Tuesday, 7 June 2011

Fixed Interest Weekly

Market Update Key Upcoming Events
The unpalatable NZD continues to dominate most local headlines NZ: Wed 8 June, NZ real building work in place
accompanied by the release of the Reserve Banks second Monetary Policy Thu 9 June, RBNZ Policy announcement
Statement for 2011. Globally the Greek story just seems to be getting
Fri 10 June, May Card spending
worse and worse with even the authorities now dubious about salvation.
Fri 10 June, REINZ house price Index
US
AUS: Tue 7 June, RBA policy announcement
Yields on US Treasuries edged higher last week after the unemployment Wed 8 June, April housing finance
rate increased to 9.1% after disappointing May jobs data of just 54,000 Thu 9 June, May unemployment rate
(165k expected). The spread between corporate bonds and Treasuries
continues to widen as corporate bonds lose favour with investors due to a US: Wed 8 June, Fed Beige Book
stalling US recovery. The safety of US Treasuries remains with yields at near Wed 8 June, Fed Speaks
2011 lows and a further US$66bn is to be auctioned this week. EUR: Thu 9 June, ECB Rate Decision
Financial analysts have begun to cut back their growth forecast for the US UK: Thu 9 June, BoE Rate Decision
with two major investment banks reducing Q2 GDP from 3.5% to 2.7%.
There has been a number of poor economic data releases from offshore Key Interest Rates
coupled with softer than expected domestic data indicating lower growth. Rates at Previous Rates
US Bond movements last week: 2yr -6bp, 10yr -8bp, 30yr +2bp 7June11 1 Week 3 Month 12Month
NZ Short Term Rates
Europe
OCR 2.50% 2.50% 2.50% 2.50%
The risk of a default by Greece was increased to 50% by Moody’s who 30 Day Bank Bills 2.61% 2.60% 2.62% 2.80%
downgraded by the embattled country to Caa1 (CCC+ in S&P terms). A 90 Day Bank Bills 2.66% 2.69% 2.65% 3.00%
second bailout package looks set to be put in place as Greece is unlikely NZ Long Term Rates
to be able to venture back into the capital markets as their borrowing costs 1 Year Swap 2.88% 2.89% 2.67% 3.66%
2 Year Swap 3.37% 3.43% 3.16% 4.28%
are uneconomical (2yr yield 23%) delivering bond holders a 21% loss over
3 Year Swap 3.79% 3.86% 3.62% 4.65%
the last year. Recent reports put Greece’s debt at 157% of GDP which is the 4 Year Swap 4.14% 4.18% 3.95% 4.92%
highest in European history. 5 Year Swap 4.42% 4.44% 4.23% 5.11%
German banks look to be the biggest losers out of a default with nearly 7 Year Swap 4.81% 4.83% 4.65% 5.36%
$23bn in Greek sovereign debt, well ahead of France’s $15bn. The two 10 Year Swap 5.17% 5.17% 5.05% 5.62%
2011 Government Bond 2.60% 2.61% 2.56% 3.69%
European heavyweights will no doubt be heavily involved in any restructure
2013 Government Bond 3.25% 3.27% 3.34% 4.36%
talks. 2015 Government Bond 4.08% 4.11% 4.21% 4.84%
Euro Bond weekly movements: UK 10yr n/c, Spain -14bp, Germany +3bp 2017 Government Bond 4.71% 4.73% 4.96% 5.27%
2019 Government Bond 4.91% 4.92% 5.23%
Australia 2021 Government Bond 5.11% 5.11% 5.46% 5.49%
The Reserve Bank of Australia left interest rates unchanged at 4.75% today International Rates
Aus 90 Day Bank Bills 5.03% 4.98% 4.86% 4.89%
with most forecasting a late 2011 rate hike. The dilemma (similar to our Aus 10 Year Gov Bonds 5.25% 5.21% 5.39% 5.34%
own Central Bank) is the surging currency. The AUD has risen 31% over the US 10 Year Treasuries 3.00% 3.06% 3.31% 3.19%
last year as investors expect a rate rise to 5.0% is definitely on the cards as UK 10 Year Bonds 3.16% 3.19% 3.43% 3.47%
the economy continues to outperform all other developed nations. Japan 10 Year Treasuries 1.15% 1.17% 1.22% 1.23%
German 10 Year Bonds 3.03% 3.02% 3.13% 2.52%
Australia’s terms of trade (a gauge of the country’s purchasing power)
is forecast to continue its recent rise to a 140yr high on the back of the
resource boom. Consumers are spending the cash generated by the boom Portfolio Yields & Duration
with retail sales advancing 1.1% in April - its biggest rise since Nov 2009.
Chart 1: NZ & Australian Cash Rate Expectations Conservative: 5.85% Duration: 3.34yrs
Balanced: 6.85% Duration: 3.18yrs
%
5.0 High Yield: 7.95% Duration: 2.36yrs
4.95
4.5
Contents
4.0 RBNZ
Charts & Tables 2
RBA
3.5 Corporate News 3
Forecast
Economic and Central Bank News 3
3.0 2.95
Example Portfolios 4
2.5 Reset Securities Analysis 5-7
Rate Sheet 8
2.0
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12

Analyst
Matt Sturmer. DDI: +64 4 495 8204
Source: Forbar, Iress matt.sturmer@forbar.co.nz

This is a private communication to Forsyth Barr clients and is not for reproduction, public circulation or the use of any third party (whether in whole or in part) without the prior written consent of Forsyth Barr Limited.

