Tuesday

Challenger Infrastructure Fund (CIF)

Post a Comment December 21, 2010 – 4:24 am |   | Permalink |  Print This Post |

We picked up some CIF last few weeks in our personal portfolio - we didn’t have time to post our trade here and so are still waiting for our entry of 1.15 and 1.09. We thought it was great opportunity in the midst of Euro crisis - the perceived risks in assets in Europe and rising bond yields and spreads would weigh down companies with assets in the region. Challenger Infrastructure Fund (CIF) hit all time low recently. It owns utility businesses, Inexus and LBC and has a yield of about 6% based on a purchase price of low $1 (7 cent dividend). Whilst its businesses have a total debt of $1.2-1.3 billion dollar AUD - large but notunusual for utility businesses - the loans are non recourse loans and so on a fund level, CIF is cashed up and at an arms length from Inexus and LBC should *** hit the fan. That was our rationale for buying CIF, which at current price trades at a market capitalisation of $376 million. Last time we checked it has about $300 million cash, and is doing a buy back.

There has been rumours on forums on bot trading - with love volume and depth, these automated bots may trigger landslide moves in the share price to allow someone to accumulate at bargain prices. We have no idea if that is true - fundamentally we are quite comfortable buying it on the back of our shorts in other overvalued equities to hedge our portfolio.

A few investors also expressed concerns regarding the ability for CIF to renew its loans, and also the covenants of its loans.

Question 1:

European sovereign crisis and rising bond yields have adversely impacted on investor confidence on EU assets and CIF’s share price. Question is will rising bond yields in certain EU nations impact on our financing costs and ability to refinance at similar terms/rates. I note that total financial institution loans amount to $1.45 billion between Inexus and LBC, with $461m of Inexus loans due in August 2012. A well known broker has refused buy orders on CIF citing credit risk management. Would appreciate if management could clarify if the aforesaid concerns are real.

Question 2: I would love to buy some CIF shares, as they appear undervalued, but have a few questions as follows.1. LBC apparently just raised capital - how much equity was raised, and how much did CIF contribute?2. How much of Inexus is owned by CIF1, and how much by CIF2? Also how much of LBC is owned by each?3. Are either CIF1 or CIF2 (or CIF) guarantors of any loans to Inexus or LBC?4. What are the covenants on the debt facilities of each entity?

Check out Challenger Infrastructure Fund (CIF) Investor Relations‘ full response on online Investor relations website DearCEO here. Generally reassuring, but the covenants of its loans are undisclosed.