2011-06-07 Forsyth Barr NZ Corporate Credit Weekly | Preferred Stock | Securities (Finance)

Tuesday, 7 June 2011

Fixed Interest Weekly
Market Update
The unpalatable NZD continues to dominate most local headlines accompanied by the release of the Reserve Banks second Monetary Policy Statement for 2011. Globally the Greek story just seems to be getting worse and worse with even the authorities now dubious about salvation. US Yields on US Treasuries edged higher last week after the unemployment rate increased to 9.1% after disappointing May jobs data of just 54,000 (165k expected). The spread between corporate bonds and Treasuries continues to widen as corporate bonds lose favour with investors due to a stalling US recovery. The safety of US Treasuries remains with yields at near 2011 lows and a further US$66bn is to be auctioned this week. Financial analysts have begun to cut back their growth forecast for the US 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 coupled with softer than expected domestic data indicating lower growth. US Bond movements last week: 2yr -6bp, 10yr -8bp, 30yr +2bp Europe The risk of a default by Greece was increased to 50% by Moody’s who downgraded by the embattled country to Caa1 (CCC+ in S&P terms). A second bailout package looks set to be put in place as Greece is unlikely to be able to venture back into the capital markets as their borrowing costs are uneconomical (2yr yield 23%) delivering bond holders a 21% loss over the last year. Recent reports put Greece’s debt at 157% of GDP which is the highest in European history. German banks look to be the biggest losers out of a default with nearly $23bn in Greek sovereign debt, well ahead of France’s $15bn. The two European heavyweights will no doubt be heavily involved in any restructure talks. Euro Bond weekly movements: UK 10yr n/c, Spain -14bp, Germany +3bp Australia The Reserve Bank of Australia left interest rates unchanged at 4.75% today with most forecasting a late 2011 rate hike. The dilemma (similar to our own Central Bank) is the surging currency. The AUD has risen 31% over the last year as investors expect a rate rise to 5.0% is definitely on the cards as the economy continues to outperform all other developed nations. 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 with retail sales advancing 1.1% in April - its biggest rise since Nov 2009. Chart 1: NZ & Australian Cash Rate Expectations
5.0 4.5 4.0 3.5 3.0 2.5 2.0
RBNZ RBA Forecast 2.95

Key Upcoming Events
NZ: Wed 8 June, NZ real building work in place Thu 9 June, RBNZ Policy announcement Fri 10 June, May Card spending Fri 10 June, REINZ house price Index AUS: Tue 7 June, RBA policy announcement Wed 8 June, April housing finance Thu 9 June, May unemployment rate US: Wed 8 June, Fed Beige Book Wed 8 June, Fed Speaks EUR: Thu 9 June, ECB Rate Decision UK: Thu 9 June, BoE Rate Decision

Key Interest Rates
Rates at
7June11

Previous Rates
1 Week 3 Month 12Month 2.50% 2.60% 2.69% 2.89% 3.43% 3.86% 4.18% 4.44% 4.83% 5.17% 2.61% 3.27% 4.11% 4.73% 4.92% 5.11% 4.98% 5.21% 3.06% 3.19% 1.17% 3.02% 2.50% 2.62% 2.65% 2.67% 3.16% 3.62% 3.95% 4.23% 4.65% 5.05% 2.56% 3.34% 4.21% 4.96% 5.23% 5.46% 4.86% 5.39% 3.31% 3.43% 1.22% 3.13% 2.50% 2.80% 3.00% 3.66% 4.28% 4.65% 4.92% 5.11% 5.36% 5.62% 3.69% 4.36% 4.84% 5.27% 5.49% 4.89% 5.34% 3.19% 3.47% 1.23% 2.52%

NZ Short Term Rates
OCR 30 Day Bank Bills 90 Day Bank Bills 2.50% 2.61% 2.66% 2.88% 3.37% 3.79% 4.14% 4.42% 4.81% 5.17% 2.60% 3.25% 4.08% 4.71% 4.91% 5.11% 5.03% 5.25% 3.00% 3.16% 1.15% 3.03%

