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6.7% Canadian Oil Sands Yield: Investment with Income

Randy — Thu, 17 May 2012 20:07:10 +0000

Investment with Income:
CANADIAN OIL SANDS LIMITED (COS.TO) and (COSWF.PK)
Per share values in USD 1-19-2012
Market value $ 20.64 Canadian
Market value $ 20.40 US

Indicated Dividend rate ~6.75 %

Durig Capital seeks out quality high yielding global investments that offer both a high yield and a good probability of appreciation, while providing a unique hedge against inflation and/or a continued devaluation of the US dollar. As a result of our diversification research efforts, we have identified and selected Canadian Oil Sands (COS.TO), Canada’s largest oil producer operated by theSyncrude consortium. Syncrude began operation in 1978 and is the biggest mine of any type in the world.

US Dollar Concerns

Most investors seeking income with growth for their investment portfolios are aware of the US 15 plus trillion in debt, but few understand that the M1 money supply “printing of money” is up 18.3% in the last twelve months alone. When you consider the fast growing economies known as the BRICs (countries Brazil, Russia, India, China, and South Africa) and the fact they are looking at replacing the US dollar as the reserve currency, any one of the above factors alone could over time cause havoc to the dollar and/or increased inflation. Having all three major forces occurring simultaneously while the US Government is lacking a real fiscal compass make it even more imperative for the wealth preservation of our clients.

The Company

Syncrude Canada Ltd. is one of the world’s largest producers of a single high quality light sweet synthetic crude oil (SCO) know as Syncrude (SSP) from oil sands and is the largest single source producer in Canada. It is located just outside Fort McMurray in the Athabasca Oil Sands. The U.S. imports about 19 percent of its total foreign oil supply from Canada, more than from any other nation, and around half of that now comes from the oil sands.

In 2003, when the Oil & Gas Journal added the Alberta oil sands to its list of proven reserves, it immediately propelled Canada to second place, behind Saudi Arabia, among oil-producing nations. The proven reserves in the oil sands are eight times those of the entire U.S., and we believe that number will go up.

Syncrude is not traded directly, but rather through the individual owners. The company is a joint venture between seven partners (by percentage): Canadian Oil Sands Limited (COS.TO)(COS WF.PK) (36.74%), Imperial Oil Limited (IMO) (25%), Suncor Energy Inc (SU) (12%), Sinopec Shanghai Petrochemical (SHI) (9.03%), Nexen Inc (NXY) (7.23%), Mocal Energy a subsidiary of Nippon Oil (5%), and Murphy Oil (MUR) (5%). Exxon Mobil (XOM) currently owns 69.6% of Imperial Oil. In 2010 Conoco Phillips (COP) sold its 9.03% interest in Syncrude to the Chinese company Sinopec for $4.65 billion. Using today’s valuation Synopec paid about a 60% premium over the value of the current share price of Canadian Oil Sands. Athabasca Oil Sands (ATH.TSE), a similar but smaller Canadian Oil Sand play with no consistent dividend, currently has lower value metrics. We value Canadian Oil Sands more on an international cash flow basis, as it has superior free cash generation, a healthy dividend, and a long life hard asset base.

The ownership board must approve all annual operating budgets, proposed capital spending projects, and are required to provide the funding for said activities based on their ownership share.

Syncrude has stated it has 20 years of proven reserves and about 40 years of probable reserves. Probable reserve means it has the same probability of having 41 years as it does 39 years of reserves. We have seen in our research indications that probable reserves have a much greater tendency to grow, often significantly, over time. Syncrude has been permitted to produce 173 million barrels of SCO which expires in Dec 2035.

Canadian Oil Sands

Canadian Oil sands is the largest shareholder with 36.74 percent of the company. Considering its long life assets, its internal cash flow is one of the highest we could identify in the Canadian Community market, including bonds. Canadian Oil Sands currently yields about a 6.75% dividend, which is above most Canadian corporate bonds that we have reviewed and significantly above the 1.945% yield for the Canadian 10 year government bond. Considering that it just raised its dividend from 30 cents to 35 cents and expects major cost to significantly decline starting in 2014, an environment is set that could afford a even higher dividend payout ratio. When you factor in probable reserves of around 40 years, it makes for a very high yielding, long term, hard asset based investment much like the Southern Copper Corporation (SCCO) that we recently recommended. The real return will vary due to the international prices of oil, but with that said, it looks as though any real or material alternative for guaranteed power is not on the short term horizon.

Dividend

The dividend has been just increase by the company to 35 cents even though they publicly stated that investors should expect a 30 cent quarterly dividend targeted for 2012.

Largest Risks

While we now want to identify what we believe to be the four largest risks to our investors, please do not assume that this list is intended to be complete or comprehensive.

Oil Prices.
Environmental
Production.
Keystone

1. Oil Prices. We believe that unless supply and demand characteristics change significantly, the price of oil is likely to gradually increase. Possibilities for change would be a change in the present US administration’s policies from a restrictive oil platform to a pro energy platform, which could potentially lower oil prices.

2. Possibly the largest risk, but one that’s hard for us to quantify, is the environmental risk. We do not see this primarily as a catastrophic risk, but the risk of possibly new and/or additional building or mining regulations intended to improve or protect the environment. The oil sands process is not a very clean or easy way to extract oil and is generally considered to be more environmentally damaging than more conventional methods. Therefore it has detractors that frequently harangue politicians for operations to be closed. However, the location of its operations is in a place where it’s so cold that it tends to avoid public scrutiny. The European Union plans to adopt the fuel quality directive, which calculates a fuel’s entire life cycle of emissions, which will make fuels from oil sands less competitive in the EU market and has caused friction between the EU and Canada.

3. Production risks. The Oil Sands appears to have resulted from centuries of oil flow. Out of a higher point of earth’s crust the oil flowed along in a river until it began to solidify at a low point or valley, which makes it uniquely different from most oil deposits still in the ground. Being a newer form of energy and mixed in with the sands, Canadian Oil Sands and the industry is still achieving significant gains in production despite the associated pitfalls of not being far along on the learning curve. That said, Canadian Oil sands could possibly run at higher cost than forecasted for a while.

4. We’ve seen many articles indicating that the lack of transportation pipelines for the Alberta and beyond region is causing a bottleneck in supply lines, and that the Keystone Pipeline (among others) would greatly expand alternative modes of transportation to market. Looking at the price history and knowing that Syncrude has been both above and below the WTI prices, it’s hard to project its impact. The current reason stated for 20 dollar lower per barrel prices in the Alberta area is the frequent recurrence and increased development of several choke points in distribution, which is common in new regions with rapid improvements in production. Our best estimate is that if Keystone and/or other pipelines are approved, it would greatly reduce the volatility of prices and make the income and earnings more correlated to other oil market prices, thus making the operation more desirable.

Summary and Conclusion

Canadian Oil Sands integrates well into our strategic plan of finding strong balance sheet companies that own highly desirable assets and/or are monopolistic businesses, and are significantly undervalued as a result of depressed markets and/or currencies, such as our recently selected Administradora de Fondos de Pen (PVD), which holds a dominant position similar to Canadian Oil Sands, when neither copper nor the Chilean peso were having much success in finding a bottom.

Therefore, we think Canadian Oil Sands allows our clients to attain the strategic goals of an income stream and long term capital growth, offers diversification away from the US economy and the US dollar, which is why we have added it to our Investment Growth & Income Portfolio. For Canadians we recommend using Bank Offshore to attain foreign denominated bonds and income.

Disclosure: Durig Capital and some clients currently have positions in COS.TO.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

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7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.

Randy — Thu, 03 May 2012 20:25:52 +0000

This week we consider a medium term Jaguar Land Rover 8.125% coupon note denominated in pound sterling that will yield about 7.24% through maturity. Although the lower rating of this company, currently owned by Tata Motors, necessitated a higher 8.125% coupon yield when it was first issued almost one year ago, the strong and steadily improving performance while under the new management of Tata Motors has brought this lesser known “junk rated” issue to the forefront of our attention and careful scrutiny. Not always believing that the well known and more popular rating agency always get it right, here at Durig Capital we have developed our own strict criteria for evaluating unrated and/or high yield junk bonds. As a result of our research, as presented in more detail below, we believe that the slight premium for this high coupon bond is justified, and that it currently represents one of the best short to medium term “risk to reward” opportunities denominated in the Queen’s currency. A further consideration of the most recent political and fiscal directions in the U.K. leads us to believe the currency is well positioned against many other global currencies. Therefore, we are using this opportunity to add Jaguar Land Rover bonds to our Foreign and World Fixed Income holdings.

Wealth Preservation Concerns

Wealth preservation remains as one of the biggest concerns among our clients, and we continue to look for the most “intelligent risks” that are more likely to achieve reasonable returns that can simply outpace moderately rising inflation. With US Five Year treasury yields still stuck near 1%, the Ten Year hovering around (often below) 2%, and with energy commodities (up over 6% year over year) threatening to push the CPI average back over 3% (the food index already at 4.4%), a certain degree of wealth destruction is virtually assured within these otherwise commonly considered “safe” US government notes.

Part of our effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars is to lower overall portfolio risk by diversifying a portion of our fixed income investments into sound, high yielding instruments denominated in (or linked to) currencies outside of the US Dollar, and away from the US economy.

United Kingdom’s Economy

The UK, a leading trading power and financial center, is the third largest economy in Europe after Germany and France. Over the past two decades, the government has greatly reduced public ownership and contained the growth of social welfare programs. Agriculture is intensive, highly mechanized, and efficient by European standards, producing about 60% of food needs with less than 2% of the labor force. The UK has large coal, natural gas, and oil resources, but its oil and natural gas reserves are declining and the UK became a net importer of energy in 2005. Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance.

Facing burgeoning public deficits and debt levels, in 2010 the CAMERON-led coalition government (between Conservatives and Liberal Democrats) initiated a five-year austerity program, which aims to lower London’s budget deficit from over 10% of GDP in 2010 to nearly 1% by 2015. In November 2011, Chancellor of the Exchequer George OSBORNE announced additional austerity measures through 2017 because of slower-than-expected economic growth and the impact of the euro-zone debt crisis. The CAMERON government raised the value added tax from 17.5% to 20% in 2011. It has pledged to reduce the corporation tax rate to 23% by 2015. The Bank of England (BoE) implemented an asset purchase program of up to £325 billion (approximately $525 billion) as of February 2011. During times of economic crisis, the BoE coordinates interest rate moves with the European Central Bank, but Britain remains outside the European Economic and Monetary Union (EMU).

	Public debt to GDP	Budget Deficit	Exports	Imports
United Kingdom in £	62.8%	£ 120 Billion	487.3 Billion	518.8 Billion
United States in USD	102.8%	US$ 1.29 Trillion	1.474 Trillion	2.239 Trillion

Stanford University has rated the UK economy number # 9 on its global Sovereign Fiscal Responsibility Index. This recognition highlights how much stronger the UK’s financial condition is compared to the # 28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.

Historically, from 1972 until 2012 the GBPUSD exchange averaged 1.75 reaching an historical high of 2.62 in May of 1972 and a record low of 1.05 in February of 1985

US Dollars per British pounds (GBP) -

1.622 (current)
1.556 (2011)

1.547 (2010)

1.605 (2009)

1.457 (2008)

2.003 (2007)

Jaguar Land Rover

Jaguar Land Rover is a business built around two great British car brands that design, engineer and manufacture in the UK. Jaguar Land Rover is currently part of Tata Motors, India’s largest automobile company, who acquired it from Ford Motor Co. in 2008 for a mere 2.3 billion dollars. Having survived the global downturn (which hurt the market for many luxury vehicles), Jaguar Land Rover’s most recently released results for the period ending Dec 2011 are demonstrating remarkable success and profitability under Tata’s management. While Moody’s credit rating of B1 for this debt issue reflects Jaguar Land Rover’s small scale as a niche player with a limited product line and materially less financial strength than other premium car manufacturers, it is evidently much more difficult to assess the value of its rapidly growing (at 17%) Chinese market versus the potential R&D expenditures of its envisioned model expansion and limited track record.

One of the key metrics that we examined when reviewing this issue was profitability. Even with the higher level of investment required by the company’s growth strategy, it continues to be fully funded from operating cash flow and the overall free cash flow remained positive in the most recent nine month period at £619.0m. The nine months revenue was increased by 31% to £9,367.5 million compared to 9M FY11. Retail volumes for Q3 FY12 were 13,006 units for Jaguar and 65,287 for Land Rover. Land Rover’s growth, compared to the equivalent quarter in the prior year was 41% whilst Jaguar’s volume increased by 9%.

Another key consideration is the amount of available free cash flow relative to the level of debt interest obligation. Their combined short and long term debt total at the end of nine months (Dec 31, 2011) was £1,583.7m. While their interest costs for this same period are listed at £71.4m, when their additional activities are added in it ends up closer to £100m. Nine month cash flow from operations came in at £1,567.5m and net income before taxes at £976.3m, providing debt interest coverage ratios of over 15x’s and nearly 10x’s, both of which are superb.

