Brian Gaynor: High on popularity, but low on security

Capital notes and secured bonds have become extremely popular in New Zealand and the two most recent issues, from Feltex and Goodman Finance (effectively Graeme Hart's Burns Philp), are hoping to raise up to $285 million.

The most important aspects of these issues are the low level of security, the absence of a credit rating and the relatively small interest-rate premium over Government bonds.

The Feltex secured bond issue, which closed yesterday having raised $60 million, was for 5 1/2 years at 10.25 per cent a year.

The Goodman capital note issue, which opened on Monday, is seeking $175 million with the right to accept oversubscriptions of $75 million. The notes are offering 9.75 per cent for five years and 9.95 per cent for eight years.

Feltex bonds rank behind bank debt, all liabilities secured by a security interest over any of the assets of Feltex, finance lease arrangements and statutorily preferred creditors.

In Australia, where the company has a big presence, employees enjoy a priority on the winding up of a company.

As far as Goodman Finance is concerned, all the guarantees offered by Burns Philp are unsecured and subordinated.

In the United States these securities, which are usually called junk bonds, are issued with a credit rating to individual investors, but the Feltex and Goodman Finance issues have none.

A senior source involved with one of the issues said a credit rating was not sought because it would not help the marketing effort (the capital notes would have a low credit rating).

Wayne Collins, the former chief financial officer of Tranz Rail and a stockbroker before that, gave an indication of the attitude of some business people towards credit rating agencies that don't give favourable reviews of their companies.

Another important point is the pricing of these capital notes. Warren Buffett has noted that the interest rate premium of junk bonds to benchmark United States Government Treasuries had fallen from 11 per cent last October to 7.6 per cent.

He said these junk bonds looked attractive at the end of last year but they now looked fairly fully priced.

By comparison, the Feltex and Goodman issues offer interest rate premiums of 4.65 per cent and 4.15 per cent respectively over six-year NZ Government bonds (there are no five-year bonds on issue).

Compared with the US, the 4.15 to 4.65 per cent premium does not compensate for the risk, particularly when no credit rating agency will be keeping an ongoing eye on the issues.

With this in mind, investors should be extremely careful that they don't become over-exposed to capital notes and secured bonds. If they do, they should have a well-diversified portfolio of these securities.

Guinness Peat Group The recently released Guinness Peat Group annual report revealed it was another good year for directors.

Their combined income last year was $11.1 million compared with $10.9 million in 2001, although there was one director less in the previous period.

The generosity of the company towards its directors doesn't stop there. As at December 31 Sir Ron Brierley had 4.9 million options that were in the money to the tune of $3 million, Trevor Beyer had 1.4 million that were ahead by $0.6 million, Tony Gibbs had 8.1 million that were to the good by $3.8 million, Graeme Cureton was ahead by $2.8 million on 6.3 million options, Blake Nixon was looking at a profit of $2.5 million on 5.5 million and Gary Weiss had 8.9 million that were in the money to the tune of $4.6 million.

Thus the six directors had 35.1 million options and were sitting on a combined profit of $17.3 million at December 31. They also had 36.6 million shares and convertible notes that were worth more than $54 million at the end of last year.

There are aspects of GPG's corporate governance structure that give cause for concern: the board has no truly independent directors and the remuneration committee is made up of Beyer (chairman), Nixon and Weiss.

The committee has rewarded the latter two particularly well.

GPG shareholders will be hoping chairman Brierley is keeping a firm hold on his fellow directors as his previous company, Brierley Investments, nearly collapsed because of poor corporate governance.

Its board was executive-dominated, they were paid too much and Bob Matthew, a former senior executive of the group, chaired the remuneration committee.

Affco Aspects of the Affco interim result to March 31 indicate the meat producer may have turned the corner.

The announcement was made on April 30 compared with May 29 last year and May 18 in the previous year. The quick result, announced ahead of Richmond for the first time, indicates a greater sense of urgency and efficiency.

The company reported a net profit of $10.8 million on sales of $442 million compared with a loss of $14.7 million on sales of $494 million in the same period in 2001-2002.

It is still difficult to predict the final result because year-end stock values will have a big influence on the final figures, but the company has a stronger balance sheet and a more realistic cost structure.

Talleys Fisheries, which now owns 26.4 per cent, is having a positive impact and the astute Hugh Green has recently raised his holding from 10 per cent to 11.1 per cent.

At yesterday's closing price of 18c, the company has a market capitalisation of $97.5 million compared with shareholders' equity of $154 million.

Meanwhile, PPCS is making no headway in its bid to control Richmond.

Its last shareholders' notice (these must be issued when every additional 1 per cent of a company is acquired) was lodged on April 4 and on market buyers are willing to pay $3.14 for Richmond shares compared with PPCS' offer price of $3.11.

Renaissance Corporation

Shareholders who failed to turn up for the Renaissance annual meeting didn't miss much.

The computer wholesaler was unwilling to reveal any hard information, only one question was raised from the floor and the meeting was over in 30 minutes.

Chairman Richard Ebbett gave a potted history of the company and concluded with the comments, "we are continuing to take a prudent view on our ability to make dividend payments in what are still very unsettled economic times.

"However, we are encouraged with both our profitability and cash generation in the first quarter".

Managing director Paul Johnston said: "We are profitable and trading to budget."

Shareholder John Wilson asked Ebbett if Renaissance had exceeded its weighted average cost of capital in the first quarter.

The chairman said yes but went on to say, "we haven't worried about measuring the cost of capital".

At last year's annual meeting shareholders were told that the company had traded profitably for each of the first four months yet it reported a net profit of only $67,000 for the six months to June 30.

In each of the past two years four of the seven directors have bought and sold shares and most of the big trades have occurred either one month before or one month after the annual meeting.

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