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Self funding instalments - SFIs

Self funding instalments are a variation on the ordinary instalment structure.

In contrast to ordinary instalments, the dividends from the underlying share are retained by the issuer and used to reduce the loan balance of a self funding instalment. You are still entitled to franking credits, which may reduce your tax liability - this is particularly important for Self Managed Super Funds.

Features of SFIs

Underlying assets Issued over Shares, Exchange Traded Funds, Listed Investment Companies, A-REITs and Managed Funds
Term to expiry Between 5 to 10 years
Exercise style American or European
Gearing ratio (LVR) Regular geared - 50 - 65%
Code abbreviation 6 letter code with the fourth letter being an S
Initial payment Instalment price, varies depending on the level of gearing (includes a funding cost component)
Final instalment Final instalment varies as Dividends are used to reduce the loan amount.
Settlement Generally Deliverable ( full ownership of underlying asset is transferred)
Entitlements Dividends and distributions are used to reduce the loan amount. Entitled to franking credits.

At annual intervals until expiry, the issuer will charge a further twelve months of prepaid interest to the loan, increasing the loan amount (generally on 30 June). The objective is to achieve a positively geared investment where the dividends outstrip the interest charged, paying off the loan as time passes.

Depending upon your circumstances, you may be entitled to a tax deduction for the interest cost. At any point in time before expiry you may sell the instalment on ASX. While the interest is prepaid for 12 months the borrowing fee is prepaid to expiry (usually five years).

Given the recent market conditions warrant issuers have issued a number of variations on the ordinary self-funding structure. These new structures of Self funding instalments may incorporate structures of other warrants such as a 'rolling' feature or a stop-loss feature. Prior to trading any self-funding instalment ensure you read the Product Disclosure Statement and understand the SFIs structure.

Benefits of SFIs

 

  • Potential accelerated capital growth compared to a direct share investment
  • Increased exposure to dividend income and franking credits
  • Long-term self funding geared investment
  • Tax effective investment
  • A leveraged investment with no margin calls
  • Can be used by Self Managed Super Funds (SMSF) seeking geared investments with low cost and low administration

Example of a self funding instalment

Warrant code NABSOU
Underlying instrument Ordinary shares of National Australia Bank Limited
Warrant type Self funding instalment
Expiry date 30 June 2012
Current loan amount $13.796 (as of 19 November 2008)
Loan amount when issued $15.00 (as of 21 July 2007)
Conversion ratio 1

NABSOU is a self funding instalment. Over the life of the SFI the loan amount will periodically increase by adding prepaid interest, and decrease by the payment of dividends by NAB Ltd.

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