We prefer companies with a low debt to cash ratio. Considering that the cash balance of their investment and financial products is £1,815.5, which is higher that their debt level, means that they could now pay off the debt entirely if necessary.

Finally, we like companies that have flexible balance sheets. Although currently a subsidiary of Tata Motors, the company has recently been valued by outside analysts surveyed by Bloomberg at more than $14 Billion (USD), which is more than either Fiat or Suzuki. With this new valuation, analysts are suggesting/expecting Tata to put JLR on the public market. Given its relatively low debt (less than $2.6B in USD), we view their debt as being about 18.5% of the value of the company, a debt to equity level that most bank lenders would gladly welcome.

Combined, these financial ratios are among the strongest that we have reviewed, and it is why we have chose to include this British pound sterling denominated Jaguar Land Rover Bond in our offshore bank income investment opportunities that include issuers such as JP Morgan (JPM)’s, Bank of America (BAC), Lloyds Bank (LYG) or UBS (UBS).

Risks

The default risk is Jaguar Land Rover’s ability to perform. Given their significantly improved performance and greatly strengthened equity position since being under the umbrella of Tata Motors, we consider the higher yield of this bond as an intelligent reward opportunity relative to its performance risk.

There is currency risk, as this bond exposes the investor to the valuation changes in British pound sterling, which is affected by certain economic conditions of the United Kingdom and fiscal policies of the Bank of England.

We view these bonds as having other risks similar to other lower or unrated high yield short to medium term bonds that we have recently written about, such as Georgian Railway, Neo Material Technologies, Netflix, or Tutor Perini Corporation.

Accessibility and Liquidity

Jaguar Land Rover has three outstanding bonds issued in May of last year, the largest being £500m and the other two being $400m each. We prefer the larger, shorter maturity issue, which is currently available in the secondary market. We believe that acquiring and owning individual maturity definite bonds offer significant advantages over owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail. Even though many times broker/dealers require an institutional sized bond purchase, it is possible with a broker and advisor’s assistance for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.

Conclusion

We hope NOT to see any further destruction of wealth resulting from a constant decline in the US dollar relative other global currencies (as forecast by the Congressional Budget Office), and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this British pound sterling denominated bond. On the other hand, should the US dollar continue on the long term path of devaluation that it has been on, this alone could add quite significantly to the already positively accruing returns of this bond, not to mention the possible stellar returns that would result should the US dollar ever lose its domineering status as the world’s reserve currency and collapse against a basket of other stronger currencies.

Therefore, we are recommended this medium term Jaguar Land Rover pound sterling bond for our clients looking for both greater cash flow and diversification away from overweighted US dollar based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Coupon: 8.125

Maturity: 5/15/2018

Pays: Semi-annually

Rating: B+

Price: 104.25

Yield to Maturity: ~7.24%

Disclosure: Some Durig Capital clients may currently own these bonds.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our Fixed Income Specialist for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

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9.00% First Year Yields with A-/A rated Morgan Stanley Australian Dollar Bonds, matures April 2017. Coupon pays quarterly.

Randy — Thu, 19 Apr 2012 16:59:26 +0000

We have identified a 5 year new issue Morgan Stanley Kangaroo bond that will yield 9.0 the first year, and then switch to a floating rate yield (the 3 mo. LIBOR rate plus 5%) in years 2 through 5. The high yield and medium length maturity of this Australian dollar bond, when considered with its solid A-/A rating, compares very favorably with other high yielding instruments in our Foreign and World Fixed Income holdings. We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we view this as an opportune time to increase our exposure to one of world’s better performing currencies and fundamentally strongest economies.

Wealth Preservation Concerns

Wealth preservation continues to be one of the biggest concerns among our clients. In other words, the focus for many people is not necessarily towards making more money, but to preserve the wealth they have already accumulated by taking what we call “intelligent risks” to achieve reasonable returns that can simply outpace moderately rising inflation. With US Five Year treasury yields still stuck near 1%, the Ten Year hovering around 2%, and with energy commodities (up over 6% year over year) threatening to push the CPI average back over 3% (the food index already at 4.4%), a certain degree of wealth destruction is virtually assured within these otherwise commonly considered “safe” US government notes.

In the continuing effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars we have chosen this highly attractive Morgan Stanley Australian Dollar issue as This Week’s Best Bond.

Australian Economy

Australia’s abundant and diverse natural resources include extensive reserves of coal, iron ore, copper, gold, natural gas, uranium, and renewable energy sources. It also has a large services sector and is a significant exporter of natural resources, energy, and food. Key tenets of Australia’s trade policy include support for open trade and the successful culmination of the Doha Round of multilateral trade negotiations, particularly for agriculture and services.

While many large advanced economies have been struggling with growing debt burdens that result from years of heavy government spending, Australia’s gross public debt stands at less than 25 percent of GDP. Unemployment, originally expected to reach 8-10%, peaked at 5.7% in late 2009 and fell to 5.0% in 2011. Budget deficits have been under control owing to prudent public finance management that recognizes limits on government. As a result of an improved economy (growing 2.7% in 2010 and 3% in 2011,) the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.

Earlier last month, the Reserve Bank of Australia trimmed the economy’s growth forecast to 3.5 percent for the year ending June 2012 from the previous forecast of 4 percent. The annual rate of inflation in Australian appears to have recently fallen to about 2%, but is projected to rise by 0.7 percent. With inflation under control, the latest batch of data keeps the door open to further rate cuts. China’s weaker-than-anticipated exports, as well as industrial production and retail sales data released last week, was generating uncertainty about the near-term outlook for Australian resource stocks, but offshore investors continue to see Australia as a safe haven with a stable growth outlook on the back of the strengthening resource boom.

	Public debt to GDP	Budget Deficit	Exports	Imports
Australia in A$	30.3%	A$ 20.3 billion	212.9 Billion	200 Billion
United States in USD	102.8%	US$ 1.29 Trillion	1.474 Trillion	2.239 Trillion

Stanford University has rated the Australian economy number #1 on its global Sovereign Fiscal Responsibility Index. This recognition helped highlight how much stronger Australia’s financial condition is compared to #28 ranked (out of 34) United States, which came in only four points above a defaulted Iceland.

Australian dollars (AUD) per US dollar -

0.9645 (current)
0.9797 (2011)

1.0902 (2010)

1.2822 (2009)

1.2059 (2008)

1.2137 (2007)

1.3285 (2006)

About Morgan Stanley

After the Glass-Steagall Act of 1933 which separated commercial banking from securities underwriting, Morgan Stanley opened for business after separating from J.P. Morgan. When the global financial crisis of 2008 brought down rivals Bears Sterns and Lehman Brothers, Morgan Stanley secured a $9 Billion capital investment from Mitsubishi UFJ (MUFG.) The firm also helped the U.S. Treasury navigate the crisis at mortgage providers Fannie Mae and Freddie Mac. In 2009, James Gorman helped create the largest wealth management platform in the world when he led the merger and integration of Morgan Stanley’s retail brokerage operations and Citibank’s Smith Barney brokerage unit. The wealth management platform is a very good annuitized income, lower risk business. The Morgan Stanley Smith Barney joint venture is now a global leader with more than 18,000 financial advisors and $ 1.5 trillion in client assets.

Morgan Stanley delivered strong full year results, reporting fourth quarter net revenues at $5.7 Billion and full year net revenues for 2011 at $32.4 Billion. The Global Wealth Management Group delivered net revenues of $13.4 billion, with global fee-based asset flows of $42.5 billion and net new assets of $35.8 billion, the highest for both since the inception of the Morgan Stanley Smith Barney joint venture (MSSB). The year’s pre-tax margin improved to 10% from 9% a year ago. Asset Management reported net revenues of $1.9 billion, with assets under management or supervision of $287 billion and positive net flows of $25.8 billion. In strategic actions that further strengthen Morgan Stanley’s capital and liquidity, their Series B Preferred Stock held by MUFG was converted into common stock, and several outstanding strategic and legacy issues were resolved, including a settlement with MBIA.

This Morgan Stanley Australian dollar note offers a very sweet 9% first year yield, making it especially attractive to fixed income investors desiring a higher cash flow from their fixed income investments. While we expect that the coupon rate will reset to lower rates (possibly under 6% if the LIBOR rate remains near current levels) in later years, the overall average rate that we think this bond could potentially produce represents a remarkable improvement over similar maturity US Treasuries, and a yield that is significantly higher than that of similar Morgan Stanley bonds denominated in US dollars. Furthermore, the floating rate feature of this issue would be a great benefit to bondholders should LIBOR rates and inflation (the inevitable result of proliferating dollars) rise much sooner than many pundits expect. Even if the Congressional Budget office is wrong and we have an appreciation of the dollar, as long as the currency appreciation averages less than 3% annually relative to the Aussie dollar, this bond is still likely outperform its US dollar counterpart.

Please compare this Australian dollar denominated Morgan Stanley Bond to our other offshore bank income investment opportunities, that include Morgan Stanley’s Russian ruble or Brazilian real linked bonds, or Bank of America (BAC)’s Brazilian real bond and Australian dollar bonds of shorter maturities.

Risks

The default risk is Morgan Stanley’s ability to perform. Morgan Stanley is currently under review for a credit downgrade from major rating agencies, which could affect the flexibility of their balance sheet, their access to more favorable financing, and possibly the desirability of their existing debt. However, given last year’s great results and their improved balance sheet, it is our opinion that the default risk for this short term bond is minimal relative to the currency risk of the Australian dollar.

The currency risk of the Australian dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy. Australia’s economy is heavily dependent upon its strong commodity export, which could be affected adversely with diminishing demand from China.

Accessibility and Liquidity

Morgan Stanley currently has over $415 billion of outstanding debt, mainly denominated in U.S. dollars. Aside from owning various emerging market funds and ETFs that blend together various winners and losers into a mixed yield cocktail, the question arises as to how a retail investor might own or acquire individual, maturity definite Morgan Stanley Russian ruble linked notes. Many times broker/dealers require an institutional sized single bond purchase. However, with a broker and advisor’s assistance, it is possible for a number of retail clients to be combined together in order to make a larger institutional sized purchase. Previously, we have been able to facilitate purchases as low as US $10,000.

Conclusion

We hope NOT to see any further destruction of wealth resulting from a constant decline in the US dollar relative other global currencies as forecast by the Congressional Budget Office, and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this Australian dollar denominated bond. On the other hand, should the US dollar continue on the long term path of devaluation that it has been on, this alone could add quite significantly to the already positively accruing returns of this bond, not to mention the possible stellar returns that would result should the US dollar ever lose its domineering status as the world’s reserve currency and collapse against a basket of other stronger currencies.

A continued demand for Australia’s abundant natural resources will likely result in a continued strengthening and expansion of their economy, which in turn is likely to result in the strengthening of the Aussie dollar, which we believe is one of the strongest global currencies. Therefore, we are recommended this new issue Morgan Stanley Aussie bond for our clients looking for both greater cash flow and diversification away from overweighted US dollar based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Coupon: 9.00 (first year, floats at 3 mo. LIBOR plus % in later years)

Maturity: 4/30/2017

Pays: Quarterly

Rating: A-

Price: 100.0

Yield to Maturity: VAR

A Preliminary Terms Prospectus for this new issue is available upon request.

Disclosure: Some Durig Capital clients may currently own these bonds.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our Fixed Income Specialist for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

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5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016

Randy — Wed, 18 Apr 2012 23:12:30 +0000

This week we identify and compare two very similar debt instruments, both denominated in Swiss francs, from two of Europe’s most reputable insurance companies, Swiss Life and SRLEV N.V. Both of these high yielding investment grade bonds have a first call date in 2016, at which time they will either be called by the company, or reset their coupon rate to the 5 year CHF swap rate (the Swiss National Bank’s key lending rate) plus the initial spread (which was 3.55% for Swiss Life, and 5.625% for SRLEV N.V.) We have targeted acquiring these bonds at close to par value, which would give holders a yield close to their current coupon rate of 5.25% for Swiss Life, or 7% for SRLEV N.V. These are two of the best rates that we have found for investment grade debt denominated in Swiss francs, and believe this to be a great opportunity for adding this traditionally strong currency into our Foreign and World Fixed Income holdings.

Wealth Preservation Concerns

As an array of mixed signals across the economic landscape continue to cajole global equity markets higher, wealth preservation and risk aversion remain top priorities for many people. Declining equity and property prices, ultra-low interest rates, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the Fed’s constant printing of more money in what may be an effort to not only backstop the US economy but also that of Europe, have all precipitated into a widespread erosion of wealth that will likely continue until the aforementioned conditions begin to change.

