Wednesday 20 January 2016 by Trade opportunities

Payce pays pretty price to exit bonds

The company has entered the market again with a compelling offer

Platinum by PAYCE

On Wednesday 4 November 2015, Payce Consolidated announced to the ASXExternal link - opens in a new window its intention to buy its notes back on market. Since then, Payce has bought back and cancelled $21.8m face value of notes, leaving $28.2m outstanding.

Payce have entered the market again and are bidding to purchase additional notes back at a yield to call of 3.69%, or a capital price of $106.80. This represents compelling value and investors are encouraged to sell into this offer. There are many opportunities to reinvest funds at higher yields in the current market, making this trade worth considering even if you are a hold to maturity investor.

If investors do not opt to sell into the offer, the issuer will have the right to purchase its notes back at a capital price of $102.00 in December this year. This would mean an effective capital value loss of $4.80.

Relative value

Selling at $106.80 represents a yield to call of 3.69%. Investors who choose to continue to hold the security are effectively accepting a return of 3.69% for this position. In our most recent update on Payce on 29 October 2015, following the announcement of the joint venture with Mirvac for East Village, we concluded that with this positive development, ‘the bonds represent value down to a yield to call of low-to-mid 4%.’ This took into account the improved security position and higher likelihood of call.

Even for investors who specifically bought this security as a short term investment, there are attractive alternatives offering better returns for short term, investment grade risk. Comparing to other investments with a similar tenor, there are two highly rated securities that offer a higher return. While these are both callable capital instruments, even after accounting for this fact, they offer a higher yield to call than Payce currently does.

Company Call date Maturity date Bond type Capital structure Yield to call
Genworth Financial Mortgage 30/06/2016 30/06/2021 Floating Lower Tier 2 4.63%

National Wealth Management Holdings Ltd

16/06/2016 16/06/2026 Floating Lower Tier 2 3.70%

*Please note rates accurate as at 20 January 2016 but subject to change. Bonds in red are wholesale only.

For investors willing to increase their tenor to 2017, there are a broader range of switch targets offering higher returns with solid investment grade credit ratings.

Company Call date Maturity date Bond type Capital structure Yield to call/maturity
Bank of Queensland Ltd 22/03/2017 22/03/2022 Floating Lower Tier 2 3.84%
RWH Finance Pty Ltd 26/03/2017 26/03/2021 Fixed Senior Debt 6.24%
Elm Bv (Swiss Rein Co) 25/05/2017 Fixed Tier 1 4.88%
Downer Group Finance Pty Ltd 29/11/2018 Fixed Senior Debt 4.07%

*Please note rates accurate as at 20 January 2016 but subject to change. Bonds in red are wholesale only.

Realise a higher return

Keeping in mind that low yields represent higher prices, we can also observe that the Payce notes have never traded at a lower yield than 3.69% - the current bid. In this way, selling into this bid will allow current holders to realise a higher return than they would achieve if they held the investment until the call in December 2016.
  Payce expected yield vs realised return

For investors who purchased the notes in the initial primary issuance at par, this will allow them to realise a total annualised return of 12.94%, compared to 10.46% if they hold until the expected call in December this year.