Management at Crown Resorts Ltd (ASX: CWN) announced the issue of their second set of Crown Subordinated Notes II this morning, having recently lodged a prospectus with the Australian Securities and Investment Commission (ASIC).
Crown is hoping to raise $400 million with its 'Notes II' offer, with the potential to raise more or less.
The notes will trade on the ASX and pay an interest 'coupon' quarterly, equivalent to the Bank Bill Rate plus a yet-to-be-determined margin.
Overall the Notes are expected to pay interest of between 4% and 4.2% per annum.
The Notes cost $100 each and a minimum purchase of 50 is required; the final date for repayment is the 23 April 2075. Interest repayments will increase by 1% per annum if the notes are not repaid by 23 July 2041.
The funds raised will be used to help finance Crown Towers Sydney, Crown Towers Perth, and 'other anticipated growth projects'.
It's a good deal for Crown, who will gain a low-cost equity injection, allowing it to commence work now on major projects that should last a lifetime.
In this way debt is being taken on to increase earnings now in return for repayment far in the future. As long as Crown's cash flow holds up, it's a sound – and cheap – strategy.
However the news is not as good for potential Note purchasers, who receive all the risks and none of the benefits of an actual share purchase in Crown, since Notes will trade on the ASX but won't convert into shares at their expiry date.
It's a good way for 'allied investors' such as major shareholders to invest more capital into Crown without buying shares (since these persons or organisations have a major vested interest in Crown's growth), but not a good way for ordinary investors like you and I to increase our exposure.
Simply put, for a similar level of risk you could own a company paying a 4% yield and receive all the benefits of earnings and capital growth over time.
If you bought Crown's Notes II you receive the 4% yield and no other benefits – with the added risk of having your money locked up potentially until 2075.
With an average life expectancy of 82 years in Australia, there's a fair chance myself and readers will be dead by the time I can get my capital back – not my idea of long-term investing!
Instead of picking up some Notes, consider Crown shares instead or check out The Motley Fool's Top Dividend Stock for 2015, a growing dividend stock that should comfortably outperform the Notes over the next decade.
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