As governments around the world lower their exchange rates in efforts to bolster competitiveness, it will cause a chain reaction in which countries involved in trade will need to weaken their own currency to bring it into a ratio of exchange that is acceptable to their perceived valuation. With the US money supply up over 60% in less than 4 years (over 12% per year), many governments (including the Congressional Budget Office of the United States) believe that the dollar will weaken over the longer term. Just last week, U.S. central bank official James Bullard, while speaking behind closed doors in Beijing, warned that nations that tie their currency to the dollar are at risk of importing inflation in the current environment.

Here at Durig Capital, we have undertaken the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of federal dollars, by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen these high yield, 5 year re-adjusting (floating) rate, perpetual Swiss franc bonds as This Week’s Best Bond.

Switzerland’s Economy

Switzerland is a peaceful, prosperous, and modern market economy with low unemployment, a highly skilled labor force, and a per capita GDP among the highest in the world. Switzerland’s economy benefits from a highly developed service sector, led by financial services, and a manufacturing industry that specializes in high-technology, knowledge-based production. Its economic and political stability, transparent legal system, exceptional infrastructure, efficient capital markets, and low corporate tax rates also make Switzerland one of the world’s most competitive economies. The Swiss have brought their economic practices largely into conformity with the EU’s, to enhance their international competitiveness, but some trade protectionism remains, particularly for its small agricultural sector. The fate of the Swiss economy is tightly linked to that of its neighbors in the euro zone, which purchases half of all Swiss exports.

The demand last year for the Swiss franc by investors seeking a safe haven currency resulted in the independent Swiss National Bank (SNB) conducting major market interventions to prevent further appreciation of the Swiss franc, as the franc’s strength made Swiss exports less competitive and weakened the country’s growth outlook. In the final quarter of 2011 exports fell 6.8% due to its strong currency. While unemployment is low at 3.1%, GDP fell to 1.4% in 2011, and the debt to GDP remains lower than most nations at 55%. The inflation rate for Switzerland was reported at -1 percent in March of 2012, with expectations for more to the downside. However, judging from the SNB’s own quarterly report (released today) on the inflation forecast, it appeared to be heading towards a bottom, then a gentle upwards slope.

As deflation concerns begin to wane, there will be increasing pressure for an exit strategy from the EURCHF “floor”, along with other unconventional policy strategies. Furthermore, there is increasing evidence of international and internal pressure to limit continued intervention. The SNB took a huge risk, which has paid off so far, in their strategy but the SNB’s balance sheet is slowly expanding, increasing the risk that the 1.2000 floor might come with a heavy price. From a historical perspective, the last time the SNB pegged the franc to another currency (the Deutsche mark) it lasted for about 2 years before it was unwound.

Public debt to GDP

Budget Deficit

(Surplus)

Exports

Imports

Switzerland
(in CHF)

55.0%

(26.5 Billion)

197.9 Billion

173.5 Billion

United States

102.8%

US$ 1.29 Trillion

1.474 Trillion

2.239 Trillion

Swiss franc (CHF) per US dollar -

0.920 (current)
0.939 (2011)

0.945 (2010)

1.029 (2009)

1.081 (2008)

1.119 (2007)

1.214 (2006)

1.327 (2005)

About Swiss Life

The Swiss Life Group is one of Europe’s leading providers of life insurance and pension solutions. In Switzerland, France and Germany, the Group offers individuals and corporations comprehensive advice and a broad range of products through its own sales force as well as brokers and banks. Swiss Life provides international corporations with employee benefits solutions from a single source, and is one of the global leaders in structured life and pension products for international high net worth individuals. Swiss Life Holding Ltd, registered in Zurich, was founded in 1857 as Schweizerische Rentenanstalt. The shares of Swiss Life Holding Ltd are listed on the SIX Swiss Exchange (SLHN), and the Swiss Life Group employs a staff of around 7500.

Swiss Life also owns AWD Group, which is a leading financial services provider in Europe. Insurance and third-party funds are managed by its subsidiary Swiss Life Asset Management.
Due to its clear orientation, Swiss Life has an attractive and sustainable competitive position in all markets. Standard & Poor’s has rated both Swiss Life Ltd, Zurich and Swiss Life, Munich, as “BBB+” with outlook “positive”. S&P affirmed the “BBB+” long-term counterparty credit and insurer financial strength ratings on Swiss Life Ltd and the “BBB-“ long-term counterparty credit rating on Swiss Life Holding Ltd.

Swiss Life increased its net profit by 8% from CHF 560 million in 2010 to CHF 606 million in 2011. Adjusted for one-offs and currency effects, profit from operations stood at CHF 793 million, representing a substantial improvement over the previous year’s figure of CHF 751 million. This was mainly driven by the outstanding investment result, improvements at operational level and ongoing cost management. The net investment result of CHF 4.3 billion corresponds to a net investment return of 3.8%; total investment performance was at 7.4%. In addition to an excellent investment result, Swiss Life achieved further operational advances and, by 2011, had already achieved the cost targets set for 2012. The Group maintained its focus on profitability and grew in strategically important business areas.

In the words of Bruno Pfister, Group CEO, “Swiss Life negotiated a tough market environment and can look back on a successful 2011…Despite the historically low interest rates, our Group has grown in key strategic business areas. Going forward, we do not expect much tailwind from the financial markets. Our improved operational effectiveness, however, allows us to expand our strong market position even in the current economic climate.”

About SRLEV

SRLEV N.V. provides insurance services in the Netherlands. The company was formerly known as REAAL Levensverzekeringen N.V. and changed its name to SRLEV N.V. in July, 2009. The company was incorporated in 1904 and is based in Alkmaar, the Netherlands. SRLEV N.V. operates as a subsidiary of REAAL Verzekeringen N.V., the insurance division of SNS REAAL. The group formed by SNS REAAL and its subsidiaries has a long history that is closely related to the social democratic movement and the worker’s movement, and its roots lay in two insurance companies connected to those movements incorporated by the trade union at the beginning of the twentieth century. In 2007, SNS REAAL acquired Zwitserleven from Swiss Life Holdings, making it the second largest life insurer in the Netherlands.

In the first half of 2011, SRLEV, the legal entity comprising most of the life Insurance activities of SNS REAAL, successfully placed € 400 million of 30-year Tier 2 notes and CHF 105 million of perpetual subordinated notes. These transactions were part of the capital management of SRLEV and were related to the replacement of internal funding by external funding, a significant portion of which were to the Dutch government. The Supervisory Boards of SNS Bank NV, REAAL NV and SRLEV NV are composed of the same individuals as the Supervisory Board of SNS REAAL.

While Moody’s currently rates these bonds at Baa2, most aspects of SRLEV’s Insurance Financial Strength rating scorecard (including market position and brand, product focus and diversification, asset quality, capital adequacy, liquidity and ALM, reserve adequacy, and financial flexibility) all received the higher A rating. Weakest in the overall rating was their diversity of distribution and geographic diversification. Moody’s also includes the financial flexibility at the SNS REAAL Group level in its analysis, and earnings are expected to remain under pressure, in line with expectations of constrained profitability of both the insurance and banking operations. Standard and Poor’s evaluation of the strong stand alone credit profiles of both REAAL Verzekeringen N.V. and SRLEV N.V. was reduced one notch (BBB) as a result of a notional group operating rating for the SNS REAAL group.

In our opinion, SRLEV’s life insurance business appeared to have a higher portion of stronger fundamentals than the parent banking group (SNS REAAL), and the additional benefit that would more normally come from the “bank guarantee” associated with this bond might actually be bringing with it the perception of added risk.

Risks

The default risk is Swiss Life and SRLEV N.V. abilities to perform. While the SRLEV debt issue does represent a higher risk than that of Swiss Life, given the sound business fundamentals and solid investment grade ratings of both, it is our opinion that the default risks for these hybird (perpetual) rate adjusting bonds are low relative to the higher yields that they offer and the currency risk of the Swiss franc.

The currency risk of the Swiss franc could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Switzerland’s economy and the policies of the Swiss National Bank.

Allotments

Many people ask, how do I invest in Switzerland Corporate bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint and allow greater diversification, we at Durig Capital combine world bond buyers into a larger institutional sized purchase. In our previous syndicates, we were able to facilitate purchases as low as $10,000 US Dollar and should be able to do the same for your interest.

Conclusion

We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the US dollar. We acknowledge that a stronger US dollar would directly reduce the total returns of this Swiss bond. Conversely, if the US dollar continues on the longer term path of relative weakness to the Swiss franc that it has been on, this alone would add significantly to the already higher positively accruing returns of this bond.

The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the US dollar’s weakness against the Swiss franc, and a diversification away from heavily overweight US dollar based assets into one of the world’s top tier fiscally conservative countries is why we are adding these bonds at this time to our Foreign and World Fixed Income holdings.

Swiss Life Coupon: 5.25

First Call: 10/04/2016

Pays: Annually

Rating: BBB-/-

Price: 100

Current Yield: 5.25%

SRLEV Coupon: 7.01

First Call: 12/19/2016

Pays: Annually

Rating: BBB-/Baa2

Price: 100

Current Yield: 7%

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our Fixed Income Specialist for questions at 971-327-8847.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
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14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
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9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.

Randy — Tue, 10 Apr 2012 23:03:01 +0000

We have identified a 5 year new issue Morgan Stanley bond linked to Russian that will yield 9.43 to maturity. The high yield and medium length maturity of this ruble bond, when considered with its solid A-/A rating, compares very favorably with other high yielding instruments in our Foreign and World Fixed Income holdings. We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we view this as an opportune time to diversify into the Russian economy, which continues to show remarkably good growth potential in spite of the recent financial turmoil.

Wealth Preservation Concerns

Wealth preservation continues to be one of the biggest concerns among our clients. In other words, the focus for many people is not necessarily towards making more money, but to preserve the wealth they have already accumulated by taking what we call “intelligent risks” to achieve reasonable returns that can simply outpace moderately rising inflation. With US Five Year treasury yields stuck near 1%, the Ten Year hovering around 2%, and with energy commodities (up over 6% year over year) threatening to push the CPI average back over 3% (the food index already at 4.4%), a certain degree of wealth destruction is virtually assured within these otherwise commonly considered “safe” US government notes.

Here at Durig Capital, we are continuing in the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars by scouring the globe in search of sound investments in a basket of the strongest global currencies, and it is why we have chosen this superior yielding Morgan Stanley Russian ruble issue as This Week’s Best Bond.

Russian Economy

Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industries, with notable exceptions in the energy and defense-related sectors. The Russian export industry consists primarily of natural gas to the Euro zone, is the world’s second largest exporter of oil, and is the third largest exporter of steel and primary aluminum. This reliance on commodity exports makes Russia vulnerable to boom and bust cycles following the highly volatile swings in global commodity prices, and provides reason for the higher correlation of its currency to oil prices.

The economy had averaged 7% growth since the 1998 Russian financial crisis, resulting in a doubling of real disposable incomes and the emergence of a middle class. The Russian economy, however, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. The economic decline bottomed out in mid-2009 and the economy began to grow in the first quarter of 2010. Growth for 2011 was 4.8%, and unemployment was at 6.6%. Capital markets are relatively small but growing and are dominated by energy companies.

Russia’s competitive flat income tax rate and low corporate tax rates support innovation, although private enterprises also must cope with “informal taxes” such as bureaucratic hassling and corruption. Other taxes include a value-added tax (VAT) and a regional property tax. Overall tax revenue as a percentage of GDP was 34.1 percent. In the most recent year, total government expenditures, including consumption and transfer payments, increased slightly to 34.1 percent of GDP. The state maintains a strong presence in such key sectors as energy and mining. Public debt is at under 10 percent of GDP in 2011, while inflation is 3.8%.

Country	Debt to GDP	2011 GDP growth	Unemployment Rate
Russia	9.9 %	4.8 %	6.6%
United States	over 100 %	3.0 %	8.2 %

About Morgan Stanley

Issuer	Currency	5 Year Bond Yield	Ratings
US Treasury	US Dollar	1.01%	AA+,AAA,AAA
Morgan Stanley	US Dollar	4.85%	A-, A
Morgan Stanley	Russian Ruble	9.43%	A-, A

This Morgan Stanley ruble linked note indicates a yield pickup of over 8% compared to similar maturity US Treasuries, and a yield that is nearly double that of similar Morgan Stanley bonds denominated in US dollars. Even if the Congressional Budget office is wrong and we have strong appreciation in the dollar, as long as the currency appreciation averages less than 4.6% annually relative to the ruble, this bond would still outperform its US dollar counterpart. However, if the CBO is correct, and should the US currency decline instead of gain that same 4.6% annually, that much appreciation of the ruble would likely result in a better than 14% annual return.

Please compare this Russian ruble Linked Morgan Stanley Bond to their Brazilian linked note, or Bank of America (BAC) Brazilian real bonds and Australian dollar bonds of shorter maturities.