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 1
Charts and Tables
Chart 2: NZ 5yr Corporate Credit Spreads
%
2.0
NZ 5yr Corporate Credit Spreads (Chart 2) 1.9

Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Last 1.8

AA rated 1.46% 1.47% 1.50% 1.44% 1.53% 1.36% 1.31% 1.24% 1.7

A rated 1.78% 1.69% 1.60% 1.57% 1.63% 1.50% 1.51% 1.57% 1.6
1.5
1.4
1.3
NZ v Australia: Cash Rate
1.2 AA A
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Last 1.1
1.0
NZ OCR 6.75% 7.25% 7.75% 8.25% 2.50% 2.50% 2.50%

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11
Aus OCR 5.50% 5.75% 6.25% 7.25% 3.00% 4.50% 4.75%
Difference 1.25% 1.50% 1.50% 1.00% -0.50% -2.00% -2.25%
Source: Bloomberg, Forsyth Barr

Chart 3: New Zealand Swap Spread (2Yr)

NZ Swap Spread - bp (Swap to Govt) (Chart 3) 160 bp

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Last

130
2Yr 51bp 80bp 81bp 96bp 101bp 11bp 34bp 07bp
5Yr 53bp 76bp 87bp 104bp 106bp 05bp 23bp 07bp
100
7Yr 50bp 82bp 92bp 114bp 105bp -02bp 16bp 04bp
10Yr 53bp 85bp 90bp 112bp 103bp 14bp 13bp 07bp 70

NZ Historical Interest Rates 40

Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Last 10

OCR 6.75% 7.25% 8.00% 8.25% 2.50% 2.50% 2.50%
90 Day BB 7.03% 7.48% 8.38% 8.69% 2.72% 3.00% 2.66% -20
Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11
1 Year Swap 6.92% 7.43% 8.46% 8.27% 2.94% 3.73% 2.87%
5 Year Swap 6.49% 6.81% 8.07% 7.49% 5.22% 5.22% 4.41%
Source: Bloomberg, Forsyth Barr

Secondary Market Yields (Chart 4) Chart 4: Secondary Trading Margins

Issue Maturity Coupon Rating Term (Yrs) Yield Margin bp) 690bp PIN020

WKS020 15/09/2012 9.65% BBB- 1.3yrs 6.60% 358bp 640bp

Margin (basis points over relevant swap rate)

MAR010
TPW020 15/09/2012 8.50% n/r 1.3yrs 6.35% 333bp 590bp
540bp
GFN030 15/11/2012 8.30% n/r 1.4yrs 7.65% 435bp
490bp
PIN020 30/11/2012 9.00% n/r 1.5yrs 10.10% 698bp GFN030
440bp
MAR010 15/07/2013 10.50% BBB- 2.1yrs 9.20% 578bp
390bp WKS020
WIA010 15/11/2013 7.50% BBB+ 2.4yrs 5.95% 238bp TWC010 IFT070
340bp
TWC010 15/04/2014 8.50% BBB- 2.9yrs 7.00% 325bp 290bp TPW020
FBI050 GFZ010
FBI050 15/05/2014 9.00% n/r 2.9yrs 7.10% 332bp 240bp TPW100
GEF010
AIA100 27/11/2014 7.00% A- 3.5yrs 5.25% 128bp WIA010
190bp
AIA100 AIA070 MEL020
FCG010 10/03/2015 7.75% A+ 3.8yrs 5.10% 104bp 140bp ANB300
FCG010 AKC050
ANB300 13/07/2015 6.51% AA 4.1yrs 5.37% 120bp 090bp
1 2 3 4 5 6 7
AIA070 7/11/2015 7.25% A- 4.4yrs 5.75% 149bp Term (years)
IFT070 15/11/2015 8.50% n/r 4.4yrs 8.00% 374bp
Source: Iress, Forsyth Barr
GFZ010 16/05/2016 7.54% n/r 4.9yrs 6.75% 235bp
GEF010 15/10/2016 7.35% n/r 5.4yrs 6.50% 201bp Chart 5: US Treasury Bond (10yr)
MEL020 16/03/2017 7.55% BBB- 5.8yrs 6.20% 163bp %
1.4
AKC050 29/09/2017 6.52% AA 6.3yrs 5.65% 097bp
TPW100 15/12/2017 7.10% n/r 6.5yrs 6.80% 208bp 1.2

1.0

0.8

US Treasury Yields (Chart 5)

0.6
Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Last
2Yr 0.37% 0.53% 0.59% 0.76% 0.70% 0.83% 0.55% 0.42% 0.4

10Yr 2.53% 3.13% 3.32% 3.63% 3.51% 3.55% 3.15% 3.00% 0.2
30Yr 4.12% 4.37% 4.48% 4.70% 4.62% 4.59% 4.29% 4.26%
0.0
Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Source: Bloomberg, Forsyth Barr

