Monday 26 September 2016 by Elizabeth Moran Trade opportunities

Low risk infrastructure bonds make sense for investors

As published in The Australian on 24 September 2016

A consortium of local and international institutions last week won the tender to lease the Port of Melbourne for $9.7 billion, around $3 billion more than what was expected

Port of Melbourne

The outstanding result appears to be a win/win for all involved. Victoria get a huge injection of funds which it will use to invest in other much needed infrastructure projects, while the consortium get 15 years exclusivity in operating the Port of Melbourne. Part of the deal includes a plan to inject further capital into developing the existing site, creating jobs for locals.

Beneficiaries of the lease agreement - aside from the consortium made up of the Future Fund, Queensland Investment Corporation, Global Infrastructure Partners and the Ontario Municipal Employees Retirement System - are thousands of everyday workers through their superannuation funds.

Why infrastructure makes sense for SMSFs

What does this have to do with your SMSF? Plenty. If the goal of your SMSF is to generate enough funds to live off when you no longer work investing in infrastructure – roads, airports, railways, ports and others – is a must.

One of the best things about infrastructure investments is that they are long dated, providing certain income for many years into the future. The Port of Melbourne lease is for 50 years and it will generate income and help provide stability for the consortium members, who in turn can rely on that income to fund defined benefit pension schemes. The asset will help them match their liabilities – the pensions. Seems like a perfect match!

From a credit perspective, infrastructure assets are often expensive to develop, so difficult to replicate and in many instances monopoly assets. Often the cashflow stems from state or federal government payments, resulting in very low risk, high quality assets.

Four infrastructure investments to consider

Many infrastructure bonds are linked to inflation as the company’s income is linked to inflation, and therefore it makes sense to link its debt to inflation too. Below are four good value infrastructure investments, from four completely different sectors and all are linked to inflation.

The bonds can be traded or transferred as part of a deceased estate, so don’t be worried about the long terms until maturity. That’s part of the securities’ protective features. All returns are shown as the yield above inflation (CPI).  For example, the Sydney Airport bond yield is quoted as 3.53% over inflation, meaning that if average inflation over the life of the bond was 2.5%, the return would be 6.03% per annum.

  1. Sydney Airport capital indexed bond, maturing in November 2030 with a yield over inflation of 3.53% per annum. This company continues to go from strength to strength. Rising passenger numbers – international passengers were up over 10% for the first half of 2016 and strong cashflow from retail rental and car parking.

    This bond is one of the few investment grade bonds trading at a discount to its face value with a price of $121.44 but underlying higher value of $127.31, meaning investors are in the money from day 1. With recent weaker inflation, investors have sold off the security but we think it has been overdone.

  2. JEM (New South Wales) Schools, indexed annuity bond maturing in November 2035 with a yield over inflation of 2.86% per annum. These bonds work differently to the capital indexed bonds. Principal and interest are returned to investors over the life of the bond, delivering strong cashflows. At maturity capital has been fully repaid. Also, the cashflow which combines interest and principal and is linked to inflation, can never go backwards even if inflation is negative.

    Funds were raised to help The Axiom consortium - which was contracted by the NSW government under private public partnership (PPP) - to finance, design, construct, maintain and manage 11 schools located in NSW.

  3. Wyuna Water indexed annuity bond maturing in March 2022 with a yield over inflation of 2.69% per annum.

    Wyuna Water is a special purpose company which entered into an agreement with the Sydney Water Corporation to design, build, and operate two water filtration plants in Illawarra and Woronora in Sydney for 25 years until 2021. The payment obligations from the Sydney Water Corporation are guaranteed by the NSW state government. The original contract has been extended for 15 years until 2036.

  4. Novacare indexed annuity bond maturing in April 2033 with a yield over inflation of 2.71% per annum.
  5. The Novacare Consortium was contracted by the NSW Department of Health for the financing, design, construction and refurbishment of various facilities at the Mater Hospital in Newcastle and the provision of specific non-clinical ancillary services. Revenues for the project come in the form of a monthly payment from the State of New South Wales which is designed to meet operational costs and provide a return on capital.

These bonds are available from around $10,000 per bond with a minimum up front spend of $50,000.

Issuer Maturity date Bond type Margin over inflation Est. yield to maturity*
JEM NSW Schools 28/02/2031 Indexed annuity bond 2.86% 5.36%
Novacare Solutions 15/04/2033 Indexed annuity bond 2.71% 5.21%
Sydney Airport 20/11/2030 Capital indexed bond 3.53% 6.03%
Wyuna Water 30/03/2022 Indexed annuity bond 2.69% 5.19%

*Assumes average inflation of 2.5% over the life of the bond
Note: Pricing accurate as at 21 September 2016 but subject to change.
Red = wholesale only. ​All other bonds listed available to both retail and wholesale investors.
Source: FIIG Securities

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