Contact Energy says it'll pay 8% annual interest on a capital bond issue that will raise NZ$200 million, NZ$50 million short of the energy generator and retailer's ultimate target.
Contact confirmed the interest rate today on the unsecured, subordinated, redeemable, cumulative, interest bearing debt securities. Contact, whose majority shareholder is Australia's Origin Energy, had been seeking to raise up to NZ$250 million, including NZ$100 million of oversubscriptions.
The bonds will have a quarterly coupon, with the 8% annual rate fixed until February 15, 2017. The legal maturity of the bonds is in February 2042 but they can be redeemed early from February 2017. If they aren't called early, the bonds will reset at a margin that is 0.25% higher than the initial margin.
Standard & Poor's has assigned a 'BB-' long-term, speculative grade, or junk, credit rating to the issue. The bonds will be listed on the NZX debt market. Contact says the money raised will help optimise its capital structure through increasing financial flexibility and extending its term debt profile. Craigs Investment Partners acted as arranger of the offer.
Although the bonds are called "Capital Bonds", in the New Zealand market capital bonds are normally fixed rate, subordinated bonds with what is known as an 'election date'. At that date bondholders are offered a choice. The exact choice differs from bond to bond, but the bondholder will end up, at the issuer’s choice, either getting fresh capital bonds with a new interest rate and election date, or ordinary shares issued at the then market price (less a small discount) or have them redeemed for cash. The bond holder does not have the power to force redemption for cash at the election date. What that means is that the issuer can make the new terms to rollover terms so unpalatable as to effectively force conversion into ordinary shares.
However the Contact bonds are better described as "subordinated callable bonds" as they don't have an election date and conversion into shares but are callable at Contact's option every 5 years. Unless Contact calls them, investors have no right to redemption until the final maturity date in 2042. Every five years, if they are not called the original margin over the five-year swap rate, which was 4.55%, increases by 0.25%.
See full details on the different types of bonds here.
And here's Contact Energy's bond issuer page.
Contact's issue of subordinated bonds closely follows one from Insurance Australia Group Limited (IAG), which last week set a 7.5% annual interest rate on its NZ$325 million issue of unsecured subordinated bonds.
The 7.5% rate will be in place until December 15, 2016. The IAG bonds will have a term to maturity of 25 years but are callable at IAG’s discretion after five years and on each interest payment date thereafter.
IAG, which operates the State and NZI brands in New Zealand, today sought Commerce Commission clearance for its proposed NZ$380 million acquisition of AMI Insurance in a deal that would leave AMI's Christchurch earthquake liabilities with the taxpayer.
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