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 2
NZ Economics Corporate & Economic News
The Reserve Bank of New Zealand (RBNZ) will release its The NZX released its trading figures for May. There are 110
Monetary Policy Statement (MPS) on Thursday with no listed debt securities (-7.6% YoY) with the number of trades
change expected to the Official Cash Rate (OCR). also down by 11.1% or $115m.
Whilst no actual movement in the OCR is currently priced Kiwibank is utilising its new European Commercial Paper
in, questions are now being asked regarding what the RBNZ programme with its latest General Disclosure Statement
intends to do about rising inflation. showing it had borrowed NZD$927.275m. With the ‘big four’
There is no doubt the RBNZ are faced with a struggling local banks still competing for retail funds, the smaller banks
economy accompanied by several offshore uncertainties such as Kiwibank have had to seek alternative funding.
(namely Europe), however inflation appears to be rising and Downer EDI (DOW) has had a further setback in its Waratah
the RBNZ may be forced to play catch up at some stage. train project. After testing the first train, Railcorp refused to
The New Zealand Institute of Economic Research has said accept the train citing some further work was required. DOW
the RBNZ will need to raise the OCR by 150bp next year to has stated that the work needed will be done by the end of
head off the inflation risks. The first interest rate hike in now the week.
firmly priced in for 8 December.
Heartland New Zealand Limited is now the new name for
Chart 6: High Inflation leading to negative real returns Building Society Holdings Limited, and PGC shareholders
% have now been allocated their shares. The NZX ticker has
16
CPI Y/Y% changed from BSH to HNZ. The ticker for the MARAC bond
14 90 Day Bank Bill (cash) remains MAR010.
12 Real Yield (90 Day BB less Inflation)
NZ Post announced that it will not meet its profit guidance for
10 the year ending 30 June 2011. The Christchurch earthquake
8 and the overall weakness in the economy has seen guidance
6 fall from $60.8m to $35-40m.
4 Struggling NZF Group is so confident of a new business
2 partner it has begun lending again. Negotiations are
0 nearly complete and Westpac who has been privy to these
-2
negotiations, has agreed to renew the current Warehouse
Facility of $225m until 18 October 2012 on similar terms
Mar. 1988
Mar. 1989
Mar. 1990
Mar. 1991
Mar. 1992
Mar. 1993
Mar. 1994
Mar. 1995
Mar. 1996
Mar. 1997
Mar. 1998
Mar. 1999
Mar. 2000
Mar. 2001
Mar. 2002
Mar. 2003
Mar. 2004
Mar. 2005
Mar. 2006
Mar. 2007
Mar. 2008
Mar. 2009
Mar. 2010
Mar. 2011

and conditions.

Dorchester Pacific reported a $14.1 million annual net profit

Source: RBNZ, Forbar
but that was entirely due to the $22.4m benefit from last
Governor Bollard does have a bit more time than in past year’s debt-for-equity swap rescue. Dorchester is forecasting
cycles as the majority of homeowners are now on floating it will be just ahead of the break-even prospectus forecast
rate mortgages. Any move in interest rates from Bollard for the current year.
will now immediately impact on borrowers which should
The ANZ Investment Grade Bond Index gained 26.51pts
translate into a much quicker response to monetary policy.
over the month of May. Two new bonds were added to the
The MPS due on Thursday is likely to be more concise Index with Transpower and Rabobank both issuing new
than the March MPS with more data available to quantify bonds in May.
the impact of the Christchurch earthquake and the budget
response from the Government. In the next month or so...
Chart 7: Fixed v Floating Mortgages ASB announced it will redeem its $200m subordinated bond
on 15 June 2011. The 5+5 issues as they are known will no
100%
longer be permitted under Basel III.
90%
Fonterra will be reset the coupon on its perpetual capital
80%
notes (FCGHA) on 10 July 2011 at 1.80% over the 1yr
70% Government Bond rate.
60%

50% Floating
Recent Bond Issues
40% Fixed Issuer Maturity Coupon Rating $m Margin
Rabobank 16/05/2018 6.25% AAA 100 139bp
30%
BNZ 11/03/2014 FRN AA 400 130bp
20% Dunedin City Treasury 15/042016 FRN AA 90 107bp
HSBC 23/05/2016 FRN AA 200 125bp
10%
ANZ National Bank 27/05/2016 FRN AA 250 150bp
0%
Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Upcoming Maturities/Rollovers
Source: RBNZ, Forbar Issuer Maturity Size $m Coupon
ASB Bank (ABB010) 15/06/2011 200 7.03%

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 3
 Fixed Interest Portfolios
Conservative
Credit Years to
Security Code Maturity Coupon Yield Price Face Value Cost Income Interest payments
Rating Maturity
PGG Wrightson Fin (Crown gtd) PWF040 BB 8/10/11 8.25% 6.50% 0.32 $1.020 $15,000.00 $15,303.31 $1,237.50 Jan/Apr/Jul/Oct
Fonterra FCG010 A+ 10/03/15 7.75% 5.25% 3.74 $1.085 $15,000.00 $16,273.57 $1,162.50 Mar/Jun/Sep/Dec
CBA Redeemable Pref Shares^ CBAFA AA- 15/04/15 3.59% 7.27% 3.84 $0.930 $15,000.00 $13,950.00 $538.50 Jan/Apr/Jul/Oct
ANZ National Bank (Senior) ANB300 AA 13/07/15 6.51% 5.37% 4.09 $1.068 $15,000.00 $16,023.61 $976.50 Jan/Jul
BNZ (Senior) BNZ300 AA 13/08/15 6.17% 5.40% 4.17 $1.048 $15,000.00 $15,726.10 $924.75 Feb/Aug
Auckland International Airport AIA070 A- 9/11/15 7.25% 5.75% 4.41 $1.064 $10,000.00 $10,642.97 $725.00 May/Nov
Auckland Council AKC050 AA 29/09/17 6.52% 5.60% 6.30 $1.061 $15,000.00 $15,921.50 $978.00 Mar/Sep
Total For Portfolio 5.85% $100,000 $103,841 $6,543
^ Dividends are imputed with dividends reset annually at 0.75% over 1 year swap rate. Matures in 2015. Forecast 1yr swap rates assumed.

