Monday 30 April 2018 by Leigh Winton Week in review

From the trading desk

US data beats expectations, Aussie cash rate expected to hold at RBA meeting, Bristow proves popular as yields fall, Barminco at an attractive yield while Ensco sells after weaker 1Q18 results. Switches from high yield AUD names into IAG 2023 FRN, and active trades in Cash Converters 2018 as a short dated option. Supply in RMBS lines were in demand last week

What’s trading

AUD

  • Insurance Australia Group’s (IAG) new bond continues to be well traded as investors look to add floating rate notes to minimize interest rate risk in their portfolios. Popular switches into the IAG BBSW+2.10% 2023c bond were out of high yield AUD names where prices have risen and yields declined. For example:
    • Lucas 8.00% 2022 at a YTW of 7.17%
    • Capitol Health 8.25% 2020 at a YTW of 6.74%
    • CML 8% 2021c at a YTW of 6.51%
  • Some large parcels in RMBS lines were secured through the week, with a popular line being some major bank issued C notes rated single A by S&P. The notes had a weighted average life of 5.9 years and a trading margin of BBSW+1.91 giving the tranche a forecasted yield of 4.61%pa

Non AUD

  • Industrial aviation services company, Bristow Group’s March 2023 fixed rate, senior bond was active last week after supply became available via the institutional sector. Many trading desks had been short bonds for almost a week following increased demand in the relatively small USD350m issue. This caused the yield to fall 23bps from this time last week to 7.11%. We have some supply in Bristow available at 7.11%pa, however liquidity could easily dry up again
  • Mining services provider Barminco Holdings proved popular last week as clients’ added exposure to the fixed rate May 2022 senior bond. Barminco has the right but not the obligation to call the bonds in May 2019 at a premium to the existing price of USD103.31, giving an indicative yield of 10.77% if called early, or 6.91% as a yield to maturity. Barminco supply is still available to wholesale clients in minimum parcels of USD10,000

Economic wrap 

Australian CPI came in broadly as expected and although the annual rate of 1.9% is still just below the target RBA band (2.0% to 3.0%), the weighted median measure was 2.0% for the year.

Strong US data continues with GDP, the Michigan Sentiment Index and consumption data all meeting or beating forecasts. Meanwhile, the UK and European data remains soft as shown by UK and French GDP.

This week, the RBA meets with expectations of an unchanged cash rate of 1.50%, while these important data figures are due in the US: the PCE deflator (the Fed’s preferred inflation measure) expected at 2% for the year; and the FOMC meeting with rates expected to be on hold with a 1.50%-1.75% Fed Funds rate.

On Friday US unemployment data is due with an expected 4% headline number, 195,000 gain in non farm payroll jobs, and a highly anticipated 2.7% annual average earnings change, according to Bloomberg.

Other news – AUD high yield available

Barminco’s May 2022 6.25% senior secured bond has been in demand as it trades below its par $100 face value price. The bond was issued about 12 months ago and has been trading below par for much of that time. However, some buying interest occurred as a result of solid EBITDA earnings for 1H18 along with an indication from the company of a broadly unchanged expectation for 2H18.

The Barminco bond is speculative shown by its sub investment grade single B rating from S&P, but there have been some positives for the contract miner and drilling services company. One of these was the extension of a couple of contracts due to expire. Please click here for the Barminco May 2022 factsheet.

Ensco had renewed selling interest after weaker 1Q18 results with EBITDA below 1Q17, driven by lower revenue (due to lower day rates and utilisation) and higher costs. We suggest holders consider exiting the bond that is on negative outlook by both S&P and Moody’s.

The Cash Converters September 2018 bond continues to trade actively with yields at or above 6.45%. The yield suggests there is potential for refinancing risk but is attracting buyers looking for short dated product.

Plenary is contacting noteholders to vote in a Circulating Resolution to enable the exercise of its issuer call rights in respect of the existing notes, and to fund its obligations in respect of that redemption via the issue of a new series of notes.

Investment grade Australian dollar floating rate notes are increasingly scarce with IAG’s June callable 2024 security and DBS’s March 2023 bond both improving in price.


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