Tuesday 24 October 2017 by Leigh Winton Week in review

From the trading desk

Improving Australian unemployment data, Mackay Sugar puts cogeneration asset sale on hold, NCIG 2027 bond reached a new high and heavy trades in Rackspace. IMF Bentham investors switch to USD denominated bonds including Avon 2022 and Frontier 2020s, inflation securities rallying buoyed by expectations of higher inflation and RMBS supply exhausted

What’s trading

AUD

  • The inflation hedge has been popular, although supply is limited with no new ILBs coming to the market since before the GFC. This has caused yields to tighten significantly in recent times. However, we have supply of the Civic Nexus IAB 2032 bond, which was issued to fund the construction and maintenance of the Southern Cross railway station in Melbourne. These are currently trading at an indicative yield of CPI+2.47%pa
  • Continued interest from the institutional market for the IMF Bentham 2020 bond has investors taking advantage and exiting their position. This has been a good opportunity for investors to decrease their exposure to high yield AUD bonds as many investors have chosen to switch into USD denominated bonds, including the Avon 7.875% 2022 and Frontier 8.5% 2020 bonds. Both offer a pick up in yield as well as sector and geographic diversification. Currently, investors can exit at an indicative yield of 6.00%pa
  • RMBS has been another popular product of late and there have been numerous new issues. Unfortunately, all are significantly oversubscribed.  However, we were able to obtain some attractive C notes (rated A) yielding 5.24%pa. As expected, these were all snapped up quickly and we are currently flat in all RMBS lines

Non AUD

  • Newcastle Coal Infrastructure Group has been a continued focus for clients since the September launch of a senior secured bond pushed the price of their unsecured line up. The fixed rate March 2027 bonds reached a new high late in the week as bid interest remained strong among institutional counterparties. Clients looking to exit their position in the unsecured bonds can do so at an indicative yield of 8.37%p.a. There is a new research note for investors with a wholesale login
  • Technology services company Rackspace Hosting continued to trade heavily last week as clients looked to switch exposure from the energy sector to other opportunities in the USD high yield space. Also popular was global beauty manufacturer Avon Products following an attractive offer from the institutional market. Both Rackspace and Avon remain available at indicative yields of 6.76%pa and 6.47%pa

Economic wrap

  • US economic data had a relatively quiet week with Empire Manufacturing at 30.2 (consensus 20.4), NAHB Housing Market Index at 68 (cons. 64) and Existing Home Sales at 5.39m (cons. 5.30m), beating expectations. Industrial Production met with consensus, whereas Capacity Utilisation, Manufacturing Production, Housing Starts and Building Permits were all soft.
  • Australian employment data surprised on the upside as it added 19,800 jobs (consensus +15,000) in September. That was split between a gain of part time and full time of 13,700 and 6,100, respectively. The unemployment rate fell to 5.5% (from 5.6%). This is the lowest rate seen since March 2013 and reflects the strength in employment growth over the past 12 months
  • Japanese Prime Minister Abe was re-elected on Sunday with his ruling coalition retaining its super majority

Other news

Inflation securities have rallied (yields lower) in recent weeks buoyed by expectations of higher inflation. The former RBA governor, Glenn Stevens was the latest to comment, in a white paper published by Ellerston Capital about the risk of inflation in global financial markets. The latest CPI figures are released on Wednesday with expectations of a +0.8% quarterly number and a 2.00% annual number, according to Bloomberg.

The Civic Nexus 2033 IAB security was actively traded last week with the margin above CPI at circa 2.50%. The Sydney Airport 2030 security is no longer trading at a discount to its indexed face value, although with the margin over CPI at 2.91%, we see some value and would expect to have strong demand at a margin of 3.00%.

Investors willing to extend maturity have been looking at moving from the Downer 2022’s to the Asciano 2027’s. The coupon increase is 0.90% and the yield to maturity increase is 0.40%. Both bonds are available for wholesale investors with Asciano rated a single notch lower at BBB-.

Mackay Sugar has agreed to put the cogeneration asset sale on hold and seek other options to strengthen the balance sheet. If management’s plans are not completed in a timely manner, as FIIG Research has previously stated, there is a growing possibility that bonds may not be repaid in full at the 5 April 2018 maturity date.

Opportunistic buyers who believe they have experience in navigating corporate restructurings may wish to consider allocating some capital towards these Mackay Sugar securities. In saying that, there is an obvious and material risk that these bonds may fall from current levels. Our latest research is here.


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