Forum Archive Index - January 2003

["Pat Fields" <pat_fields@hotmail.com>]

Hi Snoopy,

Thanks for your comprehensive and very helpful answer!


>Often the secondary market for capital notes is the the
>place to spot these higher risk capital note investments.

Yes - I wouldn't consider getting into capital notes on subscription but 
only ofter they are listed.  I would like to get a feel for the market's 
perception of risk as well as for their liquidity.


>I've looked at getting back into the capital note market at various
>stages myself, but so far I haven't been able to make the numbers
>stack up.  The 'problem', if you want to see it that way, is that
>there are so many high yielding head shares on the New Zealand market
>with good prospects that taking the risk of locking your money into
>lower yielding capital notes I find hard to justify.

In my very *rough* assesment of capital notes vs. yields, I came to the 
conclusion that the capital notes of some good companies have a higher yield 
than the yield from shares (e.g., GPG) whereas in other cases it's the other 
way round (e.g., Sky City).  So, I guess, the difference between going with 
one type versus the other one (putting aside risk) is the mix of capital vs. 
income gain buyers would wish (assuming a share price increase).


>
>Of course the shares may have a more volatile ride on the way to
>their higher expected return.   But capital notes will go up and down
>in value as well, so you don't get away from the volatility of your
>investment if you buy them.  And if smoothing the volatility is your
>goal perhaps another way of going about things is to invest half the
>money in bank deposits and the rest in high yielding head shares.


As long as I hold them until redemption (and the company's ability to repay 
them remains intact) the real loss is  the opportunity cost of being locked 
in a potentially lower yield if economic conditions change (e.g., increase 
in the cash rate, inflation, etc.)


While writing me original post, an issue I had in mind was the 
convertibility of the capital notes into shares upon maturity.  If I wanted 
the cash back but the company chooses to issue shares, I wonder what would 
the chances be of not recovering my initial amount in full if I sold the 
shares on the very day of redemption.  I wonder if the issue of dilution 
coupled with the risk of many ex-capital note holders selling would push the 
share price down to a level below than that used for the conversion hence 
not being able to recover my full amount.



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