Tuesday 20 November 2018 by Elizabeth Moran Sales commentary

BondCast – FOMC views and APEC summit, AMP, NRW, Mackay Sugar and Merredin Energy

Learn more about which bonds are on the move with the weekly podcast with Elizabeth Moran, Stephen Mackie  and Jake Koundakjian. 

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We would welcome any feedback or questions, if you could please email clientservices@fiig.com.au.


Speakers

Jake Koundjakin-spaceJake Koundakjian 
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.



Stephen Mackie - spaceStephen Mackie
Director – Fixed Income

Stephen Mackie is based in the firm's Brisbane office, managing investments for clients, ranging from individuals to institutions.

Stephen has over 25 years' experience in global markets, including his most recent role at QIC where he was a Director - Investment Specialist in the Global Multi-Asset team. Prior to this, he has held a variety of senior roles as a trader and portfolio manager with RBC Capital Markets, Citi, Kapstream Capital and the Commonwealth Bank.

Liz Moran- space
Elizabeth Moran
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: Welcome to another edition of BondCast. My name is Elizabeth Moran. I'm director of education and research here at FIIG. And today I have with me Jake Koundakjian and Stephen Mackie. Lots of bits and bobs to talk about today. I think we might kick off with the FOMC, Stephen?

[00:00:20] Stephen: Well, there was a fairly consistent theme coming out of the Fed. They pointed to balanced risks of the economy going forward and of that they mean, whilst we've had some pretty spectacular fiscal priming in the economy, they're worried with the unemployment rate as low as it is that we're going to let the inflation genie out of the bottle. So, they’re pretty good these days (the Fed), they’ve used dot plots to communicate where they see the path of interest rates going forward. We're looking at rates capping at around that 2.75 to 3 percent range which is where the market's been pricing at. So if anything, I would say the Fed's a little bit more hawkish than the market, but that's really just the fact that the market has sort of seen the Fed undershoot these hiking cycles in the past, particularly when they have implications for equity markets and risk markets like we've seen, they'll tend to err on the side of caution rather than try and torch the economy so to speak.

[00:01:30] Jake: I definitely got a sense of that from the last statement. They're going to pause – they should pause and chill out and see what's going to happen.

[00:01:35] Elizabeth: Isn't that what Powell just said? That if you're in a dark room without shoes you should tread slowly so that you don’t stub your toe, isn’t that the saying?

[00:01:45] Jake: Yes, they seem to not be bowing to what Trump is saying – “get those rates down” – so he doesn’t want to be seen losing fate. But at the same time he's got to take care of the world's largest economy.

[00:01:59] Elizabeth: What do you think about the APEC summit at the weekend and the defence alliance and the stand off between the trade – the trade war between China and the US. Is that impacting thoughts on growth and interest rates?

[00:02:14] Jake: I haven't noticed anything specific, it's been a political traffic jam and from an economic standpoint I don't think anything has changed. We know that trade wars are continuing to be annoying from a growth perspective looking forward. Certainly if the trade wars continue it’s a tax on growth and politicians aren’t making things easier for growth with the trade wars.

[00:02:38] Stephen: I think like any war there are no winners.  So, as much as in the short term it looks like the US have made some bold calls, I think ultimately that can translate into higher prices globally for all. So I think the potential collateral damage from this trade war is still yet to be seen, but could be far reaching.

[00:03:02] Jake: Or it’s already been priced in! Hard to know.

[00:03:07] Elizabeth: True, true. Okay, let’s move on to AMP, the new issue last week, the new direct bond – that's going pretty well, I believe?

[00:03:31] Jake: Certainly a lot of interest amongst investors for the name. It's a household name in Australia. They did have to price it wider than where the rest of the market is so, they had to make it attractively yielding and it certainly is attractive to investors based on the demand I'm seeing.

[00:03:31] Elizabeth: And triple B plus so that must give a certain level of comfort. Even though obviously it’s in for a bit of a rocky time with the Royal Banking Commission. A couple of other things that I wanted to talk about – NRW and Mackay Sugar – two FIIG originated bonds. Do you want to start with NRW?

[00:03:49] Jake: Sure some good news there. They've decided to take our toys away again. The bond is being redeemed unfortunately and they're taking away from us at $102 so it's been a pretty good experience for investors. But now, what do you do with the money? Please ring your friendly relationship manager and he or she can help you out and walk you through some ideas on the other side of that.

[00:04:16] Elizabeth: It was a fairly big issue, wasn't it? Wasn't it at $65m – no it was more than $65m and they’ve amortised haven’t they?

