Tuesday 07 November 2017 by Leigh Winton Week in review

From the trading desk

Merredin Energy is the newest edition to the FIIG originated bond list. Rising prices and heavy trading in Talen bonds following new energy rules, Frontier 2020 and 2021s favoured over longer dated company issues, Axsesstoday 2020 callable security in supply and popular trades in IMF Bentham and newly available RSEA. The latest Eric Insurance research is available and the AUD/USD weakens following disappointing Australian retail sales data 

What’s trading

AUD

  • Merredin Energy launched its first bond during the week issuing a 7.50% senior secured partially amortising bond maturing in November 2022. We saw heavy trading as investors looked to switch out of some other popular AUD high yield names such as IMF Bentham, Ansett Aviation Training & RSEA. All of these are trading at a premium to par and have locked in healthy returns for investors
  • RSEA became available to retail investors last week. It is a leading specialist retailer and distributor of workwear, personal and work safety products and also a hirer of road safety equipment. The bond offers investors an opportunity to diversify across different industries (Retail – Consumer staples) and offers a yield to maturity of 6.91%. However, investors need to be aware of the potential of an early call on this bond which currently has a yield to worst of 3.69%pa
  • Another FIIG issued bond, IMF Bentham finished a busy week in the AUD high yield sector with strong demand from the institutional market. The bond traded heavily late in the week as investors saw value in exiting IMF at a yield of 6.0%pa and moving into the newly issued Merredin Energy at 7.50%pa

Non AUD

  • Talen Energy senior bonds traded heavily following substantial price appreciation in recent weeks. The US Department of Energy has mandated the Federal Energy Regulatory Commission to consider new rules that would raise power prices to pay more to plants that are considered more resilient. The move has seen the price of the 9.50% July 2022 bond increase by $5.20 for the two week period ending 3 November and the 6.50% June 2025 bond increase by $4.25 for the same period. Demand from the institutional sector remains strong with clients able to exit their Talen positions at indicative yields of 8.70% and 9.37% for the 2022 and 2025 bonds respectively
  • Frontier Communications Corporation senior debt was active early in the week as clients continued to shorten duration by selling the June 2025 bond in favour of the June 2021. Disappointing 3Q earnings released during US trade on 1 November saw the June 2025 fall substantially to become the biggest price decliner in US high yield for that day. Frontier Communications debt was off across the board but the 2025 maturity felt most of the pain; this bodes well for clients who undertook the duration shortening trade

Economic wrap

  • On Friday, the US non farm payroll figures printed below expectations at 261,000 - consensus 313,000, although there were positive revisions to the previous two months’ figures. The unemployment figures, which came in at 4.1% - consensus 4.2%, was seemingly strong but this was driven by a substantial fall in the participation rate to 62.7% from 63.1%. There was also little to cheer the bulls in the wage data that only increased by 2.4% yoy versus cons. at 2.7%
  • Domestically, Australian retail sales continued to be lacklustre, being flat in September and well below the +0.4% consensus. This saw the AUD weaken 0.5 cents against the USD to about 76.60. The RBA meets on Tuesday and while no change in interest rates is expected, it will be interesting to see if the RBA has any comments on low inflation and weak retail sales
  • The Bank of England raised interest rates for the first time since 2007. Whilst the benchmark rate was raised by 0.25% to a level of 0.5%, the Pound fell due to dovish commentary and UK stocks gained

Other news

FIIG arranged a new bond for Merredin Energy who operates a peaking power station in Western Australia. Merredin’s revenue stream comes from the Australian Energy Market Operator, which is 60% government owned. The notes are senior secured pay fixed coupons of 7.50% and amortise with a final maturity in November 2022.

We continue to see owners of the Frontier 2025 and 2023 bonds moving into the 2021 and 2020 securities. As mentioned previously, there are large refinancing hurdles for the company beyond 2021, but its dividend cut and use of secured debt proceeds to tender for some of the 2020 bonds has helped clear the runway to meet the obligations of the shorter dated maturities.

The link to our latest Eric research is enclosed where we discuss its challenging operating and regulatory environment, although results to date are in line with our FY18 forecasts.

We currently have some stock available in the Axsesstoday 7.50% June 2020 callable security. The company has both a fixed and a floating rate security, but our preference is for the fixed rate line because the different debt facilities available to Axsesstoday fund different parts of its commercial equipment loan book, similar to a 1st and 2nd mortgage. A full explanation is available in the Research Report published 28 June.

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