Forum Archive Index - February 2003

["patrick mcgill" <patrick_mcgill@hotmail.com>]

I was interested in your comments on Capital Notes and while I agree with 
what you say, in general, I consider there is a place in everyones portfolio 
for some Capital Notes.  My comments on Capital notes are as follows:
- they can provide a good yield in times of low interest returns and low or 
negative share returns(such as at present);
- you need to diversify your portfolio so that a particular note is no more 
than 5-10% of a portfolio because there may be a payment default(but this 
rarely occurs);
- the returns once purchased are steady (attractive to those who do not like 
the volatility of share returns);
- you need to investigate each note before purchase to ensure that your 
notes yield is comensurate with the risk taken;
- there is a good secondary market for all the major Capital Note issuers;
- many Capital Note issuers, such as BIL, will provide cash rather than 
shares if this option is chosen at the end of a notes term.

Paddy




>From: "Pat Fields" <pat_fields@hotmail.com>
>Reply-To: sharechat@sharechat.co.nz
>To: sharechat@sharechat.co.nz
>Subject: Re: [sharechat] Capital Notes
>Date: Thu, 30 Jan 2003 02:34:28 -0500
>
>
>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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