Neither a borrower nor a lender be

The genius of James Packer continues.

Crown Resorts is a BBB rated company and they have raised $600 million in debt through the public markets at 4% above the bank bill rate, which means currently the total coupon will be 6.27% range.

The paper matures in 2075 but Crown can redeem them in 2021. Lenders own debt which is subordinated. They will rank below preference share holders and other capital market debt but above ordinary shareholders. The money is going to be used to finance projects within Crown Sydney & Crown Towers Perth.

So what they have achieved is to reap a stack of long dated capital at a cheap price without the onerous banking liens and it was raised easily because investors are simply chasing any yield.

Investors should consider not whether they are being “paid” enough to take this risk as a lender but whether they have considered the risk/return (even the risk of underperformance) of owning the shares of Crown Resorts rather than its debt would a better proposition. I’m not writing about Crown’s risk or ability to pay its coupon or return your capital but whether the herd has simply filed into another hybrid income product without thinking about it.

Think of it in terms of the return shareholders may receive as a rate of return over the cost of the capital once they complete the expansion of the various casino projects?

I forgot to say that James Packer’s family company, Consolidated Press Holdings (CPH), also bought $50 million of this debt. I’m sure this gave the new debt investors added confidence that he has backing it personally.

That’s fine, but CPH also owns at least $4 billion of Crown Resort shares.

Sometimes analysis is difficult and sometimes it can be simple.

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Price Is A Problem In The Absence Of Value

The CEO of AMP is resigning, so I had a look at how the stock price has performed under his tenure.

Since being CEO, AMP’s stock has fallen 7% compared to the ASX 200 Index, which has risen 168% over that same time.

Hmmm……

BHP’s recently retired CEO oversaw a total stock return of negative 17% while the benchmark index broke even.

Qantas’ current CEO can brag that his company’s stock price has declined 46% during his watch vs. the index return of + 55%.

Myer’s stock price has left shareholders 14% poorer (and I am counting dividends)  under the current steward but the index has climbed 28% over the same time period.

English: Why Pay More?, No. 112 The High Stree...

But I can hear the cries already. They’re in a tough industry, it’s cyclical, they inherited a bad egg from the previous boss, it’s competitive and margins are tight.

Perhaps the board is equally to blame for poor stock price performance as much the management team that is charged to execute the strategy?

To contrast, the current ANZ’s boss has presided over a 42% total stock return whilst the index fell 3%, Westpac’s stock performance has been an impressive 90%, which handsomely beats the 15% return that the index managed and last of all, had you owned that boring old power utility, AGL when their present CEO took over, your total return is 55% versus the ASX 200’s negative 3%.

Some commentators talk about what legacy a departing CEO has left or the systems they put into place.

Whilst they are being rewarded handsomely (which I don’t object to), shareholders rewards should be somewhat aligned.

Don’t even get me started on their “golden handshake” severance pay.

ASX 200 Is Oversold

Today, the ASX 200 Index has moved into oversold territory.  See the chart below covering Oversold Moments over the past 4 years.

In a recent client note, I illustrated my prediction of the ASX 200 falling to 4,170 around the mid-July 2012 timeframe.

This level was breached today, 2 months earlier than I expected.

My work suggests that the ASX 200 is now creating a base before embarking on a new tactical rally. I have found this current “set-up” similar to previous occurrences where the ASX 200 and the Shanghai Composite indices have troughed 2-4 months before other Western markets.

Combining the “oversold” reading with increasing bearish sentiment, consensus estimates for the ASX 200’s fiscal year 2013 include a P/E ratio of 10.6, a dividend yield of 5.5% and a Price to Book ratio of 1.5.

The ASX 200 is now in a range that I refer to as a “fertile investing habitat”. The Forecast Earnings Yield of the ASX 200 is 9%, which 6% above the 10 Year Aust. Commonwealth Government Bond (ACGB) yield.

Recently, I have written that the Australian equities market is not an “outright” nor a “raging” BUY whilst the 10 Year ACGB yield remains below “at-call” deposit rates and especially the Reserve Bank’s Cash Rate.

Currently, the RBA’s Cash Rate is 3.75% and the ACGB yield is 3.27%. Should the RBA cut rates by another 50 basis points, this yield curve will soon become normal again.

With all this theory and probability, I am only expecting a “tactical” rally, which may zigzag its way higher into November 2012.

Beyond this timeframe, our longer-term cycle work will see us lighten positions as the end of the calendar year nears.

Sometimes, markets move to where they can do the most damage and presently, that direction may very well be UP!

Oversold ASX 200 Moment – 4 years

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