This Week’s Best Bond—Total 4.988% YTM Due 10/2014 in New Zealand Dollars
At Durig Capital, we have clients that are seeking higher yielding corporate debt from higher rated companies. After reviewing domestic debt issues and seeing very few attractive yields, we started looking overseas for issues that offered our clients a higher yield with shorter maturities.
Investors in the United States of America have found it difficult to find bonds that offer attractive yields while maintaining shorter maturities. Durig Capital has found different foreign bonds that offer investors a significantly higher yield with a shorter maturity. These bonds also include desired diversification benefits because they are denominated in foreign currencies. Holding fixed income denominated in foreign currencies could help reduce clients risk against the potential continued decline of the real value of the US Dollar.
Fixed income investors in the United States have enjoyed a bull market since the early 80’s as interest rates have trended downward. In the last few weeks, we have seen a lot of volatility in the US treasuries markets that each pundit claims to be caused by often contradicting theories leaving investors pondering what is next. With money markets and savings accounts yielding next to nothing, we have been seeking shorter term investment vehicles that could provide investors with a higher yield in the short term.
About the Issuer
Total is a global oil, gas and energy firm headquartered in France. They have operational interests in 130 countries. Currently, they have a market cap of over one trillion US Dollars making them one of the largest firms in the world. They have developed a business model that incorporates vertical integration as illustrated with their ownership interests in oil field exploration, refining, transportation, retail marketing and have also diversified their energy production portfolio to include solar and biomass technologies. Total has issued debt in many different currencies including Euros, Swiss Franc, and US and Australian Dollars.
One of the most important things to look at when considering credit quality is the ability of the company to earn a profit. Total has a history of being profitable. Since the onset of the global financial crisis, they have seen profits fall like many other companies.
While considering the profitability of the company, we like to look at the equity and see how management and outside investors are pricing the value of the equity. Management has established a dividend payment that is yielding almost twice the industry average and over two and a half times the S&P 500 composite.
Being able to distribute cash to share holders at a rate above the industry average is impressive. It is our belief that management would not be paying such a high dividend to equity holders if they foresaw a problem with being able to pay debt holders first. This can be seen within the following excerpt taken from Total’s Fall 2010 Shareholders Newsletter.
“Confident in its outlook and financial soundness, Total will
pay its shareholders an interim dividend of 1.14 euro per
share on November 17 of this year, the same amount as
last year’s interim dividend.”
Cash in the Bank
We look for companies to include in our bond portfolios that have high levels of cash compared to the long term debt they have issued. Usually firms in mature industries, such as the oil sector, have higher debt to cash ratios because they are able to raise capital at lower rates. Total has issued long term debt that represents 1.2 times the cash they have on hand. For comparative purposes, Exxon (XOM) is 1.25, Royal Dutch Shell (RDS) is over 3. This is a strong ratio considering the mature industry they operate in.
Long Term Debt to Equity
Total published that it currently has 21.56 billion Euros of long term debt issued. In addition to this, they have long term debt that is due in the next 12 months of 10.2 billion Euros that will most likely be refinanced so one could conjure that it will be included in long term debt in the next 12 months. The total of likely long term debt is 31.76 billion Euros. With a market cap of about 90 billion Euros, the long term debt to equity ratio is about .35. This is quite good considering that they are in a mature industry where debt usually much higher. This also allows Total to raise capital by either issuing additional debt or equity.
New Zealand Dollar vs US Dollar
The US Dollar has been vulnerable as of late due to many different factors. We have been seeking to diversify out of the US Dollar. The New Zealand Dollar has been strong against the US Dollar in the recent past (see below). If this trend does continue, it may cause principal and interests payments to appreciate in value relative to the US Dollar generating gains. With the continued struggles in the US economy, we are advising clients to diversify away from a portfolio based solely on US Dollars and this bond fits this metric.
Total is a well known global corporation with an higher AA/Aa credit rating. As stated above, they have issued debt in numerous different currencies. We have found some issues denominated in US Dollars for comparative purposes.
|Currency||New Zealand Dollar||US Dollar|
|Yield to Maturity||4.98%||2.47%|
Although the maturities are about eight months apart, one can see that the yield is double when looking at the issue in New Zealand Dollars.
The value of the New Zealand Dollar may be effected by how the sovereign nation of New Zealand deals with their fiscal and monetary policy. Should they raise or lower interest rates, the underlying value could be effected. The government of New Zealand could decide or be unable to pay for debt servicing resulting in the value of the currency to fall. Although the government and society appear to be stable, one must consider what could happen if social unrest were to arise. These are a few of the factors that could materially effect the value of this issue.
The currency is what many investors may view as the largest risk. If one were to have an established fixed income portfolio invested in solely US Dollars, they are exposed to risk due to lack of diversification with regards to currency. The US Dollar has been declining in value compared to many other currencies over the last few years. The US Economy may be showing signs of growth with corporate profits soaring but at the same time lingering concerns about unemployment and housing remain. The fiscal and monetary policies have been in question as of late. The deficit keeps on climbing to historic levels. These are some of the reasons we believe there may be continued downward pressure on the value of the US Dollar compared to other currencies. Allocating a portion of ones portfolio away from US Dollar denominated debt may be prudent.
Due to the nature of the industry Total is in, there are large environmental risks. In April, the well documented BP oil spill caused problems that are still being worked out. The negative publicity and fiscal responsibility BP gained overnight materially effected the way they and the industry were able to operate. Although tragic disasters like this may be unpredictable and unintentional, one must consider what could happen to Total or the industry.
Being in the oil industry, the profitability of Total is closely linked to the price of oil. There are numerous independent factors that effect these levels one of larger is OPEC. As of November 2010, OPEC controlled an estimated 79% of the world’s oil reserves while accounting for 44% of total global production. With OPEC controlling such large percents of supply, any change in their policies could have material ripple effects on margins for Total.
At Durig Capital, we are advocates of diversification and believe in its benefits. Foreign bonds are often hard to acquire for individual investors due to the large allotments they trade in. Often these bonds trade in lot of 100 bonds or more, which could limit the ability for individual investors to gain proper global diversification. We have developed a service though established industry networking and hard work that lowers these investment barrier in world bonds to be reduced to as low as $10,000 US Dollars in a single global instrument. This allows for much more diversity, lowering the risk by using the common senses approach of allowing for many smaller eggs instead of one large egg.
Please contact us if you have interest or questions, due to the high yield, short maturity and asset diversification, we believe this opportunity is unique and could add value add value.
Durig Capital is currently recommending this Total bond denominated in New Zealand Dollars to its clients.
|Payment Delay||0 DAY DELAY|
|First Coupon Date||10/27/2005|
|First Settlement Date||10/27/2004|
|Bonds In Default||NO|
Foreign Security Features
Disclosure: Durig Capital is currently recommending clients allocate a portion of their fixed income portfolios in Total New Zealand.
To know more about this Total bond call our fixed income specialist at 971-327-8847
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