Monday 16 October 2017 by Leigh Winton Week in review

From the trading desk

US CPI missed expectations, Australian households remain highly levered, Frontier Communications attractive after price depreciation while investors took profits in NCIG. IMF Bentham 2020 remains well bid and investors switched out of AAPT 2020 and in favour of USD denominated bonds. Indexed annuities bonds a popular inflation hedge 

What’s trading

AUD

  • There has been significant interest in indexed annuities bonds over the past week as investors look to hedge inflation.  Yields tightened 5bps across the board. The Royal Women’s Hospital 2033 bond traded heavily and supply continues to be good with clients now able to purchase at an indicative yield of CPI+ 2.5%pa. MPC Funding 2033 bond has seen significant interest over the past month where yields tightened 15bps and a further 5bps just last week. There is a small parcel still available at an indicative yield of CPI+ 2.5%pa.
  • The IMF Bentham 2020 bond has seen strong interest from institutional investors with investors taking advantage and exiting their position. Investors who purchased IMF at the most recent tap have seen an annualised return of roughly 14.5%. Currently, investors can exit at an indicative yield of 6.00%pa and we expect continued interest from the institutional market for IMF Bentham.
  • Adani Abbot Point Terminal 7.1% 2020 saw heavy trading due to some unfavourable news in relation to Carmichael development causing the price to dip slightly before rebounding late last week. A popular switch out of Adani was into the USD denominated bonds, including Frontier Communications, Ensco and Barminco, all of which offer attractive yields and portfolio diversification.

Non AUD

  • Telecommunications provider Frontier Communications remained a focus last week after recent price falls provided an attractive entry point for investors seeking high yield. A declining number of subscribers and disappointing earnings results in August saw the price of Frontier debt decrease steadily until early October. The market in Frontier has stabilised over the last two weeks. The two most popular Frontier lines have been the 8.50% April 2020 senior bond and the longer dated 11.00% June 2025 senior bond. Both are currently available to investors at indicative yields of 8.27% and 13.64% respectively
  • Rackspace Hosting was popular last week as clients continued to take profits from NCIG and move into the technology services company. Recent price appreciation in NCIG coupled with an attractive offer in Rackspace made the switch an attractive option for investors looking to move out of the coal sector. The 8.625% November 2024 senior bond from Rackspace is currently in good supply at an indicative yield of 6.83%

Economic wrap

  • US CPI missed expectations on all accounts, most notably in the year on year Core CPI measure that strips out energy and food (1.7% v 1.8% exp.). The Fed has made clear that data will dictate the pace of the tightening cycle, but Yellen was oddly hawkish given these numbers and the concern shown by a number of FOMC members about weak inflation in the latest minutes
  • The RBA released the semi annual Financial Stability Review and noted that households remain highly levered and have limited income growth. The central bank continues to pay attention to the apartment market and ADI lending criteria
  • Consumer confidence surveys from Westpac (domestic) and University of Michigan were both strong last week, highlighting something of a disconnect between central banks and the man on the street

Other news

USD denominated NCIG sub debt continues to be in focus with holders able to realise more than $125. Many investors had taken large positions relative to their portfolios and have been taking profit.

In most cases, our recommendation to shorten tenor and diversify risk has been accepted and we encourage all continuing holders to consider their options. Frontier 2020, RackSpace, and Avon have all attracted inflows from clients who wish to continue holding US dollars.

IMF Bentham remains well bid and investors who received an allocation on primary can realise returns of approximately 10% pa. While we remain comfortable with the credit, the bonds are callable in June 2019 at $101, substantially lower than the prevailing range last week of $103.30 and $103.60.

FIIG Research has published an update on Eric Insurance highlighting ASIC’s review of the sector and the challenging operating environment. Although Eric is now in compliance with its regulatory capital requirements, the bonds have deteriorated in price and have traded in the past week between $94 and $96. Some investors have seen this as an opportunity to add small positions, but we encourage prospective bidders to read the research carefully.

Adani Abbot Point Terminal is marketing a loan via a Singaporean corporate adviser for up to $500m. AAPT has $977m to refinance next year which is 70% of total debt. Successful completion of this task will be a significant positive for the credit. The indicative ask yield of 6.651% on the 2020s is approximately 1.50% wide of the 2018 maturity and much higher than Dalrymple Bay's 2021 bonds that are far less liquid.

AAPT is a coal port constructed in the 1980s on a long term lease from the Queensland State Government. It is not reliant on the proposed Carmichael Mine and is ring fenced from the proposed Terminal Extension project, both of which have been quite controversial. Standard & Poor’s rates the AAPT senior unsecured debt as investment grade, while Moody’s rates it sub investment grade.



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