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An expert take on instalment warrants

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Published on: Thursday, April 15, 2010

Highly-geared portfolios are always controversial and best left to the experts, but there are ways to maximise your gains without putting everything on the line. Elizabeth Tian from RBS Morgans and Keat Chew from Netwealth join Peter Switzer on his Sky News Business Channel program – SWITZER.

Instalment warrants have been around for more than 10 years. Tian says instalment warrants came about through the float of Telstra and CBA through the instalment receipt process where you buy part of your shares now and part later.

“What we’ve done as a bank is structured instalment warrants over different asset classes,” she says. “So now you can buy instalment warrants over shares, your BHP or CBA shares, or you pay part now and the second part is a non-recourse loan.”

The non-recourse loan means that if an asset falls, you can walk away from the loan, and not have to pay it back to the banks.

Gearing through super

Tian explains that investments warrants are one of the few ways people can gear through their super.

Chew says people can involve an investment warrant in their self-managed super fund (SMSF), subject to meeting conditions and the rules of the superannuation legislation as trustees of an SMSF have certain obligations.

So what percentage what you put down as an instalment warrant? Tian says that depends on the risk profile of the investor as well as age. As it’s a geared product, they also recommend a five to seven year time frame.

“You may not necessarily put all your money in super through instalment warrants, but you can certainly have a portion and get access through the blue chip top 20 companies,” she says.

Tian says an instalment warrant is a loan product and you pay interest to the bank. In shares, it’s around 8.5 to nine per cent at the moment.

“It’s a geared investment, so we know with geared investments it can accelerate your returns, but in the down market, it’s a double edged sword,” she says. “So your capital is at risk with the non-recourse loan. The most important thing when looking at an instalment warrant is what you’re buying: the underlying asset, what shares are you picking or what managed funds are you picking?”

RBS was lending as a bank before the GFC, and had instalment warrants over ABC Learning, Centro and Babcock & Brown, all of which went bankrupt.

“People who bought these companies through an instalment warrant structure could walk away from the loan,” Tian says. “Now, they still lost the capital, but they lost roughly about 50 per cent – they were 50 per cent geared. The other 50 per cent, RBS essentially is wearing that like a bad loan. So there are some safety measures used in instalment warrants – that’s why it’s allowed in self-managed super funds.”

Property instalment warrants

Chew says as the market recovers, there have been more people looking into instalment warrants. He also says investment warrants are not limited to listed securities.

“It is whatever assets a self-managed super fund can actually own, so it could certainly be on property,” he says. “And provided the arrangement is similar, a limited recourse – and … one benefit of the arrangement, if you look at superannuation these days, there’s a limit as to how much contribution you can make. So I guess instalment warrants, indirectly gearing, it allows you to have pseudo-contributions into superannuation, self managed, whereby if it grows, that will be the gain that is in a tax concessionary environment.”

Tian says there is a difference in the way people structure this type of warrant.

“With the property instalment style warrant, how people have been structuring it though is someone’s got to take the recourse on the other side, so that’s something that investors need to make sure they’ve got in place,” she says. 

 

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 


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