Monday 25 September 2017 by Leigh Winton Week in review

From the trading desk

China and UK downgraded by S&P and Moody’s respectively, AUD falls below 80 cents despite USD weakness, Newcastle Coal issued a USD 10 year senior secured bond. Continued demand in RMBS with new Apollo 2017-1 notes and strong trades in Sydney Airport 2020 and 2030s. New DirectBonds from JC Penney and Ei Group and new FIIG originated bond issue – Lucas Total Contract Solutions 8.00% 2022 bond

What’s trading

AUD

  • Last week, we originated a new fixed rate bond from Lucas Total Contract Solutions that matures in 2022 with a yield of 8% per annum. Lucas TCS is a civil construction, infrastructure and resources contractor that has worked with some of Australia’s leading mining and civil construction organisations. This created some selling of in demand bonds such as Impact 8.5% 2021, Cash Converters 7.95% 2018, SCT 7.65% 2021 and Capitol Health 8.25% 2020 bonds, to name a few. This highlights the opportunities surrounding new issues for those wait listed for existing FIIG originated issues RMBS continued to be in strong demand. These 'A' rated notes have a weighted average life of (WAL)  of 5.2 years and a forecast yield of 5.01%. This is amazing relative value, consequently the notes traded heavily late Friday afternoon. We expect this to continue in the coming week. 
  • The Sydney Airport bonds have again been an active trade for investors with good two way flow between them. Buyers of the 2020 bond have been looking to reduce their interest rate exposure and move further out the tenor curve, whereas the opposite stands for the 2030s. However, a higher yield rewards the longer dated bond holders. Currently,  there is an increase in buying of the Sydney 2020s and we are strongly bid for these with this trend expected to continue

Non AUD

  • US department store chain JC Penney’s July 2023 senior bond has been active following its addition to the DirectBonds list last week. The retailer operates 1,011 stores across 49 states in the United States and Puerto Rico. The senior debt pays a semi annual fixed rate coupon of 5.875% and is available to wholesale clients in minimum denominations of USD10,000. Supply is currently available at an indicative yield to worst of 4.71%
  • Newcastle Coal Infrastructure Group’s March 2027 senior unsecured line was a big mover on the week after a new, senior secured bond issued by the company priced significantly tighter than guidance. This saw the price of the unsecured bond jump USD5.75 by the close of the week. The bond has since rallied further and is currently available to clients at an indicative yield to call of 8.33%
  • Elsewhere in the USD space, activity was muted as many investors focused on new AUD high yield issuance. One exception was Rackspace Hosting which saw moderate demand late in the week. Supply of the technology services company remains good; clients are able to enter positions at an indicative yield to worst of 6.37%

Economic wrap

  • China and the UK were both downgraded last week. Standard and Poor’s (S&P) cited rapid build up in Chinese debt and credit growth for the one notch downgrade to A+. while Moody’s downgraded the UK to Aa2 (to match the S&P AA equivalent) citing concerns about public finances and the impact of Brexit
  • Oil continued gains with West Texas Intermediate (WTI) closing the week above USD50.00, whereas iron ore continued its recent decline, closing at USD71.55 compared to above USD77.00 earlier in September. This has weighed on the Australian Dollar, moving it back below US80 cents, despite continued US dollar weakness
  • German and New Zealand elections were largely uninspiring for major parties, although at least Germany knows who their leader will be with Merkel winning a fourth term. It could still take weeks for NZ to know which party will work closely with Winston Peters NZ First party to secure a governing coalition
  • Credit spreads widened a little throughout last week from their recent lows, with the US investment grade index widening 6% on the week

Other news

Newcastle Coal Infrastructure Group (NCIG) issued a 10 year senior secured USD note in USD500m. The majority of the issue went to Asian investors with the yield already tightening to below 4.25% for the BBB rated entity. This caused the widely held 12.5% coupon sub debt to rally in the last week to trade between USD125.00 and USD128.00, providing significant gains to many existing investors.

JC Penney is a new USD bond available to FIIG investors via our DirectBbond process. The factsheet for the major retailer’s only secured bond is available here with the yield to maturity above 5.00%.

Ei Group (formerly Enterprise Inns) is a new GBP bond available to FIIG investors via our DirectBond process. The factsheet for the UK’s largest pub company’s bond is available here with the yield to maturity above 4.00%.

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