Balanced
Credit Years to
Security Code Maturity Coupon Yield Price Face Value Cost Income Interest payments
Rating Maturity
PGG Wrightson Fin (Crown gtd) PWF040 BB 8/10/11 8.25% 6.50% 0.32 $1.020 $15,000.00 $15,303.31 $1,237.50 Jan/Apr/Jul/Oct
ANZ ANBHA A+ 18/04/13 9.66% 6.62% 1.85 $1.066 $15,000.00 $15,990.00 $1,449.00 Apr/Oct
Tower Capital^^ TWC010 BBB- 15/04/14 8.50% 7.00% 2.84 $1.052 $10,000.00 $10,518.40 $850.00 Jan/Apr/Jul/Oct
CBA Redeemable Pref Shares^ CBAFA AA- 15/04/15 3.59% 7.27% 3.84 $0.930 $15,000.00 $13,950.00 $538.50 Jan/Apr/Jul/Oct
Genesis Energy GPLFA BB- 15/07/16 8.50% 7.69% 5.09 $1.026 $15,000.00 $15,390.00 $1,275.00 Jan/Apr/Jul/Oct
Sky Network Television^^^ SKTFA n/r 16/10/16 4.06% 7.49% 5.34 $0.910 $15,000.00 $13,650.00 $609.00 Apr/Oct
Auckland Council AKC050 AA 29/09/17 6.52% 5.60% 6.30 $1.061 $15,000.00 $15,921.50 $978.00 Mar/Sep
Total For Portfolio 6.85% $100,000 $100,723 $6,937
^^^ Rating shown for Tower is provided by AM Best. ^ Dividends are imputed with dividends reset annually at 0.75% over 1 year swap rate. Matures in 2015. Forecast 1yr swap rates assumed. ^^ Coupon rate reset annually at
0.65% over 1 year swap rate, final maturity in 2016 Forecast 1yr swap rates assumed.

High Yield
Credit Years to
Security Code Maturity Coupon Yield Price Face Value Cost Income Interest payments
Rating Maturity
Works Finance (NZ)Ltd WKS020 BBB- 15/09/12 9.65% 6.50% 1.26 $1.061 $10,000.00 $10,610.93 $965.00 Mar/Jun/Sep/Dec
GPG Finance GFN030 n/r 15/11/12 8.30% 7.65% 1.43 $1.015 $15,000.00 $15,224.47 $1,245.00 Feb/May/Aug/Nov
Prime Infrastructure PIN020 n/r 30/11/12 9.00% 10.10% 1.47 $0.988 $15,000.00 $14,823.35 $1,350.00 May/Nov
ANZ ANBHA A+ 18/04/13 9.66% 6.62% 1.85 $1.066 $15,000.00 $15,990.00 $1,449.00 Apr/Oct
MARAC Finance MAR010 BBB- 15/07/13 10.50% 9.20% 2.09 $1.041 $15,000.00 $15,616.98 $1,575.00 Jan/Apr/Jul/Oct
Genesis Energy GPLFA BB- 15/07/16 8.50% 7.69% 5.09 $1.026 $15,000.00 $15,390.00 $1,275.00 Jan/Apr/Jul/Oct
Sky Network Television^ SKTFA n/r 16/10/16 4.06% 7.49% 5.34 $0.910 $15,000.00 $13,650.00 $609.00 Apr/Oct
Total For Portfolio 7.95% $100,000 $101,306 $8,468
^Coupon rate reset annually at 0.65% over 1 year swap rate, final maturity in 2016 Forecast 1yr swap rates assumed.

Maturity Profile - Conservative Maturity Profile - High Yield

$80,000
$35,000
$35,000
$70,000
$30,000
$30,000
$60,000
$25,000
$25,000
Face Value
Value
Face Value

$50,000

$40,000 $20,000
$20,000
Face

$30,000 $15,000
$15,000

$20,000
$10,000
$10,000
$10,000
$5,000
$5,000
$-
2011 2012 2013 2014 2015 2016 2017 $-$-
Year of Maturity 2011
2011 2012
2012 2013
2013 2014
2014 2015
2015 2016
2016 2017
2017
Year
YearofofMaturity
Maturity
Maturity Profile - Balanced
$35,000
Portfolio Summary
$30,000 Conservative Balanced High Yield
$25,000 Face Value $100,000.00 $100,000.00 $100,000.00
Face Value

$20,000
Cost $103,841.06 $100,723.20 $101,305.73
Estimated Income (gross p.a.) $6,542.75 $6,937.00 $8,468.00
$15,000
Average Coupon Rate 6.58% 7.01% 8.52%
$10,000
Average Yield 5.85% 6.85% 7.95%
$5,000 Average Duration (years) 3.34 3.18 2.36
$-
2011 2012 2013 2014 2015 2016 2017
Year of Maturity

