Tuesday 05 May 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: The RBA cuts rates to 2.0%; US GDP weaker than expected and FOMC likely to delay rate rises; the yield curve continues to steepen; CBL Corp available to retail investors; and company/result updates for Cash Converters, Coffey International, Emeco and Virgin Australia

Economic wrap

RBA cuts: Yesterday, the RBA cut the official cash rate by 25bps to a historic low of 2.0% in a move that was predicted by the majority of economists.

US GDP:  US GDP fell short of expectations at just 0.2% in the first quarter, compared to consensus expectations of 1.0%. The main reasons for the slow growth have been attributed to consumer spending increasing at less than half the pace of the prior quarter, whilst exports contracted simultaneously.

FOMC minutes: The US Federal Open Markets Committee (FOMC) seems increasingly likely to delay their monetary policy tightening, following minutes released from their April meeting. Growth was labelled as having “slowed during the winter months”, down from “moderated somewhat” at their last meeting. The FOMC stated that “the pace of job gains moderated” and that despite real incomes rising and consumer sentiment apparently remaining high, household expenditure is down. Whilst the FOMC has not ruled out a rate rise in June, their weaker outlook on US economic activity suggests that the hike is unlikely to occur in June.

AUD over 80c:  In currencies, the Australian dollar gained moderately against the USD following the release of the softer-than-expected US economic data. Moreover, despite clearing 80 US cents, the Aussie suffered a late fall due to the dual factors of falling iron ore prices and increasing market apprehension ahead of the RBA’s meeting this week. Overall, our dollar finished the week at 78.51 US cents, up from 78.18 US cents but down from a mid-week peak of 80.64 US cents. Post the RBA rate cut, it was trading around 79 US cents at the time of writing, actually up over half a cent on the pre-rate cut level.

Yields:  Australian government bond yields rose for the week, following US data and yields and also in preparation for this week’s RBA meeting. Our 5 year Government bond yield rose by 8 basis points to finish at 2.11%, while the 10 year Government bond yield rose 20 basis points to finish the week at 2.69%. Over the same period, US 5 year Treasury yields rose 16 basis points to 1.50% and US 10 year Treasury yields rose 19 basis points to a 7 week high of 2.11%.

The steepening of the yield curve has been an ongoing trend since February, with longer dated bond yields rising relative to short dated bonds and cash. In that time we have seen 10 year yields increase by 30 basis points, while the cash rate has dropped by 25 basis points, highlighting opportunities in the longer end of the curve. 

For further information on the RBA rate cut and the yield curve, see the article RBA drops rates again: Where can I invest my cash?

Flows

High trading volumes have continued in the Royal Women’s Hospital (RWH) inflation linked annuity bond (IAB). With many investors reducing exposures across other IABs and inflation linked bonds (ILBs) to add the RWH to their portfolios. As a result, we have excellent access in the inflation linked space. Some indicative offer yields below (assuming 2.5% inflation):

  • CIVICNEXUS-IAB-0%-15Sep32                 4.81%
  • MPC-IAB-0%-31Dec33                             4.84%
  • JEM NSW Schools IAB-0%-28Nov35          4.94%
  • JEM SOUTHBANK IAB-0%-28Jun35           4.98%
  • RWH-IAB-0%-30Jun33                            5.53%
  • Praeco-IAB-0%-15Aug20                         4.53%
  • SYDAIR-ILB-3.76%-20Nov20                   4.82%
  • SYDAIR-ILB-3.12%-20Nov30                   5.35%
  • ENVESTRA-ILB-3.04%-20Aug25               4.40%

With Newcrest’s recent positive quarterly report and yields spiking in the US, we saw a lot of buying activity. Supply in these USD lines remains strong. Indicative offer yields below:

  • NEWCREST-4.2%-1Oct22 – USD               4.52%
  • NEWCREST-5.75%-15Nov41 – USD          6.16%

We have seen good two way flow in Fortescue USD bonds. Bond prices remain volatile in line with iron ore prices with indicative two way bid / offer yields below:

  • FMG-8.25%-1Nov19-USD                        11.46% / 10.69%
  • FMGAU-6.875%-1Apr22- USD                  12.43% / 11.65%

CBL Corporation Ltd: Becomes available to retail investors and peruses an ASX/NZX listing

After a one year ‘seasoning’ period, the CBL 8.25% 17 April 2019 medium term notes are now available to retail investors.  CBL (a NZ based insurance/reinsurance group that has been operating for more than 40 years) is also considering listing on the NZX and/or ASX stock exchanges seeking to raise between NZ$90-100m of new capital.  Please click here for more information.

The notes are available at an indicative YTM of 4.30% and add to the range of retails bonds offering attractive yields including PAYCE, PMP Ltd, Silver Chef, Cash Converters, Qantas, G8 Education and Mackay Sugar.

Cash Converters 3Q15:  Continued solid growth

Strong demand in Australia for Cash Converters  (CCV) financial services continues to drive the group’s growth, while UK operations continue to be a drag on earnings as CCV adjusts to the new regulatory regime. The CCV notes are available at an indicative YTC of 4.86% and 5.98% YTM. Please see Cash Converters 3Q15:  Continued solid growth

Coffey International 3Q15:  Restructuring and impairments

Coffey released its 3Q15 trading update as well as a strategic update to the ASX on 29 April 2015.  The bonds have fallen in price and are indicatively priced at around $97 with a YTM of 7.99%.  Please see Coffey International 3Q15: Restructuring and impairments.

Emeco 3Q15: Challenges continue

Emeco updated the market on its 3Q15 performance last week. At face value, the announcement paints a positive picture with revenues higher but provides limited further details on the company’s third quarter financial performance. Our view is that, while positive signs are emerging for the business, FY15 EBITDA may fall short of previous guidance of $50m-$60m. Without a strong fourth quarter performance, we continue to see further challenges on the credit outlook for Emeco as a standalone business.

With the potential for FY15 EBITDA/interest coverage levels to edge closer to 1.00x-1.25x levels if EBITDA falls short of previous guidance, investors may consider that now is an opportunity to de-risk their position in Emeco. One possibility is to switch from Emeco into Ausdrill, which offers a high yield, is a comparatively stronger credit than Emeco and has experienced a solid run in recent times with two large contract wins. Emeco is currently indicatively offered at a YTM of 16.65% versus Ausdrill at 12.47%.

Alternatively, bondholders may want to hold off on trading Emeco until an outcome on the proposed transaction with Orionstone is resolved. The company recently announced it is progressing talks with Orionstone to assess the benefits of a merger. We consider a merger with Orionstone would be credit positive for Emeco bondholders if it were to occur.

For more information see Emeco update on third quarter performance.

Virgin Australia 3Q15: Narrowing of loss

Virgin Australia reported its third quarter results on 1 May 2015. The company delivered an underlying loss for the quarter but still representing a strong improvement on the prior year’s performance.

For more information see Virgin reports narrower third quarter loss.

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