Bond-Yields.com: Searching The Globe For The Best Rates!

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

Related Articles:

Transportadora de Gas Del Sur S.A (TGS) Investment with Income
6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
Norway Bonds: News, Rates, Quotes and Bond List
7.25% Yield, Indonesia Rupiah: European Investment Bank, AAA rated bond maturing April 2014.
7.79% Yield, Goldman Sachs, Australian $, A+ rated, mat Nov 2016

TGS News:

TGS Yahoo feed:

Natural Gas News:

Argentina Economy News:

TGS chart

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full TGS chart at Wikinvest

6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.

Randy — Wed, 18 Jan 2012 16:21:21 +0000

Income from Rare Earth materials.

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 as minimal risk as possible relative to its projected return. The following is our review process showing why we believe this remarkable Neo Materials (TSX:NEO) convertible debenture passes the criteria for our clients.

Denominated in US Dollars, this Canadian company’s 5% Convertible Unsecured Subordinated Bond matures 12/31/17, and is currently indicating a yield to maturity of about 6.3%. Given the possibility of significantly increasing this already high yield through the added capital gains its conversion to stock option allows for, as explained further in this review, we find it timely and appropriate to include the these 59 month Neo Material Technology convertible bonds in our Foreign and World Fixed Income holdings,

NEO Material Technologies

Neo Material Technologies Inc. (“NEM” or the “Company”) is a Canadian based international company incorporated in 1986, and headquartered in Toronto, Canada, having approximately 1,550 employees in 21 locations, across 10 countries. Through its Magnequench and Performance Materials business divisions, NEM produces, processes and develops neodymium-iron-boron magnetic powders (“Neo Powders”), rare earths and zirconium based engineered materials and rare metals including gallium, indium and rhenium. These innovative products are essential in many of today’s high technology applications.

The Company’s Magnequench division (“Magnequench”) is the leading producer of Neo Powders used in the production of high performance, bonded neo (rare earth) permanent magnets and has an estimated global market share in excess of 80%, giving them monopolistic economy of scale advantages. Neo Powders are used in micro motors, precision motors, sensors and other applications requiring high levels of magnetic strength, flexibility, small size and reduced weight. Through a number of manufacturing process and composition patents which expire between now and 2014, the Company is effectively the only legal supplier of Neo Powders for bonded neo magnets manufactured or sold in the United States (“U.S.”). The Company’s patent and license position is such that all end-use products containing bonded neo magnets that are sold in the U.S. must use the Company’s Neo Powders. Magnequench operates wholly owned manufacturing facilities in Tianjin, People’s Republic of China (“China”) and Korat, Thailand.

The Company’s Performance Materials division (“Performance Materials”) manufactures a product line of oxides and salts of rare earth elements which include cerium, lanthanum, neodymium, yttrium and yttrium-europium co-precipitates, dysprosium and terbium among others. The division also produces zirconium oxides and salts plus a line of mixed rare earth/zirconium oxides. Rare earth and zirconium applications include catalytic converters, computers, television display panels, optical lenses, mobile phones, and electronic chips. Additionally, the division produces, reclaims, refines and markets high value niche metals and their compounds that include gallium, indium and rhenium used in the wireless, light-emitting diode (“LED”), flat panel display, turbine, solar and catalyst applications. Performance
Materials operates joint venture and majority owned manufacturing facilities in Jiangsu Province, China; Shandong Province, China; Stade, Germany; Sagard, Germany and Quapaw, Oklahoma. Performance Materials also operates wholly owned manufacturing facilities in Peterborough, Ontario; Napanee, Ontario and Blanding, Utah.

The Company sells its products through a direct sales force and exclusive sales agents based in all major markets throughout the world. Third quarter revenues continued to increase for the tenth consecutive quarter, reaching record levels in the three-month period ending September 30, 2011. Revenues were (US) $248 million compared to $216 million during the previous quarter, and $91 million during the corresponding period in 2010. Higher rare earth product pricing and improved margins, driven by Chinese export quota restrictions, as well as price increases for Magnequench’s Neo powders, limited direct competition, and increased product demand across both divisions in the first half of 2011, were the main reasons for the 327% improvement in operating income year over year. Earnings before depreciation and amortization, financial expenses and taxes (EBITDA) was $112 million, compared to $22 million for the 3rd quarter of 2010. Their cash balance at Sept 30, 2011,was $316 million and long term debt amounted to $197 million. During the third quarter, the Company announced the commencement of a normal course issuer bid, resulting in the repurchase of 2,541,200 common shares for cancellation as at the end of the reported period and the use of $22 million which would have otherwise been reflected in the Company’s cash balance at quarter-end.

Neo Materials holds several unique competitive advantages among its peers through a combination of its advanced low cost production facilities, its proprietary technology and patents, and its global marketing and long-standing relationships with worldwide clients. Constantine Karayannopoulos, President & CEO, reported that while they were seeing selling prices and volumes moderate off recent peak levels, the overall business remains solid while their balance sheet continued to strengthen and was providing the flexibility to capitalize on strategic opportunities. The company has grown through strategic acquisitions, the most recent being an 80% interest in Gallium Compounds in August of 2011, and their stated aim to become the global supplier of choice in the high quality advanced materials market includes maximizing integration synergies as well as a utilization of their high cash flow to pay down debt.

On June 2, 2011, the Company completed a public offering of Convertible Debentures (the “Offering”) and raised $230 million through the Offering, net of issuance costs of $9.2 million which will be used to fund future acquisitions and for general corporate purposes. The Company maintains access to credit facilities and short term borrowings for its working capital needs, capital expenditures, and general corporate purposes. Management believes that its non-cancellable contractual obligations and other commercial commitments and 2011 capital program will be funded by cash flow from operating activities and by available cash. Occasionally, NEM will enter into short-term foreign exchange forward contracts to sell U.S. dollars in exchange for Canadian dollars. These contracts will effectively hedge a portion of ongoing foreign exchange risk on the Company’s cash flows as much of its non-U.S. dollar expenses outside of China are incurred in Canadian dollars. The Company has not entered into any off-balance sheet arrangements.

There are three primary areas that Durig Capital focuses upon for its bond reviews to help assure the return of our client’s capital. After reviewing their most recent 3Q 2011 statements, Neo Material scores breeze pass all three categories with great ease:

Debt to Equity – about 25%. Very good, shows balance sheet flexibility.
Cash to Debt ~3:2. Superb, but likely to change if/when more acquisitions are made.
Cash Flow to Debt obligations – over 20 x’s. An astounding coverage ratio.

In addition to the 5% accruing interest (paid semi-annually) that it offers, a very important feature of this bond to consider is the holder’s option to convert it at anytime prior to maturity to common stock at the conversion price of US$ 13.80 (aprox. 72.4638 per US$1000.) This strike price represents a better than 75% rise from the C$7.92 price NEM is currently priced at on the Toronto exchange, yet it is our belief here at Durig Capital that there is very strong upside growth potential remaining within this company that may significantly exceed the 12% average yearly growth that would be required for the stock price to reach par. Although 2011’s 9 month EBITDA growth of nearly 280% over 2010’s first 9 may prove to be somewhat of an anomaly, solid double digit EBITDA growth averaging over 12% annually appears to have been no problem for them to achieve over the four years between 2006 and 2010. But when 2011’s numbers are added to these four much leaner years, the average growth over five years easily exceeds 40% annually. And, while we acknowledge that this bond bypasses the potential equity gains that might be realized should the stock increase from its current level to C$ 13.80, which we think likely, it instead offers a 5% accrued interest payment and significantly more protection from a possible adverse decline in stock value.

The Company has not elected to pay dividend distributions, however, it appears to have chosen instead to perform stock buybacks. In summary, this appears to be a well financed company with reasonably low debt, ready options for additional funding if necessary, and a prudent use of existing cash flows.

Risks

The default risk is Neo Material’s ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond, is minimal relative to its more favorable return potential. An option that further reduces the default risk of this convertible bond, should at its maturity the company decide not to pay off or roll over the debt, is a conversion of the principle (at par) to NEM common stock at a 5% discount to stock’s valuation at maturity on 12/31/2017.

The company also has execution and market risks as very fast growth company in developing markets, as companies often encounter unforeseen issues. This is a common risk associated with younger, fast growing companies.

We believe that these Neo Material bonds have similar to slightly lower risks, a longer maturity, and a potentially higher yield that the bonds reviewed in Seagate Technologies 2016 Bond Provides Income From the Clouds and American Railcar 2014 Bond.

Conclusion

We think this is an exceptional opportunity for obtaining a very respectable 6.3% yield with significantly lower default risk than is typically associated with an unrated (or low rated) medium term bond, not to mention the additional return potential that its conversion at any time feature allows for. Therefore, we see this less well known debt instrument as a savvy investment risk offering a potentially great return from a company that has a unique position in the world market, a good cash position, very solid interest coverage, and a remarkably strong and flexible balance sheet.

