Tuesday 21 November 2017 by Leigh Winton Week in review

From the trading desk

Strong Australian employment data, rise in US CPI. Switches into the shorter dated Frontier 2021, renewed interest in the Avon 2022 and popular trades in AUD high yield bonds following call on IPG 2019. Newfound RMBS lines offering good value. The Noble 7.75% bond benefits from Talen exits and Fitch assigns Adani Abbott Point an investment grade rating

What’s trading

AUD

  • The FIIG issued Integrated Packaging Group 2019 bond was called early last week at a price of $102, allowing investors the opportunity to move into other high yield AUD and USD names. We saw steady buying in an array of AUD bonds, including the short dated Cash Converters 7.95% 2018 bond at an indicative yield of 6.7%pa; NRW 7.5% 2020 bond at 5.35%pa; and the hard to find Centuria 7% 2021 bond that is currently trading at an indicative yield of 5.5%pa. We expect supply to remain strong in these names for the coming week
  • After a quiet few weeks in the RMBS space, we managed to find some lines offering good value. Some ‘Baa2’ rated D notes were very popular offering an expected yield of 5.55% and a WAL of 3.5 years. We also saw strong buying in some ‘AA’ rated B notes that have a WAL of 6.1 years, offering a forecasted yield of 4.25%pa. We currently have a small parcel of these notes available
  • Subordinated bank debt has seen a strong price rally in the past few weeks, however failing to dampen investors’ demand for these bonds. Some investors have been selling out of these lines and taking a healthy profit, and switching into higher rated RMBS and popular AUD corporate bonds such as the Liberty 2020 bonds whenever we find supply. There is continued strong demand for sub debt lines and we expect this trend to continue

Non AUD

  • The switch from the Frontier June 2025 callable USD bond to the Frontier September 2021 USD bond continued again this week. Clients looked to lower portfolio risk by moving into the shorter dated bonds, even though the yield is only slightly less. The Frontier 2021 bond is available at an indicative yield to maturity of 14.70%pa
  • Last week, there was renewed interest in the Avon August 2022 USD bond as clients added it to their portfolios as a diversifier. This bond is secured and offers a higher recovery rate compared to other bonds in the debt pile, appealing to those clients who believe the high yield USD cycle is coming to an end.  It is offered at an indicative yield to maturity of 7.20%pa   

Economic wrap

  • Strong Australian employment data up 3,700 to 12.29 million last month compared to expectations of 18,800. Despite the headline number coming in below consensus, hours worked rose by 0.3% and full time employment rose by 24,300. This offset a 20,700 drop in part time employment and notably, the unemployment rate fell to 5.4% from 5.5%
  • US CPI rose by 0.1% in October following a 0.5% rise in September. This equates to a year on year increase of 2.0% compared to 2.2% in September. Core CPI increased by 1.8% on a year on year basis
  • The US 2Y-10Y curve flattened further over the week to unprecedented levels not seen since 2007. This move has meant investors are not being rewarded for lending for longer
  • Fed fund futures continue to price in a rate hike of 0.25% in December. FOMC minutes will be released later this week

Other news

In US high yield, we continue to like Avon with the yield at or above 7%. Our external third party research provider has an Outperform recommendation on these senior secured 2022 bonds, despite a weak quarter and continued bad debt expense in Brazil. The bond is the only senior secured security within Avon’s traded debt, and has a high recovery rate from S&P who assign the issue a BB- rating. The Avon 2022 Factsheet is available here.

Elsewhere in USD, the shortening maturity theme in Frontier continues with some clients starting to purchase the 2021 maturities as a new outright exposure to the entity. Frontier is clearly very high risk as the yield circa 15% implies. Both the July and September 2021 bonds are assigned a ‘B’ credit rating.

Noble’s 7.75% USD bond (rated ‘B’) has been the beneficiary of some clients exiting Talen.  This theme seems set to continue this week with the yield on Noble above 10%.

Fitch has assigned Adani Abbot Point Coal Terminal an investment grade rating with a stable outlook. The rating agency notes the ratings take into account stable cash flows from medium to long term ‘take or pay’ contracts. This is some  good news for the entity which has suffered from the Adani name and the politics associated with the Queensland Carmichael project in recent weeks.

Given that US markets often require two ratings, the extra rating may be the precursor to a USD bond issue to refinance the large upcoming AUD maturities.

Merredin’s 7.50% coupon 2022 bond started trading this week, with stock hard to find for buyers below $101.50.


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