In a low interest rate world, New Zealand corporate bonds can provide attractive returns – especially those backed by critical infrastructure assets. Refining New Zealand’s bonds provide a case in point, and have delivered strong returns for investors over the last year.
Critical nature of infrastructure highlighted by recent mishaps
To fully appreciate a company’s asset base, it can help to look back at past events. We tend to take the ready supply of fuel for granted. But ask yourself the question: what if there was no fuel to pump at petrol stations around New Zealand? Perhaps an unrealistic scenario given how reliable fuel supply has been over many decades?
However, those living in the Auckland region faced this prospect during 2017, when the pipeline that brings diesel, petrol, and jet fuel from Marsden Point into Auckland ruptured. As you may recall, luckily, the pipeline was brought back into service relatively quickly and a crisis was averted (and diggers are also a bit more careful when scavenging for swamp kauri these days!).
Refining NZ owns that pipeline and operates additional fuel supply chain infrastructure which, in normal times, contributes significantly to the flow of economic activity across New Zealand. Of course, the early part of last year was anything but normal as the economy was brought to a halt when COVID-19 spread across the globe.
Uncertainty creates the opportunity for change
For New Zealand, COVID-19 led to a Level 4 lockdown on and as a result the outlook for fuel demand was highly uncertain for a period. Refining NZ faced immense challenges – not least maintaining a relentless focus on safe refining operations. Consequently, in April 2020, the company commenced a strategic review to determine the optimal business model and capital structure for its assets that would best serve the country’s fuel needs in the future. But the uncertainty created by the pandemic provided a great opportunity to invest in Refining NZ’s bonds at a discounted price.
A year later and having weathered the storm and completed its strategic review, Refining NZ is very likely to shift from refining crude oil to an import terminal of refined fuels over the coming year. Crucially, despite the material change to its operating activities, the company’s pipeline and other assets (eg. jetty, storage tanks etc) will remain critical to fuel supply across the country. The critical nature of the infrastructure ultimately swamped the concerns caused by short term uncertainty – and investors that held the course, or ideally bought more bonds, have been rewarded.
Active management means doing things differently than the herd
Companies that own and operate infrastructure assets of national significance are often very solid businesses which is why we are invested in the bonds issued by Refining NZ. Some investors chose to sell their bonds in the early stages of the global pandemic due to the short-term uncertainty. But in our view the long-term picture was what investors needed to be focused on.
Staying focused on the long term, the continued need for refined fuel, and the various strategic options available to Refining NZ gave us the comfort to buy more of the company’s bonds when they were on sale in March last year. We believe the bonds still offer attractive value in today’s low interest rate world.
Because of the critical assets owned by Refining NZ, people will be able to travel to work and goods will arrive at markets. As such, the Refining NZ bond remains an attractive investment and we think the company will continue to fuel the nation on the road ahead.