Coupon: 5.00%
Ratings: none
Maturity: 12/31/2017
Price: $93.5
Yield to Maturity: 6.31%

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

Related Articles:

Transportadora de Gas Del Sur S.A (TGS) Investment with Income
6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
Norway Bonds: News, Rates, Quotes and Bond List
7.25% Yield, Indonesia Rupiah: European Investment Bank, AAA rated bond maturing April 2014.
7.79% Yield, Goldman Sachs, Australian $, A+ rated, mat Nov 2016

Neo News:

Neo Yahoo feed:

Rare Earth News:

Canadian Economy News:

Neo.to chart

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full TSE:NEM chart at Wikinvest

7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015

Randy — Fri, 30 Dec 2011 16:47:35 +0000

This week we have identified an Aa3 rated UBS Mexican peso denominated bonds maturing in June of 2015, and anticipate achieving a better than 6.7% yield for our clients.

Corporate Bond linked to Mexican Peso

UBS AG (Jersey Branch) has 10.25% coupon bonds denominated in the Mexican peso that mature in 42 months and currently have a yield to maturity of over 6.5%. This debt instrument represents a better than 80% increase over the yield to maturity of similar UBS AG yankee bonds denominated in US dollars, while offering an exposure to Mexico’s economy and the peso. This three and a half year bond offers diversification into a country that has experienced a greater economic rebound than the United States after 2008 and is poised to grow a healthy 3.25% in 2012. While the Mexican peso has a “high sensitivity” to the economic woes of the United States, we believe there are strong fundamentals underpinning for the peso. Mexico’s central bank currently holds significant foreign reserves, amounting to 20 percent of gross domestic product (GDP) versus foreign reserves totaling 7 percent of GDP in 2008. Public debt levels are in check, and even amid weakened U.S. demand, Mexican manufactured products have gained ground, accounting for 12.4 percent of total U.S. imports versus 11 percent in 2009. So, while the peso has declined over 15% since last July due to storms on various fronts (namely European), we view the higher yield that this bond offers a great opportunity to reduce US dollar devaluation risk by diversify away from an overweighted US dollar based assets.

Wealth Preservation and US Dollar Concerns

Global equity and commodity markets appear content to end the year with no consistent or clear direction, and wealth preservation remains a top priority 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.

Headlines this week indicate that European banks are more than eager to accept ECB emergency refinance funding amid continuing liquidity concerns. Flooding the banking system with cheap (fiat) money and is, of course, the central bank’s traditional “fix” to any looming credit crunch. It’s okay if a dose or two from the ECB doesn’t provide enough juice to the European financial system with cheap euros, as there’s evidently a virtual wellspring of US drugs (i.e., cheap dollars) that’s ready, willing and able to backstop the euro. So, the financial system itself is poised to survive. Where certain sovereign political systems, politicians, economies, and their fiat currencies end up look to be another matter. But as long as the global economy survives, what significance is, can be, should be, or will be placed on the cost to any one individual, or nation?

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 UBS Mexican peso denominated bond as This Week’s Best Bond.

Mexican Economy

The economy of Mexico is 13th largest in the world in nominal terms and 11th by purchasing power parity, according to the World Bank, and the United Nations reports that Mexico’s standard of living – including health, education and per capita income – is now higher than Russia, China and India. As an export oriented economy in the trillion dollar class, it remains integrally correlated to the US economy because of its prominent role at 80% of exports trading partner. However, Mexico’s last reported debt to GDP ratio stood at 42.7% and the US ratio just passed 100%, while unemployment was about 4.97% compared to 8.6% for the US. Inflation rates for Mexico were recently reported at 3.65%, down from over 4% at the end of 2010.

While banking giant HSBC announced plans to cut back on retail operations in the US and cut 30,000 jobs worldwide, it said that it instead intends to focus on faster growing emerging markets like Brazil and Mexico, where the company is still hiring. Interestingly, Chinese tourism to Mexico increased 32.8% in 2011, and Japanese automaker Honda (which already has a plant in El Santo, Jalisco) plans to invest about 312 million dollars to build a new 100,000 vehicles per year capacity car plant near Jalisco. The Mexican Institute of Finance Executives, or IMEF, stated this week that Mexico’s economy will grow 3.25 percent in 2012 even though the economic problems in Europe and the United States remain unresolved.

UBS

UBS AG, a financial services firm, provides wealth management, asset management, and investment banking products and services to private, corporate, and institutional clients worldwide. The company is also involved in retail and commercial banking, and is Switzerland’s largest bank. Based in Zurich, UBS AG was founded on 29 June 1998 only after the merger of Union Bank of Switzerland and Swiss Bank Corporation, but its many roots go back over 100 years to 1862. UBS AG currently operates in approximately 50 countries, and employs over 65,000 people.

Having achieved a significant reduction in residual risk exposure, UBS AG recently improved their Basel 2 tier 1 ratio to 18.4% and increased its tangible book value 11% quarter on quarter. It’s long term credit ratings are Aa3 at Moody’s, A for S&P, and A for Fitch.

UBS has forecast 2012 as another year of subtrend growth, and believes that there is a longer-term “climate change” in the current economic cycle. For conservative investors, they believe finding safe-haven assets that offer acceptable real returns will be more challenging that it was this past year. UBS’s strategy is centered on its strong Global Asset Management business and a focused, less complex and less capital-intensive Investment Bank in Switzerland. Group CEO Sergio Ermotti recently stated that UBS has “chosen to substantially reduce the risk profile of the bank by exiting and downsizing businesses which do not add value to our client franchise or deliver unattractive risk-adjusted returns.”

Risks

The default risk is UBS AG’s ability to perform. Given their costs improvements, refocused efforts on building their strong Wealth Management franchise, and solid credit ratings, it is our opinion that the default risk is significantly less than the currency risk of the Mexican peso.

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

Per capita income in Mexico is roughly one-third that of the US, and income distribution remains highly unequal. The current Mexican administration continues to face many economic challenges, including improving the public education system, upgrading infrastructure, modernizing labor laws, and fostering private investment in the energy sector. Because of the dominance of exports to the US, its economy will remain correlated to that of the US.

Allotments

Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.

Conclusion

The era of dollar devaluation, the indubitable result of relentless injections of “cheap” dollars into the financial markets, appears to be far from being over. Regardless of how opaque the economic “stimulus” reasoning is, or how it is presented to the average American taxpayer as being vital and necessary for our economy, a dependence on the global economy and perhaps the dollar’s dominate position as the reserve currency of the world seems to have precipitated the need for enough of these cheap dollars to stimulate the entire global economy. How many dollars are enough or how long it will take, isn’t defined. However, we believe that diversification into higher yielding corporate debt instruments denominated in various foreign currencies offer a savvy hedge against this abject devaluation of the US dollar.

As a result, it is our opinion that this short term, higher yielding Mexican peso debenture, issued by a sound and well respected financial institution, provides an intelligent alternative to the US dollar’s further devaluation and loss of buying power, which is why we are adding it to our Foreign and World Fixed Income holdings.

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

Related Articles:

Transportadora de Gas Del Sur S.A (TGS) Investment with Income
6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
Norway Bonds: News, Rates, Quotes and Bond List
7.25% Yield, Indonesia Rupiah: European Investment Bank, AAA rated bond maturing April 2014.
7.79% Yield, Goldman Sachs, Australian $, A+ rated, mat Nov 2016

UBS News:

UBS Yahoo feed:

Mexican Economy News:

Mexican Peso News:

US Dollar (USD) in Mexican Peso (MXN)

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full MXNUSD chart at Wikinvest

Over 8 %, Southern Copper Corporation (SCCO): Investment with Income

Randy — Tue, 20 Dec 2011 23:06:42 +0000

Investment with Income:

Southern Copper Corp.(NYSE: SCCO)
Per share values in USD 12-16-2011:
Market value $ 29.46
Dividend rate 8.38 %

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 efforts, we have identified and selected Southern Cooper Corporation as holding one of the world’s largest coppers reserves for our investment with income portfolio.

US Woes

With the equity and commodity markets continuing to thrashing about with no consistent or clear direction, preserving wealth is a top priority for many people seeking income from their investment portfolios. The current very low 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 (not only backstop the US economy but 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.

The Copper Market

According to preliminary ICSG data and data projections that indicate a deficit of about 250,000 ton, global growth in copper demand for 2012 is expected to continue outpacing supply growth. “Demand will grow, but it’s not going to grow as fast as it did in 2009 and 2010,” said Walter de Wet, head of commodities research at Standard Bank Plc in London. He stated further that they see the supply side lagging substantially for copper. Barclays Capital’s estimate is forecasting copper shortages as mining companies fail to keep up with consumption. Recycling old scrap and converting it to refined metal and alloys provided 140,000 tons of copper, equivalent to 6% of apparent consumption. Copper, like aluminum, is 100% recyclable without any loss of quality whether in a raw state or contained in a manufactured product. It is estimated that 80% of all the copper ever mined is still in use today. Copper is used more in developed countries (140–300 kg per capita) than in less developed countries (30–40 kg per capita), so as countries like China and India become more developed their use of copper is forecasted to greatly increase.

