Monday 05 March 2018 by Leigh Winton Week in review

From the trading desk

RBA expected to leave rates unchanged, Dean Foods and Sprint provide USD high yield exposure, investors switch out of Talen following dividend payout, Qantas curve remains tightest on record, good two way flows between the Sydney Airport ILBs and active trades in FIIG issued bonds, including zipMoney and Cash Converters. McPherson’s will call its bonds in March 

What’s trading

AUD

  • Clients continue selling out of Qantas, as its curve trades at its tightest level on record. There has been strong demand from the institutional markets for these bonds. Currently, investors can exit their positions in the Qantas 2020 bond at an indicative yield to worst (YTW) of 3.35% pa, the Qantas 2021 bond at 3.48% pa, and the Qantas 2022 bond at 3.63% pa
  • Sydney Airport also continues to be popular with two main themes driving the trading:
    • Investors looking to add long term inflation protection to their portfolios are buying up the Sydney 2030s at an indicative YTW of CPI+2.94%.
    • Investors looking to shorten duration in their portfolios while also seeing great relative value in the Sydney 2020s that can be purchased at an indicative YTW of CPI+2.20%
  • Active trades in the FIIG issued bonds last week as clients looked to take profits. The most actively traded name was the Cash Converters 7.95% 2018 bond, seeing great two way flow. Investors who sold were looking to exit their positions early to avoid any refinance risk that may arise, while the buyers were seeing fantastic value in the short dated bond.

Non AUD

  • US telecommunications provider Sprint Corp continued as the main focus for investors looking for exposure in the high yield USD space last week. The fixed rate February 2025 senior debt remains in good supply at an indicative yield of 7.30%, available to wholesale clients only
  • Talen Energy became a sell target for many investors last week following the announcement that the company would pay a $500m dividend, despite EBITDA set to decline fairly significantly over the next two years. This was seen as negative for bondholders, many of whom chose to lighten exposure in Talen in favour of other high yield options. Investors looking to exit Talen can expect to do so at indicative yields of 10.15% for the July 2022 bond, and 11.73% for the June 2025 bond.
  • Focus was mixed elsewhere in the USD space with food and beverage company Dean Foods, data services provider RackSpace Hosting, and pharmaceutical manufacturer Mallinkrodt all in demand. All three bonds are still available in good supply at the below indicative yields and Standard & Poor’s rating:
    • Dean Foods 6.50% March 2023 – 6.29%, rated BB-
    • RackSpace 8.625% November 2024 – 7.00%, rated B
    • Mallinckrodt 5.625% October 2023 – 8.73%, rated BB-

Economic wrap

In a busy week of economic news, the focus for investors will be on US average earnings and US jobs data; both could have implications for rate hike timing and expectations. Forecasts are for a 0.2% monthly increase in earnings which will translate to a 2.8% yearly change according to Bloomberg. The US unemployment rate is expected to print at 4% for February with non farm payrolls circa 200,000.

In Australia, the Reserve Bank of Australia is expected to leave rates unchanged at Tuesday’s meeting. Our domestic GDP numbers will be released on Wednesday, 7 March, with consensus expectation of a 0.5% gain for the December 2017 quarter.

Other news – AUD high yield available

zipMoney tapped its FIIG originated Class B note for AUD20m increasing the amount outstanding to AUD60m. The tap was quickly sold and is part of a broader upsized warehouse funding action to AUD360m.

McPherson’s Ltd is calling all of its fixed and floating rate bonds on the call date of 31 March 2018. The fixed rate bond is callable at $103.00 and the floating rate bond at $101.50. This will potentially mean an additional AUD25m will be looking to be reinvested in the lead up to Easter, so please talk to your relationship manager to discuss suitable options.

All three Qantas bonds have been actively traded as investors consider alternatives post the Qantas results and our note last week. We continue to believe there are better options for owners of the bonds.

Holders of Talen Energy need to reconsider their reasons for holding onto the security. The company has announced a $500 million dividend payable to equity holders leading to a negative revision in an outlook by Moody’s. We dislike any moves that seem to give preference to equity holders over bondholders, especially when the company is in a highly leveraged position. Talen has also not made it simple to access its results information which we dislike.

Dean Foods and Sprint continue to be in demand for US dollar investors. As a reminder, Dean Foods is the largest processor and distributor of milk and various other dairy products in the US, whereas Sprint is a telecommunications company. Although the telecommunications sector underperformed in 2017, Sprint benefits from being a mainstream wireless 4G provider with strong equity backing compared to Frontier who runs a rural fibre network.


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