Brian Gaynor: Belgian dentists pull up NZ dollar

The eurokiwi bond market is heating up again, with over $2.1 billion issued since June 2002 and $900 million since the end of December.

A huge increase in these issues from 1997 to 1999 had a major impact on the New Zealand dollar and this situation could be repeated over the next few years.

A eurokiwi bond is a New Zealand dollar bond, issued typically by a non-New Zealand borrower, to investors based outside New Zealand. The bonds are usually listed on a foreign stock exchange and are often sold in small parcels, as low as $1000, to retail investors.

Retail investors, popularly known as Belgian dentists, are attracted by the high New Zealand interest rates and the strength of the New Zealand dollar. They purchase dollars and invest in a eurokiwi bond issued by well-known and highly rated organisations, such as the World Bank.

Thus Belgian dentists buy NZ dollars, lend them to the World Bank, get a relatively high interest rate and have an exposure to the kiwi.

Through a complex arrangement the World Bank onlends the NZ dollars to New Zealand banks. The banks then lend this money to individual New Zealanders to buy residential property. Through this process Belgian dentists partly fund residential housing in New Zealand.

The ideal conditions for a strong eurokiwi new issue market are strong demand for residential mortgages, high interest rates in New Zealand and a strong NZ dollar.

These conditions are prevalent and new issuance has surged since the middle of 2002, although the market is not as buoyant as in 1997-99.

Eurokiwis help fund New Zealanders' insatiable appetite for debt and ease the pressure on domestic interest rates because they increase the supply of funds available for lending. They also have a positive impact on the New Zealand dollar because of purchases by Belgian dentists.

Eurokiwis are one of the more obvious ways that a high demand for residential mortgages pushes up the dollar and has a negative impact on the export sector.

But Belgian dentists have no long-term commitment to New Zealand. As soon as New Zealand interest rates fall and the dollar weakens they want out. When their bonds mature they sell the NZ dollars and invest in other fixed-interest securities.

The decline in the NZ dollar in the late 1990s coincided with a large number of maturing eurokiwi, although they were not wholly responsible for the weak dollar.

One of the conclusions from the eurokiwi market is that immigration can have a negative impact on New Zealand's export sector as new migrants create demand for housing and push up interest rates. These high rates attract the so-called Belgian dentists, who then buy NZ dollars to invest in eurokiwis and put upward pressure on our currency.

TRANZ RAIL

The Market Surveillance Panel's report on Tranz Rail paints a depressing picture of corporate governance, disclosure, enforcement of regulation and share trading activity in New Zealand.

The main conclusions are:

* Twelve months ago Wisconsin Central Transportation and Fay Richwhite sold their Tranz Rail shareholding at $3.70 and $3.60 a share respectively but their representatives remained on the board, and in a controlling situation, until July and August.

After the share sale the company's reporting standards deteriorated and, according to the panel, the reporting of trading results to the board did not occur on a regular monthly basis or in a consistent format during the latter part of the financial year ended June 30, 2002.

* At an audit committee meeting on June 27, and a board meeting the following day, directors became aware of substantial write-downs but made no announcement to the Stock Exchange. The write-downs were revealed on July 5 after a sharp fall in the company's share price and a "please explain" from the exchange.

* The panel found that Tranz Rail was in breach of Listing Rule 10.1.1(c) because it did not disclose the write-downs after the June 28 meeting. The panel has decided not to impose any penalty on Tranz Rail or its directors for this breach of the listing rules.

* Tranz Rail's share price fell from $3.25 on June 21 to $2.78 on July 4. On July 3 its share price declined from $2.99 to $2.85 on unusually high turnover of 878,000 shares. The Securities Commission is investigating share-trading activity during this period.

Our regulatory authorities are totally incapable of taking decisive action even when they identify a clear breach of the rules. At the very least they should name and censure the directors and senior executives responsible for a breach.

Regulatory bodies overseas have found that publicly censuring directors is a strong incentive to adopt best practice in corporate governance, disclosure and share trading.

FAY RICHWHITE

The champagne will be flowing tonight at Coast bar on Princes Wharf. Sir Michael Fay and David Richwhite are hosting a party for former employees of their organisations and 300 have been invited.

The invitation list is a who's who of the financial community. It includes Bill Birnie, Michelle Boag, Rob Cameron, Paul Davenport, Leigh Davis, Murray Doyle, Mark Dunphy, Steve Montgomery, Grant Paterson, Scott Perkins, Guy Williams and Stuart Wills. Not all invitees have rushed to accept but the long list is a strong reminder that Fay and Richwhite once had an extremely powerful presence in New Zealand.

One school of thought on tonight's function is that Fay and Richwhite are interested in coming back to New Zealand and want to reconnect with the finance community.

Fay and Richwhite have plenty to celebrate. They sold out of Tranz Rail at $3.60 a share and their UK rail investment, English Welsh & Scottish Railway Holdings, had net earnings of £99.5 million ($295 million) for the March 2002 year compared with £19.3 million for the previous year.

Major shareholders in English Welsh & Scottish Railway Holdings, Britain's largest rail freight operator, are Wisconsin Central (39.8 per cent), Berkshire (20.8 per cent) and Fay Richwhite (9.2 per cent), the original consortium that made a fortune out of Tranz Rail. David Richwhite and Alan Gibbs are directors and the latter has a 1.2 per cent holding.

Maybe Fay and Richwhite are flushed with their success at English Welsh & Scottish Railway and are looking to buy back into the New Zealand rail operator.

* Email Brian Gaynor