NZ Long Term Rates

1 Year Swap 2 Year Swap 3 Year Swap 4 Year Swap 5 Year Swap 7 Year Swap 10 Year Swap 2011 Government Bond 2013 Government Bond 2015 Government Bond 2017 Government Bond 2019 Government Bond 2021 Government Bond

International Rates

Aus 90 Day Bank Bills Aus 10 Year Gov Bonds US 10 Year Treasuries UK 10 Year Bonds Japan 10 Year Treasuries German 10 Year Bonds

Portfolio Yields & Duration
Conservative: Balanced: High Yield: 5.85% Duration: 6.85% Duration: 7.95% Duration: 3.34yrs 3.18yrs 2.36yrs

%
4.95

Contents
Charts & Tables Corporate News Economic and Central Bank News Example Portfolios Reset Securities Analysis Rate Sheet 2 3 3 4 5-7 8

Source: Forbar, Iress

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.

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

Forsyth Barr Research Tuesday, 7 June 2011

1

Charts and Tables
NZ 5yr Corporate Credit Spreads (Chart 2)
Nov-10 Dec-10 Jan-11 AA rated 1.46% A rated 1.78% 1.47% 1.69% 1.50% 1.60% Feb-11 Mar-11 Apr-11 May-11 1.44% 1.57% 1.53% 1.63% 1.36% 1.50% 1.31% 1.51% Last 1.24% 1.57%

Chart 2: NZ 5yr Corporate Credit Spreads
2.0 1.9 1.8 1.7 1.6 1.5 1.4 %

NZ v Australia: Cash Rate
Jun-05 NZ OCR Aus OCR Difference 6.75% 5.50% 1.25% Jun-06 7.25% 5.75% 1.50% Jun-07 7.75% 6.25% 1.50% Jun-08 8.25% 7.25% 1.00% Jun-09 2.50% 3.00% -0.50% Jun-10 2.50% 4.50% -2.00% Last 2.50% 4.75% -2.25%

1.3 1.2 1.1 1.0 AA A

Source: Bloomberg, Forsyth Barr

NZ Swap Spread - bp (Swap to Govt) (Chart 3)
Jun-04 Jun-05 2Yr 5Yr 51bp 53bp 80bp 76bp 82bp 85bp Jun-06 81bp 87bp 92bp 90bp Jun-07 96bp 104bp 114bp 112bp Jun-08 101bp 106bp 105bp 103bp Jun-09 11bp 05bp -02bp 14bp Jun-10 34bp 23bp 16bp 13bp Last 07bp 07bp 04bp 07bp

Chart 3: New Zealand Swap Spread (2Yr)
160 130 100 70 40 bp

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

7Yr 50bp 10Yr 53bp

NZ Historical Interest Rates
Jun-05 OCR 90 Day BB 1 Year Swap 5 Year Swap 6.75% 7.03% 6.92% 6.49% Jun-06 7.25% 7.48% 7.43% 6.81% Jun-07 8.00% 8.38% 8.46% 8.07% Jun-08 8.25% 8.69% 8.27% 7.49% Jun-09 2.50% 2.72% 2.94% 5.22% Jun-10 2.50% 3.00% 3.73% 5.22% Last 2.50% 2.66% 2.87% 4.41%

