Cut your reading time and listen to a podcast instead. This week's BondCast looks at what bonds we think you could consider selling because they are expensive of credit risk has increased
Learn more about which bonds are on the move with this weekly podcast. This week our senior relationship managers discuss a few underperforming bonds and where you could reinvest. Our discussion includes Qantas, Frontier, Impact, Cash Converters, Lucas, Elanor, Zenith and Aroundtown. See the transcript below.
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Director, Fixed Income Sales
Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.
Head of Facilitation and Institutional Sales
Lincoln joined FIIG Securities in February 2003. He originally gained experience in a settlements role before moving into a sales role on the Brisbane desk later that year.
Lincoln was appointed to the role of Director - Sales Facilitation In 2010. In this role Lincoln focuses on secondary markets transactions, communicating with institutional investors to source debt opportunities & to provide price transparency & liquidity to our customers.
Lincoln holds a Bachelor of Economics and a Bachelor of Commerce majoring in Finance from University of Queensland. He also holds a Diploma of Financial Services.
Director – Education and Research
Elizabeth has been with FIIG for ten years and for much of that time has been a corporate and bank analyst. In recent years her passion for education has seen her role shift, to author/ edit FIIG’s “The Australian Guide to Fixed Income” and an online fixed income course for Financial Advisers. She continues to edit FIIG’s weekly newsletter, “The WIRE”.
In her role as Director of Education, Elizabeth has delivered presentations at conferences across Australia. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings, writing daily press releases for Bloomberg. Elizabeth spent five years in London, three working as a credit rating analyst for NatWest Markets.
[00:00:00] Elizabeth Moran: Hello, welcome to another edition of Bondcast. My name's Elizabeth Moran, Director of Education and Research at FIIG. And with me today I have Jake Koundakjian and Lincoln Tragardh. Today we're going to talk about bonds we think you should think about selling either because they are too expensive, in other words you are not getting paid enough to keep holding them, or that their credit conditions or perceived credit worthiness has reduced. So we think they're increasing in risk and we think it's a good time to sell. So let's kick off with Qantas. Jake, do you want to start?
[00:00:34] Jake Koundakjian: I've got a special place in my heart for Qantas. Not only because I like to fly the airline but also a large number of clients bought these bonds at quite a low level, much, much lower than where they're trading at right now and I guess that's what the heart of this discussion is about - that they've rallied quite dramatically over the last three or four years, Lincoln? But three or four years ago they were $10 or $15 lower?
[00:00:57] Lincoln Tragardh: Yeah you can tell by the coupons they were issued, there are a few different bonds there, but seven and a half or eight percent. So that was from memory, three, four, five years ago when we put a lot of clients in there but not they're not there anymore, are they?
[00:01:10] Jake Koundakjian: Yeah, you know there's not a lot of value remaining in them. But I do have trouble personally selling them given that clients are still enjoying a nice high coupon. But ultimately at the current price they're trading at, there's not a lot of value remaining in them.
[00:01:24] Lincoln Tragardh: Yeah it's important to understand that now you're returning three point something percent on those positions, not the seven or eight percent from half a decade ago. So yeah, no concerns around Qantas really, but they're just a bit expensive now.
[00:01:39] Elizabeth Moran: Well we can get, you know, term deposits pushing up around that mark and you can get other things rated higher and paying better returns, you know, it doesn't quite make the sense that it used to. So what are you switching your clients into Jake?
[00:01:55] Jake Koundakjian: Well, Aroundtown is a giant German company that I like quite a bit. It's an Australian dollar bond. They launched it a few months ago here in Australia and it's their maiden bond in this country. If you are not familiar Aroundtown is behemoth, just a huge, huge German real estate company. I think they've got almost 11 billion euros of commercial assets under management and their market cap is almost a little bit over 7 billion euros. So that's almost 10 billion Australian equivalent. So these guys are big, big players in Germany and the Netherlands with properties in Frankfurt and Berlin and Munich and their tenants are the bluest of the blue chip, you know, Mercedes, BMW, as you'd expect but also PWC, IBM and just a whole host of giant international companies. So just a big, big company that is offered at a pretty good yield comparatively to many of the offers I see in that high quality camp. This one is offering around about, a little over, 4.3 percent. Comparable bonds - Qantas, for example, they have a 2026 at about four percent from what I recall. There are bonds a little bit under that four percent in that same kind of time horizon and lower. So this one stands out for me as attractive - $10, 000 increments.
[00:03:11] Elizabeth Moran: And it's only for wholesale investors isn't it?
[00:03:13] Jake Koundakjian: Yes, that's right.
[00:03:13] Elizabeth Moran: And BBB+ rated, I think, is that right?
[00:03:19] Jake Koundakjian: That's right. Actually, one of their strategic objectives is lined up with bond holders, which is nice to see for a listed company. Normally management is always trying to raise their stock price but these guys and ladies are actually trying to raise their credit rating. This is one of their strategic objectives, they want to get to an A- rating, they want to up that credit rating and they have successfully for the last three years in a row. 2015, they got a credit upgrade. 2016, 2017. Each year they've been able to raise their credit profile.
[00:03:48] Elizabeth Moran: And of course Lincoln, if they got a credit rating upgrade we'd expect the yield to come off again?
[00:03:54] Lincoln Tragardh: Absolutely, what would happen is the trading margin, you know, the return above the benchmark rates that goes with that particular credit would tighten up. So, with a lower yield comes a higher trading price. So that's what you're looking for with a credit rating upgrade.
