How risky is 11%?

Here's a conundrum for investors. What looks better the Yellow Pages bond offer which will have a minimum yield of 11% or a finance company offering rates somewhere in the 9% range?

Tuesday, 4 September 2007

Working against the company in setting the rate is the turmoil in international credit markets and issues surrounding the finance company sector in New Zealand.

Enoka intimates if the offer was done at another time then investors would probably have a much lower interest rate.

"(The rate) has been set because of market conditions, not because (Yellow Pages) is risky," he says.

Yellow Pages is a consortium of made up of private equity group CCMP Capital Asia and Teachers' Private Capital which is the private investment arm of Ontario Teachers' Pension Plan. The group bought Yellow Pages from Telecom in April for $2.4 billion. Money raised in this bond offer will be used to fund that acquisition.

Yellow Pages is a well-known franchise in New Zealand and is in every home.

Enoka says the biggest risks the company faces are not from competition, but from more fundamental sources.

One is a major economic downturn. Currently Yellow Pages has around 200,000 regular customers that renew their advertising year-on-year. In many cases their Yellow Page advertising is the only advertising they do.

Enoka says some of these businesses, which spend around $2,000 each annually with Yellow Pages, could stop advertising.

The other risk he mentions is if the market shifts away from print directories to online ones. He says print is "a big chunk" of revenue and it could be impacted if this trend eventuates.

However, he says Yellow Pages has developed strategies and products to deal with this risk.

His view is that while there are other directories in the market, such as APN-owned Finda they tend to be in niche markets, rather than direct competitors.

One of the criticisms raised of the offer is that bondholders don't rank highly in the security stakes, and they are taking on equity-like risks for a debt investment.

Enoka disagrees with this saying that the owners and a lot of funders sit behind the bondholders.

One feature which may appeal to investors, and is similar to what Vector did with its bonds, is give bondholders preferential treatment to any future IPO the company may do.

Enoka says there are no plans, at this stage, for an IPO, however similar directory businesses overseas bought by private equity groups have conducted IPOs.

The Yellow Pages offer is open until October 16. The bonds will be listed on the NZDX market, however they won't have a credit rating.

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