Tuesday 11 March 2014 by FIIG Research Trade opportunities

New DirectBonds

This article lists the new bonds, their current prices and minimum investment amounts as well as a brief description of the companies that issue the bonds

Key points:

  1. There are 15 new bonds that have been added to the DirectBonds list in the last three months.
  2. FIIG has 250 bonds available in smaller parcels through its DirectBonds service.
  3. Of the 250 DirectBonds, 180 are corporate and residential mortgage backed securities (RMBS), the remaining 70 are Australian Commonwealth Government and semi-government bonds.

While the majority of bonds trade in minimum face value parcels of $500,000, FIIG makes some bonds available in smaller parcels in an effort to provide individual investors with access to this vast but underutilised asset class; these are known as “DirectBonds”. There are 250 DirectBonds with 200 AUD denominated and 50 non-AUD.

The number of corporate DirectBonds is 180 (including some residential mortgage backed securities (RMBS), while the remaining 70 are Australian Commonwealth Government and semi-government bonds.

Table 1 shows a list of the new DirectBonds over the last three months. The list shows the diversification possible with bonds available across industries, currencies and bond type. Six of the bonds are senior debt, three RMBS, three are hybrid securities (National Australia Bank, Friends Life Group in GBP and QBE Capital Funding II LP in USD) and two (Bendigo and Adelaide Bank Limited and AMP Bank Limited) are subordinated debt.

directbond yield and minimum investment table

Table 1

Brief description of the issuers

AMP Bank Limited – is a leading wealth management company in Australia and New Zealand with over five million retail and 400 institutional clients in Australia and New Zealand with offices in Asia, Europe, Middle East and North America. Principal activities include financial planning and advice, superannuation services for businesses and investment products for individuals, income protection and disability insurance as well as selected banking products and investments. Lower Tier 2 subordinated floating rate notes are redeemable in 2023 and are expected to be called at the first opportunity in 2018.

Bendigo and Adelaide Bank Limited – is a regional bank that specialises in retail banking with a focus on rural communities. It also owns Rural Bank and operates the margin lending business, Leveraged Equities. Bendigo Bank is represented in all states and territories with almost 900 outlets – including more than 190 company-owned branches, 250 locally-owned Community Bank branches, 90 agencies and 1900 ATMs. Through Adelaide Bank, the group operates a substantial wholesale banking business providing mortgages via a network of brokers and mortgage managers. In addition, Adelaide Portfolio Lending funds aged care and third party credit providers. Lower Tier 2 subordinated floating rate notes are redeemable in 2024 and are expected to be called at the first opportunity in 2019.

Dalrymple Bay Coal Terminal (DBCT) – located south of Mackay, it is the world’s largest coal export terminal. DBCT is essential infrastructure in the delivery chain of Queensland’s Bowen Basin coal reserves to the export market. The terminal’s customers include many of Australia’s, and the world’s largest coal mining companies. DBCT forms a critical link in the Queensland coal export business and as such is essential infrastructure if Australia’s coal is to continue to fuel Asian growth. Floating rate notes maturing in 2016 are senior debt.

National Australia Bank – is the third largest bank in Australia in terms of total deposits, loans and residential assets. NAB provides personal and business banking products and services, including savings, transaction, investment and foreign currency accounts, credit cards, loans, investments, insurance, financial advisory and international trade and payment services, to individuals, small and medium sized enterprises (SMEs) and large institutions. We expect the group to call (repay) it’s hybrid Tier 1 floating rate notes at the first opportunity in 2020.

Friends Life Group Plc – Friends Life Group Plc is a leading financial services group that offers a range of investment, pension, and insurance products and services for individual customers and commercial businesses. It is the fifth largest Life and Pensions company in the UK (ranked by market capitalisation) and has over five million customers worldwide. Friends Life Limited ranks in the top 10 in terms of new business sales in the UK market, with an overall market share of around 6.3%. The group also has a presence outside the UK with business written in Germany, Luxembourg, the Middle East and Asia. The “old style” perpetual hybrid step up security has 18 months until call in 2015.

G8 Education Limited - was formed through the merger of Early Learning Services (ELS) and Payce Childcare Pty Ltd (PCC) in March 2010. ELS was listed on the ASX and operated 38 centres, while PPC, owned by Wallace Infrastructure (75%) and listed property development company Payce Consolidated (25%), operated 60 centres (including 29 managed). GEM’s business model is as a consolidator and operator of childcare centres. Floating rate notes maturing in 208 are senior debt.