Risks

The default risk is Morgan Stanley’s ability to perform. Given last year’s great results, their improved balance sheet, and the positive outlook for Morgan Stanley, it is our opinion that the default risk for this short term bond is minimal relative to the currency risk of the Russian ruble.

The currency risk of the Russian ruble could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Russian economy. Russia’s long-term challenges include a shrinking workforce, a high level of corruption, difficulty in accessing capital for smaller, non-energy companies, and poor infrastructure in need of large investments. Higher oil prices, which buoyed Russian growth in the first quarter of 2011, could help Russia reduce the budget deficit inherited from the lean years of 2008-09.

Accessibility and Liquidity

Conclusion

We hope NOT to see any further destruction of wealth resulting from a constant decline in the US dollar relative other global currencies as forecast by the Congressional Budget Office, and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this Russian ruble denominated bond. On the other hand, should the US dollar continue on the long term path of devaluation that it has been on, this alone could add quite significantly to the already highly positive accruing returns of this bond, not to mention the possible stellar returns that would result should the US dollar ever lose its domineering status as the world’s reserve currency and collapse against a basket of other stronger currencies.

While acknowledging that every investment vehicle involves varying elements of risk, we believe that this recent strengthening of the US dollar relative to the Russian ruble represents an extremely attractive opportunity for initiating a moderately longer term exposure to the Russian economy with a well respected issuer, at a very attractive yield. A continued demand for Russia’s abundant supply of oil and natural gas will likely result in a continued strengthening and expansion of their economy, which in turn is likely to result in the strengthening of the ruble currency, which we believe is one of the currencies more highly correlated to the price of oil. Therefore, we view the ruble currency risk of this prominent emerging market as an unusual and significant opportunity that we have highly recommended our clients take in their continued effort to diversify away from overweighted US dollar based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Coupon: 9.25 (steps up in later years)

Maturity: 4/30/2017

Rating: A-

Price: 100.0

Yield to Maturity: 9.43%

Disclosure: Some Durig Capital clients may currently own these bonds.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Investment-Income.net

To find our more about how to place this investment offshore please see Bank-Offshore.co

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.
14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
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8% Yield in US $'s, Argentina Government "Yankee" bonds, matures Oct. 2015
Transportadora de Gas Del Sur S.A (TGS) Investment with Income

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7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.

Randy — Wed, 28 Mar 2012 16:17:30 +0000

Goldman Sachs (GS) has a floating rate debt issue denominated in Australian dollars, which resets its coupon rate quarterly at the Australian Bank Bill Swap Reference Rate (BBSW) plus 0.51%, matures in 48 months, and currently indicates a yield to maturity about 7%. The high yield and short maturity of this Aussie bond, when considered with its solid A- rating and enviable reputation, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings, and we think Australia’s recent weaker than expected economic report and pull back of Aussie dollar presents a great opportunity for increasing exposure to the Australian currency in our basket of foreign fixed income holdings. We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we share the concern of our clients in protecting existing wealth by utilizing the higher yields of sound issuers in many the world’s strongest currencies and economies.

Wealth Preservation Concerns

Meanwhile, the currency war – a term coined by Brazilian Finance Minister Guido Mantega – appears to be escalating. China has slashed its foreign currency reserves in US dollars to a record low and, along with Japan, Russia, India, and others, is making moves to shift away from the dollar to use their own currency for settling bilateral trades. According to the Chinese rating agency Dagong Global Credit, the QE scheme has substantially eroded the legitimacy of the US dollar as the global reserve currency. The Chinese policy of small steps signals the increasing intention to turn the renminbi into a freely convertible currency and to gradually liberalize the capital market. By 2020, China wants to have turned Shanghai into an international finance center. China is preparing for the post-USD era at full speed. Within the framework of their new five-year plan, China wants to settle almost 50% of foreign trade in yuan by 2016. It wants to invoice in yuan in the bilateral trade transactions with African or Latin American countries that are rich in resources. Iran for example is said to supply oil for yuan. In addition, the People’s Bank of China has allowed almost 70,000 companies to invoice its foreign business worth almost USD 70bn in yuan. Numerous other examples illustrate the fact that the dollar skepticism is growing.

As governments around the world lower their exchange rates in efforts to bolster competitiveness, it will cause a chain reaction in which all countries involved in trade will need to weaken their own currency to bring it into a ratio of exchange that is acceptable to their perceived valuation. Interestingly, the increase in US money supply has recently been accelerating. Up over 60% in less than 4 years (over 12% per year), the more recent trends indicates a year over year increase of the M1 money supply of 19.3%, a 26 week rate of 22.4%, and a 13 week rate indicating of 16.8%. Many governments (including the Congressional Budget Office of the United States) believe that the dollar will weaken over the longer term and want alternatives, other than the tarnished euro, to use for trade and investment.

Here at Durig Capital, we have undertaken the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of federal dollars, by scouring the globe in search of sound investments in the strongest global economies, and it is why we have chosen Goldman Sachs floating yield, short term Aussie bond as This Week’s Best Bond.

Australian Economy

	Public debt to GDP	Budget Deficit	Exports	Imports
Australia in A$	30.3%	A$ 20.3 billion	212.9 Billion	200 Billion
United States in USD	102.8%	US$ 1.29 Trillion	1.474 Trillion	2.239 Trillion

Australian dollars (AUD) per US dollar -

0.9533 (current)
0.9797 (2011)

1.0902 (2010)

1.2822 (2009)

1.2059 (2008)

1.2137 (2007)

1.3285 (2006)

About Goldman Sachs

The Goldman Sachs Group, Inc. is a global leader in investment banking and securities who engages in investment banking, buying and selling securities, asset management and many other financial services focusing on institutional clientele and high net worth individuals. Goldman Sachs’ headquarters is located at 200 West Street, New York, and was founded in 1869. Former employees include Robert Rubin and Henry Paulson, who both served as the United States Secretary of the Treasury after resigning from Goldman Sachs, thus the nickname “Government Sachs”.

Liquidity is of critical importance to companies in the financial services sector, and most failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, Goldman Sachs has in place a comprehensive set of liquidity and funding policies that are intended to maintain significant flexibility to address both Goldman Sachs-specific and broader industry or market liquidity events. Management stated principal objective is to be able to fund Goldman Sachs and to enable their core businesses to continue to generate revenues, even under adverse circumstances.

To finance the firm’s business, Goldman Sachs issues various types of short and long term securities, including promissory notes, commercial paper, medium term notes and global bonds. It currently has about $ 825Bn in cash, $ 491Bn in debt, and its International bonds are solid Investment grade quality, being A- rated by S&P.

Goldman Sachs domiciled bond	Yield	Maturity	Rated
US Dollar	3.62 %	02/07/2016	A-
Australia Dollar	7.11 %	04/12/2016	A-

Risks

The default risk is Goldman Sachs’ ability to perform. Given their strong cash position, financial strength and evidently close political connections, it is our opinion that the default risk for this short to medium term bond is minimal relative to the currency risk of the Aussie dollar.

The currency risk of the Aussie dollar could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Australian economy.

Allotments

Many people ask, how do I invest in Australian Corporate bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint and allow greater diversification, we at Durig Capital combine world bond buyers into a larger institutional sized purchase. In our previous syndicates, we were able to facilitate purchases as low as $10,000 US Dollar and should be able to do the same for your interest.

Conclusion

We continue to search for individual corporate instruments denominated in the currencies of growing economies that yield higher than average returns to help protect our clients against the erosion of wealth that results from a constant devaluation of the US dollar. We acknowledge that a stronger US dollar would directly reduce the total returns of this Aussie bond. Conversely, if the US dollar continues on the longer term path of relative weakness to the Australian dollar that it has been on, this alone would add significantly to the already highly positive accruing returns of this bond.

Considering Australia’s long term position as a stable economy and political system with shrew fiscal management will likely correlate with a stable and possible strengthening of the commodity based Australian dollar relative to the US dollar, we view the gaining of nearly twice the yield from such a reputable issuer as Goldman Sachs as an incredibly compelling reason for choosing their Kangaroo bond over their similar length US dollar bond. The combination of offering a remarkably high yield, some protection against a further loss of wealth with a continuation of the US dollar’s weakness against the Aussie dollar, and a diversification away from heavily overweight US dollar based assets into one of the world’s top tier fiscally conservative countries is why we are adding it at this time to our Foreign and World Fixed Income holdings.

Coupon: 4.98

Maturity: 4/12/2016

Pays: Quarterly

Rating: A1/A-

Price: 92.6

Yield to Maturity: 7.11%

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our Fixed Income Specialist for questions at 971-327-8847.

Durig.com | Investment-Income.net

To find our more about how to place this investment offshore please see Bank-Offshore.co

Australia Government and Corporate Bond Articles Here

Australian Bonds Rates Sheet

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.
14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
7.58% yield, Georgian Railway, 3 1/2 year in US $ bonds
8% Yield in US $'s, Argentina Government "Yankee" bonds, matures Oct. 2015
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The following is the current options we provide you when you request a quote:

Institutional Yields
Government Bonds, in most major countries.
Foreign Corporate Bonds, most major corporate debt in a county.
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There is a vast number of these options available, and, therefore, impossible to list as we do with our other national fixed-income product pages. Instead, we provide customized quotes to help you solve your needs.

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9.2% Yield, Hungarian Development Bank, in Euros, matures 2016

Randy — Fri, 16 Mar 2012 22:08:40 +0000

Hungary for yield? These government guaranteed Hungarian Development Bank (MFB) Euro bonds are currently yielding over 9%, are Ba1 rated, and mature in May 2016. The strategic mission of the state owned MFB is to provide development funds necessary to realize the economic development goals determined by the medium and long term economic strategy of the Hungarian Government, and to be an active participant in the renewal and development of the Hungarian economy. Therefore, we see the additional bump in yield these bonds offer as an intelligent advantage over similar maturity, similar risks, but lower yielding Hungarian government bonds denominated in Euros. As the European Central Bank continues to flex its muscle and harden itself against the debilitating troubles of a debt burdened Eurozone, the US dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against further erosion its buying power. We believe this 50 month bond provides an opportunity for adding exposure to an underweight euro, in an economy that we think may be far better positioned in the recovery process than others financial pundits have portrayed or are willing to concede, and it is why we have chosen to add it to our Foreign and World Fixed Income Holdings.

Wealth Preservation and US Dollar Concerns

The US Debt to GDP is now well over 100% and climbing as a result of the US Government’s continued inability to reign in deficit spending. After adding in the bludgeoning of a widening trade deficit (consider how many of your last five purchases were something made in the USA), the Federal Reserve’s only known economic pain medication (printing more money and pushing it out the door at superficially low rates), and an inflation rate (by any measure) that greatly exceeds the 2 or 3 year savings rate that any bankster or traditionally “safe investment” offers any saver or fixed income retiree, it’s not difficult to understand heightened wealth preservation concerns. With the Everyday Price Index measuring average annual inflation rate at 8 percent in 2011, regardless of whether stated as inflation or as a reduction in the purchasing power of our currency, short term CD investors are (safely) losing ground fast to the dredging of big banks. Measuring from just a short four years ago, the seasonally adjusted M1 money supply has risen from 1.3819 to 2.2289 trillion, a 61.3% increase. While this prescribed fix offers a certain relief to a plethora of bad debt certain “too big to fail” banks swallowed in their failed grab for glory, savers are left wondering how much its “healing power” can remain and be directed to the rest of the economy, or anyone else.

Hungary Development Bank

The stated duty of the Hungarian Development Bank (MFB) is to provide funding to create jobs and promote employment (both of notable value to Hungary and the European economy) for:

Small- and medium-sized businesses, which through their development activities might increase the technological level and the rate of employment, and as a result, some of them might be able to link up with the supplier network of the largest enterprises and extend their activities abroad;
Municipalities, by providing development funding for them;
The retail sector, primarily in the area of energy efficiency and environmental investments.
Large enterprises, by funding large-scale development projects that generate the strongest spinoff-effects in the economy whereby they promote economic growth;

For the first six months of 2011, MFB had a loss of only $3.54 million dollar after taking a charge for impairment of $31.8 million. However, with many other Hungarian based banks indicating the need for additional right-offs, the loss will probably be higher in the second half of 2011. In Feb 2012 they announced a new HUF 100Billion ($450 Million) loan program for infrastructural development and another project designed to support the construction and renovation of rental homes. Done properly, these loans should provide a significant boost to the economy while offering a good return to the bank. Since Hungary has the ability to print their own money, many analysts see Hungary as having far less default risk than many of the countries which are based on the euro. With that said, this sort of new funding announced by MFB is one of the best ways for the Hungarian government to deploy capital.

Given the Hungarian Government’s ownership and guaranteed backing of the MBF bank bonds that we are reviewing this week, we find it more appropriate to consider various aspects of the Hungarian economy rather than spend further effort considering the more difficult financial reports of a privately held Eastern European bank.

