Last week the U.S. government announced that it had spent $233 billion more than it had taken in for the month of February 2011 alone. Adding this much debt in one month to a $14 trillion dollar plus debt load has many, including us at Durig Capital, scratching their heads in disbelief. Monetary and fiscal policy has been poor and many may believe that things may get worse before they improve. People are worried about the long term value of the U.S. dollar.
Fixed income investors are also frustrated with yields that are currently being offered. We have spoken to numerous investors who have had CD’s mature recently and are disappointed with the rollover rates. Finding an investment grade bond to replace the CD is often frustrating as well due to the marginally better yields that are still depressed.
We have been trekking the globe to find yield and diversification for clients. People may want to consider investing in foreign fixed income for any number of reasons.
We believe there may be a possibility of a triple win opportunity here:
- Foreign issues offer a way to diversify out of U.S. dollar denominated debt.
- These bonds have higher yields for notes maturing in less than four years compared to similar credit rated U.S. corporate bonds.
- New Zealand dollars could potentially appreciate against the U.S. dollar allowing investors principal appreciation and/or losses.
New Zealand Dollar
New Zealand recently, on February 22, 2011, had a devastating earthquake which has subsequently slowed the economy. We recently reviewed some bonds denominated in Chilean Pesos and this situation may be similar. Over a year ago, Chile sustained a massive earth quake that created a short term ripple effect on the Chilean economy. Over a year later, the economy seems to be as strong as ever. Taking advantage of this possible short term downturn by buying bonds issued in New Zealand Dollars may reward investors in the long run. The World Bank stated that New Zealand is one of most business friendly environments in the world. This should attract capital furthering economic development.
About the Issuer
We were attracted to this issuer as Toyota (TM) is a well known global firm. They are based in Japan and have operations worldwide. Toyota owns and operates numerous subsidiaries including Lexus and Daihatsu. They currently offer over 70 different models. Although they generate a majority of their revenues from car manufacturing, they are also involved in aerospace, robotics, finance and agriculture biotechnology industries. By some, metrics including sales and production, they are considered the world’s largest auto manufacturer.
Based on our column, "This Weeks Best Bond," Toyota is one of the stronger companies we have reviewed. Management has forecasted sales in 2011 to be 19 trillion yen or about $230 billion U.S. dollars (for simplicity sake the translations from JPY to USD were done at 80 yen/USD). Net income is expected to be about 350 billion yen or $4.5 billion U.S. dollars. In 2010, Toyota earned 66.79 yen per share. Although this is better than 139.13 yen per share loss, which occurred in 2009, it is still lower than earnings from pre-financial crisis levels, which averaged about 500 yen per share. Toyota is a cash machine. As of December 31st, 2010, they had 1.8 trillion yen in the bank and were able to generate 2.5 trillion of cash flow from continuing operations. These figures help illustrate the size of Toyota.
Toyota is considered by some an industry leader in fuel efficiency. Models like the Toyota Prius, which has an estimated 51 mpg, may sell well in the current market conditions when considering gas is approaching the $4.00 per gallon level in the United States. Other domestic manufactures have recently launched vehicles in the high efficiency category such as the Chevy (GM) Volt and the Ford (F) Fusion. Although competition has risen, Toyota seems well positioned since they were one of the first in the market place.
Toyota is a Japanese firm issuing bonds in New Zealand Dollars. We have been purchasing foreign bonds for our clients whose accounts are denominated in U.S. dollars. As one can see, this issue may expose investors to three different currencies that may affect the long term value. Toyota itself has suffered as of late due to the appreciation of the Yen to the U.S. dollar. This has created an environment where it is more expensive to produce the cars of which some are being sold in the United States. The weaker U.S. dollar that sales in the U.S. produce result in lower margins after translating said sales to Yen.
As in New Zealand, a large earthquake and tsunami occurred in Japan in the last week. The Japanese economy has come to a halt. Toyota has announced that they are suspending domestic production until next Thursday. According to management, this will result in an output reduction of at least 95,000 vehicles. Although it is impossible to determine exactly the monetary effects on Toyota so soon after this event, there will be some.
Many will remember the recent negative publicity Toyota received over allegations that accelerators became jammed thus not allowing the vehicle to come to a complete stop. Since these events, Toyota has responded with costly recalls to alleviate the issue. This is a risk of doing business and there will most likely be more in the future.
Many foreign currencies like New Zealand corporate bonds often require larger single bond purchases. To circumvent this constraint, we are combining potential bond buyers into a single larger unit purchase. In our previous syndicates, we were able to facilitate $10,000 U.S. dollar purchases and should be able to do the same for this bond.
Many of the clients that like New Zealand corporate debt also like reviewing comparable Australian bond yields. Most our world based income clients have also indicated significant interest in both Brazil government bonds and selective Brazil corporate bonds which offer yields in the 8% range.
There are many benefits to owning foreign denominated debt. We believe foreign denominated bonds could increase both the value and income production capabilities of portfolios. We are guiding our clients, that a properly diversified portfolio could take advantage of the potential weakening of U.S. dollar due to fiscal and monetary policy. In the case New Zealand Dollar, one could also enjoy significantly higher income and better overall returns. We are currently adding this bond to our Foreign and World Fixed Income holdings.
Related Information Snap Shot
Ratings AA2/ AA-
Pay Frequency Annually
Price $102.059 New Zealand Dollars
Yield to Maturity 4.46%
As of Friday March 16, 2011 $0.7293 USD per NZD
|Day Count Basis||30/360|
|Make Whole Call||NO|
|Payment Delay||0 DAY DELAY|
|First Coupon Date||12/22/2011|
|First Settlement Date||12/22/2010|
|Bonds In Default||NO|
Foreign Security Features
|Primary Country||United Kingdom|
Disclosure: I am long TM. Durig Capital’s clients currently do have New Zealand Dollar denominated Toyota Motors corporate debt position along with other global holdings.