Alberta Bonds and following the money

15-Jan-2010 Posted by Chris on 15-Jan-2010 | View Comments

Alberta Bonds and following the money

The other day, sitting and watching the morning news, I had to have a laugh when Scott Hennig of the Canadian Tax Payer Federation blasted the Alberta Bonds program. They basically feel that it’s a financial shell-game, with Government taking tax-payers money from one pocket and paying for it out of another. Sure, technically it’s correct that the lender happens to be the borrower if you want to follow the tax dollars flow from start to finish. But it’s crazy to assume that the same people who are buying the bonds are the same people who would benefit from a miniscule drop in taxes, or worse the government pissing the money away on something else. In a funny way, it’s a way for the haves of Alberta to fund programs for the have-nots. One of the priorities of the bond program will be funding Senior accomodations.

The premise of the program is that it is cheaper for the government to leave their savings invested in other long-term and short-term areas, and use the bonds as a cost-averaging way to raise money. Taking money from our savings account to pay for services is only a good idea if those savings can’t be used to make a greater return than the interest costs paid on the bonds.

Here is stark example of what I mean. There was a bluster a few months ago around the arms-length investment institution AIMCO (who manages our tax-payers funds like the Heritage Trust Fund) making an equity and debt investment in Alberta ran Precision Drilling Income Trust. The Liberal Party and NDP’s screamed bloody hell that the Government was simply lining the pockets of their corporate buddies. The facts couldn’t be further from the truth.

Precision Drilling at the time of the investment was seriously under fire from it’s traditional lenders, because they extended their balance sheet after a large acquisition of American company Grey Wolf. At the same time, a global financial crisis hit, the price of oil tanked, and Precision’s very profitable business was suddenly unable to make dividend payments to their unit holders. The reality though is that the company was and is very strong, but like many good companies, it was stuck in a one per many generation global recession.

This is where the example gets clear. The professional money managers at AIMCO were smart enough to recognize the buying opportunity, but more importantly they had the money to do something about it. So, AIMCO made a major investment into Precision, basically buying 50 million units of the company for $150M at an average price just over $3.10 per share, then lending the company $175M at 10%.

So, when we first look at the debt portion, it should be fairly simple to understand. Borrow from Albertans at 2.5% and lend to a company at 10%. That’s simple. The next part is even more impressive. AIMCO buys 50M units at roughly $3.10, and that investment today is worth more than TRIPLE that. So in less than a year, the organization has taken their $150M investment and turned it into nearly $500M. Ironically their equity investment may well have been the vote of confidence needed to bolster the company.

Of course AIMCO is not the Government, so I have to give some credit to Hennig for making the observation that paying for things out of savings is really choosing between spending less, taxing more, or spending savings. But my point is equally as simple. Let the experts manage the complicated business dealings, and our politicians can focus on oversight and implementing the will of the people.

In my opinion, issuing bonds allows people who have money, to actually participate in the funding of the Province. What the Canadian Taxpayer Federation is missing, is that there are other choices of Government other than adding debt. Those include raising taxes, or reducing services. Both of those options would of course do harm to those who can afford it the least.

Thanks in advance to the Albertans who will buy the bonds and be happy making 2.5% on their money. Some low-income family will appreciate the tax relief of subsidized public service.

http://briandell.blogspot.com Brian Dell

If the govt really wanted to defer to the "experts", they would not be restarting a retail bond program.

From Alberta Finance’s own website:
"In 1996, the name was changed from Alberta Capital Bonds to Alberta Savings Certificates. By 1997, … we stopped selling the certificates because we developed even more cost-effective ways to raise money."

See http://briandell.blogspot.com/2009/10/return-of-alberta-capital-bonds-say-it.html for more.

A retail bond program is not cost effective but is being pursued anyway for PR purposes.

re Precision Drilling, it’s fine to overinvest such that one may be have to cut distributions if one has a high risk business plan. But an income trust is there to provide INCOME and if they have cut the distributed income stream they are high risk since businesses are loathe to do that. That doesn’t mean they are are necessarily a bad investment, but it does mean they are a gamble and a successful gamble is not necessarily a smart one. Your analysis doesn’t seem to acknowledge the fact that expected return has to be RISK adjusted.
http://briandell.blogspot.com Brian Dell

If the govt really wanted to defer to the "experts", they would not be restarting a retail bond program.

From Alberta Finance’s own website:
"In 1996, the name was changed from Alberta Capital Bonds to Alberta Savings Certificates. By 1997, … we stopped selling the certificates because we developed even more cost-effective ways to raise money."

See http://briandell.blogspot.com/2009/10/return-of-alberta-capital-bonds-say-it.html for more.

A retail bond program is not cost effective but is being pursued anyway for PR purposes.

re Precision Drilling, it’s fine to overinvest such that one may be have to cut distributions if one has a high risk business plan. But an income trust is there to provide INCOME and if they have cut the distributed income stream they are high risk since businesses are loathe to do that. That doesn’t mean they are are necessarily a bad investment, but it does mean they are a gamble and a successful gamble is not necessarily a smart one. Your analysis doesn’t seem to acknowledge the fact that expected return has to be RISK adjusted.
http://briandell.blogspot.com Brian Dell

If the govt really wanted to defer to the "experts", they would not be restarting a retail bond program.

From Alberta Finance’s own website:
"In 1996, the name was changed from Alberta Capital Bonds to Alberta Savings Certificates. By 1997, … we stopped selling the certificates because we developed even more cost-effective ways to raise money."

See http://briandell.blogspot.com/2009/10/return-of-alberta-capital-bonds-say-it.html for more.

A retail bond program is not cost effective but is being pursued anyway for PR purposes.

re Precision Drilling, it’s fine to overinvest such that one may be have to cut distributions if one has a high risk business plan. But an income trust is there to provide INCOME and if they have cut the distributed income stream they are high risk since businesses are loathe to do that. That doesn’t mean they are are necessarily a bad investment, but it does mean they are a gamble and a successful gamble is not necessarily a smart one. Your analysis doesn’t seem to acknowledge the fact that expected return has to be RISK adjusted.
http://briandell.blogspot.com Brian Dell

If the govt really wanted to defer to the "experts", they would not be restarting a retail bond program.

From Alberta Finance’s own website:
"In 1996, the name was changed from Alberta Capital Bonds to Alberta Savings Certificates. By 1997, … we stopped selling the certificates because we developed even more cost-effective ways to raise money."

See http://briandell.blogspot.com/2009/10/return-of-alberta-capital-bonds-say-it.html for more.

A retail bond program is not cost effective but is being pursued anyway for PR purposes.

re Precision Drilling, it’s fine to overinvest such that one may be have to cut distributions if one has a high risk business plan. But an income trust is there to provide INCOME and if they have cut the distributed income stream they are high risk since businesses are loathe to do that. That doesn’t mean they are are necessarily a bad investment, but it does mean they are a gamble and a successful gamble is not necessarily a smart one. Your analysis doesn’t seem to acknowledge the fact that expected return has to be RISK adjusted.
Joe Albertan

I think we heard it the first time Brian.
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