Hungarian Economy

Hungary had a surprisingly strong performance in GDP last year, even in the midst of a very rough and tumble European slowdown. What appears to have surprised most analysts is that based on a preliminary estimate on Feb. 15, Hungary’s economic output rose 1.4 percent in the fourth quarter from a year earlier, as rising agricultural production helped growth. Over all of 2011, the economy grew 1.7 percent from the previous year. The GDP growth was surprisingly strong, especially considering the triple whammy of the European debt crisis, the plight of Greece, and the declining Hungarian currency, the forint. Industrial production, including exports of Audi AG cars and Nokia Oyj mobile phones assembled in the country, has helped Hungary recover from 2009, its worst recession in 18 years. Nokia’s announcement on Feb. 8 that it would cut 2,300 jobs in Hungary will undoubtedly have a negative impact, but with test production already under way, Daimler AG plans to start production of its new B-Class model at its plant in Hungary at the end of March.

Although Hungary has scaled back its projection for economic growth this year, their Prime Minister’s chief of staff Mihaly Varga maintains that the country will probably avoid a recession and has estimated a range between stagnation and 0.5 percent growth. Hungary is expecting to maintain its agricultural output level, which boosted growth last year, and Roland Natran, the deputy state secretary at the Economy Ministry, was recently quoted saying, “Significant investments currently under way will also help maintain the contribution of manufacturing to economic growth.” What we find incredibly impressive about this forecast, which is above many other European countries projections for growth, is that it wasn’t many years ago when it was Hungary that was considered the root of many European debt problems. However, after 40 years of socialist rule, they moved aggressively towards a uniquely free market mode and are subsequently weathering this financial storm better than many neighboring countries, and far better that most analysts seem to have thought possible prior to its arrival.

From the chart above it is easy to see that in 2010, Chile, Korea, and Hungary were a small set of select of countries whose Government actually spent less than it took in. Knowing that the Hungarian government has (and still is) achieving significant and rare progress towards debt reduction was a certain factor in selecting its short term debt as this week’s best bond. Also making it worthy of consideration is that fact that Hungary has one of the higher reserve levels of the countries that we have reviewed:

Country	DEBT – GDP	GDP GROWTH	RESERVES - DEBT	YIELD ON 5 YEAR DEBT
United States	100 %	1.6 %	00.9 %	2%
Hungary	80 %	1.7 %	35.0 %	10%

Hungary and the United States rank similarly on the Sovereign Fiscal Responsibility Index, with Hungary being 28th and United States one better, at 27. This close proximity was achieved as a result of Hungary making many large steps towards a free market economy over the last 10 years, and several positive steps towards a fiscal discipline that, during this same period, seems to have been much more elusive for the United States.

Hungarian Government

On the political front, Viktor Orban won the election in a landslide last year, and his party received a 2/3 super majority in the parliament. This will mark the first time since the communist era ended that the Hungarian government will be run without a political coalition. Mr. Orban ran on the promise to cut taxes, curb tax evasion, create jobs and reduce state bureaucracy. Since taking office, Hungary has announced a 10% reduction in government employment and a reduction in the government’s funding of pension funds. These large austerity measures could speed Hungary’s return to fiscal health, as a return to free markets often precludes a growth in prosperity within the private sector, which typically results in a more organic and sustainable harvest for government coffers.

The (Euro)pean Currency

We have finally seen what we been looking for in the Euro currency charts. After many banks announced billions in losses relating to a Greek debt restructuring, the euro currency strengthened against the dollar. In our opinion, when the currency began a strong move up at the same time the news for it was very poor, this is often a sign of a bottom and that the worst for it has probably passed. We have therefore just started introducing the euro into our Foreign and World Fixed Income Holdings, and this is only our second euro based recommendation, the first being our recent article on 14% Cyprus Government bonds. We now suspect that the euro, like many other currencies, may be poised to outperform the US dollar.

Risks

The most obvious risk is that of default. The Republic of Hungary was recently downgraded to a Ba1 rating for their sovereign debt, even though it has shown (as noted above) to be improving their fiscal situation rather than worsening. Given the Hungarian government’s ownership and backing of the Hungarian Development Bank, we think the greater risk of this bond resides in the currency it is denominated in, which in this case is the euro.

Although Hungary does not use the euro as its primary currency, the euro and the forint do have a correlation. With so many of the recent troubles stemming from, but not isolated in, Greece, the FX currency markets have been, and may continue to be for some time, very volatile. While Hungary’s location in the heart of Europe precludes escaping severe or major economic eruptions happening around it, we believe that the sovereign forint does offer some degree of insulation to possibly a more systemic weakening of the euro.

Hungary’s economy is slowly recovering, and in many ways may be out-performing its regional peers in its ability to mitigate the effects of the global financial crisis. However, fiscal consolidation and better management of public finance are still needed, and the high level of government spending is holding back private-sector growth. For further consideration and comparisons of emerging economies, please see our other Hungarian and Foreign Bond articles.

Conclusion

With so many uncertainties lingering in the US and global economies, we believe that a good income portfolio should include issues denominated in foreign and world currencies that could potentially prove to be beneficial both in the higher yields they offer as well as in lowering overall portfolio risk by protecting principle through greater diversification. Therefore, we think that the combination exposures that this bond gives to the Hungarian economy and to the euro, at much higher yield than is typically available, represents a savvy risk to reward opportunity that stands to capture the potential appreciation of the euro and assist our clients in protecting against a possible further loss in buying power of the US dollar, and it is why we are recommending the addition of this 50 month Hungarian Development Bank Euro Bond to our Foreign and World Fixed Income Holdings.

Coupon: 5.875%
Maturity: 5/31/2016
Pays: annually
Price: 88.90
Yield to Maturity: 9.21%

Disclosure: Durig Capital clients may already own a position in Hungarian Development Bank bonds in their fixed income portfolios.

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

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Hungarian News:

Hungarian Economic News:

Euro Currency News:

10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.

Randy — Tue, 28 Feb 2012 18:35:35 +0000

We have identified a medium term A- rated Morgan Stanley bond denominated in the Brazilian real and are targeting a better than 10.50% yield for our clients.

Corporate Bond linked to the Brazilian Real

Morgan Stanley has issued debt, denominated in the Brazilian real, which currently has a yield of about 10.75% for 62 months. The very high yield of this five year Brazil bond, when considered with its solid “A-” rating and favorable positioning within the US financial system, offers an extremely favorable reward to relatively low risk position. As the European debt crisis continues to slowly work towards a resolution, the dollar’s longer term weakening trend against many of the world currencies also appears to be returning, and it remains a major concern for investors seeking protection against its devaluation and the continued erosion of its buying power. In our ongoing effort to address the concerns of our clients in protecting their existing wealth from the destruction caused by the persistent devaluation of the dollar, we believe this short to medium term Morgan Stanley Brazil bond represents this week’s best opportunity to add the higher yields of one the world’s best emerging economies to ourForeign and World Fixed Income holdings at a reasonable exchange rate.

Wealth Preservation Concerns

Wealth preservation continues to be one of the biggest concerns among our clients. In other words, the focus for many people is not necessarily towards making more money, but to preserve the wealth they have already accumulated by taking what we call “intelligent risks” to achieve reasonable returns that can simply outpace moderately rising inflation. With US Five Year treasury yields stuck below 1%, the Ten Year below 2%, and with energy commodities (up over 6% year over year) threatening to push the CPI average back over 3% (the food index already at 4.4%), a certain degree of wealth destruction is virtually assured within these otherwise commonly considered “safe” US government notes.

Giving additional credence to Sam Zell’s warning last year that Americans should brace for a disastrous 25 percent decline in the standard of living should the U.S. dollar’s reign as the global reserve currency ever end, theWall Street Journal reported last summer that the Congressional Budget Office ”anticipates that the trade-weighted exchange value of the U.S. dollar will decline at a moderate pace over the next 10 years”. It should be noted that already there are major efforts underway to further undermine the need for US dollars (or for any other currency) to be the “global reserve currency.” Last October, the first gold contracts denominated in the Chinese Renminbi (also known informally as “yuan”) came to the Hong Kong market. A month later, China and Russia decided to renounce the US dollar and resort to using their own currencies for bilateral trade. In December, China and Japan agreed to take steps to facilitate the yen-yuan currency exchange, and just last month India agreed to pay Iran in gold for oil in a move to switch away from the dollar in bilateral trade.

Regardless of whether it’s the result of new and greater or simply buffed and retreaded austerity pledges, the flight to safety evoked by the every evolving European debt crisis, which recently strengthened the US dollar, appears to have reached either a state of callous indifference or a state of “dry heaves” where just nothing much of value moves. Consequently, the dollar appears to be happy to returning to its longer term decline relative to most other major global currencies, perhaps including even the euro.

Here atDurig Capital, we are continuing in the effort to protect our client’s assets against the persistent destruction associated with an ever increasing supply of US dollars by scouring the globe in search of sound investments in a basket of the strongest global currencies, and it is why we have chosen Morgan Stanley’s very high yield, medium term Brazil bond asThis Week’s Best Bond.

Brazilian Economy

By far the largest and most populous country in South America, Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labor pool, it has large and well-developed agricultural, mining, manufacturing, and service sectors. It is the world’s largest producer of coffee, sugar and orange juice and the second-largest exporter of iron-ore and soybeans. Brazil’s offshore oil fields have turned it into a net crude exporter, helping it expand its presence in world markets, and its economy outweighs that of all other South American countries. Currently, Brazil is the world’s 11th largest oil producer.

Brazil’s economy slowed sharply last year, but remained among the world’s best at near 3%. Despite concern about the impact of slower Chinese growth, Brazil recently moved up to be the world’s sixth-largest economy and is expected to continue growing about 3 1/2 percent in 2012. This fundamentally solid economic growth underscores the importance of emerging markets, if it should even still be regarded as emerging, as the developed world continues to struggle with a sluggish rebound from the global economic slowdown and the European debt crisis.

Despite continued price pressures in Latin America’s largest economy, the Brazilian Central Bank suddenly shifted course late last year to cut interest rates because of concerns about global economic growth. Given that the inflation rate in Brazil has slowed to below 6% and is projected to pace closer to 5 ¼% for 2012, the rate cut appears warranted. The government’s official inflation target remains around 4.5%.

Stanford University has rated the Brazilian economy number #10 on its global Sovereign Fiscal Responsibility Index, a placement significantly above #28 ranked (out of 34) United States.

About Morgan Stanley

Issuer	Currency	5 Year Bond Yield	Ratings
US Treasury	US Dollar	0.85%	AA+,AAA,AAA
Morgan Stanley	US Dollar	4.85%	A-, A2, A
Morgan Stanley	Brazilian Real	10.75%	A-, A2, A

This Morgan Stanley Brazil bond indicates a yield pickup of nearly 10% when compared to similar maturity US Treasuries, and a yield that is well over double that of similar Morgan Stanley bonds denominated in US dollars. Even if the Congressional Budget office is wrong and we have strong appreciation in the dollar, as long as the currency appreciation averages less than 5.9% annually relative to the Real, this bond would still outperform its US dollar counterpart. However, if the CBO is correct, and should the US currency decline instead of gain that same 5.9% annually, that much appreciation of the Real would likely result in a better than 16.5% annual return.

Please compare this Brazilian Real Linked Morgan Stanley Bonds to our Bank of America Australian dollar bond of shorter maturity.

Risks

The currency risk of the Brazilian real could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Brazilian economy.

Allotments

Many people ask, how do I invest in Brazilian Corporate bonds? Frequently it requires an institutional sized single bond purchase. To circumvent this constraint and allow greater diversification, we at Durig Capital combine world bond buyers into a larger institutional sized purchase and achieve institutional level yields. In our previous syndicates, we have been able to facilitate purchases as low as $10,000 US Dollars and should be able to do the same for your interest.

Conclusion

We hope NOT to see any further destruction of wealth resulting from a constant decline in the US dollar relative other global currencies as forecast by the Congressional Budget Office, and we acknowledge that a strengthening of the US dollar would directly reduce the total returns of this Brazilian real denominated bond. On the other hand, should the US dollar continue on the long term path of devaluation that it has been on, this alone could add quite significantly to the already highly positive accruing returns of this bond, not to mention the possible stellar returns that would result should the US dollar ever loose its domineering status as the world’s reserve currency and collapse against a basket of other stronger currencies.

Considering Brazil’s prominent position as the leading emerging market economy, stable political system, and solid growth prospects in spite of broader global slowdowns, we view the gaining of over twice the yield as an incredibly compelling reason for choosing Morgan Stanley’s Brazilian real bond over their similar US dollar bond. The combination of a remarkably high yield, a protection against the further loss of wealth that would result should the US dollar continue to weaken against the real, and a diversification away from heavily overweighted US dollar based assets into one of the world’s top emerging markets is why we have chosen to add this 62 month Morgan Stanly bond linked to the Brazilian Real to our Foreign and World Fixed Income holdings.