10 -20

Source: Bloomberg, Forsyth Barr

Secondary Market Yields (Chart 4)
Issue WKS020 TPW020 GFN030 PIN020 MAR010 WIA010 TWC010 FBI050 AIA100 FCG010 ANB300 AIA070 IFT070 GFZ010 GEF010 MEL020 AKC050 TPW100 Maturity 15/09/2012 15/09/2012 15/11/2012 30/11/2012 15/07/2013 15/11/2013 15/04/2014 15/05/2014 27/11/2014 10/03/2015 13/07/2015 7/11/2015 15/11/2015 16/05/2016 15/10/2016 16/03/2017 29/09/2017 15/12/2017 Coupon 9.65% 8.50% 8.30% 9.00% 10.50% 7.50% 8.50% 9.00% 7.00% 7.75% 6.51% 7.25% 8.50% 7.54% 7.35% 7.55% 6.52% 7.10% Rating Term (Yrs) Yield BBBn/r n/r n/r BBBBBB+ BBBn/r AA+ AA An/r n/r n/r BBBAA n/r 1.3yrs 1.3yrs 1.4yrs 2.1yrs 2.4yrs 2.9yrs 2.9yrs 3.5yrs 3.8yrs 4.1yrs 4.4yrs 4.4yrs 4.9yrs 5.4yrs 5.8yrs 6.3yrs 6.5yrs 6.60% 6.35% 7.65% 9.20% 5.95% 7.00% 7.10% 5.25% 5.10% 5.37% 5.75% 8.00% 6.75% 6.50% 6.20% 5.65% 6.80% Margin bp) 358bp 333bp 435bp 698bp 578bp 238bp 325bp 332bp 128bp 104bp 120bp 149bp 374bp 235bp 201bp 163bp 097bp 208bp

Chart 4: Secondary Trading Margins
690bp
Margin (basis points over relevant swap rate)

640bp 590bp 540bp 490bp 440bp 390bp 340bp 290bp 240bp 190bp 140bp 090bp 1 2 TPW020 GFN030 WKS020

Jun-04

Dec-04

Jun-05

PIN020 MAR010

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

1.5yrs 10.10%

TWC010 FBI050

IFT070 GFZ010 GEF010 TPW100

WIA010

AIA100 AIA070 FCG010 3 4 Term (years) ANB300 5

MEL020 AKC050 6 7

Source: Iress, Forsyth Barr

Chart 5: US Treasury Bond (10yr)
1.4 1.2 1.0 0.8 %

US Treasury Yields (Chart 5)
Nov-10 Dec-10 2Yr 10Yr 30Yr 0.37% 2.53% 4.12% 0.53% 3.13% 4.37% Jan-11 0.59% 3.32% 4.48% Feb-11 Mar-11 Apr-11 May-11 0.76% 3.63% 4.70% 0.70% 3.51% 4.62% 0.83% 3.55% 4.59% 0.55% 3.15% 4.29% Last 0.42% 3.00% 4.26%

0.6 0.4 0.2 0.0

Source: Bloomberg, Forsyth Barr

Jun-09

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Fixed Interest Weekly

Forsyth Barr Research Tuesday, 7 June 2011

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Jun-11

NZ Economics
The Reserve Bank of New Zealand (RBNZ) will release its Monetary Policy Statement (MPS) on Thursday with no change expected to the Official Cash Rate (OCR). Whilst no actual movement in the OCR is currently priced in, questions are now being asked regarding what the RBNZ intends to do about rising inflation. There is no doubt the RBNZ are faced with a struggling local economy accompanied by several offshore uncertainties (namely Europe), however inflation appears to be rising and the RBNZ may be forced to play catch up at some stage. The New Zealand Institute of Economic Research has said the RBNZ will need to raise the OCR by 150bp next year to head off the inflation risks. The first interest rate hike in now firmly priced in for 8 December. Chart 6: High Inflation leading to negative real returns
% 16 14 12 10 8 6 4 2 0 -2 CPI Y/Y% 90 Day Bank Bill (cash) Real Yield (90 Day BB less Inflation)

