What is your definition of a financial success? Is your portfolio likely to achieve it in 2016? As we approach the end of 2016 it is well worth considering some new strategies for the new year
My first advice for 2017 is pretty simple – forget government bonds. My second piece of advice is to take a good, hard looking at some high yielding corporate bonds.
One common, but less discussed goal in the era of low interest rates is to earn 7% per annum. Mathematically inclined people will know that 7% returns reinvested at the same rate, means you double your money in 10 years.
Now, 7% is really difficult to achieve and deemed a high yield with commensurately high risk. Some shares may deliver it, as may some property investments, but it’s unlikely that you will have any confidence in the consistency of return as it will depend on the market.
A high yield is paid for a number of reasons that can include:
- The size of the company – smaller companies have fewer options if they get into difficulty
- The company is highly geared
- A complex company or bond structure
- The bond may be subordinate to other creditors
- A poor performing industry
- The product or service is commodity like
High yield corporate bonds
Returns on high yield bonds are dependent on how well the company is doing and how the market views its capacity to pay interest and return capital at maturity. The high yields paid are far removed from much lower risk government bonds that are much more correlated to interest rates.
Low interest rates have given smaller companies some ‘wiggle room’. In the last few years, with liquidity abundant, companies generally have been able to borrow cheaply and extend the term of loans, reducing the likelihood of default.
The good news is that there are 10 over the counter bonds available from $10,000 per bond, that are paying at least 7 percent per annum. Seven are denominated in Australian dollars and four in US dollars. One is floating rate but the others are fixed rate bonds. Nine of the bonds are available to wholesale investors, but Adani Abbott Point is available to retail investors.
An example is Axsesstoday group which provides commercial equipment finance to small businesses via a distribution channel of retailers. The company initially issued a floating rate bond worth $20 million in October 2015 and topped up that initial bond a further $20 million in September 2016, with a first call in October 2020 and final maturity in October 2021. The company is small and has a business that would be easy to replicate but management have delivered on its growth plan and is currently progressing an IPO and listing on the Australian Stock Exchange. The Axsesstoday bond has a projected yield to worst* of 8.00 percent per annum.
One of the USD options is Virgin Australia. The company has four large institutional owners, including Singapore Airlines and Etihad but is very heavily geared, provides a commodity like service and would likely result in a low recovery value in default. It has a fixed rate bond maturing in October 2021 with a yield to worst* of 7.00 percent per annum.
One way to mitigate against the possible loss of high yield bond investment is to diversify through investing small amounts in many bonds.
AUD high yield bonds
| Company | Call date | Maturity date | Bond type | Capital structure | Yield to worst* | Running yield | Capital price | Face value | Capital value | Accrued interest | Total value | Factsheet link |
| Adani Abbott Point Terminal | | 29/05/2020 | Fixed | Senior debt | 7.02% | 7.08%
| 100.250 | $10,000 | $10,025 | $31 | $10,056 | Factsheet |
| Axsesstoday Group | 09/10/2020 | 09/10/2021 | Floating | Senior debt
| 8.00%
| 8.02%
| 102.700 | $10,000
| $10,270 | $149 | $10,419 | Factsheet
|
| Capitol Health | | 10/05/2020 | Fixed | Senior debt
| 7.37%
| 8.04%
| 102.600 | $10,000
| $10,260 | $80 | $10,340 | n/a
|
| Eric Insurance | 04/08/2021 | 04/08/2026 | Fixed
| Tier 2 | 8.60%
| 9.50%
| 105.250 | $10,000
| $10,525 | $369 | $10,894 | n/a |
| Impact Group Aus | | 12/02/2021 | Fixed
| Senior debt
| 7.85%
| 8.35%
| 101.850 | $10,000
| $10,185 | $76 | $10,261 | Factsheet
|
| RSEA Finance |
| 27/10/2021 | Fixed
| Senior debt
| 7.03%
| 7.53%
| 102.950 | $10,000
| $10,295 | $103 | $10,398 | Factsheet |
| StockCo Holdings | 06/10/2021 | 06/10/2022 | Fixed
| Tier 2 | 7.69%
| 8.39%
| 104.250 | $10,000
| $10,425 | $21 | $10,446 | n/a
|
Source: FIIG Securities
Prices are indicative and accurate as at 13 December 2016 but subject to change
Bonds listed are available to wholesale investors only, with the exclusion of the Adani 2020 bond which is available to both wholesale and retail investors
USD high yield bonds
| Company | Credit rating | Maturity/ call date | Bond type | Capital structure | Yield to worst* | Running yield | Capital price | Face value | Capital value | Accrued interest | Total value | Factsheet link |
| Genworth Holdings | B | 24/09/2021 | Fixed | Senior debt | 8.66% | 7.94%
| 96.000 | $10,000 | $9,600 | $172 | $9,772 | Factsheet |
| Kinross Gold | BB+ | 01/09/2041 | Fixed | Senior debt
| 7.09%
| 7.05%
| 97.500 | $10,000
| $9,750 | $199 | $9,949 | Factsheet
|
| Navient Corporation | BB- | 01/08/2033 | Fixed | Senior debt
| 7.01%
| 6.50%
| 86.500 | $10,000
| $8,650 | $209 | $8,859 | Factsheet
|
| Virgin Australia | B3 | 15/10/2021 | Fixed
| Senior debt | 7.00%
| 7.61%
| 103.500 | $10,000
| $10,350 | $127 | $10,477 | Factsheet
|
Source: FIIG Securities
Prices are indicative and accurate as at 13 December 2016 but subject to change
Bonds listed are available to wholesale investors only
Note: High yield bonds are a high risk investment and investors get paid higher yields for taking on additional risk.
Investment grade subordinated bonds
Subordinated bonds issued by financial institutions are also offering good relative value returns but with much lower risk and the backing of an investment grade rating by credit rating agencies.
These bonds are often floating rate so if you have a view that interest rates are going to start rising in 2017, then these bonds will suit you. The income will rise if interest rates are expected to rise.
Projected yields range from 4.04 percent per annum for a Bendigo & Adelaide Bank bond with an expected maturity of 29 January 2019, through to 4.66 percent per annum for a bond from Suncorp subsidiary AAI, with expected maturity of November 2020.
| Company | Maturity/ call date | Bond type | Capital structure | Yield to worst* | Running yield | Face value | Factsheet link |
| Bendigo & Adelaide Bank | 29/01/2019 | Floating | Tier 2 | 4.04% | 4.48%
| $10,000 | Factsheet
|
| ME Bank | 29/08/2019 | Floating | Tier 2 | 4.42%
| 4.43%
| $10,000
| Factsheet
|
| Suncorp subsidiary, AAI Ltd | 18/11/2020 | Floating | Tier 2 | 4.66%
| 6.50%
| $10,000
| Factsheet
|
Source: FIIG Securities
Prices are indicative and accurate as at 12 December 2016 but subject to change
Bonds listed are available to wholesale investors only
*Yield to worst is the lowest yield an investor can expect when investing in a callable bond.