KEY POINTS:
What's good about fixed interest?
Exactly that - that there is a fixed rate of interest on your investment. Your money is not subject to market fluctuations and idiosyncrasies, you invest it for a fixed return. The principal risk for investors is they may not receive the full amount, or any, of their principal or interest if the company offering the investment becomes insolvent for any reason. Fixed interest products include term deposits, debentures and subordinated notes.
What should I be looking out for?
It is important to make an informed decision about any investment. You can consult a financial adviser, who will usually be paid some sort of commission by the issuing company, or source information yourself. If taking a DIY approach, the key information you will need to consider will be contained in the investment statement and prospectus of the company offering the investment. These are available on websites, or you can request copies be mailed to you. You should look at the issuing company's financial performance, its loan history (for bad debts and related party lending), who is running and managing it (do they have a history and positive track record?), signs the company has strict lending criteria and guidelines and what sectors the company lends money into. Before parting with your money, you should also look at who owns the company and the reputation of the company, its owners and executives.
How am I able to I tell if the company is a good one?
If the issuing company has a good:
1) Credit rating - this measures the ability of the issuer to pay debts and is a very important piece of information for a potential investor. Issuers are not required to have credit ratings but top-tier ones will have and publish these.
2) Corporate governance - what measures does the company have place in terms of governance? Are there clear policies and procedures, and are these published?
3) A low rate of bad debts and low provision for bad loans (indicating it does not expect its loans to run into problems but has some funds set aside for contingency).
4) Transparency of reporting - are the financial statements publicly available and up to date, are they clear and easy to follow?
5) Limited related party lending - signalling that the company isn't too committed to one group or exposed to potential domino-effects.
6) Size and length of loans - a solid company will have a variety of length and size in its loan book to make it sure it does not have a significant exposure to any one borrower or sector of the market and the maturity profile of loans is considered along with the maturity profile of its funding.
Am I allowed to sell these to anyone else?
If you find a buyer for your fixed- term investment you will need to check the prospectus or investment statement of the issuer to ensure that they allow stock transfers. If so usually a stock transfer/securities transfer form needs to be filled out and signed by the seller and buyer of the investments. The company you invest with will hold these documents. Some companies may also consider an early redemption if the case of financial hardship and/or deceased estates. Again you will need to check this in the investment statement. Some fixed interest products are issued via, and traded on, the New Zealand Exchange. Check online at www.nzx.com
What kind of percentage return should ring alarm bells?
Fixed interest issuers make their money by lending the money on again at a higher rate than that at which they need to pay the investor interest. Therefore it follows that the higher the interest rate the company is willing to pay you, the higher again the rate borrowers will pay the company - a sign they may have few other avenues for securing funding. Generally, interest rates are based on the Reserve Bank's official cash rate and this varies with the length of the investment. So any percentage offered at more than one or two points above official rates may signal an investment is high risk.
How do I find out what the money is going to be lent on, such as for cars, apartments, big screen TV, HPs and so on?
The issuing company will have information in its investment statement and prospectus on what type of loans it used gathered money for. It is unlikely you will be able to pinpoint exactly where your funds are headed unless you are investing in a particular offer for a specific project. Main areas of finance company loans are property, motor vehicles, consumer credit and infrastructure.
