Tuesday 24 February 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: US Federal Reserve minutes, S&P comments on Australia’s AAA rating, an agreement is reached to extend Greece’s loan arrangements and we provide a wrap up of the results season. Companies covered include: Dampier Bunbury Natural Gas Pipeline, IAG, PAYCE, QBE, Silver Chef, Swiss Re and Virgin Airways.

Economic wrap

Last week the US Federal Reserve released minutes from its January meeting, leading to further speculation on when it will start to lift rates. The committee remained optimistic about the US economic outlook, however it did show concern over a strong US dollar, low core inflation and global economic uncertainty. There was a suggestion in the minutes that these risks may prompt the Fed to hold off on raising rates, contrary to the June target previously hinted at.

In Australia markets are looking to the RBA and its own rates decision next week. With comments out of the RBA more explicitly favouring a lower AUD, markets are pricing in about a 50% chance of a another rate cut in March.

Ratings agency S&P last week made comments about Australia’s AAA credit rating, citing that the rating is not at immediate risk, though they do hope to see restraint in spending and a stabilisation in debt levels.

Last Friday, Euro-area finance ministers reached an agreement to extend current loan arrangements to Greece for a further four months. This deferral of an immediate EU crisis is dependent on Greece meeting a list of economic reform conditions, to be confirmed by the Greek Government this week.

The AUD gained steadily over the week against the USD, starting the week at around 77.70 US cents and closing out at 78.42 US cents.

Bonds were also relatively stable over the week, with the 5 year government bond yield down less than 1 basis point, to 1.983% and the 10 year yield up 2 basis points to 2.571%

Flows

There was plenty of activity in the USD space, freeing up supply of some of our favourite and most popular AUD names including the following offered at indicative yield to maturities:

  • Qantas 2020 – 4.99% (retail and wholesale investors)
  • Qantas 2021 – 5.30% (wholesale investors only)
  • Qantas 2022 – 5.36% (wholesale investors only)
  • Sydney Airport ILB 20 – 5.00% (retail and wholesale investors)
  • Sydney Airport ILB 30 - 5.52% (retail and wholesale investors)
  • MPC IAB 33 – 4.68% (wholesale investors only)

Results season

Below we have provided a snapshot of recent results from key issuers. To obtain full commentary on an issuer’s financial results, please contact your FIIG representative.

Dampier Bunbury Natural Gas Pipeline (DBNGP) – 1H15 results snapshot (by Alen Golubovic)

  • Throughput down 2.6% in line with recontracted full haul capacity
  • Transport revenue was down 10.5%, as a result of the 9.5% reduction in recontracted tariffs
  • EBITDA was down 13.8% to $152.9m
  • DBNGP announced it is on track to meet FY15 full-year post financing earnings forecast of $112m
  • 2019 bonds are indicatively offered at a YTM of 4.11% for retail and wholesale investors

Insurance Australia Group (IAG) – 1H15 results snapshot (by Will Arnold)

  • Revenue from ordinary activities rose 27.3% to $7.94bn, however, NPAT was down 10% to $579m as competition increased. IAG progresses in moving to a new operating model in Australia and integrated the former Wesfarmers business
  • IAG posted an insurance profit of $693m (down from $758m). IAG's gross written premium grew by 17.1% to $5.6bn (due largely to the addition of Wesfarmers)
  • IAG's underlying margin, a key indicator of insurers' profitability, hit 13.3% which is slightly below the 13.7% produced last year. IAG expects to deliver a margin of between 13.5 and 15.5% for the full year
  • The group noted more synergies from the Wesfarmers deal to come through, however that won’t be fully recognised for at least another 18 months

PAYCE - 1H15 results snapshot (by Justin McCarthy)

  • PAYCE reported NPAT of $121m for 1H15 following the sale of the Hurstville, East Village and Platinum properties/projects in the half year which is in-line with expectations set out in our last update on 20 January 2015 click here to view.
  • The results also confirmed that the East Village retail and commercial rental assets were valued at $235m in the recent re-finance process, slightly higher than our previous estimate of $230m and that new investment loan is for a seven year term.
  • Investors may recall that PAYCE cannot leverage East Village by more than 70% of its value (including the $50m bond issue) until December 2016 and 60% thereafter. Using the valuation of $235m, that would limit the senior secured investment loan to $114.5m until December 2016 and $91m thereafter, providing significant residual value to support the bonds (i.e. $114.5m bank debt + $50m bonds / $235m value = 70% and $91m bank debt + $50m bonds / $235m value = 60%). This would equate to a senior secured debt loan-to-value ratio (LVR) of 48.7% until December 2016 and 38.7% after that date, assuming the valuation remains constant at $235m.
  • The bonds have a maturity date of 3 December 2018 but are able to be called early at $102 in December 2016 or $101 in December 2017. Assuming current financial conditions remain steady over the next two years (particularly interest rates and credit margins), PAYCE would likely be able to refinance East Village at a substantially lower cost than the bonds (9.5% coupon) even taking into account the 2% premium payout for early call.
  • Bonds are indicatively offered at a yield to call (December 2016) of 4.32% for retail and wholesale investors