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 4
Reset Securities Analysis
Summary
Price Reset Current Fair Security
Security Code 7June11 Coupon Freq. Next Reset Running Yield* Margin Margin Margin Rating View
Annual Resets
ASB Capital No. 1 Ltd ASBPA $0.730 4.75% Qtly 15/11/11 6.51% 1.30% 3.86% 3.25% A+ Buy
ASB Capital No. 2 Ltd ASBPB $0.690 3.80% Qtly 15/05/12 5.51% 1.00% 3.85% 3.25% A+ Buy
CBA Capital Australia^ CBAFA $0.930 3.59% Qtly 15/04/12 7.27% 0.75% 3.13% 2.75% AA- Buy
Origin Energy OCFHA $0.661 4.92% Semi 17/10/11 7.44% 1.50% 5.20% 4.25% BBB- Hold
Motor Trade Finance MTFHC $0.564 5.77% Qtly 30/09/11 10.23% 2.40% 9.15% 7.50% n/r Hold
Infratil IFTHA $0.620 4.97% Qtly 15/11/11 8.02% 1.50% 5.83% 5.50% n/r Hold
Sky Network TV^ SKTFA $0.910 4.06% Semi 16/10/11 7.49% 0.65% 2.90% 3.50% n/r Buy
Rabobank** RBOHA $0.820 4.21% Qtly 08/10/11 5.14% 0.76% 3.80% 2.85% AA- Buy
Quayside Holdings QHLHA $0.863 5.42% Qtly 12/03/14 6.28% 1.70% 2.79% 2.55% n/r Hold
Fonterra^^ FCGHA $0.831 5.30% Qtly 10/07/11 6.38% 1.80%^ 3.38% 3.45% A Sell
Yield to 1st
Other Resets reset date
BNZ Income Securities BISHA $1.068 9.89% Qtly 26/03/13 7.04% 2.20% 2.40% 3.25% A+ Hold
BNZ Income Securities 2 BNSPA $1.085 9.10% Qtly 26/06/14 6.67% 4.09% 3.76% 3.25% A+ Hold
ANZ National Bank ANBHA $1.066 9.66% Semi 18/04/13 6.62% 2.00% 2.43% 2.95% A+ Hold
Rabobank RCSHA $1.083 8.79% Qtly 18/06/14 5.71% 3.75% 3.32% 2.85% AA- Hold
Credit Agricole CASHA $0.905 10.03% Qtly 20/12/12 17.02% 1.90% 3.30% 4.65% BBB+ Hold
Kiwibank KCSHA $1.035 8.15% Qtly 04/05/15 7.35% 2.90% 3.00% 3.05% BBB Hold

* Running Yield = Current Coupon / Current Price. ^^ Reset at 1.80% over 1Y Government Bond but expressed as a margin over swap.
^ Yield to Maturity calculated using forward swap rates, margin is over the current 1Y swap rate. **Margin expressed to 2017 i.e. 10yrs from issue date (211bp if expressed as a margin to perpetuity)

Favoured Securities Credit Spread Considerations

CBAFA, SKTFA, ASBPA, ASBPB and RBOHA are our favoured An important factor to consider for many of the securities
exposures. The ranking and set maturity of CBAFA and listed in the table above is their perpetual nature. The current
SKTFA provide more protection from rising credit spreads market conditions demonstrate that perpetual securities are
relative to securities with deep subordination and perpetual vulnerable to capital losses as credit spreads increase (gains
terms. Receiving par at maturity provides a boost to income are also possible if spreads contract). The predetermined
received. reset margin becomes insufficient to compensate buyers for
taking credit risk unless the security is traded at a discount.
The financial securities (ASBPA, ASBPB, ANBHA and RBOHA)
are subject to Basel III and may provide a potential upside Our pricing model incorporates a long run swap rate of
for investors if the securities are deemed to no longer qualify 5.50%.
as capital.
Credit spreads globally appear to have bottomed out for the
Changes From Last Report time being after a significant rally (contraction) in 2009.
None The current margin for Tier 1 AA rated bank securities is
around 325bp.
Tax Changes
New issuance of Tier 1 debt securities are likely to be on hold
In the 2010 budget, the Government announced a reduction
until the Basel III proposals are ratified and the Australian
in the company tax rate from 30% to 28%. The reduction will
Prudential Regulation Authority (APRA) and the Reserve
be effective for any income earned on or after 1 April 2011.
Bank of New Zealand announce their intentions regarding
As a result of the change in the company tax rate, both the
the proposals and how they will be implemented.
amount of cash dividends received by holders of Preference
Shares and the imputation credits available to attach to those Bank Hybrid Fair Margins
dividends will change.
ASBPA, ASBPB, BISHA and BNSPA are tier 1 capital securities
Interest Rate Considerations for regulatory purposes. We have assessed the fair margins
on these securities as being 3.25%. This represents a
In its latest financial stability report, the RBNZ reiterated many
premium to senior and subordinated debt to compensate
of its previous comments regarding the current state of the
for the additional risk associated with perpetual, deeply
New Zealand economy. The Christchurch rebuild and stronger
subordinated securities with non-cumulative distributions.
activity in New Zealand’s external sector, all point to a gradual
recovery beginning in 2012. Our fair margins on RBOHA and RCSHA are lower than other
tier 1 capital securities to reflect Rabobank’s AAA credit
In the May 19 budget, Treasury forecast 10yr Government
rating. Our CASHA fair margin is higher than NZ bank tier 1
bond yields to increase by approximately 30bp over the next
capital securities to reflect that Credit Agricole has a lower
three years.
credit rating than NZ main banks and less reputational
Long term rates should also rise due to global fiscal deficits. risk at stake in New Zealand to discourage suspension of
There is going to be supply pressure which will push longer distributions.
term rates higher.
Our ANBHA fair margin is lower than ASB and BNZ tier 1
securities. As an upper tier 2 security, ANBHA has cumulative
distributions.

