 2.29 2.69 2.79
Median 4.55 2.73 2.99 2.80

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