Corporate & Economic News
The NZX released its trading figures for May. There are 110 listed debt securities (-7.6% YoY) with the number of trades also down by 11.1% or $115m. Kiwibank is utilising its new European Commercial Paper programme with its latest General Disclosure Statement showing it had borrowed NZD$927.275m. With the ‘big four’ banks still competing for retail funds, the smaller banks such as Kiwibank have had to seek alternative funding. Downer EDI (DOW) has had a further setback in its Waratah train project. After testing the first train, Railcorp refused to accept the train citing some further work was required. DOW has stated that the work needed will be done by the end of the week. Heartland New Zealand Limited is now the new name for Building Society Holdings Limited, and PGC shareholders have now been allocated their shares. The NZX ticker has changed from BSH to HNZ. The ticker for the MARAC bond remains MAR010. NZ Post announced that it will not meet its profit guidance for the year ending 30 June 2011. The Christchurch earthquake and the overall weakness in the economy has seen guidance fall from $60.8m to $35-40m. Struggling NZF Group is so confident of a new business partner it has begun lending again. Negotiations are nearly complete and Westpac who has been privy to these negotiations, has agreed to renew the current Warehouse Facility of $225m until 18 October 2012 on similar terms and conditions. Dorchester Pacific reported a $14.1 million annual net profit but that was entirely due to the $22.4m benefit from last year’s debt-for-equity swap rescue. Dorchester is forecasting it will be just ahead of the break-even prospectus forecast for the current year. The ANZ Investment Grade Bond Index gained 26.51pts over the month of May. Two new bonds were added to the Index with Transpower and Rabobank both issuing new bonds in May.

Source: RBNZ, Forbar

Governor Bollard does have a bit more time than in past cycles as the majority of homeowners are now on floating rate mortgages. Any move in interest rates from Bollard will now immediately impact on borrowers which should translate into a much quicker response to monetary policy. The MPS due on Thursday is likely to be more concise than the March MPS with more data available to quantify the impact of the Christchurch earthquake and the budget response from the Government. Chart 7: Fixed v Floating Mortgages
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Floating Fixed

Source: RBNZ, Forbar

Fixed Interest Weekly

Mar. 2011 Mar. 2010 Mar. 2009 Mar. 2008 Mar. 2007 Mar. 2006 Mar. 2005 Mar. 2004 Mar. 2003 Mar. 2002 Mar. 2001 Mar. 2000 Mar. 1999 Mar. 1998 Mar. 1997 Mar. 1996 Mar. 1995 Mar. 1994 Mar. 1993 Mar. 1992 Mar. 1991 Mar. 1990 Mar. 1989 Mar. 1988

In the next month or so...
ASB announced it will redeem its $200m subordinated bond on 15 June 2011. The 5+5 issues as they are known will no longer be permitted under Basel III. Fonterra will be reset the coupon on its perpetual capital notes (FCGHA) on 10 July 2011 at 1.80% over the 1yr Government Bond rate.

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

Oct-04

Apr-05

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

Forsyth Barr Research Tuesday, 7 June 2011

3

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

$1,162.50 Mar/Jun/Sep/Dec

^ Dividends are imputed with dividends reset annually at 0.75% over 1 year swap rate. Matures in 2015. Forecast 1yr swap rates assumed.

Balanced
Security PGG Wrightson Fin (Crown gtd) ANZ Tower Capital^^ CBA Redeemable Pref Shares^ Genesis Energy Sky Network Television^^^ Auckland Council Total For Portfolio Code PWF040 ANBHA TWC010 CBAFA GPLFA SKTFA AKC050 Credit Rating BB A+ BBBAABBn/r AA Maturity 8/10/11 18/04/13 15/04/14 15/04/15 15/07/16 16/10/16 29/09/17 Coupon 8.25% 9.66% 8.50% 3.59% 8.50% 4.06% 6.52% Yield Years to Price Maturity 6.50% 0.32 $1.020 6.62% 7.00% 7.27% 7.69% 7.49% 5.60% 6.85% 1.85 $1.066 2.84 $1.052 3.84 $0.930 5.09 $1.026 5.34 $0.910 6.30 $1.061 Face Value $15,000.00 $15,000.00 $10,000.00 $15,000.00 $15,000.00 $15,000.00 $15,000.00 $100,000 Cost $15,303.31 $15,990.00 $10,518.40 $13,950.00 $15,390.00 $13,650.00 $15,921.50 $100,723 Income $1,237.50 $1,449.00 $850.00 $538.50 $1,275.00 $609.00 $978.00 $6,937 Interest payments Jan/Apr/Jul/Oct Apr/Oct Jan/Apr/Jul/Oct Jan/Apr/Jul/Oct Jan/Apr/Jul/Oct Apr/Oct Mar/Sep

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

15/07/13 10.50%

^Coupon rate reset annually at 0.65% over 1 year swap rate, final maturity in 2016 Forecast 1yr swap rates assumed.

