Opinion: Are Genesis Energy's capital bonds worth buying?
Jenny Ruth looks at the Genesis Energy bonds and compares them with other options available on the market.
Wednesday, April 13th 2011, 3:45PM
by Jenny Ruth
As far as Standard & Poor's is concerned, the bonds Genesis Energy is about to start selling on Friday are as near to equity as debt securities get.
Genesis wants to sell up to $275 million of the 30-year bonds to partly fund its $821 million purchase of the Tekapo A and B hydro stations from the also government-owned Meridian Energy. It will pay at least an 8.5% coupon for the first five years, after which it will be reset.
S&P has rated the bonds "BB-" compared with Genesis Energy's own "BBB+" rating with a negative outlook.
John Kidd at McDouall Stuart reckons the bonds, which will be listed on NZX, will be popular, despite their S&P's view of their equity characteristics.
"An 8.5% coupon in a market that is chronically short of offerings for fixed interest and income investors should ensure that reasonable support is received from the retail market," Kidd says.
"Genesis is a quality issuer that can point to a very strong and diverse portfolio of energy assets," he says. Government ownership "also brings with it a level of inferred comfort," he says.
Which is basically the offer in a nutshell. Whatever S&P likes to call this paper, Genesis Energy isn't likely to default.
Even if it did, even though the government would swear blind it doesn't guarantee the businesses it owns, can anybody believe it would bail out insurance company AMI and finance companies such as South Canterbury Finance but not one of its own electricity companies?
Are there better deals out there? Contact Energy's shares are currently trading at $5.76. Based on Andrew Harvey-Green at Forsyth Barr's forecasts, Contact's dividend gross yield for the year ending June will be 6.2%, rising to 6.5% the following year and 7.5% the year after.
Harvey-Green expects Contact to pay 25 cents per share in dividends this year compared with its 25.3 cents per share of normalised earnings, rising to 27 cents next year against 33 cents per-share earnings and 31 cents in 2013 against 38.6 cents per-share earnings.
So investors buying Contact shares would have to settle for a lower dividend income stream but, unlike the Genesis bonds, there's always the possibility the Contact share price may rise - currently they're not far from their year low at $5.53 and well down from the $6.50 year high.
What of other interest listed rate offerings? For those not wanting to take undue risks, the prospects aren't great. Contact has some bonds maturing May 2014 which are currently yielding 5.69%. Or take our largest listed company Fletcher Building's unrated capital notes. The highest yielding currently, those maturing March 2017, will deliver only 7.4%.
What do you think? Post your views in the comments box below.
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