Coupon: 10.09

Maturity: 5/03/2017

Rating: A-

Price: 97.5

Yield to Maturity: 10.73%

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.
14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
7.58% yield, Georgian Railway, 3 1/2 year in US $ bonds
8% Yield in US $'s, Argentina Government "Yankee" bonds, matures Oct. 2015
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Morgan Stanley News:

Morgan Stanley Yahoo feed:

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US Dollar (USD) in Brazil Real (BRL)

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14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015

Randy — Wed, 22 Feb 2012 17:56:29 +0000

Looking for higher yields? This week, we have targeted short 45 month Republic of Cyprus Government Bonds (denominated in Euros) and expect to achieve yields of about 14%. In spite of the island’s moves to reduce its deficit and improve its finances, the country was caught up in Standard & Poor’s downgrade last month of nine Eurozone countries. While the S&P ratings change moved it from investment grade to BB+, Fitch’s reassessment left the rating one notch above junk status at BBB-. Knowing that rating agencies don’t always “get it right,” we decided to take a closer look at the economy of Cyprus and determine for ourselves whether the very high yields indicated by these heavily discounted notes would meet our own stringent criteria for “an intelligent risk,” where the potential return far outweighs its discernible risk. As a result of this effort, as explained in more detail below, we see these short term Republic of Cyprus Bonds, denominated in Euros, as a very savvy opportunity to gain a well compensated exposure to both the Euro, and to the economy of Cyprus, and gladly add them to our Foreign and World Fixed Income holdings.

Wealth Preservation and US Dollar Concerns

Global equity and commodity markets appear to started the year on a positive note, yet wealth preservation and the returning weakness of the dollar remain a top priority for many people. Property prices that remain depressed, ultra-low interest rates that are set to be in place for several more years, proposals that are sowing seeds for significantly increased taxes, and a Fed that appears to be hell-bent on its multifarious control and money printing efforts to backstop numerous world economies, all continue to paint an unsightly visage of broad and rampant wealth destruction for high (and perhaps even low) net worth individuals.
Given the sad state of the current European debt crisis and economic forecast, the obvious disdain and broad negativity that many popular financial pundits have towards the outlook and uncertain future of euro, and the Fed’s stated proclivity to support the European financial system and the Euro with its US dollar creative ability, we think the merits of trading a few or our own low or no yield Federal Reserve Notes for a few European Central Bank Notes (potentially netting over 14% annually while loaned to the Republic of Cyprus for 3 ¾ years) would go a long ways towards easing the pain or disappointment some might feel in not being able to magically (or legally) produce or grow their own virtual money.

Flooding the banking system with cheap (fiat) money is, of course, the central bank’s traditional “fix” to any looming credit crunch. If the ECB can’t or doesn’t provide enough liquidity to the European financial system with cheap euros, there’s always the Fed to turn to. Therefore, the financial system itself is poised to survive, and thereby the global economy survives. If or as any one bank (private, public, or national) or group of banks fail, the failure can and will be contained by larger banks or groups of banks, and the financial system and its fiat currencies, in spite of relentless devaluations, live on.

Here at Durig Capital, we have undertaken the effort to protect our client’s assets against the persistent erosion of wealth resulting from inflation rates that remain significantly higher than the extremely low, but “safe,” yields currently available with banksters and in US treasuries. By scouring the globe in search of sound investments, in the strongest global economies, we strive to offer the best possible high yield instruments that we think offers both a high income stream and the possibility of positively accruing money in spite of broad economic uncertainties, and it is why we have chosen this relatively short term Republic of Cyprus Government Bond, denominated in euros, as This Week’s Best Bond.

Economic Background of Cyprus

The area of the Republic of Cyprus under government control has a free market economy dominated by the service sector, which accounts for nearly four-fifths of GDP. Tourism, financial services, and real estate are the most important sectors. Erratic growth rates over the past decade reflect the economy’s reliance on tourism, the profitability of which often fluctuates with political instability in the region and economic conditions in Western Europe. Nevertheless, the economy in the area under government control has grown at a rate well above the EU average since 2000. Cyprus joined the European Exchange Rate Mechanism (ERM2) in May 2005 and adopted the euro as its national currency on 1 January 2008. An aggressive austerity program in the preceding years, aimed at paving the way for the euro, helped turn a fiscal deficit (6.3% in 2003) into a surplus of 1.2% in 2008, and reduced inflation to 4.7%. This prosperity came under pressure in 2009, as construction and tourism slowed in the face of reduced foreign demand triggered by the ongoing global financial crisis.

Internationally, Cyprus promotes its geographical location as a “bridge” between East and West, along with its educated English-speaking population, moderate local costs, good airline connections, and telecommunications. The underdeveloped agrarian economy inherited from colonial rule has been transformed into a modern economy, with dynamic services, industrial and agricultural sectors and an advanced physical and social infrastructure. Among the most prosperous people in the Mediterranean region, the GDP per capita for Cyprus is about $30,000, and Cyprus is ranked 23rd in the world in terms of the Quality-of-life Index.

Although Cyprus lagged behind its EU peers in showing signs of stress from the global crisis, the economy tipped into recession in 2009, contracting by 1.7%, and has been slow to bounce back since, achieving only a 1.0% growth in 2010 and no economic growth in 2011. Serious Cypriot financial sector problems surfaced in early 2011 as the Greek fiscal crisis and euro zone debt crisis deepened. Two of Cyprus’s biggest banks are among the largest holders of Greek bonds in Europe and have a substantial presence in Greece through bank branches and subsidiaries. A liquidity squeeze appears to be choking the financial sector and the Cypriot economy as a result of concerns over the European Union crisis. Cyprus’s borrowing costs have risen because of its exposure to Greek debt, and their budget deficit rose upwards of 7% of GDP in 2011, a violation of the EU’s budget deficit criteria.

Disturbed by S&P’s credit rating downgrade last month, Finance Minister Kikis Kazamias claimed that the agency ignored the fact that the Republic of Cyprus is one of a few countries that has fully covered its financing requirements for 2012, and that the island has adopted several austerity packages to cut high government deficits. A budget passed by parliament in December projected a deficit of no more than 2.5 percent of GDP this year compared with about 6.0 percent in 2011, and it recently clinched a 2.5 billion euro ($3.2 billion) loan from Russia, which authorities say will cover its financing needs this year. Cyprus’s two largest banks, Bank of Cyprus and Marfin Popular, are exposed to Greek sovereign debt and both submitted plans for recapitalization to the national regulator last month. Although it is likely that the banks will take a hit on Greek government bonds, it was announced that the banks would be able to recapitalize on their own and would not need state support. With one of the lowest tax rates out of the 25 EU member states and very good communications network, Cyprus has an incredibly attractive onshore/offshore center for business and banking purposes, and has a wide network representing over 40 different banks across the country.

Amid the continuing financial crisis and the weak growth of the Cypriot economy, projected at a mere 0.2% GDP in 2012, the government introduced a series of austerity measures that would enable Cyprus to meet its medium term commitments to the EU and particularly for a budget deficit of 2.8 GDP in 2012 and a zero deficit by 2014. On August 27, 2011, the Parliament approved the first fiscal consolidation package with a fiscal impact of 1% GDP or 180 million EUR, while a bill for the increase of VAT rate to 17% from 15%, which would yield an additional 140 million euro to the state coffers, is pending for approval. The Cabinet also approved a second fiscal consolidation package, incorporated in the 2012 state budget, which would reduce the budget deficit below the 3 per cent Euro area benchmark (2.8%) in 2012. The package provides for the abolition of 939 vacant positions in the public sector, a 10% reduction of the starting salary of civil servants, the introduction of income criteria for the better targeting of welfare spending such as child allowance and student allowance (100 million EUR).

On November 18, 2011, the Finance Minister introduced a third fiscal consolidation package aiming at restoring Cyprus’ credibility in the international markets. The package provides for the freezing of salary increases in the public sector (including COLA) for two years, with a yield of 355 million EUR, a scaled contribution of high earners in the private sector and the introduction of a 0.5% levy on the turnover of companies with local activities for two years. The austerity measures have been welcomed by the European Commission, which on January 11 ruled that Cyprus has taken effective measures to correct its excessive deficit.

Not to be overlooked, Cyprus has just launched a second licensing round for offshore exploratory drilling in hopes that new and recent discoveries will fire up the eurozone country’s economy. An announcement on the Greek Cypriot Commerce Ministry’s website Feb. 13 invited license applications for the following 90 days to search for mineral deposits in 12 of the 13 sections that together make up the island’s 51,000-square-km exclusive economic zone off its southern coast. The announcement was first published Feb. 11 in the European Union’s official journal. An initial licensing round in 2007 generated interest only from the U.S. company Noble Energy, which last year began exploratory drilling in Block 12, the southeastern-most section of the Greek Cypriot economic zone that sits close to a huge Israeli gas field. Officials are predicting more interest in the second round following Noble’s discovery of an estimated 140 billion to 230 billion cubic meters of natural gas in Block 12, the section not up for licensing in this second round.

Τhe discovery of energy reserves in Cyprus’ Exclusive Economic Zone is a promising feature that may be a big game changer for their economy, and Minister of Foreign Affairs Erato Kozakou Marcoullis was recently quoted as saying it “will have an historic impact on Cyprus.” The scale of the findings by US company “Noble Energy”, she noted, is conservatively estimated at between 5-7 Tcf of natural gas, adding that these are the results from a single plot and from an initial search. “Cyprus has approximately 100 billion euros worth of natural gas recoverable from this single plot, that can satisfy the electricity production needs of the country for 210 years,” she said. She also said that there are indications that it will be possible to move towards joint exploitation by neighboring countries, along with the launching of joint projects, across the line separating Exclusive Economic Zones, adding that the Republic of Cyprus is actively promoting this sort of cooperation as is the case with Israel and Egypt.

Risks

The most obvious risk is that of default. While the economy has rebounded from the 2009 recession, the recovery has been difficult due in part to its reliance on tourism and the governmental initial response of merely initiating or raising tax revenues in efforts to reduce the deficit shortfall. However, it appears they are now back on track with a more suitable austerity program aimed at directly reducing governmental costs. Adding in a consideration of the recent discoveries of significant energy reserves by Noble Energy and the monetary infusion any larger development of it would bring leads us to believe that the greater risk may actually be the currency risk of the euro.

The currency risk is that of the euro, as it carries an exposure to the entire Eurozone economy and the monetary policies of the European Central Bank.

Although the British colonial history of Cyprus has left Cypriots with a good level of English, it is no longer an official language in either the (Greek) Republic of Cyprus or the (Turkish) Republic of Northern Cyprus. Ongoing tensions with Turkey have not only consistently prevented a reunification of north (Turkish) and south (Greek) sides of the island, but have occasionally resulted in skirmishes. Consequently, there is geopolitical risk. While there is speculation that the recent discovery of natural gas in the maritime areas controlled by Greek Cypriots in the Eastern Mediterranean may open the way for co-operation between all parties, and may serve to eventually unify the island, there are no plain or clear indications to support that supposition.

Conclusion

With so many uncertainties lingering in the US and global equity markets, we believe a high yielding fixed income portfolio that includes diversification in investment instruments (paying either dividends and interest), and in debt issuers (both corporate and sovereign), and in global currencies (both domestic and foreign) might not only spew a high income stream, but it might also lessen one’s overall portfolio risk by protecting principle through a much broader diversification than is typically offered to most retail investors.

Overall, we view the higher risk vs. the very high reward of this short term bond as being very favorable for clients seeking a higher income while minimizing risk, and we think that these short term, very high yielding Republic of Cyprus Bonds, denominated in euros, will help diversify clients away from overly concentrated holdings in US dollars. It is a poignant addition that will really spice up a well diversified fixed income portfolio, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Disclosure

Some Durig Capital clients may already own a position in Cyprus government bonds.

Coupon: 3.75
Price: € 71.25
Yield: 14.00%
Maturity: 11/1/2015

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.
14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
7.58% yield, Georgian Railway, 3 1/2 year in US $ bonds
8% Yield in US $'s, Argentina Government "Yankee" bonds, matures Oct. 2015
Transportadora de Gas Del Sur S.A (TGS) Investment with Income

Cyprus News:

Cyprus Economic News:

Euro Currency News:

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7.58% yield, Georgian Railway, 3 1/2 year in US $ bonds

Randy — Wed, 22 Feb 2012 17:34:58 +0000

Income from railway infrastructure services.

At Durig Capital, we have developed a process to screen, review, select, purchase and monitor high yielding corporate bonds. Each week we screen thousands of corporate bond listings to find what we believe to currently be the best corporate bond for investors needing or seeking higher yields with the least amount of risk as possible relative to its projected return. The following is our review process showing why we believe this remarkable 7.5% bond with a short 3 1/2 year maturity passes the criteria for our clients.

