Tuesday 20 October 2015 by Casper Wolski Week in review

Trading desk - BHP Billiton subordinated bond now available

We have added the BHP Billiton USD notes to the DirectBond list. The two USD lines are a part of the renowned mining, metals and petroleum company’s issue of the largest corporate hybrid in 2015 to date. On the trading front, supply remains good in the Asciano floater and Sun Group fixed rate bonds as high quality investment grade options. While popularity in trading BlueScope and Barminco USD bonds continues

Economic Wrap

Last week BHP Billiton (BHP) issued a USD6.42bn multi-currency subordinated bond transaction. This was the largest global corporate issuance of its kind this year and one of the largest ever. Demand was for more than USD13bn worldwide, more than twice the amount needed to fulfil BHP’s target, clearly demonstrating the relative perceived value of the notes. BHP issued five notes in total, rated A- rom S&P, across USD, GBP and EUR. With terms to first call between 5 and 10 years, the coupons set on the subordinated bonds ranged from 4.75% to 6.75%. We have added the two USD lines to the DirectBond list:  

Domestically, Westpac announced a $3.5bn discounted equity rights offer, which is expected to boost its Tier 1 capital ratio to 14%. Interestingly, Westpac also decided to increase its variable mortgage rates by 0.2% from 20t November. The decision to raise these rates is expected to give the RBA further impetus to cut the cash rate if the other big three banks follow suit. Given that the RBA has previously cited a need to contain upside risk to the housing sector, while growth in other sectors of the economy lags, the move by the banks to raise mortgage rates may sit well with the RBA and allow them to deliver a rate cut to stimulate other sectors, while leaving effective mortgage rates largely unchanged.

In the UK, CPI printed at -0.1% for September, the second time this year that monthly inflation has been negative. The negative inflation figure comes a week after Bank of England Governor Mark Carney stated that he believed Britain’s economy possessed “the domestic strength” to support “the prospect of limited and gradual rate increases over time”. Carney has provided numerous hawkish statements throughout the year regarding a rate hike within the UK. He has indicated that he still believes an increase should occur this year despite inflation remaining around 0% for the year. Market expectation is for a rate raise in early 2017, which seems more likely given the Bank of England’s mandate to maintain 2% year-on-year inflation.

In the US, demand has been sufficient for the one month Treasury bills to trade at negative yields, where investors would effectively be paying the US government to borrow their money. Interestingly, the Treasury does not permit the auctioning of its debt at negative yields, so these instruments are issued at a 0% yield. Buyers can immediately sell into the secondary market at a negative yield for a quick profit. The regular issuing of government debt is contributing to the country’s rapid approach towards its ‘debt ceiling’, the limit on the amount of debt that can be incurred as set by Congress. US Treasury Secretary Jacob J. Lew has indicated that on or around 5 November, the Treasury will have exhausted measures to stay under the ‘debt ceiling’ and may be left with less than USD30 billion cash, with daily expenditures currently sitting at USD60 billion.

Bonds rallied over the week, namely the longer term instruments. The 3 and 10 year Australian Government bond yields were down 9 and 12 basis points respectively to 1.82% and 2.60%. With the Australian dollar also down on the week, falling from 73.30 US cents to 72.64 US cents on Friday.

Flows

Today, we have added the recently issued BHP USD subordinated bonds to the DirectBond list.  There has been a lot of enquiry from clients, given the highly rated non-AUD exposure in a household name. Full details of the multi-currency issue are available in Alen Golubovic’s note from last week, BHP Billiton issues multi-tranche, multi-currency bond.

In trading last week investors continued to favour high quality investment grade senior debt. We picked up stock in the Sun Group 2024 floating rate note and Asciano 2025 fixed rate bond; supply in these names remains strong.

In the inflation linked space we had an attractive offer in the Novacare 2033 inflation linked annuity. At a yield to maturity of around 5% (assuming 2.5% inflation), investors saw value in adding this high quality infrastructure asset to their portfolios. The Novacare 2033 is still available but supply is limited. So, if you are interested in this bond please contact your dealer.

In non-AUD trading the Barminco and BlueScope USD bonds, both maturing in 2018, continue to attract significant interest.

Please note that pricing is indicative only and subject to change, accurate as at 19 October 2015.