[00:04:11] Jake Koundakjian: Definitely, I want to buy at lower levels and if they get a credit upgrade then suddenly I've got a stronger piece of paper that I'm buying and I bought it a good level and hopefully if they do get a credit upgrade, that's a nice win for investors.
[00:04:24] Elizabeth Moran: Well A- is a very nice rating isn't it. But we also wanted to talk a little bit about some of the other higher risk names we're seeing that we're suggesting clients sell. So one of those is Frontier, Lincoln, if you want to give us a little bit of background about Frontier?
[00:04:35] Lincoln Tragardh: Frontier is a bond we've been trading for 18 odd months now. Hasn't had the best of times, you know, results continue to be subpar. So, the 25s is probably the most active bond that we trade in the set and its capital price has been hovering around 80 dollars. So in percentage yield to maturity terms, that's well into the double digits and it's just a little bit hairy for what we like to look at. So, you know, as opposed to Qantas, which is potentially a sell recommendation just because there's better value elsewhere and we think it's expensive, Frontier would be more from a point of view of, you know, we've just got some real concerns around that particular credit…
[00:05:23] Elizabeth Moran: I think I saw that the credit rating was downgraded, is that right?
[00:05:26] Jake Koundakjian: Yeah, CCC+. I think it was downgraded, I think late Friday afternoon by S&P. So once you have a C handle attached to a bond my concerns really start to pick up and statistically speaking that's quite a bad place to be with a triple C handle. So yeah, I'd definitely be encouraging to move away. It is a credit and it is a company that has tried to stem their losses by cutting the dividend. You know, listening to the conference calls in the last six months, they've certainly changed their tune from a year ago where they were heads in the sand, "we're gonna keep this dividend forever" and then early in the year, 2018, they started to really change their tune and just a few concerns of late have really picked up. They had failed auctions for some of their assets, CFO leaving abruptly, so some real negative signs out there. It certainly is reflecting through the price of the bond, you know at 80 cents on the dollar right now, but I guess it's just a name that has been described as a slowly melting iceberg. These guys are in the cable telecom space which well, a lot of people have been cutting their cable for year after year or so, just an area I'd rather be moving away from.
[00:06:38] Elizabeth Moran: And would most of our investors be facing a loss there Lincoln, do you think? Or getting out about the same rate?
[00:06:45] Lincoln Tragardh: That largely depends where you got in and which bond you bought. There were some shorter dated Frontier bonds which actually turned out really well. The company tended some of those and you know the price on those went up to where the majority of clients got into them. But the 25s, being a little bit longer dated, it does pay 11 percent, I think it's 11 percent coupon on those ones, so you know, they're not too far in the negative. Even if the capital price has fallen 20 you've got that 11 percent coupon to offset that. So you know for the sake of maybe a five or ten percent reduction, you know, CCC as Jake said, yeah.
[00:07:21] Elizabeth Moran: Really scary. Any others you want to talk about in that space in terms of… Windstream is another one, perhaps we might want to talk about?
[00:07:29] Jake Koundakjian: Well again, that's in the telecom space. There have been some tragedies in that space. Not a name that I ever really took on and I don't think we really had a lot of it. But, I think they suffer from similar kinds of problems that Frontier has recently. Just took on way too much debt and weren't able to capitalise.
[00:07:49] Elizabeth Moran: I know one of our other points, we’ve been selling out some of these bonds, I'm looking at some of the shorter dated ones, the sort of less than two years and there's quite a lot in that bucket. I was just having a look myself. I know Cash Converters is due to…
[00:08:02] Jake Koundakjian: Yeah, there's only a month left.
[00:08:02] Elizabeth Moran: A month, a month left and 60 million back in the hands of investors. So what would you suggest to anyone now, Lincoln, to anyone looking at getting those funds back in a month or so?
[00:08:12] Lincoln Tragardh: So if you're just trying to buy like-for-like, you know, in the Aussie high yield space, there is plenty of value in some of the shorter dated issues that we've got out there. You know names like IMPACT or some of property related bonds have come off a little bit in price, so, you know, depending on your view on property, there's some good value to be had there. Or you know, wait around for the next new issue, we had Zenith last week and there'll be more to come, I'm sure.
[00:08:38] Jake Koundakjian: There's a few names I sort of like. Lucas has caught my eye because the price has come down recently. So off the back of that, suddenly clients can earn 7.4 percent. So flashback, a few months ago the price was a little bit harder. Can't really figure out why it's drifted down in price. Grilled our analyst, checked the internet, checked the industry and haven't been able to put my finger on it. So that's why I want to buy, because I can’t figure out why it's gone down and there's no fundamental reason that I can find thus far, so that, I find attractive. Elanor is another name that I also find attractive given the current pricing I'm seeing. Sunland, I do find that attractive. Again, it's also in the property space. Yeah, there are a few good offers out there.
[00:09:20] Lincoln Tragardh: Yeah, a few names there and at the end of the day this is all just active, fixed income management. I mean you don't need to be trading daily but, you know, to make these tweaks to your portfolio every month or quarter as things change, we certainly promote that sort of action.
[00:09:36] Jake Koundakjian: Cash Converters is also, like in a month's time that's 60 million of cash coming to the system. So I don't know how much supply really, I mean I don't think we've got 60 million available in the high yield space. So if you want to get ahead of the curve and get ahead of that tidal wave of cash coming to the markets, now could be the time to go forward.
[00:09:59] Elizabeth Moran: Fantastic. Thanks very much Jake and Lincoln. That wraps up another week of Bondcast. Thanks, per usual for listening and if you have any feedback please let us know.
[00:10:03] Both: Thanks Liz.