Providing Big Yields For Mums And Dads
Sydney Morning Herald
Friday May 27, 1994
SMALL investors stand to gain from a much bigger choice of listed fixed-interest securities as the Australian Stock Exchange (ASX) moves to encourage more issues to the retail market.
Fixed-interest securities, including notes and debentures, are usually offered to big, institutional investors as part of a wholesale offering. Very few issues are listed on the ASX and made available to retail clients.
But the success of recent retail issues suggests small investors are very hungry for a higher-yielding, fixed-interest investment.
In particular, they have jumped at listed note issues from Macquarie Bank, Advance Bank, Metway Bank, Crown Casino and Lion Nathan during the past 18 months.
The ASX is keen for the issuers of fixed-interest securities to direct more offers to the listed retail market.
"The ASX is well advanced in planning to revitalise that part of the market," says Ray Schoer, the director of operations at the ASX.
The ASX has asked listed companies what's needed to give the retail market a kick-along. Brokers have been surveyed to find out how committed they are to promoting the retail market. And, the ASX is in the middle of surveying investors as to whether they are keen to invest in corporate debt.
"Over the years, they (the issuers) have tended to issue debt to institutions," Schoer says. It is cheaper to issue large lines of debt to institutions and the retail sector has tended to miss out.
Margaret Hardy, the director of debt origination at Macquarie Bank, says issuers of corporate debt have had little incentive to go to the retail market in the past.
Issuers have satisfied their requirements by going to wholesale institutions and fund managers, Hardy says.
Once you start offering listed debt to the retail market, you usually get caught by some onerous requirements, she says. You need to issue a prospectus, appoint a trustee and comply with the ASX listing rules.
For most big borrowers, offering corporate debt to the retail market is more trouble than it's worth.
"We are aiming at amending the rules to facilitate the listing and trading of (retail) debt securities," Schoer says.
Unsecured notes and debentures are simply different types of fixed-interest securities. You lend the issuer funds in return for a regular, fixed payment of interest for a fixed term.
If you hold the security to maturity, you get back your principal plus accrued interest.
With unsecured notes, as the name suggests, you have no claim over the assets of the borrowing company. In contrast, debentures are "secured".
But both types of securities rank ahead of ordinary shareholders if the company is wound up.
Notes and debentures are issued by a wide range of government, semi-government and other institutions. But, as already mentioned, retail investors usually miss out.
"It is probably fair to say that retail investors have been limited to semi-government or government bonds, finance company debentures and bank term deposits," Hardy says.
With these securities, you are usually locked in for the term of the investment. If you want to get out early, you often pay a penalty.
(In some cases, you can sell your securities through a fixed-interest broker.)
To get exposure to corporate debt securities, retail investors have been mainly forced to rely on the use of fund managers, Hardy says.
But if corporate notes and debentures are listed on the ASX, you can buy them in your own right and don't need to be locked in for the term of the investment.
The securities can be bought and sold at any time without penalty. As with equities, this depends on the liquidity of the market.
The perceived liquidity of listed fixed-interest securities is one of their major attractions, Schoer says. If people think interest rates will move one way or the other, they have the chance to trade their securities.
You can track the capital value of your investment on a daily basis and sell out when you want to, says Robert Marie, an associate director at Macquarie Investment Management.
(With unlisted debt, the capital volatility of your investment is disguised, he says. You simply hold the investment to maturity and get back your principal.)
But retail investors need to be fairly sophisticated to know the best times to buy and sell, he says.
If you sell a listed security before the end of its term, you must be prepared to lose some of your original investment.
For example, if interest rates have risen since you invested in the security, its market sale value could be a lot less than what you paid for it
On the other hand, if interest rates have fallen since you invested, you stand to make a capital gain on sale.
Listed fixed-interest securities can provide "incredible value", says Tony Lewis, principal of Lewis Securities. For example, he says, Crown Casino notes were showing a yield of 10.58 per cent last week.
Be aware that the newspaper share listings quote the "running yield" on a fixed-interest security, Lewis says, rather than the "more correct" yield to maturity (see box).
You also need to realise that listed notes usually get jumbled up in the normal share listings. They are not listed separately.
But before you jump at the offer of a double-digit yield, you need to be aware of how much risk you're taking on.
Some listed securities have an official credit rating that gives you a fair idea of the issuer's credit-worthiness and the security of the investment.
Other securities carry no official credit rating at all.
"This does not mean they are a buy or not a buy," says Peter Hilton, an equity analyst at Bridges Personal Investment Services. "It just means they have not been rated by a recognised crediting agency."
If this is the case, you should really do your homework on them, Hilton says. "If the yield looks too good to be true, you should look even harder,"he says.
You also need to work out if it's worth taking on extra risk, says Arun Abey, executive chairman of portfolio research and management firm IPAC Securities.
If the risk associated with a totally unsecured note is little different from the risk of a straight equity investment, Abey says, then it could be worth taking the next step into equities.
"There is no point taking close to equity risk and getting half the return," he says.
But debt securities, unlike equities, typically offer a regular income stream plus the repayment of principal if held to maturity, Hardy says. In an environment of low interest rates, this is what many investors are after.
On top of that, debt securities rank ahead of equities in the event of a company wind-up.
Some listed fixed-interest securities actually throw in an equity component at the end of a specified period.
For example, a convertible note gives you the option of converting the loan into equity (shares) in the issuing (borrowing) company at a certain date.
Convertible preference shares and redeemable preference shares also offer a cross between equity and fixed-interest investments.
However, Max Weston, an executive director of KPMG Peat Marwick Financial Services, says investors need to gain a detailed understanding of the conversion provisions.
"They are invariably complex and unless one investigates them carefully, one can get caught," he says.
UNDERSTANDING THE JARGON
* NOTE: A type of security issued by borrowers, bought by lenders, and frequently traded in the money market.
* DEBENTURE: A type of fixed-interest security issued by companies (as borrowers) in return for medium- and long-term investment of funds.
* FACE/PAR VALUE: The value of a security when it is issued. This is usually the amount that the issuer promises to pay at maturity and is not an indication of current market value.
* COUPON RATE: The annual rate of interest payable to the investor, expressed as a percentage of the face value of the security. Interest is usually payable quarterly or half-yearly.
* RUNNING YIELD: The yield on a fixed-interest security expressed as a percentage of the capital invested. This takes no account of the capital accrual - it is the actual cash flow related to the price paid for the investment.
* YIELD TO MATURITY: The actual rate of return on the security from its date of purchase until it matures, taking into account the interest payments and the investor's capital gain/loss.
* Prepared with reference to County NatWest Dictionary of Investment Terms and The Language of Money.
© 1994 Sydney Morning Herald