Copper is the benchmark standard for electrical conductivity. It conducts electrical current better than any other metal except silver. Being so highly conductive for electricity makes copper the most common choice for most light-gauge wires. Silver is more conductive, but due to its cost it is not practical in most cases. Aluminum is also used, but the metal can heat up and also looses more power during transmission. Consequently, in most of the electrical devices used today from cell phones to TV’s to house wiring, copper is the preferred, if not the only, solution of choice. With that said, perhaps it’s easier to understand the demand growth in copper by looking at the increase in electrical power equipment usage year over year.

Southern Copper Corporation

Southern Copper Corporation is one of the largest integrated copper producers in the world, and their operations make them one of the largest mining companies in Peru and in Mexico. Furthermore, our research has revealed that they may have the largest copper reserves in the world. Most of the reviews that we have read list them as a Peruvian exploration company. Based on last year’s book value, about 52% of their property value was based in Peru and roughly 48% in Mexico, splitting their book value nearly equally between the two countries. Their corporate headquarters is in the United States, in Arizona.

We think that Southern Copper Corporation’s greatest strength may reside in their copper ore reserves, which at December 31, 2010 were estimated at 59.7 million ton, as it generates about 80% of its revenues from copper. The 2008 US Geological Survey estimate of 590 million tons of identified and undiscovered global copper reserves seems to indicate that Southern Copper Corporation has over 10 % of the world’s copper reserves. Using the estimate of nearly 60 million tons of proven and probable reserves and a copper price of $6,622 a ton (12/16/2011, 3 month futures) would gives them over 395 billion dollars in situ. They currently have a market capitalization of about 24.8 billion dollars, and realize net profits after tax of about 24-30% of their $6.6 billion in revenues. Given a resource value of about $395 billion, they could conceivably generate over $106 billion in future profits using an average of their most recent returns. Furthermore, they could theoretically mine their reserves at the current rate for about 60 years, which is well beyond the expectancy of most of the other mining companies that we have reviewed. Looking at Southern Copper’s baseline numbers, which are always subject to change, we can see a greater than 14% internal rate of return at its current price.

Graph

On the above graph it can be seen that the price of High Grade Copper is closely correlated to Southern Copper Corporation stock price, not the S@P 500 Stock Index.

Dividend

Southern Copper has paid $ 2.46 in dividends over the last 52 weeks, which works out to be a 8.38% yield at the current stock price. Though this dividend is high, it will fluctuate along with the underlying fundamentals. Their most recent quarter resulted in a .70 dividend, giving them an over 9.5 % run rate yield. However, considering that copper is now priced on the lower end of where it has traded for the last two years, we expect there to be a lower dividend payout in future quarters.

Risk Considerations:

Copper fluctuations.
Union and labor issues
Deflation.

1. Copper Prices. Even though over longer time periods copper prices have seen strong growth, short term week to week and month to month fluctuations in the price of the metal could result in sharp movements in either direction. Since their dividend seems heavily based on current profits, there could also be significant variations in the dividend yield rates. Based on the last three years, forward sales accounted for about 80% of Southern Copper’s revenues. As a result, the fluctuations in copper prices will still affect the overall valuation of the company, but may have much less of an effect than what some investors might expect on the current quarter’s profit. Although the share prices of SCCO have fluctuated, they have roughly been flat for about the the last 5 years, their future forward sales should help protect profits, and therefore the dividend, if the metal remains weak for another quarter or two.

2. Labor Unions. Southern Copper Corporation utilizes a high level of unionized labor, and with many global issues akin to such things as the Occupy protests and the fairness of wages issues in the US, there is a possibility of being affected by labor issues in the future. In recent years, their Buenavista mine experienced a severe labor stoppage that started in July 2007 and finished in June 2010. The Bunenavista mine is a very large open pit mine in Mexico that has since become fully operational, and seems to be positively affecting earnings and has raised output for the entire company.

3. Deflation. While we at Durig capital believe that generating unprecedented growth in the US dollar money supply in the efforts to forgo a US, European or even a more global systemic failure will continue to incubate an eventual wealth devastating inflationary cycle, we also acknowledge that continued near term failures and a possible meltdown of the European banking system will likely emanate more deleveraging and disinflation. In an effort to shield the rest of the world from the grave deflationary whirlpool now stirring in Europe, the US has aggressively accelerated its increase of money supply and is expanding its global lending portal. Historically, over time this sort of action results in a significant inflationary cycle. However, this may not materialize any time soon, as it could be overshadowed by the disinflationary effect of significant European failures for some number of years.

The US service industry is about 80% of the US economy and is still under pressure, showing signs of further contraction and deflation. This large sector’s decline has quite effectively thrown a wet blanket on the vast amounts of kindling that typically fuels inflation. Aside from the service industry, in hard goods like copper, we seem to already have alarming high levels of inflation. Given the uncertain outlook and possibility of ongoing European quasi fumbles, a torrid mixture of deflationary and inflationary pressures will continue to smolder.

Conclusion

Our interest and primary focus is to protect our clients wealth. While we continue to prepare for and be very wary of an inflationary cycle and believe the vast trillions of dollars of national debt will likely only be addressed with a greatly devalued fiat currency, we are aware that the gestation period prior to its arrival may be long and drawn out. In the short term, we also believe hard goods like cooper may continue to see prices increases, even without a significant rise in official inflation rates and in spite of possible negative growth in the service industry. Therefore, we believe that adding a high dividend yielding position in Southern Copper Corporation, which has significant world class copper reserves and is very closely correlated to copper prices, is an very intelligent diversification risk.

We think SCCO allows our clients to attain the strategic goals of a good current income stream, and provides for diversification away from the US economy and the US dollar. By owning hard assets in the ground that could result in an appreciating revenue stream, SCCO and its future dividends could possibly outlive most of our current clients. This portfolio position looks to provide a longer term hedge against commodities inflation while also generating a high level of income, and it is why we’ve selected it as a core position in our Investment Growth & Income Portfolio.

Disclosure: Durig Capital and some of its clients may have positions in SCCO.

A+ Rating with the BBB!
Durig.com | Bond-Yields.com

Related Articles:

Southern Copper Corporation news:

Yahoo Southern Copper Corporation feed:

Copper News

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full SCCO chart at Wikinvest

7.67% Netflix (NFLX) bond Yield-to-Worst with a 4 year call

Randy — Fri, 09 Dec 2011 16:02:40 +0000

7.671 % Yield to Worst 2015 Call at par

Netflix (NFLX) bonds are one of our favorite bonds, and we appreciate the opportunity to buy it while the stock is showing such glaring weakness. Although this Netflix bond is only rated Ba2 by Moody’s and BB- by Standard & Poor’s, its underlying fundamentals exceed the stringent criteria that we here at Durig Capital use to find better high yielding bonds. Furthermore, this bond provides an ideal example of why we think the official rating agencies may occasionally be mistaken in their assessment of a company’s credit worthiness.

Netflix has recently issued approximately in $200 million in stock and $200 million more in zero coupon convertible bonds. Prior to these actions, Netflix’s had a very conservative balance sheet and excellent liquidity. Including these two issues do not change the interest expense or current cost structure of the company, as the primary effect appears to be a dilution to shareholders.

What is surprising to us is the view that some people appear to have taken on Netflix debt. Netflix has to buy the content for their mailing and streaming clients. Historically, this cost of doing business has been in the 52-57% of their revenues range. Netflix currently has a $3.456 billion revenue run rate, and historically has spent above 50% of their revenues on content. Together these would put projected costs for film libraries next year at about 1.72 billion. While they have made forward contracts for library content that obligates them to $2.136 billion over the next three years, this is the product that they need to serve their clients. If next year’s library cost is in the $740 million range for 2012, which Netflix presented as an obligation in their last 10Q, that represents only about 24% of their anticipated revenues, which is significantly below their normal costs ratio. The simplest and most logical explanation appears to be that they have merely committed to buy (in the future) about one half of their projected library needs.

If this future purchase commitment is incorrectly categorized and painted as debt, as some writers evidently have, it quickly becomes a stumbling block for the average fixed incomer’s desire to own Netflix bonds. And while it’s true that building a large rental library of ongoing newly released films, older films, classic films, and popular old TV shows is very expensive for Netflix, one must also consider and remember that it also presents a formidable barrier for anyone looking to compete with Netflix.

Netflix believes and has stated many times that their client churn is being reduced, but we acknowledge that their image has been tarnished recently and more work is needed to restore the shine.

Looking at the basics – Interest Coverage Ratios

Netflix had $120 million in operations income last quarter, an unbelievable 22 times coverage of the roughly $5.3 million quarterly interest expense resulting from their debt. There has been no addition interest rate expenses with the new bonds. But with projected short term loses, coverage will possibly go negative the next few quarters. Knowing that the last quarter was influenced by many factors, we reviewed the previous calendar years numbers and found they had about 13 times coverage, which is well above most of the companies we review. In fact, this is a stronger number than several AA rated companies we follow.

Debt to cash ratio

Netflix reported long term debt at $200 million, and raised approximately $200 addition in zero interest convertibles bonds since the quarter, so we estimate total long term to be about $400 million. Cash and short term investments should be about $700 million, as they raised approximately 400 million in both stock and convertible debt offerings. Cash on hand would therefore exceed long term debt by about $ 300 million dollars, which is very rare for a billion dollar in revenues company. This is one of the best cash to debt ratios among the many companies we have reviewed.

