Investors queuing to place funds in local debt market

By ELLEN READ markets writer

The local sharemarket may be less than stellar, but another local market is buzzing.

Unimpressive bank deposit rates and a dearth of major new equity offerings mean New Zealand retail investors are queuing to pour money into the ever-increasing number of corporate fixed-interest investments.

Companies have this year issued around $900 million of debt securities. Add the banks' senior and subordinated bond issues and the tally tops $1.5 billion.

The local debt market falls into two categories - Crown and non-Crown. Crown securities are issued by the Government, in the form of Treasury bills, Kiwi Bonds, Government bonds and inflation-indexed bonds.

With the Government running Budget surpluses, its debt requirements are shrinking, leaving fewer opportunities for investors.

It's a different story on the non-Crown or corporate side of the market, where issuers include state-owned enterprises, local authorities, banks and other private-sector companies.

Investor demand and corporate supply are meeting in a marriage of convenience, resulting in a surge of new debt issues which shows no sign of slowing.

For companies needing to raise money there are two options: issue shares or borrow.

Increasingly, companies are choosing to borrow by issuing debt securities; it's cheaper than borrowing from the banks or issuing shares and it avoids diluting existing shareholdings.

Investors like debt issues because they appear less risky than shares and hold the promise of a more reliable income stream - as well as a promise of getting their initial investment back when the investment matures.

Corporate debt securities also offer higher returns than the banks or Government debt.

The coupon interest rates on corporate debt issued in the past year or so have generally ranged from Fonterra's 7.48 per cent through to Advantage's 10 per cent. Issuers of capital notes typically start at about 2 percentage points above five-year Government stock rates.

As with most investments, investors can chase higher returns - if they are prepared to accept higher risk. Some large issues of capital notes are graded by international ratings agencies, based on the creditworthiness of the company offering the notes, but many are ungraded, making it difficult for investors to judge how secure their money is.

But there are risks.

Ratings agency Standard & Poor's has warned that investments such as capital notes carry "materially higher risks to investors" compared with more highly ranked fixed-interest investments - though they are less risky than shares.

No issuer of capital notes listed on the Stock Exchange has missed an interest payment or failed to redeem capital notes that investors chose to convert into shares.

The exchange is keen to raise the profile of "subordinated" debt issues - so called because they rank behind a company's other debts - to encourage people to use them as an alternative to bank deposits. It wants to see more such investments listed, so they can be more easily bought and sold.

At present the exchange handles only 50 or 60 fixed-interest trades a day, but it wants to see that number increase.

The holders of capital notes are often older people looking for a steady income, who are happy to hold their investments for some time. But, if circumstances change and they want to get out early, the relatively low level of trading might make that difficult and costly.

To help investors judge the level of risk they are taking, Grosvenor Group, of Wellington, has come up with the "Bondwatch" service, which aims to help investors and financial advisers. It assesses the risk and relative value of fixed-interest investments in New Zealand, based on investment statement information and prospectuses.

Bond issues are assessed against 47 criteria, including the history and ownership of issuers, governance and management structures, as well as balance sheet and financial analysis.

Grosvenor chief investment officer David Beattie said recent problems in the fixed-interest and bond market, such as the default on payments of Metropolis bonds (which are not listed), highlighted the need for investors to fully understand risk in the expanding bond and fixed-interest market.

Grosvenor says the ratings are not a matter of giving investments a pass/fail mark; it's more about finding an investment that matches an investor's willingness to take on risk.

The local bond market has been criticised for not offering investors enough of a return for the risk they can be taking, above the return they could get from a "risk-free" investment such as Government stock.

If investors and issuers accept that argument, the differential between Government stock and the higher-risk end of the market could widen in future.

Capital note issues


2002


FletcherBuilding $150m


ASB $200m


Tower $125m


Powerco $125m


Nuplex $75m


Advantage $10m


PRG $75m


NZDairyFoods $125m


AMP(NZ&Aus) $1.15b


Vector $350m


2001


Nufarm $225m


SkyTV $125m


GPG $250m


Richmond $50m


2000


Montana $125m


SkyCity $150m


1999


BILFinance $85m


CapitalProperties $100m


StLukes $175m


1997


Telecom $275m


Telecom $160m


1996


Fernz $170m


1995


FletcherChallenge $250m


1994


BILFinance $70m


1993


FletcherChallenge $150m


BILFinance $150m


1992


FletcherChallenge $150m


BILFinance $170m


1991


FletcherChallenge $100m


1990


FletcherChallenge $170m