Crown notes soar
Many clients have an allocation to Alternative securities. This allocation specifically aims to provide investment diversification, as well as targeting income and some capital return.
This allocation contains the two Crown hybrids (for those clients without a gambling restriction). There are two hybrids issued by Crown Resorts - CWNHA and CWNHB.
It has been an interesting period of time for these investments.
The CWNHA notes were added to clients' portfolios in May-16 at a price of $92.43 (vs face value of $100). The CWNHB notes were added in Mar-16 and May-16, at an average price of $75.84 (vs face value of $100).
Uncertainty existed regarding James Packer's intention to possibly privatise Crown. This was compounded when he resigned from the company's Board. Hybrid holders viewed this unfavourably, because they viewed a private issuer as more risky than a publicly traded, dividend-paying one.
However, Crown remained in compliance with its obligations with respect to the Notes when we purchased them (including payment of distributions), and we expected this would continue - even in the unlikely event that Crown was privatised. Certainly, the price, especially of the CWNHB, reached a level that was far from in keeping with the risk that existed. Thus we purchased the notes.
Crown subsequently (last week) announced a planned re-organisation of its business - Australian gaming and overseas gaming to be split into separate entities. Crown also advised it may sell a 49% interest in its underlying Australian properties. This announcement stopped the market speculation around privatisation.
After this announcement, the Crown notes CWNHA and CWNHB are trading at $93.70 and $83.10 respectively - a considerable price increase, especially for the CWNHBs.