Tuesday 10 February 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: volatility continues following the RBA rate cut; RBA quarterly Statement on Monetary Policy seems to favour easing bias; Qantas and Virgin volumes remain high; activity in Newcrest 2041 USD bond; Adani update following the Queensland election; and Downer and Coffey International 1H15 result updates.

Economic wrap

Last week, the RBA announced its first rate cut since August 2013. The 25 basis point cut brings the official cash rate down to a record low 2.25%. Markets were volatile as they priced in the new rate cut and digested Eurozone/Greek developments and positive US data.

On Friday, the RBA released its quarterly Statement on Monetary Policy in which it lowered its GDP growth and inflation forecasts. The RBA also detailed that it expects unemployment to creep higher. Currency levels were cited in the statement as still being too high to deliver balanced growth. On the whole, the statement indicated a bias towards further rate easing in order to support growth in a lower inflationary environment.

Overseas there was some headway made in Europe, with the suggestion that the Greek government may swap existing debt for new growth-linked bonds. We, however, look forward to firmer plans coming out of this week’s emergency meeting in Brussels where the Greek finance minister meets with 18 other Eurozone counterparts.

More positive overseas news came out of the US, with employment data out last Friday. Non-farm payrolls (employment) rose by 257,000 in January, well above consensus. The unemployment rate edged up by 0.1% to 5.7%, but this was driven by a higher participation rate. Average earnings were also up 0.5%, ahead of forecasts.

Given the significant news flow, markets traded within a wide range through the week. Our five year government bond finished the week three basis points lower in yield at 2.00% while the 10 year was unchanged at 2.45%. We did, however, see big moves, particularly after the RBA rate cut, with government yields hitting and all-time lows of 1.86% and 2.26% in the five and ten year respectively. Demonstrating the volatility, the ten year government bond yield has ranged from 2.26% to 2.59% in the first week of February alone.

The Australian dollar also traded within a wide band against the US dollar, ranging between 76.3 and 78.7 US cents. Overall though, our dollar was up about half a cent over the week to finish at 78.4 US cents.

Flows

Both Qantas and Virgin remain active following a positive update from Virgin last week (see Qantas and Virgin flying high article in this week’s edition of the WIRE for further detail). The three Qantas bonds and USD Virgin bond are currently offered at the following indicative yield to maturities (YTM):

  • Qantas 20 – 5.35% (retail and wholesale investors)
  • Qantas 21 – 5.55% (wholesale investors only)
  • Qantas 22 – 5.60% (wholesale investors only)
  • Virgin 19 – 7.32% (wholesale investors only)

There was plenty of activity in the USD space, including large volumes in the Newcrest Mining 2041 fixed rate bond. While this bond clearly will be very sensitive to interest rate movements in the US and hence exhibit volatile pricing, it has struck a chord with many investors and is in good supply at an indicative YTM of over 6%.

Note: Foreign currency bonds are only available to wholesale investors.

Adani Abbot Point Terminal – comment on media speculation following Queensland election result (by Alen Golubovic)

There has been plenty of speculation in the media regarding Adani and its involvement in Queensland following the shock defeat of the LNP Government in the state election. Much of the speculation revolves around the viability of Adani’s mining project in the Galilee Basin, following the Labor Party’s promise to scrap taxpayer subsidies for any Galilee coal related projects.

We note that the creditworthiness of the existing Abbot Point Terminal is linked to the continued performance of the Bowen Basin mines, which pay for the take-or-pay revenues received by the terminal. These Bowen Basin mines are ultimately owned by mining companies such as Glencore and Rio Tinto and mostly relate to existing operational mines. Adani’s proposed Carmichael mine in the Galilee Basin requires an expansion of Abbot Point through the development of a new terminal which would be ring-fenced from the existing terminal cashflows.

In addition, in a statement released by the company, Adani has affirmed its commitment to proceeding with its mine, rail and port projects, and that the result of the Queensland election does not influence the company's decision.

Based on the company’s statement, we have every reason to believe that Adani will continue to develop the Carmichael project. However, even if it weren’t to proceed or was delayed, we do not believe this would have a material credit impact on the Adani Abbot Point Terminal bonds, whose revenues are already fully contracted to existing coal mines in the Bowen Basin. We continue to support the credit and believe the Adani Abbot Point Terminal bonds offer good value in the investment grade space. Indicatively offered at a yield to maturity of 5.17%, the Adani Abbot Point Terminal 2020 senior secured bonds remain some of the highest yielding investment grade bonds on offer.

Note: The Adani bond is only available to wholesale investors.

Downer reports 1H15 results (by Alen Golubovic)

Downer announced its 1H15 results last week, with the following key points:

  • Total revenue down 8.8% to $3.6bn, EBITDA down 11.5% to $263.7m and 1H15 net profit down 4.4% to $94.7m
  • Net debt of $252.7m was up from $32.7m at 30 June 2014 post the acquisition of maintenance services business Tenix. As a result, gearing was up to 11.2%.
  • Available liquidity of approximately $1bn comprising cash of $378m and undrawn committed facilities of $612m
  • Adjusted net debt / EBITDAR (earnings before interest, tax, depreciation and amortisation and lease rentals) up from 2.0x to 1.8x at 30 June 2014, and interest cover ratio up to 9.7x from 7.9x at 30 June 2014

All key financial measures are down on 1H14, and mining based construction and services markets remain subdued. The company’s performance reflects the challenging conditions facing the mining/engineering services sector.

However, Downer has affirmed its NPAT guidance of $210m for FY15 based on current trading versus an NPAT of $216m in FY14. The company has insisted it will meet its full year target but says it will focus on reducing costs.

The Downer 5.75% fixed rate bond with a maturity date of 29 November 2018 is indicatively offered at a YTM of 3.90%.

Note: The Downer bond is available to both retail and wholesale investors.

Coffey International reports 1H15 results (by William Arnold)

Coffey announced its 1H15 results on Monday. Key points:

  • Okay results in the face of significant industry headwinds. While many revenue lines face pressure, the company continued to adjust its cost base accordingly. Positively, longer term forward indicators suggest improvements may be seen in the business out beyond 12 months
  • Revenue was down 8.6% to $296m and NPAT down 50% to $1m year on year. However EBITDA is relatively stable down only 1.7% to $10.4m. Results included one off costs such as $1.3m in refinancing break costs, redundancy costs and $4.4m in relating to office consolidation

Source: Company presentations

  • Geoservices: Positively, fee revenue rose to $101.6m for the half with modest growth in Australia driven by the more sustainable transport infrastructure and property industries. Mining continued to decline while oil and gas remained strong. Forward contracted revenues were impacted somewhat by political uncertainty and the change of two state governments (which generally causes a pause to government driven projects) Source: Company presentations
  • International Development: Revenue of $152.8m was down 9.2% on 1H14 with EBITDA down 4% to $8.4m due to discontinued business and the completion of major projects. Positively, total contracted revenue, including contracted forward revenue beyond 12 months, was up 14% on December 2013 and the value of contracts short listed or in negotiation, significantly increased
  • Funding and liquidity: Gearing was stable at 30% and liquidity is adequate with cash holdings of $30m and access to $12.2m in undrawn bank lines. The company reiterated that reducing debt and increasing financial stability remain key priorities and continued not to pay a dividend

The Coffey floating rate note with a maturity date 12/09/2019 (callable September 2017) is indicatively offered at a trading margin of +437bps (YTM of 6.86%) and is starting to look attractive as one of the highest margin AUD bond currently available.

Note: The Coffey bond is only available to wholesale investors.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. For more information, please call your FIIG representative.

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