Forum Archive Index - October 2002

["Malcolm Cameron" <malharcameron@hotmail.com>]

Good on you Snoopy and another point for your argument. Would not Worldcom 
and Enron have been stated as very desirable quality tenants, even Onetel or 
HIH at some time would have fallen into this category. A better model would 
be if they held a fixed rate first ranking morgage for about 70% of the 
value of the building at 1% above the Annuity rate which is how annuities 
used to be worked years ago even at times using domestic mortgages.
Malcolm


>From: "tennyson@caverock.net.nz" <tennyson@caverock.net.nz>
>Reply-To: sharechat@sharechat.co.nz
>To: sharechat@sharechat.co.nz
>Subject: Re: [sharechat] Re:  CLI
>Date: Mon, 14 Oct 2002 13:29:05 +0000
>
>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
>
>
>
>
>
>
>---------------------------------
>Message sent by Snoopy
>e-mail  tennyson@caverock.net.nz
>on Pegasus Mail version 2.55
>----------------------------------
>"Q: If you call a dog tail a leg, how many legs does a dog have?"
>"A: Four.  Calling a tail a leg doesn't make it a leg."
>
>
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