LEWIS SECURITIES LTD ACN 002 928 985 ABN 46 002 928 985 FIXED INTEREST NEWSLETTER VOL 12 NO 12 Issue # 144 12th December 2002 Level 13, 15 Bent St, Sydney GPO Box 7014, Sydney 2001 Telephones: (02) 9221 1777 1800 630609 Fax: (02) 9221 1666 Email: lewis@ fixedinterest.com.au Website: www.fixedinterest.com.au Shares website: www.comupdate.com.au e-mail/address changes: please e-mail us with your new e-mail and include your old e-mail address whenever you have changes. BOND LOSSES TRIGGER FINANCIAL SECTOR INSTABILITY Over the last year there have been some spectacular collapses of large companies that issued debt that most likely will never be repaid. These companies include Worldcom and Enron. Many other corporate issues have been relegated to junk bond status. We have read reports that $180 billion has been lost but we cannot recall whether this was $US or $A. These bonds would have been owned by banks, general insurers, life insurers, pension funds and the general public. Pension funds and the public would just record negative performance for the period but the other types of investor have lost capital, estimated to be at least $A100 billion. Whilst general insurers can lift premiums relatively easily to recover their lost capital as they have done to recover WTC 911 and liability claims it is much harder for banks and life insurers to replace capital without new capital raisings. Many companies have simply not reported exposures to these bond losses but eventually, over the next 2 to 3 years, they will become known. Abbey National in the UK recently reported a trading loss blaming exposure to Enron. Australian banks, due to their domestic focus, have largely been unhurt by these bond losses. Shares in life insurers throughout the world have been under pressure with solvency margins being hit after stockmarket and bond losses. US and UK life insurers have been particularly under pressure. Pearl Assurance has been struggling and AMP recently raised $1 billion in Australia to restore Pearl’s solvency. We do not recall any statement by Pearl as to capital losses from failed companies over the last year. Our conclusion is that it will take some years for these events to wear themselves throughout the financial system and that shares in financial sector companies will be volatile until the capital has been replaced or restored. The losses referred to above do not include noncurrent finance leases on the majority of the world’s airplanes that are grounded with the falloff in flying. The number of dormant and non-serviced airplanes is likely to increase with the bankruptcy of United Airlines this week in USA. BOOM AND BUST IN HYBRIDS A sure sign of an impending bust in a market occurs when investors scramble to complete prospectuses without reading “the bit” between the front cover and the application form. We are seeing a small bull run in local hybrids and high yield securities being rushed by traders and speculators as well as uninformed investors. We try to read the prospectuses however note that very few other brokers appear to, otherwise they probably would not be recommending them. Most brokers and investors did not know that AMP Ltd cannot legally issue preference shares yet and that $1.0 billion was actually lent to a trust managed by an AMP subsidiary. Few seem to have read the Westpac prospectus, which is likely to breach a tax default provision. An amazing number of brokers and clients were mesmerised by the 10.25% offered by NexusBonds last month without reading what they were buying. A basic rule of lending money safely is that you lend money to the parent company or a subsidiary that has parent company guarantees. Anything less is fraught with danger. We are also amazed that virtually none of the recent hybrid or convertibles issued has a cumulative dividend policy. WESTPAC “FIRSTS” Westpac Funds Management Ltd as responsible entity of the Westpac First Trust has issued $600m (+$100m oversubscriptions) of Westpac “FIRsTS”. Most of the issue has gone to brokers’ clients and Westpac shareholders. All of the proceeds will ultimately be invested in Convertible Debentures issued by Westpac New Zealand. Unfranked distributions will be paid quarterly and will be set at 1.50% over the five-year swap rate to be set on 19/12/02. This is expected to be in the 6.75-7.00% range. The first rollover date is 31st December 2007 and repayment then (in cash, subject to APRA approval) is expected. Investors should refer to the offer document which believe is extremely complicated. Despite the complications we believe that this looks good when thought of as a second-ranking debenture for 5 years from a major bank. HIGHLIGHTS MARKET interest rates on longer securities have been range trading but heading lower reflecting overseas bond trends. Markets have gyrated with volatile sharemarkets following bad earnings and poor banking outlook. US Fed and RBA leave official rates unchanged. INFLATION in US remains benign due to low economic activity. Prospective inflation in security, travel