As we highlighted in our note on the 16th of July, new issues have been an important source of diversification (due to their number) and also returns (due to the existence of new issue concessions), particularly since the COVID pandemic has introduced such uncertainty to company outlooks. As a response these companies have been issuing new bonds to shore up their liquidity in the short term.
Recent weeks have seen reporting season domestically, and as such has also seen the introduction of a large number of new bonds, as companies must allow investors to have the most up to date information about their performance before they issue securities.
The pricing of new issues has also been of interest, particularly in relation to the new issue concession we referred to earlier, which is typically the premium available to investors in the new issue to entice them to buy that instead of an existing issue in the secondary market.
Here are some charts showing where the new bonds priced in relation to their current secondary curves:
QBE (pink curve) and IAG (blue curve):
Slightly different story here as QBE typically has issued in non-AUD currencies, so the only comparable bonds in the same name are foreign currency bonds which have to be swapped back into an AUD equivalent.
Doing this we see that the new AUD bond (circled in white) looks very expensive compared to the foreign currency bonds, having been issued at a margin approximately 50bps lower than the curve.
This is a situation we see often, where Australian issuers are forced to pay more for access to foreign markets, in particular the US, and gives us as local investors who know these credits very well, an opportunity to pick up yields in excess of those that the risk would otherwise determine.
That being said, when compared to its local insurance counterpart in IAG, we can see it looks like very good value compared to the new IAG bond issued the week before (again highlighted in white) given the spread on the IAG at issue was +245 vs +275 from QBE.
IAG is considered a better credit so this increased margin for QBE is appropriate in our view.
IAG itself was issued almost in line with the curve, offering a very small new issue concession of around just 5bps.
Coles:
We have seen these concessions actually turn negative, in the case of the Coles 5 year issue, due to the weight of demand enabling the bond to price at a tighter level than indicated by the existing securities.
As shown below, a huge order book of $2.6bn across both tranches allowed the $150m 5 year deal to price 5bps tighter than the curve suggested and the $300m 10 year to price 6 bps tighter than the curve.
Ordinarily this would imply a poor result for the purchaser, as the new bonds would be expected to price in line with the other bonds available in the market, but instead we observed the opposite, where the new bond repriced the existing securities even tighter, resulting in gains for all holders immediately after the new issue closed.
Historically this has been a sign of FOMO, or Fear Of Missing Out, and didn’t end well in late 2007. We are a little more relaxed this time around as these issuers have very strong balance sheets and in the case of Coles for example, is actually likely to benefit from the COVID pandemic, as consumer choice leans towards more at home consumption rather than in restaurants for instance, benefitting the grocery sector.
We continue to believe that new issues offer value to buyers, either if the new issue concessions look attractive – it has to be said that currently that is harder to judge – or that simply the weight of money in the market will price bonds tighter as holding cash drags on fund managers’ returns so to be invested even at prices higher than issue is a better outcome.
To invest in new issues it is important to have your account ready and open, as they can close quickly – currently a few hours – and at short notice. The other factor to consider is that new issues are available only to wholesale qualified investors, so please check your status and if appropriate get it updated with us.