Forum Archive Index - October 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dimebag,

> 
>I have no idea why you have taken Happy's comments as gospel. 
> They are ill-founded.
>
>


I didn't.  I gave you the opportunity to refute Happy's comments, 
and you have.


>
> 
>You question how much debt relates to annuity model I demonstrated. 
>The short answer is - ALL OF IT.
> 
>They have bank debt of around $1.7b, and policy liabilities of
>around $1.3b (ie the annuity portion).  This roughly corresponds to
>their $2.47b in property, plus their fixed interest instruments that
>fund 20% of their book (ie around $600m).
>
>

IIRC Dimebag, you first made a post here explaining how these 
annuity deals were structured, which started like this:

-------------
Example:

CLI write a $100,000 annuity contract, entitling the
annuitant to and income stream of $10,000 per annum for
15 years.

CLI then borrow $100,000 from the banks.
--------------

Working backwards, a 'total policy liability' of $1.3b spread 
over 15 years equates to total annuity contract payments of $866m, 
which is matched by an equivalnet bank debt of $866m.  This gives a 
total debt associated with the annuity business of $866m + $866m = 
$1.73b.   This is only about half the total CLI debt of $3.4b.

With shareholders funds of of only $1b, that means there is around 
$1.70 of debt for every dollar of equity.


> 
>What is this talk about re-insurance??  CLI has no life 
>exposure - they simply sell annuities through a life
>vehicle; life insurance and re-insurance are completely different
>sectors.
>



I was talking re-insurance in relation to the rest of the business of 
CLI, not the annuity side of it.  Also presumably the buildings that 
CLI own are all insured and that entire risk is not taken by CLI.




> 
> 
>But this part made me laugh the hardest:
> 
> 
>QUOTE
>> 
>> 
>>All cashflows (rents etc) are legal fixed.  They can't change
>>(except rents can rise).  
>>
>>
> 
>And a big business tenant could create a shelf company to rent out
>their business premises.   Then if rents get too high they could
>just wind up the shelf company completely, cutting off the cashflow
>to CLI, create another shelf company and rent another building at
>lower rent from someone else.
> 
>>
>>CLI's property is top quality - 
>>there will always be a ready market for it; most of the
>>tenants will roll over; those that don't will have a replacement
>>quickly found.  Their rental cashflows rise yearly...
>>
> 
>This is all speculation.  You cannot guarantee a property will 
>remain 'top quality' with almost no reinvestment for 15 years.
>You can't  guarantee there will always be a ready market for it.
>Tenants do not always roll over and good buildings can remain vacant 
>for years and years....
>
> 
>QUOTE
> 
> 
>You accuse me of speculating, while at the same time proposing
>absolutely outrageous possible sequences of event that may screw CLI
>over (eg all this shelf company business which is completely out of
>leftfield).
> 
>

The first point is that the two things that you have linked together 
I do not see as linked so I will deal with them separately.

1/ 'Shelf Company Business is completely out of Left Field'.

Pick a company, any big company.  I chose Telecom and put that name 
into the search engine at the NZ companies office, here:

http://www.companies.govt.nz/search/cad/DBSSITEN.Main

There you will find a company:  'Telecom Leasing Limited' that has 
been struck off and now 'Telecom Mobile Leasing No.1 Limited' exists 
as does 'Telecom Mobile Leasing No.2 Limited'.   The setting up and 
destruction of shelf companies is something that happens all the 
time.   Far from being 'out of left field' it is normal business 
practice.   


2/  Accusation of Speculation

I define 'business speculation' as a business plan where success 
depends on someone buying you out of a business at a higher price 
than that at which you bought in, somewhere down the track.   The 
path between where you buy in and sell out is largely determined by 
external factors beyond your control.

Compare this to 'business investment' where a businessman uses his 
own talents and specialised knowledge to build the buisness and the 
increase in the value of the business depends on direct application 
of his expertise.

You assume speculation is a bad thing.   There is good and bad 
speculation.  I would class the CLI annuity scheme as 'good 
speculation' in the sense that the assumptions are conservative and 
are broadly in line with historic norms.   This does not mean that it 
is not speculation though.

Whether the CLI business plan comes to fruition largely depends on 
the performance of the tenants in their different fields of 
endeavour. This is out of the control of CLI, and the reason why I 
said it was speculation.

Australian companies have a poor reputation when exporting their 
supposed expertise to the USA or Europe  (eg the Homeside mortgage 
Saga from NAB, billions in writedowns by Newscorp on broadcasting 
assets).  

Sure there is no more land being made in Europe, but neither is the 
population forecast to keep increasing either.   It is far from 
obvious that commercial office real estate will continue to increase 
at the rate of historic norms.

Falls in real estate values are not unprecedented over long periods.  
Indeed CBD values in Wellington and Christchurch (and some in 
Auckland) for fifteen year old buildings are *right now* well below 
where they were 15 years ago.  That's what low inflation and not 
keeping up with technology does to your 'prime' real estate 
investment.

This is evidenced by the number of New Zealand listed property 
companies trading well below asset backing (e.g Newmarket, Trans 
Tasman).

SNOOPY






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