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 5
Our CBAFA fair margin is lower to reflect that cumulative
distributions, ordinary subordination and the defined
maturity date provide significantly more protection to
investors than the terms of tier 1 capital securities.
SECURITIES
ASBPA Perpetual Preference Shares
The issuer has converted to a Portfolio Listed Company under
the PIE tax regime. Therefore, ASBPA may be tax effective for
some investors.
ASBPA is reset in November at 1.30% over the 1 year swap
rate. The issuer can redeem this issue at $1.00 but is
unlikely to do so in current market conditions.
ASBPB Perpetual Preference Shares
ASBPB has come under price pressure due to the reset
margin being significantly lower than margins required by
the primary market. The issuer has converted to a Portfolio
Listed Company under the PIE tax regime. Therefore, ASBPB
may be tax effective for some investors.
ASBPB is reset in May at 1.00% over the 1 year swap rate.
The issuer can redeem this issue at $1.00 but is unlikely to
do so in current market conditions.
CBA Redeemable Preference Shares
This AA- rated security provides good value when compared
to other annual reset securities, after adjusting for risk. The
benefit of CBAFA is the ranking and defined maturity date.
Investors can benefit from a capital appreciation over the
next four years (redemption is at par).
Investors must be able to utilise the imputation credits.
Motor Trade Finance Perpetual Preference Shares
The credit crunch has had an impact on Motor Trade
Finance’s ability to sell their commercial paper (CP) through
their securitisation facility in Europe. MTF last issued CP in
September 2008.
This suggests that these perpetual preference shares are
unlikely to be called in the near future.
This unrated security provides a high yield given the current
discount. However, with only $40 million on issue, the lack of
liquidity and current funding issues stops us recommending
it as a buy.
Investors must be able to utilise the imputation credits.
Infratil Perpetual Bonds
IFTHA is still trading at a discount as the reset margin of
1.50% is very tight for an unrated perpetual bond from an
investment company.
Globally the ‘investment company’ sector has come under
pressure due to the credit crunch and the general level of
gearing this sector maintains.
Sky Network Television Bonds
Although unrated, we consider the issuer to be a sound
credit risk. The senior ranking and set redemption date in
2016 should provide protection from rising credit spreads.
The annual reset and margin being only 0.65% are both
downsides. However, due to the discount, investors benefit
from capital appreciation over the next five years (redemption
is at par). Early redemption is possible, but unlikely as this
provides cheap funding for the issuer.
Fixed Interest Weekly
Rabobank Capital Securities
RBOHA is the largest non government issue at $900m. The
peak in the interest rate cycle and further issuance (e.g.
BISHA & ANBHA) has placed selling pressure on RBOHA
along with other similar securities. As part of a review on
European banks, S&P downgraded RBOHA from AA to AA-.
Rabobank issued another Tier 1 security (RCSHA) in New
Zealand in 2009 at a margin of 3.75%.
Fonterra Perpetual Capital Notes
Fonterra Perpetual Capital Notes (FCGHA) were originally
issued as a capital management tool for Fonterra and a
mechanism whereby non farmers could invest in the dairy
sector. When a farmer sold a farm and was no longer a milk
supplier he/she would surrender shares in Fonterra and
receive capital notes they could sell in the market.
Fonterra once considered these notes an expensive form of
debt capital and repurchased and redeemed the majority of
the notes in 2006. Currently there is just over $102m on
issue however Fonterra holds 65% of these which means
liquidity is limited.
Quayside Holdings Perpetual Preference Shares
Quayside Holdings is a wholly owned subsidiary of the Bay
of Plenty Regional Council and was established to manage
Council investments. The underlying security is Quayside’s
55% stake in Port of Tauranga (POT). Since QHLHA was
issued the POT share price has traded at an average of
$6.64.
If Quayside does not pay a dividend when due, the council
is obligated (on an unsecured and unsubordinated basis) to
redeem the PPS at par plus accrued interest. The trading
margin is tight relative to alternatives.
Investors must be able to utilise the imputation credits.
BNZ Income Securities - BISHA
The second tranche of these securities (BNSPA) currently
represents much better value on an implied margin basis
than BISHA. BNZIS (the issuer) is a “PIE” making BISHA a tax
effective security for those investors with a higher marginal
tax rate.
BISHA is a perpetual security. However, BNZIS has a call
option available that allows BISHA to be called anytime after
five years. Investors who can utilise the tax efficient structure
are receiving an effective gross income return from an A+
rated security for the next four years.
BNZ Income Securities 2 - BNSPA
BNSPA is good value at current levels and the reset margin
for this security makes it highly likely it will be called in the
future. BNZIS (the issuer) is a “PIE” making BNSPA a tax
effective security for those investors with a higher marginal
tax rate.
BNSPA is a perpetual security. However, BNSPA has a call
option available that allows BNSPA to be called anytime after
five years. Investors who can utilise the tax efficient structure
are receiving an effective gross income return from an A+
rated security for the next four years.
Forsyth Barr Research
Tuesday, 7 June 2011 6
ANZ National Bank Perpetual Subordinated Bonds
ANBHA is a perpetual security; however, ANZ has a call
option available that allows ANBHA to be called after five
years (18/4/13), on the second call date (18/4/18) and on
any interest payment date following the second call date. If
the bonds are not called after the second call date then the
interest rate on ANBHA will reset quarterly as the sum of the
three month FRA rate, plus a margin of 3.00%. Under Basel
III, securities like ANBHA that have a step-up feature will no
longer be permitted. This step up increases the likelihood of
ANBHA being called.
With $835m on issue, ANBHA has reasonable liquidity.
Rabobank PIE Capital Securities
Rabo Capital Securities Ltd (the issuer) is a “PIE” making
RCSHA a tax effective security for those investors with a
higher marginal tax rate. Investors will only pay a maximum
30% tax rate.
RCSHA is a perpetual security with deep subordination and
non-cumulative distributions. The dividend rate will be reset
for another five years at 3.75% over swap. RCSHA has a call
option available that allows RCSHA to be redeemed after 10
years which seems highly likely given where new comparable
new issues are being priced.
Credit Agricole Deeply Subordinated Notes
CASHA was set at 1.90% over the five year swap and the
current coupon is fixed until 19 December 2012 where upon
the coupon will be reset for a further five years.
CASHA trades at a wider margin than equivalent securities
of NZ banks, reflecting some concern over the stability of
European banking systems. Credit Agricole S.A recorded a
FY10 net income of €1,263m (+12% pcp). The implications
of Basel III on tier 1 capital (currently 10.6% - Core Tier 1
capital 8.4%) continues to be unresolved. As part of a global
review on European banks, S&P downgraded CASHA from A
to A- and has subsequently been downgraded to BBB+ on
Credit Agricole S.A exposure to Greek debt.
Kiwi Income Securities
KCSHA issued $150m of perpetual, callable non-cumulative
preference shares which listed on the NZDX on 6 May 2010.
The dividend rate was set at 2.90% above the five year swap
rate. KCSHA is also a ‘PIE’ and rated BBB by S&P.
On the first call date of 4 May 2015 the margin and dividend
will be reset. KCSHA are issued by Kiwi Capital Securities
Ltd which is a wholly owned subsidiary of New Zealand Post,
effectively resulting in the proceeds being used as Tier One
capital for Kiwibank.

Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 7
Rate Sheet
S&P Maturity/ Yield/ Price Min
Credit Coupon Election Coupons Margin* per Holding
Rating Issuer Security Code % p.a. Date p.a. % p.a. $100 ($) Security Type
Corporate Bonds
n/r Quayside Holdings QHLHA^ 5.42% 13/03/14 4 3.68%* $87.50 5,000 Perpetual Preference Share reset every three years
A- Auckland Int'l Airport AIA050 6.83% 29/07/11 2 3.00% $102.91 10,000 Senior Bond
AA- ANZ ANB040 7.16% 15/09/11 2 4.53% $102.28 10,000 Subordinated Bond with official maturity of 15/09/16
AA BNZ BNZ070 7.50% 15/09/11 2 3.11% $102.81 10,000 Senior Bond
BB PGG Wrightson Fin PWF040 8.25% 8/10/11 4 6.30% $101.97 5,000 Senior Secured Bond, Crown guaranteed
AA- BNZ BNZ080 8.42% 15/06/12 2 4.80% $107.54 10,000 Subordinated Bond with official maturity of 15/06/17
AA- ANZ ANB050 7.60% 2/03/12 2 4.59% $104.10 10,000 Subordinated Bond with official maturity of 02/03/17
AA- ANZ ANB060 8.23% 23/07/12 2 4.84% $106.68 10,000 Subordinated Bond with official maturity of 23/7/17
AA BNZ BNZ060 7.50% 15/09/12 2 3.76% $106.25 10,000 Senior Bond
BBB- Works WKS020 9.65% 15/09/12 4 6.45% $106.03 3,000 Senior Bond
AA- ASB ABB020 8.77% 15/11/12 2 5.03% $105.61 10,000 Subordinated Bond with official maturity of 15/11/17
A Telecom TCN480 6.92% 22/03/13 2 4.95% $104.75 5,000 Senior Bond
BBB- MARAC Finance MAR010 10.50% 15/07/13 4 9.10% $104.16 5,000 Senior Secured Bond
AA Westpac WBC11137045 7.05% 28/11/13 2 4.48% $106.09 10,000 Senior Bond
AA- Auck City AKC010 6.42% 24/03/14 2 4.50% $106.26 10,000 Senior Bond
A- AMP AQN010 9.80% 15/05/14 4 5.00% $113.59 10,000 Subordinated Bond with official maturity of 01/04/19
BBB- Tower TWC010 8.50% 15/04/14 4 7.00% $105.06 10,000 Senior Bond
BBB Contact CEN010 8.00% 15/05/14 4 5.20% $108.04 10,000 Senior Bond
AA ASB ABB050 8.22% 17/09/14 2 5.05% $111.24 10,000 Senior Bond
BBB+ Vector VCT050 7.80% 15/10/14 2 5.15% $109.15 10,000 Senior Bond
n/r Trustpower TPW080 7.60% 15/12/14 4 5.75% $107.57 5,000 Senior Bond
A+ Fonterra FCG010 7.75% 10/03/15 4 5.10% $110.85 10,000 Senior Bond
AA- Auck City AKC020 6.28% 24/03/15 2 4.60% $107.04 10,000 Senior Bond
BBB+ Meridian Energy MEL010 7.15% 16/03/15 2 4.95% $109.06 10,000 Senior Bond
AA ANZ ANB200 6.60% 31/03/15 2 5.35% $105.46 10,000 Senior Bond
BBB Powerco PWC060 6.53% 29/06/15 4 5.90% $103.49 10,000 Credit Wrapped Bond
AA ANZ ANB300 6.51% 13/07/15 2 5.37% $106.74 10,000 Senior Bond
AA BNZ BNZ300 6.17% 13/08/15 2 5.40% $104.75 10,000 Senior Bond
A+ Fonterra FCG020 6.83% 4/03/16 2 5.30% $108.07 10,000 Senior Bond
n/r Australasian News and Media APM010 7.86% 15/03/16 4 7.90% $101.64 5,000 Senior Bond
A Telecom TCN490 7.04% 22/03/16 2 5.86% $106.33 10,000 Senior Bond
