Tuesday 13 June 2017 by Leigh Winton Week in review

From the trading desk

Banco Popular bailed out and purchased by Banco Santander, the UK held an election and we DirectBonded a USD bond from Rackspace and an AUD bond from NEXTDC

What’s trading

We have DirectBonded a new USD bond from Rackspace Hostings Inc. Rackspace operates within the digital infrastructure market and is a leading global multi cloud solutions provider. They are similar in many respects to NEXTDC and Global Switch, although there are subtleties with each in services provided, financing, and ownership. The bond pays coupons at 8.625% semi annually, has a yield to worst of 6.50%, and is rated B+, sub investment grade.

Cash Converters’ fixed rate 2018 bond continues to trade between $101.30 and $101.60, with the yield above 6.60% even though maturity is less than 18 months. Cash Converters has always been a divisive business – the relatively high rate of return on offer is compensation for not only this, but also the risk of further litigation, a changing regulatory environment, and the approaching refinancing.

Axsesstoday is issuing A$10m in secured subordinated floating rate notes, paying BBSW +6.50% quarterly.

We have ongoing access to residential mortgage backed securities (RMBS), although tranche sizes are often small. RMBS continue to offer compelling value when compared to equivalently rated corporate bonds, particularly investment grade bank and insurance sub debt. Unlike corporate bonds, RMBS become structurally more secure over time, benefiting from an improving underlying exposure as the pool of mortgages pays down.

The NEXTDC 2021 bond starts trading this week and demand is likely to be very strong. On primary issue, the deal was upsized significantly to A$300m as well as pricing tighter than guidance. Yield on the 2021 bond is likely to be just above 5.50%.

Aurizon has hired ANZ, CBA, Mizuho and NAB for an Australian dollar bond. The investment grade issuer is in the market for seven year funds, with the yield expected to be around 4.3%.

Economic wrap

  • Australian GDP came in at +0.3% with some good component numbers. Of note was the agriculture sector having its strongest run in four years, and both professional services and financial services picking up after several quarters of declining growth. On the flipside, the single biggest driver of growth is household spending, which shifted from weak to weaker
  • The US Federal budget swung back into deficit in May after having been in surplus in April
  • The Fed is virtually guaranteed to raise rates at the FOMC meeting this week. More attention will be on the accompanying statement and the outlook for inflation and further rate hikes
  • Short British Pound positions were increased last week according to the official Commodity Futures Trading Commission data. Selling is likely to continue this week as Prime Minister May tries to form a minority government amidst ongoing criticism of her election campaign
  • Tech stocks in the US sold off 3% in the last two sessions with the NASDAQ 100, having its largest decline in nine months

Other news

Political events led the way last week with yet another unexpected result in the UK and a majority result for Macron in France. The UK result once again shocked markets which were following the opinion polls and expecting an easy Tory victory. Markets didn’t react strongly but perhaps they should have, as this result – following several months of weak economic data – heightens the risk that Brexit could create significant damage to the UK economy.

On the other hand, the French result was the best possible one for markets. Macron can now make the reforms so desperately needed, and could wind up with 455 of the 577 seats in France’s national assembly. Macron’s government is a technocratic one, meaning that he will have experts in each policy area rather than left and right philosophical leanings. Unlocking underutilised labour in France could be the start of an economic purple patch for France, and good news for Europe as a whole if he can do it.

Banco Popular has been purchased by Banco Santander for a measly €1 in a move that is bad news for subordinated bondholders. Additional Tier 1 securities were written down and Tier 2 instruments converted into shares. Banco Santander will raise about €7bn through a rights issue to improve their balance sheet as a result of the transaction.

On the US front, former FBI Director James Comey gave testimony before the US Senate. Most of his comments in the open session had been well telegraphed beforehand. Uncertainty over the position of President Trump makes his legislative agenda more difficult to pass – US markets have unwound some expectation of promised tax reform and infrastructure spending.

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