Crownies

Been studying fixed interest securities lately (it was one of my weaker areas of Finance, as confirmed by my pathetic performance in that section of the CFA exam).

Anyway, I noticed Crown is going to issue some subordinated notes soon. These notes are a form of fixed interest security (the fixed rate being the BBSW (or Australian risk free rate) + 5% or so depending on the book build). Sounds pretty good? It isn't a bad yield at the moment.

Problem is the securities have a maturity of 60 years...which is a long time for a note. Also the coupon payment can be deferred, both at Crown's discretion (optional deferred) or when certain criterior are fulfilled (mandatory deferred)

For the optional deferment, there is a dividend stopper in place which stops crown paying dividends/buying back shares from the ordinary shareholders until the deferred interest is paid. However, there is no obligation for Crown to pay the interest until maturity...a long way away.

For the mandatory deferment, no dividend stopper in place. So there is a risk that buybacks/dividends could be paid, but interest deferred if Interest Cover ratio goes under 2.5 (currently 7) and/or  Leverage ratio exceeds 5 (currently 2). So remote. Also mandated that the deferred interest be paid at most 5 years after event, also good.

Then there is a call provision (which is an option by Crown to buy the notes back at their face value) in 2018, but it is unlikely that it will be exercised (if Crown believes it can get a reduction in the margin it might think about it…if equities remain depressed this could come into play)


The maturity is the big danger…sure 5% yield over the risk free rate looks ok now, but 10 years from now, when equities are back and returning potentially 7-8% over the risk free rate, it might be a different story (got to factor in the opportunity costs after all). There is a step up provision in the margin in 2038, but it’s only 1% increase. That is why Packer is locking in the margin now, he is assuming that cost of equity will increase significantly in the future (which is probably true)

So to buy or not to buy. Couple of good points, couple of bad. Best to check your own circumstances and talk to a Financial advisor as always.

NOTE: This is not financial advice and should not be a recommendation to invest/not invest in these debt securities.