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This article appeared in the July 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

Learn about the features, benefits and risks of ASX-listed instalment MINIs.

Photo of Rebecca Fesq By Rebecca Fesq, CitiGroup

Instalment warrants have been available in Australia since the early 1990s and are a means of borrowing to invest for individual investors and self-managed super funds (SMSFs).

(Editor's note: To learn more about the features, benefits and risks of instalment warrants, do the free ASX online warrants and instalments course.)

Traditionally, the listed instalment structure involved an investor contributing a portion of the share price, while the issuer of the instalment warrant (generally an investment bank) contributed the remaining portion (the loan amount).

The investor pre-paid interest on the loan and purchased an option, which gave investors a choice at maturity: pay the loan amount back and own the shares, or walk away from the loan and receive any remaining equity in the investment.

This walk-away feature is one of the fundamental elements of the instalment structure and provides SMSFs with one of the few approved means of gearing in their fund.

Until the Global Financial Crisis, the cost of this option was relatively inexpensive; making instalment warrants a popular means of gearing to invest in the Australian sharemarket. However, because of the increasingly volatile nature of the sharemarket over the past four years, the cost has increased significantly, therefore increasing the end cost to investors.

Walk-away feature retained

To tackle this new market norm of heightened sharemarket volatility, issuers of instalment warrants have been developing the next generation of instalments. This involves maintaining the key walk-away feature of the instalment structure while eliminating the potentially costly option.

The result is Instalment MINIs, which are listed and traded on ASX.

Instead of using an option to create the walk-away nature of the investment, Instalment MINIs use a stop-loss feature. This ensures an investor cannot have negative equity and cannot lose more than their original investment amount. The stop-loss feature can potentially provide a significant cost saving.

But it should be noted that if a stop-loss event is triggered, the investor no longer has exposure to the underlying share, because their position has been closed down.

The second key difference between the traditional instalment structure and the Instalment MINI structure is the calculation and payment of interest. In the traditional structure, interest is paid upfront; in the Instalment MINI structure, interest is accrued daily and added to the loan amount.

These two new key features within the Instalment MINI structure provide investors with a straightforward, transparent and cost-effective alternative.

How they work

Instalment MINIs allow investors to purchase shares by making two payments:

The first instalment represents the cost of purchasing the Instalment MINI and also the amount of equity in an investment. It is calculated as follows:

First instalment = underlying share price - loan amount.

The final instalment is the loan amount, which increases daily by a funding amount.

Investors have the right to pay the loan amount at any time until maturity to complete the payment of the shares. It is important to note that the loan repayment is at the discretion of the investor; it is never a requirement that this loan is paid back.

The stop-loss feature ensures that investors are unable to lose more than their original investment amount. It is generally set at 10 per cent above the loan amount.

When an investor buys an Instalment MINI, the issuer simultaneously buys an equivalent number of underlying shares. These are held in trust on behalf of the investor. If a stop-loss is reached, the shares are sold and the investor will receive back the sale price of the shares minus the outstanding loan amount. (Editor's note: The stop-loss point is designed to minimise losses).

Irrespective of the performance of the underlying shares, investors can walk away from the loan at any time.

An example using Telstra

Let's look at an example of a $50,000 investment in an Instalment MINI over Telstra Group (TLS) compared with an investment in TLS shares directly, from July 1, 2011 through to June 20, 2012.

TLS share details:

   TLS shares
 Purchase date  July 1, 2011
 Investment amount  $50,000
 TLS share price  $2.90
 Quantity  17,241

TLS Instalment MINI details

  TLS Instalment MINI 
Purchase date   July 1, 2011
Investment amount  $50,000
First instalment  $1.45 (share price - loan amount)
Final Instalment $1.45
Stop-loss level   $1.60 (10% above the loan amount) 
 Quantity  34,482
 Gearing  50%

A $50,000 investment in TLS shares directly would give the investor exposure to 17,241 shares, compared to 34,482 shares with a $50,000 investment in a TLS Instalment MINI.

The Instalment MINI price of $1.45 is the portion of the share price that the investor contributes. This payment confers the benefits of share ownership, including capital appreciation, dividends and franking credits, as if the investor owned the underlying TLS shares outright.

Because the investor is contributing only a portion of the share price and receiving the benefits of share ownership, both the dividend yield and the overall return on the Instalment MINI is magnified.

Dividend yield

During the term of the investment, the holder of an Instalment MINI is entitled to all dividends and franking credits paid in relation to the underlying share. These dividends are passed through in the same way as if the shares were owned directly.

Let's compare the dividend yield on a TLS share compared with the TLS Instalment MINI during this time:

  TLS share  TLS Instalment MINI 
 Cash dividend  $0.28  $0.28
 Grossed-up dividend (fully franked)  $0.40  $0.40
 Dividend yield  9.6% 19.31%
 Grossed-up dividend yield  13.80%  27.60%

Gross dividend yield p.a.

Gross dividend yield pa on Telstra and Telstra instalment minis

Source: CitiGroup

It can be seen that the grossed-up dividend yield on the TLS Instalment MINI of 27.60 per cent is double the grossed-up dividend yield on the direct share investment.

Instalment MINI return versus share return

If we look at the total return of the Instalment MINI, including dividends and franking credits, from July 1, 2011 through to June 20, 2012, against an investment in TLS shares directly, the results are as follows (for illustrative purposes only and not taking tax into account):

TLS share details:

  TLS share 
 Sale date  June 20, 2012
 TLS share price  $3.69
 Grossed-up dividend  $6896
 Total return ($)  $18,792
 Total return (%)  37.58%

TLS Instalment MINI details:

  TLS Instalment MINI 
Sale date  June 20, 2012
Instalment MINI price   $2.01
Final instalment  $1.5805
Stop-loss level   $1.73 (10% above the loan amount)
Grossed-up dividend  $13,792
 Total return ($)  $33,102
 Total return (%)  66.20%

You can see that on a pre-tax basis, in this example, the Instalment MINI provides a significantly higher return than a direct share investment.

About the author

Rebecca Fesq is Citigroup Global Markets' vice-president, warrants and structured product sales.

For further information about Instalment MINIs speak to your stockbroker or financial adviser. You can find an investment guide and relevant Product Disclosure Statement here.

From ASX

ASX Warrants has useful information on the features, benefits and risks of different types of ASX-listed warrants.


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