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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Commodities bubble set to burst

Jed Clampett struck crude in his backyard while a hunt'n and he ended up living the high life in Beverly Hills and lived a very happy life with Jethro and the whole clan. He would have been even wealthier today.

As we speak, the price of Nymex crude futures is US $134.40 a BBL, LME copper futures are US$8299 a metric tonne, wheat futures US $787 a bushel and a whole host of the worlds other commodities: gold, steel, aluminum etc are at record prices and show little sign of slowing down their upwards trajectory.

Sure, much of the reason why these commodities keep climbing are because of unprecedented demand from the likes of China and India and the use of soy, maize and other food crops to make Bio-fuel, are having an impact on food prices but one cant underestimate the effect speculators and traders are having on commodity prices.

At just shy of US$135 bucks the oil price has far outstripped the upward pressure that pure demand would put on it and just like any other bubble, the commodity bubble is inevitably going to burst.

When is not clear but just like the stock booms of the past, the tech bubble of 2000 and the current real estate collapse, what goes up inevitably comes down. It would simply defy history for this not to happen.

So what is the problem? you might ask. Well the big headache will be that this sector of the investing market is now getting manifold increases in money being invested; by individuals, hedge funds, banks, pension funds and all the other derivative, bond holding, debt laden fund raising schemes(that I don't completely understand) that were involved in the Sub-Prime mortgage sector.

This wouldn't be so bad if the direct investors were the only ones burned when things go pear shaped but as we know these things have a tendency to effect the real economy and therefore the average man on the street.

These speculators have bailed from the stockmarket and real estate and are now creating another bubble that will burst like Elle May Clampet out of her gingham top.

The consequences of a commodity bubble bursting though will be a whole lot less attractive than Elle May's décolletage.

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