Flexible balance sheets

The reason we like a flexible balance sheet is because when we last wrote about Netflix, it only had a 6% debt to equity ratio and subsequently had very little trouble raising an additional 400 million dollars, an amount that was double their entire $200 million debt at the time. Netflix currently has about a $3.5 billion dollar market capitalization, while long term debt is around $400 million. This debt to equity ratio of around 11% is still among the lowest we have reviewed, even after NFLX’s recent sharp stock price decline and new stock and debt issuance. In comparison, if a home were valued at $ 100,000, a relatively similar debt ratio would indicate an owner only owes about $ 11,000 to the banks. Even after the restructuring, Netflix retains one of the most flexible balance sheets we have analyzed, having plenty of flexibility remaining with which to pay off their earlier debenture.

High Yields

This issue’s yield to worst call at par in November 15 of 2015, or about four years, is 7.671% if bought today at the premium price of 102.75. At this point it is unclear whether Netflix will exercise this option, as rates then may or may not allow them to refinance at a much lower rate and save substantially on interest expenses. If the bond is held to maturity in 2017, a time frame concurrent with our economic outlook, it would return a handsome 7.907% and represents more than a whopping 6.5% spread above the current rate for even longer 7 seven year US treasury bills. Enclosed is a link to current junk grade bond offerings one can use as a benchmark against Netflix Inc.

Risks Considerations

Even though many companies have tried to emulate Neflix’s model, few have achieved the marketing and economics of scale that is essential in this specialized movie service. Netflix is still a rapidly evolving company in a segment of business that is renowned for having bankrupt both previous major players, Blockbuster and Hollywood Video.

The Technology and Rental industries are very volatile and market capitalization’s can experience breath taking swings. However, the debt to equity ratio is so low for Netflix it remains in very low double digits. This extremely low ratio provides excellent balance sheet flexibility, even if the stock were to decline another 50%.

Netflix may not be profitable for several quarters or even a year as a result of their global launches, and this would reduce their interest rate coverage and possibly decrease their cash position. Since this is an annuity business, these short term expenses and build outs could be scaled back if needed, and the annuitized cash flow makes them a more stable business than most.

Conclusion

The 7.605 % yield to worst call scenario is extremely attractive for a diversified portfolio given the current market conditions. Although Netflix Inc. lacks an investment grade rating and some appear to have mistakenly claimed that their largest single cost of doing business is their debt, we perceive their stated obligation as a simple forward contact to purchase core products and are not dissuaded by the lower credit ratings assigned to them. If the last domestic company we reviewed, Century Aluminum, obligated itself to a forward purchase of raw material used in the production of its end products, perhaps it would be easier for most to understand this to be a purchase commitment of the company, and not debt. Given that Netflix’s largest cost is to provide film libraries for their clients, it is surprising to see people refer to this planned future cost as debt.

Netflix’s historically strong operating cash flow, its solid annuitized business model, and its current large cash position gives them what we believe is a very firm foundation. With one of the highest cash balances, previously very high interest rate coverage, and one the lowest debt to equity we have analyzed, we are recommending that our clients take advantage of this bond’s high rate of return, possibly the result of a misinterpretation of Netflix’s forward contract obligations and a credit risk that we think is not properly understood.

Coupon 8.5 %
Ratings Ba2/BB-
Maturity 11/15/2017
CUSIP 64110LACO
Price 102.75
Yield to Worst 7.671 % 11/15/2015 call at par
Yield to Maturity 7.907 %

Disclaimer: Durig Capital and certain clients currently do have positions in Netflix bonds.

Durig.com | Investment-Income.net

Related Articles:

6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
7.67% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
6.218 % Century Aluminum (CENX) Bonds Yield-to-Worst Call May 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
6.84% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
10.094% Yield Tutor Perini Corporation (TPC) 7 year bond

Netflix News:

Netflix Company News

Yahoo Netflix News:

High Yield Bond News:

Movie Streaming News:

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.

Randy — Thu, 01 Dec 2011 19:57:57 +0000

We have identified a short term A- rated Goldman Sachs floating rate bond denominated in the Australian dollar and are targeting 8.50% yield to maturity for our clients.

Corporate Bond linked to the Australian Dollar

Goldman Sachs 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 41 months, and currently indicates a yield to maturity about 8.50%. The high yield and short maturity of this Aussie bond, when considered with its solid A- rating and enviable position, compares extremely favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings, and we consider the recent strength of the US dollar relative to the Aussie dollar 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 economies.

Wealth Preservation Concerns

The equity and commodity markets continue thrashing about with no consistent or clear direction, and wealth preservation remains a top priority 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.

With the Euro-Region Economic confidence falling to a two year this week, talks in Brussels have moved towards forcing the 17 countries that use the euro to cede control of their sovereign spending to a central authority. Whether or not that is what is destined, it’s likely there will be more bumps along the way that allow for (or perhaps necessitate) the printing of more US dollars to insure the current financial system’s survivability. Interestingly, the increase in US money supply has recently been accelerating. Up over 50% in less than 4 years (or about 11% per year), the more recent trends indicates a year over year increase over 20%, a 26 week rate indicating over 25%, and a 13 week rate indicating over 30%. At these accelerated rates, by 2015 perhaps a debt of only $17.6 trillion will quite magically appear as “reduced” according to most any politician’s measure and the “banksters” will be ready for their next round of fleecing.

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

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.

The Australian economy grew for 17 consecutive years prior to the global financial crisis. Subsequently, the Rudd government introduced a fiscal stimulus package worth over US$50 billion to offset the effect of the slowing world economy, while the Reserve Bank of Australia cut interest rates to historic lows. These policies – and continued demand for commodities, especially from China – helped the Australian economy rebound after just one quarter of negative growth. The economy grew by 1.2% during 2009 – the best performance in the OECD – and by 3.3% in 2010. Unemployment peaked at 5.7% in late 2009 and fell to 5.1% in 2010. As a result of an improved economy, the budget deficit is expected to peak below 4.2% of GDP and the government could return to budget surpluses as early as 2015.

Although Australia has experienced persistent deficits since World War II, the estimated 2010 deficit of $30.4 billion, a mere 2.46% of GDP, bringing the total outstanding public debt to 22.4 % of GDP (2010 est.) The 2010 inflation rate stood at 2.9%, with current unemployment rates about 5.1%. Exports exceeded imports to the tune of 10.3 billion, with partners China, Japan, South Korea, and India all listed ahead of the US. The longer term outlook remains good as Australia’s terms of trade appear to have reached record peaks with prices for key export commodities staying high thanks to voracious demand from China and the rest of Asia.

	Public debt to GDP	Budget Deficit	Exports	Imports
Australia in A$	22.4%	A$ 20.3 billion	210 Billion	200 Billion
United States in USD	100.0 %	US$ 1.294 Trillion	1.28 Trillion	1.94 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 -

0.9771 (current)

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 $ 835Bn in cash, $ 492Bn 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	4.70 %	06/22/2016	A-
Australia Dollar	8.30 %	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 over 75% more yield from such a reputable issuer as Goldman Sachs as an incredibly compelling reason for choosing their Kangaroo bond over their similar Yankee (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.

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

Australia Government and Corporate Bond Articles Here

Australian Bonds Rates Sheet

Related Articles:

Bank of America News:

Bank of America Yahoo feed:

Australian Economic News:

Australian Currency News:

Australia Dollar (AUD) in US Dollar (USD)

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full AUDUSD chart at Wikinvest

9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.

Randy — Mon, 21 Nov 2011 17:36:27 +0000

We have identified a short term A3/A- rated Volkswagen 8.5% coupon bond denominated in Turkish lira, maturing in December 2013 and currently trading at about par, and have targeted a yield over 9.05 % for our clients.

Corporate Bond linked to the Turkish Lira

Germany based Volkswagen AG has bonds, denominated in the Turkish lira, that currently has a yield of about 8.5% for 25 months. The high yield of this Turkey bond, with its A- rating, compares very favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings. Aside from the US dollar’s polarized response to the “on again, off again” fears over the euro’s future, the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against further erosion its buying power. This bond provides a significant diversification away from the US dollar and towards an economy that has weathered the recent financial turmoil relatively well with no government bailouts.

US Debt Woes

While the eyes of the financial world remain fixed on what is happening in Greece and Italy, it appears that the US debt’s crossing the $15 trillion mark this week is barley worth mentioning. Yet, with only a week until the deadline to reach agreement on cutting $1.2 trillion to $1.5 trillion from the federal deficit over the next 10 years, the Joint Select Committee on Deficit Reduction still has no agreement to stem automatic cuts to the budget. At the current rate, Debtclock.org reckons that the US debt will top $23 trillion in 2015, though the nonpartisan Congressional Budget Office puts the estimate at $17.6 trillion.

As incredible as it might seem, the US dollar M1 money supply is currently up over 50% since the beginning of 2008. However, if you prefer to keep it closer, then it’s only up 17.5% since the beginning of 2011. At these rates, by 2015 perhaps a debt of only $17.6 trillion will somehow appear as “reduced” according to most any political measure. In the mean time, to diversify and protect our client’s assets against a further possible devaluation of the dollar and corresponding inflation threats, we here at Durig Capital will continue to scour the globe in search of higher yielding sound investments which may better protect and positively accrue wealth.