Step 1 – Assessing the Yield Curve

As confidence continues to return to the market after the new year, we have observed the price of many higher yielding bonds starting to strengthen, which is resulting in declining yields. Along with these declining fixed income yields are heightened concerns for acquiring fixed income instruments that can outpace inflation without adding excessive risks. With the 5 years treasuries currently trading at about a 0.86 % yield and the (possibly flawed) CPI at 3.4%, this short term 7.5% bond appears to be able to make a stunning difference in performance as long the underlying fundamentals of the issuer, which we will review the major elements of here in this article, support future income and principle payments.

Step 2 – A look at the issuer

Georgian Railway (GR) is a 100% state-owned limited liability company founded in 1992 after the transformation of the Transcaucasia Railway, and is an important part of the Euro-Asian Transportation Corridor that links Europe with Central Asia. It is a fully integrated railroad company that includes infrastructure ownership and all rail operations in Georgia (apart from subways or trams). GR operates 468 kilometers of main lines (100% electrified) from the Azerbaijan and Armenian borders to the Black Sea, but only 293 kilometers of double track lines. The total network owned and operated by GR is 1,326 kilometers and includes 114 stations.

GR operates the national railway system through three principal strategic business units: the Freight unit, the Passenger unit, and the Infrastructure unit.

Notable strengths for GR are its monopolistic position as a vertically integrated rail carrier for the Transport Corridor Europe-Caucasus-Asia, its superb operating margins despite difficult conditions during the past few years, and the “extremely high” likelihood of extraordinary government support from the Republic of Georgia in the event of financial stress.

Step 3 – We like companies that are profitable.

For the year ending 2012, the Freight and loss-making Passenger unit accounted for about 95% and 4%, respectively, of the GR’s total revenue of GEL489 million ($292.8 million), which is more than a 20% increase over 2010’s revenues. At the same time there was a reduction of operational expenses by 2.5 %, from 326 million GELS to 320 million GELS, resulting in the EBITDA margin increasing from 50.5% to 55.6%. The net profit increased from 101.5 million GELS ($60.8 million) in 2010 to 145 million GELS ($86.8 million) in 2011, showing a 43% year over year growth. In 2012 the company expects continued growth of profits.

Step 4 – Interest Coverage Ratios

Long term credit obligations of the company are limited to 250 million USD that is represented by this bond. Reviewing Georgian Rail’s Q3 financials reveals that net financing costs, excluding a one time cancellation fee, were GEL14.039 million and earnings before taxes were GEL41.816. While 3x’s coverage is less than we might normally like to see, in light of GR’s state ownership and its highly monopolistic business model that provides the main distribution service for many of Georgia’s prized industries, we believe it to be more than adequate to service the debt.

Step 5 – We like companies with lower debt to cash ratio.

GR reported Q3 long term debt at GEL411.474 million ($246.4 million), which is primarily a result of this 9.875% debenture maturing 7/22/2015. Cash and short term investments were GEL199.246 million ($119.33 million), giving a very good cash to debt ration of almost 1:2. However, this ratio may decline as larger capital commitments relating to their Main Line Modernization and Tbilisi Bypass projects progress.

Step 6 – We like companies that have flexible balance sheets

Total equity for this 100% state-owned limited liability company is currently reported at GEL1,778,923 (about $1.065 billion USD), while long term debt is GEL411.474 million (about $246.4 million.) This would indicate a debt to equity ratio of about .23, which is quit low considering that much of this equity consist of such tangible assets as over 800 miles of rail lines, significant land holdings, rail stations, rail cars and locomotives. Given the importance and profitability of this monopolistic company to the Republic of Georgia, we agree with Standard & Poor’s view of the “extremely high” likelihood of extraordinary government support from the Republic of Georgia in the event of financial stress. Considering further that the state also has the option to capitalize a portion of GR to fund additional rail service expansion, we consider GR to have extremely good balance sheet flexibility.

Step 7 – We like high yields.

This US dollar denominated Yankee bond issued by Georgian Rail has a face coupon of 9.875 and currently has a 7.5% yield to maturity. In contrast, similar maturity U.S. Treasuries are yielding about 0.5%. Although the credit ratings are widely different, we believe this large 7% spread between the yields is extremely high given the risks that we can identify.

Step 8 – Risks Considerations

Although GR has a monopolistic business with very high profit margins, they have significant capital expenditures programs which could weaken the company’s financial profile. However, under the terms of the bond GR is committed, at all times, to maintain a ratio of net financial debt to EBITDA of not more than 4x. Also worth noting is GR’s key role in implementing Georgia’s infrastructure development plan, which is one of the highest priorities for the current government. Being the largest employer and the largest tax payer in the country, GR is the major player in the domestic economy, and there are no expectations the GR will be privatized over the medium term.

There is the potential for geopolitical instability in the Caucasus. The small network size exposes GR to a significant event risk, which has deepened due to tensions with its neighbor to the north. Russia dominates the recently updated documentation of twelve “Threats, Risks and Challenges to the National Security of Georgia.” Listed as strategic partners are the Ukraine, Turkey, and Azerbaijan.

We believe that these Georgian Railway bonds have similar to slightly higher risks, similar maturity, and a much higher yield that the bonds reviewed in Seagate Technologies 2016 Bond Provides Income From the Clouds and American Railcar 2014 Bond.

Summary and Conclusion

This is an exceptional yield, especially considering its short 3 ½ year maturity and strong governmental backing by the Republic of Georgia. Although Georgian Rail bonds are rated as B+/BB-, we believe they are a savvy risk offering a significantly higher yield from a company that has a good cash position, sound interest coverage, and a flexible balance sheet.

Coupon: 9.785
Ratings: B+/ BB-
Maturity: 7/22/2015
Price: $ 106.75
Yield to Maturity: 7.58 %

Disclosure: Durig Capital and certain clients may have a position in Georgian Railway bonds.

Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

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Transportadora de Gas Del Sur S.A (TGS) Investment with Income

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8% Yield in US $’s, Argentina Government “Yankee” bonds, matures Oct. 2015

Randy — Tue, 07 Feb 2012 22:30:28 +0000

Looking for higher yields? This week, we have targeted short 44 month Argentine Government senior unsecured “Yankee” bonds (denominated in US Dollars) and expect to achieve yields of about 8%. The country was upgraded last year to “B” and stable by Standard & Poor’s, but more noteworthy is the country’s success in reducing its debt levels to about 38% of its GDP and last October’s landslide victory of the recently re-elect President Christina Fernández. It is our opinion here at Durig Capital that Argentina’s current political stability and strong economic performance, as indicated below, results in a significantly better risk vs. reward opportunity than what a quick or cursory glance at the assigned credit ratings for the Argentine government might imply. As a result, we see these short term Argentine Yankee bonds as an intelligent addition to our Investment Growth & Income Portfolio.

US Woes

While the equity and commodity markets have rallied into positive territory the first month of 2012, uncertainties as to how both Europe and the United States will resolve their debt issues continue to make wealth preservation a top priority for many people seeking income from their investment portfolios. The current very low “safe” US Treasury rates remain significantly below inflation rates, putting American savers in the tenuous position of continuous wealth erosion.

Considering that this has been another year of declining equity and property prices, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the Fed’s constant printing of more money (to backstop both the US economy, and also that of Europe) leaves one with the stark realization that all these have resulted in a widespread erosion of wealth that will likely continue and perhaps even accelerate until the aforementioned conditions begin to change.

Argentina’s Economic Background

Argentina’s booming economy has been one of the few bright lights in an otherwise gloomy global financial picture the last few years. But high inflation, a weakness of the Argentine economy for decades, threatens that growth. Last week, it was announced that average salaries in Argentina rose 29.5 percent last year, while revenues kept pace at 30 percent and unemployment dropped to 6.7 percent. Annual inflation was officially reported to be at 9.5%, much less than the over 25 percent that private analysts say may be the true pace of price increases. In Washington, the International Monetary Fund gave Argentina 180 days to restore international credibility to its inflation index, which has been widely discounted since the government intervened and changed its methods in 2007. Argentines are racing uphill all across the economy as inflation shows no signs of easing.

Meanwhile, Argentina’s central bank predicted economic growth of 6 percent in 2012, citing efforts to reduce exposure to global financial contagion, increase jobs and keep the economy growing. That compares to the range of between 4.5% and 7.5% growth previously forecast by the central bank for 2012 and follows two consecutive years of 9.2% economic growth. The government is finally taking steps to rein in the rampant inflation that has helped stoke growth in recent years. During 2012, wage negotiations are likely to result in lower raises than those seen last year, and the monetary supply is expected to increase by 26.4%, a lower pace than in 2011, the central bank said. Most of that will be achieved through loans to the private sector. While the global economy is seen slowing this year, Argentina is still expecting a new record of both imports and exports. The country is expected to maintain a trade surplus, although a narrower one than that seen in 2011, the central bank said. During 2012, the central bank expects government debt to fall to 37% of GDP, with a debt of just 12% of GDP owed to private investors. That is down from the 42.2% and 14.1%, respectively, seen in September 2011.

	Debt to GDP	GDP Growth	Foreign Reserves	Foreign Reserves to Outstanding debt (%)
Argentina	39.5% of GDP	9.2% (2011)	$46.5 billion	25%
USA	100% of GDP	1.7% (2011)	$140.607 billion	0.9%

Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Although one of the world’s wealthiest countries 100 years ago, Argentina suffered during most of the 20th century from recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting external debt, and capital flight. Following a long and severe depression, the Argentine economy bottomed out in 2001, with real GDP 18% smaller than in 1998 and almost 60% of Argentines were under the poverty line. Real GDP rebounded to grow by an average 8.5% annually over the subsequent six years, taking advantage of previously idled industrial capacity and labor, an audacious debt restructuring and reduced debt burden, excellent international financial conditions, and expansionary monetary and fiscal policies. Inflation also increased, however, during the administration of President Nestor Kirchner, which responded with price restraints on businesses, as well as export taxes and restraints, and beginning in early 2007, with understating inflation data. Cristina Fernández de Kirchner succeeded her husband as President in late 2007, and the rapid economic growth of previous years began to slow the following year as government policies held back exports and the world economy fell into recession. High economic growth resumed in 2010, and GDP expanded by over 8.5%. Argentina is considered an emerging market by the FTSE Global Equity Index, and is one of the G-20 major economies.

In the absence of major tax reforms, the top individual and corporate tax rates remain at 35 percent. Other taxes include a value-added tax (VAT), a wealth tax, and a tax on financial transactions, with the overall tax burden now at 31.6 percent of total domestic income. Government spending has risen to 37.9 percent of GDP, and the budget deficit hovers around 2 percent of GDP. Public debt amounts to about 50 percent of total domestic output. The trade weighted average tariff rate is 6.2 percent, with more non-tariff barriers imposed in the form of import and export taxes and fees. New import restrictions were imposed on 200 goods in 2011. Hostility toward foreign investment persists, and the government exerts heavy control in the financial sector.

Argentina’s Political Consideration

Argentina recently moved to slow imports into the country and ease the nation’s inflationary troubles, requiring Importers to now report and get approval for goods coming into the country through an official agency. Although the move to give government bureaucracy more powers to control and restrict imports has triggered complaints from Argentine business and industry, and from regional trading partners, President Christina Fernández’s administration has always argued that the measures are justified because they help “protect national production and Argentine jobs.” Given how her popularity has only increased (to 60%) with the latest economic indicators, it bodes well for the near term stability and continuation of the current administration.

Risks

The most obvious risk is that of default. The economy has rebounded strongly from the 2009 recession, but the government’s continued reliance on expansionary fiscal and monetary policies risks exacerbating already high inflation. The government’s challenge is how to keep alive a consumer boom that has been the motor of economic growth while shifting the subsidies bill to consumers. Wage negotiations with unions kick off in February and the government hopes to keep salary rises to around 18 per cent this year. At the same time, it is seeking to curb imports in a bid to keep the 2012 trade surplus in line with last year’s $10bn. In any event, Argentina’s days of crippling debts totaling 166 percent of its gross domestic product in 2002 appear to be far behind it, as foreign debt was only 14.1 percent of its gross domestic product last year. Given the short term maturity of this bond, we view the inability to satisfy the debt obligation much less of a risk than the risk of a broader geopolitical change and possible emergence of a politically motivated unwillingness to perform.

Argentina’s foundations of economic freedom have weakened in light of extensive government intrusion into free markets. Aggravated by corruption and political interference, the lack of judicial independence has severely eroded limits on government. The government regulates prices of electricity, water, and retail-level gas distribution, pressuring companies to fix prices and wages. However, given the currently increasing popularity of President Christina Fernández’s administration, the risk of any sudden or unanticipated changes in monetary policy appears to be diminished. Therefore we see the overall risk vs. reward of this short term bond as being very favorable for clients seeking a higher income while minimizing risk.