Maturity Profile - Conservative
$80,000 $70,000 $60,000

Maturity Profile - High Yield
$35,000 $35,000 $30,000 $30,000

Face Value

$50,000 $40,000 $30,000 $20,000 $10,000 $2011 2012 2013 2014 2015 2016 2017

Face Value Face Value

$25,000 $25,000 $20,000 $20,000 $15,000 $15,000 $10,000 $10,000 $5,000 $5,000 $$2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017

Year of Maturity

Maturity Profile - Balanced
$35,000 $30,000

Year of Maturity Year of Maturity

Portfolio Summary
Face Value Cost Estimated Income (gross p.a.) Average Coupon Rate Average Yield Average Duration (years)
2011 2012 2013 2014 2015 2016 2017

Face Value

$25,000 $20,000 $15,000 $10,000 $5,000 $-

Conservative $100,000.00 $103,841.06 $6,542.75 6.58% 5.85% 3.34

Balanced $100,000.00 $100,723.20 $6,937.00 7.01% 6.85% 3.18

High Yield $100,000.00 $101,305.73 $8,468.00 8.52% 7.95% 2.36

Year of Maturity

Fixed Interest Weekly

Forsyth Barr Research Tuesday, 7 June 2011

4

Reset Securities Analysis
Summary
Security Annual Resets ASB Capital No. 1 Ltd ASB Capital No. 2 Ltd CBA Capital Australia^ Origin Energy Motor Trade Finance Infratil Sky Network TV^ Rabobank** Quayside Holdings Fonterra^^ Other Resets BNZ Income Securities BNZ Income Securities 2 ANZ National Bank Rabobank Credit Agricole Kiwibank Price Code 7June11 ASBPA ASBPB CBAFA OCFHA MTFHC IFTHA SKTFA RBOHA QHLHA FCGHA $0.730 $0.690 $0.930 $0.661 $0.564 $0.620 $0.910 $0.820 $0.863 $0.831 Coupon 4.75% 3.80% 3.59% 4.92% 5.77% 4.97% 4.06% 4.21% 5.42% 5.30% Freq. Qtly Qtly Qtly Semi Qtly Qtly Semi Qtly Qtly Qtly Next Reset Running Yield* 15/11/11 15/05/12 15/04/12 17/10/11 30/09/11 15/11/11 16/10/11 08/10/11 12/03/14 10/07/11 6.51% 5.51% 7.27% 7.44% 10.23% 8.02% 7.49% 5.14% 6.28% 6.38% Yield to 1st reset date 7.04% 6.67% 6.62% 5.71% 17.02% 7.35% Reset Margin 1.30% 1.00% 0.75% 1.50% 2.40% 1.50% 0.65% 0.76% 1.70% 1.80%^ Current Margin 3.86% 3.85% 3.13% 5.20% 9.15% 5.83% 2.90% 3.80% 2.79% 3.38% Fair Security Margin Rating 3.25% 3.25% 2.75% 4.25% 7.50% 5.50% 3.50% 2.85% 2.55% 3.45% A+ A+ AABBBn/r n/r n/r AAn/r A View Buy Buy Buy Hold Hold Hold Buy Buy Hold Sell