BBB+ Credit Agricole CASHA^ 10.03% 19/12/17 4 4.70%* $90.70 5,000 Perpetual Deeply Subordinated Notes reset every five years
A+ BNZ Income Securities BISHA^ 9.89% 31/03/18 4 2.48%* $107.25 5,000 Perpetual non-cumulative shares reset every five years PIE
A+ ANZ Callable Bonds ANBHA^^ 9.66% 18/04/13 2 6.62%* $106.80 10,000 Perpetual Callable subordinated bonds,reset 2013,step-up2018
BBB Kiwibank KCSHA^ 8.15% 4/05/15 4 2.70%* $104.00 5,000 Perpetual non-cumulative shares reset every five years PIE
AA- Rabobank Nederland RCSHA^ 8.79% 15/06/19 4 2.95%* $109.50 5,000 Perpetual non-cumulative shares reset every five years PIE
A+ BNZ Income Securities BNSPA^ 9.10% 28/06/19 4 3.27%* $109.00 5,000 Perpetual non-cumulative shares reset every five years PIE
AA Transpower TRA010 6.95% 16/06/20 2 6.01% $109.79 10,000 Senior Bond
Capital Notes/Bonds + Redeemable Prefs
n/r Works WKS010 9.80% 15/06/12 4 23.00% $90.68 5,000 Redeemable Preference Shares - imputed dividend paid
n/r Nuplex NPX020 9.30% 15/09/12 4 7.20% $104.62 5,000 Capital note
n/r Guinness Peat Group GFN030 8.30% 15/11/12 4 7.50% $101.58 5,000 Capital note
n/r Fletcher Building Finance FBI040 8.90% 15/03/13 2 6.80% $105.43 5,000 Capital note
n/r Guinness Peat Group GFN020 9.00% 15/12/13 4 7.50% $105.45 5,000 Capital note
n/r Infratil IFT070 8.50% 15/11/15 4 7.75% $103.31 5,000 Capital note
BB- Genesis GPLFA^^^ 8.50% 15/07/16 4 7.65% $102.80 5,000 Capital note
Annual Reset Securities
n/r Motor Trade Finances MTFHC 5.77% Perpetual 4 7.31%* $60.00 5,000 Perpetual PS-Dividend reset annually at 240bp over 1 yr swap
A Fonterra FCGHA 5.30% Perpetual 4 2.05%* $84.00 5,000 Perpetual Cap- Note reset annually at 180bp over 1 yr Govt
A+ ASB ASBPA 4.78% Perpetual 4 3.74%* $73.20 5,000 Perpetual PS-Dividend reset annually at 130bp over 1 yr swap PIE
A+ ASB ASBPB 3.80% Perpetual 4 3.76%* $69.00 5,000 Perpetual PS-Dividend reset annually at 100bp over 1 yr swap PIE
n/r Infratil IFTHA 4.97% Perpetual 4 6.70%* $62.00 5,000 Perpetual Bond reset annually at 150bp over 1 year swap
AA- Rabobank Nederland RBOHA^ 4.21% Perpetual 4 3.60%* $82.00 5,000 Perpetual PS-Annually reset security at 76bp over 1 year swap
BBB- Origin Energy OCFHA 4.92% Perpetual 2 5.98%* $66.10 5,000 Perpetual PS-Dividend reset annualy at 150bp over 1 yr swap
AA- CBA CBAFA 3.59% 15/04/15 4 3.00%* $93.00 5,000 Redeemable Pref Share reset annually at 75bp over 1 yr swap
n/r Sky TV SKTFA 4.06% 16/10/16 2 3.58%* $91.00 5,000 Unsec, Unsubord bond reset annually at 65bp over 1 yr swap

^RBOHA & RCSHA & BISHA & BNSPA & QHLHA & CASHA valued as a perpetual. ^^ Expressed as a yield to reset 2013.

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Forsyth Barr Research

Fixed Interest Weekly Tuesday, 7 June 2011 8