Monday 07 May 2018 by Leigh Winton Week in review

From the trading desk

Disappointing US average earnings, active trading in Barminco continues, price rallies in the Sprint 2023 and 2025 bonds following merger talks, Dean Foods downgraded. Investment grade BoQ sub debt available, switches into the IAG Tier 2 note from AUD FRNs. CML and Capitol Health due to repay investors. Plenary’s new subordinated notes still open

What’s trading

AUD

  • Insurance Australia Group’s recent Tier 2 note continues to be an attractive option for clients, as many are still looking for floating rate note exposure in their portfolios. The bond is rated BBB by S&P offering clients a yield to worst of 4.21%pa. Popular switches into the IAG BBSW+2.15% 2024c bond were from :
    • MEBANK-BBSW+2.70%-29Aug19c at an indicative YTW of 3.8%p.a
    • BENAU-BBSW+2.80%-29Jan19c at an indicative YTW of 3.8%p.a
    • AAI-BBSW+3.30%18Nov20c at an indicative YTW of 3.7%p.a
  • Investors took advantage of strong institutional demand in the Alumina 5.5% 2019 bond, and with the recent spike in the price of aluminium, the yield on the bond hit the tightest since first issue. Many investors chose to switch into investment grade rated floating rate notes with a popular switch being into the recently issued Bank of Queensland Tier 2 bond, rated BBB- by S&P at an indicative yield to worst of 4.02%pa
  • The Reserve Bank of Australia Governor, Phillip Lowe recently stated that he believes inflation will reach 2.5% by 2019. Following his statement we saw strong demand for inflation linked bonds (ILBs) and indexed annuity bonds (IABs).  A popular bond was the Sydney Airport ILB 3.12% 2030 bond, with its price tightening 10bps throughout the week. If you are interested in selling Sydney Airport 2030s, you can exit at an indicative real yield of 3.07%pa. The AGN ILB 3.04% 2025 bond also saw strong demand and investors can exit their position at an indicative real yield of 2.48%pa

Non AUD

  • Barminco Holdings continues to be popular as clients look to add the fixed rate May 2022 senior bond to their portfolios. In the week prior, outright purchases were the main trade, however last week clients were switching from the Ensco Energy fixed rate March 2025 bond and replacing the holding with Barminco May 2022.  This enabled clients to shorten the duration of their portfolios and improve the credit rating.  The Barminco May 2022 bond is three years shorter in maturity and is rated two notches higher than the Ensco March 2025 bond. While Ensco offers a higher indicative yield to maturity at 8.31%, Barminco has a call option early May 2019 at a premium of 103.31, then the indicative yield to maturity is 7.44%pa.  The company has the option to redeem the bond early but is not obligated to. Barminco supply is still available to wholesale clients in minimum parcels of USD10,000
  • Sprint bonds rallied on the news of a definitive merger with T-Mobile. The companies expect to close the deal no later than 30 June 2019.  However it still has to jump through regulatory hoops and so the deal remains uncertain.
  • After the news, the price on the Sprint February 2025 bond rallied by $3 and the Sprint September 2023 bond rallied by $2, both rated single B by S&P. The bond prices for each maturity have decreased slightly after the spike, but still remain higher than where they were trading prior to the news.  Clients have been adding the position to their portfolios to gain any potential upside ahead of the possible merger. The February 2025 bond is available at an indicative yield to maturity of 6.42% and the September 2023 bond is offered at an indicative yield to maturity of 5.96%   

Economic wrap

US unemployment looked impressive with the headline number at 3.9%, but the number of people registered to participate in the survey declined which dampened perceptions. Importantly, average earnings disappointed with a 2.6% yearly number compared to expectations of 2.7%. 

Nevertheless, US markets took comfort from the likelihood that moderating numbers will lead to fewer rate hikes in 2018. US CPI is due out this week with expectations of a 2.5% yearly number, although it should be noted that the measure preferred by the US Federal Reserve, namely the PCE deflator is still below 2.00%.

Oil continues to trend higher with the NYMEX WTI contract, the world’s most liquid crude oil benchmark, close to USD70.00.

Other news – AUD high yield available

Plenary is issuing a 2024, subordinated AUD62m bond with a 6.50% coupon to wholesale investors. The issuer of the unrated bond is Plenary Bond Co Ltd Pty ATF the Plenary Bond Finance Unit Trust, with the parent, Plenary Group Holdings Pty Ltd acting as guarantor. The group is a leading independent long term investor, developer and manager of public infrastructure projects.

We have access to the new Bank of Queensland (BOQ) (click to view factsheet) Tier 2 sub debt at levels circa BBSW + 1.45%. The 2023 callable security does have lower coupon levels than the BOQ 2021 bond, but it is another investment grade floating rate note and can be used for additional issuer diversification, alongside the IAG, DBS and Asciano bonds. Asciano is the highest yielding of these although the note has a longer maturity than the other names. Clients looking to incorporate more floating rate bonds in their portfolios have been switching out of the Alumina and the Downer fixed rate bonds.  

CML fixed rate bonds and Capitol Health are both about to repay investors. CML can still be transacted for a few more days. Funds from both of these can still be used towards the new Plenary bond with offers closing 10AM AEDT 9 May 2018.

The Dean Foods 6.5% 2023 bond was downgraded by Moody’s to B3 which is equivalent to a B- with S&P. The downgrade reflects Moody’s expectations of lower earnings and cash flow resulting in weaker liquidity.


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