BISHA BNSPA ANBHA RCSHA CASHA KCSHA

$1.068 $1.085 $1.066 $1.083 $0.905 $1.035

9.89% 9.10% 9.66% 8.79% 10.03% 8.15%

Qtly Qtly Semi Qtly Qtly Qtly

26/03/13 26/06/14 18/04/13 18/06/14 20/12/12 04/05/15

2.20% 4.09% 2.00% 3.75% 1.90% 2.90%

2.40% 3.76% 2.43% 3.32% 3.30% 3.00%

3.25% 3.25% 2.95% 2.85% 4.65% 3.05%

A+ A+ A+ AABBB+ BBB

Hold Hold Hold Hold Hold 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 CBAFA, SKTFA, ASBPA, ASBPB and RBOHA are our favoured exposures. The ranking and set maturity of CBAFA and SKTFA provide more protection from rising credit spreads relative to securities with deep subordination and perpetual terms. Receiving par at maturity provides a boost to income received. The financial securities (ASBPA, ASBPB, ANBHA and RBOHA) are subject to Basel III and may provide a potential upside for investors if the securities are deemed to no longer qualify as capital. Changes From Last Report None Tax Changes In the 2010 budget, the Government announced a reduction in the company tax rate from 30% to 28%. The reduction will be effective for any income earned on or after 1 April 2011. As a result of the change in the company tax rate, both the amount of cash dividends received by holders of Preference Shares and the imputation credits available to attach to those dividends will change. Interest Rate Considerations In its latest financial stability report, the RBNZ reiterated many of its previous comments regarding the current state of the New Zealand economy. The Christchurch rebuild and stronger activity in New Zealand’s external sector, all point to a gradual recovery beginning in 2012. In the May 19 budget, Treasury forecast 10yr Government bond yields to increase by approximately 30bp over the next three years. Long term rates should also rise due to global fiscal deficits. There is going to be supply pressure which will push longer term rates higher.

Credit Spread Considerations An important factor to consider for many of the securities listed in the table above is their perpetual nature. The current market conditions demonstrate that perpetual securities are vulnerable to capital losses as credit spreads increase (gains are also possible if spreads contract). The predetermined reset margin becomes insufficient to compensate buyers for taking credit risk unless the security is traded at a discount. Our pricing model incorporates a long run swap rate of 5.50%. Credit spreads globally appear to have bottomed out for the time being after a significant rally (contraction) in 2009. The current margin for Tier 1 AA rated bank securities is around 325bp. New issuance of Tier 1 debt securities are likely to be on hold until the Basel III proposals are ratified and the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of New Zealand announce their intentions regarding the proposals and how they will be implemented. Bank Hybrid Fair Margins ASBPA, ASBPB, BISHA and BNSPA are tier 1 capital securities for regulatory purposes. We have assessed the fair margins on these securities as being 3.25%. This represents a premium to senior and subordinated debt to compensate for the additional risk associated with perpetual, deeply subordinated securities with non-cumulative distributions. Our fair margins on RBOHA and RCSHA are lower than other tier 1 capital securities to reflect Rabobank’s AAA credit rating. Our CASHA fair margin is higher than NZ bank tier 1 capital securities to reflect that Credit Agricole has a lower credit rating than NZ main banks and less reputational risk at stake in New Zealand to discourage suspension of distributions. 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 Tuesday, 7 June 2011

Fixed Interest Weekly

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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.

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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.

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Forsyth Barr Research Tuesday, 7 June 2011

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Rate Sheet
S&P Credit Rating
n/r AAAAA BB AAAAAAAA BBBAAA BBBAA AAABBBBBB AA BBB+ n/r A+ AABBB+ AA BBB AA AA A+ n/r A BBB+ A+ A+ BBB AAA+ AA n/r n/r n/r n/r n/r n/r BB-