and energy costs continue to cause concern. OIL prices have traded around $28 due to Mid-East fears, potential war against Iraq and low stockpiles. AUSTRALIAN bond rates are around 2.0% higher than US bonds for 5 year and 1.5% for longer maturities. Corporate spreads continue to be volatile with US financial borrowers under pressure. STATISTICS point to strong Australian economy however the drought will have a large impact. US long bond rates have been volatile and inversely correlated to NASDAQ and stockmarket moves. $A has been stable against the $US and trading between 55.8 and 56.5 cents. STATISTICS GDP: +0.9% Sep Q, +3.7% YoY Unempl’t: 6.0% Oct (6.2% Sep) Jobs: +15,800 Oct (-30,700 Sep) Part Rate: 63.4% Oct (63.5% Sep) Trade Balance: $-926m Oct ($-955m Sep) ANZ Jobs: -2.6% Nov Building Approvals: +25.3% Oct, +16.7% YoY Retail Sales: -0.3% Oct, +6.1% YoY New Autos: -0.4% Oct, +9.5% YoY SECURITIES AVAILABLE AS OF 12TH DECEMBER 2002 ISSUER COUPON MATURITY FACE G’TEE INT RATING YIELD @ % DATE VALUE* BY FREQ 12.11.02 BONDS CGL 9.00 15/9/04 quantity Aust HY AAA 4.50 CGL 7.50 15/7/05 quantity Aust HY AAA 4.55 CGL 6.75 15/11/06 quantity Aust HY AAA 4.70 CGL 8.75 15/8/08 quantity Aust HY AAA 4.95 CGL 7.50 15/9/09 quantity Aust HY AAA 5.05 CGL 5.75 15/6/11 quantity Aust HY AAA 5.15 CGL 6.50 15/5/13 quantity Aust HY AAA 5.25 CGL 6.00 15/4/15 quantity Aust HY AAA 5.35 SEMIS & BANKS CBA (Col State) 5.50 15/11/03 590,000 - HY AA- 4.80 NSWTC 7.00 1/4/04 quantity NSW HY AAA 4.50 QTC 6.50 14/6/05 quantity Qld HY AAA 4.70 NSWTC 6.50 1/5/06 quantity NSW HY AAA 4.85 Bank of Qld 5.60 16/3/06 250,000 - Q BBB 5.40 Telstra 12.00 15/5/06 quantity - HY A+ 5.20 QTC 8.00 14/9/07 quantity Qld HY AAA 5.00 NSWTC 8.00 1/3/08 quantity NSW HY AAA 5.10 QTC 6.00 14/7/09 quantity Qld HY AAA 5.20 Adelaide Bank 6.60 15/7/10 62,000 - Q BBB 5.75 TC Victoria 5.50 15/9/10 quantity Vic HY AAA 5.30 TC Victoria 6.25 15/10/12 quantity Vic HY AAA 5.45 QTC 6.50 15/5/13 quantity Qld HY AAA 5.45 DEBENTURES Esanda 5.50 29/1/04 25,000 - A AA- 5.00 Esanda 7.20 8/2/04 13,000 - A AA- 5.10 Esanda 5.60 13/7/04 25,000 - A AA- 5.00 TelEurope Ltd 12.00 31/07/04 50,000 - Q unr 11.75 Qld Invest Bonds 6.60 10/12/04 250,000 - HY A- 5.00 Esanda 5.75 30/8/05 500,000 - HY AA- 5.20 CBFC 6.45 19/12/05 720,000 - HY AA- 5.20 NOTES Crown Casino 9.50 15/8/05 quantity - HY unr 6.75 Coles Myer Conv 6.50 30/11/05 quantity - HY unr 4.40 + frcr = 7.00 St George Conv 6.36 20/2/06 quantity - HY unr 4.15 + frcr = 7.00 Amcor Conv 8.57 30/4/06 quantity - HY unr 6.50 Santos Conv 6.57 30/9/06 quantity - HY unr 5.10 + frcr = 7.90 IAG Conv 5.80 30/9/06 quantity - HY unr 5.40 + frcr = 7.90 Computershare Conv 5.50 30/11/06 quantity - HY unr 8.50 + frcr = 10.95 Fairfax Conv 6.65 12/12/06 quantity - HY unr 4.65 + frcr = 7.10 Macq Park St Trust 7.25 31/12/06 quantity - Q unr 6.70 (tax advantaged) Automotive Parts 10.00 15/4/07 quantity - Q unr 9.10 Jupiters Ltd 8.15 9/4/07 quantity - HY unr 7.90 Macquarie Goodman 7.50 30/6/07 quantity - Q unr 6.40 (tax advantaged) AMP prefs 8.62 24/10/07 quantity - HY unr 8.25 Seven prefs 6.60 30/11/07 quantity - HY unr 6.70% + frcr = 9.65 Futuris 7.00 31/12/07 quantity - HY unr 9.35 * In most cases Lewis Securities Ltd will be able to split holdings and provide smaller quantities. Yields quoted including franking credits are estimates only and rely upon certain assumptions. We can usually provide large or smaller quantities of “hot” bonds and semis. Yields quoted on listed hybrids are subject to availability and certain assumptions including the ability to receive franking credits. DISCLOSURE In order to comply with sections of the Corporation Law, we wish to state that the Directors and staff of Lewis Securities Limited may have an interest in the above securities and may earn brokerages on the recommendations. We believe that the advice and information contained herein are accurate and reliable, but no warranty of accuracy and reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of neglig ence) is accepted by the company. As it is not possible to take into account each client’s individual circumstances, before acting on the recommendations contain in this report clients must determine the appropriateness of a particular recommendation in the light of their investment objectives and financial situation. AUSTRALIAN THREE & TEN YEAR BOND FUTURES INTERNATIONAL YIELD CURVES – AUST, WATC, US & EURO HISTORIC SPREADS – AUSTRALIA vs US 10YR BONDS AUST 10YR BOND FUTS vs US 10 YR BOND FUTS 0.000 0.200 0.400 0.600 0.800 1.000 1.200 1.400 1.600 1.800 2.000 15/02/01 30/04/01 13/07/01 25/09/01 08/12/01 20/02/02 05/05/02 18/07/02 30/09/02 13/12/02 SPREAD 4.000 4.500 5.000 5.500 6.000 6.500 16/7/01 5/9/01 26/10/01 16/12/01 5/2/02 28/3/02 18/5/02 8/7/02 28/8/02 18/10/02 8/12/02 AUST 10 YR BOND FUTS AUST 3 YR BOND FUTS YIELD CURVES 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 5.000 5.500 6.000 6.500 7.000 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y Aust Govt Western Australia US Treasury Euro Benchmark