Turkish Economy

Turkey is a secular state often viewed as a bridge between East and West. With a constitution adopted in 1982 after a military coup, it is now a successful multi-party democracy. Prime Minister Recep Tayyip Erdogan has held office since 2003. Turkey’s financial sector has undergone a rapid transformation. Since the 2000–2001 financial crisis, the government has increased transparency, strengthened regulatory and accounting standards, and improved oversight. The Turkish economy has been Europe’s fastest growing economy in the last decade and has become the world’s 16th largest economy as of 2010.

While its traditional agriculture sector still accounts for about 30% of employment, an aggressive privatization program has reduced state involvement in basic industry, banking, transport, and communication, and an emerging cadre of middle-class entrepreneurs is adding dynamism to the economy. Turkey’s traditional textiles and clothing sectors still account for one-third of industrial employment, despite stiff competition in international markets that resulted from the end of the global quota system. Other sectors, notably the automotive, construction, and electronics industries, are rising in importance and have surpassed textiles within Turkey’s export mix. The government sets prices for many agricultural products and pharmaceuticals and influences prices through regulation, subsidies, and state-owned utilities and enterprises.

After Turkey experienced a severe financial crisis in 2001, reforms strengthened the country’s economic fundamentals and ushered in an era of strong growth which averaged more than 6% annually until 2008, when global economic conditions and tighter fiscal policy caused GDP to contract in 2009, reduced inflation to 6.3% (a 34-year low) and cut the public sector debt-to-GPD ratio below 50%. Central government spending in the most recent year equaled 23.4 percent of GDP, while overall tax revenue as a percentage of GDP was 23.5 percent. Its well-regulated financial markets and banking system weathered the global financial crisis and GDP rebounded strongly up towards 9% in 2010, as exports returned to normal levels following the recession. The first half of 2011 experienced 9% GDP growth and rising inflation concerns.

Household consumption and private investment are considered the main growth drivers. Decreasing unemployment and ample credit availability are expected to prop up household consumption, which is reflected in the upward trend in the consumer price index. External demand is likely to remain subdued as the EU and UK, Turkey’s main trading partners, are facing sluggish growth. Central bank governor Erdem Basci surprised investors in August by cutting the benchmark lending rate by 50 basis points to a record low of 5.75 percent. While this does raise inflation concerns, Basci has sought to control inflation by increasing bank reserve requirements to as much as 16 percent for the shortest-term deposits to limit lending and consumer demand. Reaching for alternatives to defend the lira when it tumbled to a record low against the dollar in August, the central bank spent about 10 percent of its $84.4 billion of foreign-exchange reserves in three months to buy the currency. Furthermore, Basci announced plans last month for dual lending rates to banks ranging from 5.75 percent to 12.5 percent, saying he may switch between them on a daily basis. The intent of these policies were to give him the flexibility that “no other bank in the world” has to strengthen the currency while retaining the option of cheaper money should Europe’s debt markets worsen.

Volkswagen Group

Sitting third on the list of the world’s largest automotive manufacturers (behind Toyota and GM), the German luxury car maker Volkswagen sold over 7 million units in 2010 and constitutes such brands as Audi AG, Automobili Lamborghini Holding S.p.A., Bentley Motors Ltd, Bugatti Automobiles S.A.S., MAN SE, SEAT, Skoda automobilova a.s., Volkswagen, and heavy goods vehicle manufacturer Scania AB. Volkswagen Group is divided into two primary divisions: the Automotive Division, and the Financial Services Division. The Group consists of 342 Group companies, which are involved in either vehicle production or other related automotive services, and has about 450,000 employees worldwide.

Sales revenues for the first 3 quarters of 2011 were reported at over 116 billion euros, a better than 25% increase over the last year’s results. Operating profit was up €4.2 billion on the prior year figure, to €9.0 billion. Also note was that the planned merger with Porsche Automobile Holding SE would not be implemented, but that all parties remain committed to the goal of an integrated automotive group.

In August, rating agency Moody’s Investor Services raised its outlook for Volkswagen AG from “stable” to “positive” and held out the prospect of a rating upgrade in the next 12 to 15 months. At present, Moody’s has given Volkswagen a long-term rating of A3, and Standard & Poor’s rating is A-.

Risks

The default risk is Volkswagen Group’s ability to perform. Given its underlying strength and solid A3/A- ratings, as outlined above, it is our opinion that the default risk is significantly less than the currency risk of the Turkish lira.

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

The strong economic recovery is attracting much (short term) foreign capital. About a third of Turkey’s external financing comprises short term debt, and the large influx of short term foreign capital could lead to asset bubbles. By nature, short term capital flows tend to be volatile, which is a risk in itself. Downward risk to the growth projections are present in the form of a sudden reversal of short term foreign capital flows and lower economic growth than is currently expected in the western countries. In spite of solid growth outlook, many global investors still consider emerging markets relatively risky. Turkey’s relatively high current account deficit, uncertainty related to policy-making, and fiscal imbalances leave the economy vulnerable to destabilizing shifts in investor confidence.

Allotments

How can people invest in Turkish lira denominated bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint, at Durig Capital we often combine world bond buyers into a larger institutional sized purchase. In this week’s offering, we anticipate being able to facilitate purchases as low as $ 5,000 US Dollars should that be the level best fits your desire. So the answer to the question is simple – contact your Durig professional.

Conclusion

While there are increased concerns of overheating and inflation flaring up with an economy growing at over 7%, Turkey stands out as having successfully rebuffed a serious global economic crisis. By rebounding strongly in 2010, it appears to have decoupled itself from the rest of Europe and is well positioned as one of the economic leaders in the area. As a result of our consideration of these trends and the high yield in Turkish lira backed by a highly recognized and accredited industry leader, we believe this very short two year Volkswagen Group corporate bond in Turkish lyra offers an exceptionally attractive opportunity for high yield income diversification, and it is why we have chosen to add it to our Foreign and World Fixed Income holdings.

Disclosure:

Durig Capital clients currently own Turkish bonds.

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

Durig.com | Investment-Income.net

Turkey Government and Corporate Bond Articles Here

Turkey Bond Rate sheet

Related Articles:

Transportadora de Gas Del Sur S.A (TGS) Investment with Income
6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
Norway Bonds: News, Rates, Quotes and Bond List
7.25% Yield, Indonesia Rupiah: European Investment Bank, AAA rated bond maturing April 2014.
7.79% Yield, Goldman Sachs, Australian $, A+ rated, mat Nov 2016

Turkish Bond News:

Turkish Economy News:

Turkish Lira News:

US Dollar (USD) in Turkish Lira (TRY)

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full TRYUSD chart at Wikinvest

6.218 % Century Aluminum (CENX) Bonds Yield-to-Worst Call May 2013.

Randy — Wed, 16 Nov 2011 22:15:04 +0000

6.218% yield to call in May 15, 2013

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, along with supporting documents, showing why we believe this high yield short 6.218% bond with only 20 months to call for Century Aluminum passes the criteria for our clients.

Step 1 – Assessing the Yield Curve

While the M1 money supply is currently growing at over 20% year over year, and the Consumer Price Index (CPI) moving up to 3.9%, our screening has revealed to us the highest 3 yr CD rates for 3 years is about 1.6 % percent. This is woefully below what is needed to keep pace with the officially stated inflation rate. The math tells us that CD savers are actually losing about 2.3% per year in buying power, before taxes. Factoring in compounding, CD savers would lose about $215.62 of buying power per year on a $10,000 dollar CD in one year at these current rates. Taxes are dues on the mystical gains, so in reality the after tax loss of buying power would be even greater. When this is multiplied over several years, it’s no wonder that so many savers are now angry at the banks. Perhaps this anger would be better directed towards the FED, whose flamboyant money printing while simultaneously pressing short term interest rates to record lows has resulted in a toxic combination for accruing wealth.

Step 2 – A look at the issuer

Century Aluminum Company produces primary aluminum in the United States, Iceland, and internationally. The company offers molten aluminum, as well as standard-grade ingot, extrusion billet, and other value-added primary aluminum products. It also holds a 40% joint venture interest in a carbon anode and cathode facility located in China. The company was founded in 1981 and is based in Monterrey, California.

Step 3 – We like companies that are profitable.

Century Aluminum Company reported Third quarter 2011 net loss of $6.6 million ($0.07 loss per basic and diluted share), which was positively affected by mark to market contract gains. Net income for the first 9 months of 2011 was reported at $42.4 million. During the last 3 quarters they made several large strides towards improving their balance sheet by paying down debt, reducing pension costs, and had plant curtailment costs of around 91 million dollars, which significantly realigned their balance sheet.

Step 4 – Interest Coverage Ratios

Century Aluminum Company provided $42 million in operations income for the last nine months. They owed about $25.2 million during the same time period in interest expense on the debt, and when annualized, show Century’s income coverage for it was just under 1.66 times. Knowing that the last few quarter were influence by many factors, we reviewed the previous calendar years numbers and found 4 times coverage. After this quarter’s loss, and considering the economy last year, this is a number than we would like to see improved.

