Tuesday 08 August 2017 by George Whittle Trade opportunities

Moody’s takes rating action on RWH Finance Pty Ltd

Moody’s upgrades Royal Women’s Hospital floating rate notes, as expected.

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During 2014, FIIG Research suggested investing in the Royal Women’s Hospital (RWH) indexed annuity bonds (IABs) as refinancing the floating rate bonds would likely lead to a credit rating upgrade for the IABs, and as a result decreasing bond yields.

Following the redemption in the Royal Women’s Hospital floating rate bond last week, Moody’s has increased the credit rating on the RWH IAB from Baa2 to A2. Many clients who bought RWH IAB expecting this upgrade could now sell or reduce their holdings. For those that invested in 2014, your holding period return may be double digits.

We have been talking about these bonds for a long time – the first trade was in January 2013 – and the strategy hasn’t changed in that time. The core risk has always been the refinancing of other RWH bonds, and without this risk, the ratings agency indicated they would upgrade. At last, the refinancing is done and A2 is a better credit rating than expected.

Not everyone bought these bonds with speculation in mind; they have and will continue to serve perfectly well as a long term hedge against the pressure that inflation puts on fixed rate and floating rate bonds. Buy and hold clients need only read on for interest.

For those who invested more strategically, Figure 1 tells the story (remember, as yield goes lower, price moves higher).

Figure 1 shows yield instead of price as these bonds pay back the principal each quarter – the price naturally goes down over time which is misleading.

Figure 2 captures the holding period return on an annualised basis from a broad sample of holders and includes purchase price, income, and principal return.

FIIG Securities is licenced to provide general advice only and this note has not taken personal circumstances into account.

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