Tuesday 14 August 2018 by Guest Contributor At FIIG

BondCast - the AUD's dramatic fall against the USD

Cut your reading time and listen to a podcast instead. This week's BondCast looks at the AUD's fall against the USD

Learn more about which bonds are on the move with this weekly podcast. Finally we see the AUD fall against the USD as our experts predicted. This has led to some exiting USD positions, others switching into better credits or repatriating funds home. Companies mentioned include: Next Generation, Aroundtown, Talen, Mallinckrodt, Hertz, IAMGOLD and Dean Foods. See the transcript below.


Stay tuned for our weekly podcast to learn more about bonds and trade opportunities brought to your by our experts. We would welcome any feedback or questions, if you could please email clientservices@fiig.com.au.

Presenters

Tom spaceTom Guest 
Director - Fixed Income

Tom is a Brisbane local who joined FIIG as a dealer in 2014 after stints as an analyst with Queensland Investment Corporation (QIC) and before that Creidt Suisse International in London. 

Tom is now Director of Fixed Income in Brisbane.


Lincoln spaceLincoln Tragardh 

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.

Elizabeth Moran Liz space
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.


Transcript

[00:00:00] Elizabeth Moran: Hello, welcome to another edition of Bondcast. My name is Elizabeth Moran, I'm director of Education and Research here at FIIG. With me, I have Lincoln Tragardh and for the first time I'm delighted to introduce Tom Guest, one of our senior relationship managers here in Brisbane. Good afternoon.

[00:00:17] Both: Good Afternoon, Liz.

[00:00:17] Elizabeth Moran: So today we're going to talk about the USD/AUD currency, given last Friday the significant drop in the AUD against the USD. It's now trading just under 73 US cents. Interestingly, as recently as January it was trading 81 cents, so a significant decline and if you've been reading The WIRE, FIIG's weekly newsletter, you would have read Craig Swanger's article predicting an AUD of about 70 cents against the USD. You might also have read Greg Gibbs's note in March about the downside to the AUD. He was very much suggesting that it was too high then and it was about 77 cents. And very recently, in fact just last week, Patrick Reid, who is our UK based foreign currency expert, stated that he was broadly bearish on the AUD. He even went as far as to say that perhaps we were pausing halfway down the Mariana Trench. So Linco, what are you seeing on the desk with the change in the currency?

[00:01:24] Lincoln Tragardh: Oh, look, every time you see a big move in the currency it really brings into play the USD holdings that our clients have. You know, given they're unhedged, that’s obviously a big jump in the Aussie dollar. It has a material impact on your returns in AUD if you own US bonds. So what's happened this time around has coincided with reporting season as well. There's a lot of US companies that have had results out the last week or two, some good some bad. So, investors and dealers are really looking through those results and figuring out if they need to make a change here or there. And then you get two main conclusions - you either switch those USD bonds if you wanted to take some profits on any of them, into an Aussie dollar opportunity, or stay in USD. So from there we look at the Aussie dollar opportunities. Generally, last week what we saw was a fair bit of high yield Aussie dollar buying. Recent FIIG issuance, Next Generation, that sort of bond is available at the moment. In investment grade, there's Tier 2, there's RMBS. I think Jake mentioned the other week, AroundTown, a fairly vanilla corporate, paying four and a bit per cent. A lot of clients are going in there as well. So that's what I was seeing in the US. There are opportunities there as well. Again, I mentioned the results, so Tom maybe you've got some ideas on what you were seeing last week?

[00:02:44] Tom Guest: Yeah, reinvesting into US dollar is sort of my preference given the state of play at the moment. I think that in the investment grade space it has to be QBE. So they've been dragged down with a lot of the high yield and those fringe investment grade names that are traded in the US and the Royal Banking Commission, as well as some serial underperformance from the issuer, hasn't helped that name at all. And they've been trading at cheap levels for quite some time now. That company reports on Thursday.

[00:03:17] So, it'll be interesting to see what comes out of that. In US high yield, my preference is for IAMGOLD and Dean Foods. IAMGOLD, they've been growing and improving their operations and they have cash on hand well exceeding their debt. They just reported very positive results. Dean Foods, they've had a very tough year. They've been posting some declining demand in the US, so with consumers going to other beverages, they lost a couple contracts as well and they've also been facing some inflationary headwinds. Those plants have come off about four or five per cent but the company has implemented cost cutting measures to create a leaner organisational structure and they're on their way in delivering that. And so I feel there's some good value in the Dean Foods bond yielding close to seven percent.

[00:04:19] Elizabeth Moran: Wow, that's quite a high yield. So that's sub investment grade is it? What's it rated?

[00:04:23] Tom Guest: Yes, that's right. It's rated BB- by S&P and B- by Moody's. There's a three notch divergence there, which is a little unusual. You know, some people might argue that S&P have been a little bit optimistic and Moody's have been a bit pessimistic.

[00:04:44] Elizabeth Moran: But milk, you would have thought, is a sort of necessity good for a lot of people?

[00:04:49] Tom Guest: Yeah it is, it is non discretionary and non cyclical in a way. But there has been reducing demand from consumers and so they have been facing a challenging period. In fact the equity is off around 26 per cent for the year which puts a takeover possibility in play as well, which wouldn't be bad for the bonds, given that you can buy them well below par and there is a change of control clause at $101, so that wouldn't be a bad outcome.

[00:05:20] Elizabeth Moran: No, that'd be fantastic and they would be rubbing their hands with glee, I would think. And just going back to the sub investment grade one, the IAMGOLD...

[00:05:36] Lincoln Tragardh: Yeah that's B+ rated by S&P. But yes, they reported last week.

[00:05:43] Tom Guest: They did. They had good results and certainly their balance sheet was extremely healthy. They have some pretty aggressive targets. They want to break into being one of the top 10 miners globally. So they're making operational improvements to facilitate that expansion and yes they are being successful in that.

[00:06:06] Elizabeth Moran: Excellent. Fantastic. So Lincoln, if you're thinking about selling your USD bonds now, that decline in the currency, what sort of price, what sort of uptick in price when you translate the funds back, would you be looking at? Would it be $1-2 in the hundreds or the face value, or...

[00:06:23] Lincoln Tragardh: Yeah that's right. That's, those sort of numbers, I think the currencies dropped circa $2 just the last week or so. But over a longer period of time, it's been more than that. So yeah, it roughly translates dollar for dollar. So they are big moves when you're talking fixed income. Where you know most of our clients are trying to achieve somewhere between five and 10 percent anyway. So you know that that's a material move in a short period of time.

[00:06:50] Elizabeth Moran: So actually it's an opportunity to get out of some of those bonds that aren't so attractive or aren't looking so attractive. I know Hertz and Mallinckrodt were too and I think there was another one, was that Talen the people were looking to get out of?

[00:07:05] Lincoln Tragardh: Yeah, most of the selling pressures came from Talen and Frontier last week. And Mallinckrodt I think also had results out. There are divergent views on that, those two a little bit. And Talen, I'm pretty sure that Talen reports tonight given that private equity owned by Riverstone. You never quite know or you don't have a good gauge on what they're going to put out. So it'll be interesting. It could go either way.

[00:07:30] Tom Guest: So lots of moves at the moment based on the price of the bonds but also the price in the currencies.

[00:07:36] Elizabeth Moran: Thanks very much for joining us, Tom and Lincoln and if you have any questions, feel free to call your local relationship manager. I'm sure they'll update you on the pricing and what's possible. Thanks very much for joining us for another week of Bondcast.

[00:07:50] Both: Thanks Liz.

Lincoln Tragardh 
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.

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