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

Century reported long term debt at $ 256 million. Cash and short term is about $216 million. Long term debt is more than cash on hand, meaning that while they would be able pay off most to the debt, they would still be short about $40 million were an unforeseen event to occur. Considering that they had net income in calendar 2010 of $102 million and $42 million in the last nine months, the debt level appears quite manageable. One should take special notice here about the $144 in accrued retirement and post retirement benefits not funded. This should be looked at from both a balance sheet perspective, and from the union protesting and liability issues from past operations.

Step 6 – We like companies that have flexible balance sheets

Century Aluminum currently has a market capitalization of $992 million, while long term debt is around $256 million. A debt to equity ratio of around .25 is a very low number. For example, if they were a home valued at $ 100,000, they would only owe about $ 25,000 to the banks. There is a second issue of 15% owed to retirement related issues, which leaves them with about 40% of the total value. Banks often loan up to 75% of the value, and if the company needed additional funding they could issue new stock (although this would be quite dilute to current shareholders.) Based on previous quarter’s results, they have made strong inroads into these issues.

Century owns the Hawesville and Ravenswood properties, and a 49.7% undivided interest in the property on which the Mt. Holly facility is located. We could not get a value on these 2 ½ properties, but we are seeing Rio Tinto put 13 aluminum facilities for sale at the asking price of $7.5 billion. While the above sales prices may not be close due to capacity, size, electrical contracts, workers salaries, etc., it does show the closest comparable assets we could identify. While the current price/book value is shown at .85, we think that merely subtracting depreciation from the historical purchase price of their properties might greatly understate the current market value of these assets. Judged buy the above Rio Tinto valuations, it appears the value of Aluminum plants have been gaining in value well above historic book value.

Step 7 – We like high yields.

This issue of Century Aluminum currently has a 6.218% yield to worst call in the 5th month 2013, while corresponding U.S. Treasuries yield only .24%. Although the credit ratings are widely different, we believe this large 5.88% spread between the yields is extremely high given the risks that we can identify. If this bond is held to normal maturity May 2014, the yield would be an even higher 6.89%. We currently are finding 5 year loan rates with banks well below these rates, and thus, we believe the probability is high that these bonds will be called in the earlier time period of May of 2013.

Step 8 – Risks Considerations

Even though Century Aluminum provides very specialize Aluminum products and services, they are still in a commodity based industry, which is known for large cyclical changes in prices. However, they have been well managed through this last downturn and were even able to significantly reduce their balance sheet.

Their unfunded liabilities are our biggest concern, but their proactive approach, along with the rally in the investment market and slight glimpses of a better US economy, could significantly benefit them.

One should be mindful of the spread indicated between bid and ask on these bonds, as this appears to be one of the widest we have seen. We recommend contacting a professional to assist buying inside the offer, if possible.

The price of the metal has been moving higher since 2008 but has been dropping in the last few months. “Of all industrial metals, aluminum will have the biggest annual increase in demand through 2015 as the surplus supply turns to a shortage”, according to researcher CRU. Greece, Europe and China could all effect global aluminum prices, and have over the last several months. However, we believe the US economy has shown some resilience and would have more of a direct effect on the majority of their operations. We also believe that these Century bonds have similar to slightly higher risks, a similar maturity, and similarly high yield that the bonds reviewed in Tutor Perini building with highway and infrastructure bonds and American Railcar 2014 Bond.

Summary and Conclusion

This is a strong yield, especially when considering the short 20 month call possibility, the cash holdings at 84% of its debt, and its large real estate holdings, which in and of itself might be enough collateral to merit restructuring all their outstanding debt into a new, lower cost loan. Although Century Aluminum bonds are rated a single B, we believe they are a savvy risk offering a significantly higher yield from a company that has a good cash position, solid interest coverage, and possibly a more flexible balance sheet than what it first appears as.

CUSIP: 156431AJ7
Coupon: 8.00
Ratings: B
Maturity: 5/15/2014
Price: 102.5
Yield to Maturity: 6.89 %
Callable 05/15/2013 100 Yield to Worst: 6.218%

Disclaimer: Durig Capital and certain clients currently do have a position in Netflix bonds.

Durig.com | Investment-Income.net

Related Articles:

6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
7.67% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
6.218 % Century Aluminum (CENX) Bonds Yield-to-Worst Call May 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
6.84% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
10.094% Yield Tutor Perini Corporation (TPC) 7 year bond

Century Aluminum News:

Century Aluminum Company News

Yahoo Century Aluminum News:

High Yield Bond News:

Aluminum Industry News:

[contact-form-7]

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full CENX chart at Wikinvest

Durig Capital celebrates it’s 10th years in business.

Randy — Fri, 11 Nov 2011 19:25:57 +0000

Within weeks of opening our Investment Advisory business at Durig Capital, two jet planes crashed into the twin towers in New York City and what was known as 9-11 shut down Wall Street for a week. In hindsight, it may have been one of the worst times imaginable to open an investment firm.

Now, the concurrence of escalating debt issues and the inability of our US Government to solve a 15 trillion dollar problem, of Greece’s precipitous trek towards implosion as a result of lack of financial control, of a contagion concern for the entire Euro zone, and of many other threats to the global economy, appears to have striking similarities to the to the uncharted and uncertain times in which we started our Advisory firm.

What is truly remarkable today, is that within this paralyzing financial time for individuals and investment firms alike, and considering the background of when we started, in our 10th year here at Durig Capital with our global income leadership, we are seeing our most robust growth ever! Clients can find refuge in our fiduciary model of “Always putting our clients’ interest first”, knowing that we are providing a level of service that few, if any, in the financial industry provide. By creating an environment that gives our clients the highest level of individual care, we believe that our robust portfolio of income investment options positions Durig Capital as the innovative and product leader in global bond options for retail investors. But we didn’t stop there. Durig Capital provides all these combined high levels of service at one of the lowest fee structures for any Registered Investment Adviser that we have reviewed.

Randy Durig our CEO and founder remarked about our 10 year anniversary, “With the level of trust and support from our clients only increasing, even in this tough economy it’s been a remarkable 10 years for us. I would like to thank our clients, because they are what make our services successful. We will continue to work hard, and are committed to the highest ethical standard of always putting their interests first. ”

Thank you for visiting our website. If you have any questions, we will try to answer them directly and honestly. You can find our company site at: Durig.com

7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.

Randy — Wed, 09 Nov 2011 16:44:06 +0000

Fred.Olsen Energy ASA (FOE.OL) has a short to medium term floating rate bond maturing 5/12/16, denominated in the Norwegian kroner, that is currently yielding 7.38%.

Corporate Bond linked to the Norwegian Kroner

The desire to locate a corporate bond denominated in Norwegian krone that both steps away from so many of concerns currently plaguing the financial industry and steps up yields to outpace inflation motivated us to look outside the normal “investment grade” rating boundaries set by official rating agencies. And although this week’s best bond stands as “unrated” by these popular agencies, we will present how it does meet and exceed the strict criteria that Durig Capital has previously developed and found highly successful for evaluating lower rated bond issues. As a result, we believe that the significantly higher return potential offered in this floating rate debt instrument for Fred.Olsen Energy represents a savvy investment choice in what is historically regarded as one of the world’s strongest currencies, and one in which high yields seem to have been quite elusive to find.

Therefore, we find this an appropriate opportunity to including Fred.Olsen bonds in our Foreign and World Fixed Income holdings, as it offers additional diversification protection against the continued erosion of the dollar’s buying power and status as the world’s reserve currency, as well as offering an opportunity to keep pace with potential changes in Norwegian bank rates. While the US dollar strengthened recently in the wake of the Greek financial crisis and its impact on the euro, much of its effect appears to wax or wane as quick as the wind. The longer term trend of the Norwegian kroner appears to have very convincingly held its ground against the dollar in spite of weaker oil prices, and its currency exchange rate remains firmly on a 10 year bullish trend against the dollar. Slightly over two years ago, banking giant HSBC analysts dubbed the Norwegian krone “The World’s Safest Currency“, and as recently as last summer, HSBC’s chief FX strategist David Bloom stated the belief that “there is no better currency than the NOK.”

Norway, like Switzerland, isn’t a member of the European Union and is the second richest country per capita in the world. Although Norwegian krone and the Norwegian economy isn’t big enough to become a safe haven for many large institutional investors, the strength of the currency mixed with a longer maturity date works extremely well with our laddering strategy to diversify clients away from heavily weighted US dollar based assets, and it is why we have chosen it for This Week’s Best Bond.

US Debt Woes

With the US National debt fast approaching $15 trillion, it appears it will very soon surpass our total Gross Domestic Production for the first time since WW II. In other words, the average American’s share of government debt will be more than an average American makes in a year. Not included in the aforementioned national debt, is the estimated $2 to $4.2 trillion U.S. state debt (including pension gaps) recently reported by Reuters. Yet, in spite of all of this, the appetite for “safe-haven” U.S. debt continues to be whetted by troubles more persistent than cockroaches in a dark pantry. The size and scope of the US economy and financial markets, combined with the relative stability of the political climate, have made the US dollar a preferred currency for international trade, and there can be little doubt that the US Dollar has reaped tremendous benefits from being the world’s reserve currency.