QBE – FY14 results snapshot (by Justin McCarthy)

  • QBE Insurance Group Ltd reported a full-year profit of USD742m for FY14, compared to a full year loss of USD254m in FY13 on an improved North American business and absence of one-off write-downs as seen a year earlier
  • QBE expects its gross written premium for 2015 to be in the range of USD15.5bn-$15.9bn compared with USD16.3bn in 2014 as tough market conditions and the recent asset sales take effect
  • Management have also announced a delay in the potential spin-off/IPO of QBE’s lenders mortgage insurance business, which is likely related to the recent problems seen at Genworth
  • There was significant improvement in the capital position (i.e. APRA capital base), reduction in borrowings and material reduction in leverage (with debt to equity falling from 43.4% at FY12 to 32.5% at FY14). The prescribed capital amount ratio (PCA) is now a strong 1.7x
  • QBE subordinated debt and Tier 1 securities in USD and GBP continue to offer value given the improvement in debt metrics over the past six months. QBE USD 2017 and 2021 are offered at an indicative yield to maturity of 3.77% and 4.80% respectively for wholesale investors only

Silver Chef – 1H15 results snapshot (by Will Arnold)

  • SIV reported strong 1H15 results with revenue increasing 23% to $82.9m, underlying EBITDA increasing 20% to $52.7m and NPAT increasing 9% to $7.1m driven by a faster than expected turnaround in the GoGetta business
  • Interest cover continues to grow to a strong ~14x (up from ~13x 1H14) and net debt/EBITDA is 2.7x (up from 2.4x 1H14). FY15 guidance has been revised upward to a range of $15.2-$15.7m (from $13.75-$14.25m)
  • Overall, good results and importantly for bondholder’s credit metrics continue to strengthen
  • Bondholders have recently been advised that the company seeks to alter the terms of the Notes. Under the current terms, SIV is unable to have multiple senior secured lenders. SIV wants to change this and this is seen as broadly credit positive given the ability to diversify funding sources
  • Bonds are indicatively offered at a yield to call (September 2015) of 3.86% for retail and wholesale investors

Swiss Re - 4Q14 results snapshot (by Justin McCarthy)

  • 4Q14 NPAT of USD245m, down from USD1.2bn in 4Q13 and below consensus estimates of USD325.1m
  • Continuation of the trend of returning excess capital to shareholders with a CHF4.25 ordinary dividend, CHF 3.00 special dividend and announcement of a CHF1bn share buyback program
  • Overall the results were solid and not expected to impact credit margins or ratings. However, they did demonstrate a continuation of two key trends in play for the past 18 months for Swiss Re (and the broader re/insurance market): tougher conditions in the reinsurance market with softer pricing/renewals (CEO said he expects “the overall re/insurance market environment to remain challenging over the next years”) and return of excess capital to shareholders
  • The Swiss Re AUD Tier 1 securities are seen as fairly priced at current levels: the fixed rate 2017 bonds are indicatively offered at 3.98% YTM and the floating rate 2017 indicatively offered at 186bps over BBSW for wholesale investors only

Virgin Airways – 1H15 results snapshot (by Alen Golubovic)

  • Consolidated EBITDA of $200.6m is up 57% on the 1H14 result of $127.8m, with the majority of this EBITDA ($190.2m) generated from its domestic operations
  • The performance of the domestic business has improved significantly, with EBIT up 300% to $103.8m versus 1H14. However, the EBIT loss on the international business increased from $31.9m to $49.5m
  • While Virgin’s cash balance has increased from the 30 June 2014 position of $783.8m to $1,099.7m, net debt for the 6 months to 31 December 2014 is up overall from $1,169m to $1,422.7m. This is a result of the bond issuance and the currency impact on Virgin’s USD debt. Most of Virgin’s secured aircraft loans and its bonds have been issued in US dollars, and so the principal outstanding expressed in AUD increases when the AUD depreciates against the USD
  • Current Bloomberg consensus guidance is for FY15 EBITDA of $326m, which would give Virgin a net debt / EBITDA ratio of 4.4x based on current net debt levels. If Virgin were to achieve this EBITDA result it would mean a significant improvement from the 8.3x leverage position at FY14
  • Virgin’s improved performance reflects the turnaround in the Australian domestic aviation sector which has more than offset the continued weak performance of the international business
  • USD 2019 bonds are indicatively offered at a 7.09% YTM for wholesale investors only

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 or our general line 1800 01 01 81.

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