Saturday, March 14, 2009

Bonds: "Investment Grade" Bonds

Contact Energy's [CEN.NZ] NZ$550 million retail bond issue-with the scope to accept "unlimited subscriptions- is being issued principally to pay off existing debt on company books but to also use for day to day business and capital investment.

It already has very high debt levels.

The company is finding it hard to borrow money elsewhere so is going to kiwi mum and dads with their hands out.

In that respect they are not alone. Fontera, NZ Post, Auckland International Airport [AIA.NZ] and others have or will offer bonds to the public to bolster ailing balance sheets.

The only problem is that interest rates being offered do not always reflect the risk investors will be taking.

While Contact Energy is a stable near monopoly and isn't about to go bust any time soon it faces some uncertainty in regards to regulation, raw power production, customer demand and clearly their ability to fund even higher debt levels will be hampered.

Their unsecured, unsubordinated bonds, which will be issued for a term of five years have been assigned a credit rating of BBB by Standard & Poor's and that is in the lower to medium level in the S & P investment grade rankings.

While 8% is a great rate in these low return economic times, that interest rate simply doesn't reflect the risk being taken by investors.

Investors interested in taking a punt on Contact Energy would be best to buy shares in the company rather than these unsecured bonds. They are at attractive prices and make a good investment in uncertain times.

Contact Energy shares were up 7c today to $5.67 on positive wider market sentiment.

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Managing Credit Risk in Corporate Bond Portfolios: A Practitioner's Guide

Managing Credit Risk in Corporate Bond Portfolios: A Practitioner's Guide by Srichander Ramaswamy
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c Share Investor 2009