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.


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.


The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

The information has been prepared solely for informational purposes only and does not constitute or form part of any offer for sale or subscription of, or solicitations or any offer to buy or subscribe for, or any invitation to subscribe for or purchase any securities and nothing contained herein shall form the basis of any contract or commitment whatsoever. The information is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. No action has been taken to permit the public distribution of the information in any jurisdiction and the information should not be distributed to any person or entity in any jurisdiction where such distribution would be contrary to applicable law.

The information has not been lodged with Australian Securities and Investments Commission or any other authority. The information is intended for distribution only to financial institutions and professional investors whose ordinary business includes the buying or selling of securities in circumstances where disclosure is not required under Chapter 6D.2 or Chapter 7 of the Corporations Act 2001 of Australia (the “Corporations Act”) and only in such other circumstances as may be permitted by applicable law. Any securities that may be offered by the Issuer in, or into, Australia are offered only as an offer that would not require disclosure to investors under Part 6D.2 or 7.9 of the Corporations Act. This information is directed only to persons to whom disclosure is not required under Part 6D.2 or 7.9 of the Corporations Act. The information is a summary only and does not purport to be complete. It does not amount to an express or implied recommendation or a statement of opinion (or a report or either of those things) with respect to any investment in the Issuer nor does it constitute a financial product or financial advice. The information does not take into account the investment objectives, financial situation or needs of any particular investor. FIIG does not provide accounting, tax or legal advice. Prospective investors are required to make their own independent investigation and appraisal of the business and financial condition of the Issuer and the nature of any securities that may be issued by the Issuer. By accepting receipt of the information the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial securities discussed herein.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the Issuer which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Any offering of any security or other financial instrument that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation (“Offering Documents”) and in such case the information will be superseded in its entirety by any such Offering Documents in its final form. In addition, because the information is a summary only, it may not contain all material terms and the information in and of itself should not form the basis for any investment decision. Any decision to purchase securities in the context of a proposed offering of securities, if any, should be made solely on the basis of information contained in the Offering Documents published in relation to such an offering.

Neither FIIG nor the Issuer shall have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG or the Issuer be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG has been engaged by the Issuer to arrange the issue and sale of the Notes by the company and will receive fees from the issuer of the Notes. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. FIIG’s AFS Licence does not authorise it to give personal advice. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that all of the views expressed in this document accurately reflects their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG.