This week, I got a letter from my little bank (formerly Heritage Building Society, up until late last year) offering to sell me Retail Bonds. They are 5 year, fixed rate, senior interest-bearing, unsecured bonds. They will pay 7.25%pa (paid quarterly), and will be quoted on the ASX. They intend to raise $125 million for "general funding purposes", providing them with "general business expansion opportunities". These are obviously not protected by any government guarantee, so what is the risk here? * Heritage Bank go under? * Heritage Bank stay afloat, but decide not to repay the bonds? Because as a customer of this Building Society/Bank for over 20 years, this seems attractive. With them, for 5 years I can get 5.2% term deposit, or 7.25% bond. I am not after financial advice, just thoughts and comments. Thanks
OK, I'm going to go ahead and reply to my own question! The key risks include the following risks associated with Heritage Bank Retail Bonds: Investments in Heritage Bank Retail Bonds are unsecured and are not Protected Accounts or deposit liabilities of Heritage Bank under the Banking Act Heritage Bank may fail to pay Interest and/or Face Value on Heritage Bank Retail Bonds The market price of Heritage Bank Retail Bonds may fluctuate and you may not recover the full Face Value if you sell your Heritage Bank Retail Bonds There may not be a liquid market for Heritage Bank Retail Bonds and there is no guarantee the Heritage Bank Retail Bonds will remain listed on ASX. You may not be able to sell your Heritage Bank Retail Bonds at a price acceptable to you or at all Interest rates may rise, which could cause the Heritage Bank Retail Bonds to become a comparatively less desirable investment. This could cause the trading price of Heritage Bank Retail Bonds to fall Heritage Bank may Redeem Heritage Bank Retail Bonds early if a Tax Event or a Change of Control Event occurs Holders do not have the right to request that their Heritage Bank Retail Bonds be Redeemed early Heritage Bank may raise more debt than it currently has and issue further securities which may rank equally with or ahead of Heritage Bank Retail Bonds, whether or not secured The BBB+ credit rating assigned to Heritage Bank Retail Bonds is subject to revision or withdrawal The key risks include the following risks associated with Heritage Bank's business that may affect Heritage Bank Retail Bonds: Heritage Bank may be adversely affected by a downturn in the Australian economy Heritage Bank is exposed to credit risk and may incur losses Heritage Bank is subject to extensive regulation. Changes to relevant regulations (including prudential capital requirements) could impose additional funding and operational costs on Heritage Bank Heritage Bank is subject to intense competition Heritage Bank may be adversely affected by harm to its reputation Acquisitions of other businesses by Heritage Bank, or change of ownership or control of Heritage Bank, may adversely affect its performance or financial position Heritage Bank is exposed to liquidity and funding risk, which may adversely affect its performance or financial position Heritage Bank may be subject to contagion risk
Bonds are slightly more risky than deposits but less risky than holding the shares. If the company goes bust then depositors get first bite at what's left over (but also have the Gov Guarantee), then bond holders and then lastly, if there is anything left - shareholders. Bonds are generally considered to be fairly low risk. If you get the Fin Rev it gives a listing of all the retail bonds out in the market and current pricing/yield. You'll see most are about or slightly less than the issue price. They are usually affected (depending on if they are floating, resetable or fixed) by currect/future RBA % movements. HOWEVER - if there is market rumour that the company may not be able to make future payments - you will see the price plunge (and yield increase) fairly quickly. Most bonds are held by Super funds etc and are considered to by very safe so if a company shows any signs of the wobbles - the bonds will be dumped faster than you can imagine!!! So it follows standard market theory - the higher the return the higher the risk. Yes you are taking a bit more of a risk with bonds but if you are just putting money in the bank for future days - they are ALMOST as secure as a deposit in the bank. Another side attraction is during periods of decreasing interest rates (such as potentially now)- you can make a very nice capital return. If the RBA decrease rates then the market will decrease the rate of your bond. It does this by increasing the value of your bond. For example if you buy a $100 bond returning 10% (to make for easy numbers!!) and then the RBA drop interest rates by 1% (again for easy numbers) then the market will reprice your bond for a 9% return by revaluing your bond at $111.11 giving you the same $10 interest payment but now it is off a "value" of $111.11 thereby giving you a 9% return. Clear as Mud?????? malachii
Corperate fixed interest bond in Australia have been pretty good oppertunities - but I dont know enough about them to take advantage. Ideally you would aim to structure your bonds so that they come due at alternate times so you have a constant income stream. Obviously you would do you DD in the ability of the company/organisation to pay the interest
