By Craig Simpson
With Standard and Poor's (S&P) shifting the goal posts on how it calculates financial ratios for hybrid securities where the interest they pay is classed as dividends, Contact Energy has chosen to exercise its rights under the original investment statement and redeem bonds not due to mature until February 2042.
They will be redeemed on on November 15, 2013.
The terms in the original investment statement say the bonds could be called (repaid early) at the behest of the issuer, on the first Reset Date of February 15, 2017 and then on any subsequent quarterly Interest Payment Date.
If the bonds are not called in February 2017 there is a step up margin of 0.25% on top of the reset margin of 4.55%. The Issuer also has the right, in certain limited circumstances, to redeem the capital bonds prior to the first Reset Date.
The change in S&P classification is considered a "ratings event" by the issuer and therefore the bonds are redeemed at par value plus any accrued interest owed to investors. We originally highlighted this issue as a possibility back in April, and noted a Genesis hybrid issue was in the same boat as Contact Energy.
Contact Energy intends using bank facilities and existing funds held on deposit to fund the redemption and this early repayment of capital and interest does not affect any other Contact Energy bonds on issue.
The issue facing investors is how to replace an income stream of 8% per annum in the current low interest rate environment. To see what is available click here.
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