One of the most cited reasons for the dollar dominance, however, isn’t the United States’ role in international commerce, but rather, results from its oil trade monopoly. However, China recently arranged to trade oil and energy products with Russia in their own currencies. In another interesting move last Monday (10/24), the first gold contracts denominated in the Chinese Renminbi (also known informally as “yuan”) came to the Hong Kong market. In allowing the markets to buy gold denominated in the Chinese currency, investors can essentially exchange yuan directly for other currencies, using gold as a proxy. And while oil contracts may be a few months or years away, the Chinese may be quite content to have the Renminbi more slowly chip away at the USD’s coveted status as “world’s reserve currency.”

While the notion of a strong dollar may initially sound good or even invoke a sense of national pride, easier money and currency depreciation appears to be central banks latest weapon of choice to stimulate economies. Yesterday Japan sold the yen for the second time in less than three months, saying it intervened unilaterally to counter speculative moves that were hurting world’s third-biggest economy. With Federal Reserve Chairman Bernanke likely to repeat his disappointment with the pace of economic recovery after this week’s Fed meeting, it now seems likely for the dollar to take its turn at bat. In short, what we are looking for here at Durig Capital, are the fundamentally soundest economies to diversify towards, and away from overweighted US assets that are likely to significantly depreciate should the much longer and broader term global confidence in the dollar continue to deteriorate.

Norwegian Economy

Norway is one of the world’s most prosperous countries, and is ranked 16th in economic freedom out of 43 countries in the Europe region. In general, Norway’s economy was shielded from the worst of the global credit crisis due primarily to its extensive oil wealth (world’s sixth-largest oil exporter), a strong labor sector, a stable housing market and a mainland economy that is expected to continue expanding at a somewhat moderate pace. The country is richly endowed with numerous natural resources including hydropower, fish, forests, and minerals in addition to its already noted petroleum sector, which accounts for nearly half of exports and over one third of state revenue. In anticipation of eventual declines in oil and gas production, Norway saves state revenue from the petroleum sector in the world’s second largest sovereign wealth fund, recently valued over $570 billion.

After solid GDP growth in 2004-07, the Norwegian economy slowed in 2008, and contracted in 2009 before returning to positive growth again in 2010. It features a combination of free market activity and government intervention, with the government controlling key areas, such as the vital petroleum sector, through large-scale state-majority-owned enterprises. Norway opted to stay out of the EU during a referendum in November 1994. However, as a member of the European Economic Area, it contributes sizably to the EU budget.

Norwegian inflation accelerated last month as the central bank signaled it would delay planned interest rate increases amid a deepening European debt crisis. Oslo-based Statistics Norway recently reported that the underlying inflation rate, adjusted for taxes, fees and energy prices, climbed to 1.2 percent in September from 0.8 percent a month earlier. Headline inflation was 1.6 percent, also faster than the 1.3 percent estimated in a survey. The country’s central bank kept its overnight deposit rate unchanged at 2.25 percent this month and postponed its next rate increase into the second half of 2012, as policy makers tried to protect the economy from the fallout of Europe’s debt crisis. Norway’s government last week presented a 2012 budget plan that will increase the use of its oil money and stimulate the economy by 0.3 percentage point amid concern that the euro area debt crisis will sap exports.

The mainland economy is projected to grow 2.8 percent for 2011, and expand to 3.1% growth in 2012. The unemployment rate in Norway has fallen to 3.3% as the economy has bounced back from a shallow recession in 2009, and with those hiring chasing fewer candidates, wages and therefore inflation could rise. The Norges Bank traditionally is a flexible inflation fighter, balancing inflation and growth. The three- month Norwegian interbank offered rate was at 3.13 percent on Oct. 28, compared with a low for the year of 2.53 percent in January. The kroner has risen about 8% versus the U.S. dollar over the past year, and a stuttering U.S. recovery has weakened expectations that the Federal Reserve will raise rates any time soon.

Fred.Olsen Energy ASA (FOE:OSL)

Fred. Olsen Energy ASA (The Company) is a leading provider of exploration and development services to the oil and gas industry, and operates nine rigs and vessels for firms such as BP, Anadarko and Statoil. From roots over 150 years earlier in the shipping industry and more than 35 years in international offshore drilling, the Company first listed on the Oslo Stock Exchange in 1997. In 2000, important steps were taken to position itself within the deep water segment of the offshore market and strengthen its position as a supplier of offshore drilling and floating production services. Operating activities of Fred.Olsen Energy ASA and its subsidiaries (The Group) currently consist of offshore drilling as well as engineering and fabrication services. The Company is headquartered in Oslo with offices in Norway, the UK, Singapore, Bermuda, Brazil, Mozambique, Hungary and South Africa.

Gross revenues for the Group in 2010 was NOK 6,019 million, and earnings before depreciation and amortization, financial expenses and taxes (EBITDA) were NOK 3,401 million. The net interest bearing debt at 31 December 2010 was NOK 4,041 million. The number of tenders and fixtures within the offshore drilling market increased in 2010, resulting in a trend of shorter term contracts and decreasing lead-times, with rate levels remaining relatively stable. Oil prices fluctuated at levels between USD 70-90 per barrel during 2010.

Geographically, the Group currently operates in Norway, the UK, Mozambique and Brazil. At year-end 2010, the Group’s offshore units had an average contract length of 21 months. The current contract backlog is approximately USD 1.9 billion. At mid-end June 2011, the Group had consolidated assets of NOK 14,182 million. The ratio of net interest bearing debt to total assets about 41.5% and the book value of the equity was NOK 7,381 million. Net cash from operating activities for the first half of 2011 was NOK 1,182 million (compared to 1,066 a year ago) and cash and cash equivalents were NOK 2,268 million.

In April of this year Fred.Olsen Energy ASA ordered a new ultra-deepwater drillship from Hyundai Heavy Industries Co. for delivery in 2013 at an estimated cost of USD 615 million and in the following month successfully completed a five year NOK 1,400 senior unsecured bond issue, with a maturity date of 12 May 2016. The floating rate for this note is reset quarterly, at NIBOR (Norwegian Interbank Offered Rate) + 4.25%, which currently equates to 7.32% after 12 August 2011. The interest is paid in arrears quarterly.

There are three primary areas that Durig Capital focuses upon for its bond reviews to help assure the return of our client’s capital. After reviewing their most recent 2Q 2011 statements, Fred.Olsen Energy scores passes all three categories with flying colors:

Debt to Equity – about 50%. Higher than we normally prefer, but still quite acceptable.
Debt to Cash - about 2.5 to 1. This is reasonable, and once again, quite acceptable.
Cash Flow to Debt obligations – over 10 x’s. An excellent coverage ratio.

In 2007 the Company distributed dividends for the first time since listing in 1997, and stated that the Company would pursue a yearly strategy to pay a dividend of NOK 10 per share. This they have not only done, but an additional NOK 10 extraordinary dividend brought the total to NOK 20 per share for the year 2010. In summary, this is a well financed company with reasonably low debt, ready options for additional funding if necessary, and a prudent use of existing cash flows.

Risks

The default risk is Fred.Olsen’s ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond, is minimal relative to its more favorable return.

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

The Norwegian kroner has gained about 6 % against the euro from a year ago, but because 80 percent of Norway’s exports go to the European Union, the kroner remains connected to the euro and would be affected in the advent of a Greek default. Though Norway’s banks hold little in the way of Greek debt, the fallout of a Greek default on banks in Germany and France would pass through the whole region and hit even Europe’s richest economies.

Allotments

How can investors participate in Norwegian krone denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 10,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.

Conclusion

Indications of a slow or modest US economic recovery remain very fragile and sensitive to oil prices. Considering that higher oil prices will likely correlate into an added boost to the krone’s strength relative to the US dollar and numerous other global currencies, there may be significant potential for a longer term capital gains advantage residing in the currency exchange for the Norwegian kroner. Therefore, we view the both the currency risk of this leading European economy and the integral strength of a growing and profitable Norwegian oil services company like Fred.Olsen Energy as an intelligent risk choice that we have recommend 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.

Disclosure:

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

Durig.com | Investment-Income.net

Most of our Norway Krone bonds are quoted on our Norway Bond page.

Our Norway articles are found here.

Related Articles:

Norway Bond News:

Norway Krone News:

Norway Economic News:

Norway Krone Graph

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

6.84% Netflix (NFLX) bond Yield-to-Worst with a 4 year call

Randy — Thu, 27 Oct 2011 00:51:22 +0000

Netflix bonds are one of our favorite bonds, and we appreciate the opportunity to buy it while the stock is showing weakness. Although this Netflix bond is only rated Ba2 by Moody’s and BB+ by Standard & Poor’s, its underlying fundamentals exceed the stringent criteria that we use to find better yielding bonds and it provides an ideal example of why we think these official rating agencies may occasionally be mistaken in their assessment of a company’s credit worthiness. After considering Netflix’s very conservative balance sheet and liquidity, perhaps you might agree with us that with its very low debt, high coverage, and large cash ratios compare more reasonably to that of other Aa/AA rated corporations rather than what is typically expected and found in companies sharing the junk status it’s currently branded with.

