Thursday 10 July 2008

Sold some IPE and bought some IANG instead

I have a large block (for me) of the listed ING Private Equity company IPE, which I obtained last year when the $1.00 options were exercised. Since then the general market slump has seen them marked down severely, to around $0.70 at present. Although the book value of the IPE shares would still be much higher than this, they could continue trading at a discount to book value for a long time, so I decided to off load some of my holding - selling 22,000 of them at $0.70, realising $15,370.05 after Comsec brokerage fee of $29.95. That still leaves me holding 90,000 IPE shares, which I'll keep for the longer term.

I bought 200 IANG shares (IAG (NZ) Reset Exchangeable Securities) for $80.20 each - costing $16,269.95 incl. brokerage.

Overall, these trades will have increased my margin loan debt by $900, but will actually reduce the chance of getting a margin call. The IPE shares only have a margin value of 5%, whereas the IANG shares have a margin value of 80%, so the margin valuation of my portfolio will have increased by roughly $12,000 by making these trades. The IANG shares should also be a somewhat less risky investment than the IPE shares they're replacing - being an investment in a portfolio of high quality, short dated, fixed interest securities (Portfolio) managed by IAG Asset Management Limited (IAGAM). This Portfolio has an Australian Bond Fund Rating of ‘AAAf’ from S&P. It pays a fully franked dividend of 1.2% above the 90 day Bank Bill Rate, which should provide income roughly equivalent to the current margin loan interest cost (tax-deductible) of 10.50%. The IANG shares used to trade around the issue price ($100) plus accumulated dividend, as shown below. However, over the past year they have been deeply discounted by the market to currently trade around 20% below "face value". Since the IANG shares first "reset date" is in a couple of years time (15 March 2010), and the portfolio of bonds currently still has a valuation of $100.70 per share, this discount seems likely to be a temporary "panic" reaction and the shares should recover to around $100 by the reset date (barring any significant defaults in the bonds held within the portfolio). Combined with the fully franked dividend rate IANG seems a safer bet than holding on to the IPE shares they replace.

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