Saturday 24 March 2012 by Elizabeth Moran Trade opportunities

Clash of the airports

This article compares bonds issued by Perth, Melbourne, Brisbane and Sydney Airports and was published in The Australian on Saturday 22 March 2014.

Key points:

  1. Perth Airport issued a new seven year fixed rate corporate bond last week. Strong demand meant the airport accepted bids for $400m, more than twice that originally proposed.
  2. The yield to maturity for the bond was 5.70%, a competitive rate compared to other fixed rate airport bonds of similar term in the market.
  3. While not directly comparable to the new Perth bond, the Sydney Airport November 2020 bond with a similar term, is considered to represent value in the sector with a projected yield to maturity of 6.30% (assuming inflation of 2.5%).

Bond investors like monopoly infrastructure assets with defined income streams as it gives them confidence that interest payments will be paid on time and they can lock in a good rate of return for an extended period, which enables them to plan ahead.

Last week Perth Airport came to the market with a new over-the-counter seven year fixed rate bond, maturing in March 2021. Like other recent issues the initial $150m proposed as the amount required was oversubscribed and the airport accepted bids for $400m. The raising was twice that originally stated and shows the current demand from investors for corporate bonds in Australia. The Perth Airport bond adds diversification, being unlisted and not on any indices but more importantly for wholesale investors meets their risk and return assessment.

Strong demand also meant the bond was issued at the lower end of the indicative price range and settled at a margin of 165 basis points (100 basis points (bps) = 1 per cent) over the benchmark swap rate. A simple definition of swap is the bank’s future expectations of interest rates and it is a common term used when talking about bonds. It enables investors to compare different bond issues with various maturity dates. The yield to maturity of the fixed rate Perth bond is 5.70 per cent.

There are other airport bonds in the market. Melbourne, Brisbane and Sydney airports also have bonds in the over-the-counter market. Melbourne Airport has a bond over a similar term that matures in April 2020. Its current margin is 105bps over swap and yield to maturity is 5.05 per cent. Brisbane too has an October 2020 maturity trading at a margin of 120bps with a yield to maturity of 5.20 per cent. Comparing the new Perth Airport issue to these two bonds makes the 5.70 per cent yield, look attractive.

Sydney Airport is a larger airport and more highly geared ($5.4bn in total of rated bond issues), meaning it has issued more bonds with a range of maturities offering various yields. Sydney Airport has a November 2021 floating rate bond that last traded at a margin over swap of 150bps, making the new Perth bond competitive at 165bps. However, the value in the market is the Sydney Airport November 2020 inflation linked bond.

While not directly comparable to the new Perth bond and the other bonds mentioned above, as its returns are calculated making assumptions about inflation, we can use the implied yield to maturity for comparison.

The Sydney Airport November 2020 inflation linked bond pays a current margin over the Consumer Price Index of 370bps. If we assume inflation runs at the Reserve Bank of Australia target mid-point of 2.5 per cent, the implied yield to maturity is 2.5 per cent plus 380bps equals 6.30 per cent. Of course the final return can be more or less depending an actual inflation, where there is greater certainty with the fixed rate Perth bond.

Both the Sydney Airport and the Perth Airport bonds are similar risk investments (both rated the same by the credit rating agencies) over similar terms. The new Perth Airport bond though is only available in $500,000 parcels. Sydney Airport 2020 inflation linked bonds are available in smaller parcels from $10,000 (as part of a minimum $50,000) and available to retail investors.

airports table

Common terms

Basis points (bps)- The basis point is commonly used for calculating changes in interest rates, equity indices and the yield of a fixed income security. A bond whose yield increases from 6.50% to 7.00% is said to increase 50 basis points; or interest rates that have dropped by 1.00% are said to have decreased by 100 basis points.

Capital indexed bonds (CIB) – CIB’s pay a predetermined coupon based on a capitalising principal amount where the capitalisation is a function of inflation. At maturity the investor receives the capitalised face value

Maturity - this is the date when the bond is due for repayment by the issuer. The principal plus any outstanding interest of a particular security will be repaid on this date.

Running yield - uses the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased a bond and held it for a year. It is calculated by dividing the coupon by the market price.

running yield equation

Yield to maturity - the return an investor will receive if they buy a bond and hold the bond to maturity. It is the annualised return based on all coupon payments plus the face value or the market price if it was purchased on a secondary market. Yield to maturity thus includes any gain or loss if the security was purchased at a discount (below face value) or premium (above face value). It refers to the interest or dividends received from a security and is usually expressed annually or semi-annually as a percentage based on the investment’s cost, its current market value or its face value. Bond yields may be quoted either as an absolute rate or as a margin to the interest rate swap rate for the same maturity. It is a useful indicator of value because it allows for direct comparison between different types of securities with various maturities and credit risk. Note that the calculation makes the assumption that all coupon payments can be reinvested at the yield to maturity rate. Also, the yield and coupon are different.

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