New equity investment: Crown Notes
The Crown Hybrid (CWNHB) has been added to clients' equity portfolios this week, as a ~1% position. Clients with a gambling prohibition have obviously been excluded.
The hybrid pays quarterly interest at 90 day Bank Bill Swap (BBSW) rate plus 4%. It was acquired for ~$84 per note, versus a face value of $100. Thus we expect a cash interest return of ~7%p.a., and a yield to term (2021 is the call date) of ~11%p.a.
This opportunity has arisen due to the noise created by the Macau gambling slowdown, and the arrest of several staff members relating to promoting gambling in China. The potential restructuring of Crown into new entities - a company containing its overseas operations, a company containing its Australian operations, and a listed REIT with part ownership of Australian property assets - is also creating some uncertainty in the market.
We view the sell down (on small volume) as being overdone, and see solid returns available at these prices.
Crown is a highly regulated company and its ability to damage hybrid holders is low (it is not allowed to over-gear itself, under its gambling license terms). It also has a major shareholder who requires strong dividends to fund an above average lifestyle. This means a distribution stop on the hybrids would be unlikely (Crown is precluded from paying dividends if it stops paying hybrid distributions).