Monday 09 April 2018 by Leigh Winton Week in review

From the trading desk

US jobs figures reverse previously upbeat employment growth, Rackspace a standout USD high yield trade amidst IPO speculation, FIIG originated IMF Bentham now available to retail investors with strong supply, and CML calls its fixed rate notes in May. Investors switch into new DirectBonded IAG 2044 bond from other subordinated debt and two new DirectBonds from Teva Pharmaceuticals maturing in 2023 and 2026


What’s trading

AUD

  • Australia’s largest litigation funder IMF Bentham’s 7.40% 2020 bond became available to retail investors last week. We saw strong demand in the name as investors looked to diversify their portfolio and minimise risk given litigation funding has a low correlation to general economic conditions. Investors have been able to purchase the bonds at an indicative yield to maturity of 4.00%pa and supply is strong
  • Insurance Australia Group’s (IAG) recently issued 26 non call 6 year BBSW+2.10% bond is popular with investors looking to add investment grade paper to their portfolios. We saw strong institutional demand and as a result the bond traded higher throughout the week. Forecast yield to worst (YTW) is 4.30%pa with many clients looking to switch out of other subordinated debt bonds and into IAG, including the following:
  • MEBANK-BBSW+2.70%-29Aug19c at an indicative YTW of 3.8%pa
  • BENAU-BBSW+2.80%-29Jan19c at an indicative YTW of 3.8%pa
  • AAI-BBSW+3.30%18Nov20c at an indicative YTW of 3.7%pa
  • Investors took the opportunity to sell into an institutional bid for the Royal Women Hospital’s 2033 index annuity bond. Investors were able to exit their positions at an indicative yield of CPI + 2.89%pa. There is currently no further demand in the institutional market for the name.

Non AUD

  • Rackspace Hosting was the standout among USD denominated high yield last week. The price of the company’s 2024 fixed rate, senior bond declined markedly during the last week of March following 4Q17 results that disappointed markets. Despite this, our independent research firm reiterated its ‘outperform’ recommendation on the bond citing reasonable gross leverage and strong free cash flow margins, and stating that investing in the credit is even more enticing given the recent price weakness. Rackspace 2024 is still in good supply. Client’s seeking to add this to portfolios can expect an indicative yield of 8.17% pa
  • Two new securities from Teva Pharmaceuticals Industries Ltd (Teva) were added to the DirectBonds list last week, expanding FIIG’s offerings in the pharmaceutical sector. Teva is the world’s largest generic medicines producer, leveraging its portfolio of more than 1,800 molecules to produce a wide range of generic products in nearly every therapeutic area. Both Teva bonds are senior fixed rate maturing in 2023 and 2026. Both maturities are currently available to wholesale clients only at indicative yields of 5.47%pa and 5.58%pa, respectively.

Economic wrap

US job figures missed expectations, reversing the trend of upbeat employment growth since the beginning of 2018. Friday’s data release showed nonfarm payrolls increased by 103,000 compared to market expectation of a 193,000 rise.

This was a sharp decline from 326,000 jobs created in February, but may be due to severe weather that hit the north eastern seaboard in March. The headline unemployment rate missed forecasts printing at 4.1%, although average hourly earnings growth met expectations of a 2.7% annualised rate.

US inflation figures will be released this Wednesday. The market expects headline CPI of 2.4% compared to 2.2% in February and core CPI of 2.1% compared to 1.8% reported last month.

The FOMC minutes from Fed Chairman Jerome Powell’s first meeting will also be released on Wednesday.

Other news – AUD high yield available

IMF was in demand late last week as the security is now available to retail investors. The company is involved in the funding and backing of litigation and arbitration claims, offering the 2020 unrated security that has a yield to maturity of circa 5% and a yield to worst of around 4%. Contact us or your relationship manager if you want more information on the bond or how the differing yields are calculated.

CML has called its A$40 million 8% fixed rate security at 104.00 with a call date of 18 May 2018. The cashflow finance business is retiring the bond in conjunction with an extension of its institutional funding facility.

Rackspace continues to find favour following the Bloomberg article mentioning a possible IPO. The November 2024 US dollar bonds have a yield to worst of 8.17% and a yield to maturity a little higher than that.

Our independent US credit research provider has initiated coverage on Mallinckrodt with an ‘outperform’ on the 2020 bonds and an ‘underperform’ on the 2022 and 2023 securities. There are a number of differing opinions on the company from investment banks, mainly focusing on the positioning and sustainability of the Acthar drug and franchise.


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