Issuer

Maturity/ Yield/ Coupon Election Coupons Margin* Security Code % p.a. Date p.a. % p.a.
5.42% 6.83% 7.16% 7.50% 8.25% 8.42% 7.60% 8.23% 7.50% 9.65% 8.77% 6.92% 10.50% 7.05% 6.42% 9.80% 8.50% 8.00% 8.22% 7.80% 7.60% 7.75% 6.28% 7.15% 6.60% 6.53% 6.51% 6.17% 6.83% 7.86% 7.04% 10.03% 9.89% 9.66% 8.15% 8.79% 9.10% 6.95% 9.80% 9.30% 8.30% 8.90% 9.00% 8.50% 8.50% 5.77% 5.30% 4.78% 3.80% 4.97% 4.21% 4.92% 3.59% 4.06% 13/03/14 29/07/11 15/09/11 15/09/11 8/10/11 15/06/12 2/03/12 23/07/12 15/09/12 15/09/12 15/11/12 22/03/13 15/07/13 28/11/13 24/03/14 15/05/14 15/04/14 15/05/14 17/09/14 15/10/14 15/12/14 10/03/15 24/03/15 16/03/15 31/03/15 29/06/15 13/07/15 13/08/15 4/03/16 15/03/16 22/03/16 19/12/17 31/03/18 18/04/13 4/05/15 15/06/19 28/06/19 16/06/20 15/06/12 15/09/12 15/11/12 15/03/13 15/12/13 15/11/15 15/07/16 Perpetual Perpetual Perpetual Perpetual Perpetual Perpetual Perpetual 15/04/15 16/10/16 4 2 2 2 4 2 2 2 2 4 2 2 4 2 2 4 4 4 2 2 4 4 2 2 2 4 2 2 2 4 2 4 4 2 4 4 4 2 4 4 4 2 4 4 4 4 4 4 4 4 4 2 4 2 3.68%* 3.00% 4.53% 3.11% 6.30% 4.80% 4.59% 4.84% 3.76% 6.45% 5.03% 4.95% 9.10% 4.48% 4.50% 5.00% 7.00% 5.20% 5.05% 5.15% 5.75% 5.10% 4.60% 4.95% 5.35% 5.90% 5.37% 5.40% 5.30% 7.90% 5.86% 4.70%* 2.48%* 6.62%* 2.70%* 2.95%* 3.27%* 6.01% 23.00% 7.20% 7.50% 6.80% 7.50% 7.75% 7.65% 7.31%* 2.05%* 3.74%* 3.76%* 6.70%* 3.60%* 5.98%* 3.00%* 3.58%*

Price Min per Holding $100 ($) Security Type
$87.50 $102.91 $102.28 $102.81 $101.97 $107.54 $104.10 $106.68 $106.25 $106.03 $105.61 $104.75 $104.16 $106.09 $106.26 $113.59 $105.06 $108.04 $111.24 $109.15 $107.57 $110.85 $107.04 $109.06 $105.46 $103.49 $106.74 $104.75 $108.07 $101.64 $106.33 $90.70 $107.25 $106.80 $104.00 $109.50 $109.00 $109.79 $90.68 $104.62 $101.58 $105.43 $105.45 $103.31 $102.80 $60.00 $84.00 $73.20 $69.00 $62.00 $82.00 $66.10 $93.00 $91.00 5,000 10,000 10,000 10,000 5,000 10,000 10,000 10,000 10,000 3,000 10,000 5,000 5,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 5,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 5,000 10,000 5,000 5,000 10,000 5,000 5,000 5,000 10,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 Perpetual Preference Share reset every three years Senior Bond Subordinated Bond with official maturity of 15/09/16 Senior Bond Senior Secured Bond, Crown guaranteed Subordinated Bond with official maturity of 15/06/17 Subordinated Bond with official maturity of 02/03/17 Subordinated Bond with official maturity of 23/7/17 Senior Bond Senior Bond Subordinated Bond with official maturity of 15/11/17 Senior Bond Senior Secured Bond Senior Bond Senior Bond Subordinated Bond with official maturity of 01/04/19 Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Credit Wrapped Bond Senior Bond Senior Bond Senior Bond Senior Bond Senior Bond Perpetual Deeply Subordinated Notes reset every five years Perpetual non-cumulative shares reset every five years PIE Perpetual Callable subordinated bonds,reset 2013,step-up2018 Perpetual non-cumulative shares reset every five years PIE Perpetual non-cumulative shares reset every five years PIE Perpetual non-cumulative shares reset every five years PIE Senior Bond Redeemable Preference Shares - imputed dividend paid Capital note Capital note Capital note Capital note Capital note Capital note Perpetual PS-Dividend reset annually at 240bp over 1 yr swap Perpetual Cap- Note reset annually at 180bp over 1 yr Govt Perpetual PS-Dividend reset annually at 130bp over 1 yr swap PIE Perpetual PS-Dividend reset annually at 100bp over 1 yr swap PIE Perpetual Bond reset annually at 150bp over 1 year swap Perpetual PS-Annually reset security at 76bp over 1 year swap Perpetual PS-Dividend reset annualy at 150bp over 1 yr swap Redeemable Pref Share reset annually at 75bp over 1 yr swap Unsec, Unsubord bond reset annually at 65bp over 1 yr swap

