Almost daily, there are new corporate bonds being issued into the Australian domestic fixed income market. High yield bonds (either sub-investment grade or unrated) are a subset of that overall corporate bond issuance. FIIG has been the largest originator of unrated corporate bonds.
Since September 2012, FIIG has arranged 70 new issuance transactions, including 9 follow on or “tap” transactions of previously issued bonds for 45 discrete issuers. Given almost 10 years of unrated bond origination history, it is an appropriate juncture to look back and holistically assess what these bonds have done for investor returns along that journey.
If an investor had bought an equal amount of bonds in each of the primary issues, the Internal Rate of Return (IRR) would be 6.97%. This return is calculated by reference to:
- The coupon payable over the life of the bonds. It is noted some coupons have been amended both upwards and downwards over the life of the bonds consistent with corporate actions
- The current market valuation
- For those bonds that have already redeemed, the redemption price. Whilst bond terms stipulate a redemption price at par, some bonds have not been redeemed at par given
- early redemption in some instances has triggered early call premia to be paid to the benefit of investors, and
- some bonds have been redeemed suffering a capital loss
As best as possible, using a total return methodology, the 10-year performance of the returns for a number of investment types is summarised below.
To analyse the benefit or otherwise of holding unrated corporate bonds over this timeframe, and comparing their performance to other asset classes, it is important to consider the total return in the context of an investment’s risk.
A few observations on the above:
- Arguably, due to FIIG’s rigorous credit approval and review process, returns on a hypothetical portfolio of FIIG arranged bond investments as measured by the IRR has outperformed the S&P High Yield Bonds benchmark by 1.42%.
- We can see that both categories of High Yield Bonds outperform the Investment Grade Bond Index. This is entirely logical
- What is also logical is that equities, as represented by the ASX 200 Index, have a total return, including dividends, higher than for corporate bonds, but with an associated higher volatility
- Infrastructure has been a strong performer
Of note is that recently arranged bond issues which have only been outstanding for a number of months have been affected by the recent rises in market interest rates, and as such contribute negative total returns to this calculation given the resulting lower capital prices and relatively short time for interest accrual. If held to maturity (which is the assumption used for all holdings) and capital is redeemed at par as expected, these returns will be strongly positive and contribute to further outperformance.
FIIG takes steps to balance the risks inherent in each bond issue with the return offered. Each bond proposal is reviewed by FIIG’s internal Debt Capital Markets team for suitability and thereafter a further review from our independent Credit Research team takes place.
These checks and balances are at the heart of how FIIG clients could have achieved an IRR of 6.97% on the High Yield bond portion of their investment portfolio.
We conclude from the above that high yield bonds perform as expected amongst the broader range of investment alternatives and as such is a very useful asset class of itself and within a diversified portfolio.
If you are interested in finding out more about FIIG-arranged high yield issuances, please contact your Relationship Manager as we arrange new issues on a regular basis.