Conclusion

With so many uncertainties lingering in the US and global equity markets, we believe a high yielding fixed income portfolio that includes diversification in investment instruments (paying either dividends and interest), and in debt issuers (both corporate and sovereign), and in global currencies (both domestic and foreign) might not only result in a high income stream, but it might also lessen one’s overall portfolio risk for protecting principle through a much broader diversification than is typically offered to most retail investors.

We believe that these short term, high yielding, Argentine bonds, denominated in US Dollars, are a welcome addition to a well diversified fixed income portfolio, and it is why we are adding it to our Foreign and World Fixed Income holdings.

Disclosure

Some Durig Capital clients may already own a position in Argentina government bonds.

Disclosure:

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

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Transportadora de Gas Del Sur S.A (TGS) Investment with Income

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Transportadora de Gas Del Sur S.A (TGS) Investment with Income

Randy — Tue, 24 Jan 2012 22:19:36 +0000

Investment with Income:

Transportadora de Gas Del Sur S.A. (TGS)
Per share values in USD 1-19-2012
Market value $ 3.00
Indicated Dividend rate 49%

Durig Capital seeks out quality high yielding global investments that offer both a high yield and a good probability of appreciation, while providing a unique hedge against inflation and/or a continued devaluation of the US dollar. As a result of our diversification research efforts, we have identified and selected Transportadora de Gas Del Sur S.A. (TGS), Argentina’s largest natural gas pipeline operator, for our Investment with Income Portfolio.

US Dollar Concerns

Most investors seeking income with growth for their investment portfolios are aware that the artificially very low US Treasury return rates still remain, even before taxes, significantly below current inflation rates. American savers are thus thrust into the tenuous position of continuous wealth erosion. Considering that last year was another year of declining equity and property prices, minimal pay raises, elevated inflation, ineffective politicians, potentially increased taxes, and the constant printing of more dollars (not only to backstop the US economy, but also that of Europe) leaves one with the stark realization that all of these components have precipitated a widespread erosion of wealth that will likely continue, and perhaps even accelerate, until the aforementioned conditions begin to change.

We would like point out something that been growing at a amazing rate. Unfortunately, it is not our economy. According to the Federal Reserve, the unfunded liabilities (known in Enron terms as off balance sheet debt) of the US Government now exceed $1million dollars per average tax payer.

The Natural Gas Market

Natural Gas is considered to be one of the more environmentally friendly sources of guaranteed energy while having one of the lowest costs to provide electrical power generation. It is therefore forecast to be one of the top providers of new guaranteed energy power plants in the near future. The newer technological ability of transforming Gas to Liquids (GTL), a refinery process that converts Natural Gas into such products as ethane, propane, butane and natural gasoline are recovered. The conversion to liquids should lessen the price spread between gasoline and Natural Gas. However, we are currently seeing the highest price spread since GTL technology has become a reality.

With that said, Natural Gas inventories are still growing more than expected during this unseasonably warm winter, raising concerns that the U.S. could run out of places to store the liquid. As more gas producers come online, the added supply plays a major role in the current bulging inventories. If inventories are increasing during the heaviest usage winter heating season, the problem is that added new sources could grow inventory much faster during the warmer lower heating time period. This excess inventory issue is a major factor why the spot price of natural gas is at the lowest price in 10 years.

With our energy usage/needs having only increased over time and with both gas and diesel prices on the rise during most of the recent past, we see the combination of a 10 year low in this carbon based fuel and a growing market for its use as a very intriguing investment opportunity.

Transportadora de Gas Del Sur S.A.

During our review of Transportadora de Gas Del Sur S.A. we found very few professional articles detailing their products and services. Other than rather simple articles featuring their high margins and very oversize dividend, very little (if any) of the many underling merits of the business were ever discussed. After diving deeper into the details surrounding Transpotadora De Gas Del Sur, we believe this is a largely misunderstood business that simply needs a better and more detailed explanation of a number of its hidden values.

The company has two main revenue streams:

1) Liquids, 61% of Revenues

TSA’s largest and faster growing business segment is an unregulated portion that converts natural gas to liquid gasoline and/or diesel. A majority of these sales go to world markets, where 90% of it is settled in US dollars. Liquid petroleum, as exports outside Argentina, provided 31% percent of total sales for the company. Thus, a major profit hub of Transportadora’s overall business is acquiring low cost natural gas at the wellhead, converting it into liquids, and then selling it at spot prices to the World markets. We think this is a good business, as judging by the current (and growing) price spread of the two carbon based fuels it should have very robust margins.

However, the stock of TGS appears to have a close correlation to the price of Natural Gas (see second graph below) and not the spread between gas and liquid fuel prices (see the first graph). Considering that the liquids business profits are likely to affected more by buying Natural Gas at the low levels and then selling at higher (gasoline) prices, the spread charts indicate that the current price difference should make this particular segment of their business extremely profitable.

The liquids segment also has revenues from a (not at risk) consulting division that provides cleaning and conversion to liquids services without taking ownership of the fuel.

Spread, with Gasoline Price in Blue and Natural Gas in Red

Natural Gas Price in Blue and TGS Transportadora de Gas Del Sur S.A. in Red

2) Gas Transportation, 33% of Revenues

TGS pipelines transport about 61% of all of Argentina’s Gas, and is Argentina is recognized as the largest gas producer in South America. Argentina also uses Natural Gas for over 50% of their energy needs. Since all non-interruptibility contracts with TGS are regulated and performed at a fixed rate, similar to a real estate rent, TGS revenues are not sensitive to the price the price of gas, volumes and other such factors. All guaranteed Gas (not-interruptible) clients pay connection fees that do not fluctuate with gas prices or actual usage. TGS provides a wholesale pipeline transportation business primarily to resale natural gas companies, as TGS is restricted from having their own retail gas business. They have one major pipeline competitor and don’t foresee any new direct competitors, putting them in the dominate and very desirable position of an oligopoly. Thus, the second major aspect of TGS’s business should not be directly correlated to natural gas prices, as its revenues are fairly immune to natural gas price swings.

Late last year, YPF S.A. (YPF) said they had found a huge deposit of unconventional natural gas that would be equivalent to a quarter of the country’s proven reserves in the region of Patagonian province of Neuquén. TGS has 2 gas lines into the Neuquén region and their competitor, TGN, has only one. Transportadora de Gas Del Sur S.A. has a total of 5598 miles of pipeline, 4754 miles of which is owned by the company and the remainder leased. The transportation portion of the business is a heavily regulated and licensed industry. Their current license is good until 2027, after which they have an additional ten year option.

The aforementioned new discovery will increase the countries known reserves by about 25%. Considering the close proximity of 2 existing TGS pipelines and the corresponding right of ways, this large of an increase in should allow TGS to possibly negotiate additional contracts to move the gas (risk-less transport business) while also supply an even lower cost (at risk business) source to make highly profitable liquids (i.e., gasoline.)

Earnings and Book Value

TGS’s overall US GAAP earnings for the last 5 years averaged $1.50 per (ADR) share per year. Judging from this, they are trading at only about 2x historic profits. The first nine months of profit for 2011 are 81 cents per ADR share, making this year’s run rate $1.08. Considering that the industry average is a PE ratio of 16.1, a 2.78 PE ratio for TGS is astonishingly low for a dominate oligopoly business with a solid balance sheet.

Historical US GAAP earnings:

2010 $1.42

2009 .84

2008 1.31

2007 1.38

2006 2.55

TGS currently trades at about 16% discount to its book value. However, we think the depreciated value of the 4754 miles of pipelines and property that is figured into the stated book value might be considerably lower than what its true market value really is. Therefore, we see buying shares of a very profitable “almost monopolistic” business at a (16%) discount to a “book value” that might very well be cloaking other significantly discounted assets, as a savvy investment opportunity.

Dividends and Taxes.

We believe that the last dividend was an abnormally large onetime distribution, and we expect it to be significantly cut to more historical levels this year. However, considering the company is trading near a 2.8 PE based on just 9 months reported earnings and that their 5 year US GAAP average yearly earnings is $1.5, we think that a very respectable level of dividends could easily be maintained alongside the retention of considerable funds for capital improvements and ongoing concerns. A review of the dividend history revealed no consistency in the dividends, and their annual reports contained no stated dividend policy or guidelines. Our contact the company’s representatives confirmed that no such policy or guidelines exist at this time. The payout last year was a onetime event, is clearly unsustainable, and is far above what it was in prior years. Our best estimate after talking to TGS company representatives is that the next dividend may be in the 7 cent range, and will most likely be paid in the spring of 2012. Short term, this would give about a 6% yield on new purchases of the stock, but only about 2.4% on a yearly basis. A 30% payout of earnings, which we see as being more reasonable, would probably bring the dividend yield to over 10%.

No taxes need to be paid on Argentina dividend stocks unless the dividend is found to exceed profits. If profits are exceeded, they would be taxed at a 35 % rate. This Argentine regulation inspires us to think that TGS, which in the last 9 months had tremendous cash flow and depreciated their assets about $1 per ADR share, could easily pay out about 30 cents per share per year and still retain over 70% of the US GAAP income.

Risks

While we now want to identify what we believed to be the three largest risks to our investors, please do not assume that this list is intended to be complete or comprehensive.

Natural Gas Prices.
Geo Political issues.
The Argentina Peso.

1. Natural Gas Prices. Since Natural Gas prices ended 2011 near 10 year lows and been trading down since then, this is plainly one of a natural gas company investor’s greatest concerns. After reviewing the company, we think they might actually be the recipient of benefits from possibly increased profits due to a larger spread between low gas prices and high liquid prices.

2. Geo Political issues. The second largest risk we could identify was the Geo-political risk of the county of Argentina. With that said, in 2011 Argentina in had some of the highest GDP growth rates in the World that we could identify, surpassing both India and China, and has by far the fastest growing GDP in Latin America.

Even though the Argentine economy is seeing some of the most robust growth in the world, which certainly helps to minimize the Geo political risk, it should be kept in mind that this is a highly regulated industry and this is one of the most regulated companies that we have reviewed. Robust economic growth does not stop local regulators from implementing poor bureaucratic policies, which over time have severely hampered the Argentinean gas industry.

3. The Dollar vs. the Argentina Peso. Since all their debt is carried in US dollars, we were concerned about what effect this might have on the company’s earnings. However, much to our surprise, about 30 percent of their business is done in the World markets, is settled in US Dollars, and is their fast growing business. Deducting their USD assets from their USD debt (according to their 2010 annual report) leaves only 115.5 million US dollars of debt exposed to currency fluctuations.

Summary and Conclusion

TGS integrates well into our strategic plan of finding strong balance sheet companies that own highly desirable assets and/or are monopolistic businesses, and are significantly undervalued as a result of depressed markets and/or currencies, such as our recently selected Southern Cooper Corp (SCCO) or Administradora de Fondos de Pen (PVD), an oligopoly similar to TGS, when neither copper nor the Chilean peso were finding a bottom.

Even though the currently indicated dividend level from online financial sources is clearly not sustainable and not to be expected, it is extraordinary to find a monopolistic styled business in a most desirable clean energy resource sector that, considering a historical 5 year period, is trading at less than a mere 2.8x’s GAAP earnings. If TGS were to initiate a 25-30% payout level, based on current prices the dividend would likely be in the 8-10% range while retaining plenty of cash to continue growing the value of its brands and properties. Furthermore, Argentina’s recent major Natural Gas discovery, in close proximity to two existing TGS lines, should help significantly improve Argentine energy needs and help insure future revenue growth for TGS, who’s main business is transporting/buying/selling fuels.

Therefore, we think TGS allows our clients to attain the strategic goals of an income stream and long term capital growth, as well as some diversification away from the US economy and the US dollar, which is why we have added it to our Investment Growth & Income Portfolio.

Disclosure

Durig Capital and some clients currently have positions in TGS.

Durig Capital clients may currently own these bonds.
Contact our fixed Income analyst for questions at 971-327-8847.

Durig.com | Bond-Yields.com

To find our more about how to place this investment offshore please see Bank-Offshore.co

Related Articles:

7.24% Yield in British Pound Sterling with Jaguar Land Rover bonds, mat. May 2018.
5 and 7% in BBB rated Swiss Franc Bonds. Swiss Life Holdings or SRLEV N.V., two hybrid debt notes with a first call in 2016
9.43% Yields with A-/A rated Morgan Stanley Russian Bonds, matures June 2017.
7.11% Australian dollar, Goldman Sachs, A1/A- rated, floating rate bonds, maturing April 2016.
9.2% Yield, Hungarian Development Bank, in Euros, matures 2016
10.75% Yield Brazilian in Real, Morgan Stanley, A- rated, mat May 2017.
14% Cyprus Government Bonds yielding in Euro’s, matures Nov. 2015
7.58% yield, Georgian Railway, 3 1/2 year in US $ bonds
8% Yield in US $'s, Argentina Government "Yankee" bonds, matures Oct. 2015
Transportadora de Gas Del Sur S.A (TGS) Investment with Income

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