[00:04:17] Stephen: It’s been amortised down so investors have got about 60 percent of their face value to reinvest. So like Jake was saying, I would get in early and beat the rush on that NRW reinvestment. A few people have been looking at names today and names that we've spoken about in the past like Virgin for example, is a name that's got a couple of bonds both in Aussie and USD at present good value.

[00:04:49] Jake: Plenty of ideas out there just reach out to us and to the safety side I'm happy to look at investment grade or if you want to keep that high yield going. And that's what it's all about – it’s maintaining those high cash flows for as long as possible and as safely as possible. So, talk to your relationship manager and see what might work for you.

[00:05:09] Elizabeth: Absolutely. Do you know what the internal rate of return was on that bond issue if you bought it at first issue?

[00:05:14] Jake: I'm thinking annualized circa 9 percent is what I feel, but I haven't verified that. It was just announced not that long ago. 

[00:05:20] Elizabeth: No, but getting a hundred and two back, it's got to be well up there doesn't it?

[00:05:24] Stephen: Yeah, I’m thinking around 10 percent, so a good experience for investors.

[00:05:30] Elizabeth: Fantastic and Mackay Sugar had some more positive news.

[00:05:34] Jake: Yeah, Reuters came out and said that they had a legally binding offer but then went to correct themselves saying it's a non legally binding offer. It changed its story but it's a continuation of the direction that I guess the German company wants to go in in 2017. They liberalise the sugar market in the Eurozone and certainly from what I've read, from Reuters at least, they've been looking for something to acquire and Mackay Sugar seems to be the target.

Elizabeth: Okay, and we would be delighted with that?

Jake: Very much so and hopefully that process continues along. But obviously they have got quite a few hoops to still jump through.

[00:06:18] Elizabeth: Okay. Next on my list of bits and bobs is Merredin which has gone retail, I believe?

[00:06:29] Stephen: That's correct. So Merredin Energy is now open to retail investors. So we've seen some pretty good demand come in the past couple of days. But on the flip side of that, a lot of the investors have bought at new issue and happy to take a bit of profit and look for some other options. So that's a bond I think we'll do a bit of business in the next week or so. Again, it's one of those bonds whose cash flows are tied to government revenue/government payments. So whilst we're not expecting the company to grow, etc., we do think it’s going to be a stable owner going forward.

[00:07:01] Elizabeth: Yes. So I was just thinking, is that a switch then, from NRW possibly for retail holders. I mean, for NRW holders, is that a switch target?

Stephen: Definitely.

Jake: Offered about just under 6.4 percent thereabouts, it’s a senior secured bond from them.

[00:07:18] Stephen: Exactly. But the problem is with NRW being called, now wholesale investors may not want to sell their Merredin Energy so we could see bonds getting snapped up pretty quickly. So again I would get in quickly to your relationship manager and take advantage of the supply that we do have at this point in time, because like in a boat, when the crowd runs to one side of the boat it can quickly go the other way.

[00:07:44] Jake: Yeah, the speed of both teams – there's a tidal wave of cash coming back to investors from a couple of names, PMP as well as NRW now.

Elizabeth: One last thing on my radar is some of the US dollar names. The prices have declined on some of those high yield bonds.

Jake: In some cases it's been sector wide, we've certainly seen some real pain in the higher yielding bond space, not just the bonds that we've been concentrating on. But generally speaking higher yield has been hurt alongside the equity side. The higher yielding an asset, is that typically, we correlate with equity type volatility. So that's what we are seeing in the broader markets in the US side of things. So there are certainly some specific names that again, just reach out to your relationship manager to talk about any specific names. But from a general market sense, the higher yielding asset the more equity like it should act when in times of fear and that's what we've seen.

Elizabeth: So, prices are down obviously yields are up a bit; maybe then, are some of those names attractive to buy in at this point?

Jake: That's where you feel and look through the weeds and have a good close look at the companies themselves and whether you think they'll get through the next cycle.

[00:08:59] Stephen: And the high yield market does have exposure to those sectors that have a sort of a higher volatility – oil, tech, energy – those are all the sectors that you'd expect to perform poorer in a downturn in the market. But again it's an opportunity. So you're better off buying in now in these sort of periods when the prices are depressed a little. If you're holding, it might be an opportunity to add to what you've got already on your books.

Jake: Or conversely, because the U.S. bond market is so deep, you can look at healthcare which is a defense, telecoms, and you can look at the investment grade area. It's a very, very deep universe of defensive utilities and all types of things you can look at. It's a very broad choice listing of foreign that includes the high yield stuff.

[00:09:54] Elizabeth: Certainly a massive market. I think that does it for BondCast today. Thanks very much for joining us. Thanks guys.



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