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Positive Gearing with Instalment Warrants?

Discussion in 'Shares' started by JIT, 18th Aug, 2007.

  1. JIT

    JIT Well-Known Member

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    Hi there,

    Could someone explain to me what instalment warrants are?

    Is this another way of 'positive gearing' into the sharemarket?

    Thanks,

    GSJ
     
  2. Tim

    Tim Well-Known Member

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    GSJ,

    there are a couple of good publications from ASX (see below) that explain warrants including self funding installment (SFI) warrants.

    My understanding from reading these publications is that you essentially pay a reduced price on a share, the balance is a "loan" and the dividends are used to pay the loan off over say a 5 or 10 year period. An example would be if you bought CBA installment warrants, the first payment might be 50% of the normal share price, and then dividends reduce the loan for the balance over several years. Eventually you would own the share so it is a way of gearing into shares by paying part up front and then having the balance paid or partly for by future dividends.

    I am not sure I would call this positive gearing because it is just another way of gearing, all it really means is you pay less up front, but get full entitlements to a share from a dividend perspective, and I guess your loan payments are not even reduced really because unless you pay cash for the installment warrant, you need to use borrowed funds (say a personal loan or a Line of Credit) for the installment warrant but then you don't really get the dividends as they are used to pay down the balance of the share price.

    The other thing to note is that Commsec will not margin loan for self funding installment warrants (not sure about other lenders)

    ASX site is down here is a google search that will link you to it:
    asx installment warrants - Google Search

    Hope that helps,

    Tim
     
  3. bundy1964

    bundy1964 Well-Known Member

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    UBS warrants have a 50% margin available from SGB/BankSA, haven't looked too far into it.
     
  4. JIT

    JIT Well-Known Member

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    Positive gearing within a SMSF!

    Hi there,

    Thanks for the replies. I've just read through a lot of the material on the ASX website, and I might even buy the ASX book on warrants.

    Anyone here read 'The ASX Way: Warrants'?

    The use of instalment warrants seems very well suited to SMSF. Essentially, I still think it's a way of positive gearing within a SMSF! Additional tax benefits could also apply when using the SMSF structure.

    Is anyone here investing using instalment warrants as part of their SMSF???

    Outside a SMSF, you could compare this with margin lending. Using instalment warrants, however, means there are no credit checks, you don't get margin calls, and your liability is limited to your initial investment (via a non-recourse loan). However, I suspect the 'interest rate' + 'borrowing fees' (ie. 'funding cost'), may be higher to compensate. Not sure what the interest rate % comparison would be between the two methods??

    It seems there are also index/ETF type instalment warrant products available too, which I like even more.

    Just curious to see if others here are investing using instalment warrants?

    Another way of leveraging into the sharemarket, and this forum seems to love this, so I'd be interested to hear your thoughts on this.

    Thanks,

    GSJ
     
  5. Rob G.

    Rob G. Well-Known Member

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    Don't forget that any fee referable to a non-recourse feature is a non-deductible capital expense.

    e.g. if you pay a premium for limiting your debt exposure to the value of the securities themselves and you can walk away.

    e.g. if part of the product is a put option to guarantee your capital should the market crash.

    Cheers,

    Rob
     
  6. JIT

    JIT Well-Known Member

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    Come on Invested, not much response on this thread?

    It's about shares, high yield, positive gearing, and no margin calls - right up the alley of this forum! - so I'm curious to see who else here is investing in instalment warrants???

    No-one?! :eek:

    Seems like a pretty great investment vehicle to me from my initial research...

    Why use traditional margin lending when you can achieve the same thing, but better, using instalment warrants???

    GSJ
     
  7. Rob G.

    Rob G. Well-Known Member

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    I think most people here use loans borrowed against real estate to get a better rate. Also, limited recourse features are not tax deductible.

    Instalment warrants are popular with SMSF's as the Trustee's power of borrowing is limited, but the limited recourse helps limit risk of loss of capital and gives a legal loophole. Hence it is about the only geared investment available for an SMSF.

    They might appeal to the less aggressive investor who does not wish to encumber other property but only risk the investment itself.

    Cheers,

    Rob
     
  8. JIT

    JIT Well-Known Member

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    Thanks Rob,

    Will have to read up on the taxation treatment of warrants.

    I guess the other thing is that if you were margin lending, you could still purchase put options or warrants to 'insure' your portfolio against capital loss.

    Still trying to get my head around the difference between the two options.

    GSJ
     
  9. Tropo

    Tropo Well-Known Member

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  10. JIT

    JIT Well-Known Member

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    Yes, will read that ASX booklet. I'm not really interested in the trading aspect of it though, but mainly using it with a buy/hold approach for higher yield, with leverage, and comparing this to the standard margin lending approach.

    On Somersoft, someone mentioned Peter Spann preferred instalment warrants over margin lending. Did anyone who went to his seminars (I didn't :D ) hear this too?

    GSJ
     
  11. DaveA

    DaveA Well-Known Member

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    i think i looked at this earlier in the year...

    comsec offers something on it but the interest rate was 19% a year, however it did drop to about 16% per year if you took a 5 year time frame... maybe its not the same thing though
     
  12. JIT

    JIT Well-Known Member

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    Don't think it's the same sort of thing. Macquarie banks interest rate on instalment warrants is something like 7.95% pa from memory. But there is also other fees involved.

    GSJ
     
  13. JIT

    JIT Well-Known Member

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    You mean just the cost of the put option is not tax deductible? This is quite small anyway compared to the interest and borrowing fees together.

    According to the Macquaries Bank's PDS the interest on the loan is tax deductible. Also, the 'borrowing fee' is also tax deductible over the life of the loan.

    GSJ
     
  14. melbear

    melbear Member

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    I've got a lot of my portfolio in Warrants at the moment. To me, I'm using them the same I would a margin lending account - without the chance of a margin call.

    I can choose the gearing - generally going for a 50% 'loan' component, and buy the majority of my shares in this way - both buy and hold, and ones I use to write Options against - sort of a covered call strategy, but not quite as we don't actually own the underlying share.