Tuesday, September 11, 2007

Look closer at the Risk Ladies and Gents

Given the last couple of months of turmoil in the Finance Company sector and the recent scrapping of the Yellow Pages Bond issue, one might expect companies looking to issue more debt would be a bit clearer in their advertising than they possibly would have before all this mess kicked off.

A current case in point is the offer by Origin Energy, the Australian majority owner of New Zealand' s Contact Energy(CEN)

In their advertising the preference share offer , Origin make no reference to the BBB- rating for the debt, one step above "junk" status and the 10% gross they are currently offering is too low for the risk that investors will be taking if they accept the offer.

To gauge what might be a fair return for potential investors one would only have to look at the offering by the local office of the Dutch giant Rabobank.

Rabobank are asking for $NZ400 million or more in a bond issue that will carry interest rates at between 9-9.25%. The advantage of the Rabobank offer though is that the bonds issued will be rated AA+ and the parent bank is rated AAA.

By comparison the risk potential investors in Origin's Preference share issue are taking is not reflected in the interest rate offered.

I must repeat what I have said in a previous column about the Origin share offer. Those that are pushing it, ASB Bank and ASB Securities are desperate to palm this issue off to mum and dad investors.

Issues like this one, with big names behind them, make them look safe and less risky, in the face of the last few weeks of collapsing finance companies. They could be just as risky.

I have been hassled 3 times by sweaty bankers and pimply brokers to buy these pref shares and do not recommend them to others.

You have been warned :)


c Share Investor 2007