Tuesday 27 March 2018 by Leigh Winton Week in review

From the trading desk

Subdued market reaction to Fed rate hikes while unchanged Aussie rate outlook continues, Frontier buys back over USD1.6bn in tender results, Rackspace yielding above 8%, investors exit Newcrest following outlook downgrade, and switches to QMS 2022 bond before McPherson’s call date. High demand for foreign DBS 2023 bond, and Emirates and Qatar 2028 bonds. Active trades in new DirectBonds including Bristow, JC Penney and Sprint

What’s trading

AUD

  • DBS Group, a leading Asian financial services group with over 280 branches across 18 different locations, recently issued a 10 year non call 5 year unsecured floating rate subordinated bond. The bond is very highly rated by Moody’s at A3 with an attractive relative value yield. We saw strong demand for this bond through the week with investors now able to purchase DBS BBSW+1.58% coupon, 2023 callable at an indicative yield of 3.75%pa. Many investors chose to switch out of other lower rated subordinated bonds such as:
    • MEBANK-BBSW+2.70%-29Aug19c at an indicative YTW of 3.8% pa
    • Challenger-BBSW+2.10%-24Nov22c at an indicative YTW of 4.4% pa
    • AAI-BBSW+3.30%18Nov20c at an indicative YTW of 3.7% pa 
  • QMS Media continues to be well traded, after we were able to secure a large parcel. We saw many investors use the institutional bid for Mcpherson’s Limited to exit the bond before its call date and move into high yield QMS. The Mcphersons bid is no longer available however, a small parcel of QMS-7.0%-21Nov22 remains, investors can purchase the bond at an indicative YTW of 6.0% pa

Non AUD

  • Trading in the senior debt of gold producer Newcrest Mining was active last week following the decision by research firm CreditSights to downgrade its outlook on Newcrest from ‘outperform’ to ‘market perform’. The change was in response to uncertainty surrounding the company’s Cadia mine after Newcrest suspended operations following a limited breakthrough at the northern tailings damn embankment over two weeks ago. The mine accounts for roughly 50% of Newcrest’s EBITDA, highlighting the business concentration risk of the credit. This prompted a few clients to exit positions in the gold producer. Holders looking to do the same can expect to sell at the following indicative yields: 2021 – 4.12%, 2022 – 4.18%, 2041 – 5.45%
  • Elsewhere in the USD space, trading was mixed as most clients looked to enter positions in some of FIIGs more recent additions to the DirectBonds list. Most popular among them were industrial aviation services provider Bristow Group, clothing retailer JC Penny and telecommunications provider Sprint Corp. Each are in good supply with indicative offer yields listed below
    • BRISTOW-8.75%-01Mar23-USD – 7.51% pa
    • JCP-8.625%-15Mar25-USD – 9.07% pa
    • SPRINT-7.625%-15Feb25-USD – 7.43% pa

Economic wrap

The market reaction to the Fed rate hike was limited with little change in bond rates after the FOMC ratified its expectation of three hikes in 2018. Fed officials did however project a steeper path of hikes in 2019 and 2020. 

US data continues to be strong with Durable Goods numbers Friday beating expectations. US PCE deflator is released this week with a forecast of 1.9% according to Bloomberg. This is the Fed’s preferred inflation measure.  Additionally, the US Treasury auctions circa USD300bn of debt which is its largest weekly offering ever. This includes USD30bn of 2.5 and 7 year notes and markets will focus on the level of offshore demand, particularly from China.

Locally, the minutes of the March RBA meeting continued to point towards an unchanged cash rate in 2018. There was some mention of optimism in GDP growth and of CPI inflation to exceed 2%, and that US government bond yields had surpassed the equivalent Australian benchmark for the first time in 20 years.

Other news – AUD high yield available

The DBS floating rate note continues to attract buyers looking for higher rated securities. The A- (S&P equivalent) rated Tier 2 subordinated note is trading at a spread over BBSW of 1.22%.

In a similar vein, our two middle-eastern bonds continue to be in demand for purchasers looking to increase the quantity of A rated securities held. The Emirates NBD (ENBD) 4.75% 2028’s are trading at a yield of 4.40% pa and the QNB Finance 4.90% 2028’s are trading at 4.44% pa.

Oil has been rising strongly over the past two weeks with an 8.5% increase for Brent and a 7.4% rise for WTI. Current high prices appear more a function of increased geopolitical risk (mainly between Iran and Saudi Arabia) rather than changes in fundamentals. Our offshore credit provider views Transocean (RIG) as being better placed to perform if oil falls, whereas Ensco (ESV) and Noble (NE) are less likely to perform with lower oil prices.

Rackspace is finding buyers with the yield for its 8.625% USD bond above 8.00%. The bonds are positively viewed by our offshore credit research provider, who notes that Rackspace has reasonable gross leverage, strong free cash flow margins and a long runway until its term loan matures in 2023.

Frontier tender results were released where the company purchased just over USD1.6bn of 2020 and 2021 securities. This was funded via an issuance of USD1.6bn of 8.5% 2nd lien notes, maturing April 2026.


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