Corporate Bonds

Quayside Holdings QHLHA^ Auckland Int'l Airport AIA050 ANZ ANB040 BNZ BNZ070 PGG Wrightson Fin PWF040 BNZ BNZ080 ANZ ANB050 ANZ ANB060 BNZ BNZ060 Works WKS020 ASB ABB020 Telecom TCN480 MARAC Finance MAR010 Westpac WBC11137045 Auck City AKC010 AMP AQN010 Tower TWC010 Contact CEN010 ASB ABB050 Vector VCT050 Trustpower TPW080 Fonterra FCG010 Auck City AKC020 Meridian Energy MEL010 ANZ ANB200 Powerco PWC060 ANZ ANB300 BNZ BNZ300 Fonterra FCG020 Australasian News and Media APM010 Telecom TCN490 Credit Agricole CASHA^ BNZ Income Securities BISHA^ ANZ Callable Bonds ANBHA^^ Kiwibank KCSHA^ Rabobank Nederland RCSHA^ BNZ Income Securities BNSPA^ Transpower TRA010 Works Nuplex Guinness Peat Group Fletcher Building Finance Guinness Peat Group Infratil Genesis Motor Trade Finances Fonterra ASB ASB Infratil Rabobank Nederland Origin Energy CBA Sky TV WKS010 NPX020 GFN030 FBI040 GFN020 IFT070 GPLFA^^^ MTFHC FCGHA ASBPA ASBPB IFTHA RBOHA^ OCFHA CBAFA SKTFA

Capital Notes/Bonds + Redeemable Prefs

Annual Reset Securities
n/r A A+ A+ n/r AABBBAAn/r

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

Disclosure: The comments in this publication are for general information purposes only. This publication is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) may own or have an interest in securities or other products referred to in this publication, and may be directors or officers of, or provide investment banking services to, the issuer of those securities or products, and may receive fees for acting in any such capacity in relation to that issuer. Further, they may buy or sell securities as principal or agent, and as such may undertake transactions that are not consistent with any recommendations contained in this publication. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) confirms no inducement has been accepted from the researched/recommended entity, whether pecuniary or otherwise, in connection with making any recommendation contained in this publication or on our website. Analyst Disclosure Statement: In preparing this publication the analyst(s) may or may not have a threshold interest in the securities mentioned in this publication. A threshold interest is defined as being a holder of more than $50,000 or 1% of the securities on issue, whichever is the lesser. In preparing this publication non-financial assistance may have been provided by the entity being researched. A disclosure statement is available on request and is free of charge. Disclaimer: This publication has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr Limited. Accordingly, Forsyth Barr Limited: (a) does not make any representation or warranty (express or implied) that the information is accurate, complete or current; and (b) excludes and disclaims (to the maximum extent permitted by law) any liability for any loss which may be incurred by any person as a result of that information being inaccurate or incomplete in any way or for any reason. The information, analyses and recommendations contained in this publication are confidential to the intended recipients and are statements of opinion only. They have been prepared for general information purposes and whilst every care has been taken in their preparation, no warranty or representation is given (express or implied) as to their accuracy or completeness. Nothing in this publication should be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from doing so or engaging in any other transaction. This publication should not be used as a substitute for specific advice. This publication is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore prior to acting on any information, analysis or recommendation contained in this publication, you should seek advice from your usual Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) will not be liable for any loss whatsoever suffered by any person relying upon any such information, analysis or recommendation. This publication is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations.

Fixed Interest Weekly

Forsyth Barr Research Tuesday, 7 June 2011

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