Global Switch Property – is a property business, offering design specific assets which meet the unique requirements of multi-use data centres for its clients. Key to Global Switch’s business model is that it is ‘carrier-neutral’, ie. the company’s international clients can be assured they enjoy equal access to services (rather than subletting from a centre owner which is also a competitor). With the exception of the centres in Amsterdam and Singapore, Global Switch maintains freehold ownership of its properties. Bonds maturing in 2020 are senior debt and provide an opportunity for investors to diversify their fixed income portfolio into a new sector whilst retaining investment grade strength.

Members Equity Bank – established by 35 industry superannuation funds with closely aligned interests. It provides a full range of personal and business banking services as well as retirement and superannuation products. ME bank’s asset quality is above average reflecting a low risk lending strategy and sound underwriting with the group not having to write off any home loan debt over FY11 and FY 12. All residential home loans are fully insured. Floating rate notes maturing in 2015 are senior debt.

Newcrest Finance Pty Ltd – is the largest gold producer listed on the Australian Stock Exchange and one of the world’s largest gold mining companies. Newcrest owns and operates a portfolio of predominantly low cost, long life mines and a strong pipeline of brownfield and greenfield exploration projects. Any client who remains more positive on the gold price should be comfortable with the Newcrest bonds and should expect to see a gradual improvement in the credit metrics over time as the cash flow turns around on the gold price lift. USD dollar denominated senior secured bonds mature in 2020 and 2021.

Payce – is a Sydney focused medium density apartment and mixed use (retail/commercial) development and investment group. Payce focuses on mid-range affordable apartments with the average sale price for a two bedroom apartment in Sydney around $600,000. The business has been operating for more than 30 years and has established a strong record in delivering successful projects. Bonds are senior debt and fixed rate, maturing in 2018.

QBE Capital Funding II LP – is Australia’s largest general insurance and reinsurance group and one of the top 20 insurers and reinsurers worldwide with operations in all key global insurance markets. QBE is listed on the Australian Stock Exchange and has operations in 52 countries and over 16,000 employees worldwide. QBE continues to display strong access to both domestic equity funding and offshore debt funding and thus we believe that will call its hybrid Tier 1 securities at the first opportunity in 2017.

Sapphire Trust - originated by Bluestone Group which is a mortgage origination and asset management business with operations in Australia, New Zealand, Asia, the UK and Europe. It currently operates across two business units, Asset Management (BAM) and Capital Management (BCM). BAM originates mortgages and manages those loans in addition to managing portfolios of loans purchased by the group or on behalf of thirds parties, while BCM secures funding from capital markets and manages the group balance sheet. Since 2000, Bluestone has originated close to AUD6bn of residential, reverse and commercial mortgages in Australia and New Zealand. This has been funded through a securitisation vehicle under which Bluestone has launched sixteen non-conforming and two reverse securitisation trusts under the “Saphire” and “Emerald” programmes, eleven of which have been refinanced.

Sapphire XII Series 2013-1 RMBS has a final legal maturity in March 2040 with a call date expected to be earlier of 14 December 2018 or the date on which the outstanding balance of the notes is 10% of the initial balance.

Torrens Trust – issued by Perpetual Trustee Co. Ltd as trustee for the Torrens Series 2014-1 mortgage backed, pass-through floating rate notes. The issuance consists of notes backed by a pool of first ranking Australian residential full documentation mortgage loans originated by Bendigo and Adelaide Bank Limited. The trust is created under the master trust deed for Torrens and has a final legal maturity in March 2045.

Common terms

Call date - the date prior to maturity on which a callable bond may be redeemed by the issuer. If the issuer determines there is a benefit to refinancing the issue, the bond may be redeemed on the call date, at par, or at a small premium to par depending on the terms of the call option.

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.

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.

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

Face value - is the initial capital value of the bond and the amount repaid to the bondholder on its maturity, usually $100.

Capital price – also referred to as “clean price” and does not include any accrued interest.

If you would like to learn more about bonds, or to discuss possible strategies, please contact your local dealer.
Note, prices and yields are accurate as at 10 March 2014, and are guide only and subject to market availability. FIIG doesn’t make a market in these securities. 


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