As a follow up to the Listed Income Securities article, I have been reviewing some previous posts and have updated my numbers on AFIG. I can't explain why I didn't buy AFIG earlier when the stock was issued at $100: I knew about the trade, the downside was extremely low, plenty of upside, simple. Maybe it was just too simple!
Live and learn. But it is better to learn and live.
Moving on. AFIG are now up a bit to $117.50. AFIG pay a coupon rate of $6.25 so the current yield is 5.3% p.a. Okay, the notes are trading well above the face value of $100. A number of things could happen. First, the notes could mature in 28/2/17 for the face value of $100. Under this scenario, the yield-to-maturity (YTM) is 1.5% p.a. As noted in the first post, this type of return isn't a great outcome, but there are stocks out there far more downside potential than +1.5% p.a.
The other possibility is the conversion of the notes into ordinary shares. AFIG shareholders have the right to do this every semi-annual interest payment date of Feb and August. Each AFIG share can convert into AFI shares at a fixed rate of $5.09 per AFI share. $100/$5.09 = 19.6 shares. Therefore, as the AFI share increases in value, the value of the in-built option in the AFIG shares increases.
The potential return therefore depends on the timing of the conversion and the AFI share price. I have updated my scenarios based on assuming conversion takes place at maturity in 2017 and AFI share prices of $5.72 (the current share price), $6, $8 and $10. Please note I have no idea what the share price will actually be: the purpose of the analysis is to understand the types of returns possible depending on the AFI share price.
Here are the potential pre-tax returns based on the assumed AFI share prices:
If the AFI shares reach those levels earlier, the IRR gets better.
I don't own AFIG, but they are on my list to buy when I stop procrastinating about it.
Kristian
Disclosure: do not own AFIG or AFI
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