Interest Rate Securities come in four primary flavours:

• Corporate Bonds. An unsecured loan to a company for a fixed period of time at a fixed rate of interest.
• Floating rate notes. An interest rate security that pays interest at a variable rate that is set periodically in relation to an underlying reference rate.
• Convertible Notes. A loan made to a company at a fixed rate of interest with the right to be either redeemed (i.e. repaid by the company) for cash or converted into ordinary shares at a predetermined date or within a certain period.
• Hybrid Securities. Hybrid Securities are products that may have both equity and debt characteristics during their life, although typically they begin their life with predominantly fixed interest characteristics. They generally pay a fixed dividend for a set period of time and then convert into the ordinary shares at a date or dates in the future.

Details of current interest rate securities available in Australia can be obtained at the ASX website.

The Fusion Investment Portfolio has invested in convertible notes issued by Great Southern Limited (GSL). To date that has been the portfolio’s worst performing asset. With another interest payment due 31 October and a 37% paper loss, now is a good time for a review.

It has been a tumultuous year for GSL and a volatile ride for shareholders in GTP.AX. Let’s have a quick recap:

• A change of senior management,
• their largest shareholder, Ospraie, had to close up shop,
• changing government regulations

Investors see considerable risk in GSL’s convertible notes, GTPGA which Fusion owns and GTPGB. The bids for these are for $40.50 and $43 respectively. Both notes have a face value of $100 and pay respectable interest rates with no payment missed to date. From here on I’ll concentrate on the GTPGA notes.

Investors are only prepared to pay 40 cents in the dollar for GTPGA. What’s more, there are still three interest payments at 6.4% to come. Is the appropriate risk priced in or is this an opportunity?

GSL are attempting to restructure their business as explained in this company announcement. They are hoping investors in their early plantation wood lots and recent cattle projects will exchange their interest in the MIS projects for shares in the company. If successful this should guarantee the future of GSL as a going concern and the ensuing stable cash flows should make GSL a more attractive business. The offer to project investors has been made considerably more attractive and at current share prices they could collectively own 71% of the company. The closing of this deal certainly shrouds GSL in uncertainly; however, I am not convinced that it significantly increases the risk to convertible note holders.

More Fusion Analysis of Great Southern

NOTE: I consider this post less than half finished, but due to time commitments I am unlikely to finish it this week and so decided to put it at there as is.