At Durig Capital, we have developed a process to screen, review, select, purchase and monitor high yielding corporate bonds. The following overview and supporting document/link illustrates some of the review and selection criteria used after screening thousands of separate corporate bond listings to find what we believe is currently the best corporate bond for investors, and it shows why we believe this corporate bond makes sense for our clients’ income portfolios.

Step 1 – Yield Curve at 4-7 Years Out.

With the uncertainty that is griping the investment community, we have studied the yield curve in order to maximize earning higher yields while trying to protect against principal loss. Investors are disgruntled with savings accounts that are currently yielding an average of only .51% (per Bankrates.com.) With inflation ticking up at an annual rate of 3.9 percent, our clients want to know how or where they can intelligently attain a higher return with a reasonably acceptable level of risk, rather than keeping their money in a saving account where it is “safely” losing buying power at 3.39% per year.

Step 2 – A look at the issuer

Netflix is an extremely popular and low priced service, and they have been very successful with their mail delivery service. Working to gain an advantage and be ahead of the curve, they launched their video streaming service. Although many customers like these services, there have been a number of missteps in implementation.

The video streaming element is still a small, but fast growing, part of their business that provides faster delivery, lower costs, and superior margins than the US postal service used for DVD deliveries and returns. This migration is likely essential for the future of Netflix, and they appear to be a primary leader both in introducing this service and in providing a quality product. While they clearly have a marketing advantage, it also appears that they have had execution issues.

Step 3 – We like companies that are profitable.

Netflix Inc has found a very profitable niche in the multimedia rental market. Considering that they have put up herculean numbers in the past, their more recent hiccups seems to have proved this year that they are mere mortals. With that said, they have still provided outstanding profits that are built on the superior business model of annuitized income. In the latest quarter, Netflix posted a profit of $62.5 million, or $1.16 a share, which is up from $38 million, or 70 cents a share, a year earlier. Revenue jumped 49% to $821.8 million. Netflix projects that it will now lose money for a few quarters starting in the first period, due to costs associated with an expansion in the United Kingdom and Ireland, and the ongoing build out of their technology improvement for streaming. However, they believe their Stream technology will increase margins about 1% per quarter going forward.

Step 4 – Interest Coverage Ratios

Netflix had $120 million in operations income last quarter, an unbelievable 22 times coverage of the roughly $5.3 million quarterly interest expense resulting from their debt. But with projected short term loses, coverage will possibly go negative the next few quarters. Knowing that the last quarter was influenced by many factors, we reviewed the previous calendar years numbers and found they had about 13 times coverage, which is well above most of the companies we review. In fact, this is a stronger number than several AA rated companies we follow.

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

Netflix reported long term debt at $200 million, and when including its additional $32 million property leases, total long term debt sits at $ 232 million. Cash and short term investments grew to $365 million. Cash on hand exceeds long term debt by over $ 103 million dollars, meaning that they are able to pay off 100% of the debt at will. This is one of the best cash to debt ratios in a company we have reviewed.

Step 6 – We like companies that have flexible balance sheets

Netflix currently has about a $4 billion dollar market capitalization, while long term debt is around $232 million. This debt to equity ratio of around .06 is among the lowest we have reviewed, even after Netflix’s recent sharp decline. In comparison, if a home were valued at $ 100,000, a relatively similar debt ratio would indicate an owner only owes about $ 6,000 to the banks. This gives Netflix one of the most flexible balance sheets we have analyzed.

Step 7 – We like high yields.

This issue is first callable at a price of 104.25 in November 15 of 2013, or two years, which would return a yield of about 7.38 % if bought today at the premium price of 105.75. At this point it is unclear whether Netflix will exercise this option, as rates then may allow them to refinance at a much lower rate and save substantially on interest expenses. The yield to worst, assuming the more likely call at par in 2015, is 6.845 %, which is an outstanding rate. If the bond is held to maturity in 2017, a time frame concurrent with our economic outlook, it would return a highly coveted 7.305% and represents a whopping 5.7 spread above the 1.6 of corresponding maturity treasuries. Enclosed is a link to current junk grade bond offerings one can use as a benchmark against Netflix Inc.

Step 8 – Risks Considerations

Even though Netflix provides a very specialized movie service, they are still a rapidly evolving company and business, in an industry that is renowned for having bankrupt both previous major players, Blockbuster and Hollywood Video. It is worth noting that the innovative leadership at Netflix has kept them profitable throughout this last downturn and has worked hard to lead them into next technology, an element that was missing and was perhaps the major downfall of their earlier predecessors.

The Technology and Rental industries are very volatile and market capitalizations can experience breath taking swings. However, the debt to equity ratio is so low for Netflix it remains in single digits. This extremely low ratio provides excellent balance sheet flexibility, even if the stock were to decline another 50%.

Netflix may not be profitable for several quarters as a result of their global launches, and this would reduce their interest rate coverage and possibly decrease cash. Since this is an annuity business, these short term expenses and build outs could be scaled back if needed, and the annuitized cash flow makes them a more stable business than most.

Conclusion

The 6.84% yield till worst case scenario is very attractive for a diversified portfolio with the current market conditions. Although Netflix Inc. lacks an investment grade rating, the combination of extremely strong operating cash flow, a solid annuitized business model, and current cash position gives them is a very solid foundation. With one of the highest cash balances, current interest rate coverage high, and the lowest debt to equity we have analyzed, we believe Netflix should perhaps be rated much higher. However, we are taking advantage of this low rating as it appears to allow our clients to obtain a higher rate of return because of risk which we believe others have assigned incorrectly.

Coupon 8.5 %
Ratings Ba2/BB+
Maturity 11/15/2017
CUSIP 64110LAC0
Price 105.75
Yield to Worst 6.845 % 11/15/2015 call at par
Yield to Maturity 7.305%

Disclaimer: Durig Capital and certain clients currently do have a position in Netflix bonds.

Durig.com | Investment-Income.net

Related Articles:

6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.
7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015
7.67% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.
9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.
6.218 % Century Aluminum (CENX) Bonds Yield-to-Worst Call May 2013.
7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.
6.84% Netflix (NFLX) bond Yield-to-Worst with a 4 year call
12.50% Yield Brazilian Real, Bank of America, A rated, mat Nov 2014.
10.094% Yield Tutor Perini Corporation (TPC) 7 year bond

Netflix News:

Netflix Company News

Yahoo Netflix News:

High Yield Bond News:

Movie Streaming News:

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

New Issues Municipal Bond News, Calendar, Rates, Quotes and Updates

Randy — Wed, 26 Oct 2011 22:18:10 +0000

We have a New Issue Municipal bonds free E-mail update serves available for tax free income investors. Most clients know us for our diligent work in Global Bonds along with our Corporate Bond research, but we also help clients separately in individual State and Municipal bonds. Many people ask “how do you buy New Issue Municipal bonds? “ Here at Durig Capital we work hard to make it easy for you, first you could review the upcoming offerings in our free State by State New Issue E-mail service by signing up below or simpler yet just give our bond annalist a call.

We would like to help you, if your interested please just a few moments for our very short sign-up questions for our Free New Issue Municipal bond update service, our emails Municipal bonds new issue will be sporadic due to the nature of the New Issue Markets. We hope you like our service.

Bond-Yields.com: Searching The Globe For The Best Rates!

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

Get a Quote

TGS chart

6.3% Yield, US Dollar Yankee Convertible bond: Neo Material, mat. Dec 2017.

Get a Quote

Neo.to chart

7% Yield, Mexican Peso: UBS, Aa3/A rated, matures June 2015

Get a Quote

US Dollar (USD) in Mexican Peso (MXN)

Over 8 %, Southern Copper Corporation (SCCO): Investment with Income

7.67% Netflix (NFLX) bond Yield-to-Worst with a 4 year call

Get a Quote

8.50% Australian dollar, Goldman Sachs, A3/A- rated, floating rate bonds, maturing April 2016.

Australia Government and Corporate Bond Articles Here

Australian Bonds Rates Sheet

Australia Dollar (AUD) in US Dollar (USD)

9.05% Yield, Turkish Lira: Volkswagen, A3/A- Bond mat. Dec 2013.

Turkey Government and Corporate Bond Articles Here

Turkey Bond Rate sheet

Get a Quote

US Dollar (USD) in Turkish Lira (TRY)

6.218 % Century Aluminum (CENX) Bonds Yield-to-Worst Call May 2013.

Get a Quote

Durig Capital celebrates it’s 10th years in business.

7.38% Yield, Norwegian Kroner: Fred.Olsen Energy, matures May 2016.

Norway Krone Graph

6.84% Netflix (NFLX) bond Yield-to-Worst with a 4 year call

Get a Quote

New Issues Municipal Bond News, Calendar, Rates, Quotes and Updates

New Issue Municipal Bond News

Municipal Bond News

Municipal Bond Calendar

Municipal Bond Default News

Municipal Yield Curve